<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Act of 1934 for the Quarterly Period ended March 29, 1998.
Commission File Number: 0-14968
--------------------------------------------------------
EATERIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Oklahoma 73-1230348
- ------------------------------------------ --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3240 W. Britton Rd., Ste. 202,
Oklahoma City, Oklahoma 73120
- ------------------------------------------ --------------------------------
(Address of principal executive offices) (Zip Code)
(405) 755-3607
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ]No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of May 10, 1998, 3,939,669
common shares, $.002 par value, were outstanding.
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EATERIES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 29, 1998 and
December 28, 1997 (unaudited)........................ 4
Condensed Consolidated Statements of
Income (unaudited)
Thirteen weeks ended March 29, 1998
and March 30, 1997................................... 5
Condensed Consolidated Statements of
Cash Flows (unaudited)
Thirteen weeks ended March 29, 1998
and March 30, 1997................................... 6
Notes to Condensed Consolidated Financial
Statements (unaudited).................................. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................... 11
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................... 21
</TABLE>
2
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PART I
FINANCIAL INFORMATION
3
<PAGE> 4
ITEM 1. FINANCIAL STATEMENTS.
EATERIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 29, December 28,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 759,671 $ 1,331,363
Receivables 952,902 1,121,365
Deferred income taxes 452,000 452,000
Inventories 2,151,914 2,296,282
Other 656,268 357,903
------------ ------------
Total current assets 4,972,755 5,558,913
------------ ------------
PROPERTY AND EQUIPMENT 39,886,076 42,460,936
Less landlord finish-out allowances (14,980,564) (14,880,564)
Less accumulated depreciation and
amortization (7,844,521) (7,201,463)
------------ ------------
Net property and equipment 17,060,991 20,378,909
------------ ------------
DEFERRED INCOME TAXES 244,000 398,000
GOODWILL 1,664,228 2,479,045
OTHER ASSETS, net 689,692 959,817
------------ ------------
$ 24,631,666 $ 29,774,684
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,527,602 $ 4,850,211
Accrued liabilities 3,761,061 4,538,150
Current portion of long-term
obligations 468,807 1,014,715
------------ ------------
Total current liabilities 8,757,470 10,403,076
------------ ------------
OTHER NONCURRENT LIABILITIES 753,432 741,138
------------ ------------
LONG-TERM OBLIGATIONS, net of
current portion 3,518,438 7,637,415
------------ ------------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock, none issued -- --
Common stock 8,524 8,444
Additional paid-in capital 9,561,513 9,486,594
Retained earnings 3,599,572 3,065,300
------------ ------------
13,169,609 12,560,338
Treasury stock, at cost,
347,115 shares at
March 29, 1998 and
December 28, 1997 (1,567,283) (1,567,283)
------------ ------------
Total stockholders' equity 11,602,326 10,993,055
------------ ------------
$ 24,631,666 $ 29,774,684
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
EATERIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
March 29, March 30,
1998 1997
------------ ------------
<S> <C> <C>
REVENUES:
Food and beverage sales $ 23,132,878 $ 14,031,238
Franchise fees and royalties 106,593 70,639
Other income 260,553 101,538
------------ ------------
23,500,025 14,203,415
------------ ------------
COSTS AND EXPENSES:
Costs of sales 6,327,769 4,081,825
Operating expenses 13,962,645 8,188,374
Pre-opening costs 131,000 18,000
General and administrative 1,451,451 981,858
Depreciation and amortization 728,758 542,026
Interest expense 140,130 67,524
------------ ------------
22,741,753 13,879,607
------------ ------------
INCOME BEFORE INCOME TAXES 758,272 323,808
PROVISION FOR INCOME TAXES 224,000 95,000
------------ ------------
NET INCOME $ 534,272 $ 228,808
============ ============
NET INCOME PER COMMON SHARE $ 0.14 $ 0.06
============ ============
NET INCOME PER COMMON SHARE
ASSUMING DILUTION $ 0.13 $ 0.06
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
EATERIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
March 29, March 30,
1998 1997
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
Cash flows from operating activities:
Net income $ 534,272 $ 228,808
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation & amortization 728,758 542,026
Gain on sale of assets (942) --
Common stock bonuses -- 1,950
Deferred income taxes 204,000 95,000
(Increase) decrease in:
Receivables 93,393 (125,130)
Inventories (39,273) 82,671
Other (288,259) (10,276)
Increase (decrease) in:
Accounts payable (857,511) (216,411)
Accrued liabilities (679,065) (512,266)
Other noncurrent liabilities 8,681 49,366
------------ ------------
Total adjustments (830,218) (93,070)
------------ ------------
Net cash provided by (used in) operating activities (295,946) 135,738
------------ ------------
Cash flows from investing activities:
Capital expenditures (1,564,086) (838,348)
Landlord allowances 206,250 294,616
Net cash paid for restaurant acquisitions (6,329) --
Proceeds from sale of property and equipment 5,182,341 --
Payments received on notes receivable 42,501 --
Decrease (increase) in other assets (31,439) 42,484
------------ ------------
Net cash provided by (used) in investing activities 3,829,238 (501,248)
------------ ------------
Cash flows from financing activities:
Payments on long-term obligations (4,864,885) (6,782)
Borrowing under note payable -- 115,000
Net borrowings under revolving credit agreement 200,000 1,250,000
Increase (decrease) in bank overdraft included in
accounts payable 534,902 (872,545)
Proceeds from sale of common stock -- 325
Proceeds from exercise of stock options 24,999 18,000
------------ ------------
Net cash provided by financing activities (4,104,984) 503,998
------------ ------------
Net increase (decrease) in cash & cash equivalents (571,692) 138,488
Cash and cash equivalents at beginning of period 1,331,363 695,481
------------ ------------
Cash and cash equivalents at end of period $ 759,671 $ 833,969
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
EATERIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Basis of Preparation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the thirteen weeks ended March 29, 1998 are
not necessarily indicative of the results that may be expected for the year
ended December 27, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 28, 1997.
Note 2 - Balance Sheet Information
Receivables are comprised of the following:
<TABLE>
<CAPTION>
March 29, December 28,
1998 1997
------------ ------------
<S> <C> <C>
Franchisees ........................................... $ 42,481 $ 35,693
Insurance refunds ..................................... 173,665 488,594
Landlord finish-out allowances ........................ -- 106,250
Other ................................................. 736,756 490,828
------------ ------------
$ 952,902 $ 1,121,365
============ ============
</TABLE>
Accrued liabilities are comprised of the following:
<TABLE>
<CAPTION>
March 29, December 28,
1998 1997
------------ ------------
<S> <C> <C>
Compensation .......................................... $ 1,811,857 $ 2,191,775
Taxes, other than income .............................. 753,647 815,039
Other ................................................. 1,195,557 1,531,336
------------ ------------
$ 3,761,061 $ 4,538,150
============ ============
</TABLE>
Note 3 - Supplemental Cash Flow Information
For the thirteen-week periods ended March 29, 1998 and March 30, 1997, the
Company had the following non-cash investing activity:
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<TABLE>
<CAPTION>
Thirteen Weeks Ended
March 29, March 30,
1998 1997
------------ ------------
<S> <C> <C>
Net decrease in receivables for
landlord finish-out allowances $ 106,250 $ 97,384
Increase in additional paid-in
capital as a result of tax
benefits from exercise of
non-qualified stock options 50,000 --
</TABLE>
Note 4 - Restaurant Acquisitions and Dispositions
In November 1997, the Company, through its wholly-owned subsidiary, Fiesta
Restaurants, Inc., acquired from Famous Restaurants, Inc. and its subsidiaries
("Famous"), substantially all of the assets comprising 17 Mexican restaurants,
and the corporate headquarters of Famous (the "Famous Acquisition"). The
acquired restaurants operated under the names: Garcia's (10), Casa Lupita (five)
and Carlos Murphy's (two). The purchase price for the assets was approximately
$10,652,000 of which $8,631,415 was paid in cash at closing and the balance
represented estimated liabilities of Famous assumed by the Company and
transaction costs. The acquisition has been accounted for under the purchase
method.
In February 1998, the Company sold substantially all of the assets, including
real estate, comprising three of the Casa Lupita restaurants (acquired from
Famous) to Chevy's, Inc. ("Chevy's") for a cash price of approximately
$5,300,000. The proceeds from this sale were used to pay-down debt primarily
related to the Famous Acquisition. In connection with this transaction, the
Company entered into an agreement to sell substantially all of the assets
related to one additional Casa Lupita to Chevy's for a price of approximately
$1,000,000. This transaction closed in May 1998. The proceeds from this
transaction were used to pay-down debt. As a result of this transaction, the net
book value of the assets related to this restaurant as of March 29, 1998, was
adjusted to the approximate sales price of the assets. This adjustment resulted
in a decrease in goodwill of $900,000 with a corresponding increase in leasehold
improvements.
In March 1998, the Company acquired one additional Garcia's from Famous. In
connection with this transaction, Famous paid the Company $70,000 to assume the
real estate lease associated with this location and approximately $60,000 to
assume certain liabilities related to this location. The liabilities assumed by
the Company cannot exceed the amount paid to the Company by Famous.
Note 5 - Net Income Per Common Share
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," which requires the calculation of basic and diluted earnings per share
("EPS"). Basic EPS includes no dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS is computed by dividing net income
available to common stockholders by the sum of the weighted-average number of
common shares outstanding for the period plus common stock equivalents. The
Company adopted the provisions of SFAS No. 128 in the fourth quarter of 1997,
and
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<PAGE> 9
as required has restated prior period EPS amounts to conform to the new
accounting standard.
The following table sets forth the computation of basic and diluted EPS:
<TABLE>
<CAPTION>
Thirteen Weeks Ended
---------------------------------
March 29, March 30,
1998 1997
-------------- --------------
<S> <C> <C>
Numerator:
Net income ................................................ $ 534,272 $ 228,808
============== ==============
Denominator:
Denominator for basic EPS- weighted average shares
outstanding
3,898,406 3,863,267
Dilutive effect of nonqualified stock options
218,253 142,738
-------------- --------------
Denominator for diluted EPS ............................. 4,116,659 4,006,005
============== ==============
Basic EPS ....................................................... $ 0.14 $ 0.06
============== ==============
Diluted EPS ..................................................... $ 0.13 $ 0.06
============== ==============
</TABLE>
Note 6 - Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 requires that all items required to be recognized under accounting
standards as components of comprehensive income, consisting of both net income
and those items that bypass the income statement and are reported in a balance
within a separate component of stockholders' equity, be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS No. 130 is effective for financial statements for periods
beginning after December 15, 1997, and accordingly, has been adopted by the
Company in the first quarter of 1998. The Company had no components of
comprehensive income other than net income during the thirteen week periods
ended March 29, 1998 and March 30, 1997. Thus, comprehensive income equals net
income for both quarterly periods.
Note 7 - Other New Accounting Standards
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which is effective for financial statements
for fiscal years beginning after December 15, 1997. SFAS No. 131 is not required
to be applied to interim financial statements in the initial year of its
application. SFAS No. 131 establishes standards for reporting information about
operating segments in annual
9
<PAGE> 10
financial statements and requires selected information about operating segments
in interim financial reports to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company does not anticipate that the adoption of this new
accounting standard will create additional business segment reporting
requirements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures About
Pensions and Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 132 revises disclosures about
pensions and other postretirement benefit plans. It does not change the
measurement or recognition of costs associated with those plans. The Company
does not expect the adoption of SFAS No. 132 to have a material impact on its
financial position or its results of operations.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Amounts capitalized
or expensed by the Company for internal-use software projects are not expected
to differ materially as a result of SOP 98-1, as the prescribed accounting
treatment is consistent with the Company's current accounting policy. SOP 98-1,
the effect of which is to be recognized prospectively, is effective for 1999
financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-up
Activities," which requires start-up costs to be expensed as incurred. SOP 98-5
is effective for fiscal years beginning after December 15, 1998, although
earlier application is encouraged. The Company does not expect the adoption of
SOP 98-5 to have a material effect on its financial position or results of
operations, as the prescribed accounting treatment is consistent with the
Company's current accounting policy regarding start-up costs.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
From time to time, the Company may publish forward-looking statements relating
to certain matters including anticipated financial performance, business
prospects, the future opening of Company-owned and franchised restaurants,
anticipated capital expenditures, and other matters. All statements other than
statements of historical fact contained in this Form 10-Q or in any other report
of the Company are forward-looking statements. The Private Securities Litigation
Reform Act of 1995 provides a safe harbor for forward-looking statements. In
order to comply with the terms of that safe harbor, the Company notes that a
variety of factors, individually or in the aggregate, could cause the Company's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in the Company's forward-looking statements
including, without limitation, the following: consumer spending trends and
habits; competition in the casual dining restaurant segment; weather conditions
in the Company's operating regions; laws and government regulations; general
business and economic conditions; availability of capital; success of operating
initiatives and marketing and promotional efforts; and changes in accounting
policies. In addition, the Company disclaims any intent or obligation to update
those forward-looking statements.
INTRODUCTION
As of March 29, 1998, the Company owned and operated 62 ( 44 Garfield's, 13
Garcia's, two Casa Lupitas, two Pepperoni Grills and one Carlos Murphy's) and
franchised 11 (nine Garfield's and two Garcia's) restaurants. One of the
Company-owned Garcia's as of March 29, 1998, was temporarily closed for remodel.
Subsequent to March 29, 1998, the Company opened one new Garfield's and sold one
Casa Lupita. The Company currently has one new Garcia's in development. As of
the date of this report, the entire system includes 73 restaurants of which 62
are Company-owned (45 Garfield's, 13 Garcia's, one Carlos Murphy's, one Casa
Lupita, and two Pepperoni Grills) and 11 are franchised (nine Garfield's and two
Garcia's).
In November 1997, the Company, through its wholly-owned subsidiary, Fiesta
Restaurants, Inc. ("Fiesta"), acquired from Famous Restaurants, Inc. and its
subsidiaries ("Famous"), substantially all of the assets comprising 17 Mexican
restaurants and the corporate headquarters of Famous (the "Famous Acquisition").
The acquired restaurants operated under the names: Garcia's (10), Casa Lupita
(five) and Carlos Murphy's (two). The purchase price for the assets was
approximately $10,652,000, of which $8,631,415 was paid in cash at closing and
the balance represented estimated liabilities of Famous assumed by the Company
and transaction costs. The cash portion of the purchase price was financed
through a five-year term loan with a bank (see Liquidity and Capital Resources
for a discussion of this term loan).
In February 1998, the Company sold substantially all of the assets, including
real estate, comprising three of the Casa Lupita restaurants to Chevy's, Inc.
("Chevy's") for a cash price of approximately $5,300,000. The proceeds form this
sale were used to pay-down debt primarily related to the Famous Acquisition. In
connection with this transaction, the Company entered into an agreement to sell
substantially all of the assets related to one additional Casa Lupita to Chevy's
for a price of approximately $1,000,000. This second transaction closed in May
1998.
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The decision to sell the four Casa Lupita locations was the result of a plan to
consolidate Fiesta's operations and focus on the expansion of Garcia's. In May
1998, the Company completed the conversion of the one remaining Casa Lupita to a
Garcia's and is currently converting one of the Carlos Murphy's locations to a
Garcia's.
PERCENTAGE RESULTS OF OPERATIONS AND RESTAURANT DATA
The following table sets forth, for the periods indicated, (i) the percentages
that certain items of income and expense bear to total revenues, unless
otherwise indicated, and (ii) selected operating data:
<TABLE>
<CAPTION>
Thirteen Weeks Ended
March 29, March 30,
1998 1997
------------ ------------
<S> <C> <C>
Statements of Income Data:
Revenues:
Food and beverage sales .......................... 98.4% 98.8%
Franchise fees and royalties ..................... 0.5% 0.5%
Other income ..................................... 1.1% 0.7%
------------ ------------
100.0% 100.0%
Costs and Expenses:
Costs of sales (1) ............................... 27.4% 29.1%
Operating expenses (1) ........................... 60.4% 58.4%
Pre-opening costs (1) ............................ 0.6% 0.1%
General and administrative ....................... 6.2% 6.9%
Depreciation and amortization (1) ................ 3.2% 3.9%
Interest expense ................................. 0.6% 0.5%
------------ ------------
Income before income taxes ............................ 3.2% 2.3%
Provision for income taxes ............................ 1.0% 0.7%
------------ ------------
Net income ............................................ 2.2% 1.6%
============ ============
Selected Operating Data:
(Dollars in thousands)
System-wide sales:
Company restaurants .............................. $ 23,133 $ 14,031
Franchise restaurants ............................ 2,925 1,994
------------ ------------
Total ....................................... $ 26,058 $ 16,025
============ ============
Number of restaurants (at end of period):
Company restaurants .............................. 62 43
Franchise restaurants ............................ 11 8
------------ ------------
Total ....................................... 73 51
============ ============
</TABLE>
(1) As a percentage of food and beverage sales.
12
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RESULTS OF OPERATIONS
For the quarter ended March 29, 1998, the Company recorded net income of
$534,000 ($0.14 per common share; $0.13 per common share assuming dilution) on
revenues of $23,500,000. This compares to net income of $229,000 ($0.06 per
common share; $0.06 per common share assuming dilution) for the quarter ended
March 30, 1997 on revenues of $14,203,000.
REVENUES
Company revenues for the quarter ended March 29, 1998 increased 65% over the
revenues reported for the same period in 1997. The number of Company restaurants
operating at the end of each respective first quarter and the number of
operating months during that quarter were as follows:
<TABLE>
<CAPTION>
Period Number of Number of Average Monthly
Ended Units Open Operating Months Sales Per Unit
- --------------------- -------------- ---------------- ---------------
<S> <C> <C> <C>
Garfield's (1)
March 29, 1998 46 136 $113,300
March 30, 1997 43 131 107,100
Garcia's (2)
March 29, 1998 16 48 $161,000
March 30, 1997 - - -
</TABLE>
(1) Includes Pepperoni Grill.
(2) Includes Carlos Murphy's and Casa Lupita.
Average monthly sales per unit for Garfield's increased by $6,200 or 5.8% during
the first quarter of 1998 versus 1997. This increase is primarily attributable
to a successful television advertising campaign during the first quarter of
1998, and the success of continued radio and newspaper advertising.
Franchise fees and continuing royalties increased to $107,000 during the quarter
ended March 29, 1998, versus $71,000 during the quarter ended March 30, 1997.
This increase is primarily due to the recognition of the initial franchise fee
related to the opening of a new franchised Garfield's during the first quarter
of 1998.
Other income for the quarter ended March 29, 1998 was $261,000 as compared to
the previous year's amount of $102,000. During the first quarter of 1998, the
Company was paid a fee of $120,000 to terminate an agreement under which the
Company managed a Carlos Murphy's restaurant owned by an independent third
party. Under this agreement, the Company was paid a fee equal to 4% of sales to
manage the restaurant for a term of two years. This management agreement
termination fee is included in other income for the quarter ended March 29,
1998.
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<PAGE> 14
COSTS AND EXPENSES
The following is a comparison of costs of sales and labor costs (excluding
payroll taxes and fringe benefits) as a percentage of food and beverage sales at
Company-owned restaurants:
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------------
March 29, March 30,
1998 1997
---------- ----------
<S> <C> <C>
Garfield's (1):
Costs of sales ............. 28.3% 29.1%
Labor costs ................ 28.5% 26.5%
---------- ----------
Total .................... 56.8% 55.6%
========== ==========
Garcia's (2):
Costs of sales ............. 25.4% --
Labor costs ................ 29.6% --
---------- ----------
Total .................... 55.0% --
========== ==========
Total Company:
Costs of sales ............. 27.4% 29.1%
Labor costs ................ 28.9% 26.5%
---------- ----------
Total .................... 56.3% 55.6%
========== ==========
</TABLE>
(1) Includes Pepperoni Grill.
(2) Includes Carlos Murphy's and Casa Lupita.
The decrease in cost of sales percentages for Garfield's during 1998 versus 1997
primarily relates to continued menu development, increased vendor rebates and
continued improvements in store-level food and beverage cost controls.
Labor costs for Garfield's increased to 28.5% of food and beverage sales during
the quarter ended March 29, 1998, versus 26.5% during the 1997 comparable
period. This increase is primarily due to increased kitchen labor and
restaurant-level management salaries and incentive compensation. The increase in
kitchen labor is primarily due to an increase in the Federal minimum wage in
late 1997.
For the quarter ended March 29, 1998, operating expenses as a percentage of food
and beverage sales increased to 60.4% from 58.4% in the quarter ended March 30,
1997. This increase principally relates to Garfield's increased labor costs (as
previously explained) and the addition of the Garcia's, Carlos Murphy's and
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<PAGE> 15
Casa Lupitas which generally have higher labor costs than Garfield's due to more
labor intensive kitchen operations.
Restaurant pre-opening development costs, which are expensed as incurred, were
$131,000 in 1998 (0.6% of food and beverage sales) versus $18,000 (0.1% of food
and beverage sales) in 1997. Two restaurants were opened in the 1998 first
quarter while no restaurants were opened in the 1997 first quarter.
Under the Company's policy of expensing pre-opening costs as incurred, income
from operations, on an annual and quarterly basis, could be adversely affected
during periods of restaurant development; however, the Company believes that its
initial investment in the restaurant pre-opening costs yields a long-term
benefit of increased operating income in subsequent periods.
During the quarters ended March 29, 1998 and March 30, 1997, general and
administrative costs as a percentage of total revenues were 6.2% and 6.9%,
respectively. The first quarter 1998 decrease as a percentage of revenues
primarily relates to the growth in revenues exceeding the growth in general and
administrative costs as a result of the Famous Acquisition. The higher absolute
levels of general and administrative costs from 1997 to 1998 are related
primarily to additional personnel costs and related costs of operating the
expanding restaurant system. The Company anticipates that its costs of
supervision and administration of Company and franchise stores will continue to
increase at a slower rate than revenue increases during the next few years.
Depreciation and amortization expense increased during the first quarter of 1998
to $729,000 (3.2% of food and beverage sales) compared to $542,000 (3.9% of food
and beverage sales) in 1997. The increase primarily relates to the increase in
net assets subject to depreciation and amortization in 1998 versus 1997 because
of additional restaurants opened or acquired since March 30, 1997.
Interest expense during the first quarter of 1998 was $140,000 (0.6% of total
revenues) versus $68,000 (0.5% of total revenues) in the first quarter of 1997.
This increase primarily relates to an increase in long-term debt resulting from
the Famous Acquisition, partially offset by a lower average borrowing rate in
1998 versus 1997.
INCOME TAXES
The Company's provision for income taxes was $224,000 during the first quarter
of 1998 versus $95,000 during 1997. The effective tax rate for the Company
during the first quarter of 1997 was 29.5% versus 29.3% during the previous
year's first quarter.
NET INCOME PER SHARE AMOUNTS
In March 1997, the Financial Accounting Standards Board ("FASB")
15
<PAGE> 16
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share," which requires the calculation of basic and diluted earnings per
share (EPS). Basic EPS includes no dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. The weighted-average common share outstanding for
the basic EPS calculation were 3,898,406 and 3,863,267 in the quarters ended
March 29, 1998 and March 30, 1997, respectively. Diluted EPS is computed by
dividing net income available to common stockholders by the sum of the
weighted-average number of common shares outstanding for the period plus
dilutive common stock equivalents. The sum of the weighted-average common shares
and common share equivalents for the diluted EPS calculation were 4,116,659 and
4,006,005 for the quarters ended March 29, 1998 and March 30, 1997,
respectively. The Company adopted the provisions of SFAS No. 128 in the fourth
quarter of 1997, and, as required, has restated all prior period EPS amounts to
conform to the new accounting standard.
IMPACT OF INFLATION
The impact of inflation on the costs of food and beverage products, labor and
real estate can affect the Company's operations. Over the past few years,
inflation has had a lesser impact on the Company's operations due to the lower
rates of inflation in the nation's economy and the economic conditions in the
Company's market areas.
Management believes the Company has historically been able to pass on increased
costs through certain selected menu price increases and increased productivity
and purchasing efficiencies, but there can be no assurance that the Company will
be able to do so in the future. Management anticipates that the average cost of
restaurant real estate leases and construction costs could increase in the
future which could affect the Company's ability to expand. In addition, mandated
health care and an increase in the Federal or state minimum wages could
significantly increase the Company's costs of doing business.
LIQUIDITY AND CAPITAL RESOURCES
At March 29, 1998, the Company's working capital ratio was 0.57 to 1 compared to
0.53 to 1 at December 28, 1997. The Company's working capital was $(3,785,000)
at March 29, 1998 versus $(4,844,000) at December 28, 1997. As is customary in
the restaurant industry, the Company has operated with negative working capital
and has not required large amounts of working capital. Historically, the Company
has leased the majority of its restaurant locations and through a strategy of
controlled growth financed its expansion from operating cash flow, proceeds from
the sale of common stock and utilizing the Company's revolving line of credit.
During the quarter ended March 29, 1998, the Company had net cash
16
<PAGE> 17
used in operating activities of $(296,000) as compared to net cash provided by
operating activities of $136,000 during the comparable 1997 period.
The Company plans to open three to five units during 1998 in restaurant
locations leased in regional malls and in free-standing sites. The Company
believes the cash generated from its operations and borrowing availability under
its credit facility (described below), will be sufficient to satisfy the
Company's net capital expenditures and working capital requirements during 1998.
In August 1995, the Company entered into an agreement with a bank for a
revolving line of credit for $3,000,000. In July 1996, the Company's $3,000,000
revolving line of credit was increased to $5,000,000 and the term was extended
by one year to August, 1999. In November 1997, the Company entered into a new
loan agreement with a bank. This loan agreement provides for a $6,000,000
revolving line of credit and a term loan in the principal amount not to exceed
the lesser of $9,500,000, or the actual acquisition cost of the assets
purchased from Famous Restaurants, Inc., under the Asset Purchase Agreement
dated November 14, 1997. As of March 29, 1998, the Company had outstanding
borrowings of $3,774,000 under the term loan feature. There were $200,000 of
outstanding borrowings under the revolving line of credit as of March 29, 1998.
Outstanding borrowings under both the revolving line of credit and term loan
bear interest at three-month LIBOR plus 1.25% (6.88% as of March 29, 1998). The
interest rate is adjusted quarterly. There is no non-use fee related to either
facility. The revolving line of credit has a five-year term with final maturity
in November 2002. Under the term loan, outstanding principal and interest are
payable quarterly in the amount necessary to fully amortize the outstanding
principal balance over a seven-year period, with a final maturity in November
2002. Borrowings under this loan agreement are secured by all of the Company's
real estate. This loan agreement contains, among other things, certain
financial covenants and restrictions. As of March 29, 1998, the Company was in
compliance with these financial covenants and restrictions. The revolving
credit facility included in this loan agreement provides the Company adequate
borrowing capacity to continue its expansion plans for Garfield's and Garcia's
for the next two years.
In November 1997, the Company entered into an interest rate swap agreement with
a bank to hedge its risk exposure to potential increases in LIBOR. This
agreement has a term of five years and an initial notional amount of $9,500,000.
The notional amount declines quarterly over the life of the agreement on a
seven-year amortization schedule assuming a fixed interest rate of 7.68%. Under
the terms of the interest rate swap agreement, the Company pays interest
quarterly on the notional amount at a fixed rate of 7.68%, and receives interest
quarterly on the notional amount at a floating rate of three-month LIBOR plus
1.25%.
17
<PAGE> 18
In April 1997, the Company's Board of Directors authorized the repurchase of up
to 200,000 shares of the Company's common stock. In July 1997, an additional
200,000 shares were authorized for repurchase. As of March 29, 1998, 55,100
shares had been repurchased under this plan for a total purchase price of
approximately $160,000. No additional shares have been repurchased subsequent to
March 29, 1998.
OTHER
The use by many existing computer systems of a two-digit year date format rather
than four digits - the Year 2000 issue - impacts the Company's business systems
and facilities. The Company is working with its key suppliers and vendors to
ensure Year 2000 compliance. Although the ultimate outcome of the Year 2000
project cannot be guaranteed, management believes the cost of addressing the
Year 2000 issue will not be material to the consolidated results of operations
or financial condition of the Company.
18
<PAGE> 19
PART II
OTHER INFORMATION
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit 27.1 - Financial Data Schedule.
(b) A Form 8-K/A was filed on February 6, 1998, with the Securities
and Exchange Commission ("SEC") regarding the Registrant's
acquisition of certain assets from Famous Restaurants, Inc. and
its subsidiaries. This Form 8-K/A amended a Form 8-K filed on
December 8, 1997, with the SEC, to include the required
financial statements and pro forma financial information
related to the acquisition. The financial statements filed with
this Form 8-K/A were:
1. Statement of assets acquired and liabilities
assumed of the restaurants included in the Asset
Purchase Agreement among Fiesta Restaurants, Inc.,
a wholly-owned subsidiary of Eateries, Inc., and
Famous Restaurants, Inc. as of November 14, 1997
together with report of public accountants
2. Statements of revenues and direct operating
expenses of the restaurants included in the Asset
Purchase Agreement among Fiesta Restaurants, Inc.,
a wholly-owned subsidiary of Eateries, Inc., and
Famous Restaurants, Inc. for each of the three
fiscal years in the period ended December 29,
1996, together with report of public accountants
and for the forty weeks ended October 6, 1996, and
October 5, 1997 (unaudited)
The pro forma financial statements included in this Form 8-K/A
were:
1. Pro forma condensed balance sheet at September
28, 1997 (unaudited)
2. Pro forma condensed statement of income for the
year ended December 29, 1996 (unaudited)
3. Pro forma condensed statement of income for the
thirty-nine weeks ended September 28, 1997
(unaudited)
A Form 8-K was filed on March 16, 1998, with the SEC regarding
the Registrant's sale of certain assets to Chevy's, Inc. This
Form 8-K included the following pro forma financial statements:
20
<PAGE> 21
1. Pro forma condensed balance sheet at September
28, 1997 (unaudited)
2. Pro forma condensed statement of income for the
year ended December 29, 1996 (unaudited)
3. Pro forma condensed statement of income for the
thirty-nine weeks ended September 28, 1997
(unaudited)
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EATERIES, INC.
Registrant
Date: May 15, 1998 By: /s/ COREY GABLE
-------------------------------------
Corey Gable
Vice President/Treasurer
Chief Financial and
Accounting Officer
22
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27.1 - Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 29, 1998 AND THE CONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR THE THIRTEEN WEEKS ENDED MARCH 29, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> MAR-29-1998
<CASH> 760
<SECURITIES> 0
<RECEIVABLES> 953
<ALLOWANCES> 0
<INVENTORY> 2,152
<CURRENT-ASSETS> 4,973
<PP&E> 24,906
<DEPRECIATION> 7,845
<TOTAL-ASSETS> 24,632
<CURRENT-LIABILITIES> 8,757
<BONDS> 3,518
0
0
<COMMON> 9
<OTHER-SE> 11,594
<TOTAL-LIABILITY-AND-EQUITY> 24,632
<SALES> 23,133
<TOTAL-REVENUES> 23,500
<CGS> 6,328
<TOTAL-COSTS> 21,019
<OTHER-EXPENSES> 1,723
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 140
<INCOME-PRETAX> 758
<INCOME-TAX> 224
<INCOME-CONTINUING> 534
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 534
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.13
</TABLE>
