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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1997
FILE NO. 0-14968
EATERIES, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
OKLAHOMA 73-1230348
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
3240 W. BRITTON ROAD
OKLAHOMA CITY, OKLAHOMA 73120
(Address of principal executive offices) (Zip code)
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(405) 755-3607
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE, $.002 PER SHARE
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, and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. (X)
The aggregate market value of the voting common stock held by
non-affiliates of the registrant as of March 25, 1998 was $15,448,609. The
Company has assumed that its directors and officers are the only affiliates, for
purposes of this calculation.
Number of shares outstanding as of March 25, 1998 - 3,914,669 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Following is a list of annual reports, proxy statements, and Rule
424(b) or (c) prospectuses which are incorporated by reference into the Form
10-K and the Part of the Form 10-K into which the document is incorporated - The
Company's Proxy Statement for its 1998 Annual Meeting of Shareholders is
incorporated by reference in Part III, Items 10, 11, 12 and 13.
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EATERIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1997
TABLE OF CONTENTS
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PART 1 PAGE
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Item 1. Business....................................................................................... 1
Item 2. Properties..................................................................................... 7
Item 3. Legal Proceedings.............................................................................. 8
Item 4. Submission of Matters to a Vote of Security Holders........................................... 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................... 8
Item 6. Selected Financial Data........................................................................ 8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................... 10
Item 8. Financial Statements and Supplementary Data.................................................... 16
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure........................................................................... 16
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 16
Item 11. Executive Compensation......................................................................... 16
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 16
Item 13. Certain Relationships and Related Transactions................................................. 16
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 16
INDEX TO EXHIBITS.......................................................................................... 17
SIGNATURES................................................................................................. 18
INDEX TO FINANCIAL STATEMENTS.............................................................................. 19
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ITEM 1. BUSINESS
IN GENERAL
Eateries, Inc. (the "Company") and its subsidiaries own, operate and
franchise restaurants under the names: Garfield's Restaurant & Pub
("Garfield's"), Pepperoni Grill, Garcia's Mexican Restaurants ("Garcia's"), Casa
Lupita and Carlos Murphy's. As of December 28, 1997, the Company-owned 62 (43
Garfield's, 10 Garcia's, five Casa Lupita's, two Carlos Murphy's and two
Pepperoni Grills) and franchised 10 (eight Garfield's and two Garcia's)
restaurants in 27 states.
The Company opened its first restaurant, a Garfield's, in 1984 in
Oklahoma City, Oklahoma. In 1986, the Company completed an initial public
offering of its common stock. Prior to 1997, Garfield's was the Company's
primary growth concept. Garfield's is a family-oriented concept, providing an
upscale alternative to traditional fast-food. Garfield's are designed to appeal
to a divergent customer base that grew up on fast-food, but now prefers a more
sophisticated menu, the availability of alcoholic beverages, a comfortable
ambiance, speed, value and convenience. The concept features a varied selection
of moderately-priced, high quality food and beverage items with table service
dining.
In January 1995, the Company acquired substantially all the assets of
the "Pepperoni Grill" restaurant located in Oklahoma City, Oklahoma, along with
all rights to the use of the trademarks associated with the concept. Pepperoni
Grill features a variety of Italian entrees with special emphasis on brick-oven
baked pizza.
In November 1997, the Company, through its wholly-owned subsidiary,
Fiesta Restaurants, Inc., acquired 17 Mexican restaurants under the names:
Garcia's (10), Casa Lupita (5) and Carlos Murphy's (2), along with the
trademarks associated with these concepts. In February 1998, the Company sold
three of the Casa Lupita locations to Chevy's, Inc. In connection with this
transaction, the Company entered into an agreement to sell another Casa Lupita
location to Chevy's conditioned upon, among other things, the transfer to
Chevy's of the liquor license related to such restaurant. The decision to sell
these restaurants was the result of a plan to consolidate operations and focus
on the expansion of Garcia's. The Company plans to convert the remaining Casa
Lupita and the two Carlos Murphy's to the Garcia's concept in 1998.
In 1997, the Company constructed and opened three (3) Garfield's in
major regional malls in addition to the acquisition noted above. The Company's
future expansion of its existing concepts will be primarily focused on
Garfield's and Garcia's. The Company expects to add up to five additional
Garfield's and Garcia's restaurants in 1998. The primary expansion emphasis will
be on Company-owned rather than franchised restaurants. However, management will
visit with qualified, interested parties as potential franchisees. The Company
also plans to pursue other acquisitions to further enhance shareholder value.
The Company's principal offices are located at 3240 West Britton Road,
Oklahoma City, Oklahoma 73120. Its telephone number is (405) 755-3607.
GARFIELD'S RESTAURANT & PUB
MENU
Each Garfield's restaurant offers a diverse menu of freshly prepared
traditional and innovative entrees, including steak, seafood, chicken,
hamburgers, Mexican, Italian, and sandwiches along with a variety of appetizers,
salads and desserts. Menu offerings are revised by the Company semi-annually to
improve sales. The Company's senior management actively participates in the
search for new menu items. Garfield's restaurants also offer a separate
lower-priced children's menu.
In an effort to further define the strengths of various mall-based
Garfield's, management began testing six urban stores as "Garfield's Cafe's"
during 1997. These units are located in major urban markets and lack the ability
to be marketed due to exorbitant advertising costs. This lack of visibility
negatively impacts sales and profitability. Thus, "Garfield's Cafe's" have
repositioned menus that offer greater value, lower costs, a simpler and thus,
faster mix of menu selections. Food costs for items in "Cafe" stores are lower
than traditional Garfield's. "Cafe" stores also feature specials designed to
drive sales and profits. Results of the "Cafe" stores have been encouraging. The
Company will continue utilizing this concept in all six locations. As of
December 28, 1997, no additional Garfield's have been converted to the "Cafe"
concept..
RESTAURANT LAYOUT
Garfield's restaurants are constructed in regional malls in accordance
with uniform design specifications and are generally similar in appearance and
interior decor. Restaurants are furnished and styled in a colorful motif,
highlighting the travels of the Company's namesake, "Casey Garfield", including
exhibits, photographs, souvenirs and other travel-related furnishings. Tables
are covered with paper and customers are encouraged to doodle with crayons
provided at each table.
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The size and shape of Garfield's restaurants vary depending largely
upon the location but typically average 4,500 to 5,500 square feet, and seat
approximately 200 guests. The Company's prototype Garfield's to be constructed
in 1998 will approximate 4,700 square feet.
HOURS OF OPERATION
Depending on location, most restaurants are open from 11:00 a.m. until
11:00 p.m. on weekdays and Sunday, and later on Friday and Saturday.
UNIT ECONOMICS
Historically, the cost of opening a new Garfield's restaurant has
varied widely due to the different restaurant configuration and sizes, regional
construction cost levels, and certain other factors. The Company currently
leases the restaurant premises in major regional malls and builds-out the leased
space to meet the Garfield's concept specifications of style and decor. Total
construction costs for a typical Garfield's opened in 1997 were approximately
$886,000, of which approximately $433,000 was funded through landlord finish-out
allowances, bringing the Company's net investment to approximately $453,000 per
unit. Management believes its unit economics are among the best in the industry.
SITE SELECTION
All Garfield's restaurants are located in regional shopping malls,
primarily in the eastern half of the United States. The Company considers the
location of a restaurant to be critical to its long-term success and has devoted
significant effort to the investigation and evaluation of potential mall sites.
The site selection process focuses on historical sales per foot by mall tenants
and proximity to entertainment centers within and near the mall as well as
accessibility to major traffic arteries. The Company also reviews potential
competition in the area and utilizes an Equifax site selection model to "rate"
each potential location based upon a multitude of different criteria. Senior
management inspects and approves each mall restaurant site. The Company expects
to locate future Garfield's in regional malls. It takes approximately 18 weeks
to complete construction and open a Garfield's.
RESTAURANT LOCATIONS
The following table sets forth the locations of the existing Garfield's
restaurants as of December 28, 1997.
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COMPANY-OWNED RESTAURANTS FRANCHISED RESTAURANTS
NO. OF NO. OF
STATE UNITS STATE UNITS
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Alabama............................... 1 Colorado............................... 1
Arkansas.............................. 1 Iowa................................... 2
Florida............................... 3 Oklahoma............................... 5
Georgia............................... 1 -------
Illinois.............................. 4 Total............................. 8
Indiana............................... 4 =======
Kentucky.............................. 1
Louisiana............................. 2
Michigan.............................. 2
Mississippi........................... 4
Missouri.............................. 4
New York.............................. 2
North Carolina........................ 1
Ohio.................................. 2
Oklahoma.............................. 3
South Carolina........................ 1
Tennessee............................. 1
Texas................................. 2
West Virginia......................... 2
Wisconsin............................. 2
=========
Total............................ 43
=========
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PEPPERONI GRILL RESTAURANTS
The original Pepperoni Grill restaurant, located in Oklahoma City,
Oklahoma, was purchased by the Company in January, 1995. Its menu features a
variety of Italian entrees with special emphasis on brick-oven baked pizza. The
warm European bistro
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atmosphere is accented with an exhibition kitchen, light woods and booths
covered in tapestry. All menu items are prepared on the premises with the entire
entree presentation being performed within view of the guest, making the kitchen
part of the restaurant's atmosphere. An in-store bakery makes all the breads and
daily desserts. Pepperoni Grill's signature bakery item is a Tuscan parmesan
black pepper bread that is served with all entrees along with the traditional
olive oil and balsamic vinegar. Over 60 different wine selections are offered
along with 25 wines available by the glass.
The Company purchased the Pepperoni Grill restaurant primarily because
of its many similarities to the existing Garfield's concept and its popular
"Italian" based menu. The Pepperoni Grill restaurant concept is similar to
Garfield's as it is a full service dinner house, located in a mall and is
approximately the same size with many operational functions which parallel a
Garfield's.
The Company opened a second Pepperoni Grill restaurant in a regional
mall located in Terre Haute, Indiana in November, 1995, next to an existing
Garfield's. After evaluating the benefits of this strategy and the future growth
potential of the Pepperoni Grill restaurant concept, management decided to open
a free-standing Pepperoni Grill in Edmond, Oklahoma, to capitalize on its strong
reputation in the Oklahoma City market. As part of this decision, management
decided to convert the Terre Haute location into a test location for a Casa Ole'
franchise and transferred assets with approximately $275,000 in net book value
to the Edmond location. The Casa Ole test location was closed in November 1997.
At this time, management does not expect any further development of Casa Ole'.
FIESTA RESTAURANTS
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 operate 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. This term loan bears
interest at the three-month London Interbank Offered Rates ("LIBOR") plus 1.25%
(6.94% as of December 28, 1997) and is secured by all of the Company's real
estate (all of which was obtained through the Famous Acquisition). The term loan
requires principal to be repaid based upon a seven-year amortization schedule,
with all remaining unpaid principal due on the fifth anniversary of the loan.
MENU
Each Garcia's restaurant offers a traditional menu of high quality
Mexican food. Alcoholic beverages are also offered in each location. Menus are
generally standardized, although there are slight variations to accommodate
regional taste preferences.
RESTAURANT LAYOUT
Garcia's restaurants have a distinctive southwestern design and decor.
The existing restaurants generally measure 8,000 to 10,000 square feet and seat
approximately 200 to 250 guests in the main dining area with an additional 75 to
125 seats in the bar area.
RESTAURANT LOCATIONS
The following table sets forth the locations of the existing Fiesta
restaurants as of December 28, 1997.
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COMPANY-OWNED RESTAURANTS FRANCHISED RESTAURANTS
NO. OF NO. OF
STATE UNITS STATE UNITS
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Arizona............................... 6 Iowa................................... 1
California............................ 2 Tennessee.............................. 1
Colorado.............................. 2 -------
Florida............................... 1 Total............................. 2
Idaho................................. 1 =======
Illinois.............................. 1
Michigan.............................. 1
New Jersey............................ 1
Ohio.................................. 1
Utah.................................. 1
=========
Total............................ 17
=========
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SALE OF RESTAURANTS
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 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 $1,000,000. Closing of this
transaction is conditioned upon, among other things, the transfer to Chevy's of
the liquor license related to such restaurant. Management currently expects
closing of this transaction to occur during the second quarter of 1998.
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.
The Company plans to convert the remaining Casa Lupita and the two Carlos
Murphy's to the Garcia's concept in 1998. Initial expansion plans are for Fiesta
to open several new Garcia's in its core operating area in and around Phoenix,
Arizona. In March 1998, the Company opened a new Garcia's food court facility in
Bank One Ball Park, home of the Arizona Diamondbacks (a Major League Baseball
team), in Phoenix, Arizona. This premier entertainment location will be open
throughout the Major League Baseball season as well as for all special events
and concerts held at the Ball Park.
RESTAURANT OPERATIONS
MANAGEMENT AND EMPLOYEES
Responsibility for the Company's restaurant operations is organized
geographically with restaurant general managers reporting to area directors of
operations who, in turn, report to the respective divisional vice president of
operations for Garfield's, Fiesta and Pepperoni Grill. A typical restaurant has
a general manager, two to four assistant managers and average 57 employees,
approximately 75% of whom are part-time.
Area directors of operations as well as restaurant general managers and
associate managers are eligible for cash and stock bonuses, travel incentives,
professional training and attendance at industry conferences. Receipt of these
incentives is based on reaching restaurant performance objectives. The Company's
hourly employees are eligible for performance-based awards for superior service
to the Company and its guests. Employee awards can include travel incentives,
gift certificates, plaques and Company memorabilia. Most employees other than
restaurant management and corporate management are compensated on an hourly
basis.
QUALITY CONTROL
The Company has uniform operating standards and specifications relating
to the quality, preparation and selection of menu items, maintenance and
cleanliness of the premises, and employee conduct. Managers are responsible for
assuring compliance with Company operating procedures. Executive and supervisory
personnel routinely visit each restaurant to evaluate adherence to quality
standards and employee performance.
TRAINING
The Company places a great deal of emphasis on the proper training of
its hourly employees and general and associate managers. In 1995, the Company
hired a full-time training director to oversee all areas of employee education.
The outline for the training program is based on the individual expertise of the
trainee and typically lasts about two weeks for hourly employees and up to eight
weeks for managers. Managers must be certified in a number of skills in
restaurant management, including technical proficiency and job functions,
management techniques and profit and loss responsibilities. These skills are
taught primarily in the restaurant along with classroom training and assigned
projects. Manager training is performed in several geographically dispersed
restaurants. Standard manuals regarding training and operations, products and
equipment, and local marketing programs are provided by the Company.
PURCHASING
During 1994, the Company hired a purchasing director to oversee the
relations and negotiations with manufacturers and regional distributors for most
food and beverage products and to ensure uniform quality, competitive costs and
adequate supplies of proprietary products. The Company and its franchisees
purchase substantially all food and beverage products from several national and
regional suppliers. The Company has not experienced any significant delays in
receiving food and beverage inventories or restaurant supplies.
ADVERTISING AND MARKETING
The Company uses television, newspaper, radio and outdoor advertising
to promote its restaurants. In markets where the Company shares a trade area
with a franchisee, advertising cooperatives are utilized to maximize the
Company's restaurant's visibility.
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Franchisees of Garfield's units are generally required to expend up to 4% of
sales on restaurant related marketing efforts. In addition, all Company and
franchise restaurants contribute 1/2% of their sales to a marketing fund used to
produce advertising, menu development and point-of-sale material to promote
increased sales. The Company engages in a variety of local market promotional
activities such as contributing goods, time and money to charitable, civic and
educational programs, in order to increase public awareness of the Company's
restaurants.
RESTAURANT REPORTING
Financial controls are implemented through the use of computerized cash
registers and management information systems. Sales reports and food, beverage
and labor cost data are prepared and reviewed weekly for operational control.
During 1997, the Company implemented new systems to streamline the flow of
sales, payroll and accounts payable information.
EXPANSION STRATEGY
The Company intends to open Garfield's restaurants in regional malls
principally throughout the eastern half of the United States. This expansion
strategy is designed to capitalize on the growing trend to include and expand
dining and entertainment facilities in regional malls. Management believes this
mall-based expansion strategy for Garfield's reduces the risks associated with
locating restaurants in new markets because of the availability of historical
trends regarding mall sales and customer traffic. Further, restaurant
construction within a mall typically requires a substantially lower investment
than construction of a free-standing restaurant.
Management believes there are sufficient additional mall locations for
its restaurant concepts, particularly as existing malls are expanded and
remodeled with a view toward becoming entertainment and dining centers. The
Company maintains relationships with several leading mall operators who provide
the Company with an ongoing supply of potential mall locations for evaluation.
This will not, however, preclude it from searching for other expansion
opportunities such as free-standing sites.
The Company intends to open Garcia's in free-standing sites primarily
in its core operating area in and around Phoenix, Arizona. This strategy
capitalizes on the strong reputation of the Garcia's concept in the Phoenix
area.
The Company has retained a Director of Real Estate to represent it in
site negotiations. This individual is compensated on a success fee basis. The
Company expects to focus its expansion primarily on the opening of Company-owned
Garfield's and Garcia's restaurants. Additional franchising is possible but
likely to be a minor part of expansion.
Subsequent to December 28, 1997, the Company has opened one new
Garfield's in Jasper, Alabama, and is currently developing one new Garfield's in
Asheville, North Carolina. In March 1998, the Company opened a new Garcia's food
court facility in the Bank One Ball Park in Phoenix, Arizona. Also, in March
1998, a new franchised Garfield's was opened in Vincennes, Indiana. The Company
expects to open up to five Company-owned Garfield's and Garcia's restaurants in
1998 and up to ten Company-owned Garfield's and Garcia's restaurants in 1999.
The Company also plans to convert the existing Casa Lupita's and Carlos Murphy's
to the Garcia's concept during 1998.
In addition, management is actively seeking possible merger or
acquisition candidates that it believes will add value to the Company.
FRANCHISE OPERATIONS
GENERAL TERMS
As of December 28, 1997, eight franchised Garfield's were operating
pursuant to agreements granted by the Company. In March 1998, a new franchised
Garfield's opened in Vincennes, Indiana, bringing the total count of franchised
Garfield's to nine. The typical Garfield's franchise agreement provides for (i)
the payment of an initial franchise fee of up to $35,000 and a monthly
continuing royalty fee expressed as a percentage (typically 3% or 4%) of gross
sales with a minimum fee of $2,000 to $2,500 per month; (ii) the payment of 1/2%
of gross sales to the Garfield's Creative Marketing Fund; (iii) quality control
and operational standards; (iv) development obligations for the opening of new
restaurants under the franchise; and (v) the creation and use of advertising.
The franchise term usually ranges from five to 10 years with five-year renewals.
The grant of a franchise does not ensure that a restaurant will be opened. Under
the Company's typical franchise agreement, the failure to open restaurants can
cause a termination of the franchise. Although the Company largely relies upon
standardized agreements for its franchises, it will continue to adjust its
agreements as circumstances warrant.
As of December 28, 1997, there were two franchised Garcia's
restaurants. These franchise agreements provide for the monthly payment of
continuing royalties of 1.5% to 2.0% of gross sales.
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FUTURE FRANCHISE DEVELOPMENT
The Company has elected to emphasize Company restaurant development but
is studying the possibility of becoming more aggressive in its franchise
development. The Company entered into one new franchise agreement in 1997 for a
new Garfield's which opened in March 1998. The Company has not entered into any
additional franchise agreements as of the date of this report.
COMPANY MANAGED FRANCHISES
The Company currently manages three of its franchised Garfield's
restaurants in Oklahoma City pursuant to a management agreement with the
franchisee who remains the owner of the restaurants. The Company receives fixed
management and accounting fees in addition to its royalties and other charges
under the franchise agreement.
FRANCHISE REVENUE DATA
The following table sets forth fees and royalties earned by the Company
from franchisees for the years indicated.
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1997 1996 1995
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Initial franchise fees $ -- $ -- $ 50,000
Continuing royalties 268,000 265,000 258,000
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COMPLIANCE WITH FRANCHISE STANDARDS
All franchisees are required to operate their Garfield's restaurants in
compliance with the Company's methods, standards and specifications regarding
such matters as menu items, ingredients, materials, supplies, services,
fixtures, furnishings, decor and signs, although the franchisee has the
discretion to determine the menu prices to be charged. However, as a practical
matter, all franchisees utilize the Company's standardized Garfield's menu. In
addition, all franchisees are required to purchase all food, ingredients,
supplies and materials from suppliers approved by the Company. The Company
enforces the standards required of franchisees. Such enforcement may result in
the closure or non-renewal of certain franchise units, but any such closings or
non-renewals are not expected to have a material adverse effect upon the
Company's results of operations or financial position.
COMPETITION
The restaurant industry is intensely competitive with respect to price,
service, location, food type and quality. There are many well-established
competitors with substantially greater financial and other resources than the
Company. Some of the Company's competitors have been in existence for
substantially longer periods than the Company and may be better established in
the market area than the Company's restaurants. The restaurant business is often
affected by changes in consumer taste, national, regional or local economic
conditions, demographic trends, traffic patterns and type, number and location
of competing restaurants. In addition, factors such as inflation, increased
food, labor and benefit costs, and the lack of experienced management and hourly
employees may adversely affect the restaurant industry in general and the
Company's restaurants in particular.
SERVICE MARKS
"GARFIELD'S", "CASEY GARFIELD'S", "PEPPERONI GRILL", "GARCIA'S", "CASA
LUPITA" and "CARLOS MURPHY'S" are Company service marks registered with the
United States Patent and Trademark Office. The Company pursues any infringement
of its marks within the United States and considers its marks to be crucial to
the success of its operations.
EMPLOYEES
As of March 1, 1998, the Company employed 3,567 individuals, of whom
278 were management or administrative personnel (including 219 who were
restaurant managers or trainees) and 3,289 were employed in non-management
restaurant positions. As of this date, the Company employed 262 persons on a
salaried basis and 3,305 persons on an hourly basis. Each restaurant employs an
average of 57 people.
Most employees, other than restaurant management and corporate
management personnel, are paid on an hourly basis. The Company believes that it
provides working conditions and wages that compare favorably with those of its
competition. As the Company expands, it will need to hire additional management
and its continued success will depend in large part on its ability to attract
and retain good management employees. The Company's employees are not covered by
a collective bargaining agreement.
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SEASONALITY
With 44 of the 62 Company-owned restaurants located in regional malls
as of December 28, 1997, the resulting higher pedestrian traffic during the
Thanksgiving to New Year holiday season has caused the Company to experience a
substantial increase in food and beverage sales and profits in the Company's
fourth fiscal quarter. However, as a result of the 1997 acquisition of 17
free-standing Mexican restaurants from Famous, the Company's management believes
that its revenues and profits on a quarterly basis will be less affected by
seasonality in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Impact of Seasonality."
GOVERNMENT REGULATIONS
The Company's restaurants are subject to licensing and regulation by
alcoholic beverage control, health, sanitation, safety and fire agencies in each
state and/or municipality in which restaurants are located. The Company has not
experienced material difficulties in these areas, however, regulatory
difficulties or failures in obtaining the required licenses or approvals could
delay or prevent the opening of a new restaurant and affect profitability.
Approximately 14% of the Company's food and beverage revenues in 1997
were attributable to the sale of alcoholic beverages. Alcoholic beverage control
regulations require each of the Company's restaurants to apply to a state
authority and, in certain locations, county or municipal authorities, for a
license or permit to sell alcoholic beverages on the premises and to provide
service for extended hours and on Sundays. Typically, such licenses or permits
must be renewed annually and may be revoked or suspended for cause at any time.
Alcoholic beverage control regulations relate to numerous aspects of the daily
operations of the Company's restaurants, including minimum age of patron and
employees, hours of operation, advertising, wholesale purchasing, inventory
control and handling, storage and dispensing of alcoholic beverages.
In certain states the Company may be subject to "dram-shop" statutes,
which generally provide a person injured by an intoxicated patron the right to
recover damages from an establishment that wrongfully served alcoholic beverages
to the intoxicated person. The Company carries liquor liability coverage as part
of its existing comprehensive general liability insurance.
The Company's restaurant operations are also subject to federal
and state laws governing such matters as minimum wages, working conditions,
overtime and tip credits. Significant numbers of the Company's food service and
preparation personnel are paid at rates equal to or based upon the federal
minimum wage and, accordingly, further increases in the minimum wage could
increase the Company's labor costs. The enactment of future legislation
increasing employee benefits, such as mandated health insurance, could also
significantly adversely affect the industry and the Company, as could future
increases in workers' compensation rates.
The Company is subject to Federal Trade Commission ("FTC") regulation
and state laws that regulate the offer and sale of franchises. The Company may
also become subject to state laws that regulate substantive aspects of the
franchisor-franchisee relationship. The FTC requires the Company to furnish
prospective franchisees a franchise offering circular containing prescribed
information. A number of states in which the Company might consider franchising
also regulate the offer and sale of franchises and require registration of the
franchise offering with state authorities. The Company believes that it is in
material compliance with such laws.
The Americans With Disabilities Act ("ADA") prohibits discrimination in
employment and public accommodations on the basis of disability. While the
Company believes it is in substantial compliance with the ADA regulations, the
Company could be required to expend funds to modify its restaurants to provide
service to, or make reasonable accommodations for the employment of disabled
persons.
ITEM 2. PROPERTIES
All but one of the Company's facilities are occupied under leases. The
majority of the Company's restaurant leases provide for the payment of base
rents plus real estate taxes, insurance and other expenses and for the payment
of a percentage of the Company's sales in excess of certain sales levels. These
leases typically provide for escalating rentals in future years and have initial
terms expiring as follows:
<TABLE>
<CAPTION>
NO. OF
YEAR LEASE TERM EXPIRES FACILITIES *
----------------------- ------------
<S> <C>
1998-1999...................................... 3
2000-2001...................................... 10
2002-2003...................................... 9
2004-2005...................................... 19
2006-2007...................................... 10
2008 and beyond................................ 13
</TABLE>
7
<PAGE> 10
* Includes two leases which have been executed for locations that were
under-development and had not opened as of December 28, 1997, and three leases
for locations which were sold subsequent to December 28, 1997.
The Company's executive offices, located in approximately 7,400 square
feet of office space in Oklahoma City, Oklahoma, are occupied under a lease
which expires in June, 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently engaged in any legal proceedings the
outcome of which is expected to have a material adverse effect upon its business
or financial condition. However, in the ordinary course of its business, the
Company is named in various lawsuits related to the operation of its
restaurants, most of which relate to on-the-job injury claims by its employees
and are typically handled by the Company's insurance carriers.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders
during its fourth fiscal quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's common stock has been quoted on the NASDAQ National
Market System under the symbol "EATS" since May 1994. Prior to that date, the
Company's common stock was quoted on the NASDAQ Small-Cap Market. The following
table sets forth, for the quarterly periods indicated, the high and low closing
bid prices for the common stock, as reported by the NASDAQ Markets.
<TABLE>
<CAPTION>
Low High
--- ----
<S> <C> <C>
1996
First Quarter.................................. $2.19 $3.50
Second Quarter................................. 3.25 5.75
Third Quarter.................................. 2.75 4.88
Fourth Quarter................................. 3.00 4.75
1997
First Quarter.................................. $2.94 $4.31
Second Quarter................................. 2.50 3.19
Third Quarter.................................. 2.56 4.38
Fourth Quarter................................. 3.69 5.00
1998
First Quarter (to March 25).................... $3.44 $5.50
</TABLE>
Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
On March 25, 1998, the Company's stock transfer agent reported that the
Company's common stock was held by 247 holders of record. However, management
believes there are approximately 1,000 beneficial owners of the Company's common
stock.
The Company has paid no cash dividends on its common stock. The Board
of Directors intends to retain earnings of the Company to support operations and
to finance expansion and does not intend to pay cash dividends on the common
stock for the foreseeable future. The payment of cash dividends in the future
will depend upon such factors as earnings levels, capital requirements, the
Company's financial condition and other factors deemed relevant by the Board of
Directors.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company.
The selected financial data in the table are derived from the consolidated
financial statements of the Company. The following data should be read in
conjunction with, and is qualified in its entirety by, the Company's
consolidated financial statements and related notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
8
<PAGE> 11
<TABLE>
<CAPTION>
(In thousands except per share amounts)
Fiscal Year
-------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Food and beverage sales .......................... $ 62,851 $ 55,733 $ 45,811 $ 38,869 $ 26,401
Franchise fees and royalties ..................... 268 265 307 267 488
Other income ..................................... 423 418 482 423 369
-------- -------- -------- -------- --------
63,542 56,416 46,600 39,559 27,258
-------- -------- -------- -------- --------
Costs and Expenses:
Costs of sales ................................... 17,840 17,070 13,968 12,052 8,231
Operating expenses ............................... 36,795 32,219 26,387 22,359 14,891
Pre-opening costs ................................ 279 726 830 568 591
General and administrative expenses .............. 4,049 3,666 3,067 2,467 2,101
Provision for restaurant closures
and other disposals ............................ -- -- 897 -- --
Provision for impairment of long-lived assets .... 85 -- -- -- --
Depreciation and amortization .................... 2,216 1,886 1,337 927 601
Interest expense ................................. 310 194 41 48 50
-------- -------- -------- -------- --------
61,574 55,761 46,527 38,421 26,465
-------- -------- -------- -------- --------
Income before provision (benefit) for
income taxes and cumulative effect of
change in accounting for income taxes ............. 1,968 655 73 1,138 793
Provision (benefit) for income taxes ................. 569 74 (113) 316 293
-------- -------- -------- -------- --------
Income before cumulative effect of change
in accounting for income taxes .................... 1,399 581 186 822 500
Cumulative effect of change in accounting
for income taxes .................................. -- -- -- -- 202
-------- -------- -------- -------- --------
Net income ........................................... $ 1,399 $ 581 $ 186 $ 822 $ 702
======== ======== ======== ======== ========
Net income per common share (1):
Income before cumulative effect
of change in accounting for income taxes ....... $ 0.36 $ 0.15 $ 0.05 $ 0.23 $ 0.24
Cumulative effect of change in
accounting for income taxes .................... -- -- -- -- 0.09
-------- -------- -------- -------- --------
Net income per common share ...................... $ 0.36 $ 0.15 $ 0.05 $ 0.23 $ 0.33
======== ======== ======== ======== ========
Net income per common share
assuming dilution (1):
Income before cumulative effect
of change in accounting for income taxes ....... $ 0.35 $ 0.15 $ 0.05 $ 0.21 $ 0.18
Cumulative effect of change in
accounting for income taxes .................... -- -- -- -- 0.08
-------- -------- -------- -------- --------
Net income per common share
assuming dilution .............................. $ 0.35 $ 0.15 $ 0.05 $ 0.21 $ 0.26
======== ======== ======== ======== ========
Weighted average common shares ....................... 3,869 3,836 3,723 3,646 2,124
======== ======== ======== ======== ========
Weighted average common shares
assuming dilution ................................ 3,988 4,002 3,834 3,832 2,732
======== ======== ======== ======== ========
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (deficit) ........................ $ (4,844) $ (3,456) $ (1,677) 922 $ 2,021
Total assets ..................................... 29,775 18,709 16,596 12,933 11,363
Long-term obligations (2) ........................ 7,637 1,471 1,249 75 42
Stockholders' equity ............................. 10,993 9,650 8,912 8,625 7,690
OTHER DATA:
Earnings before interest, depreciation
and taxes (EBITDA) ............................. $ 4,493 $ 2,736 $ 1,451 $ 2,113 $ 1,444
System-wide sales ................................ 71,133 64,036 53,802 45,891 39,025
</TABLE>
(1) In March 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS 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 128 in the fourth quarter of 1997, and, as
required, has restated all prior period EPS amounts to conform to the new
accounting standard.
(2) Includes capital leases and long-term debt obligations, net of current
portions. (See Note 5 of Notes to Consolidated Financial Statements.)
9
<PAGE> 12
ITEM 7. 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-K 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 December 28, 1997, the Company owned and operated 62 (43
Garfield's, 10 Garcia's, five Casa Lupitas, two Carlos Murphy's and two
Pepperoni Grills) and franchised 10 (eight Garfield's and two Garcia's)
restaurants. Subsequent to December 28, 1997, the Company opened one new
Garfield's and sold three Casa Lupitas. Additionally, one new franchised
Garfield's was opened subsequent to December 28, 1997. The Company currently has
one Garfield's and one Garcia's in development. As of the date of this report,
the entire system includes 60 (44 Garfield's, 10 Garcia's, two Casa Lupitas, two
Carlos Murphy's, and two Pepperoni Grills) Company-owned restaurants and 11
(nine Garfield's and two Garcia's) franchise restaurants.
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>
Fiscal Year
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Food and beverage sales ............................ 98.9% 98.8% 98.3%
Franchise fees and royalties ....................... 0.4 0.5 0.7
Other income ....................................... 0.7 0.7 1.0
--------- --------- ---------
100.0 100.0 100.0
--------- --------- ---------
Costs and Expenses:
Costs of sales (1) ................................. 28.4 30.6 30.5
Operating expenses (1) ............................. 58.5 57.8 57.6
Pre-opening costs (1) .............................. 0.4 1.3 1.8
General and administrative expenses ................ 6.4 6.5 6.6
Provision for restaurant closures
and other disposals .............................. -- -- 1.9
Provision for impairment of long-lived assets ... 0.1 -- --
Depreciation and amortization (1) .................. 3.5 3.4 2.9
Interest expense ................................... 0.5 0.3 0.1
--------- --------- ---------
Income before provision (benefit) for income taxes ..... 3.1 1.1 0.2
Provision (benefit) for income taxes ................... 0.9 0.1 (0.2)
--------- --------- ---------
Net income ............................................. 2.2% 1.0% 0.4%
========= ========= =========
SELECTED OPERATING DATA:
(Dollars in thousands) System-wide sales:
Company restaurants ................................. $ 62,851 $ 55,733 $ 45,811
Franchise restaurants ............................... 8,282 8,303 7,991
--------- --------- ---------
Total ............................................ $ 71,133 $ 64,036 $ 53,802
========= ========= =========
Number of restaurants (at end of period):
Company restaurants ................................. 62 45 41
Franchise restaurants ............................... 10 8 8
--------- --------- ---------
Total ............................................ 72 53 49
========= ========= =========
</TABLE>
(1) As a percentage of food and beverage sales.
10
<PAGE> 13
IMPACT OF SEASONALITY
The concentration of restaurants in regional malls, where customer
traffic increases substantially during the Thanksgiving to New Year holiday
season, has resulted in the Company experiencing a substantial increase in
restaurant sales and profits during the fourth quarter of each year. However,
as a result of the acquisition of 17 free-standing Mexican restaurants from
Famous, the Company's management believes that its revenues and profits on a
quarterly basis will be less affected by seasonality in the future. The
following table presents the Company's revenues, net income (loss) and certain
other financial and operational data for each fiscal quarter of 1997, 1996 and
1995.
<TABLE>
<CAPTION>
FISCAL QUARTERS
----------------------------------------------------------------------
1ST 2ND 3RD 4TH ANNUAL
----------- ----------- ----------- ----------- ------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1997:
Revenues .................................... $ 14,203 $ 13,709 $ 14,735 $ 20,895 $ 63,542
Net income .................................. 229 24 225 921 1,399
Net income per common share ................. 0.06 0.01 0.06 0.24 0.36
Net income per common share
assuming dilution ...................... 0.06 0.01 0.06 0.22 0.35
Weighted average common shares .............. 3,863 3,898 3,858 3,857 3,869
Weighted average common
shares assuming dilution .............. 4,006 3,945 3,958 4,044 3,988
Pre-opening costs ........................... $ 18 $ 156 $ 92 $ 13 $ 279
Number of Company units at
end of period (1) ....................... 43 45 46 62 62
Company restaurant operating months ......... 131 131 135 162 559
Sales per Company restaurant
operating month ......................... $ 107 $ 103 $ 108 $ 128 $ 113
1996:
Revenues .................................... $ 12,772 $ 13,426 $ 13,999 $ 16,219 $ 56,416
Net income (loss) ........................... 37 (166) 109 601 581
Net income (loss) per common share .......... 0.01 (0.04) 0.03 0.16 0.15
Net income per common share
assuming dilution ....................... 0.01 (0.04) 0.03 0.15 0.15
Weighted average common shares .............. 3,808 3,843 3,845 3,849 3,836
Weighted average common
shares assuming dilution ................ 3,894 3,843 4,004 4,007 4,002
Pre-opening costs ........................... $ 120 $ 154 $ 230 $ 222 $ 726
Number of Company units at
end of period ........................... 42 43 44 45 45
Company restaurant operating months ......... 124 127 128 134 513
Sales per Company restaurant
operating month ......................... $ 102 $ 104 $ 108 $ 119 $ 109
1995:
Revenues .................................... $ 10,475 $ 10,682 $ 11,449 $ 13,994 $ 46,600
Net income (loss) (2) ....................... 25 (45) (642) 848 186
Net income (loss) per common
share (2) .............................. 0.01 (0.01) (0.17) 0.23 0.05
Net income (loss) per common
share assuming dilution (2) ............ 0.01 (0.01) (0.17) 0.22 0.05
Weighted average common
shares ................................. 3,695 3,727 3,733 3,737 3,723
Weighted average common
shares assuming dilution ............... 3,829 3,727 3,733 3,842 3,834
Pre-opening costs ........................... $ 143 $ 198 $ 223 $ 266 $ 830
Number of Company units at
end of period ........................... 37 38 38 41 41
Company restaurant operating months ......... 107 114 113 119 453
Sales per Company restaurant
operating month ......................... $ 96 $ 92 $ 100 $ 116 $ 101
</TABLE>
(1) During the fourth quarter of 1997, the Company acquired 17 Mexican
restaurants under the names: Garcia's (10), Casa Lupita (5) and Carlos
Murphy's (2).
(2) During the third quarter of 1995, the Company recorded a pre-tax charge of
$897,000 to establish a provision for restaurant closures and other
disposals. The effect of this provision on the reported net income (loss)
and per share data for the third quarter and the fiscal year was $(639,000)
or $(0.17) per share.
11
<PAGE> 14
FISCAL YEARS 1997, 1996, AND 1995
REVENUES
Revenues for the year ended December 28, 1997, increased 13% over the
revenues reported for the year ended December 29, 1996. Revenues in 1996
increased 21% over 1995 levels. Revenues for the year ended December 31, 1995,
increased 18% over the same period in 1994. The 1997, 1996 and 1995 increases
were primarily due to increases in food and beverage sales.
The number of restaurants operating at the end of each year, the
number of operating months during that year and average sales per operating
month were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Number of Company restaurants at year end ............. 62 45 41
Number of Company restaurant operating months ......... 559 513 453
Average sales per Company restaurant operating
month ............................................. $112,500 $108,600 $101,100
</TABLE>
A summary of sales and costs of sales expressed as a percentage of sales
are listed below for the fiscal years:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
SALES:
<S> <C> <C> <C>
Food ..................................... 85.6% 85.1% 83.5%
Beverage ................................. 14.4% 14.9% 16.5%
------ ------ ------
Total ................................. 100.0% 100.0% 100.0%
====== ====== ======
COSTS OF SALES:
Food ..................................... 28.7% 30.7% 30.6%
Beverage ................................. 26.7% 30.5% 30.2%
------ ------ ------
Total ................................. 28.4% 30.6% 30.5%
====== ====== ======
</TABLE>
Average monthly sales per unit were $112,500 during 1997 compared to
$108,600 during 1996. The 1997 per unit monthly sales increased by $3,900 or
3.6% from 1996 levels. This increase is primarily due to the introduction of a
new Garfield's menu design, a successful television advertising campaign during
the fourth quarter, the success of continued radio and newspaper advertising,
the implementation of a mall employee rewards program in selected locations,
and the addition of 17 higher volume restaurants through the Famous Acquisition
in the fourth quarter of 1997. The Company's management expects that average
monthly sales per unit will increase in future periods due to the addition of
the 17 new Mexican restaurants through the Famous Acquisition and the future
openings of Garcia's.
Average monthly sales per unit were $108,600 during 1996 compared to
$101,100 during 1995. The 1996 per unit monthly sales increased by $7,500 or
7.4% from 1995 levels. The increase was primarily due to a stronger, more
experienced senior-level management team in place at the beginning of 1996, the
successful introduction of quarterly regional newspaper advertising programs
which were used in the majority of the Company's restaurant markets in 1996,
successful tests of radio and direct mail advertising campaigns in selected
markets and two menu roll-outs (in July and October 1996), both of which
included selective modest price increases (in-line with competitor pricing on
comparable menu selections) and introduced several new product selections that
were featured in the aforementioned newspaper, radio and direct mail
advertising campaigns.
Continuing royalties were $268,000 in 1997, $265,000 in 1996 and
$258,000 in 1995. Continuing royalties were comparable as the same number of
franchise restaurants (eight) were in operation during the three year period.
During the second quarter of 1995, one franchise restaurant closed and a new
one opened. Initial franchise fees recognized in 1995 were $50,000. No initial
franchise fees were recorded in 1997 or 1996.
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>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Costs of sales ................................... 28.4% 30.6% 30.5%
Labor costs ...................................... 27.3% 27.6% 28.0%
------ ------ ------
Total ....................................... 55.7% 58.2% 58.5%
====== ====== ======
</TABLE>
12
<PAGE> 15
Costs of sales as a percentage of food and beverage sales decreased in
1997 (28.4%) from 1996 (30.6%). This decrease is primarily due to the Company's
continued menu development, increased vendor rebates, and improved store-level
food and beverage cost controls. Costs of sales as a percentage of food and
beverage sales increased slightly in 1996 (30.6%) as compared to 1995 (30.5%)
primarily due to higher meat and dairy product costs, partially offset by lower
produce costs and improvements in the Company's purchasing techniques.
The Company's labor costs as a percentage of food and beverage sales
decreased in 1997 to 27.3% from 27.6% in 1996. Labor costs as a percentage of
food and beverage sales decreased in 1996 from 28.0% in 1995. The 1997 decrease
is primarily due to continued improvement of store-level monitoring of labor
needs, continued refinement of restaurant operations resulting in reduced
kitchen labor costs and a reduction in the average number of managers per store
from 1996. The decrease in 1996 from 1995 is primarily due to the improvements
of store-level monitoring of labor needs.
Operating expenses (which include labor costs) as a percentage of food
and beverage sales were 58.5% in 1997, 57.8% in 1996, and 57.6% in 1995. The
increase in operating expenses as a percentage of food and beverage sales in
1997 as compared to 1996 was due primarily to higher promotional and
advertising expenses and occupancy costs (primarily rent and utilities)
partially offset by lower labor costs (as previously explained). The modest
increase in operating expenses as a percentage of food and beverage sales in
1996 versus 1995 was attributable to higher advertising and promotional
expenses partially offset by lower restaurant occupancy and labor costs.
PRE-OPENING COSTS
Unlike a majority of its publicly-held competitors which capitalize and
amortize pre-opening costs over a period of up to 24 months, the Company
expenses such costs as incurred.
During each of the three years ended December 28, 1997, December 29,
1996, and December 31, 1995, the Company incurred and recognized as expense the
following amounts for restaurant pre-opening costs relative to the
corresponding number of restaurants opened:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Total pre-opening costs ............................... $279,000 $726,000 $830,000
Restaurants opened .................................... 3 8 9
Average pre-opening costs per restaurant opened ....... $ 93,000 $ 90,700 $ 92,200
Total pre-opening costs as a percentage of food
and beverage sales ................................ 0.4% 1.3% 1.8%
</TABLE>
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.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased as a percentage of total
revenues to 6.4% in 1997 from 6.5% in 1996. In 1996, general and administrative
expenses decreased from 6.6% in 1995. The higher absolute levels of general and
administrative expenses from 1995 to 1997 are related primarily to additional
personnel costs and related costs of operating the Company's expanding
restaurant group. General and administrative expenses as a percentage of total
revenues decreased modestly in 1997 as compared to 1996 and in 1996 as compared
to 1995, as a result of the Company's revenues increasing at a higher rate than
its increase in general and administrative expenses. The Company anticipates
that its costs of supervision and administration of Company and franchise
stores will increase at a slower rate than revenue increases during the next
few years.
PROVISION FOR RESTAURANT CLOSURES AND OTHER DISPOSALS
During 1995, the Company approved and began the implementation of a plan
to close four under-performing restaurants. During 1996, the Company identified
two additional locations for closure. As of December 28, 1997, the Company had
disposed of all restaurants planned for closure in 1995 and 1996. These
restaurants (the 1995 and 1996 identified closures) collectively accounted for
$79,000, $1,784,000 and $3,498,000 of revenues and $(18,000), $(68,000) and
$(223,000) of operating losses for fiscal years 1997, 1996 and 1995,
respectively. Management expects the effect of closing these under-performing
restaurants to result in improved margins and increased profitability for the
Company in future periods.
As a result of the plan to close under-performing restaurants, the
Company recorded a pre-tax charge of $897,000 in the third quarter of 1995. The
provision related to lease termination costs, litigation settlement costs,
write-down of property, equipment and leasehold improvements, and other exits
costs. As of December 28, 1997, the Company has a remaining reserve of
approximately $51,000 for settlement of any remaining liabilities associated
with the closures.
13
<PAGE> 16
PROVISION FOR IMPAIRMENT OF LONG-LIVED ASSETS
In 1996, the Company adopted the provisions of SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." Pursuant to SFAS 121, the Company's restaurants are reviewed on an
individual restaurant basis for indicators of impairment, whenever events or
circumstances indicate that the carrying value of its restaurants may not be
recoverable. The Company's primary test for an indicator of potential
impairment is operating losses. In order to determine whether an impairment has
occurred, the Company estimates the future net cash flows expected to be
generated from the use of its restaurants and the eventual disposition, as of
the date of determination, and compares such estimated future cash flows to the
respective carrying amounts. Those restaurants which have carrying amounts in
excess of estimated future cash flows are deemed impaired. The carrying value
of these restaurants is adjusted to an estimated fair value by discounting the
estimated future cash flows attributable to such restaurants using a discount
rate equivalent to the rate of return the Company expects to achieve from its
investment in newly-constructed restaurants. The excess is charged to expense
and cannot be reinstated.
Considerable management judgment and certain significant assumptions are
necessary to estimate future cash flows. Significant judgments and assumptions
used by the Company in evaluating its assets for impairment include, but may
not be limited to: estimations of future sales levels, cost of sales, direct
and indirect costs of operating the assets, the length of time the assets will
be utilized and the Company's ability to utilize equipment, fixtures and other
moveable long-lived assets in other existing or future locations. In addition,
such estimates and assumptions include anticipated operating results related to
certain profit improvement programs implemented by the Company during 1996 and
1997, as well as the continuation of certain rent reductions, deferrals, and
other negotiated concessions from certain landlords. Actual results could vary
significantly from management's estimates and assumptions and such variance
could result in a change in the estimated recoverability of the Company's
long-lived assets. Accordingly, the results of the changes in those estimates
could have a material impact on the Company's future results of operations and
financial position.
During 1997, the Company recorded an $85,000 provision for impairment of
long-lived assets related to three locations. Additionally, as of December 28,
1997, the Company had identified a total of six locations with indicators of
impairment.
Prior to adopting SFAS 121, the Company accounted for the impairment of
long-lived assets by evaluating the recoverability of assets of restaurant
locations for which management had identified and began a plan to close the
location. The Company continues to use the guidance of FASB Emerging Issues
Task Force ("EITF") Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity" for guidance in
recognizing costs related to closing restaurants.
In the normal course of business, management performs a regular review of
the strength of its operating assets. It is management's plan to continue to
make such decisions to close under-performing restaurants and/or dispose of
other assets it considers in the best long-term interest of the Company's
shareholders.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased in 1997 to $2,216,000
(3.5% of restaurant sales) compared to $1,886,000 (3.4% of restaurant sales) in
1996 and $1,337,000 (2.9% of restaurant sales) in 1995. The increase in expense
in 1997 as compared to 1996 is primarily attributable to the increase in net
assets subject to depreciation and amortization in 1997 versus 1996 as the
result of opening and acquisition of additional restaurants. The expense
increase in 1996 versus 1995 relates principally to the increase in net assets
subject to depreciation and amortization because of opening additional
restaurants, the purchase of the Pepperoni Grill restaurant in January 1995,
and the remodeling of existing restaurants.
INTEREST EXPENSE
Interest expense during each of the three years in the period ended
December 28, 1997, was $310,000 in 1997, $194,000 in 1996, and $41,000 in 1995.
Additionally, the Company has capitalized approximately $39,000, $62,000 and
$72,000 of interest costs during 1997, 1996 and 1995, respectively. The
increase in interest expense in 1997 as compared to 1996 is attributable to an
increase in the 1997 average borrowing balances and a higher average interest
rate under the Company's revolving credit agreements and the increase in the
Company's long-term debt as a result of the Famous Acquisition. The increase in
interest expense in 1996 versus 1995 is attributable to an increase in the
average borrowing balance under the Company's revolving credit agreement in
1996 versus 1995.
INCOME TAXES
The Company records income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes." The
provision (benefit) for income taxes was $569,000, $74,000 and $(131,000),
respectively, for 1997, 1996 and 1995.
At December 28, 1997, the Company has recorded a benefit for its deferred
tax assets of approximately $2,869,000. Management believes that approximately
$2,019,000 of the assets will be recognized through the reversal of existing
taxable
14
<PAGE> 17
temporary differences with the remainder to be recognized through realization
of future income. It is management's opinion, based on the historical trend of
normal and recurring operating results, present store development and
forecasted operating results, that it is more likely than not that the Company
will realize the approximately $2,300,000 in the future net income in the next
two years necessary to recognize the deferred tax assets not otherwise offset
by reversing taxable temporary differences; net operating loss carryforwards do
not begin to expire until 2003 and general business tax credits until 2009.
While management of the Company is not presently aware of any adverse matters,
it is possible that the Company's ability to realize the deferred income tax
assets could be impaired if there are significant future exercises of
non-qualified stock options or if the Company were to experience declines in
sales and/or profit margins as a result of loss of market share, increased
competition or other adverse general economic conditions. Management intends to
evaluate the realizability of the net deferred tax asset at least quarterly by
assessing the need for a valuation allowance.
NET INCOME PER SHARE AMOUNTS
In March 1997, The Financial Accounting Standards Board ("FASB") issued
SFAS 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 shares outstanding for the basic EPS calculation were
3,868,950, 3,836,228 and 3,722,788 in 1997, 1996, and 1995, 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
3,988,016, 4,002,359 and 3,833,956 in 1997, 1996, and 1995, respectively. The
Company adopted the provisions of SFAS 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 cost 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 area.
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.
LIQUIDITY AND CAPITAL RESOURCES
At December 28, 1997, the Company's working capital ratio increased to
0.53 to 1 compared to 0.50 to 1 at December 29, 1996. As is customary in the
restaurant industry, the Company has consistently operated with negative
working capital and has not historically required large amounts of working
capital. Historically, the Company has leased the vast majority of its
restaurant locations. For fiscal years 1997, 1996 and 1995, the Company's
expenditures for capital improvements were $3,886,000, $7,307,000, and
$7,789,000, respectively, which were funded out of cash flows from operating
activities of $4,977,000, $2,438,000, and $3,318,000, respectively, landlord
finish-out allowances of $1,742,000, $3,022,000, and $2,492,000, respectively,
and borrowings under the Company's credit agreements. In addition, the Company
expended approximately $529,000 in January 1995 for the acquisition of the
Pepperoni Grill restaurant and trade name and approximately $8,939,000 for the
Famous Acquisition in November 1997. The Famous Acquisition was financed
primarily through a term loan with a bank (described below).
During 1998, the Company expects to construct and open an aggregate total
of five new Garfield's (in regional malls) and Garcia's (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 through 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 December 28, 1997, the Company had
borrowed $8,631,415 under the term loan feature. There were no outstanding
borrowings under the revolving line of credit as of December 28, 1997.
Outstanding borrowings under both the revolving line of credit and term loan
bear interest at three-month LIBOR plus 1.25% (6.94% as of December 28, 1997).
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
15
<PAGE> 18
covenants and restrictions. As of December 28, 1997, 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%.
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 December 28,
1997, 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 December 28, 1997.
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 key suppliers, vendors and
customers 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 is not material to the consolidated results of
operations or financial condition of the company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are included in a separate
section of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
In accordance with General Instruction G(3), a presentation of
information required in response to Items 10, 11, 12, and 13 appear in the
Company's Proxy Statement to be filed pursuant to Regulation 14A within 120
days of the year end covered hereby, and shall be incorporated herein by
reference when filed.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of the report:
1. Consolidated Financial Statements:
Management's Responsibility for Financial Reporting
Reports of Independent Auditors
Consolidated Balance Sheets as of December 28, 1997 and December 29,
1996
Consolidated Statements of Income for each of the three years in the
periods ended December 28, 1997, December 29, 1996 and December 31,
1995
Consolidated Statements of Stockholders' Equity for each of the
three years in the periods ended December 28, 1997, December 29, 1996
and December 31, 1995
Consolidated Statements of Cash Flows for each of the three years in
the periods ended December 28, 1997, December 29, 1996 and December
31, 1995
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules:
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have
been omitted.
3. Exhibits.
The following exhibits are filed with this Form 10-K and are
identified by the numbers indicated:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
3.1 Amended and Restated Articles of Incorporation.(1)
3.2 Amendment to the Amended and Restated Articles of
Incorporation.(2)
3.3 Bylaws as amended.(1)
4.1 Specimen Stock Certificate.(3)
16
<PAGE> 19
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
4.2 Form of Representative's Warrant.(3)
10.1 Employment Agreement between the Company and Vincent F.
Orza, Jr., dated October 1, 1995.(10)
10.2 Employment Agreement between the Company and James M. Burke,
dated October 1, 1995.(10)
10.4 Lease Agreement dated May 1, 1987 (as amended June 30, 1990,
October 1, 1992 and October 1, 1993) between the Company and
Colonial Center, LTD for the lease of the Company's
corporate office facilities in Oklahoma City, Oklahoma. (3)
10.8 Franchise Agreement and Amendment dated August 31, 1993
between the Company and Wolsey Dublin Company for the
Garfield's franchise in Sioux City, Iowa and non-exclusive
development rights to two additional locations in seven
cities in four states over the next two years. (3)
10.9 Amended and Restated Franchise Agreement and Modification of
Amended and Restated Franchise Agreement dated December 31,
1992 between the Company and O.E., Inc. for the three
Garfield's franchise locations in the Oklahoma City,
Oklahoma metropolitan area. (3)
10.10 Form of Franchise Agreement (revised March 1, 1993).(7)
10.11 Management Agreement dated December 31, 1992 between the
Company and O.E., Inc. for the supervision and accounting
services provided by the Company for three Garfield's
franchise locations in the Oklahoma City metropolitan area.
(3)
10.12 Collateral Assignment Agreement dated January 20, 1991,
between the Company and Vincent F. Orza, Jr. (5)
10.13 Collateral Assignment Agreement dated January 20, 1991,
between the Company and James M. Burke. (5)
10.15 Stock Plan for Significant Employees of the Company,
dated December 1, 1986. (6)
10.16 1987 Director Stock Incentive Plan. (6)
10.17 Eateries, Inc. Omnibus Equity Compensation Plan. (6)
10.18 Underwriting Agreement between the Company, Pauli & Company
Incorporated, RAS Securities Corp. and certain shareholders
of the Company dated November 15, 1993. (3)
10.22 Asset Sale Agreement dated January 9, 1995 between the
Company and Pepperoni Grill, Inc. and Specialty Restaurants,
involving the purchase of assets of Pepperoni Grill
restaurant by the Company. (9)
10.23 Employment Agreement between the Company and Corey Gable,
dated January 1, 1997. (10)
10.24 Employment Agreement between the Company and Peter L.
Holloway, dated January 1, 1995. (9)
10.25 Employee Stock Purchase Plan dated June 15, 1994 (8).
10.26 Amended and restated Eateries, Inc. Omnibus Equity
Compensation Plan dated as of June 15, 1994. (9)
10.27 Option Agreement between the Company and Vincent F. Orza,
Jr., dated January 4, 1996 (10)
10.28 Option Agreement between the Company and James M. Burke,
dated January 4, 1996 (10)
10.29 Option Agreement between the Company and Corey Gable, dated
April 5, 1996 (10)
10.32 Asset Purchase Agreement dated November 14, 1997, by and
between the Company, through its wholly-owned subsidiary,
Fiesta Restaurants, Inc., and Famous Restaurants, Inc. and
its subsidiaries. (11)
10.33 Agreement for Purchase and Sale of Assets and Licenses dated
February 26, 1998, among the Company and Chevy's, Inc. (12)
10.34 Agreement for purchase and Sale of Assets dated February 26,
1998, between the Company and Chevy's, Inc. (12)
10.35 Loan Agreement dated as of November 18, 1997, by and between
NationsBank, N.A. and the Company.
10.36 Stock Put Agreement dated April 2, 1997, by and among
Vincent F. Orza, Jr. and the Company.
10.37 Stock Put Agreement dated April 2, 1997, by and among James
M. Burke and the Company.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
(1) Filed as exhibit to Registrant's Registration Statement on
Form S-18 (File No. 33-6818-FW).
(2) Filed as exhibit to Registrant's Quarterly Report on Form
10-Q for the six months ended June 30, 1988 (File No.
0-14968) and incorporated herein by reference.
(3) Filed as exhibit to Registrant's Registration Statement on
Form S-2 (File No. 33-69896).
(4) Filed as exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992 (File No.
0-14968) and incorporated herein by reference.
(5) Filed as exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1990 (File No.
0-14968) and incorporated herein by reference.
(6) Filed as exhibit to Registrant's Registration Statement on
form S-8 (File No. 33-41279).
(7) Filed as exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993 (File No.
0-14968) and incorporated herein by reference.
(8) Filed as Appendix A to the Company's Notice of Annual
Meeting of Shareholders dated April 29, 1994 and
incorporated herein by reference.
(9) Filed as exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 (File No.
0-14968) and incorporated herein by reference.
(10) Filed as exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 29, 1996 (File No.
0-14968) and incorporated herein by reference.
(11) Filed as exhibit to Registrant's Current Report on Form 8-K
dated December 8, 1997 (File No. 0-14968) and incorporated
herein by reference.
(12) Filed as exhibit to Registrant's Current Report on Form 8-K
dated March 16, 1998 (File No. 0-14968) and incorporated
herein by reference.
(b) A Form 8-K was filed on December 8, 1997, with the Securities and Exchange
Commission regarding the Registrant's acquisition of certain assets from
Famous Restaurants, Inc. and its subsidiaries.
17
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
REGISTRANT:
EATERIES, INC.
Date: April 10, 1998 By: /s/ Vincent F. Orza, Jr.
-------------- ------------------------
Vincent F. Orza, Jr.
President
Chief Executive Officer
Date: April 10, 1998 By: /s/Corey Cable
-------------- -------------------------
Corey Gable
Vice President/Treasurer
Chief Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: April 10, 1998 By: /s/Vincent F. Orza, Jr.
-------------- -------------------------
Vincent F. Orza, Jr.
Chairman of the Board,
President and Director
Date: April 10, 1998 By: /s/James M. Burke
-------------- -------------------------
James M. Burke
Vice President of Operations,
Assistant Secretary and Director
Date: April 10, 1998 By: /s/Edward D. Orza
-------------- -------------------------
Edward D. Orza,
Director
Date: April 10, 1998 By: /s/Patricia L. Orza
--------------- -------------------------
Patricia L. Orza,
Secretary and Director
Date: April 10, 1998 By: /s/Thomas F. Golden
--------------- -------------------------
Thomas F. Golden,
Director
Date: April 10, 1998 By: /s/Philip Friedman
--------------- -------------------------
Philip Friedman,
Director
Date: April 10, 1998 By: /s/Larry Kordisch
--------------- -------------------------
Larry Kordisch,
Director
18
<PAGE> 21
EATERIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
<S> <C>
Management's Responsibility for Financial Reporting....................................................... F-1
Reports of Independent Auditors............................................................................ F-2
Consolidated Balance Sheets as of December 28, 1997 and December 29, 1996.................................. F-4
Consolidated Statements of Income for each of the three years in the period ended
December 28, 1997.................................................................................... F-5
Consolidated Statements of Stockholders' Equity for each of the three years in
the period ended December 28, 1997................................................................... F-6
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 28, 1997.................................................................................... F-7
Notes to Consolidated Financial Statements................................................................. F-8
</TABLE>
19
<PAGE> 22
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Eateries, Inc. has the responsibility for preparing
the accompanying consolidated financial statements and for their integrity and
objectivity. The statements were prepared in accordance with generally accepted
accounting principles and include amounts that are based on management's best
estimates and judgment where necessary. Management believes that all
representations made to our external auditors during their examination of the
financial statements were valid and appropriate.
To meet its responsibility, management has established and maintains a
comprehensive system of internal control that provides reasonable assurance as
to the integrity and reliability of the consolidated financial statements, that
assets are safeguarded, and that transactions are properly executed and
reported. This system can provide only reasonable, not absolute, assurance that
errors and irregularities can be prevented or detected. The concept of
reasonable assurance is based on the recognition that the cost of a system of
internal control is subject to close scrutiny by management and is revised as
considered necessary.
The Board of Directors of Eateries, Inc. have engaged Arthur Andersen
LLP, independent auditors, to conduct an audit of and express an opinion as to
the fairness of the presentation of the 1997 consolidated financial statements.
Their report is included on the following page.
/s/Vincent F. Orza, Jr.
- -----------------------------
Vincent F. Orza, Jr.
President and Chairman
Chief Executive Officer
/s/Corey Gable
- ----------------------------
Corey Gable
Vice President/Treasurer
Chief Financial and Accounting Officer
April 10, 1998
F-1
<PAGE> 23
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Eateries, Inc.
Oklahoma City, Oklahoma
We have audited the accompanying consolidated balance sheet of Eateries,
Inc. and subsidiaries as of December 29, 1996 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the two
years in the period ended December 29, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Eateries, Inc. and subsidiaries at December 29, 1996, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 29, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
March 26, 1997,
except for the last paragraph of Note 5, as to which the date is
April 9, 1997
F-2
<PAGE> 24
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Eateries, Inc.
Oklahoma City, Oklahoma
We have audited the accompanying consolidated balance sheet of Eateries,
Inc. and subsidiaries as of December 28, 1997 and the related consolidated
statements of income, stockholders' equity and cash flows for year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Eateries, Inc. and subsidiaries at December 28, 1997, and the consolidated
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma
March 5, 1998,
F-3
<PAGE> 25
EATERIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 28, December 29,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 1,331,363 $ 695,481
Receivables:
Franchisees .............................................. 35,693 53,685
Insurance refunds ........................................ 488,594 164,219
Landlord finish-out allowances ........................... 106,250 188,866
Other .................................................... 490,828 394,776
Deferred income taxes (Note 8) .................................. 452,000 387,000
Inventories ..................................................... 2,296,282 1,400,262
Other current assets ............................................ 357,903 209,929
------------ ------------
Total current assets ................................. 5,558,913 3,494,218
Property and equipment, at cost (Notes 4 and 5):
Land and buildings .............................................. 5,234,000 125,167
Furniture and equipment ......................................... 11,076,626 9,322,453
Leasehold improvements .......................................... 26,026,890 23,453,916
Assets under capital leases ..................................... 123,420 123,420
------------ ------------
42,460,936 33,024,956
Less: Landlord finish-out allowances ............................ 14,880,564 13,896,522
------------ ------------
27,580,372 19,128,434
Less: Accumulated depreciation and amortization ................. 7,201,463 5,444,896
------------ ------------
Net property & equipment ................................ 20,378,909 13,683,538
Deferred income taxes (Note 8) ....................................... 398,000 975,000
Goodwill, net ........................................................ 2,479,045 193,589
Other assets ......................................................... 959,817 362,356
------------ ------------
$ 29,774,684 $ 18,708,701
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable ................................................ $ 4,850,211 $ 4,359,571
Accrued liabilities:
Compensation ............................................ 2,191,775 1,388,058
Taxes, other than income ................................ 815,039 456,681
Other (Note 6) .......................................... 1,480,055 572,022
Restaurant closure costs (Note 7) ....................... 51,281 145,575
Current portion of long-term obligations (Note 5) ............... 1,014,715 28,308
------------ ------------
Total current liabilities ...................... 10,403,076 6,950,215
Deferred credit ...................................................... 658,638 575,517
Other liabilities .................................................... 82,500 62,500
Long-term obligations, net of current portion (Note 5) ............... 7,637,415 1,470,715
Commitments (Note 4)
Stockholders' equity (Note 10):
Preferred stock, $.002 par value, none outstanding .............. -- --
Common stock, $.002 par value, 4,221,785 and 4,143,391 shares
outstanding at December 28, 1997 and December 29, 1996,
respectively ............................................. 8,444 8,287
Additional paid-in capital ...................................... 9,486,594 9,340,519
Retained earnings ............................................... 3,065,300 1,666,092
------------ ------------
12,560,338 11,014,898
Treasury stock, at cost, 347,115 and 282,761 shares at
December 28, 1997 and December 29, 1996, respectively ... (1,567,283) (1,365,144)
------------ ------------
Total stockholders' equity ..................... 10,993,055 9,649,754
------------ ------------
$ 29,774,684 $ 18,708,701
============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 26
EATERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
December 28, December 29, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Food and beverage sales ....................... $ 62,850,893 $ 55,732,807 $ 45,810,664
Franchise fees and royalties .................. 267,785 264,954 307,653
Other ......................................... 422,842 418,476 482,123
------------ ------------ ------------
Total revenues ........................... 63,541,520 56,416,237 46,600,440
Costs of sales ...................................... 17,840,104 17,070,384 13,967,757
------------ ------------ ------------
45,701,416 39,345,853 32,632,683
Operating expenses (Note 6) ......................... 36,795,093 32,218,754 26,387,127
Pre-opening costs (Note 2) .......................... 279,000 726,000 830,000
General and administrative expenses ................. 4,048,964 3,665,207 3,067,610
Provision for restaurant closures
and other disposals (Note 7) ................. -- -- 897,000
Provision for impairment of
long-lived assets (Note 8) .................... 85,000 -- --
Depreciation and amortization ....................... 2,215,640 1,886,323 1,336,919
Interest expense .................................... 309,511 194,070 41,186
------------ ------------ ------------
43,733,208 38,690,354 32,559,842
------------ ------------ ------------
Income before provision (benefit) for income taxes .. 1,968,208 655,499 72,841
Provision (benefit) for income taxes (Note 9) ....... 569,000 74,000 (113,000)
------------ ------------ ------------
Net income .......................................... $ 1,399,208 $ 581,499 $ 185,841
============ ============ ============
Net income per common share (Note 11) ............... $ 0.36 $ 0.15 $ 0.05
============ ============ ============
Net income per common share
assuming dilution (Note 11) ................... $ 0.35 $ 0.15 $ 0.05
============ ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 27
EATERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------
SHARES TREASURY STOCK
----------------------------- -----------------------------
AUTHORIZED ISSUED AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ......... 20,000,000 3,952,890 $ 7,906 272,122 $ (1,328,867)
Issuance of common stock:
Exercise of stock options ..... -- 53,833 107 -- --
Employee stock purchase plan .. -- 12,411 25 -- --
Tax benefit from the exercise of
non-qualified stock options
(Note 8) ...................... -- -- -- -- --
Treasury stock acquired (Note 9) ... -- -- -- 1,917 (5,751)
Net income ......................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 ......... 20,000,000 4,019,134 8,038 274,039 (1,334,618)
Issuance of common stock:
Exercise of stock options ..... -- 97,163 194 -- --
Employee bonuses .............. -- 2,750 6 -- --
Employee stock purchase plan .. -- 24,044 48 -- --
Sale of common stock .......... -- 300 1 -- --
Tax benefit from the exercise of
non-qualified stock options
(Note 8) ...................... -- -- -- -- --
Treasury stock acquired (Note 9) ... -- -- -- 8,722 (30,526)
Net income ......................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 29, 1996 ......... 20,000,000 4,143,391 8,287 282,761 (1,365,144)
Issuance of common stock:
Exercise of stock options ..... -- 59,332 119 -- --
Employee bonuses .............. -- 2,500 5 -- --
Employee stock purchase plan .. -- 16,462 33 -- --
Sale of common stock .......... -- 100 -- -- --
Tax benefit from the exercise of
non-qualified stock options
(Note 8) ...................... -- -- -- -- --
Treasury stock acquired (Note 9) ... -- -- -- 64,354 (202,139)
Net income ......................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 28, 1997 ......... 20,000,000 4,221,785 $ 8,444 347,115 $ (1,567,283)
============ ============ ============ ============ ============
<CAPTION>
ADDITIONAL
PAID-IN RETAINED
CAPITAL EARNINGS TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
Balance, December 31, 1994 ......... $ 9,047,594 $ 898,752 $ 8,625,385
Issuance of common stock:
Exercise of stock options ..... 33,476 -- 33,583
Employee stock purchase plan .. 26,350 -- 26,375
Tax benefit from the exercise of
non-qualified stock options
(Note 8) ...................... 47,000 -- 47,000
Treasury stock acquired (Note 9) ... -- -- (5,751)
Net income ......................... -- 185,841 185,841
------------ ------------ ------------
Balance, December 31, 1995 ......... 9,154,420 1,084,593 8,912,433
Issuance of common stock:
Exercise of stock options ..... 60,533 -- 60,727
Employee bonuses .............. 10,941 -- 10,947
Employee stock purchase plan .. 57,432 -- 57,480
Sale of common stock .......... 1,193 -- 1,194
Tax benefit from the exercise of
non-qualified stock options
(Note 8) ...................... 56,000 -- 56,000
Treasury stock acquired (Note 9) ... -- -- (30,526)
Net income ......................... -- 581,499 581,499
------------ ------------ ------------
Balance, December 29, 1996 ......... 9,340,519 1,666,092 9,649,754
Issuance of common stock:
Exercise of stock options ..... 51,214 -- 51,333
Employee bonuses .............. 8,595 -- 8,600
Employee stock purchase plan .. 48,941 -- 48,974
Sale of common stock .......... 325 -- 325
Tax benefit from the exercise of
non-qualified stock options
(Note 8) ...................... 37,000 -- 37,000
Treasury stock acquired (Note 9) ... -- -- (202,139)
Net income ......................... -- 1,399,208 1,399,208
------------ ------------ ------------
Balance, December 28, 1997 ......... $ 9,486,594 $ 3,065,300 $ 10,993,055
============ ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 28
EATERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------
December 28, December 29, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .......................................... $ 1,399,208 $ 581,499 $ 185,841
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .................. 2,215,640 1,886,323 1,336,919
Gain on asset disposals ........................ (6,165) (42,544) (133,144)
Common stock bonuses ........................... 8,600 10,947 --
Provision (benefit) for deferred income taxes .. 549,000 74,000 (113,000)
(Increase) decrease in operating assets:
Receivables ............................... (393,730) (7,869) (209,745)
Inventories ............................... 46,320 (31,589) (268,464)
Prepaid expenses and deposits ............. 10,041 (30,909) (45,213)
Increase (decrease) in operating liabilities:
Accounts payable .......................... 202,198 154,383 1,285,362
Accrued liabilities ....................... 842,299 (329,300) 1,171,977
Deferred credit ........................... 103,121 222,035 (4,659)
Other liabilities ......................... -- (49,400) 111,900
------------ ------------ ------------
Total adjustments .............................. 3,577,324 1,856,077 3,131,933
------------ ------------ ------------
Net cash provided by operating activities ...... 4,976,532 2,437,576 3,317,774
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures ................................ (3,886,481) (7,306,987) (7,788,654)
Landlord finish-out allowances ...................... 1,741,658 3,021,883 2,491,931
Net cash payments for restaurant acquisitions ....... (8,991,173) -- (529,083)
Proceeds from the sale of property and equipment .... 15,063 53,001 426,214
Sales of marketable securities ...................... -- -- 514,737
Payments received for notes receivable .............. 11,620 -- --
Decrease (increase) in other assets ................. (72,784) (50,457) (24,143)
------------ ------------ ------------
Net cash used in investing activities .......... (11,182,097) (4,282,560) (4,908,998)
------------ ------------ ------------
Cash flows from financing activities:
Sales of common stock ............................... 49,299 58,674 26,375
Payments on notes payable to vendor ................. -- (13,139) (434,362)
Payments on long-term obligations ................... (28,308) (25,305) (70,619)
Net borrowings under revolving credit agreement ..... (1,450,000) 250,000 1,200,000
Borrowings under note payable ....................... 8,631,415 -- --
Proceeds from issuance of stock on exercise of ...... 26,333 60,727 27,833
stock options
Payment of withholding tax liabilities related
to acquisition of treasury stock ................. (17,224) (30,526) --
Repurchase of treasury stock ........................ (159,915) -- --
Increase (decrease) in bank overdrafts included in
accounts payable ................................. (210,153) 1,238,080 --
------------ ------------ ------------
Net cash provided by financing
activities ................................. 6,841,447 1,538,511 749,227
------------ ------------ ------------
Net decrease in cash and cash equivalents ................. 635,882 (306,473) (841,997)
Cash and cash equivalents at beginning period ............. 695,481 1,001,954 1,843,951
============ ============ ============
Cash and cash equivalents at end of period ................ $ 1,331,363 $ 695,481 $ 1,001,954
============ ============ ============
</TABLE>
See accompanying notes.
F-7
<PAGE> 29
EATERIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
Eateries, Inc. (the "Company") was incorporated under the laws of the
State of Oklahoma on June 1, 1984. The Company is engaged in the creation,
design, management and operations of restaurants through Company-owned and
franchise restaurants. The Company's restaurants are located primarily in
regional malls in the Southwest, Midwest and Southeast regions of the United
States. The Company's restaurants operate under the name "Garfield's Restaurant
& Pub" ("Garfield's"), "Pepperoni Grill" and "Casa Ole" (as a franchisee). An
analysis of Company-owned and franchised restaurants for the three years in the
period ended December 28, 1997, is as follows:
<TABLE>
<CAPTION>
Company Franchised Total
Units Units Units
--------- ---------- -----------
<S> <C> <C> <C>
At December 31, 1994 34 8 42
Units opened 9 1 10
Units closed (3) (1) (4)
Unit acquired 1 -- 1
--------- ---------- -----------
At December 31, 1995 41 8 49
Units opened 8 -- 8
Units closed (3) -- (3)
Unit sold (1) -- (1)
--------- ---------- -----------
At December 29, 1996 45 8 53
Units opened 3 -- 3
Units closed (3) -- (3)
Units acquired 17 2 19
--------- ---------- -----------
At December 28, 1997 62 10 72
========= ========== ===========
</TABLE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Eateries,
Inc. and its wholly-owned subsidiaries, Fiesta Restaurants, Inc., Pepperoni
Grill, Inc. and Garfield's Management, Inc. All significant intercompany
transactions and balances have been eliminated.
FISCAL YEAR
In 1996, the Company changed its fiscal year to a 52/53 week year ending
on the last Sunday in December.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include certain highly liquid debt instruments
with a maturity of three months or less when purchased.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist primarily of food, beverages and smallwares.
LANDLORD FINISH-OUT ALLOWANCES
Amounts received or receivable from landlords for reimbursement of
improvements to leased facilities are recorded as a reduction of the costs
incurred by the Company for property and equipment.
DEPRECIATION AND AMORTIZATION
Property and equipment (which includes assets under capital leases) and
landlord finish-out allowances are stated at cost (or amounts received with
respect to landlord finish-out allowances) and are depreciated and amortized
over the lesser of the estimated useful lives of the assets or the remaining
term of the leases using the straight-line method. Estimated useful lives are as
follows:
F-8
<PAGE> 30
<TABLE>
<S> <C>
Buildings....................... 15-30 Years
Furniture and equipment......... 5-15 Years
Leasehold improvements.......... 3-15 Years
Landlord finish-out allowances.. 8-15 Years
</TABLE>
ADVERTISING COSTS
Costs incurred in connection with advertising and marketing of the
Company's restaurants are expensed as incurred. Such costs amounted to
$1,376,000 in 1997, $797,000 in 1996 and $647,000 in 1995.
PRE-OPENING COSTS
The costs related to the opening of restaurant locations are expensed when
incurred.
INCOME TAXES
The Company is subject to Federal, State and local income taxes. The
Company records income taxes in accordance with Statement of Financial
Accounting Standards No. ("SFAS") 109 "Accounting for Income Taxes." Under SFAS
109, deferred income taxes are provided on the tax effect of presently existing
temporary differences, net of existing net operating loss and tax credit
carryforwards. The tax effect is measured using the enacted marginal tax rates
and laws that will be in effect when the differences and carryforwards are
expected to be reversed or utilized. Temporary differences consist principally
of depreciation caused by using different lives for financial and tax reporting,
the expensing of smallwares when incurred for tax purposes while such costs are
capitalized for financial purposes and the expensing of costs related to
restaurant closures and other disposals for financial purposes prior to being
deducted for tax purposes.
DEFERRED CREDIT
Certain of the Company's long-term noncancellable operating leases for
restaurant and corporate facilities include scheduled base rental increases over
the term of the lease. The total amount of the base rental payments is charged
to expense on the straight-line method over the term of the lease. The Company
has recorded a deferred credit to reflect the net excess of rental expense over
cash payments since inception of the leases.
FRANCHISE ACTIVITIES
The Company franchises the Garfield's Restaurant & Pub concept to
restaurant operators and, at December 28, 1997 and December 29, 1996, eight
restaurant units were operating under franchise agreements. During 1997, the
Company signed an agreement for a new franchise location. This location was
opened in March, 1998, increasing the total number of franchised Garfield's to
nine. The initial franchise fee paid to the Company is recognized as income when
substantially all services have been performed by the franchisor to each
franchised location, which is typically when the related restaurant is opened.
The franchisor provides initial services to the franchisee in the selection of a
site, approval of architectural plans, assistance in the selection of equipment
for the restaurant, distribution of operations manuals and training of
franchisee's personnel prior to the opening of the restaurant. The Company
recognized $50,000 of initial franchise fees for franchised restaurants during
1995 (none were recognized in 1996 or 1997).
Continuing royalties are recognized as revenue based on the terms of each
franchise agreement, generally as a percentage of sales of the franchised
restaurants. During 1997, 1996 and 1995, the Company recognized $268,000,
$265,000, and $258,000, respectively, of fees from continuing royalties.
Franchisees are required to remit an amount equal to 1/2% of their sales
to the Garfield's Creative Marketing Fund. The franchisees' payments, which were
$41,000, $41,000, and $39,000 during 1997, 1996 and 1995, respectively, are
combined with the franchisor's expenditures to purchase services for creative
advertising and design, market research and other items to maintain and further
enhance the Garfield's concept.
Franchisee receivables at December 28, 1997 and, December 29, 1996 are
comprised primarily of uncollected continuing royalties, which are generally
unsecured; however, the Company has not experienced significant credit losses in
prior years and is not aware of any significant uncollectible amounts at
December 28, 1997.
CAPITALIZATION OF INTEREST
Interest attributed to funds used to finance restaurant construction
projects is capitalized as an additional cost of the related assets.
Capitalization of interest ceases when the related projects are substantially
complete. The Company has capitalized
F-9
<PAGE> 31
approximately $39,000, $62,000 and $72,000 of interest costs during 1997, 1996
and 1995, respectively. These costs are included in leasehold improvements in
the accompanying balance sheets.
STOCK-BASED COMPENSATION
In 1996, the Company adopted SFAS 123, "Accounting for Stock-Based
Compensation." As permitted by SFAS 123, the Company has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and related interpretations in accounting for its
employee stock options because the alternative fair value accounting provided
for under SFAS 123, requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
NET INCOME PER COMMON SHARE
In March 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS 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 128 in the fourth
quarter of 1997, and, as required, has restated all prior period EPS amounts to
conform to the new accounting standard.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
STATEMENTS OF CASH FLOWS
Interest of $277,000, $228,000 and $94,000 was paid for each of the three
years 1997, 1996 and 1995, respectively.
For the three years 1997, 1996 and 1995, the Company had the following
non-cash investing and financing activities.
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Increase (decrease) in current receivables
for landlord finish-out allowances ...................... $ (82,616) $ (559,422) $ 493,288
Increase (decrease) in non-current receivables for
landlord finish-out allowances .......................... -- (429,000) 429,000
Sales of property and equipment in exchange
for notes receivable .................................... 160,000 95,000 --
Borrowings for capital expenditures under
notes payable to vendor ................................. -- -- 116,567
Acquisition of treasury stock upon exercise of
stock options (Note 9) .................................. 25,000 -- 5,751
Increase in additional paid-in capital as a result
of tax benefits from the exercise of
non-qualified stock options ............................. 37,000 56,000 47,000
Asset write-offs related to restaurant
closures and other disposals ............................ 13,334 71,932 --
Assumption of liabilities related to restaurant acquisition .. 1,618,773 -- --
</TABLE>
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating the fair values of financial instruments for purposes of complying
with SFAS 107, "Disclosures About Fair Values of Financial Instruments":
Cash and cash equivalents, accounts receivable, deposits, accounts payable
and accrued liabilities - The carrying amounts reported in the consolidated
balance sheets approximate fair values because of the short maturity of these
instruments.
F-10
<PAGE> 32
Long-term obligations - The revolving credit agreement, which represents
the material portion of long-term obligations in the accompanying consolidated
balance sheets, bears interest at a variable rate, which is adjusted monthly.
Therefore, the carrying values for these borrowings approximate their fair
values.
OTHER
During 1997 and early 1998, the Financial Accounting Standards Board
issued several pronouncements related to financial statement disclosure that
will affect the Company's 1998 financial statement presentation. Following is a
discussion of the new standards.
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income," established standards for the reporting and display of
comprehensive income and its components as a part of the basic financial
statements. The Company does not believe that comprehensive income will differ
materially from net income. The disclosures will be required for the 1998
year-end financial statements, and abbreviated information will be required for
the first quarter.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for determining segments and reporting
information about a company's business segments, products and services,
geographic areas and major customers in annual financial statements. Also
required is selected information about operating segments in interim financial
reports issued to shareholders. The Company does not anticipate the adoption of
this new accounting standard will create additional business segment reporting
requirements.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," was issued in February 1998. This statement,
effective for year-end 1998 financial statements, revises disclosures about
pensions and other postretirement benefit plans. It does not change the
measurement or recognition of costs associated with those plans.
In March 1998, the American Institute of Certified Public Accountants
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 the SOP, since the prescribed accounting
treatment is fairly consistent with the Company's current accounting policy.
The SOP, the effect of which is to be recognized prospectively, is effective
for 1999 financial statements.
(3) RESTAURANT ACQUISITIONS
In January 1995, the Company acquired substantially all of the assets of
the "Pepperoni Grill' restaurant located in Oklahoma City, Oklahoma, along with
rights to use trademarks associated with the restaurant, for a cash purchase
price (including transaction expenses) of $529,000. Additionally, the Company
assumed real estate and equipment leases for the restaurant. The acquisition has
been accounted for under the purchase method. As a result, the Company recorded
inventory, equipment and leasehold improvements totaling $199,000, trademarks of
$125,000 and goodwill of approximately $205,000. The Company is amortizing the
cost of the trademarks and goodwill over 20 years using the straight-line method
and assesses the recoverability of such assets based upon the expected future
cash flows from operations of the Pepperoni Grill concept.
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 operate 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.
The following unaudited pro forma combined information for the years ended
December 28, 1997 and December 29, 1996, give effect to the Famous Acquisition
as if it had been consummated as of December 30, 1996 and January 1, 1996,
respectively:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Total revenues $ 92,211,956 $ 88,583,645
Net income 1,549,630 678,932
Net income per common share 0.40 0.18
Net income per common share
assuming dilution 0.39 0.17
</TABLE>
The unaudited pro forma combined information is based upon the historical
financial statements of the Company and Famous Restaurants, Inc., giving effect
to the transaction under the purchase method of accounting and adjustments for:
(1) amortization and depreciation of the property and equipment acquired, (2)
amortization of goodwill recorded in connection with the acquisition, (3)
interest expense related to the acquisition debt, and (4) the tax effects of the
adjustments and pro forma results of the acquisition.
The unaudited pro forma combined information has been prepared based on
estimates and assumptions deemed by the Company to be appropriate and do not
purport to be indicative of the results of operations which would actually have
been obtained if the Famous Acquisition had occurred as presented in such
information or which may be obtained in the future. The Company has developed
and will apply its existing cost reduction practices beyond those assumed in
these unaudited pro forma results to further reduce cost of sales, operating
expenses and general and administrative expenses. The results of these cost
saving practices are prospective in nature and although there are savings
inherent in these techniques, such projected savings have not been incorporated
into the pro forma combined information.
(4) REAL ESTATE LEASES
The Company leases the majority of its restaurant facilities and its
corporate office under operating leases with initial terms expiring at various
dates through the year 2009. Certain leases contain renewal options ranging from
five to ten years. Most, but not all, leases require the Company to be
responsible for the payment of taxes, insurance and/or maintenance and include
percentage rent and fixed rent escalation clauses. In the normal course of
business, the Company may grant a landlord lien on certain personal property
upon an event of default by the Company. At December 28, 1997, the remaining
minimum rental commitments under long-term noncancellable leases, excluding
amounts related to taxes, insurance, maintenance and percentage rent, are as
follows:
<TABLE>
<S> <C>
1998......................................... $ 5,269,000
1999......................................... 5,233,000
2000......................................... 5,158,000
2001......................................... 4,884,000
2002......................................... 4,323,000
Thereafter................................... 14,711,000
-----------
Total minimum rental commitments............. $39,578,000
===========
</TABLE>
F-11
<PAGE> 33
Total minimum rental commitments include $1,649,000 related to two
locations scheduled for opening in 1998 and $705,000 related to three locations
which were sold subsequent to December 28, 1997.
The components of rent expense for noncancellable operating leases are
summarized as follows:
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Minimum rents ................ $3,549,000 $2,912,000 $2,611,000
Percentage rents ............. 203,000 211,000 131,000
---------- ---------- ----------
$3,752,000 $3,123,000 $2,742,000
========== ========== ==========
</TABLE>
(5) LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
December 28, December 29,
1997 1996
----------- -----------
<S> <C> <C>
Revolving line of credit with a bank, interest at the London Interbank Offered
Rates ("LIBOR") plus 2.75%
(8.35% at December 28, 1997) ...................................................... $ -- $ 1,450,000
Term loan with a bank, interest at LIBOR plus 1.25%
(6.94% at December 28, 1997) ................................................... 8,631,415 --
Obligations under capital leases .................................................... 20,715 49,023
----------- -----------
8,652,130 1,499,023
Less current portion ................................................................ (1,014,715) (28,308)
----------- -----------
$ 7,637,415 $ 1,470,715
=========== ===========
</TABLE>
At December 28, 1997 the future minimum lease payments for equipment under
capital leases are $21,600 for 1998 and none for 1999 (amount representing
interest is $885).
Maturities of long-term obligations at December 28, 1997 are:
<TABLE>
<CAPTION>
<S> <C>
1998 $1,014,715
1999 1,064,000
2000 1,140,000
2001 1,221,000
2002 4,212,415
----------
$8,652,130
==========
</TABLE>
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 December
28, 1997, the Company had borrowed $8,631,415 under the term loan feature. There
were no outstanding borrowings under the revolving line of credit as of December
28, 1997. Outstanding borrowings under both the revolving line of credit and
term loan bear interest at three-month LIBOR plus 1.25% (6.94% as of December
28, 1997). 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 December 28, 1997, the Company was
in compliance with these financial covenants and restrictions.
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%.
In August 1995, the Company entered into a three-year unsecured revolving
credit agreement with a bank (which replaced a $500,000 line of credit with
another bank). This agreement was a three-year unsecured revolving facility
allowing the Company to borrow at the national prime interest rate or the LIBOR
plus 2.75% (the interest rate was reset monthly). The Company was also
F-12
<PAGE> 34
required to pay a non-use fee of 1/2of 1% per annum on the daily average of the
unborrowed amount of the revolving loan facility. In July, 1996, the loan
agreement was amended to allow the Company to borrow up to $5,000,000 through
August 31, 1999. During the year ended December 29, 1996, the Company had not
met a financial covenant and certain restriction provisions under this loan
agreement. In April 1997, these violations were waived by the bank. This
agreement was terminated in November 1997 and replaced by the loan agreement
described above.
(6) RELATED PARTY TRANSACTIONS
An affiliate of the Company is providing marketing and advertising
services. Total costs incurred for such services (primarily radio, television
and print media) were approximately $554,000 in 1997, $168,000 in 1996 and
$424,000 in 1995. A director of the Company is a partner in a law firm that
provides legal services to the Company. During 1997, 1996 and 1995, the Company
incurred approximately $132,000, $148,000 and $127,000, respectively, in legal
services with the firm.
During 1997 and 1996, the Company also acquired common stock from certain
officers and directors (see Note 9).
(7) PROVISION FOR RESTAURANT CLOSURES AND OTHER DISPOSALS
During 1995, the Company approved and began the implementation of a plan
to close four under-performing restaurants. During 1996, the Company identified
two additional locations for closure. As of December 28, 1997, the Company had
disposed of all restaurants planned for closure in 1995 and 1996. These
restaurants (the 1995 and 1996 identified closures) collectively accounted for
$79,000, $1,784,000 and $3,498,000 of revenues and $(18,000), $(68,000) and
$(223,000) of operating losses for fiscal years 1997, 1996 and 1995,
respectively. Management expects the effect of closing these under-performing
restaurants to result in improved margins and increased profitability for the
Company in future periods.
As a result of the plan to close under-performing restaurants, the Company
recorded a pre-tax charge of $897,000 in the third quarter of 1995. The
provision related to lease termination costs, litigation settlement costs,
write-down of property, equipment and leasehold improvements, and other exits
costs. As of December 28, 1997, the Company has a remaining reserve of
approximately $51,000 for settlement of its remaining liabilities associated
with the closures.
(8) PROVISION FOR IMPAIRMENT OF LONG-LIVED ASSETS
In 1996, the Company adopted the provisions of SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed
Of." Pursuant to SFAS 121, the Company's restaurants are reviewed on an
individual restaurant basis for indicators of impairment, whenever events or
circumstance indicate that the carrying value of its restaurants may not be
recoverable. The Company's primary test for an indicator of potential impairment
is operating losses. In order to determine whether an impairment has occurred,
the Company estimates the future net cash flows expected to be generated from
the use of its restaurants and the eventual disposition, as of the date of
determination, and compares such estimated future cash flows to the respective
carrying amounts. Those restaurants which have carrying amounts in excess of
estimated future cash flows are deemed impaired. The carrying value of these
restaurants is adjusted to an estimated fair value by discounting the estimated
future cash flows attributable to such restaurants using a discount rate
equivalent to the rate of return the Company expects to achieve from its
investment in newly-constructed restaurants. The excess is charged to expense
and cannot be reinstated.
Considerable management judgment and certain significant assumptions are
necessary to estimate future cash flows. Significant judgments and assumptions
used by the Company in evaluating its assets for impairment include, but may not
be limited to: estimations of future sales levels, cost of sales, direct and
indirect costs of operating the assets, the length of time the assets will be
utilized and the Company's ability to utilize equipment, fixtures and other
moveable long-lived assets in other existing or future locations. In addition,
such estimates and assumptions include anticipated operating results related to
certain profit improvement programs implemented by the Company during 1996 and
1997 as well as the continuation of certain rent reductions, deferrals, and
other negotiated concessions from certain landlords. Actual results could vary
significantly from management's estimates and assumptions and such variance
could result in a change in the estimated recoverability of the Company's
long-lived assets. Accordingly, the results of the changes in those estimates
could have a material impact on the Company's future results of operations and
financial position.
F-13
<PAGE> 35
During 1997, the Company recorded an $85,000 provision for impairment of
long-lived assets related to three locations. Additionally, as of December 28,
1997, the Company had identified a total of six locations with indicators of
impairment.
Prior to adopting SFAS 121, the Company accounted for the impairment of
long-lived assets by evaluating the recoverability of assets of restaurant
locations for which management had identified and began a plan to close the
location. The Company continues to use the guidance of FASB Emerging Issues Task
Force ("EITF") Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity" for guidance in
recognizing costs related to closing restaurants.
(9) INCOME TAXES
The provision (benefit) for income taxes consists of the following (see
Note 2):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ --
State 20,000 -- --
--------- --------- ---------
20,000 -- --
--------- --------- ---------
Deferred:
Federal 450,000 44,000 (110,000)
State 99,000 30,000 (3,000)
--------- --------- ---------
549,000 74,000 (113,000)
--------- --------- ---------
Provision (benefit) for income taxes $ 569,000 $ 74,000 $(113,000)
========= ========= =========
</TABLE>
The components of deferred tax assets and liabilities consist of the
following:
<TABLE>
<CAPTION>
December 28, December 29,
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ......................... $1,646,000 $2,169,000
General business tax credits ............................. 972,000 687,000
Restaurant Closures and other disposals .................. 20,000 54,000
Deferred rent credit ..................................... 61,000 68,000
Other .................................................... 170,000 65,000
---------- ----------
Total deferred tax assets .............................. 2,869,000 3,043,000
Valuation allowance for deferred tax assets .............. -- --
---------- ----------
Total deferred tax assets, net of allowance ............ 2,869,000 3,043,000
Deferred tax liabilities:
Smallwares expensed for tax purposes ..................... 578,000 338,000
Tax depreciation in excess of financial depreciation ..... 1,411,000 1,325,000
Other .................................................... 30,000 18,000
---------- ----------
Total deferred tax liabilities ......................... 2,019,000 1,681,000
---------- ----------
Net deferred tax assets .................................. $ 850,000 $1,362,000
========== ==========
</TABLE>
At December 28, 1997, the Company has recorded a benefit for its deferred
tax assets of $2,869,000. Management believes that $2,019,000 of these assets
will be recognized through the reversal of existing taxable temporary
differences with the remainder to be recognized through realization of future
income. It is management's opinion based on the historical trend of normal and
recurring operating results, present store development, and forecasted operating
results that it is more likely than not that the Company will realize the
approximately $2,300,000 in future net income in the next three years necessary
to realize the deferred tax assets not otherwise offset by reversing taxable
temporary differences. Net operating loss carryforwards do not begin to expire
until 2003 and general business tax credits until 2009. While management is not
presently aware of any adverse matters, it is possible that the Company's
ability to realize the deferred income tax assets could be impaired if there are
significant future exercises of non-qualified stock options or the Company were
to experience declines in sales and/or profit margins as a result of loss of
market share, increased competition or other adverse general economic
conditions.
F-14
<PAGE> 36
A reconciliation of theoretical income taxes follows:
<TABLE>
<CAPTION>
Fiscal Year
---------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Expected tax provision at 34% $ 669,000 $ 223,000 $ 24,800
Permanent differences (1,000) 12,100 8,500
State tax provisions, net of federal benefit 79,000 19,700 2,200
Tax effect of general business tax credits (178,000) (180,800) (149,000)
Other, net -- -- 500
--------- --------- ---------
Income tax provision (benefit) $ 569,000 $ 74,000 $(113,000)
========= ========= =========
</TABLE>
The Company estimates that at December 28, 1997, the tax net operating
loss carryforward was approximately $4,300,000 (which principally relates to the
tax benefit from the exercise of non-qualified stock options, the benefit of
which was recognized through paid-in capital) which is available for utilization
in various years through 2011.
(10) STOCKHOLDERS' EQUITY
The Company has authorized 10,000,000 shares of $.002 par value preferred
stock. None of the preferred stock has been issued. The rights, preferences and
dividend policy have not been established and are at the discretion of the
Company's Board of Directors.
The Company has authorized 20,000,000 shares of common stock at a par
value of $.002 per share. In conjunction with an offering of common stock in
1993, the Company issued to the underwriters warrants to purchase 67,500 common
shares of the Company. Such warrants are exercisable beginning on November 22,
1994, at an initial exercise price of $5.89 per share. The exercise price
escalates each anniversary date with a final exercise price of $6.56 per share
on the fourth anniversary of the issuance of the warrants. The warrants expire
on November 22, 1998. The exercise price and the number of shares of common
stock for which the warrants are exercisable are subject to adjustment upon the
occurrence of certain dilutive events.
In May 1989, the Company's shareholders approved the Eateries, Inc.
Omnibus Equity Compensation Plan ("the Plan") (which was amended in June 1994 by
approval of the shareholders). The Plan consolidated the Company's equity based
award programs which are described as follows:
DIRECTOR OPTION PLAN
Non-qualified stock options granted and outstanding include 343,661
director options. Under the Plan, each director receives options to purchase
50,000 shares of common stock upon initial election to the Board of Directors.
These options vest over a five-year period at 20% per year and expire five years
from the date vested (last expiring in 2007). As a result of an amendment to the
Plan in 1994, any director who has served as a director of the Company for five
years, upon election for any additional terms, shall be granted an option to
purchase 10,000 shares of common stock for each additional year elected. These
options fully vest after one year of additional service by the director and
expire five years from the date vested (last expiring in 2003).
MANAGEMENT OPTIONS
Non-qualified stock options granted and outstanding include 517,500
management options, which are vested over three to five-year periods and expire
five years from the date vested (last expiring in 2006).
A summary of stock option activity under the Plan is as follows:
F-15
<PAGE> 37
<TABLE>
<CAPTION>
Weighted
Number Exercise Price Average
of Shares Per Share Exercise Price
----------- ---------------------------- ------------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1994 (of which approximately
269,000 options are exercisable at weighted average
prices of $.78) .......................................... 450,489 $ .50 -- $ 6.00 $ 2.15
Granted .................................................... 120,000 2.875 -- 3.875 3.20
Options exercised:
Director ................................................. (23,333) .625 -- 1.00 .79
Management ............................................... (30,500) .50 .50
Forfeited .................................................. (65,000) 3.375 -- 5.50 5.01
---------
Outstanding at December 31, 1995 (of which approximately
283,000 options are exercisable at weighted average
prices of $1.65) ......................................... 451,656 .625 -- 6.00 2.20
Granted .................................................... 495,000 2.625 -- 4.375 2.91
Options exercised:
Director ................................................. (97,163) .625 .63
Forfeited .................................................. (20,000) 3.375 3.38
---------
Outstanding at December 29, 1996 (of which approximately
362,000 options are exercisable at weighted average
prices of $2.51) ......................................... 829,493 .625 -- 6.00 2.77
Granted .................................................... 110,000 2.563 -- 3.00 2.76
Options exercised:
Director ................................................. (53,332) .625 .63
Management ............................................. (6,000) 3.00 3.00
Forfeited .................................................. (19,000) 3.00 3.00
--------- ----------------------------- --------
Outstanding at December 28, 1997 (of which approximately
441,000 options are exercisable at weighted average
prices of $3.02) ......................................... 861,161 $ .625 -- $ 6.00 $ 2.90
========= ============================= ========
</TABLE>
As of December 28, 1997, the Plan provides for issuance of options up to
2,554,989 shares and has 586,452 shares of common stock reserved for future
grant under the Plan.
RESTRICTED MANAGEMENT OPTIONS
As of December 28, 1997 and December 29, 1996, there were 20,000
restricted stock options (not granted under the Plan) which had an original
vesting date of 1999 and expire five years from the date vested (last expiring
in 2004). These options included an acceleration feature which allowed for all
or a portion of the options to vest in 1996, based on certain performance
criteria. Based on these performance criteria, 10,000 of these options vested in
1996. The remaining 10,000 options will vest in 1999. A summary of restricted
stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted
Number Exercise Price Average
of Shares Per Share Exercise Price
----------- ------------------------------ -----------------
<S> <C> <C> <C>
Outstanding at December 31, 1994 ........................... -- -- --
Granted .................................................... 120,000 $ 3.00 -- $ 3.125 $ 3.02
---------
Outstanding at December 31, 1995 (none are exercisable) .... 120,000 3.00 -- 3.125 3.02
Forfeited .................................................. (100,000) 3.00 3.00
--------- ------------------------------- --------
Outstanding at December 28, 1997 and December 29,
1996 (of which 10,000 options are exercisable at a
price of $3.13 per option share) ........................ 20,000 $ 3.125 $ 3.13
========= ============================== ========
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In June 1994, the Company's shareholders approved the Employee Stock
Purchase Plan under the Company's Omnibus Equity Compensation Plan. The Stock
Purchase Plan enables substantially all employees to subscribe to shares of
common stock on an annual offering date at a purchase price of 85% of the fair
market value of the shares on the offering date or, if lower, 85% of the fair
market value of the shares on the exercise date, which is one year from the
annual offering date. A maximum of 200,000 shares are
F-16
<PAGE> 38
authorized for subscription over the ten year term of the plan (30,000 shares
reserved for issuance at December 28, 1997, for the offering period ending on
December 1, 1998). During 1997, 1996 and 1995, 16,462, 24,044 and 12,411 shares,
respectively, were issued under the Plan.
STOCK BONUS PLAN
The Plan provides for up to 200,000 shares of stock to be awarded to
non-executive employees at the Compensation Committee's discretion over
specified future periods of employment. A total of 20,961 shares have been
issued under the Plan leaving 179,039 shares available for issuance.
TREASURY STOCK TRANSACTIONS
As provided for in each stock option agreement, option holders can satisfy
amounts due for the exercise price and applicable required withholding taxes on
the exercise by delivery to the Company shares of common stock having a fair
market value equal to such amounts due to the Company. During 1997, 1996 and
1995, the Company acquired 9,254, 8,722 and 1,917 common shares, respectively,
in lieu of cash for such amounts due to the Company related to the exercise of
stock options. (Also see Note 8 regarding the tax benefits from the exercise of
stock options.)
PRO FORMA INFORMATION FOR STOCK OPTIONS
Pro forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to December 31, 1994, under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average assumptions for
1997, 1996 and 1995, respectively: risk-free interest rates of 6.53%, 5.71% and
6.34%; a dividend yield of 0%; volatility factors of the expected market price
of the Company's common stock of .38, .28 and .28 and a weighted-average
expected life of the options of 7.6 years. The weighted average grant date fair
value of options issued in 1997, 1996 and 1995 was $1.32, $1.08 and $1.21,
respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options and stock purchase plan
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options and stock purchase plan.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ----------- -----------
<S> <C> <C> <C>
Pro forma net income .......................... $ 1,247,622 $ 419,269 $ 149,714
Pro forma net income per common share ......... 0.32 0.11 0.04
Pro forma net income per common share
assuming dilution .......................... 0.31 0.10 0.04
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 2000.
STOCK PUT AGREEMENTS
In April, 1997, the Company entered into stock put agreements with two of
its executive officers (who also serve on the Company's Board of Directors).
Under the agreements, in the event of the officer's death while an employee of
the Company, their respective estate or other legal representative has the right
(but not the obligation) to compel the Company to purchase all or part of
the common stock owned by or under stock option agreements with the deceased
officer or the members of their immediate families (i.e. spouse or children) or
controlled by any of them through trusts, partnership corporations or other
entities on the date of their death. The per share purchase price payable by the
Company for common stock purchased under the agreements is the greater of the
highest closing stock price during the 60 days preceding the officer's death or
two times the net book value per share as of the last day of the calendar month
immediately preceding the officer's death. In any event, the total purchase
price cannot exceed the proceeds payable to the Company from the key man life
insurance policy maintained on the life of the respective officer.
F-17
<PAGE> 39
(11) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Numerator:
Net income $1,399,208 $ 581,499 $ 185,841
========== ========== ==========
Denominator:
Denominator for basic
earnings per share-
weighted-average shares
outstanding 3,868,950 3,836,228 3,722,788
Dilutive effect of nonqualified
stock options 119,066 166,131 111,168
---------- ---------- ----------
Denominator for diluted
earnings per share 3,988,016 4,002,359 3,833,956
========== ========== ==========
Basic earnings per share $ 0.36 $ 0.15 $ 0.05
========== ========== ==========
Diluted earnings per share $ 0.35 $ 0.15 $ 0.05
========== ========== ==========
</TABLE>
As of December 28, 1997, there were outstanding options and warrants to
purchase 177,500 shares of common stock at prices ranging from $4.38 per share
to $6.56 per share, which were not included in the computation of diluted
earnings per share because their effect would have been anti-dilutive.
(12) SUBSEQUENT EVENT
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 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 $1,000,000. Closing of this
transaction is conditioned upon, among other things, the transfer to Chevy's of
the liquor license related to such restaurant. Management currently expects
closing of this transaction to occur during the second quarter of 1998.
(13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In thousands except per share data)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER ANNUAL
--------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1997:
Total revenues $ 14,203 $ 13,709 $ 14,735 $ 20,895 $ 63,542
Gross profit 10,121 9,913 10,624 15,043 45,701
Net income 229 24 225 921 1,399
Net income per common share 0.06 0.01 0.06 0.24 0.36
Net income per common share
assuming dilution 0.06 0.01 0.06 0.22 0.35
1996:
Total revenues $ 12,772 $ 13,426 $ 13,999 $ 16,219 $ 56,416
Gross profit 8,931 9,350 9,773 11,292 39,346
Net income (loss) 37 (166) 109 601 581
Net income (loss) per common 0.01 (0.04) 0.03 0.16 0.15
share
Net income (loss) per common
share assuming dilution 0.01 (0.04) 0.03 0.15 0.15
1995:
Total revenues $ 10,475 $ 10,682 $ 11,449 $ 13,994 $ 46,600
Gross profit 7,261 7,399 8,096 9,877 32,633
Net income (loss) 25 (45) (642) 848 186
Net income (loss) per common
share 0.01 (0.01) (0.17) 0.23 0.05
Net income (loss) per common
share assuming dilution 0.01 (0.01) (0.17) 0.22 0.05
</TABLE>
F-18
<PAGE> 40
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation.(1)
3.2 Amendment to the Amended and Restated Articles of
Incorporation.(2)
3.3 Bylaws as amended.(1)
4.1 Specimen Stock Certificate.(3)
4.2 Form of Representative's Warrant.(3)
10.1 Employment Agreement between the Company and Vincent F.
Orza, Jr., dated October 1, 1995.(10)
10.2 Employment Agreement between the Company and James M. Burke,
dated October 1, 1995.(10)
10.4 Lease Agreement dated May 1, 1987 (as amended June 30, 1990,
October 1, 1992 and October 1, 1993) between the Company and
Colonial Center, LTD for the lease of the Company's
corporate office facilities in Oklahoma City, Oklahoma. (3)
10.8 Franchise Agreement and Amendment dated August 31, 1993
between the Company and Wolsey Dublin Company for the
Garfield's franchise in Sioux City, Iowa and non-exclusive
development rights to two additional locations in seven
cities in four states over the next two years. (3)
10.9 Amended and Restated Franchise Agreement and Modification of
Amended and Restated Franchise Agreement dated December 31,
1992 between the Company and O.E., Inc. for the three
Garfield's franchise locations in the Oklahoma City,
Oklahoma metropolitan area. (3)
10.10 Form of Franchise Agreement (revised March 1, 1993).(7)
10.11 Management Agreement dated December 31, 1992 between the
Company and O.E., Inc. for the supervision and accounting
services provided by the Company for three Garfield's
franchise locations in the Oklahoma City metropolitan area.
(3)
10.12 Collateral Assignment Agreement dated January 20, 1991,
between the Company and Vincent F. Orza, Jr. (5)
10.13 Collateral Assignment Agreement dated January 20, 1991,
between the Company and James M. Burke. (5)
10.15 Stock Plan for Significant Employees of the Company,
dated December 1, 1986. (6)
10.16 1987 Director Stock Incentive Plan. (6)
10.17 Eateries, Inc. Omnibus Equity Compensation Plan. (6)
10.18 Underwriting Agreement between the Company, Pauli & Company
Incorporated, RAS Securities Corp. and certain shareholders
of the Company dated November 15, 1993. (3)
10.22 Asset Sale Agreement dated January 9, 1995 between the
Company and Pepperoni Grill, Inc. and Specialty Restaurants,
involving the purchase of assets of Pepperoni Grill
restaurant by the Company. (9)
10.23 Employment Agreement between the Company and Corey Gable,
dated January 1, 1997. (10)
10.24 Employment Agreement between the Company and Peter L.
Holloway, dated January 1, 1995. (9)
10.25 Employee Stock Purchase Plan dated June 15, 1994 (8).
10.26 Amended and restated Eateries, Inc. Omnibus Equity
Compensation Plan dated as of June 15, 1994. (9)
10.27 Option Agreement between the Company and Vincent F. Orza,
Jr., dated January 4, 1996 (10)
10.28 Option Agreement between the Company and James M. Burke,
dated January 4, 1996 (10)
10.29 Option Agreement between the Company and Corey Gable, dated
April 5, 1996 (10)
10.32 Asset Purchase Agreement dated November 14, 1997, by and
between the Company, through its wholly-owned subsidiary,
Fiesta Restaurants, Inc., and Famous Restaurants, Inc. and
its subsidiaries. (11)
10.33 Agreement for Purchase and Sale of Assets and Licenses dated
February 26, 1998, among the Company and Chevy's, Inc. (12)
10.34 Agreement for purchase and Sale of Assets dated February 26,
1998, between the Company and Chevy's, Inc. (12)
10.35 Loan Agreement dated as of November 18, 1997, by and between
NationsBank, N.A. and the Company.
10.36 Stock Put Agreement dated April 2, 1997, by and among
Vincent F. Orza, Jr. and the Company.
10.37 Stock Put Agreement dated April 2, 1997, by and among James
M. Burke and the Company.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
(1) Filed as exhibit to Registrant's Registration Statement on
Form S-18 (File No. 33-6818-FW).
(2) Filed as exhibit to Registrant's Quarterly Report on Form
10-Q for the six months ended June 30, 1988 (File No.
0-14968) and incorporated herein by reference.
(3) Filed as exhibit to Registrant's Registration Statement on
Form S-2 (File No. 33-69896).
(4) Filed as exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992 (File No.
0-14968) and incorporated herein by reference.
(5) Filed as exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1990 (File No.
0-14968) and incorporated herein by reference.
(6) Filed as exhibit to Registrant's Registration Statement on
form S-8 (File No. 33-41279).
(7) Filed as exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993 (File No.
0-14968) and incorporated herein by reference.
(8) Filed as Appendix A to the Company's Notice of Annual
Meeting of Shareholders dated April 29, 1994 and
incorporated herein by reference.
(9) Filed as exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 (File No.
0-14968) and incorporated herein by reference.
(10) Filed as exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 29, 1996 (File No.
0-14968) and incorporated herein by reference.
(11) Filed as exhibit to Registrant's Current Report on Form 8-K
dated December 8, 1997 (File No. 0-14968) and incorporated
herein by reference.
(12) Filed as exhibit to Registrant's Current Report on Form 8-K
dated March 16, 1998 (File No. 0-14968) and incorporated
herein by reference.
</TABLE>
<PAGE> 1
LOAN AGREEMENT
This Loan Agreement (the "Agreement") dated as of November ______,
1997, is made by and between NationsBank, N.A., a national banking association
("Bank") and the Borrower described below.
In consideration of the Loan or Loans described below and the mutual
covenants and agreements contained herein, and intending to be legally bound
hereby, Bank and Borrower agree as follows:
1. DEFINITIONS AND REFERENCE TERMS. In addition to any other terms
defined herein, the following terms shall have the meaning set forth with
respect thereto:
"ACCOUNTING TERMS". All accounting terms not specifically defined or
specified herein shall have the meanings generally attributed to such terms
under generally accepted accounting principles ("GAAP"), as in effect from time
to time, consistently applied throughout the periods involved, with respect to
the financial statements referenced in Section 3.H. hereof.
"AGREEMENT" shall mean the Loan Agreement and all Exhibits attached
thereto, as the same may from time to time be amended, supplemented or modified.
"ASSET PURCHASE AGREEMENT" shall mean the Asset Purchase Agreement
dated November 14, 1997, by and among Fiesta Restaurants, Inc., as Buyer, and
Famous Restaurants, Inc. and its various related and subsidiary companies, as
Sellers, covering the terms and conditions of the sale of 17 Garcia's Mexican
Restaurants, Casa Lupita Restaurants and Carlos Murphy's Restaurants to the
Buyer, and all amendments, modifications and substitutions thereof.
"BORROWER" shall mean, collectively, Eateries, Inc., an Oklahoma
Corporation, and its successors, with an address of 3204 West Britton Road,
Suite 202, Oklahoma City, Oklahoma 73120, and all of the Subsidiaries.
"COLLATERAL" means all of the Borrower's right, title and interest
in and to the real property and all improvements related to the Borrower's
restaurant locations in Ft. Myers, Florida; Newark, Ohio; Naperville, Illinois
and Lawrenceville, New Jersey, together with all rents, issues and profits
related thereto, pursuant to such mortgages, deeds of trust, assignments,
financing statements and other security documents as the Bank may require, all
in form satisfactory to the Bank, together with all proceeds thereof.
"CURRENT ASSETS" shall mean the aggregate amount of all of
Borrower's assets which would, in accordance with GAAP, properly be defined as
current assets.
<PAGE> 2
2
"CURRENT LIABILITIES" shall mean the aggregate amount of all current
liabilities as determined in accordance with GAAP, but in any event shall
include all liabilities except those having a maturity date which is more than
one year from the date as of which such computation is being made.
"DEBT" means, as to any person, all indebtedness, liabilities and
obligations of such person as may be required to be reflected on the balance
sheet of such person as a liability, all capital lease obligations and all
guaranties of indebtedness of other persons, all as determined in accordance
with GAAP.
"EBITDA" means the Borrower's net income before taxes and tax
accruals, plus interest, depreciation and amortization expenses pursuant to
GAAP, all during the period of the last four fiscal quarters immediately
preceding the date of determination.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended, together with all regulations issued pursuant thereto.
"FUNDED DEBT" means, as of any date of determination, the amount
outstanding on any long term Debt of the Borrower plus the current portion of
long term Debt, including any capital leases.
"HAZARDOUS MATERIALS" shall mean and include all materials defined
as hazardous materials or substances under any local, state or federal
environmental laws, rules or regulations, and petroleum, petroleum products, oil
and asbestos.
"LIEN" means any lien, mortgage, security interest, tax lien,
pledge, encumbrance, conditional sale or title retention arrangement, or any
other interest in property of the Borrower designed to secure the repayment of
Debt of the Borrower, whether arising by agreement or under any statute or law,
or otherwise.
"LOAN" shall mean any loan described in Section 2 hereof and any
subsequent loan which states that it is subject to this Loan Agreement.
"LOAN DOCUMENTS" means this Loan Agreement and any and all
promissory notes executed by Borrower in favor of Bank and all other documents,
instruments, guarantees, certificates and agreements executed and/or delivered
by Borrower, any guarantor or third party in connection with any Loan.
"MATERIAL ADVERSE EFFECT" means any set of circumstances or events
which (i) has an adverse effect upon the validity, performance or enforceability
of this Agreement or any other Loan Documents, (ii) is material and adverse to
the financial condition or business operations of the Borrower, (iii) materially
impairs the ability of the Borrower to perform its obligations under this
Agreement or any other Loan Documents, or (iv) constitutes an Event of Default.
"NET WORTH" means the difference between Borrower's (i) Total
Assets, and (ii) Total Liabilities, all as set forth in the consolidated
financial statements of Borrower.
<PAGE> 3
3
"PBGC" means the Pension Benefit Guaranty Corporation and any
successor to all or any of its functions under ERISA.
"PERMITTED LIENS" means: (i) pledges or deposits made to secure
payment of workers' compensation insurance (or to participate in any fund in
connection with workers' compensation insurance), unemployment insurance,
pensions or social security programs, (ii) Liens imposed by mandatory provisions
of law such as for materialmen's, mechanics', warehousemen's and other like
Liens arising in the ordinary course of business, securing Debt whose payment is
not yet due or if the same is due, it is being contested in good faith by
appropriate proceedings and the imposition of which would not have a Material
Adverse Effect on the Borrower, (iii) Liens for taxes, assessments and
governmental charges or levies imposed upon a person or upon such person's
income or profits or property, if the same are not yet due and payable or if the
same are being contested in good faith by appropriate proceedings and the
imposition of which would not have a Material Adverse Effect on the Borrower,
(iv) pledges or deposits to secure public or statutory obligations and deposits
to secure (or in lieu of) surety, stay, appeal or customs bonds and deposits to
secure the payment of taxes, assessments, customs duties or other similar
charges.
"REGULATION D" means Regulation D of the Board of Governors of the
Federal Reserve System, as in effect from time to time.
"REGULATION U" means Regulation U of the Board of Governors of the
Federal Reserve System, as in effect from time to time.
"REGULATION X" means Regulation X promulgated by the Board of
Governors of the Federal Reserve System, as in effect from time to time.
"SUBSIDIARIES" shall mean Fiesta Restaurants, Inc., an Oklahoma
corporation, Pepperoni Grill, Inc., an Oklahoma corporation, and Garfield's
Management, Inc. an Oklahoma corporation, and any of their successors.
"TOTAL ASSETS" shall mean the Total Assets of Borrower as reflected
on Borrower's financial statements and as accounted for under GAAP.
"TOTAL LIABILITIES" shall mean the Total Liabilities of Borrower as
reflected on Borrower's financial statements and as accounted for under GAAP.
2. LOANS.
A. LOAN. Bank hereby agrees to make (or has made) one or more loans
to Borrower in the aggregate principal face amount of $15,500,000.00. The
obligation to repay the loans is evidenced by a promissory note or notes dated
even date herewith (the promissory note or notes together with any and all
renewals, extensions or rearrangements thereof being hereafter collectively
referred to as the "Note") having a maturity date, repayment terms and interest
rate as set forth in the
<PAGE> 4
4
Note. Each of the Notes shall be executed by each Borrower and shall be the
joint and several obligation of each Borrower.
i . REVOLVING CREDIT FEATURE. One of the Loans in the principal
face amount of $6,000,000.00 provides for a revolving line of credit (the
"Line") under which Borrower may from time to time, borrow, repay and re-borrow
funds.
ii . TERM CREDIT FEATURE. One of the Loans in the principal
amount of not to exceed the lesser of (a) $9,500,000.00, or (b) the actual
acquisition cost of the assets of Famous Restaurants, Inc. under the Asset
Purchase Agreement, provides for a term credit upon which Borrower shall receive
a single advance at the closing of the Asset Purchase Agreement and thereafter
repay in accordance with the terms and conditions of the Note evidencing such
obligation.
3. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and
warrants to Bank as follows:
A. GOOD STANDING. Borrower is an Oklahoma corporation, duly
organized, validly existing and in good standing under the laws of the State of
Oklahoma and has the power and authority to own its property and to carry on its
business in each jurisdiction in which Borrower does business.
B. AUTHORITY AND COMPLIANCE. Borrower has full power and authority
to execute and deliver the Loan Documents and to incur and perform the
obligations provided for therein, all of which have been duly authorized by all
proper and necessary action of the appropriate governing body of Borrower. No
consent or approval of any public authority or other third party is required as
a condition to the validity of any Loan Document, and Borrower is in substantial
compliance with all laws and regulatory requirements to which it is subject.
C. BINDING AGREEMENT. This Agreement and the other Loan Documents
executed by Borrower constitute valid and legally binding obligations of
Borrower, enforceable in accordance with their terms.
D. LITIGATION. There is no proceeding involving Borrower pending or,
to the knowledge of Borrower, threatened before any court or governmental
authority, agency or arbitration authority which could have a Material Adverse
Effect on the Borrower.
E. NO CONFLICTING AGREEMENTS. There is no charter, bylaw, stock
provision, partnership agreement or other document pertaining to the
organization, power or authority of Borrower and no provision of any existing
agreement, mortgage, indenture or contract binding on Borrower or affecting its
property, which would prevent, hinder or delay the execution, delivery or
carrying out of the terms of this Agreement and the other Loan Documents.
F. OWNERSHIP OF ASSETS. Borrower has good title to its assets, and
its assets are free and clear of liens, except for Permitted Liens and as
otherwise disclosed to Bank in writing prior to the date of this Agreement.
<PAGE> 5
5
G. TAXES. All taxes and assessments due and payable by Borrower have
been paid or are being contested in good faith by appropriate proceedings and
the Borrower has filed all tax returns which it is required to file.
H. FINANCIAL STATEMENTS. The financial statements of Borrower
heretofore delivered to Bank have been prepared in accordance with GAAP applied
on a consistent basis throughout the period involved and fairly present
Borrower's financial condition as of the date or dates thereof, and there has
been no material adverse change in Borrower's financial condition or operations
since June 29, 1997. All factual information furnished by Borrower to Bank in
connection with this Agreement and the other Loan Documents is and will be
accurate and complete on the date as of which such information is delivered to
Bank and is not and will not be incomplete by the omission of any material fact
necessary to make such information not misleading.
I. PLACE OF BUSINESS. Borrower's chief executive office is located
at:
3240 W. Britton Road, Suite 202, Oklahoma City, Oklahoma 73120.
J. ENVIRONMENTAL. The conduct of Borrower's business operations and
the condition of Borrower's property does not and will not violate any federal
laws, rules or ordinances for environmental protection, regulations of the
Environmental Protection Agency, any applicable local or state law, rule,
regulation or rule of common law or any judicial interpretation thereof relating
primarily to the environment or Hazardous Materials.
K. PERMITS. The Borrower has all licenses, permits, certificates,
consents and franchises, and all necessary filings associated thereto have been
made, in order to carry on its business as now being conducted and to own or
lease and operate its properties as now owned, leased or operated. All such
licenses, permits, certificates, consents, and franchises are valid and
subsistent, and the Borrower is not in violation thereof to the extent such
violation would cause a Material Adverse Effect.
L. FULL DISCLOSURE. Except as otherwise disclosed to Bank in writing
prior to the execution of this Agreement, there is no material fact known to
Borrower that Borrower has not disclosed to Bank which could have a Material
Adverse Effect on the properties, business, prospects or condition (financial or
otherwise) of Borrower. Neither the financial statements referenced herein, nor
any certificate or statement delivered herewith or heretofore by Borrower to
Bank in connection with the negotiations of this Agreement, contains any untrue
statement of a material fact or omits to state any material fact necessary to
keep the statements contained herein or therein from being misleading which
would have a Material Adverse Effect.
M. USE OF PROCEEDS; MARGIN STOCK. The proceeds of the Loans will be
used by Borrower solely for the purposes described herein. None of such proceeds
will be used for the purpose of purchasing or carrying any "margin stock" as
defined in Regulation U or Regulation X, or for the purpose of reducing or
retiring any Debt which was originally incurred to purchase or carry a margin
<PAGE> 6
6
stock or for any other purpose which might constitute this transaction a
"purpose credit" within the meaning of such Regulation U or Regulation X.
Borrower is not engaged in the business of extending credit for the purpose of
purchasing or carrying margin stocks. Borrowers have not taken or will not take
any action which might cause the Loans or any of the other Loan Documents,
including this Agreement, to violate Regulation U or Regulation X, or any other
regulations of the Board of Governors of the Federal Reserve System or to
violate Section 8 of the Securities Exchange Act of 1934 or any rule or
regulation thereunder, in each case as now in effect or as the same may
hereinafter be in effect. Borrower does not own margin stock.
N. ERISA. Borrower is in compliance with all ERISA requirements and
interpretations with respect to any employee benefit plan of the Borrower and
has not incurred any liability to PBGC with respect to any such plan.
O. COMPLIANCE WITH LAW. Borrower is not in material violation of any
law, rule, regulation, order or decree which is applicable to Borrower or its
properties the result of which could have a Material Adverse Effect.
P. CASUALTIES. Neither the business nor the properties of Borrower
are currently affected by any environmental hazard, fire, explosion, accident,
strike, lockout or other labor dispute, drought, storm, hail, earthquake,
embargo, act of God or other casualty (whether or not covered by insurance),
which could have a Material Adverse Effect.
Q. NO EVENT OF DEFAULT. No Event of Default has occurred and is
continuing.
R. SURVIVAL OF REPRESENTATIONS. All representations and warranties
made under this Agreement shall be deemed to be made at and as of the date
hereof and at and as of the date of any advance under any Loan. All of the
representations and warranties made by the Borrower herein and in any Loan
Document will survive the delivery of the Loan Documents and any renewal and
extension of the Loans hereunder. All statements contained in any certificate or
other instrument delivered by or on behalf of the Borrower under or pursuant to
the Loan Agreement or in connection with the transactions contemplated hereby
shall constitute representations and warranties made by the Borrower hereunder
as applicable.
4. CONDITIONS OF LENDING. The obligation of the Bank to perform this
Agreement and to extend the Loans as described herein is subject to the
performance of the following conditions precedent:
A. LOAN DOCUMENTS. This Agreement and the other Loan Documents, and
all other documents required by the Bank shall have been duly executed,
acknowledged (where appropriate) and delivered to the Bank, all in form and
substance satisfactory to the Bank. All of the Loan Documents which require
filing or recordation for the perfection of Liens on any Collateral shall be
properly filed or recorded in all appropriate recording offices and the Borrower
shall have reimbursed the Bank for all costs, including reasonable attorney's
fees, pertaining thereto.
<PAGE> 7
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B. INFORMATION. The Borrower shall have furnished to the Bank such
financial statements and other information as the Bank shall have requested.
C. NO DEFAULT, REPRESENTATIONS AND WARRANTIES. No Events of Default
shall have occurred and be continuing under this Agreement or the Loan
Documents. All representations and warranties contained herein shall be true and
correct.
D. AUTHORITY. The Borrower shall have delivered to the Bank such
resolutions and other documents reasonably required to authorize the execution,
delivery and performance of the Loan Documents, all in form and substance
satisfactory to the Bank, together with certified copies of the Borrower's
Certificate of Incorporation (and amendments), Bylaw (and amendments), and Good
Standing Certificate from the State of Oklahoma.
E. INCUMBENCY CERTIFICATE. The Bank shall have received a
certificate of an officer of Borrower which shall certify the names of the
persons authorized to sign each of the Loan Documents to be executed by such
person and the other documents or certificates to be delivered by such person
pursuant to the Loan Documents, together with the true signatures of each of
such persons. Bank may conclusively rely on the certificates until Bank shall
receive a further certificate of an officer of Borrowers canceling or amending
the prior certificate and submitting the signatures of the persons named in such
further certificate.
F. OPINION OF COUNSEL. A favorable opinion of legal counsel for
Borrower, in such form as shall be acceptable to Bank and Bank's counsel, shall
have been delivered to the Bank, covering such matters as: (i) the Borrower's
due organization and qualification under the laws of the State of Oklahoma, and
good standing under the laws of the State of Oklahoma and all other states as
may be required by applicable law; (ii) Borrower's authorization to enter into
this Agreement and the other Loan Documents, and that such documents, when
executed and delivered, will be the valid and binding obligations of the
Borrower enforceable according to their respective terms; (iii) that the
execution and delivery of this Agreement and the other Loan Documents shall not
violate any applicable law, regulation or rule; and (iv) that the Loan Documents
and other security documents evidencing the Liens of the Bank, when recorded,
will be valid liens against the Collateral and that such documents will secure
the payment and performance of the Loans and other obligations of the Borrower
to the Bank as described herein.
G. UCC INFORMATION. The Bank shall have received and reviewed copies
of UCC Title Searches for the Borrower in such jurisdictions as the Borrower may
require, and all Liens of any party as evidenced by such information shall have
been released to the satisfaction of the Bank.
H. TITLE INSURANCE. The Bank shall have received satisfactory
marked-up commitments for the issuance of policies of mortgagee's title
insurance covering the Collateral, and issued for amounts equal to the
respective appraised values of the Collateral by companies approved by the Bank.
The commitments for title insurance shall bind the title insurers to insure the
Bank's first Lien mortgages on the respective properties being insured and
insure that all future advances under the Notes will be secured by the first
Lien of the Bank, subject only to such exceptions as are approved by the Bank.
Prior to the date of closing the Loans, the Bank shall have received preliminary
<PAGE> 8
8
commitments for such policies, subject only to those Liens which are to be paid
prior to or at closing, routine utility easements and restrictions and current
year's taxes not yet due and payable, together with copies of all documents
evidencing restrictive covenants, easements, encumbrances and other exceptions
of record covering the Collateral. The title policies shall not include an
exception based on mechanics' and materialmen's liens or an exception for unpaid
taxes other than the current year's taxes not yet due.
I. ACQUISITION BY BORROWER. The Bank shall have reviewed a copy of
the fully executed Asset Purchase Agreement and such parts of the other
documentation, up to the whole thereof, of the Borrower's acquisition of assets
of Famous Restaurants, Inc. and its related and subsidiary companies as
described in the Asset Purchase Agreement, as the Bank may deem necessary, the
results of such review being satisfactory to the Bank in all respects.
J. EXPENSES. Each party shall have paid all of their respective
costs and expenses, including reasonable fees of legal counsel, incurred in the
negotiation and preparation of the Loan Documents and in closing and perfecting
any rights and interests under the Loan Documents.
5. SECURITY. The Loans shall be secured by first and prior Liens on
the Collateral in favor of the Bank pursuant to the Loan Documents, subject only
to such other exceptions or other liens or encumbrances as may be consented to
by the Bank in writing. From time to time during the term of this Agreement, the
Bank may reasonably require the Borrower to execute and deliver other and
further Loan Documents to confirm and further secure the interest of the Bank in
the Collateral, which Borrower agrees it will so execute and deliver upon
request.
6. AFFIRMATIVE COVENANTS. Until full payment and performance of all
obligations of Borrower under the Loan Documents, Borrower will, unless Bank
consents otherwise in writing (and without limiting any requirement of any other
Loan Document):
A. FINANCIAL CONDITION. Maintain Borrower's financial condition as
follows, determined in accordance with GAAP applied on a consistent basis
throughout the period involved except to the extent modified by the following
definitions:
i. NET WORTH. Borrower shall maintain a Net Worth of at least
$9,000,000.00 during the term of this Agreement, and the Borrower shall increase
its Net Worth by an amount of not less than fifty percent (50%) of the
Borrower's annual net income for each calendar year.
ii. FUNDED DEBT TO EBITDA. Borrower will not allow its ratio of
Funded Debt to EBITDA to be in excess of 3.20 to 1.00 during the term of this
Agreement.
iii. DEBT COVERAGE. Borrower shall not permit the ratio of its
(i) net income after taxes and tax accruals, plus interest, depreciation and
amortization expenses, all during the period of the last four fiscal quarters
immediately preceding the date of determination, to (ii) the sum of (a) the
current portion of long term Debt of the Borrower for the last fiscal quarter,
and (b) all interest expense of the Borrower, during the last four fiscal
quarters after the date of determination, to be less
<PAGE> 9
9
than 1.40 to 1.00. Such ratio shall be determined quarterly as of the close of
each fiscal quarter, beginning with the second fiscal quarter of 1998.
B. FINANCIAL STATEMENTS AND OTHER INFORMATION. Maintain a system of
accounting satisfactory to Bank and in accordance with GAAP applied on a
consistent basis throughout the period involved, permit Bank's officers or
authorized representatives to visit and inspect Borrower's books of account and
other records at such reasonable times and as often as Bank may desire, and pay
the reasonable fees and disbursements of any accountants or other agents of Bank
selected by Bank for the foregoing purposes. Unless written notice of another
location is given to Bank, Borrower's books and records will be located at
Borrower's chief executive office set forth above. All financial statements
called for below shall be prepared in form and content acceptable to Bank and by
independent certified public accountants acceptable to Bank.
In addition, Borrower will:
i. Furnish to Bank audited, consolidated, annual financial
statements of Borrower for each fiscal year of Borrower, within 120 days after
the close of each such fiscal year.
ii. Furnish to Bank unaudited, consolidated quarterly financial
statements (including a balance sheet and profit and loss statement) of Borrower
for each fiscal quarter of each fiscal year of Borrower, within 60 days after
the close of each such period.
iii. Furnish to Bank a quarterly compliance certificate for (and
executed by an authorized representative of) Borrower concurrently with and
dated as of the date of delivery of each of the financial statements as required
in paragraphs i and ii above, containing (a) a certification that the financial
statements of even date are true and correct and that the Borrower is not in
default under the terms of this Agreement, and (b) computations and conclusions,
in such detail as Bank may request, with respect to compliance with this
Agreement, and the other Loan Documents, including computations of all
quantitative covenants.
vii. Furnish to Bank promptly such additional information,
reports and statements respecting the business operations and financial
condition of Borrower, from time to time, as Bank may reasonably request
including but not limited to: (a) all Quarterly and other periodic reports to
the Securities and Exchange Commission (Forms 10Q, 10K, etc.) which, reports
among other information provided, shall detail all new store openings and other
material business matters of the Borrower; and (b) written notification, in form
acceptable to the Bank, of any potential merger, acquisition, reorganization or
sale of a material part of the assets of the Borrower to any other party.
C. INSURANCE. Maintain insurance with responsible insurance
companies on such of its properties, in such amounts and against such risks as
is customarily maintained by similar businesses operating in the same vicinity,
specifically to include fire and extended coverage insurance covering all
assets, business interruption insurance, workers compensation insurance and
liability insurance, all to be with such companies and in such amounts as are
satisfactory to Bank and providing for at least 30 days prior notice to Bank of
any cancellation thereof. Satisfactory evidence of
<PAGE> 10
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such insurance will be supplied to Bank prior to funding under the Loan(s) and
30 days prior to each policy renewal.
D. EXISTENCE AND COMPLIANCE. Maintain its existence, good standing
and qualification to do business, where required and comply with all laws,
regulations and governmental requirements including, without limitation,
environmental laws applicable to it or to any of its property, business
operations and transactions.
E. ADVERSE CONDITIONS OR EVENTS. Promptly advise Bank in writing of
(i) any condition, event or act which comes to its attention that would or might
materially adversely affect Borrower's financial condition or operations or
Bank's rights under the Loan Documents, (ii) any material litigation filed by or
against Borrower, (iii) any event that has occurred that would constitute an
event of default under any Loan Documents and (iv) any uninsured or partially
uninsured loss through fire, theft, liability or property damage in excess of an
aggregate of $25,000.00.
F. TAXES AND OTHER OBLIGATIONS. Pay, prior to delinquency, all of
its taxes, assessments and other obligations, including, but not limited to
taxes, costs or other expenses arising out of this transaction, as the same
become due and payable, except to the extent the same are being contested in
good faith by appropriate proceedings in a diligent manner.
G. MAINTENANCE. Maintain all of its tangible property in good
condition and repair and make all necessary replacements thereof, and preserve
and maintain all licenses, trademarks, privileges, permits, franchises,
certificates and the like necessary for the operation of its business.
H. ENVIRONMENTAL. Immediately advise Bank in writing of (i) any and
all enforcement, cleanup, remedial, removal, or other governmental or regulatory
actions instituted, completed or threatened pursuant to any applicable federal,
state, or local laws, ordinances or regulations relating to any Hazardous
Materials affecting Borrower's business operations; and (ii) all claims made or
threatened by any third party against Borrower relating to damages,
contribution, cost recovery, compensation, loss or injury resulting from any
Hazardous Materials. Borrower shall immediately notify Bank of any remedial
action taken by Borrower with respect to Borrower's business operations.
Borrower will not use or permit any other party to use any Hazardous Materials
At any of Borrower's places of business or at any other property owned by
Borrower except such materials as are incidental to Borrower's normal course of
business, maintenance and repairs and which are handled in compliance with all
applicable environmental laws. Borrower agrees to permit Bank, its agents,
contractors and employees to enter and inspect any of Borrower's places of
business or any other property of Borrower at any reasonable times upon three
(3) days prior notice for the purposes of conducting an environmental
investigation and audit (including taking physical samples) to insure that
Borrower is complying with this covenant and Borrower shall reimburse Bank on
demand for the costs of any such environmental investigation and audit. Borrower
shall provide Bank, its agents, contractors, employees and representatives with
access to and copies of any and all data and documents relating to or dealing
with any Hazardous Materials used, generated, manufactured, stored or disposed
of by Borrower's business operations within five (5) days of the request
therefore.
<PAGE> 11
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I. AUTHORIZATIONS AND APPROVALS. Borrower shall promptly obtain,
from time to time at its own expense, all such governmental licenses,
authorizations, consents, permits and approvals which may be required or
necessary in the Borrower's business or with respect to its assets and
properties if the failure to obtain the same could have a Material Adverse
Effect.
J. ERISA COMPLIANCE. Borrower shall (i) at all times, make prompt
payment of all contributions required under all employee benefit plans and as
required to meet the minimum funding standard set forth in ERISA with respect to
its plans, (ii) notify Bank immediately of any fact, including, but not limited
to, any reportable event arising in connection with any of its plans, which
might constitute grounds for termination thereof by the PBGC or for the
appointment by the appropriate United States District Court of a trustee to
administer such plan, together with a statement, if requested by Bank, as to the
reason therefor and the action, if any, proposed to be taken with respect
thereto, and (iii) furnish to Bank, upon its request, such additional
information concerning any of their plans as may be reasonably requested.
K. MAINTENANCE OF COLLATERAL. Borrower will do all things necessary
to maintain, preserve, protect and keep all the Collateral in good condition,
and make all necessary and proper repairs, renewals and replacements thereto so
that the business anticipated by the Borrower through the ownership, operation
or use of the Collateral can be performed and conducted at all times.
7. NEGATIVE COVENANTS. Until full payment and performance of all
obligations of Borrower under the Loan Documents, Borrower will not, without the
prior written consent of Bank (and without limiting any requirement of any other
Loan Documents):
A. CAPITAL EXPENDITURES. Make capital expenditures during each
fiscal year (including capitalized leases) exceeding in the aggregate the lesser
of $5,000,000.00.
B. TRANSFER OF ASSETS OR CONTROL. Sell, lease, assign or otherwise
dispose of or transfer any assets, except in the normal course of its business,
or enter into any merger or consolidation, or transfer control or ownership of
the Borrower or form or acquire any subsidiary.
C. LIENS. Grant, suffer or permit any contractual or noncontractual
lien on or security interest in its assets, except in favor of Bank, or fail to
promptly pay when due all lawful claims, whether for labor, materials or
otherwise which would have a Material Adverse Effect.
D. EXTENSIONS OF CREDIT. Make or permit any subsidiary to make, any
loan or advance to any person or entity (other than one of the Borrowers), or
purchase or otherwise acquire, or permit any subsidiary to purchase or otherwise
acquire, any capital stock, assets, obligations, or other securities of, make
any capital contribution to, or otherwise invest in or acquire any interest in
any entity (other than one of the Borrowers), or participate as a partner or
joint venturer with any person or entity, except for the purchase of direct
obligations of the United States or any agency thereof with maturities of less
than one year.
<PAGE> 12
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E. BORROWINGS. Create, incur, assume or become liable in any manner
for any indebtedness (for borrowed money, deferred payment for the purchase of
assets, lease payments, as surety or guarantor for the debt for another, or
otherwise) other than to Bank, except debts incurred in the ordinary course of
Borrower's business, and except for existing indebtedness disclosed to Bank in
writing and acknowledged by Bank prior to the date of this Agreement.
F. CHARACTER OF BUSINESS. Change the general character of business
as conducted at the date hereof, or engage in any type of business not
reasonably related to its business as presently conducted.
G. MANAGEMENT CHANGE. Make any substantial change in its present
executive or management personnel.
8. DEFAULT. Borrower shall be in default under this Agreement and under
each of the other Loan Documents if it shall: (i) default in the payment of any
amounts due and owing under the Loan and it shall have failed to cure such
default within five (5) days after written notice thereof to Borrower as
provided herein; or (ii) fail to timely and properly observe, keep or perform
any term, covenant, agreement or condition in any Loan Document or in any other
loan agreement, promissory note, security agreement, deed of trust, deed to
secure debt, mortgage, assignment or other contract securing or evidencing
payment of any indebtedness of Borrower to Bank or any affiliate or subsidiary
of NationsBank Corporation, and it shall have failed to cure such default within
twenty (20) days after written notice thereof to Borrower as provided herein.
9. REMEDIES UPON DEFAULT. If an event of default shall occur, Bank
shall have all rights, powers and remedies available under each of the Loan
Documents as well as all rights and remedies available at law or in equity.
10. NOTICES. All notices, requests or demands which any party is
required or may desire to give to any other party under any provision of this
Agreement must be in writing delivered to the other party at the following
address:
Borrower: Eateries, Inc.
3240 West Britton Road, Suite 202
Oklahoma City, Oklahoma 73120
Attention: Vincent F. Orza, Jr., President
Fax. No. 405-____________
With a copy to: Thomas F. Golden, Esq.
Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C.
320 South Boston, Suite 400
Tulsa, Oklahoma 74103-3708
Fax. No. 918-594-0505
Bank: NationsBank, N.A.
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211 North Robinson
Oklahoma City, Oklahoma 73102
Attention: Kelly H. Sachs
Fax No. 405-230-4089
With a copy to: Clyde V. Crutchmer, Esq.
McKinney, Stringer & Webster, P.C.
101 N. Broadway
Oklahoma City, Oklahoma 73102
Fax. No. 405-239-7902
or to such other address as any party may designate by written notice to the
other party. Each such notice, request and demand shall be deemed given or made
as follows:
A. If sent by mail, upon the earlier of the date of receipt or five
(5) days after deposit in the U.S. Mail, first class postage prepaid;
B. If sent by any other means, upon delivery.
11. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank
immediately upon demand the full amount of all costs and expenses, including
reasonable attorneys' fees (to include outside counsel fees and all allocated
costs of Bank's in-house counsel if permitted by applicable law), incurred by
Bank in connection with (a) the enforcement of this Agreement and each of the
Loan Documents, and (b) all other costs and attorneys' fees incurred by Bank for
which Borrower is obligated to reimburse Bank in accordance with the Terms of
the Loan Documents.
12. MISCELLANEOUS. Borrower and Bank further covenant and agree as
follows, without limiting any requirement of any other Loan Document:
A. CUMULATIVE RIGHTS AND NO WAIVER. Each and every right granted to
Bank under any Loan Document, or allowed it by law or equity shall be cumulative
of each other and may be exercised in addition to any and all other rights of
Bank, and no delay in exercising any right shall operate as a waiver thereof,
nor shall any single or partial exercise by Bank of any right preclude any other
or future exercise thereof or the exercise of any other right. Borrower
expressly waives any presentment, demand, protest or other notice of any kind,
including but not limited to notice of intent to accelerate and notice of
acceleration. No notice to or demand on Borrower in any case shall, of itself,
entitle Borrower to any other or future notice or demand in similar or other
circumstances.
B. APPLICABLE LAW. This Loan Agreement and the rights and
obligations of the parties hereunder shall be governed by and interpreted in
accordance with the laws of Oklahoma and applicable United States federal law.
C. AMENDMENT. No modification, consent, amendment or waiver of any
provision of this Loan Agreement, nor consent to any departure by Borrower
therefrom, shall be effective unless
<PAGE> 14
14
the same shall be in writing and signed by an officer of Bank, and then shall be
effective only in the specified instance and for the purpose for which given.
This Loan Agreement is binding upon Borrower, its successors and assigns, and
inures to the benefit of Bank, its successors and assigns; however, no
assignment or other transfer of Borrower's rights or obligations hereunder shall
be made or be effective without Bank's prior written consent, nor shall it
relieve Borrower of any obligations hereunder. There is no third party
beneficiary of this Loan Agreement.
D. DOCUMENTS. All documents, certificates and other items required
under this Loan Agreement to be executed and/or delivered to Bank shall be in
form and content satisfactory to Bank and its counsel.
E. PARTIAL INVALIDITY. The unenforceability or invalidity of any
provision of this Loan Agreement shall not affect the enforceability or validity
of any other provision herein and the invalidity or unenforceability of any
provision of any Loan Document to any person or circumstance shall not affect
the enforceability or validity of such provision as it may apply to other
persons or circumstances.
F. INDEMNIFICATION. Notwithstanding anything to the contrary
contained in Section 10(G), Borrower shall indemnify, defend and hold Bank and
its successors and assigns harmless from and against any and all claims,
demands, suits, losses, damages, assessments, fines, penalties, costs or other
expenses (including reasonable attorneys' fees and court costs) arising from or
in any way related to any of the transactions contemplated hereby, including but
not limited to actual or threatened damage to the environment, agency costs of
investigation, personal injury or death, or property damage, due to a release or
alleged release of Hazardous Materials, arising from Borrower's business
operations, any other property owned by Borrower or in the surface or ground
water arising from Borrower's business operations, or gaseous emissions arising
from Borrower's business operations or any other condition existing or arising
from Borrower's business operations resulting from the use or existence of
Hazardous Materials, whether such claim proves to be true or false. Borrower
further agrees that its indemnity obligations shall include, but are not limited
to, liability for damages resulting from the personal injury or death of an
employee of the Borrower, regardless of whether the Borrower has paid the
employee under the workmen' s compensation laws of any state or other similar
federal or state legislation for the protection of employees. The term "property
damage" as used in this paragraph includes, but is not limited to, damage to any
real or personal property of the Borrower, the Bank, and of any third parties.
The Borrower's obligations under this paragraph shall survive the repayment of
the Loan and any deed in lieu of foreclosure or foreclosure of any Deed of
Trust, Security Agreement or Mortgage securing the Loan.
G. SURVIVABILITY. All covenants, agreements, representations and
warranties made herein or in the other Loan Documents shall survive the making
of the Loan and shall continue in full force and effect so long as the Loan is
outstanding or the obligation of the Bank to make any advances under the Line
shall not have expired.
13. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES
HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR
<PAGE> 15
15
RELATING TO THIS, INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS,
AGREEMENTS OR DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED
TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL
ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF
PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF
J.A.M.S./ENDISPUTE OR ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL
RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES
SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT
HAVING JURISDICTION. ANY PARTY TO THIS AGREEMENT MAY BRING AN ACTION, INCLUDING
A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR
CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH
ACTION.
A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE CITY OF
THE BORROWER'S DOMICILE AT THE TIME OF THE EXECUTION OF THIS INSTRUMENT,
AGREEMENT OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN
ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE
ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL
ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR
ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE
PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60
DAYS.
B. RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION PROVISION
SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE
STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS ARBITRATION
PROVISION; OR (II) BE A WAIVER BY THE BANK OF THE PROTECTION AFFORDED TO IT BY
12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE
RIGHT OF THE BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT
LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY
COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH
AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT
OF A RECEIVER. THE BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH
PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR
AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS
INSTRUMENT, AGREEMENT OR DOCUMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES
NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL
OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY,
INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE
CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES.
<PAGE> 16
16
14. NO ORAL AGREEMENT. THIS WRITTEN LOAN AGREEMENT AND THE OTHER
LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
<PAGE> 17
17
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed under seal by their duly authorized representatives as of the date
first above written.
BORROWER: BANK:
Eateries, Inc. NationsBank, N.A.
By:
----------------------------------- By: ------------------------------
Name: Vincent F. Orza, Jr., Name: Kelly H. Sachs
Title: President Title: Vice President
Fiesta Restaurants, Inc.
By: -----------------------------------
Name: Vincent F. Orza, Jr.,
Title: President
Pepperoni Grill, Inc.
By:
-----------------------------------
Name: Vincent F. Orza, Jr.,
Title: President
Garfield's Management, Inc.
By:
-----------------------------------
Name: Vincent F. Orza, Jr.,
Title: President
<PAGE> 1
STOCK PUT AGREEMENT
THIS STOCK PUT AGREEMENT is made and entered into as of the 2 day of
April, 1997, by and among VINCENT F. ORZA, JR. ("Orza") and EATERIES, INC.
(the "Company").
RECITALS
A. Orza is President of the Company.
B. In order to retain the services of Orza, the Company desires
to grant Orza's estate or legal representative the right in the event of his
death to cause the Company to purchase shares of common stock of the Company
(the "Common Stock") owned or controlled, directly or indirectly, by Orza or
members of his immediate family on the date of his death.
NOW, THEREFORE, in consideration of the foregoing, and for other good
and valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
1. GRANT OF PUT. The Company hereby grants Orza and his estate
or other legal representative the right (but not the obligation) to compel the
Company to purchase all or part of the Common Stock owned by Orza or members of
his immediate family (i.e. spouse or children) or controlled by any of them
through trusts, partnerships, corporations or other entities on the date of
Orza's death and any Common Stock acquired by Orza's estate or other legal
representative after Orza's death pursuant to the exercise of stock options
held by Orza at the time of his death.
2. PURCHASE PRICE. The per share purchase price payable by the
Company for Common Stock purchased under this Agreement shall be the greater of
(a) the highest closing price (as hereinafter defined) of a share of Common
Stock during the sixty (60) days preceding the date of Orza's death or (b) two
times the net book value per share of Common Stock as of the last day of the
calendar month immediately preceding the month of Orza's death as reflected in
the Company's regularly maintained financial records; provided, that, in any
event the total purchase price shall not exceed the proceeds payable to the
Company from the key man life insurance policy maintained on the life of Orza.
The "closing price" shall be (x) if the Common Stock is then traded on the
over-the-counter market, the mean between the highest closing bid and lowest
closing asked prices for a share of the Common Stock as reported by the
National Association of Securities Dealers Automated Quotation System, or if
not reported by that system, the mean between the closing bid and asked prices
as quoted by a source designated by the Board of Directors of the Company, or
(y) if the Common Stock is listed on a national or regional stock exchange, the
closing sales price per share on such exchange. The Company shall escrow
proceeds from the key man life insurance policy maintained on the life of Orza
on terms mutually acceptable to Orza's estate or other legal representative
until such time as the put right granted in this Agreement has been fully
exercised or has fully expired.
<PAGE> 2
3. TERM OF PUT. The put right granted under this Agreement shall
commence on the date of this Agreement and shall continue for a period of one
year after the date of Orza's death provided that Orza is a full-time employee
of the Company (or its successor) on the date of his death (the "Put Period").
If Orza shall for any reason cease to be a full-time employee of the Company
prior to his death, then this Agreement and the rights and obligations of the
parties hereunder shall terminate on the date of such cessation of employment.
4. CLOSING. Orza's estate or other legal representative shall
exercise the put right granted under this Agreement by giving written notice of
exercise to the Company during the Put Period. Closing of the exercise of the
put right shall take place at a time selected by the Company within ninety (90)
days of the date written notice of exercise is given even if the Closing occurs
beyond the Put Period. At the Closing, the Company shall deliver to Orza's
estate or other legal representative payment for the full amount of the
purchase price, which payment shall be made by cashiers check, wire transfer or
other mutually-agreeable methods.
5. ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto without the prior written consent of the other parties.
6. MISCELLANEOUS.
(a) All costs and expenses incurred in connection with
this Agreement and the transaction contemplated hereby shall be paid by the
party incurring such expense.
(b) This Agreement may not be amended except by an
instrument in writing signed by the parties hereto.
(c) This Agreement shall be governed by and construed in
accordance with the laws of the State of Oklahoma.
(d) All notices or other communications required or
permitted hereunder shall be in writing and shall be delivered in person or
sent by United States certified or registered mail, postage prepaid, return
receipt requested, or by overnight express mail, or by telex, facsimile or
telecopy to the address of the party set forth below. Any such notice shall be
effective upon receipt or three days after being placed in the mail, whichever
is earlier.
If to Eateries: Eateries, Inc.
3240 W. Britton Road, Suite 202
Oklahoma City, OK 73120-2032
Attn: Vincent F. Orza, Jr.
Facsimile: (405) 748-3576
-2-
<PAGE> 3
If to Orza: [To be provided.]
(e) Time is of the essence in the performance and
interpretation of the terms of this Agreement.
Executed effective as of the date first set forth above.
/S/
------------------------
Vincent F. Orza, Jr.
EATERIES, INC.
By: /S/
---------------------
Its: /S/
--------------------
-3-
<PAGE> 1
STOCK PUT AGREEMENT
THIS STOCK PUT AGREEMENT is made and entered into as of the 2 day of
April, 1997, by and among JAMES M. BURKE ("Burke") and EATERIES, INC.
(the "Company").
RECITALS
A. Burke is a senior executive employee of the Company.
B. In order to retain the services of Burke, the Company desires
to grant Burke's estate or legal representative the right in the event of his
death to cause the Company to purchase shares of common stock of the Company
(the "Common Stock") owned or controlled, directly or indirectly, by Burke or
members of his immediate family on the date of his death.
NOW, THEREFORE, in consideration of the foregoing, and for other good
and valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
1. GRANT OF PUT. The Company hereby grants Burke and his estate
or other legal representative the right (but not the obligation) to compel the
Company to purchase all or part of the Common Stock owned by Burke or members
of his immediate family (i.e. spouse or children) or controlled by any of them
through trusts, partnerships, corporations or other entities on the date of
Burke's death and any Common Stock acquired by Burke's estate or other legal
representative after Burke's death pursuant to the exercise of stock options
held by Burke at the time of his death.
2. PURCHASE PRICE. The per share purchase price payable by the
Company for Common Stock purchased under this Agreement shall be the greater of
(a) the highest closing price (as hereinafter defined) of a share of Common
Stock during the sixty (60) days preceding the date of Burke's death or (b) two
times the net book value per share of Common Stock as of the last day of the
calendar month immediately preceding the month of Burke's death as reflected in
the Company's regularly maintained financial records; provided, that, in any
event the total purchase price shall not exceed the proceeds payable to the
Company from the key man life insurance policy maintained on the life of Burke.
The "closing price" shall be (x) if the Common Stock is then traded on the
over-the-counter market, the mean between the highest closing bid and lowest
closing asked prices for a share of the Common Stock as reported by the
National Association of Securities Dealers Automated Quotation System, or if
not reported by that system, the mean between the closing bid and asked prices
as quoted by a source designated by the Board of Directors of the Company, or
(y) if the Common Stock is listed on a national or regional stock exchange, the
closing sales price per share on such exchange. The Company shall escrow
proceeds from the key man life insurance policy maintained on the life of Burke
on terms mutually acceptable to Burke's estate or other legal representative
until such time as the put right granted in this Agreement has been fully
exercised or has fully expired.
<PAGE> 2
3. TERM OF PUT. The put right granted under this Agreement shall
commence on the date of this Agreement and shall continue for a period of one
year after the date of Burke's death provided that Burke is a full-time
employee of the Company (or its successor) on the date of his death (the "Put
Period"). If Burke shall for any reason cease to be a full-time employee of
the Company prior to his death, then this Agreement and the rights and
obligations of the parties hereunder shall terminate on the date of such
cessation of employment.
4. CLOSING. Burke's estate or other legal representative shall
exercise the put right granted under this Agreement by giving written notice of
exercise to the Company during the Put Period. Closing of the exercise of the
put right shall take place at a time selected by the Company within ninety (90)
days of the date written notice of exercise is given even if the Closing occurs
beyond the Put Period. At the Closing, the Company shall deliver to Burke's
estate or other legal representative payment for the full amount of the
purchase price, which payment shall be made by cashiers check, wire transfer or
other mutually-agreeable methods.
5. ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto without the prior written consent of the other parties.
6. MISCELLANEOUS.
(a) All costs and expenses incurred in connection with
this Agreement and the transaction contemplated hereby shall be paid by the
party incurring such expense.
(b) This Agreement may not be amended except by an
instrument in writing signed by the parties hereto.
(c) This Agreement shall be governed by and construed in
accordance with the laws of the State of Oklahoma.
(d) All notices or other communications required or
permitted hereunder shall be in writing and shall be delivered in person or
sent by United States certified or registered mail, postage prepaid, return
receipt requested, or by overnight express mail, or by telex, facsimile or
telecopy to the address of the party set forth below. Any such notice shall be
effective upon receipt or three days after being placed in the mail, whichever
is earlier.
If to Eateries: Eateries, Inc.
3240 W. Britton Road, Suite 202
Oklahoma City, OK 73120-2032
Attn: Vincent F. Orza, Jr.
Facsimile: (405) 748-3576
-2-
<PAGE> 3
If to Burke: [To be provided.]
(e) Time is of the essence in the performance and
interpretation of the terms of this Agreement.
Executed effective as of the date first set forth above.
/S/
------------------------
James M. Burke
EATERIES, INC.
By: /S/
---------------------
Its: /S/
--------------------
-3-
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-41279) pertaining to the Eateries, Inc. Omnibus Equity
Compensation Plan of our report dated March 5, 1998, with respect to the
consolidated financial statements of Eateries, Inc. included in the Annual
Report (Form 10-K) for the year ended December 28, 1997.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma
April 10, 1998
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-41279) pertaining to the Eateries, Inc. Omnibus Equity
Compensation Plan of our report dated March 26, 1997, except for the last
paragraph of Note 5, as to which the date is April 9, 1997, with respect to the
consolidated financial statements of Eateries, Inc. included in the Annual
Report (Form 10-K) for the year ended December 28, 1997.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
April 10, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 28, 1997 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 28, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> DEC-28-1997
<CASH> 1,331
<SECURITIES> 0
<RECEIVABLES> 1,121
<ALLOWANCES> 0
<INVENTORY> 2,296
<CURRENT-ASSETS> 5,559
<PP&E> 27,580
<DEPRECIATION> 7,201
<TOTAL-ASSETS> 29,775
<CURRENT-LIABILITIES> 10,403
<BONDS> 7,637
0
0
<COMMON> 8
<OTHER-SE> 10,985
<TOTAL-LIABILITY-AND-EQUITY> 29,775
<SALES> 62,851
<TOTAL-REVENUES> 63,542
<CGS> 17,840
<TOTAL-COSTS> 56,851
<OTHER-EXPENSES> 4,722
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 310
<INCOME-PRETAX> 1,968
<INCOME-TAX> 569
<INCOME-CONTINUING> 1,399
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,399
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.35
</TABLE>
