-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SzCu561hQ0JO47NRWD5+vJ52UFcrX4BSe1kcUh9yBk4W9LfGNUvtYCJnvMRXkTzF 0Guo5O8hH/FH2SRnE3naLw== 0000950134-97-002904.txt : 19970415 0000950134-97-002904.hdr.sgml : 19970415 ACCESSION NUMBER: 0000950134-97-002904 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19961229 FILED AS OF DATE: 19970414 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EATERIES INC CENTRAL INDEX KEY: 0000796369 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 731230348 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-14968 FILM NUMBER: 97580159 BUSINESS ADDRESS: STREET 1: 3240 W BRITTON RD STE 202 CITY: OKLAHOMA CITY STATE: OK ZIP: 73120 BUSINESS PHONE: 4057553607 10-K405 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1996 1 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 29, 1996 FILE NO. 0-14968 EATERIES, INC. (Exact name of registrant as specified in its charter) OKLAHOMA 73-1230348 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3240 W. BRITTON ROAD OKLAHOMA CITY, OKLAHOMA 73120 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (405) 755-3607 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 April 1, 1997 was $6,851,457. Number of shares outstanding as of April 1, 1997 - 3,866,630 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 1997 Annual Meeting of Shareholders is incorporated by reference in Part III, Items 10, 11, 12 and 13. 2 EATERIES, INC. FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 29, 1996 TABLE OF CONTENTS
PART 1 PAGE - ------ ---- Item 1. Business .......................................................... 1 Item 2. Properties ........................................................ 8 Item 3. Legal Proceedings ................................................. 8 Item 4. Submission of Matters to a Vote of Security Holders .................................................. 8 PART II - ------- Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ................................... 8 Item 6. Selected Financial Data ........................................... 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ......................................... 11 Item 8. Financial Statements and Supplementary Data ....................... 18 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ............................... 18 PART III - -------- Item 10. Directors and Executive Officers of the Registrant ................ 18 Item 11. Executive Compensation ............................................ 18 Item 12. Security Ownership of Certain Beneficial Owners and Management .... 18 Item 13. Certain Relationships and Related Transactions .................... 18 PART IV - ------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .. 18 INDEX TO EXHIBITS .......................................................... 18 SIGNATURES ................................................................. 20 INDEX TO FINANCIAL STATEMENTS .............................................. 21
i 3 ITEM 1. BUSINESS IN GENERAL Eateries, Inc. (the "Company") owns, operates and franchises a 51-unit (43 Company, 8 franchise) chain of Garfield's and Pepperoni Grill restaurants. These casual theme, dinnerhouse restaurants are located primarily in regional malls in 22 states. The Company opened its first restaurant in 1984 in Oklahoma City, Oklahoma. The Company's restaurants are family-oriented, providing an upscale alternative to traditional fast-food. The restaurants 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. Both restaurant concepts feature 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. The warm European bistro 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. Over 60 different wine selections are offered along with 25 wines available by the glass. In 1996, the Company constructed and opened six (6) Garfield's and a test Casa Ole' Mexican restaurant in major regional malls and one Pepperoni Grill in a free-standing location. The Company expects to add up to five additional restaurants in 1997. The primary expansion emphasis will be on Company rather than franchised restaurants. However, management will visit with qualified, interested parties as potential franchisees. Early results of the Casa Ole' test do not indicate the likelihood of continuing its expansion. 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. In February, 1996 the Company hired a Director of Product Research and Development to further assist in developing new menu selections. 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 is testing six urban stores as "Garfield's Cafe's." 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. Early results are very encouraging and management will continue to monitor and fine tune "Cafe" results. 1 4 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. 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 1997 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 1996 were approximately $968,000, of which approximately $428,000 was funded through landlord finish-out allowances, bringing the Company's net investment to approximately $540,000 per unit. Management believes it's unit economics are among the best in the industry. SITE SELECTION All Garfield's restaurants are located in regional shopping malls. 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 out of 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. 2 5 RESTAURANT LOCATIONS The following table sets forth the location of the existing Garfield's restaurants.
COMPANY-OWNED RESTAURANTS FRANCHISED RESTAURANTS STATE # OF UNITS STATE # OF UNITS ----- ---------- ----- ---------- Alabama ......... 1 Colorado ....... 1 Arkansas ........ 1 Iowa ........... 2 Florida ......... 3 Oklahoma ....... 5 Georgia ......... 1 -- Illinois ........ 4 Total .......... 8 Indiana ......... 2 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 ... 1 Wisconsin ....... 2 -- Total ........... 40 ==
PEPPERONI GRILL RESTAURANTS The original Pepperoni Grill restaurant, located in Oklahoma City, Oklahoma was purchased by Eateries, Inc. in January, 1995. It is located in a recently renovated mall and its menu features a variety of Italian entrees with special emphasis on brick-oven baked pizza. The warm European bistro 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 Company is considering building one additional free-standing Pepperoni Grill in Oklahoma during 1997. At this time, management does not expect any further development of Casa Ole'. 3 6 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 and Pepperoni Grill. A typical restaurant has a general manager, two to four assistant managers and average 51 employees, approximately 81% 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 Director of Training to oversee all areas of employee education. The outline for the program is based on the individual expertise of the trainee and typically lasts about two weeks for hourly employees and up to 8 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. 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. 4 7 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. EXPANSION STRATEGY Eateries, Inc. intends to open Company-owned Garfield's restaurants in regional malls principally throughout the Southwest, Midwest and Southeast regions 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 smaller 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 expanding 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 other expansion opportunities such as free-standing sites. 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 Pepperoni Grill restaurants. Additional franchising is possible but likely to be a minor part of expansion. The Company currently is developing three additional Garfield's restaurants as follows: South Bend, Indiana; Bridgeport, West Virginia; Richmond, Indiana, and is negotiating for additional locations designated to open in 1997 and 1998. The Company is also negotiating for a third Pepperoni Grill location to open in 1997. The Company expects to open up to five Company-owned restaurants in 1997 and up to ten Company-owned restaurants in 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 Eight franchised Garfield's are currently operating pursuant to agreements granted by the Company. The typical 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. FUTURE FRANCHISE DEVELOPMENT The Company has elected to emphasize Company restaurant development and as a result does not intend to aggressively pursue new restaurant franchising. The Company had not entered into any new franchise agreements as of April 1, 1997. COMPANY MANAGED FRANCHISES The Company currently manages three of its franchised 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. 5 8 FRANCHISE REVENUE DATA The following table sets forth fees and royalties earned by the Company from franchisees for the years indicated.
1994 1995 1996 ---- ---- ---- Initial franchise fees $ -- $ 50,000 $ -- Continuing royalties $267,000 $258,000 $265,000
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, and 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 a substantially longer period 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" and "PEPPERONI GRILL" 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 its operations. EMPLOYEES As of March 1, 1997, the Company employed 2,357 individuals, of whom 178 were management or administrative personnel (including 143 who were restaurant managers or trainees) and 2,179 were employed in non-management restaurant positions. As of this date, the Company employed 169 persons on a salaried basis and 2,188 persons on an hourly basis. Each restaurant employs an average of 51 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. 6 9 SEASONALITY With 42 of the 43 Company-owned restaurants located in regional malls, the resulting higher pedestrian traffic during the Thanksgiving to New Year holiday season has caused the Company to experience a substantial increase in restaurant sales and profits in the Company's fourth fiscal quarter. 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 15% of the Company's food and beverage revenues in 1996 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. 7 10 ITEM 2. PROPERTIES All of the Company's facilities are occupied under leases, primarily in regional malls. 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:
YEAR LEASE TERM EXPIRES NUMBER OF FACILITIES* ----------------------- --------------------- 1997-1998 ............................................... 1 1999-2000 ............................................... 2 2001-2002 ............................................... 11 2003-2004 ............................................... 12 2005-2006 ............................................... 11 2007 and beyond ......................................... 10
* Includes two leases which have been executed for locations where restaurants have not yet been opened and two leases which were terminated subsequent to December 29, 1996. 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 1996. 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.
LOW HIGH ----- ----- 1995 First Quarter .......................................... $3.00 $4.13 Second Quarter ......................................... 2.88 3.63 Third Quarter .......................................... 2.63 3.25 Fourth Quarter ......................................... 2.13 3.50 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
8 11 Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. On April 1, 1997, the Company's stock transfer agent reported that the Company's common stock was held by 265 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. 9 12 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 financial statements of the Company. The following data should be read in conjunction with, and are qualified in their entirety by, the Company's financial statements and related notes and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. (In thousands, except per share data).
Fiscal Year ------------------------------------------------------ INCOME STATEMENT DATA: 1992 1993 1994 1995 1996 -------- -------- -------- -------- -------- Revenues: Restaurant sales $ 17,913 $ 26,401 $ 38,869 $ 45,811 $ 55,733 Franchise fees and royalties 522 488 267 307 265 Other income 315 369 423 482 418 -------- -------- -------- -------- -------- 18,750 27,258 39,559 46,600 56,416 -------- -------- -------- -------- -------- Costs and Expenses: Cost of sales 5,697 8,231 12,052 13,968 17,070 Operating expenses 10,435 14,891 22,359 26,387 32,219 Pre-opening costs 280 591 568 830 726 General and administrative expenses 1,403 2,101 2,467 3,067 3,666 Provision for restaurant closures and other disposals -- -- -- 897 -- Depreciation and amortization 484 601 927 1,337 1,886 Interest expense 41 50 48 41 194 -------- -------- -------- -------- -------- 18,340 26,465 38,421 46,527 55,761 -------- -------- -------- -------- -------- Income before income taxes and cumulative effect of accounting change 410 793 1,138 73 655 Provision (benefit) for income taxes 5 293 316 (113) 74 -------- -------- -------- -------- -------- Income before cumulative effect of change in accounting principle 405 500 822 186 581 Cumulative effect of change in accounting for income taxes -- 202 -- -- -- -------- -------- -------- -------- -------- Net income $ 405 $ 702 $ 822 $ 186 $ 581 ======== ======== ======== ======== ======== Weighted average shares of common and common equivalent shares 2,334 3,077 3,940 3,818 3,988 ======== ======== ======== ======== ======== Net income per share (1): Income before cumulative effect of change in accounting for income taxes $ .17 $ .16 $ .21 $ .05 $ .15 Cumulative effect of change in accounting for income taxes -- .07 -- -- -- -------- -------- -------- -------- -------- Net income per share $ .17 $ .23 $ .21 $ .05 $ .15 ======== ======== ======== ======== ======== BALANCE SHEET DATA (AT END OF PERIOD): Working capital (deficit) $ (567) $ 2,021 $ 922 $ (1,677) $ (3,456) Total assets 4,053 11,363 12,933 16,596 18,709 Long-term obligations (2) 117 42 75 1,249 1,471 Stockholders' equity 1,405 7,690 8,625 8,912 9,650 OTHER DATA: Earnings before interest, depreciation and taxes (EBITDA) $ 935 $ 1,444 $ 2,113 $ 1,451 $ 2,736 System-wide sales 29,717 39,025 45,891 53,802 64,036
(1) Based upon the weighted average number of common and dilutive common equivalent shares (if applicable) outstanding during the period. (See Note 2 of Notes to Consolidated Financial Statements.) (2) Includes capital leases and long-term debt obligations, net of current portions. (See Note 5 of Notes to Consolidated Financial Statements.) 10 13 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 similar 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 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. In addition, the Company disclaims any intent or obligation to update those forward-looking statements. INTRODUCTION As of December 29, 1996, the Company owned and operated 45 restaurants and franchised eight Garfield's restaurants. The Company currently has three Garfield's restaurants in development and closed two under-performing Garfield's restaurants subsequent to December 29, 1996. As of the date of this report, the entire system includes 43 (40 Garfield's, two Pepperoni Grills and one Casa Ole') Company-owned restaurants and eight franchise Garfield's restaurants. Unlike a majority of its publicly-held competitors which capitalize and amortize restaurant pre-opening costs over a period of up to 24 months, the Company expenses such costs as incurred. Pre-opening costs were $726,000 for the year ended December 29, 1996. 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:
Fiscal Year --------------------------------- 1994 1995 1996 -------- -------- -------- INCOME STATEMENT DATA: Revenues: Restaurant sales 98.3% 98.3% 98.8% Franchise fees and royalties 0.7 0.7 0.5 Other income 1.0 1.0 0.7 -------- -------- -------- 100.0 100.0 100.0 -------- -------- -------- Costs and Expenses: Cost of sales (1) 31.0 30.5 30.6 Operating expenses (1) 57.5 57.6 57.8 Pre-opening costs (1) 1.5 1.8 1.3 General and administrative expenses 6.2 6.6 6.5 Provision for restaurant closures and other disposals -- 1.9 -- Depreciation and amortization (1) 2.4 2.9 3.4 Interest expense 0.1 0.1 0.3 Income before income taxes 2.9 0.2 1.1 Provision (benefit) for income taxes 0.8 (0.2) 0.1 -------- -------- -------- Net income 2.1% 0.4% 1.0% ======== ======== ======== SELECTED OPERATING DATA: (Dollars in thousands) System-wide sales: Company restaurants $ 38,869 $ 45,811 $ 55,733 Franchise restaurants 7,112 7,991 8,303 -------- -------- -------- Total $ 45,891 $ 53,802 $ 64,036 ======== ======== ======== Number of restaurants (at end of period): Company restaurants 34 41 45 Franchise restaurants 8 8 8 -------- -------- -------- Total 42 49 53 ======== ======== ========
(1) As a percentage of restaurant sales. 11 14 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. The following table presents the Company's revenues, net income (loss) and certain other financial and operational data for each fiscal quarter of 1994, 1995 and 1996.
FISCAL QUARTERS ------------------------------------------------- 1ST 2ND 3RD 4TH ANNUAL ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 1996: Revenues $12,772 $13,426 $13,999 $16,219 $56,416 Net income (loss) 37 (166) 109 601 581 Net income (loss) per share .01 (.04) .03 .15 .15 Weighted average shares and equivalents (000's) 3,932 3,843 4,087 4,088 3,988 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) (1) 25 (45) (642) 848 186 Net income (loss) per share (1) .01 (.01) (.17) .22 .05 Weighted average shares and equivalents (000's) 3,908 3,727 3,733 3,904 3,818 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 1994: Revenues $ 8,421 $ 9,276 $ 9,945 $11,917 $39,559 Net income 78 27 106 611 822 Net income per share .02 .01 .03 .16 .21 Weighted average shares and equivalents (000's) 3,958 3,941 3,934 3,926 3,940 Pre-opening costs $ 177 $ 102 $ 120 $ 169 $ 568 Number of Company units at end of period 28 30 31 34 34 Company restaurant operating months 80 88 92 98 358 Sales per Company restaurant operating month $ 103 $ 103 $ 106 $ 121 $ 109
(1) 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 $(.17) per share. 12 15 FISCAL YEARS 1996, 1995, AND 1994 REVENUES Revenues for the year ended December 29, 1996, increased 21% over the revenues reported for the year ended in 1995. Revenues in 1995 increased 18% over 1994 levels. The 1996 and 1995 increases were primarily due to increases in restaurant sales. Restaurant sales for the year ended December 31, 1994, increased 45% over the same period in 1993. 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:
1994 1995 1996 -------- -------- -------- Number of units at year end ................... 34 41 45 Number of restaurant operating months ......... 358 453 513 Average sales per restaurant operating month .. $108,600 $101,100 $108,600
A summary of restaurant sales and related costs expressed as a percentage of sales are listed below for the fiscal years:
1994 1995 1996 ------ ------ ------ RESTAURANT SALES: Food ........................................ 82.0% 83.5% 85.1% Beverage .................................... 18.0% 16.5% 14.9% ------ ------ ------ Total ....................................... 100.0% 100.0% 100.0% ====== ====== ====== COST OF SALES: Food ........................................ 31.5% 30.6% 30.7% Beverage .................................... 28.8% 30.2% 30.5% Combined .................................... 31.0% 30.5% 30.6%
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. This increase is attributable to the following items: A stronger, more experienced management team in place at the beginning of 1996. (Several key examples follow). In November, 1995, the Company created and filled the position of Divisional Vice President of Operations/Garfield's. The individual responsible for this position brings 17 years of senior operations' management experience with two nationally recognized restaurant chains. The Divisional Vice President is responsible for improving service and sales of the Garfield's stores as well as recruiting and hiring experienced store management. In August, 1995 the Company hired a Vice President of Marketing, a new position at the Company. The new Vice President of Marketing has over 17 years of marketing experience with a nationally recognized chain of dinnerhouse restaurants. During the fourth quarter of 1995, a detailed marketing plan was developed for 1996, with the primary objectives being to improve same store sales and guest satisfaction. The implementation of the marketing plan begun during the first quarter of 1996 positively impacted the Company's same store sales results during 1996. Following the November, 1995, successful introduction of regional newspaper advertising, the Company ran four (one during each of the Company's fiscal quarters) regional newspaper print programs for Garfield's restaurants during 1996. These programs were used in the majority of the Company's restaurant markets and have all been successful in increasing revenues and customer visits. During 1996, the Company began testing radio and direct mail advertising campaigns in selective restaurant markets. Initial results have been favorable and the Company plans to further utilize these campaigns in additional restaurant markets during fiscal year 1997. 13 16 The Company also rolled out two new menu revisions (in July and October, 1996) both of which included selective modest price increases (in line with competitor pricing on comparable food selections) and introduced several new product selections that were featured in the Company's radio, direct mail and newspaper advertising campaigns. While these marketing programs resulted in increased short-term costs, management believes their effects, along with the local efforts of our restaurant management, contributed to the Company's significant average monthly sales per unit increases. (The Company experienced a 7.4% increase in average unit volumes during 1996 versus the comparable 1995 period). Management expects it will continue to experience improving sales trends during fiscal year 1997 with higher marketing and promotion costs, of which management believes the long-term benefits outweigh the short-term costs. Average monthly sales per unit were $101,100 during 1995 compared to $108,600 during 1994. The 1995 per unit monthly sales decreased by $7,500 or 6.9% from 1994 levels. The decrease was attributable to the following items: In late 1994, the Company began testing and rolled out to nineteen stores in January, 1995, a new menu which contained a combination of several new lower priced and a la carte selections. The stores with this menu experienced a reduction in average check amounts and revenues during the first five months of 1995, rather than the overall increase the Company expected. Management reacted quickly to reverse these declines by beginning implementation of a new menu to its stores in late June, 1995. The new menu contained many new food selections and incorporated a pricing strategy similar to menus used by the Company previous to the January, 1995 menu. A new drink menu was also rolled out to the stores in late June, 1995. The Company experienced increases in average check amounts and revenues beginning in the third quarter of 1995 as a result of the new menus and the trend continued through the end of the year. The Company's first quarter 1995 three weeks television advertising campaign coincided with two consecutive weekends of bad weather in the Company's Northern and Midwestern stores. Thus, the Company incurred the advertising expense without the normal sales gains it has achieved during past advertising campaigns. The Company's next major 1995 television advertising campaign began in late July, 1995 to promote the Company's new food and drink menus. Advertising was minimal during the second quarter and lower than normal in the third quarter as management believed its advertising would be more effective if it was done in conjunction with the introduction of the new menus and under the direction of the new Vice President of Marketing. As previously mentioned, the Company hired a Vice President of Marketing in August, 1995. As a result of this advertising strategy, sales remained weak during the second and third quarters. When the campaigns were begun, the Company experienced improvement in sales. A regional newspaper print program for Garfield's restaurants was developed and implemented in early November, 1995, for the majority of the Company's restaurants and resulted in an increase in revenues and operating results during the fourth quarter of 1995. Also, several new entree selections were developed during the 1995 fourth quarter holiday season. These items were priced higher than the usual entree pricing and achieved excellent sales results during the fourth quarter of 1995. The affects of the previously noted items, along with the overall increase in casual dining restaurant development during 1994 and 1995 coupled with the 1995 soft consumer discretionary spending trend contributed to the Company's same store sales and average monthly sales per unit decreases. The average monthly sales per unit decreases experienced during 1995 as compared to 1994 narrowed from $(11,300) during the second quarter to $(4,300) during the fourth quarter. Management believes its increased focus on and actions taken in the marketing area beginning in the second quarter of 1995 had a direct affect on the improvements in average monthly sales per unit experienced during the second half of 1995 and continuing through 1996. Continuing royalties were $265,000 in 1996, $258,000 in 1995 and $267,000 in 1994. 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 1996 or 1994. 14 17 COSTS AND EXPENSES The following is a comparison of cost of sales and labor costs (excluding payroll taxes and fringe benefits) as a percent of restaurant sales at Company-owned restaurants:
1994 1995 1996 ---- ---- ---- Cost of sales .................................... 31.0% 30.5% 30.6% Labor costs ...................................... 28.2% 28.0% 27.6% ---- ---- ---- Total ............................................ 59.2% 58.5% 58.2% ==== ==== ====
Cost of sales as a percent to sales increased slightly in 1996 (30.6%) as compared to 1995 (30.5%) primarily due to higher meat and dairy product costs. These 1996 product cost increases were partially offset by lower produce costs and the Company's continuing improvements in its purchasing techniques, which involves the Company entering into agreements with its vendors to fix purchase prices for certain high volume food products. The cost of sales as a percent to sales decreased to 30.5% in 1995 as compared to 31.0% in 1994 as a result of the Company's improvements in its purchasing techniques previously mentioned. The Company's labor costs as a percent to sales decreased during the three year period to 27.6% in 1996 from 28.2% in 1994. The Company has continued to achieve reductions in its labor cost percents through improving store level monitoring of labor needs and enhanced scheduling techniques. Restaurant operating expenses (which include labor costs) as a percent of restaurant sales were 57.5% in 1994, 57.6% in 1995 and 57.8% in 1996. The increase in operating expenses as a percent to restaurant sales in 1996 as compared to 1995 was due primarily to higher promotional and advertising expenses partially offset by lower occupancy costs (primarily rent and utilities). The modest increase in operating expenses as a percent to restaurant sales in 1995 versus 1994 was attributable to higher occupancy costs and repairs and maintenance expenses partially offset by lower advertising and promotional expenses. PRE-OPENING COSTS The Company's accounting policy for restaurant pre-opening costs is to expense such costs as incurred. Management anticipates that these pre-opening costs will remain stable with 1996 levels during 1997. During each of the three years ended December 31, 1994, 1995, and December 29, 1996, the Company incurred and recognized as expense the following amounts for restaurant pre-opening development costs relative to the corresponding number of restaurants in various stages of development:
1994 1995 1996 -------- -------- -------- Total pre-opening costs .................... $568,000 $830,000 $726,000 Restaurants ................................ 8 9 8 Average costs per location ................. $ 71,000 $ 92,200 $ 90,700 As a percentage of restaurant sales ........ 1.5% 1.8% 1.3%
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 costs increased as a percentage of revenues from 6.2% in 1994 to 6.6% in 1995, and decreased to 6.5% in 1996. The higher absolute levels of general and administrative costs from 1994 to 1996 are related primarily to additional personnel costs and related costs of operating the Company's expanding restaurant group. General and administrative costs as a percent to sales decreased modestly 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. General and administrative costs as a percent to sales increased in 1995 as compared to 1994 primarily due to the strengthening of the Company's management group through hiring employees to fill new positions (Vice President of Marketing, Divisional Vice Presidents of Garfield's and Pepperoni Grill, Director of Training, etc.) management believed were necessary to effectively operate its restaurants and continue its expansion plans. 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. 15 18 PROVISION FOR RESTAURANT CLOSURES AND OTHER DISPOSALS During 1995, the Company approved and began the implementation of a plan to close certain under-performing restaurants. As of December 29, 1996, the Company has disposed of three of the four restaurants planned in 1995 for closure. The remaining restaurant closure was completed in the first quarter of 1997. In addition, the Company identified and closed two additional restaurant locations (one of which occupied land and building owned by the Company which is presently held for sale). These restaurants (the 1995 and 1996 identified closures) collectively accounted for $5,695,000, $3,498,000, and $1,784,000 of revenues and $(31,000), $(223,000), and $(68,000) of operating losses for fiscal years 1994, 1995, and 1996, respectively. Management expects the effect of closing under-performing restaurants to result in improved margins and increased profitability for the Company in future periods. As a result of the completed and planned restaurant closures and other disposals, 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 29, 1996, the Company has a remaining reserve of approximately $145,000 for settlement of its remaining liabilities associated with the closures. Management expects to settle these liabilities in early 1997 and believes the reserve to be sufficient for such purposes. The Company has eight restaurants as of December 29, 1996, with indicators of potential impairment. 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 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 1996, the Company recorded no provision for impairment as management believes there is no additional impairment under SFAS 121. 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 1996 to $1,886,000 (3.4% of restaurant sales) compared to $1,337,000 (2.9% of restaurant sales) in 1995 and $927,000 (2.4% of restaurant sales) in 1994. The increase in expense in 1996 as compared to 1995 is primarily attributable to the increase in net assets subject to depreciation and amortization in 1996 versus 1995 as the result of opening additional restaurants. The expense increase in 1995 versus 1994 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 the three year period ended December 29, 1996, was $48,000 in 1994, $41,000 in 1995, and $194,000 in 1996. Additionally, the Company has capitalized approximately $72,000 and $62,000 of interest costs during 1995 and 1996, respectively (none in 1994). The increase in interest expense in 1996 as compared to 1995 is attributable to an increase in the 1996 average borrowing balances under the Company's revolving credit agreement versus 1995 average borrowing balances. The interest rates incurred by the Company on its borrowings were at similar levels during 1996 and 1995. Interest expense during the 1995 and 1994 fiscal years were comparable as average borrowing balances and interest rates incurred during the periods remained steady. 16 19 INCOME TAXES The Company records income taxes in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes." The deferred provision (benefit) for income taxes was $316,400, $(131,000) and $74,000, respectively, for 1994, 1995 and 1996. At December 29, 1996, the Company has recorded a benefit for its deferred tax assets of approximately $3,043,000. Management believes that approximately $1,681,000 of the 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 $3,700,000 in the future net income in the next three 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 reliazability of the net deferred tax asset at least quarterly by assessing the need for a valuation allowance. NET INCOME PER SHARE AMOUNTS Net income per share amounts are computed by dividing net income by the weighted average number of common and dilutive common equivalent shares outstanding during the period as more fully described in Note 2 of the Notes to Consolidated Financial Statements. Per share amounts are based on total outstanding shares plus the assumed exercise of all dilutive stock options and warrants. Common and common equivalent share amounts were 3,939,750, 3,817,997, and 3,987,661 in 1994, 1995 and 1996, respectively. 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 29, 1996, the Company's working capital ratio decreased to .50 to 1 compared to .72 to 1 at December 31, 1995. As is customary in the restaurant industry, the Company has consistently operated during the past two years 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 the three years in the period ended December 29, 1996, the Company's expenditures for capital improvements were $5,453,000, $7,789,000, and $7,307,000, respectively, which were funded out of cash flows from operating activities of $2,557,000, $3,318,000, and $ 2,438,000, respectively, landlord finish-out allowances of $3,167,000, $2,492,000, and $3,022,000, respectfully, 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. During 1997, the Company expects to construct and open up to five new Garfield's in regional malls and is considering one new Pepperoni Grill in a free-standing site. 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 1997. On August 31, 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. This revolver is unsecured, has a three year term and contains customary financial covenants. This credit facility provides the Company additional borrowing capacity to continue its expansion plans over the next several years. 17 20 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 Report of Independent Auditors Consolidated Balance Sheets as of December 31, 1995 and December 29, 1996 Consolidated Statements of Income for each of the three years in the period ended December 29, 1996 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 29, 1996 Consolidated Statements of Cash Flows for each of the three years in the period ended December 29, 1996 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) 4.4 Specimen Stock Certificate. (3) 4.5 Form of Representative's Warrant. (3) 10.1 Employment Agreement between the Company and Vincent F. Orza, Jr., dated October 1, 1995. 10.2 Employment Agreement between the Company and James M. Burke, dated October 1, 1995. 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) 10.5 Lease Agreement dated May 28, 1992 between the Company and The Pines Mall Limited Partnership, an Iowa limited partnership, for the lease of the Garfield's restaurant facilities at The Pines Mall, Pine bluff, Arkansas. (3) 10.6 Lease Agreement dated March 16, 1992 between the Company and UM Partners, an Illinois general partnership, for the lease of the Garfield's restaurant facilities at University Mall, Carbondale, Illinois. (3)
18 21
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 10.7 Lease Agreement dated December 17, 1991 (and amended November 10, 1992) between the Company and Columbia Mall Limited Partnership, an Iowa general partnership, for the lease of the Garfield's Restaurant facilities at Columbia Mall, Columbia, Missouri. (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. 10.24 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 10.28 Option Agreement between the Company and James M. Burke, dated January 4, 1996 10.29 Option Agreement between the Company and Corey Gable, dated April 5, 1996 10.30 Loan Agreement between the Company and Liberty Bank and Trust Company of Oklahoma City, National Association, dated August 31, 1995 10.31 First Amendment, dated July 30, 1996, to Loan Agreement between the Company and Liberty Bank and Trust Company of Oklahoma City, National Association, dated August 31, 1995 11.1 Computation of net income (loss) per share. 23.1 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. (b) No reports on form 8-K were filed during the fiscal quarter ended December 29, 1996. 19 22 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 11, 1997 By: /s/ Vincent F. Orza, Jr. ---------------------------------- Vincent F. Orza, Jr. President Chief Executive Officer Date: April 11, 1997 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 11, 1997 By: /s/ Vincent F. Orza, Jr. ---------------------------------- Vincent F. Orza, Jr. Chairman of the Board, President and Director Date: April 11, 1997 By: /s/ James M. Burke ---------------------------------- James M. Burke Vice President of Operations, Assistant Secretary and Director Date: April 11, 1997 By: /s/ Edward D. Orza ---------------------------------- Edward D. Orza, Director Date: April 11, 1997 By: /s/ Patricia L. Orza ---------------------------------- Patricia L. Orza, Secretary and Director Date: April 11, 1997 By: /s/ Thomas F. Golden ---------------------------------- Thomas F. Golden, Director Date: April 11, 1997 By: /s/ Philip Friedman ---------------------------------- Philip Friedman, Director 20 23 EATERIES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Management's Responsibility for Financial Reporting ........................ F-1 Report of Independent Auditors ............................................. F-2 Consolidated Balance Sheets as of December 31, 1995 and December 29, 1996 .. F-3 Consolidated Statements of Income for each of the three years in the period ended December 29, 1996 ...................................... F-4 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 29, 1996 ...................................... F-5 Consolidated Statements of Cash Flows for each of the three years in the period ended December 29, 1996 ...................................... F-6 Notes to Consolidated Financial Statements ................................. F-7
21 24 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 Ernst & Young LLP, independent auditors, to conduct an audit of and express an opinion as to the fairness of the presentation of the 1996 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 Officer April 11, 1997 F-1 25 REPORT OF INDEPENDENT AUDITORS Board of Directors Eateries, Inc. Oklahoma City, Oklahoma We have audited the accompanying consolidated balance sheets of Eateries, Inc. and subsidiaries as of December 31, 1995 and December 29, 1996 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three 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 31, 1995 and December 29, 1996, and the consolidated results of its operations and its cash flows for each of the three 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 26 EATERIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, December 29, 1995 1996 ------------ ------------ ASSETS Current assets: Cash and cash equivalents ................................... $ 1,001,954 $ 695,481 Receivables: Franchisees ............................................ 88,448 53,685 Insurance refunds ...................................... 283,883 164,219 Landlord finish-out allowances ......................... 748,288 188,866 Other .................................................. 232,480 394,776 Deferred income taxes (Note 8) .............................. 389,000 387,000 Inventories ................................................. 1,368,673 1,400,262 Prepaid expenses and deposits ............................... 179,020 209,929 ------------ ------------ Total current assets ............................... 4,291,746 3,494,218 Property and equipment, at cost (Notes 4 and 5): Land and buildings .......................................... 175,376 125,167 Furniture and equipment ..................................... 7,455,322 9,322,453 Leasehold improvements ...................................... 19,064,963 23,453,916 Assets under capital leases ................................. 123,420 123,420 ------------ ------------ 26,819,081 33,024,956 Less: Landlord finish-out allowances ........................ 12,409,951 13,896,522 ------------ ------------ 14,409,130 19,128,434 Less: Accumulated depreciation and amortization ............. 4,047,414 5,444,896 ------------ ------------ Net property & equipment ............................... 10,361,716 13,683,538 Deferred income taxes (Note 8) .................................. 991,000 975,000 Landlord finish-out allowances receivable (Note 2) .............. 429,000 -- Other assets .................................................... 522,493 555,945 ------------ ------------ $ 16,595,955 $ 18,708,701 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to vendor ..................................... $ 13,139 $ -- Accounts payable ............................................ 2,967,109 4,359,571 Accrued liabilities: Compensation ........................................... 1,259,896 1,388,058 Taxes, other than income ............................... 395,930 456,681 Other (Note 6) ......................................... 711,699 572,022 Restaurant closure costs (Note 7) ...................... 596,039 145,575 Current portion of long-term obligations (Note 5) ........... 25,305 28,308 ------------ ------------ Total current liabilities ..................... 5,969,117 6,950,215 Deferred credit ................................................. 353,482 575,517 Other liabilities ............................................... 111,900 62,500 Long-term obligations, net of current portion (Note 5) .......... 1,249,023 1,470,715 Commitments (Note 4) Stockholders' equity (Note 9): Preferred stock, $.002 par value, none outstanding .......... -- -- Common stock, $.002 par value, 4,019,134 and 4,143,391 shares outstanding at December 31, 1995 and December 29, 1996, respectively ........................................... 8,038 8,287 Additional paid-in capital .................................. 9,154,420 9,340,519 Retained earnings ........................................... 1,084,593 1,666,092 ------------ ------------ 10,247,051 11,014,898 Treasury stock, at cost, 274,039 and 282,761 shares at December 31, 1995 and December 29, 1996, respectively .. (1,334,618) (1,365,144) ------------ ------------ Total stockholders' equity .................... 8,912,433 9,649,754 ------------ ------------ $ 16,595,955 $ 18,708,701 ============ ============
See accompanying notes. F-3 27 EATERIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year Ended ------------------------------------------- December 31, December 31, December 29, 1994 1995 1996 ------------ ------------ ------------ Revenues: Food and beverage sales ......................... $ 38,869,481 $ 45,810,664 $ 55,732,807 Franchise fees and royalties .................... 266,872 307,653 264,954 Other ........................................... 422,756 482,123 418,476 ------------ ------------ ------------ Total revenues ............................ 39,559,109 46,600,440 56,416,237 Cost of sales ........................................ 12,051,825 13,967,757 17,070,384 ------------ ------------ ------------ 27,507,284 32,632,683 39,345,853 Operating expenses (Note 6) .......................... 22,358,999 26,387,127 32,218,754 Pre-opening costs (Note 2) ........................... 568,129 830,000 726,000 General and administrative expenses .................. 2,466,743 3,067,610 3,665,207 Provision for restaurant closures and other disposals (Note 7) .................... -- 897,000 -- Depreciation and amortization ........................ 927,128 1,336,919 1,886,323 Interest expense ..................................... 47,628 41,186 194,070 ------------ ------------ ------------ 26,368,627 32,559,842 38,690,354 ------------ ------------ ------------ Income before provision (benefit) for income taxes ... 1,138,657 72,841 655,499 Provision (benefit) for income taxes (Note 8) ........ 316,400 (113,000) 74,000 ------------ ------------ ------------ Net income ........................................... $ 822,257 $ 185,841 $ 581,499 ============ ============ ============ Weighted average common and common equivalent shares ........................ 3,939,750 3,817,997 3,987,661 ============ ============ ============ Net income per share ................................. $ 0.21 $ 0.05 $ 0.15 ============ ============ ============
See accompanying notes. F-4 28 EATERIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ----------------------------- SHARES TREASURY STOCK ADDITIONAL --------------------- -------------------- PAID-IN RETAINED AUTHORIZED ISSUED AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL ---------- --------- ------ ------- ----------- ---------- ---------- ---------- Balance, December 31, 1993 ......... 20,000,000 3,857,019 $7,714 249,018 $(1,240,781) $8,846,528 $ 76,495 $7,689,956 Issuance of common stock: Exercise of stock options ....... 94,191 189 68,801 68,990 Employee bonuses ................ 1,680 3 9,650 9,653 Tax benefit from the exercise of non-qualified stock options (Note 8) ........................ 130,000 130,000 Treasury stock acquired (Note 9) ... 23,104 (88,086) (88,086) Other .............................. (7,385) (7,385) Net income ......................... 822,257 822,257 ---------- --------- ------ ------- ----------- ---------- ---------- ---------- Balance, December 31, 1994 ......... 20,000,000 3,952,890 7,906 272,122 (1,328,867) 9,047,594 898,752 8,625,385 Issuance of common stock: Exercise of stock options ....... 53,833 107 33,476 33,583 Employee stock purchase plan .... 12,411 25 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) ... 1,917 (5,751) (5,751) Net income ......................... 185,841 185,841 ---------- --------- ------ ------- ----------- ---------- ---------- ---------- Balance, December 31, 1995 ......... 20,000,000 4,019,134 8,038 274,039 (1,334,618) 9,154,420 1,084,593 8,912,433 Issuance of common stock: Exercise of stock options ....... 97,163 194 60,533 60,727 Employee bonuses ................ 2,750 6 10,941 10,947 Employee stock purchase plan .... 24,044 48 57,432 57,480 Sale of common stock ............ 300 1 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) ... 8,722 (30,526) (30,526) Net income ......................... 581,499 581,499 ---------- --------- ------ ------- ----------- ---------- ---------- ---------- Balance, December 29, 1996 ......... 20,000,000 4,143,391 $8,287 282,761 $(1,365,144) $9,340,519 $1,666,092 $9,649,754 ========== ========= ====== ======= =========== ========== ========== ==========
See accompanying notes. F-5 29 EATERIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended -------------------------------------------- December 31, December 31, December 29, 1994 1995 1996 ------------ ------------ ------------ Cash flows from operating activities: Net income ................................................. $ 822,257 $ 185,841 $ 581,499 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ........................ 927,128 1,336,919 1,886,323 (Gain) loss on asset disposals ....................... 9,627 (133,144) (42,544) Common stock bonus ................................... 9,653 -- 10,947 Provision (benefit) for deferred income taxes ........ 316,400 (113,000) 74,000 (Increase) decrease in operating assets: Receivables ...................................... (46,784) (209,745) (7,869) Inventories ...................................... (256,662) (268,464) (31,589) Prepaid expenses and deposits .................... (317) (45,213) (30,909) Increase (decrease) in operating liabilities: Accounts payable ................................. 296,695 1,285,362 154,383 Accrued liabilities .............................. 401,295 1,171,977 (329,300) Deferred credit .................................. 77,215 (4,659) 222,035 Other liabilities ................................ -- 111,900 (49,400) ------------ ------------ ------------ Total adjustments .................................... 1,734,250 3,131,933 1,856,077 ------------ ------------ ------------ Net cash provided by operating activities ............ 2,556,507 3,317,774 2,437,576 ------------ ------------ ------------ Cash flows from investing activities: Capital expenditures ....................................... (5,453,460) (7,788,654) (7,306,987) Landlord finish-out allowances ............................. 3,166,297 2,491,931 3,021,883 Net cash payments for restaurant acquisition ............... -- (529,083) -- Proceeds from the sale of property and equipment ........... 4,548 426,214 53,001 Sales of marketable securities ............................. 485,263 514,737 -- Collection of notes receivable ............................. 30,000 -- -- Increase in other assets ................................... (67,916) (24,143) (50,457) ------------ ------------ ------------ Net cash used in investing activities ................ (1,835,268) (4,908,998) (4,282,560) ------------ ------------ ------------ Cash flows from financing activities: Sales of common stock ...................................... -- 26,375 58,674 Payments on notes payable to vendor ........................ (694,338) (434,362) (13,139) Payments on long-term obligations .......................... (110,787) (70,619) (25,305) Net borrowings under revolving credit agreement ............ -- 1,200,000 250,000 Proceeds from issuance of stock on exercise of stock options ........................................... 31,490 27,833 60,727 Payment of withholding tax liabilities related to acquisition of treasury stock ........................ (50,586) -- (30,526) Increase in bank overdrafts included in accounts payable ... -- -- 1,238,080 Other ...................................................... (7,385) -- -- ------------ ------------ ------------ Net cash provided by (used in) financing activities ........................................... (831,606) 749,227 1,538,511 ------------ ------------ ------------ Net decrease in cash and cash equivalents ...................... (110,367) (841,997) (306,473) Cash and cash equivalents at beginning period .................. 1,954,318 1,843,951 1,001,954 ------------ ------------ ------------ Cash and cash equivalents at end of period ..................... $ 1,843,951 $ 1,001,954 $ 695,481 ============ ============ ============
See accompanying notes. F-6 30 EATERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND DECEMBER 29, 1996 (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 29, 1996, is as follows:
Company Franchised Total Units Units Units ----- ----- ----- At December 31, 1993 26 8 34 Units opened 8 -- 8 --- --- --- At December 31, 1994 34 8 42 Units opened 9 1 10 Units closed (3) (1) (4) Purchase of Pepperoni Grill 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 === === ===
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Eateries, Inc. and its wholly-owned subsidiaries, 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. As of December 31, 1995, there was $429,000 of noncurrent landlord finish-out receivables recorded in the balance sheet, which represents the amount of landlord finish-out receivables in excess of capital expenditures incurred. F-7 31 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: Buildings ........................... 15-30 Years Furniture and equipment ............. 5-15 Years Leasehold improvements .............. 3-15 Years Landlord finish-out allowances ...... 8-15 Years
ADVERTISING COSTS Cost incurred in connection with advertising and marketing of the Company's restaurants are expensed as incurred. Such costs amounted to $683,000 in 1994, $647,000 in 1995 and $797,000 in 1996. 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 31, 1995 and December 29, 1996, eight restaurant units were operating under franchise agreements. 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 1994 or 1996). 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 1994, 1995 and 1996, the Company recognized $267,000, $258,000, and $265,000, 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 $44,000, $39,000, and $41,000 during 1994, 1995 and 1996, 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. F-8 32 Franchisee receivables at December 31, 1995 and December 29, 1996, are comprised principally 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 29, 1996. 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 approximately $72,000 and $62,000 of interest costs during 1995 and 1996, respectively (none in 1994). 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. 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 indications 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 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. 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. NET INCOME PER COMMON SHARE Per share amounts are computed by dividing net income by the weighted average number of common and dilutive common equivalent shares outstanding during the period. F-9 33 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 $48,000, $94,000 and $228,000 was paid for each of the three years in the period ended December 29, 1996, respectively. For the three years in the period ended December 29, 1996 the Company had the following non-cash investing and financing activities.
Fiscal Year ------------------------------------- 1994 1995 1996 ---------- ---------- ---------- Increase (decrease) in current receivables for landlord finish-out allowances ............... $ (271,429) $ 493,288 $ (559,422) 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 ............................. -- -- 95,000 Borrowings for capital expenditures under notes payable to vendor .......................... 664,030 116,567 -- Acquisition of treasury stock upon exercise of stock options (Note 9) ........................... 37,500 5,751 -- Increase in additional paid-in capital as a result of tax benefits from the exercise of non-qualified stock options ...................... 130,000 47,000 56,000 Asset write-offs related to restaurant closures and other disposals ..................... -- -- 71,932
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. 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. (3) RESTAURANT ACQUISITION 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. Pro forma results of operations for the year ended December 31, 1994, assuming that the restaurant acquisition had been made at the beginning of 1994, would not be materially different than the results reported. F-10 34 (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 29, 1996, the remaining minimum rental commitments under long-term noncancellable leases, excluding amounts related to taxes, insurance, maintenance and percentage rent, are as follows: 1997 .............................. $ 3,026,000 1998 .............................. 3,264,000 1999 .............................. 3,299,000 2000 .............................. 3,267,000 2001 .............................. 3,162,000 Thereafter ........................ 10,964,000 ----------- Total minimum rental commitments .. $26,982,000 ===========
Total minimum rental commitments includes $2,030,000 related to two locations scheduled for opening in 1997. The components of rent expense for noncancellable operating leases are summarized as follows:
Fiscal Year ------------------------------------ 1994 1995 1996 ---------- ---------- ---------- Minimum rents ........................... $2,013,000 $2,611,000 $2,912,000 Percentage rents ........................ 123,000 131,000 211,000 ---------- ---------- ---------- $2,136,000 $2,742,000 $3,123,000 ========== ========== ==========
(5) LONG-TERM OBLIGATIONS Long-term obligations consist of the following:
December 31, December 29, 1995 1996 ------------ ------------ Revolving line of credit with a bank, interest at the London Interbank Offered Rates ("LIBOR") plus 2.75% (8.35% at December 29, 1996) ........................ $ 1,200,000 $ 1,450,000 Obligations under capital leases (A) .................. 74,328 49,023 ------------ ------------ 1,274,328 1,499,023 Less current portion .................................. (25,305) (28,308) ------------ ------------ $ 1,249,023 $ 1,470,715 ============ ============
(A) At December 29, 1996 the future minimum lease payments for equipment under capital leases are $32,400 for 1997 and $21,600 for 1998 (amount representing interest is $4,977). Maturities of long-term obligations at December 29, 1996 are: 1997 $ 28,308 1998 20,715 1999 1,450,000 ---------- $1,499,023 ==========
F-11 35 In August 1995, the Company entered into a loan agreement with a bank (which replaced a $500,000 line of credit with another bank). This $3,000,000 loan agreement is 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 is reset monthly). The Company is required to pay a non-use fee of 1/2 of 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. At December 29, 1996, the unborrowed amount under the amended agreement was $3,550,000. The loan agreement contains, among other things, certain financial covenants and restrictions. The more significant financial covenants require the Company maintain or achieve designated amounts of tangible net worth, current ratio and cash flow coverage ratio. The more significant restrictions contained in the amended loan agreement include amounts for capital expenditures, number of new stores, guaranteed debt obligations of any other corporation or individual, entering into merger, acquisition or significant asset sales agreements and limitation of borrowings during a designated period ("clean-down period"). The Company is required to maintain its borrowing under $2,000,000 for 30 consecutive days during the following clean-down periods; November 30, 1996 through January 31, 1997, November 30, 1997 through January 31, 1998 and November 30, 1998 through January 31, 1999. During the year ended December 29, 1996, the Company had not met a financial covenant and certain restriction provisions under the loan agreement. In April, 1997, these violations were waived by the bank. (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 $607,000 in 1994, $424,000 in 1995 and $168,000 in 1996. A director of the Company is a partner in a law firm that provides legal services to the Company. During 1994, 1995 and 1996, the Company incurred $107,000, $127,000 and $148,000, respectively, in legal services with the firm. During 1994 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 certain under-performing restaurants. As of December 29, 1996, the Company has disposed of three of the four restaurants planned in 1995 for closure. The remaining restaurant closure was completed in the first quarter of 1997. In addition, the Company identified and closed two additional restaurant locations (one of which occupied land and building owned by the Company which is presently held for sale). These restaurants (the 1995 and 1996 identified closures) collectively accounted for $5,695,000, $3,498,000, and $1,784,000 of revenues and $(31,000), $(223,000), and $(68,000) of operating losses for fiscal years 1994, 1995, and 1996, respectively. Management expects the effect of closing under-performing restaurants to result in improved margins and increased profitability for the Company in future periods. As a result of the completed and planned restaurant closures and other disposals, 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 29, 1996, the Company has a remaining reserve of approximately $145,000 for settlement of its remaining liabilities associated with the closures. Management expects to settle these liabilities in early 1997 and believes the reserve to be sufficient for such purposes. The Company has eight restaurants as of December 29, 1996, with indicators of potential impairment. During 1996, the Company recorded no provision for impairment as management believes there is no additional impairment under SFAS 121. F-12 36 (8) INCOME TAXES The provision (benefit) for income taxes consist of the following (see Note 2):
Fiscal Year -------------------------------------- 1994 1995 1996 ---------- ---------- ---------- Current: Federal $ -- $ -- $ -- State -- -- -- ---------- ---------- ---------- -- -- -- ---------- ---------- ---------- Deferred: Federal 264,400 (110,000) 44,000 State 52,000 (3,000) 30,000 ---------- ---------- ---------- 316,400 (113,000) 74,000 ---------- ---------- ---------- Provision (benefit) for income taxes $ 316,400 $ (113,000) $ 74,000 ========== ========== ==========
The components of deferred tax assets and liabilities consist of the following at:
December 31, December 29, 1995 1996 ------------ ------------ Deferred tax assets: Net operating loss carryforwards ....................... $ 1,702,000 $ 2,169,000 General business tax credits ........................... 400,000 687,000 Restaurant closures and other disposals ................ 260,000 54,000 Deferred rent credit ................................... 41,000 68,000 Other .................................................. 45,000 65,000 ------------ ------------ Total deferred tax assets ........................... 2,448,000 3,043,000 Valuation allowance for deferred tax assets ............ -- -- ------------ ------------ Total deferred tax assets, net of allowance ......... 2,448,000 3,043,000 ------------ ------------ Deferred tax liabilities: Smallwares expensed for tax purposes ................... 272,000 338,000 Tax depreciation in excess of financial depreciation ... 787,000 1,325,000 Other .................................................. 9,000 18,000 ------------ ------------ Total deferred tax liabilities ...................... 1,068,000 1,681,000 ------------ ------------ Net deferred tax assets ................................ $ 1,380,000 $ 1,362,000 ============ ============
At December 29, 1996, the Company has recorded a benefit for its deferred tax assets of $3,043,000. Management believes that $1,681,000 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 $3,700,000 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-13 37 A reconciliation of theoretical income taxes follows:
Fiscal Year -------------------------------------- 1994 1995 1996 ---------- ---------- ---------- Expected tax provision at 34% $ 387,100 $ 24,800 $ 223,000 Permanent differences 6,200 8,500 12,100 State tax provisions, net of federal benefit 34,200 2,200 19,700 Tax effect of general business tax credits (107,800) (149,000) (180,800) Other, net (3,300) 500 -- ---------- ---------- ---------- Income tax provision (benefit) $ 316,400 $ (113,000) $ 74,000 ========== ========== ==========
The Company estimates that at December 29, 1996, the tax net operating loss carryforward was approximately $5,900,000 (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 2010. (9) 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 286,993 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 2001). 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 2002). MANAGEMENT OPTIONS Non-qualified stock options granted and outstanding include 542,500 management options, which are vested over three to five-year periods and expire five years from the date vested (last expiring in 2006). F-14 38 A summary of stock option activity under the Plan is as follows:
Weighted Number of Exercise Price Average Shares Per Share Exercise Price --------- --------------- -------------- Outstanding at December 31, 1993 (of which approximately 338,000 options are exercisable at weighted average prices of $.65) ..................................... 394,974 $ .50 - $ 1.25 $ .72 Granted ................................................ 172,500 $3.375 - $ 6.00 $4.53 Options exercised: Director ............................................ (19,191) $ 1.25 $1.25 Management .......................................... (75,000) $ .50 - $ .625 $ .60 Forfeited .............................................. (22,794) $ 1.25 $1.25 ------- 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 ======= =============== =====
As of December 29, 1996, the Plan provides for issuance of options up to 2,494,017 shares and has 619,380 shares of common stock reserved for future grant under the Plan. RESTRICTED MANAGEMENT OPTIONS As of December 31, 1995 and December 29, 1996, there were 120,000 and 20,000, respectively, restricted stock options (not granted under the Plan) which primarily vest over a four year period at 25% per year and expire five years from the date vested (last expiring in 2004). A summary of restricted stock option activity is as follows:
Weighted Number of Exercise Price Average Shares Per Share Exercise Price --------- -------------- -------------- Outstanding at December 31, 1993 and 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 29, 1996 (of which 5,000 options are excerisable at a price of $3.13 per option share) ...... 20,000 $3.125 $3.13 ======= ============== =====
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 authorized for subscription over the ten year term of the plan (10,000 shares reserved for issuance at December 29, 1996, for the offering period ending on December 1, 1997). No shares were issued under the plan during 1994. During 1995 and 1996, 12,411 and 24,044 shares, respectively, were issued under the Plan. F-15 39 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 1994, 1995 and 1996, the Company acquired 23,104, 1,917 and 8,722 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 1995 and 1996, respectively: risk-free interest rates of 6.34% and 5.71%; a dividend yield of 0%; volatility factors of the expected market price of the Company's common stock of .28 and .28 and a weighted-average expected life of the options of 7.7 years. The weighted average grant date fair value of options issued in 1995 and 1996 was $1.21 and $1.08, 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:
1995 1996 -------- -------- Pro forma net income $149,714 $419,269 Pro forma net income per share $ 0.04 $ 0.11
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. (10) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (In thousands except per share data)
First Second Third Fourth Quarter Quarter Quarter Quarter Annual ------- ------- ------- ------- ------- 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 share 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 share 0.01 (0.01) (0.17) 0.22 0.05 1994 Total revenues $ 8,421 $ 9,276 $ 9,945 $11,917 $39,559 Gross profit 5,903 6,511 6,866 8,227 27,507 Net income 78 27 106 611 822 Net income per share 0.02 0.01 0.03 0.16 0.21
F-16 40 INDEX TO EXHIBITS
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) 4.4 Specimen Stock Certificate. (3) 4.5 Form of Representative's Warrant. (3) 10.1 Employment Agreement between the Company and Vincent F. Orza, Jr., dated October 1, 1995. 10.2 Employment Agreement between the Company and James M. Burke, dated October 1, 1995. 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) 10.5 Lease Agreement dated May 28, 1992 between the Company and The Pines Mall Limited Partnership, an Iowa limited partnership, for the lease of the Garfield's restaurant facilities at The Pines Mall, Pine bluff, Arkansas. (3) 10.6 Lease Agreement dated March 16, 1992 between the Company and UM Partners, an Illinois general partnership, for the lease of the Garfield's restaurant facilities at University Mall, Carbondale, Illinois. (3) 10.7 Lease Agreement dated December 17, 1991 (and amended November 10, 1992) between the Company and Columbia Mall Limited Partnership, an Iowa general partnership, for the lease of the Garfield's Restaurant facilities at Columbia Mall, Columbia, Missouri. (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. 10.24 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 10.28 Option Agreement between the Company and James M. Burke, dated January 4, 1996 10.29 Option Agreement between the Company and Corey Gable, dated April 5, 1996 10.30 Loan Agreement between the Company and Liberty Bank and Trust Company of Oklahoma City, National Association, dated August 31, 1995 10.31 First Amendment, dated July 30, 1996, to Loan Agreement between the Company and Liberty Bank and Trust Company of Oklahoma City, National Association, dated August 31, 1995 11.1 Computation of net income (loss) per share. 23.1 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. EX-10.1 2 EMPLOYMENT CONTRACT - VINCENT ORZA 1 EXHIBIT 10.1 EMPLOYMENT CONTRACT EMPLOYMENT CONTRACT, dated as of October 1, 1995, between EATERIES, INC., an Oklahoma corporation (the "COMPANY"), and VINCENT F. ORZA, JR., an Oklahoma resident ("ORZA"). ORZA currently serves as the President, and CEO of the Company under a year to year Employment Contract dated January 1, 1993 and extended to December 31, 1995; The Company desires to enter into a three (3) year Employment Contract with ORZA to be effective on January 1, 1996 in substitution of his existing year to year Employment Agreement and ORZA desires to accept such Employment Contract in accordance with the terms and conditions hereinafter set forth. NOW THEREFORE, ORZA and the Company, in consideration of the mutual covenants and promises herein contained do hereby agree as follow: 1. Term. The Company shall employ ORZA, and ORZA shall serve as the President and CEO of the Company, on the terms and conditions of this Employment Contract for a three (3) year term commencing January 1, 1996, and ending December 31, 1998, unless extended or terminated earlier as hereinafter provided. The initial three (3) year Term of this Employment Contract shall be automatically extended for one (1) additional calendar year on the 31st day of each December during Term hereof unless ORZA is given written notice by the Compensation Committee of the Board of Directors of the Company sixty (60) days prior to the 31st day of December that the Term is not to be thus automatically extended for one (1) additional year. If thus extended each year, then on January 1st of each year, this Employment Contract shall have three (3) years remaining to the Term hereof. 2. Duties and Services. During the Term hereof ORZA shall be employed in the business of the Company as President and CEO and shall perform such services diligently, faithfully and consistent with the responsibilities of such positions. In performance of his duties ORZA shall report to the Board of Directors of the Company. ORZA shall be available to travel as the needs of the business require. 3. Compensation. (a) Salary. As a compensation for his services hereunder, the Company shall pay ORZA, during the Term, a salary payable in equal bi-weekly installments at the 2 annual rate of $200,000.00, subject to annual re-evaluation by the Compensation Committee of the Board of Directors of the Company. The annual re-evaluation shall be based in part upon the attainment of corporate objectives mutually agreed upon by ORZA and the Board of Directors of the Company. Nothing contained herein shall preclude ORZA from participating in future executive bonus plans, pension or profit sharing, deferred compensation, stock option, or other employee benefit plans of the Company, if he meets the eligibility requirements therefor. (b) Options. As additional compensation ORZA has been granted nonqualified options of Eateries, Inc. ORZA shall be entitled to additional grants of nonqualified stock options of Eateries, Inc. upon approval of the Compensation Committee of the Board of Directors of the Company. 4. Expenses and Vacation. ORZA shall be entitled to reimbursement for reasonable travel and other out-of-pocket expenses necessarily incurred in the performance of his duties hereunder, upon submission and approval of written statements and bills in accordance with the then regular policies and procedures of the Company. ORZA shall be entitled to a car allowance payable in equal bi-weekly installments of $325.00 commencing January 1, 1996. ORZA shall be entitled to reasonable vacations in accordance with the then regular policies and procedures of the Company governing executives. 5. Representations and Warranties of ORZA. ORZA represents and warrants to the Company that (a) he is under no contractual or other restriction or obligation which is inconsistent with the execution of this Contract, the performance of his duties hereunder, or the other rights of the Company hereunder and (b) he is under no physical or mental disability that would hinder his performance of duties under this Employment Contract. 6. Confidential Information. All trade secrets, or other proprietary or confidential information which ORZA may now possess, may obtain during or after the Term hereof, or may create prior to the end of the period ORZA is employed by the Company under this Contract or otherwise relating to the business of the Company or its affiliates shall not be published, disclosed, or made accessible by him to any other person, firm, or corporation either during or after the termination of his employment or used by him except during the Term hereof in the business and for the benefit of the Company. ORZA shall return all tangible evidence of such trade secrets, or other proprietary or confidential information to the Company prior to or at the termination of his employment. -2- 3 "Trade secrets" shall include, but not be limited to recipes developed or utilized by the Company, as well as methods of operations developed and utilized by the Company. Additionally, during the Term hereof, ORZA shall not acquire, directly or indirectly, any interest in any restaurants with concepts similar to Company restaurants, unless specifically authorized by the Board or Directors of the Company in writing. Notwithstanding the foregoing, ORZA shall not be prevented from owning any securities of any competitor of the Company which are regularly traded on any national securities exchange or in the over-the-counter market; provided, that the same shall not result in ORZA and his immediate family owning, legally or beneficially, at any time, ten percent (10%) or more of the voting securities of any such company. In the event that the provisions of this section should ever be deemed to exceed the time, geographic or occupational limitations permitted by applicable law, then such provisions shall be reformed to the maximum time, geographic, or occupational limitations permitted by applicable law. 7. Termination. Notwithstanding anything herein contained, if on or after the date hereof and prior to the end of the Term hereof, (a) either (i) ORZA shall be physically or mentally incapacitated or disabled or otherwise unable fully to discharge his duties hereunder for a period of six (6) months, (ii) ORZA shall be convicted of a felony crime by a court of last resort, (iii) ORZA shall commit any act or omit to take any action in bad faith and to the substantial detriment of the Company, or (iv) ORZA shall breach any term of this Contract and such breach shall directly cause a material adverse impact upon the Company and he shall fail to cure and correct such breach within ten (10) days after notice to ORZA by the Company of the same, or such longer period as may be necessary with due diligence to cure such breach then, and in each case, the Company shall have the right to give notice of termination of ORZA's services hereunder as of a date (not earlier than ten (10) days from such notice in the case of items (ii), (iii) or (iv) and not earlier than six (6) months from such notice in the case of item (i) to be specified in such notice and this Agreement shall terminate on the date so specified; or (b) ORZA shall die, then this Employment Contract shall terminate on the date of ORZA death, Whereupon ORZA or his estate, as the case may be, shall be entitled to receive only his salary at the rate provided in Section -3- 4 3 to the date on which termination shall take effect. In the event of ORZA's death, his estate or designated beneficiary shall receive, in addition to the foregoing amount, an amount equal to two (2) year's salary payable by the Company upon receipt of the life insurance proceeds of ORZA's key man insurance policy, if any and if not sufficient then within ninety (90) days of ORZA's death. 8. Merger, Et Cetera. In the event of a future disposition of (or including) the properties and business of the Company, substantially as an entirety, by merger, consolidation, sale of assets, or otherwise, then the Company may elect: (a) To assign this Contract and all of its rights and obligations hereunder to the acquiring of surviving entity; provided that such entity shall be capable of assuming and performing and shall assume in writing and perform all of the obligations of the Company hereunder; provided further that the Company (in the event and so long as it remains in business as an independent going enterprise) shall remain liable for the performance of its obligations hereunder in the event of an unjustified failure of the acquiring entity to perform its obligations under this Contract; and provided finally that the duties assigned ORZA are commensurate with those held prior to the merger and that a relocation of more than 50 miles from the city limits of the City of Oklahoma City, is not required to fulfill such duties; or (b) In addition to its other rights of termination, to terminate this Contract upon at least thirty (30) days' written notice by paying ORZA one (1) year's salary and car allowance at the rate provided in Section 3 and 4 on the date which such termination shall take effect. 9. Liquidation Damages. The parties hereto covenant and agree that, in the event the Company shall breach the terms of this Employment Contract or the Contract shall terminate under Section 8 (b), it shall pay to ORZA, as liquidated damages for such breach or termination, an amount equal to that which would have been received by him under Section 3(a) and 4 for then remaining Term of this Employment Contract, plus reasonable attorneys' fees, if any. Such amount shall be promptly paid upon a determination of breach or termination, but in no event later than thirty (30) days after such determination. 10. Survival. The covenants, agreements, representation, and warranties contained in or made pursuant to this Employment Contract shall survive ORZA's termination of employment, irrespective of any investigation made by or on behalf of any party. -4- 5 11. Modification. This Employment Contract sets forth the entire understanding of the parties with respect to the subject matter hereof, and may be modified only by a written instrument duly executed by each party. 12. Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt, to the party to whom it is to be given at the then address of such party (or to such other address as the party shall have furnished in writing). Notice to the estate of ORZA shall be sufficient if addressed to ORZA as provided in this Section 12. Any notice or other communication given by certified mail shall be deemed given at the time of certification thereof, except for a notice changing a party's address which shall be deemed given at the time of receipt thereof. 13. Waiver. Any waiver by either party of a breach of any provision of this Contract shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any provision in this Contract. The failure of a party to insist upon strict adherence to any term of this Contract on one or more occasions shall not be considered a waiver or deprive that party of the right hereafter to insist upon strict adherence to that term or any other term of this Contract. Any waiver must be in writing and signed by the parties. 14. Binding Effect. ORZA's rights and obligations under this Contract shall not be transferable by assignment or otherwise, such rights shall not be subject to commutation, encumbrance, or the claims of ORZA's creditors, and any attempt to do any of the foregoing shall be void. The provisions of this Contract shall be binding upon and inure to the benefit of ORZA and his heirs and personal representatives, and shall be binding upon and inure to the benefit of the Company and its successors and those who are its assigns. 15. No Third Party Beneficiaries. This Employment Contract does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Employment Contract (except as provided in Section 14). 16. Headings. The headings in this Employment Contract are solely for the convenience of reference and shall be given no effect in the construction or interpretation of this Contract. 17. Counterparts: Governing Law. This Employment Contract may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall be governed by and construed -5- 6 in accordance with the laws of the State of Oklahoma, without given effect to the conflict of laws. IN WITNESS WHEREOF, the parties have duly executed this Employment Contract as of the date first above written. "COMPANY" EATERIES, INC., an Oklahoma corporation By: /s/ ----------------------------------- Vice President "ORZA" /s/ --------------------------------------- VINCENT F. ORZA, JR. As approved by a vote of the Compensation Committee of the Board of Directors of Eateries, Inc. on September 7, 1995. -6- EX-10.2 3 EMPLOYMENT CONTRACT - JAMES M. BURKE 1 EXHIBIT 10.2 EMPLOYMENT CONTRACT EMPLOYMENT CONTRACT, dated as of October 1, 1995, between EATERIES, INC., an Oklahoma corporation (the "COMPANY"), and JAMES M. BURKE, an Oklahoma resident ("BURKE"). BURKE currently serves as the Vice President-Operations of the Company under a year to year Employment Contract dated January 1, 1993 and extended to December 31, 1995; The Company desires to enter into a three (3) year Employment Contract with BURKE to be effective on January 1, 1996 in substitution of his existing year to year Employment Agreement and BURKE desires to accept such Employment Contract in accordance with the terms and conditions hereinafter set forth. NOW THEREFORE, BURKE and the Company, in consideration of the mutual covenants and promises herein contained do hereby agree as follow: 1. Term. The Company shall employ BURKE, and BURKE shall serve as the Vice President-Operations of the Company, on the terms and conditions of this Employment Contract for a three (3) year term commencing January 1, 1996, and ending December 31, 1998, unless extended or terminated earlier as hereinafter provided. The initial three (3) year Term of this Employment Contract shall be automatically extended for one (1) additional calendar year on the 31st day of each December during Term hereof unless BURKE is given written notice by the Compensation Committee of the Board of Directors of the Company sixty (60) days prior to the 31st day of December that the Term is not to be thus automatically extended for one (1) additional year. If thus extended each year, then on January 1st of each year, this Employment Contract shall have three (3) years remaining to the Term hereof. 2. Duties and Services. During the Term hereof BURKE shall be employed in the business of the Company as Vice President-Operations and shall perform such services diligently, faithfully and consistent with the responsibilities of such positions. In performance of his duties BURKE shall report to the Board of Directors of the Company. BURKE shall be available to travel as the needs of the business require. 3. Compensation. (a) Salary. As a compensation for his services hereunder, the Company shall pay BURKE, during the Term, a salary payable in equal bi-weekly installments at the annual rate of $140,000.00, subject to annual re-evaluation by the Compensation Committee of the Board of Directors of the Company. The annual re-evaluation shall be based in part upon the attainment of corporate objectives mutually agreed upon by BURKE and the Board of Directors of the Company. Nothing contained herein shall preclude BURKE from participating in future executive bonus plans, pension or profit sharing, deferred compensation, stock 2 option, or other employee benefit plans of the Company, if he meets the eligibility requirements therefor. (b) Options. As additional compensation BURKE has been granted nonqualified options of Eateries, Inc. BURKE shall be entitled to additional grants of nonqualified stock options of Eateries, Inc. upon approval of the Compensation Committee of the Board of Directors of the Company. 4. Expenses and Vacation. BURKE shall be entitled to reimbursement for reasonable travel and other out-of-pocket expenses necessarily incurred in the performance of his duties hereunder, upon submission and approval of written statements and bills in accordance with the then regular policies and procedures of the Company. BURKE shall be entitled to a car allowance payable in equal bi-weekly installments of $235.00 commencing January 1, 1996. BURKE shall be entitled to reasonable vacations in accordance with the then regular policies and procedures of the Company governing executives. 5. Representations and Warranties of BURKE. BURKE represents and warrants to the Company that (a) he is under no contractual or other restriction or obligation which is inconsistent with the execution of this Contract, the performance of his duties hereunder, or the other rights of the Company hereunder and (b) he is under no physical or mental disability that would hinder his performance of duties under this Employment Contract. 6. Confidential Information. All trade secrets, or other proprietary or confidential information which BURKE may now possess, may obtain during or after the Term hereof, or may create prior to the end of the period BURKE is employed by the Company under this Contract or otherwise relating to the business of the Company or its affiliates shall not be published, disclosed, or made accessible by him to any other person, firm, or corporation either during or after the termination of his employment or used by him except during the Term hereof in the business and for the benefit of the Company. BURKE shall return all tangible evidence of such trade secrets, or other proprietary or confidential information to the Company prior to or at the termination of his employment. "Trade secrets" shall include, but not be limited to recipes developed or utilized by the Company, as well as methods of operations developed and utilized by the Company. Additionally, during the Term hereof, BURKE shall not acquire, directly or indirectly, any interest in any restaurants with concepts similar to Company restaurants, unless specifically authorized by the Board or Directors of the Company in writing. Notwithstanding the foregoing, BURKE shall not be prevented from owning any securities of any competitor of the Company which are regularly traded on any national securities exchange or in the over-the-counter market; provided, that the same shall not result in BURKE and his immediate family owning, legally or beneficially, at any time, ten percent (10%) or more of the voting securities of any such company. In the event that the provisions of this section should ever be deemed to exceed the time, geographic or occupational limitations permitted by applicable law, then such provisions shall be reformed to the maximum time, geographic, or occupational limitations permitted by applicable law. -2- 3 7. Termination. Notwithstanding anything herein contained, if on or after the date hereof and prior to the end of the Term hereof, (a) either (i) BURKE shall be physically or mentally incapacitated or disabled or otherwise unable fully to discharge his duties hereunder for a period of six (6) months, (ii) BURKE shall be convicted of a felony crime by a court of last resort, (iii) BURKE shall commit any act or omit to take any action in bad faith and to the substantial detriment of the Company, or (iv) BURKE shall breach any term of this Contract and such breach shall directly cause a material adverse impact upon the Company and he shall fail to cure and correct such breach within ten (10) days after notice to BURKE by the Company of the same, or such longer period as may be necessary with due diligence to cure such breach then, and in each case, the Company shall have the right to give notice of termination of BURKE's services hereunder as of a date (not earlier than ten (10) days from such notice in the case of items (ii), (iii) or (iv) and not earlier than six (6) months from such notice in the case of item (i) to be specified in such notice and this Agreement shall terminate on the date so specified; or (b) BURKE shall die, then this Employment Contract shall terminate on the date of BURKE's death, Whereupon BURKE or his estate, as the case may be, shall be entitled to receive only his salary at the rate provided in Section 3 to the date on which termination shall take effect. In the event of BURKE's death, his estate or designated beneficiary shall receive, in addition to the foregoing amount, an amount equal to two (2) year's salary payable by the Company upon receipt of the life insurance proceeds of BURKE's key man insurance policy, if any and if not sufficient then within ninety (90) days of BURKE's death. 8. Merger, Et Cetera. In the event of a future disposition of (or including) the properties and business of the Company, substantially as an entirety, by merger, consolidation, sale of assets, or otherwise, then the Company may elect: (a) To assign this Contract and all of its rights and obligations hereunder to the acquiring of surviving entity; provided that such entity shall be capable of assuming and performing and shall assume in writing and perform all of the obligations of the Company hereunder; provided further that the Company (in the event and so long as it remains in business as an independent going enterprise) shall remain liable for the performance of its obligations hereunder in the event of an unjustified failure of the acquiring entity to perform its obligations under this Contract; and provided finally that the duties assigned BURKE are commensurate with those held prior to the merger and that a relocation of more than 50 miles from the city limits of the City of Oklahoma City, is not required to fulfill such duties; or -3- 4 (b) In addition to its other rights of termination, to terminate this Contract upon at least thirty (30) days' written notice by paying BURKE one (1) year's salary and car allowance at the rate provided in Section 3 and 4 on the date which such termination shall take effect. 9. Liquidation Damages. The parties hereto covenant and agree that, in the event the Company shall breach the terms of this Employment Contract or the Contract shall terminate under Section 8 (b), it shall pay to BURKE, as liquidated damages for such breach or termination, an amount equal to that which would have been received by him under Section 3(a) and 4 for then remaining Term of this Employment Contract, plus reasonable attorneys' fees, if any. Such amount shall be promptly paid upon a determination of breach or termination, but in no event later than thirty (30) days after such determination. 10. Survival. The covenants, agreements, representation, and warranties contained in or made pursuant to this Employment Contract shall survive BURKE's termination of employment, irrespective of any investigation made by or on behalf of any party. 11. Modification. This Employment Contract sets forth the entire understanding of the parties with respect to the subject matter hereof, and may be modified only by a written instrument duly executed by each party. 12. Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt, to the party to whom it is to be given at the then address of such party (or to such other address as the party shall have furnished in writing). Notice to the estate of BURKE shall be sufficient if addressed to BURKE as provided in this Section 12. Any notice or other communication given by certified mail shall be deemed given at the time of certification thereof, except for a notice changing a party's address which shall be deemed given at the time of receipt thereof. 13. Waiver. Any waiver by either party of a breach of any provision of this Contract shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any provision in this Contract. The failure of a party to insist upon strict adherence to any term of this Contract on one or more occasions shall not be considered a waiver or deprive that party of the right hereafter to insist upon strict adherence to that term or any other term of this Contract. Any waiver must be in writing and signed by the parties. 14. Binding Effect. BURKE's rights and obligations under this Contract shall not be transferable by assignment or otherwise, such rights shall not be subject to commutation, encumbrance, or the claims of BURKE's creditors, and any attempt to do any of the foregoing shall be void. The provisions of this Contract shall be binding upon and inure to the benefit of BURKE and his heirs and personal representatives, and shall be binding upon and inure to the benefit of the Company and its successors and those who are its assigns. -4- 5 15. No Third Party Beneficiaries. This Employment Contract does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Employment Contract (except as provided in Section 14). 16. Headings. The headings in this Employment Contract are solely for the convenience of reference and shall be given no effect in the construction or interpretation of this Contract. 17. Counterparts: Governing Law. This Employment Contract may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall be governed by and construed in accordance with the laws of the State of Oklahoma, without given effect to the conflict of laws. IN WITNESS WHEREOF, the parties have duly executed this Employment Contract as of the date first above written. "COMPANY" EATERIES, INC., an Oklahoma corporation By: /s/ ------------------------------------- President "BURKE" /s/ ---------------------------------------- JAMES M. BURKE As approved by a vote of the Compensation Committee of the Board of Directors of Eateries, Inc. on September 7, 1995. -5- EX-10.23 4 EMPLOYMENT CONTRACT - COREY GABLE 1 EXHIBIT 10.23 EMPLOYMENT CONTRACT EMPLOYMENT CONTRACT, dated as of January 1, 1997, between EATERIES, INC., an Oklahoma corporation (the "COMPANY"), and COREY GABLE, an Oklahoma resident ("GABLE"), residing at 3200 W. Britton Rd. #35, Oklahoma City, OK 73120. The Company desires to engage GABLE to perform services for the Company, and GABLE desires to perform such services, on the terms and conditions hereinafter set forth. 1. Term. The Company agrees to employ GABLE, and GABLE agrees to serve, on the terms and conditions of this Agreement for a period commencing on the date stated above, and ending December 31, 1997, or for such shorter period as may be provided herein (the "Employment Period"). Unless action is taken by the Compensation Committee the contract is automatically extended for successive one year periods at the same terms and conditions. Unless written or oral notice of termination is given by either party prior to expiration of a contract year, the contract is automatically extended for successive one (1) year periods at the same terms and conditions. 2. Duties and Services. During the Employment Period, GABLE shall be employed in the business of the Company as Interim Vice President of Finance, Treasurer and Chief Financial Officer or other position as may be determined by the Board of Directors, and shall perform services consistent with whatever such position he may hold. In performance of his duties GABLE shall be subject to the direction of the Board of Directors of the Company. GABLE shall be available to travel as the needs of the business require. 3. Compensation. (a) Salary. As a compensation for his services hereunder, the Company shall pay GABLE, during the Employment Period, a salary payable in equal bi-weekly installments at the annual rate of $85,000.00, subject to annual re-evaluation by the Board of Directors of the Company. The annual re-evaluation shall be based in part upon the attainment of corporate objectives mutually agreed upon by GABLE and the Board of Directors of the Company. Nothing contained herein shall preclude GABLE from participating in future executive bonus plans, pension or profit sharing, deferred compensation, stock option, or other employee benefit plans of the Company, if he meets the eligibility requirements therefor. (b) Options. As additional compensation GABLE may in the future, be granted additional nonqualified options at the sole discretion of the Compensation Committee of the Board of Directors of the Company. 2 4. Expenses and Vacation. GABLE shall be entitled to reimbursement for reasonable travel and other out-of-pocket expenses necessarily incurred in the performance of his duties hereunder, upon submission and approval of written statements and bills in accordance with the then regular policies and procedures of the Company. GABLE reasonable vacations in accordance with the then regular policies and procedures of the Company governing executives. 5. Representations and Warranties of GABLE. GABLE represents and warrants to the Company that (a) he is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of his duties hereunder, or the other rights of the Company hereunder and (b) he is under no physical or mental disability that would hinder his performance of duties under this Agreement. 6. Confidential Information. All trade secrets, or other proprietary or confidential information which GABLE may now possess, may obtain during or after the Employment Period, or may create prior to the end of the period GABLE is employed by the Company under this Agreement or otherwise relating to the business of the Company or its affiliates shall not be published, disclosed, or made accessible by him to any other person, firm, or corporation either during or after the termination of his employment or used by him except during the Employment Period in the business and for the benefit of the Company. GABLE shall return all tangible evidence of such trade secrets, or other proprietary or confidential information to the Company prior to or at the termination of his employment. "Trade secrets" shall include, but not be limited to recipes developed or utilized by the Company, as well as methods of operations developed and utilized by the Company. Additionally, during the Employment Period, GABLE shall not acquire, directly or indirectly, any interest in any restaurants with concepts similar to Company restaurants, unless specifically authorized by the Board or Directors of the Company in writing. Notwithstanding the foregoing, GABLE shall not be prevented from owning any securities of any competitor of the Company which are regularly traded on any national securities exchange or in the over-the-counter market; provided, that the same shall not result in GABLE and his immediate family owning, legally or beneficially, at any time, five percent (5%) or more of the voting securities of any such company. In the event that the provisions of this section should ever be deemed to exceed the time, geographic or occupational limitations permitted by applicable law, then such provisions shall be reformed to the maximum time, geographic, or occupational limitations permitted by applicable law. 3 7. Termination. Notwithstanding anything herein contained, if on or after the date hereof and prior to the end of the Term hereof, (a) either (i) GABLE shall be physically or mentally incapacitated or disabled or otherwise unable fully to discharge his duties hereunder for a period of three months, (ii) GABLE shall be convicted of a felony crime by a court of last resort, (iii) GABLE shall commit any act or omit to take any action in bad faith and to the substantial detriment of the Company, or (iv) GABLE shall breach any term of this Agreement and fail to correct such breach within ten (10) days after notice to GABLE by the Company of the same, then, and in each case, the Company shall have the right to give notice of termination of GABLE's services hereunder as of a date (not earlier than ten (10) days from such notice in the case of items (ii), (iii) or (iv) and not earlier than three months from such notice in the case of item (i) to be specified in such notice and this Agreement shall terminate on the date so specified; or (b) GABLE shall die, then this Agreement shall terminate on the date of GABLE's death, In the event of GABLE's death, his estate or designated beneficiary shall receive bi-weekly installments of salary for a period of one year from his death. Nothing contained in this Section 7 shall be deemed to limit any other right the Company may have to terminate GABLE's employment hereunder upon any ground permitted by law. 8. Merger, Et Cetera. In the event of a future disposition of (or including) the properties and business of the Company, substantially as an entirety, by merger, consolidation, sale of assets, or otherwise, then the Company may elect either of the following options: (a) To assign this Agreement and all of its rights and obligations hereunder to the acquiring of surviving corporation; provided that such corporation shall be capable of assuming and performing and shall assume in writing all of the obligations of the Company hereunder; provided further that the Company (in the event and so long as it remains in business as an independent going enterprise) shall remain liable for the performance of its obligations hereunder in the event of an unjustified failure of the acquiring corporation to perform its obligations under this Agreement; and provided finally that the duties assigned GABLE are commensurate with those held prior to the merger and that a relocation of more than 50 miles from the city limits of the City of Oklahoma City, is not required to fulfill such duties; or 4 (b) In addition to its other rights of termination, to terminate this Agreement upon at least thirty (30) days' written notice by paying GABLE one half year's salary and at the rate provided in Section 3 and 4 on the date which such termination shall take effect. (c) The options stated in this Section 8 are for the benefit of the Company and the Company may choose not to exercise either of them. 9. Liquidation Damages. The parties hereto covenant and agree that, in the event the Company shall breach the terms of this Agreement or the Agreement shall terminate under Section 8 (b), it shall pay to GABLE, as liquidated damages for such breach or termination, an amount equal to that which would have been received by him under Section 3(a) and 4 for one half year. Such amount shall be promptly paid upon a determination of breach or termination, and in accordance with the Company's bi-weekly payroll system until such time as above noted amount has been paid in full. 10. Survival. The covenants, agreements, representation, and warranties contained in or made pursuant to this Employment Contract shall survive GABLE's termination of employment, irrespective of any investigation made by or on behalf of any party. 11. Modification. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. 12. Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt, to the party to whom it is to be given at the address of such party set forth in the preamble to this Agreement (or to such other address as the party shall have furnished in writing). Notice to the estate of GABLE shall be sufficient if addressed to GABLE as provided in this Section 12. Any notice or other communication given by certified mail shall be deemed given at the time of certification thereof, except for a notice changing a party's address which shall be deemed given at the time of receipt thereof. 13. Waiver. Any waiver by either party of a breach of any provision of this Contract shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any provision in this Agreement. The failure of a party to insist upon strict adherence to any term of this Contract on one or more occasions shall not be considered a 5 waiver or deprive that party of the right hereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing. 14. Binding Effect. GABLE's rights and obligations under this Agreement shall not be transferable by assignment or otherwise, such rights shall not be subject to commutation, encumbrance, or the claims of GABLE's creditors, and any attempt to do any of the foregoing shall be void. The provisions of this Agreement shall be binding upon and inure to the benefit of GABLE and his heirs and personal representatives, and shall be binding upon and inure to the benefit of the Company and its successors and those who are its assigns under Section 8. 15. No Third Party Beneficiaries. This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement (except as provided in Section 14). 16. Headings. The headings in this Agreement are solely for the convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. 17. Counterparts: Governing Law. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall be governed by and construed in accordance with the laws of the State of Oklahoma, without given effect to the conflict of laws. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. EATERIES, INC.: By: /s/ Vincent F. Orza ----------------------------------- Vice President GABLE: /s/ Corey Gable --------------------------------------- COREY GABLE As approved by a vote of the Compensation Committee of the Board of Directors of Eateries, Inc. on November 10, 1995. EX-10.27 5 OPTION AGREEMENT - VINCENT F. ORZA 1 EXHIBIT 10.27 OPTION AGREEMENT (EXECUTIVE) THIS AGREEMENT is made and entered into as of the 4th day of January, 1996, by EATERIES, INC., an Oklahoma corporation (the "Company"), and VINCENT F. ORZA, JR. ("Awardee"), an Oklahoma resident. The Company and Awardee agree as follows: 1. GRANT OF OPTIONS. The Company grants to Awardee options to purchase Two Hundred Fifty Thousand (250,000) shares of common stock of the Company (the "Option Shares") at an exercise price of $2.625 per share (the "Stock Options"). The Stock Options are an award made pursuant to the Company's Omnibus Equity Compensation Plan (the "Plan") which is incorporated into and made a part of this Agreement. Unless otherwise indicated, all words and phrases used in initially capitalized form shall have the meanings given them in the Plan. 2. VESTING. The Stock Options granted hereby shall vest and become exercisable in increments of twenty percent (20%) per year with the first twenty percent (20%) increment vesting and becoming exercisable on the date of this Agreement, and additional increments of twenty percent (20%) vesting and becoming exercisable on each successive anniversary of the date of this Agreement. If the Awardee ceases to be an employee of the Company for any reason prior to vesting of any of the Stock Options, the then unvested Stock Options shall be forfeited and expire. 3. TERM. The Stock Options shall expire upon the earlier of: (a) expiration prior to vesting under paragraph 2 above; or (b) the fifth anniversary of the date on which they first became exercisable under paragraph 2 above; or (c) if the Stock Options were exercisable at the time the Awardee ceased to be an employee of the Company, six months after Awardee ceases to be an employee of the Company for any reason. 4. METHOD OF EXERCISE. To exercise any Stock Options, Awardee shall give the Company written notice of the exercise of the options, in substantially the form attached hereto as Exhibit A. Awardee shall pay the exercise price for the Option Shares at the time of the notice of the exercise of the Stock Options in cash, in "mature shares" of the Company's common stock (valued at their Fair Market Value at dates of exercise), in a combination of cash and "mature shares," or in such other consideration as the Committee determines is consistent with the purpose of the Plan, this Agreement, and applicable law. The Company shall issue or shall have its transfer agent issue one or more certificates for the Option Shares purchased within five (5) business days after exercise. The Committee may establish other requirements to provide reasonable procedures for the exercise of the Stock Options. "Mature shares" are shares of the Company's common stock held by the Awardee for a period greater than six months prior to the exercise dates. 2 5. TRANSFERABILITY OF OPTIONS. Awardee shall not have the right to transfer all or any part of the Stock Options except by will or pursuant to the laws of descent and distribution. 6. REIMBURSEMENT FOR WITHHOLDING LIABILITIES. Subsequent to the granting of any Stock Options to Awardee pursuant to this Agreement, Awardee shall have the obligation to reimburse the Company for any withholding liabilities for Federal, state, and local income taxes, social security taxes, and any other taxes which it may incur as a result of the granting, vesting, and/or exercise of the Stock Options. Awardee shall reimburse the Company no more frequently than on a monthly basis for those amounts within 30 days after his receipt of a written accounting of the amounts due. Awardee shall satisfy the tax withholding reimbursement obligation with cash unless the Compensation Committee elects to permit or require the Awardee to satisfy such obligation with the delivery of shares of the Company's common stock having a Fair Market Value as of the date of delivery of such shares to the Company equal to the withholding liability or a combination of cash and common stock. 7. MODIFICATION. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. 8. NOTICES. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt, to the party to whom it is to be given at the address of such party set forth in the records of the Company (or to such other address as the party shall have furnished in writing). Notice to the estate of Awardee shall be sufficient if addressed to Awardee as provided in this paragraph 8. Any notice or other communication given by certified mail shall be deemed given at the time of certification thereof, except for a notice changing a party's address which shall be deemed given at the time of receipt thereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first set forth above. COMPANY: EATERIES, INC. By Act of the Compensation Committee By: /s/ ----------------------------------- _________________________, Chairman AWARDEE: /s/ --------------------------------------- Vincent F. Orza, Jr. -2- 3 EXHIBIT A NOTICE OF EXERCISE OF STOCK OPTIONS The undersigned hereby gives notice to Eateries, Inc. (the "Company") of exercise of the stock options issued to him pursuant to the terms of the Stock Option Agreement between the Company and the undersigned, dated as of _______________________, to purchase _____________ shares of common stock of the Company. The undersigned has enclosed a check for $______________ and delivers ____________ shares of the Company's common stock held of record by him and having a fair market value of $_____________ as payment of the purchase price for the shares of common stock. DATED this ____ day of ______________, 19___. --------------------------------------------- EX-10.28 6 OPTION AGREEMENT - JAMES M. BURKE 1 EXHIBIT 10.28 OPTION AGREEMENT (EXECUTIVE) THIS AGREEMENT is made and entered into as of the 4th day of January, 1996, by EATERIES, INC., an Oklahoma corporation (the "Company"), and JAMES M. BURKE ("Awardee"), an Oklahoma resident. The Company and Awardee agree as follows: 1. GRANT OF OPTIONS. The Company grants to Awardee options to purchase One Hundred Thousand (100,000) shares of common stock of the Company (the "Option Shares") at an exercise price of $2.625 per share (the "Stock Options"). The Stock Options are an award made pursuant to the Company's Omnibus Equity Compensation Plan (the "Plan") which is incorporated into and made a part of this Agreement. Unless otherwise indicated, all words and phrases used in initially capitalized form shall have the meanings given them in the Plan. 2. VESTING. The Stock Options granted hereby shall vest and become exercisable in increments of twenty percent (20%) per year with the first twenty percent (20%) increment vesting and becoming exercisable on the date of this Agreement, and additional increments of twenty percent (20%) vesting and becoming exercisable on each successive anniversary of the date of this Agreement. If the Awardee ceases to be an employee of the Company for any reason prior to vesting of any of the Stock Options, the then unvested Stock Options shall be forfeited and expire. 3. TERM. The Stock Options shall expire upon the earlier of: (a) expiration prior to vesting under paragraph 2 above; or (b) the fifth anniversary of the date on which they first became exercisable under paragraph 2 above; or (c) if the Stock Options were exercisable at the time the Awardee ceased to be an employee of the Company, six months after Awardee ceases to be an employee of the Company for any reason. 4. METHOD OF EXERCISE. To exercise any Stock Options, Awardee shall give the Company written notice of the exercise of the options, in substantially the form attached hereto as Exhibit A. Awardee shall pay the exercise price for the Option Shares at the time of the notice of the exercise of the Stock Options in cash, in "mature shares" of the Company's common stock (valued at their Fair Market Value at dates of exercise), in a combination of cash and "mature shares," or in such other consideration as the Committee determines is consistent with the purpose of the Plan, this Agreement, and applicable law. The Company shall issue or shall have its transfer agent issue one or more certificates for the Option Shares purchased within five (5) business days after exercise. The Committee may establish other requirements to provide reasonable procedures for the exercise of the Stock Options. "Mature shares" are shares of the Company's common stock held by the Awardee for a period greater than six months prior to the exercise dates. 2 5. TRANSFERABILITY OF OPTIONS. Awardee shall not have the right to transfer all or any part of the Stock Options except by will or pursuant to the laws of descent and distribution. 6. REIMBURSEMENT FOR WITHHOLDING LIABILITIES. Subsequent to the granting of any Stock Options to Awardee pursuant to this Agreement, Awardee shall have the obligation to reimburse the Company for any withholding liabilities for Federal, state, and local income taxes, social security taxes, and any other taxes which it may incur as a result of the granting, vesting, and/or exercise of the Stock Options. Awardee shall reimburse the Company no more frequently than on a monthly basis for those amounts within 30 days after his receipt of a written accounting of the amounts due. Awardee shall satisfy the tax withholding reimbursement obligation with cash unless the Compensation Committee elects to permit or require the Awardee to satisfy such obligation with the delivery of shares of the Company's common stock having a Fair Market Value as of the date of delivery of such shares to the Company equal to the withholding liability or a combination of cash and common stock. 7. MODIFICATION. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. 8. NOTICES. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt, to the party to whom it is to be given at the address of such party set forth in the records of the Company (or to such other address as the party shall have furnished in writing). Notice to the estate of Awardee shall be sufficient if addressed to Awardee as provided in this paragraph 8. Any notice or other communication given by certified mail shall be deemed given at the time of certification thereof, except for a notice changing a party's address which shall be deemed given at the time of receipt thereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first set forth above. COMPANY: EATERIES, INC. By Act of the Compensation Committee By:/s/ ----------------------------------- , Chairman --------------- AWARDEE: /s/ -------------------------------------- James M. Burke -2- 3 EXHIBIT A NOTICE OF EXERCISE OF STOCK OPTIONS The undersigned hereby gives notice to Eateries, Inc. (the "Company") of exercise of the stock options issued to him pursuant to the terms of the Stock Option Agreement between the Company and the undersigned, dated as of _______________________, to purchase _____________ shares of common stock of the Company. The undersigned has enclosed a check for $______________ and delivers ____________ shares of the Company's common stock held of record by him and having a fair market value of $_____________ as payment of the purchase price for the shares of common stock. DATED this ____ day of ______________, 19___. -------------------------------------- EX-10.29 7 OPTION AGREEMENT - COREY GABLE 1 EXHIBIT 10.29 OPTION AGREEMENT THIS AGREEMENT is made and entered into as of the 5th day of April, 1996, by EATERIES, INC., an Oklahoma corporation (the "Company"), and COREY GABLE ("Awardee"), an Oklahoma resident. The Company and Awardee agree as follows: 1. Grant of Options. The Company grants to Awardee options to purchase 30,000 shares of the common stock of the Company (the "Option Shares") at an exercise price of $3.25 per share (the "Stock Options"). The Stock Options are an award made pursuant to the Company's Omnibus Equity Compensation Plan (the "Plan") which is incorporated into and made a part of this Agreement. Unless otherwise indicated, all words and phrases used in initially capitalized form shall have the meanings given them in the Plan. 2. Vesting. The Stock Options granted hereby shall vest and become exercisable in increments of thirty three and one-third percent (33 1/3%) per year with the first thirty three and one-third percent (33 1/3%) increment vesting and becoming exercisable on April 5, 1997, and additional increments of thirty three and one-third percent (33 1/3%) vesting and becoming exercisable on April 5, 1998 and April 5, 1999. If the Awardee ceases to be an employee of the Company for any reason prior to the vesting of any of the Stock Options, the then unvested Stock Options shall be forfeited and expire. 3. Term. The Stock Options shall expire upon the earlier of: (a) expiration prior to vesting under paragraph 2 above; or (b) the fifth anniversary of the date on which they first became exercisable; or (c) if the Stock Options were exercisable at the time the Awardee ceased to be an employee of the Company, thirty (30) days after Awardee ceases to be an employee of the Company for any reason unless such cessation of employment shall be caused by Awardee's death in which event the Stock Options shall remain exercisable for a period of six (6) months after Awardee's death. 4. Method of Exercise. To exercise any Stock Options, Awardee shall give the Company written notice of the exercise of the options, in substantially the form attached hereto as Exhibit A. Awardee shall pay the exercise price for the Option Shares at the time of the notice of the exercise of the Stock Options in cash or in such other consideration as the Committee determines is consistent with the purpose of the Plan, this Agreement, and applicable law. The Company shall issue or shall have its transfer agent issue one or more certificates for the Option Shares purchased within five (5) business days after exercise. The Committee may establish other requirements to provide reasonable procedures for the exercise of the Stock Options. 5. Transferability of Options. Awardee shall not have the right to transfer all or any part of the Stock Options except by will or pursuant to the laws of descent and distribution. 6. Reimbursement for Withholding Liabilities. Subsequent to the granting of any Stock Options to Awardee pursuant to this Agreement, Awardee shall have the obligation to reimburse the Company for any withholding liabilities for Federal, state, and local income taxes, social security taxes, and any other taxes which it may incur as a result of the granting, vesting, and/or exercise of the Stock Options. Awardee shall reimburse the Company no more frequently than on a monthly basis for those amounts within thirty (30) days after his receipt of a written accounting of the amounts due. Awardee shall satisfy the tax withholding reimbursement obligation with cash unless the Compensation Committee elects to permit or require the Awarded to satisfy such obligation with delivery of shares of the Company's common stock having a Fair 2 Market Value as of the date of exercise equal to the withholding liability or a combination of cash and common stock. 7. Modification. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. 8. Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt, to the party to whom it is to be given at the address of such party set forth in the records of the Company (or to such other address as the party shall have furnished in writing). Notice to the estate of Awardee shall be sufficient if addressed to Awardee as provided in this paragraph 8. Any notice or other communication given by certified mail shall be deemed given at the time of certification thereof, except for a notice changing a party's address which shall be deemed given at the time of receipt thereof. IN WITNESS WHEREOF, the parties hereto have executed this Option Agreement as of the day and year first set forth above. COMPANY: EATERIES, INC. By Act of the Compensation Committee By: /s/ ------------------------------------- , Chairman ----------------- AWARDEE: /s/ ---------------------------------------- Corey Gable -2- 3 EXHIBIT A NOTICE OF EXERCISE OF STOCK OPTIONS The undersigned hereby gives notice to Eateries, Inc. (the "Company") of exercise of the stock options issued to him pursuant to the terms of the Stock Option Agreement between the Company and the undersigned, dated as of _________________________, to purchase __________ shares of the common stock of the Company. The undersigned has enclosed a check for $_______________ and delivers __________ shares of the Company's common stock held of record by him and having a fair market value of $_______________ as payment of the purchase price for the shares of common stock. DATED this ____ day of _______________, 19____. -------------------------------------- EX-10.30 8 LOAN AGREEMENT 1 EXHIBIT 10.30 LOAN AGREEMENT THIS LOAN AGREEMENT ("Agreement") is made and entered into this 31st day of August, 1995, by and among EATERIES, INC., an Oklahoma corporation ("Eateries"), PEPPERONI GRILL, INC., an Oklahoma corporation ("PGI") (Eateries and PGI are hereinafter collectively referred to as the "Borrowers" and individually as a "Borrower"), and LIBERTY BANK AND TRUST COMPANY OF OKLAHOMA CITY, NATIONAL ASSOCIATION (hereinafter referred to as the "Bank"). RECITALS A. The Borrowers have requested that the Bank establish a revolving loan facility, in the principal amount not to exceed $3,000,000, to refinance and increase the Borrowers' existing $500,000 line of credit at the Bank. B. The Bank is willing to establish the requested revolving loan facility, subject to the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and the loan facility to be established hereunder, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Borrowers and the Bank hereby covenant and agree as follows: 1. DEFINITIONS. As used in this Agreement: 1.1 Terms Defined Above. The terms "Borrowers," "Eateries," "PGI" and "Bank" shall have the respective meanings set forth in the preamble above. 1.2 Certain Definitions. As used herein, the following terms shall have the meanings indicated below (unless the context otherwise requires): "ADVANCE" means a cash loan from the Bank to the Borrowers under the Revolving Loan. "AFFILIATE" means any Person who has a relationship with either Borrower whereby either such Person or such Borrower directly or indirectly controls or is controlled by or is under common control with the other, or holds or beneficially owns five percent (5%) or more of the equity interest in the other or five percent (5%) or more of any class of voting securities of the other and, in addition, shall include all officers and directors of each of the Borrowers. "AGREEMENT" and such terms as "herein," "hereof," "hereto," "hereby," "hereunder" and the like mean and refer to this Loan Agreement, together with any and 2 all exhibits and schedules attached hereto, and any and all supplements, modifications or amendments hereto. "BUSINESS DAY" means that any day, other than a Saturday, Sunday or legal holiday for commercial banks under the laws of the State of Oklahoma, during which the Bank is open for substantially all of its normal banking functions. "CAPITAL EXPENDITURE" means any payment for any fixed assets or improvements (including those incurred in connection with the acquisition or expansion of any Store) or for replacements, substitutions or additions thereto, and which are required to be capitalized under GAAP. "CLEAN-DOWN AMOUNT" means: (a) $600,000 for the Clean-Down Periods during the periods commencing November 30, 1995 and 1996, respectively, and ending January 31, 1996 and 1997, respectively; and (b) $2,000,000 for the Clean-Down Period during the period commencing November 30, 1997, and ending January 31, 1998. "CLEAN-DOWN PERIOD" has the meaning set forth in Subsection 2.7.2 hereof. "CLOSING" means the date and time, as provided in Subsection 4.1 hereof, on which the Loan Documents are executed and delivered by the appropriate parties thereto, all in form and substance satisfactory to the Bank. "COMMITMENT FEE" has the meaning set forth in Subsection 2.6.1 hereof. "COMPLIANCE CERTIFICATE" means a written certificate to be delivered by the Borrowers pursuant to Subsection 6.1(c) hereof, substantially in the form of Exhibit "C" attached hereto. "DEBT" means, with respect to any Person, (i) all obligations of such Person which, in accordance with GAAP, would be shown on its balance sheet as a liability (including, without limitation, obligations for borrowed money and for the deferred purchase price of property or services, and obligations evidenced by bonds, debentures, notes or other similar instruments); (ii) all rental obligations under leases required to be capitalized under GAAP; (iii) all guaranties (direct or indirect) and other contingent obligations of such Person in respect of, or obligations to purchase or otherwise acquire or to assure payment of, Debt of other Persons; and (iv) Debt of other Persons secured by a Lien upon Property of such Person, whether or not assumed. "DEFAULT" means the occurrence of any event or the existence of any circumstances which, but for the giving of notice or the passage of time, or both, would constitute an Event of Default. 2 3 "DISBURSEMENT REQUEST" means a written request for an Advance, substantially in the form of Exhibit "B" attached hereto. "ENVIRONMENTAL LAWS" means all laws, statutes, ordinances, and regulations of any Governmental Authority pertaining to health, sanitation, food standards and/or environmental conditions on, under, about, or in any way relating to any Stores or other Properties of the Borrowers, including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C. Sections 9601 et seq., as amended and in effect from time to time, and the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Sections 6901 et seq., as amended and in effect from time to time. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended and as in effect from time to time. "EVENT OF DEFAULT" means the occurrence of any of the events or the existence of any of the circumstances specified in Section 8 hereof. "GAAP" means generally accepted accounting principles in effect from time to time, applied on a consistent basis throughout the periods involved, as set forth in the opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or Statements of the Financial Accounting Standards Board which may be applicable as of any determination date. "GOVERNMENTAL AUTHORITY" means any court or any administrative or governmental department, commission, board, bureau, authority, agency or body of any governmental entity, whether foreign or domestic, and whether national, federal, state, county, city, municipal or otherwise. "LIBOR RATE" means, for any calendar month in which interest on the Revolving Note is determined by reference to the LIBOR Rate, the "London Interbank Offered Rates (LIBOR)" for dollar deposits having a term of one (1) month, as published in the "Money Rates" section of The Wall Street Journal (Southwest Edition) on the last Business Day of the preceding calendar month. "LIEN" means any mortgage, pledge, lien, security interest, assignment, charge, restriction, claim, or other encumbrance, whether statutory, consensual or otherwise, which is granted, created or suffered to exist by either of the Borrowers on any of its Properties and which secures any Debt of such Borrower. "LOAN DOCUMENTS" means this Agreement, the Revolving Note, and all other instruments and documents executed or issued, or to be executed or issued, in favor of the 3 4 Bank pursuant hereto or in connection with the Revolving Loan, and all amendments, modifications, extensions and renewals of any of the foregoing. "MATERIAL ADVERSE EFFECT" means any event, circumstance or set of events which (i) has or could reasonably be expected to have any adverse effect whatsoever on the validity, enforceability or performance of the Loan Documents, (ii) is material and adverse to the financial condition, assets, liabilities or business operations of the Borrowers on a consolidated basis, (iii) does or could reasonably be expected to impair the ability of the Borrowers to fulfill their obligations under the terms and conditions of the Loan Documents, or (iv) causes or creates a Default. "NATIONAL PRIME RATE" means the "Prime Rate" as published on a daily basis in the "Money Rates" section of The Wall Street Journal (Southwest Edition). "NON-USE FEE" has the meaning set forth in Subsection 2.6.2 hereof. "OBLIGATIONS" means and include all liabilities, obligations and indebtedness of the Borrowers to the Bank, of every kind and description, now existing or hereafter incurred, direct or indirect, absolute or contingent, due or to become due, matured or unmatured, whether joint, several or joint and several, whether or not currently contemplated by the Bank or the Borrowers, including, without limitation, (i) all liabilities, obligations and indebtedness of the Borrowers to the Bank arising out of or relating to this Agreement, the Revolving Loan, the Revolving Note or any other of the Loan Documents, (ii) all Advances and other amounts from time to time owing under this Agreement (including interest accruing thereon and fees payable in respect thereof), (iii) any overdrafts by either of the Borrowers on any deposit account maintained with the Bank, and (iv) any and all extensions and renewals of any of the foregoing. "PBGC" means the Pension Benefit Guaranty Corporation, as established pursuant to Section 4002 of ERISA, and any successor thereto or substitute therefor under ERISA. "PERMIT" means any permit, certificate, consent, franchise, concession, license, authorization, approval, filing, registration or notification from or with any Governmental Authority or other Person. "PERMITTED LIENS" means the following Liens against the Properties of the Borrowers: (i) deposits to secure payment of worker's compensation, unemployment insurance and other similar benefits; (ii) Liens for property taxes not yet due; (iii) statutory Liens (A) against which there are established reserves in conformity with GAAP and which are being contested in good faith by appropriate legal proceedings, (B) which arise in favor of contractors or subcontractors in connection with the construction or improvement of Stores, are being contested or disputed in good faith by the applicable Borrower and do not exceed $100,000 in the aggregate and the existence of which has 4 5 been disclosed to the Bank, or (C) arise in the ordinary course of business and secure obligations which are not yet due and not in default; (iv) Liens in favor of the Bank; and (v) Liens which are in existence on the date hereof and which are described on Schedule I attached hereto. "PERSON" means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, institution, entity, party or Governmental Authority. "PROPERTY" means any asset or property, whether real, personal or mixed, tangible or intangible, which is now or at any time hereafter owned, operated or leased by either of the Borrowers. "RATE ELECTION" has the meaning set forth in Subsection 2.5.3 hereof. "REVOLVING COMMITMENT" means the sum of Three Million Dollars ($3,000,000), unless reduced by the Borrowers in accordance with the provisions of Subsection 2.10 hereof. "REVOLVING LOAN" means the revolving loan facility to be established by the Bank in favor of the Borrowers pursuant to Subsection 2.1 hereof. "REVOLVING NOTE" means the promissory note to be executed by the Borrowers in order to evidence all Advances made under the Revolving Loan pursuant to Subsection 2.4 hereof, substantially in the form of Exhibit "A" attached hereto (with appropriate insertions), as the same may be amended, modified, supplemented, renewed or extended from time to time. "SEC" means the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of its functions. "STORE" means any restaurant or restaurant location which is owned, leased and/or operated by either of the Borrowers. "SUBSIDIARY" means any Person in which either of the Borrowers owns or controls, directly or indirectly, more than fifty percent (50%) of the outstanding equity interest. "TANGIBLE NET WORTH" means the consolidated net worth of the Borrowers after subtracting therefrom goodwill, franchises, licenses, patents, trademarks, trade names, copyrights, service marks, brand names, and all other items of intangible Property. 5 6 1.3 Accounting Terms. Accounting and financial terms used herein and not otherwise defined with respect to the Borrowers' financial statements and consolidated financial position shall have the meanings ascribed thereto pursuant to GAAP. 1.4 Interpretation. All terms defined herein in the singular shall include the plural, as the context requires, and vice-versa. 1.5 References to Borrowers. Unless the context otherwise requires, all references herein to the "Borrowers" shall mean "the Borrowers, jointly, severally and individually," whether or not specifically so stated. 2. LENDING AGREEMENT. Subject to the terms and conditions of this Agreement and the Loan Documents, and in reliance upon the representations and warranties contained herein and therein: 2.1 Revolving Loan. The Bank agrees, at the Closing, to establish a revolving loan facility, to be designated as the "Revolving Loan," in an aggregate principal amount equal to the Revolving Commitment. The Revolving Loan may be drawn upon by the Borrowers from time to time, in whole or in part, on or before August 31, 1998, by requesting Advances in accordance with the provisions of Subsection 2.3 hereof; provided, however, that the aggregate principal amount of all Advances at any one time outstanding under the Revolving Loan shall not exceed the Revolving Commitment as of such date. The Revolving Loan shall be a revolving facility, and the prepayment of outstanding Advances shall restore the amount available for reborrowing. 2.2 Use of Proceeds. Advances under the Revolving Loan shall be used by the Borrowers solely for the purposes of (i) refinancing the Borrowers' existing revolving line of credit at the Bank, (ii) refinancing and paying off the Borrowers' existing revolving line of credit at First Enterprise Bank in the approximate principal amount of $300,000, (iii) providing working capital, and/or (iv) financing the Borrowers' acquisition and expansion of new and existing Stores and other Capital Expenditures. 2.3 Borrowing Procedures. The Borrowers shall make each request for an Advance by delivering to the Bank a properly completed and executed Disbursement Request no later than 1:00 p.m., Oklahoma City time, on the requested date of disbursement; provided, however, that the Borrowers make request an Advance by telephone if such request is confirmed in writing by delivering to the Bank a properly completed and executed Disbursement Request within three (3) Business Days after the date of the telephonic request. Not later than 3:00 p.m., Oklahoma City time, on the date on which any Advance is requested to be made, the Bank shall credit the amount of the requested Advance to an account maintained by Eateries with the Bank. Notwithstanding any provision of this Agreement, the Bank shall not be required to make any Advance hereunder if any of the conditions precedent in Section 4 hereof has not been satisfied. 6 7 2.4 Revolving Note. The Advances from time to time outstanding under the Revolving Loan shall be evidenced by the Revolving Note, which shall be made, executed and delivered by the Borrowers at the Closing. Notwithstanding the principal amount stated on the face of the Revolving Note, the actual principal amount due from the Borrowers on account thereof shall be the sum of all Advances made by the Bank, less all principal payments actually received by the Bank in collected funds. All Advances made against the Revolving Note shall be recorded by the Bank in its books and records, and the unpaid principal balance so recorded shall be presumptive evidence of the principal amounts owing thereon. 2.5 Interest. 2.5.1 Options. The unpaid principal amount of all Advances from time to time outstanding under the Revolving Note shall bear interest at a rate determined on a monthly basis by reference to the Prime Rate or the LIBOR Rate, as selected by the Borrowers pursuant to a Rate Election made in accordance with the provisions of Subsection 2.5.3 hereof, as follows: (a) If for any calendar month the Borrowers have selected the Prime Rate option, the unpaid principal balance of all Advances outstanding during such month shall bear interest at a fluctuating rate equal to the Prime Rate, adjusted as of the date of each change therein. (b) If for any calendar month the Borrowers have selected the LIBOR Rate option, the unpaid principal balance of all Advances outstanding during such month shall bear interest at a fixed rate equal to the applicable LIBOR Rate, plus two and three-quarters percent (2.75%). 2.5.2 Post-Default Interest. Upon the occurrence of any Event of Default and until cured to the satisfaction of the Bank, the unpaid principal amount of all Advances outstanding under the Revolving Note shall bear interest at a fluctuating rate equal to the Prime Rate, adjusted as of the date of each change therein, plus two percent (2%). 2.5.3 Rate Election. On or before the first Business Day of each calendar month, the Borrowers shall deliver to the Bank a notice ("Rate Election") stating whether the Borrowers elect that interest on the Revolving Note for such month be determined by reference to the Prime Rate or the LIBOR Rate. Each Rate Election so delivered to the Bank shall be irrevocable. In the event the Borrowers fail to deliver a Rate Election to the Bank on a timely basis, interest on the Revolving Note for that month shall bear interest at a rate determined by reference to the Prime Rate. 2.5.4 Payment. Interest shall be due and payable monthly in arrears on the last day of each calendar month, commencing September 30, 1995, and at the maturity of the Revolving Note (whether at the stated maturity, upon acceleration or otherwise). 7 8 2.5.5 Computation of Interest. Interest on the Advances outstanding under the Revolving Note shall be computed on the basis of a year consisting of 360 days and for the actual number of days elapsed. 2.6 Fees. 2.6.1 Commitment Fee. At the Closing, the Borrowers shall pay to the Bank a nonrefundable "Commitment Fee" in the amount of $10,000. 2.6.2 Non-Use Fee. The Borrowers shall pay to the Bank a nonrefundable "Non-Use Fee" of one-half of one percent (1/2 of 1%) per annum on the daily average of the unborrowed amount of the Revolving Commitment. The Non-Use Fee shall be computed on the basis of a year consisting of 360 days and for the actual number of days elapsed. The Non-Use Fee shall be payable in arrears on the first Business Day of each January, April, July and October during the term of this Agreement, commencing October 1, 1996, and at the maturity of the Revolving Note (whether at the stated maturity, upon acceleration or otherwise). 2.7 Principal Payments. 2.7.1 Maturity. The entire outstanding principal balance of the Revolving Note, together with all unpaid interest accrued thereon, shall be due and payable in full on August 31, 1998. 2.7.2 Clean-Down Periods. During the period commencing November 30 of each year and ending on January 31 of the following year, the Borrowers will designate a period of thirty (30) consecutive calendar days as a "Clean-Down Period." During each Clean-Down Period: (a) the aggregate outstanding Advances shall not exceed the applicable Clean-Down Amount; and (b) the Borrowers shall not request, and the Bank shall not be obligated to make, any new Advances if the making of such Advances would cause the aggregate outstanding Advances to exceed the applicable Clean-Down Amount. 2.8 Optional Prepayments. The Borrowers may, at any time and from time to time, prepay the outstanding principal amount of the Revolving Note, in whole or in part, without premium or penalty. 2.9 Making of Payments. All payments, including prepayments, of principal of, or interest on, the Revolving Note shall be made to the Bank at its principal office in Oklahoma City, Oklahoma, on or before 2:00 p.m., Oklahoma City time, on the date due, in immediately available funds. Whenever a payment is due on a day other than a Business Day, the due date shall be extended to the next succeeding Business Day and interest (if any) shall accrue during such extension. 8 9 2.10 Reduction or Termination of Revolving Loan. The Borrowers may, from time to time, upon written notice received by the Bank, permanently reduce the amount of the Revolving Commitment, but only upon repayment of the amount, if any, by which the unpaid principal balance of the Revolving Note exceeds the then reduced amount of the Revolving Commitment. Any such reduction shall be in an amount of at least $100,000. The Borrowers may at any time on like notice terminate the Revolving Commitment in full by paying the Revolving Note in full. 2.11 Renewal and Extension. In the event the Revolving Loan is renewed and extended at maturity, the terms and provisions of this Agreement shall continue in full force and effect with respect to the Revolving Loan, except as may otherwise be agreed in writing by the Borrowers and the Bank. Notwithstanding the foregoing, nothing contained in this Agreement shall be construed as obligating the Bank to agree or consent to any such renewal and extension, and the Borrowers acknowledge that the Bank has not made or given any assurances regarding renewal and extension of the Revolving Loan. 2.12 Maximum Lawful Interest Rate. It is not the intention of the Bank or the Borrowers to violate the laws of any applicable jurisdiction relating to usury or other restrictions on the maximum lawful interest rate. The Loan Documents and all other agreements between the Borrowers and the Bank, whether now existing or hereafter arising and whether written or oral, are hereby limited so that in no event shall the interest paid or agreed to be paid to the Bank for the use, forbearance or detention of money loaned, or for the payment or performance of any covenant or obligation contained herein or in any other Loan Document, exceed the maximum amount permissible under applicable law. If from any circumstances whatsoever fulfillment of any provision hereof or of any other Loan Document, at the time the performance of such provision shall be due, shall involve transcending the limit of validity prescribed by law, then, ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity. If from any such circumstances the Bank shall ever receive anything of value deemed interest under applicable law which would exceed interest at the highest lawful rate, such excessive interest shall be applied to the reduction of the principal amount owing hereunder, and not to the payment of interest, or if such excessive interest exceeds any unpaid balance of principal, such excess shall be refunded to the Borrowers. All sums paid or agreed to be paid to the Bank for the use, forbearance or detention of monies shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of the Obligations until payment in full so that the rate of interest on account of such Obligations is uniform throughout the term thereof. This Subsection 2.12 shall control every other provision of the Loan Documents and all other agreements between the Bank and the Borrowers contemplated thereby. 2.12 Appointment of Agent. PGI hereby designates and appoints Eateries as its sole and exclusive agent for the purposes of requesting and receiving Advances, submitting reports and certificates hereunder and making payments or prepayments in accordance herewith. 9 10 3. NEGATIVE PLEDGE. To secure the Obligations, each of the Borrowers agree that, until the Obligations have been paid and satisfied in full and the Revolving Commitment has been terminated: 3.1 Liens. Except for Permitted Liens, neither of the Borrowers will create, grant, assume or suffer to exist any Lien on any of its Properties. 3.2 Sale of Properties. Neither of the Borrowers will sell, transfer, convey or otherwise dispose of any of its Properties, whether pursuant to a single transaction or a series of transactions, except in the ordinary course of business. 4. CONDITIONS OF LENDING 4.1 Closing. The Closing shall take place at the offices of the Bank in Oklahoma City on August 31, 1995, at 10:00 a.m., or at such other place, date and/or time as the parties shall agree in writing. 4.2 Conditions to Initial Funding. The obligation of the Bank to enter into and perform under this Agreement and to make Advances under the Revolving Loan is subject to the Borrower's satisfaction of the following conditions precedent at or as of the Closing: (a) Loan Documents. This Agreement and the Revolving Note shall have been duly and validly authorized, executed and delivered to the Bank, all in form and substance satisfactory to the Bank. (b) Corporate Documents. The Bank shall have received the following with respect to each of the Borrowers: (i) a true and correct copy of its Articles or Certificate of Incorporation, as amended, certified by the Oklahoma Secretary of State; (ii) a true and correct copy of its Bylaws, as amended, certified by its duly elected and acting corporate secretary; (iii) a good standing certificate issued by the Oklahoma Secretary of State as to its due incorporation and good standing under the laws of the State of Oklahoma; and (iv) a good standing certificate issued by the Secretary of State or equivalent public official of each other state or jurisdiction in which it owns any Stores or conducts business. (c) Resolutions. The Bank shall have received a true and correct copy of the resolutions adopted by the Board of Directors of each of the Borrowers duly authorizing the borrowings contemplated hereunder and such Borrower's execution, delivery and performance of the Loan Documents. (d) Incumbency Certificates. The Bank shall have received certificates executed by the duly elected and acting corporate secretary of each of the Borrowers stating the names and titles and containing specimen signatures of the officers authorized to execute and deliver the Loan Documents on behalf of such Borrower. 10 11 (e) Lien Searches. The Bank shall have received certified responses to UCC lien search requests reflecting that there are no effective UCC financing statements on file in any filing office in the State of Oklahoma or any other states or jurisdictions in which the Borrowers own any Stores naming either of the Borrowers as debtor and covering any Properties of the Borrowers, other than financing statements relating to Permitted Liens. (f) Insurance Policies. The Bank shall have received copies of such insurance policies, or binders or certificates of insurance, in form and substance satisfactory to the Bank, evidencing that the Borrowers have obtained and are maintaining the minimum insurance coverages required by this Agreement. (g) Payoff Letter. The Bank shall have received a satisfactory payoff letter from First Enterprise Bank (i) stating the amount necessary to pay off the entire principal balance of and accrued interest on the Borrowers' existing line of credit at such bank, (ii) setting forth payment instructions for remitting the payoff amount, and (iii) stating that, upon its receipt of the payoff amount, it will cancel and terminate all outstanding loan agreements, promissory notes and other loan documents previously delivered to it by the Borrowers, and will release and terminate any and all Liens held by it on any Properties of the Borrowers. (h) Other Matters. The Borrowers shall have provided the Bank with such reports, information, financial statements, and other documents as the Bank has reasonably requested to evidence the Borrowers' compliance with the terms and conditions of this Agreement. (h) Legal Matters. All legal matters incident to the Loan Documents and the Revolving Loan shall be satisfactory to the Bank and its counsel. 4.3 Conditions to Advances Under Revolving Loan. The obligation of the Bank to make any Advance under the Revolving Loan subsequent to the Closing is subject to the Borrower's satisfaction of the following additional conditions precedent: (a) Disbursement Request. The Bank shall have received a proper request for such Advance in accordance with the provisions of Subsection 2.3 hereof. (b) Representations and Warranties. The representations and warranties set forth herein and in the other Loan Documents shall be true and accurate (except to the extent any representations or warranties as to the financial condition of the Borrowers relate solely to an earlier specified date). (c) No Defaults. There shall not have occurred and be continuing any Default or Event of Default. 11 12 (d) No Violation. The making of such Advance shall not cause the Bank to be in violation of any statute or regulation or any order or decree of any Governmental Authority. 5. REPRESENTATIONS AND WARRANTIES. In addition to the other representations and warranties made herein, each of the Borrowers represents and warrants to the Bank that the following statements are true and correct and will be true and correct at all times until the Obligations is paid and satisfied in full: 5.1 Existence. Each of the Borrowers is a corporation, duly organized, validly existing and in good standing under the laws of the State of Oklahoma and is duly qualified to conduct business and in good standing under the laws of all other states and jurisdictions in which it owns any Stores or conducts business. Each of the Borrowers is duly authorized, qualified and licensed under all applicable laws, regulations, ordinances and orders of Governmental Authorities to carry on its business as currently conducted and as contemplated to be conducted. 5.2 Validity and Binding Nature. The Loan Documents constitute (or upon execution and delivery will constitute) valid and legally binding obligations of each of the Borrowers, enforceable in accordance with their respective terms (subject to any applicable bankruptcy, insolvency and similar laws affecting the enforcement of creditors' rights generally and subject to general principles of equity). 5.3 Conflicting Agreements and Restrictions. Neither of the Borrowers is a party to any contract or agreement or subject to any other restriction which has or is likely to have a Material Adverse Effect. Neither the execution and delivery by each of the Borrowers of the Loan Documents to which it is a party, nor fulfillment or compliance with the terms and provisions thereof, will (i) conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of any agreement, instrument, undertaking, judgment, decree, order, writ, injunction, statute, law, rule or regulation to which it is subject or by which its Properties are bound, (ii) result in the creation or imposition of any Lien on any Property now or hereafter owned by it pursuant to the provisions of any mortgage, indenture, security agreement, contract, undertaking or other agreement, or (iii) require any authorization, consent, license, approval or authorization of or other action by, or notice or declaration to, or registration with, any Governmental Authority, or, to the extent that any such consent or other action may be required, it has been validly procured or duly taken. 5.4 Actions and Proceedings. There is no action or proceeding against or investigation of either of the Borrowers, pending or threatened, which questions the validity of any of the Loan Documents or which is likely to have a Material Adverse Effect. 5.5 Financial Condition. The audited consolidated financial statements of Eateries for the fiscal year ended December 31, 1994, and the unaudited financial statements of Eateries for the six months ended June 30, 1995, copies of which have been furnished to the Bank, are correct 12 13 and complete and fairly present the consolidated financial position of the Borrowers as of the dates thereof. Such financial statements were prepared in conformity with GAAP, and there has occurred no material adverse change in the consolidated financial position of the Borrowers from the effective dates of such financial statements to the date hereof. Neither of the Borrowers has any contingent obligations, unusual or long-term commitments, unrealized or anticipated losses from any unfavorable commitment, or liabilities for taxes not reflected in such financial statements or in the notes thereto which are individually or in the aggregate substantial in relation to the consolidated financial position of the Borrowers. 5.6 Ownership of Properties; Liens. Each of the Borrowers has good and marketable title to, or valid leasehold interests in, all Properties owned, leased or used by it in connection with the operation of its business, and none of such Properties is subject to any Lien of any kind other than Permitted Liens. 5.7 No Subsidiaries. PGI is a wholly-owned Subsidiary of Eateries. Except for Eateries' ownership of the stock of PGI, neither of the Borrowers has any Subsidiaries (other than limited purpose Subsidiaries which are not operating companies and which individually do not have total assets in excess of $20,000), owns any stock in any other corporation, or is a partner or joint venturer in or equity owner of any partnership, joint venture or other business association. 5.8 Permits. Each of the Borrowers has all Permits and has made all governmental and regulatory filings, registrations and notifications (i) which are presently necessary for it to carry on its business as now being conducted or as contemplated to be conducted, (ii) which are presently necessary for it to own, lease and operate its Properties as now owned, leased and operated, or (iii) which if not obtained would have a Material Adverse Effect. All such Permits are valid and subsisting, and neither of the Borrowers is in material violation of the terms of any such Permit. 5.9 No Defaults. Neither of the Borrowers is in default of or in breach under any material contract, agreement or instrument to which it is a party or by which it or any of its Properties may be bound. 5.10 ERISA. Neither of the Borrowers has incurred any "accumulated funding deficiency," as such term is defined in Section 302(a)(2) of ERISA, with respect to any employee pension or other benefit plan or trust maintained by or related to it, or with respect to which it is required to make contributions, and neither of the Borrowers has incurred any material liability to PBGC or otherwise under ERISA in connection with any such plan. No reportable event described in Sections 4042(a) or 4043(b) of ERISA has occurred. 5.11 No Violation of Applicable Law. Each of the Borrowers is in compliance in all material respects with all statutes, rules and regulations relating to its business and operations in all states and jurisdictions where it is currently doing business, including, without limitation, those 13 14 relating to health and safety standards, equal employment practices, labor relations and civil rights. 5.12 Environmental Laws. Each of the Borrowers is in compliance in all material respects with all applicable Environmental Laws in all jurisdictions in which its is currently doing business, and neither of the Borrowers is aware of any violation or claimed violation of any Environmental Law which has or is likely to have a Material Adverse Effect. 5.13 Taxes. Each of the Borrowers has filed all federal, state and local tax returns required by law to be filed, and has paid all taxes, assessments and similar charges shown to be due and payable on said returns, to the extent that such taxes and assessments have become due, except those being diligently contested by appropriate legal proceedings, in good faith, and against which adequate reserves have been established in conformity with GAAP. At the date of this Agreement, no extensions of time are in effect for assessments of deficiencies for federal income taxes of either of the Borrowers. 5.14 Compliance with Board Regulations. No part of the proceeds of any Advance will be used, and no part of any loan repaid or to be repaid with the proceeds of any Advance was or will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security or margin stock within the meaning of Regulations G or U of the Federal Reserve Board. The Properties of the Borrowers do not include any margin securities or margin stock, and neither of the Borrowers has any present intention of acquiring any margin securities or margin stock. 5.15 Investment Company Act; Public Utility Holding Company Act. Neither of the Borrowers is (i) an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or (ii) a "holding company", a "subsidiary company" thereof or an "affiliate" of a "holding company" or of such a "subsidiary company", each within the meaning of the Public Utility Holding Company Act of 1935, as amended. 5.16 Survival of Representations. All representations and warranties made herein shall survive the delivery of this Agreement and the Revolving Note and the making of any Advances, and any investigation at any time made by or on behalf of the Bank shall not diminish its right to rely thereon. All statements contained in any certificate or other instrument delivered by or on behalf of the Borrowers under or pursuant to this Agreement or any other Loan Documents or in connection with the transactions contemplated hereby or thereby shall constitute representations and warranties made hereunder. 6. AFFIRMATIVE COVENANTS. Until the Obligations have been paid in full and all of the Revolving Commitment has been terminated, the Borrowers agree to perform or cause to be performed the following, unless the Bank shall otherwise consent in writing: 6.1 Financial Statements and Other Reports. 14 15 (a) Annual Financial Statements and Reports. Within ninety (90) days after the end of each fiscal year, the Borrowers will furnish to the Bank a copy of the audited consolidated balance sheet of Eateries as of the end of such year and the audited consolidated statements of income, retained earnings, stockholders' equity and cash flows of Eateries for such fiscal year, each prepared in conformity with GAAP and setting forth in each case, in comparative form, corresponding figures from the preceding fiscal year, all in reasonable detail and satisfactory in scope to the Bank. Such financial statements shall be duly certified by independent certified public accountants of recognized standing selected by Eateries and acceptable to the Bank. (b) Quarterly Financial Statements. Within forty-five (45) days after the end of each fiscal quarter (excluding the last fiscal quarter) of each year, the Borrowers will furnish to the Bank a copy of the interim unaudited consolidated financial statements of Eateries, prepared in conformity with GAAP and presented in a manner consistent with the audited financial statements required under Subsection 6.1(a) hereof and certified (subject to normal year-end adjustments) as to fairness of presentation, compliance with GAAP and consistency by the chief financial officer of Eateries. (c) Compliance Certificates. Within forty-five (45) days after the end of each fiscal quarter (excluding the last fiscal quarter) of each year and within ninety (90) days after the end of the final fiscal quarter of each year, the Borrowers will furnish to the Bank a Compliance Certificate, signed by the chief financial officer of Eateries, (i) stating that such officer, after due inquiry, has no knowledge of the occurrence of a Default or an Event of Default, (ii) stating that, to the knowledge of such officer, after due inquiry, the Borrowers have complied with the terms of the Loan Documents in all material respects, or, in the event such officer has knowledge of a Default or an Event of Default or that any of the terms of the Loan Documents has not been complied with in all material respects, the nature of such Default or Event of Default or non-compliance will be specified in such certificate together with any steps being taken by the Borrowers to correct such Default or Event of Default or non-compliance, and (iii) containing a computation of, and showing compliance with, each of the financial covenants contained in Subsection 7.8. (d) SEC Reports. The Borrowers will furnish to the Bank (i) as soon as practicable and in any event within one hundred twenty (120) days after the end of each fiscal year, copies of the Annual Report of Eateries filed with the SEC on Form 10-K (including any financial statements incorporated by reference therein) for such fiscal year, (ii) as soon as practicable and in any event within forty-five (45) days after the end of each fiscal quarter (other than the last fiscal quarter), copies of the Quarterly Report of Eateries filed with the SEC on Form 10-Q for such fiscal quarter, and (iii) promptly upon their becoming available, copies of all other regular and periodic reports including, without limitation, all periodic reports filed on Form 8-K, proxy statements and other materials filed by Eateries with the SEC. 15 16 6.2 Other Reports and Notifications. (a) Other Financial Information. Within ten (10) days after each request, each of the Borrowers will furnish the Bank with such other information concerning its business, operations and financial condition as may be reasonably requested from time to time by the Bank. (b) Litigation. Each of the Borrowers will promptly notify the Bank, but in any event within seven (7) days, after it knows of any pending or threatened suit, action, investigation or administrative proceeding against or affecting such Borrower or any of its Properties, where the amount sued for or the value of the Property involved (notwithstanding any insurance coverage therefor) is $500,000 or more. (c) Notification of Liens. Each of the Borrowers will promptly notify the Bank, but in any event within seven (7) days, after it knows of the existence or asserted existence of any Lien on any of its Properties, excluding only Permitted Liens (other than statutory Liens of the type described in clause (ii)(B) of the definition of "Permitted Liens"). (d) Environmental Notices. Each of the Borrowers will promptly notify the Bank, but in any event within seven (7) days, after it knows of any violation or claimed violation of any Environmental Law which has or is likely to have a Material Adverse Effect. (e) Events With Respect to ERISA. Each of the Borrowers will promptly notify the Bank, but in any event within seven (7) days, after it knows that any reportable event described in Sections 4042(a) or 4043(b) of ERISA has occurred with respect to any employee pension or other benefit plan or trust maintained by or related to the Borrowers or that PBGC has instituted or intends to institute proceedings under ERISA to terminate any such plan. Such notice shall contain (i) a certificate of the chief executive officer or chief financial officer of Eateries setting forth details as to such event and the action which the Borrowers propose to take with respect thereto, and (ii) a copy of any notice delivered by PBGC evidencing its intent to institute such proceedings. Each of the Borrowers will also furnish to the Bank (or cause each plan administrator to furnish to the Bank) the annual report for each plan covered by ERISA maintained by or related to such Borrower as filed with the U.S. Secretary of Labor not later than ten (10) days after the receipt of a request from the Bank in writing for such report. (f) Other Notifications. Each of the Borrowers will promptly notify the Bank, but in any event within seven (7) days, after it knows that any of the following has occurred: (i) a Default or an Event of Default; (ii) any change in the assets, liabilities, financial condition, business, operations, affairs or circumstances of either of the Borrowers which might have a Material Adverse Effect; (iii) any material change in the 16 17 accounting practices and procedures of the Borrowers, including a change in fiscal year; and (iv) any change in the principal place of business of the Borrowers. 6.3 Books and Records. Each of the Borrowers will maintain adequate and accurate books and records of account in conformity with GAAP. The Bank will have the right to examine and copy such books and records at its expense, and to discuss the affairs, operations, finances and accounts with the Borrowers' authorized officers, during business hours and upon reasonable notice. 6.4 Inspection. Each of the Borrowers will permit any employee or authorized representative of the Bank to enter upon its premises and inspect any of its Properties during business hours and upon reasonable notice. 6.5 Taxes; Other Liens. Each of the Borrowers will pay when due all taxes, assessments, governmental charges or levies owing or payable by it, and will pay when due all claims for labor, materials, supplies, rent and other obligations which, if unpaid, might become a Lien against any of its Properties, except to the extent any of the foregoing are being diligently contested in good faith by appropriate legal proceedings and against which there are established adequate reserves in conformity with GAAP. 6.6 Existence. Each of the Borrowers will maintain its corporate existence and will be duly qualified or licensed to conduct business and in good standing under the laws of each state or jurisdiction in which it owns any Stores or conducts any business. 6.7 Licenses and Permits. Each of the Borrowers will maintain all Permits (i) which are necessary for it to carry on its business as now being conducted or as contemplated to be conducted, (ii) which are necessary for it to own and operate its Properties, or (iii) which, if not obtained, would have a Material Adverse Effect. 6.8 Maintenance of Properties. Each of the Borrowers will maintain all of its Stores and other Properties in good and workable condition, repair, and appearance, normal wear and tear excepted. 6.9 Compliance with Laws. Each of the Borrowers will comply in all material respects with all statutes, laws, rules or regulations to which it is subject or by which its Properties are bound or affected, including, without limitation, (i) Environmental Laws (ii) those pertaining to occupational health and safety standards, (iii) those pertaining to equal employment practices, labor relations and civil rights, and (iv) those pertaining to its business or operations, except to the extent that any of the foregoing are being diligently contested in good faith by appropriate legal proceedings and against which there are established adequate reserves in conformity with GAAP. 17 18 6.10 Further Assurances. Each of the Borrowers will upon request cure or cause to be cured any defects or omissions in the execution and delivery of, or the compliance with, the Loan Documents or the conditions described in Section 4 hereof. 6.11 Reimbursement of Expenses. The Borrowers will pay or reimburse the Bank, either at the Closing or within ten (10) days after the Bank presents a statement therefor, for (i) all reasonable and customary out-of-pocket expenses incurred by the Bank in connection with the negotiation and preparation of this Agreement and the Loan Documents and the consummation of the transactions herein contemplated, including, without limitation, filing fees, recording costs, examinations of and certifications as to public records, and attorneys' fees (not to exceed $5,000) and expenses, (ii) all reasonable and customary out-of-pocket expenses incurred by the Bank in connection with the administration of this Agreement and the Loan Documents, including, without limitation, attorneys' fees and expenses incurred in connection with any amendment, modification, interpretation, termination, waiver or consent with respect to this Agreement or the other Loan Documents, and (iii) upon the occurrence of any Event of Default, all amounts reasonably expended, advanced or incurred by the Bank (A) after notice to the Borrowers, to satisfy any obligation of the Borrowers under the Loan Documents, or (B) to collect upon the Revolving Note or any other obligations included in the Obligations, or (C) to enforce the rights of the Bank under the Loan Documents or to collect the Obligations, which amounts will include all court costs, attorneys' fees, fees of auditors and accountants, and investigation expenses reasonably incurred by the Bank in connection with any such matters. All of the foregoing charges and expenses shall be considered Obligations for purposes of this Agreement and if not paid when due shall thereafter bear interest at the Prime Rate, plus two percent (2%), until paid. 6.12 Insurance. Each of the Borrowers will at all times maintain in full force and effect, with insurance companies satisfactory to the Bank, insurance policies in amounts and against risks consistent with insurance coverage customarily or typically maintained by similar businesses which are similarly situated. Without limiting the foregoing, such insurance coverage: (i) will provide the Borrowers with comprehensive general liability insurance against loss or damage from hazards and risks to the person, rights and property of others in amounts not less than $1,000,000 per occurrence, and (ii) will provide that no adverse alteration or cancellation thereof shall be effective as against the Bank until thirty (30) days after written notice of such alteration or cancellation is given to the Bank. If requested, each of the Borrowers will furnish the Bank with copies of all insurance policies in effect and evidence of premium payment thereon. Neither of the Borrowers will commit or suffer to be committed any act whereby any insurance required hereunder will or may be suspended, impaired or defeated, nor suffer or permit its Properties to be used in a manner not permitted under any applicable insurance policy then in effect. Each of the Borrowers will notify the Bank at least fifteen (15) days prior to making any change in the insurance company or companies providing the insurance coverage required hereunder. 7. NEGATIVE COVENANTS. Until the Obligations have been paid in full and the Revolving Commitment has been terminated, neither of the Borrowers will perform or permit to be performed any of the following acts, unless the Bank shall otherwise consent in writing: 18 19 7.1 Mergers, Consolidations and Reorganization. Neither of the Borrowers will (i) merge or consolidate with any Person (or enter into any merger or consolidation agreement or plan), or permit any such merger or consolidation with it, (ii) adopt or effect any plan of reorganization, recapitalization, liquidation or dissolution, (iii) form or acquire any Subsidiaries (other than limited purpose Subsidiaries which are not operating companies and which individually do not have total assets in excess of $20,000), (iv) acquire any stock in any other corporation, (iv) become a partner or joint venturer in or equity owner of any partnership, joint venture or other business entity, or (vi) acquire all or substantially all of the assets or properties of any other Person. 7.2 Loans to and Transactions with Affiliates. 7.2.1 Loans. Neither of the Borrowers will make or suffer to exist any loan, advance or other extension of credit, directly or indirectly, to or for the benefit of any Affiliate, except for loans, advances and other extensions of credit made to employees of the Borrowers in the ordinary course of business which do not exceed $50,000 in the aggregate at any time outstanding. 7.2.2 Other Transactions. Neither of the Borrowers will enter into any other transaction with any Affiliate, including, without limitation, any purchase, sale or exchange of property or the rendering of any services, except in the ordinary course of and pursuant to the reasonable requirements of its business and upon fair and reasonable terms no less favorable to it than would exist in a comparable transaction with a Person other than an Affiliate. 7.3 Limitation on Contingent Debt. Neither of the Borrowers will, directly or indirectly, guarantee, co-sign, agree to purchase or repurchase or provide funds in respect, or otherwise become or remain liable with respect to Debt of any character of any other Persons, including any Affiliates, which exceeds $10,000 in the aggregate. 7.4 Changes in Nature of Business. Neither of the Borrowers will (i) discontinue its business or enter into any business or line of business which is not related to any business or line of business currently conducted by such Borrower, or (ii) own, lease or operate any Store under any name or concept other than the existing "Garfield's" and "Pepperoni Grill" names and concepts. 7.5 New Stores. The Borrowers will not open or acquire (i) more than ten (10) new Stores during the fiscal year ending December 31, 1995, (ii) more than fourteen (14) new Stores during the fiscal year ending December 31, 1996, or (iii) more than twenty (20) new Stores during the fiscal year ending December 31, 1997. 7.6 Capital Expenditures. The Borrowers will not incur aggregate Capital Expenditures in excess of (i) $4,200,000 during the fiscal year ending December 31, 1995, (ii) $6,400,000 19 20 during the fiscal year ending December 31, 1996, and (iii) $8,300,000 during the fiscal year ending December 31, 1997. For purposes of this Subsection 7.6, (i) the calculation of the Borrowers' Capital Expenditures for the fiscal year ending December 31, 1995, shall exclude the payments made by Eateries to acquire the assets now held by PGI, and (ii) the annual capitalized lease obligations of the Borrowers' incurred in connection with the proposed sale-leaseback of the Borrowers' point-of-sale equipment and related software shall be included in the calculation of the Borrowers' annual Capital Expenditures. 7.7 Sale-Leaseback Transactions. Except for the proposed sale-leaseback of the Borrowers' point-of-sale equipment and related software, neither of the Borrowers will make or permit the occurrence of any sale, transfer or disposition of any of its Properties followed by such Borrower's leasing or rental of such Property, or any portion thereof, as lessee. 7.8 Financial Covenants. 7.8.1 Tangible Net Worth. The Borrowers will not permit their Tangible Net Worth at any time to be less (i) $8,000,000 for the period commencing on the Closing and ending April 30, 1996, (ii) $8,750,000 for the period commencing on May 1, 1996, and ending April 30, 1997, or (iii) $9,500,000 for the period commencing on May 1, 1997, and ending August 31, 1998. 7.8.2 Debt to Net Worth. The Borrowers will not permit the ratio of their consolidated Debt to their Tangible Net Worth to exceed 1.50 to 1 at any time. 7.8.3 Current Ratio. The Borrowers will not permit their current ratio (i.e., the ratio of its current assets to its current liabilities) to be less than (i) 0.60 to 1 at any time during the fiscal year ending December 31, 1995, (ii) 0.55 to 1 at any time during the fiscal year ending December 31, 1996, or (iii) 0.50 to 1 at any time thereafter. 7.8.4 Cash Flow Coverage Ratio. The Borrowers will not permit their "Cash Flow Coverage Ratio," determined as of the last day of any fiscal quarter, to be less than 1.35 to 1. For purposes of this Subsection 7.8.4, the Borrowers' "Cash Flow Coverage Ratio" as of any determination date means the fraction whose numerator is equal to the following: (i) consolidated net income of the Borrowers for the four preceding fiscal quarters (excluding extraordinary gains); PLUS (ii) depreciation and amortization expense and other noncash expenses of the Borrowers for the four preceding fiscal quarters; and whose denominator is equal to the following: 20 21 (i) the current maturities of the Borrowers' long-term Debt (which shall exclude in any event the Revolving Loan) during the four fiscal quarters immediately following such determination date; PLUS (ii) the total amount of cash dividends paid by Eateries during the four fiscal quarters immediately preceding such determination date; PLUS (iii) the sum of $600,000 (which amount represents one-fifth of the Revolving Commitment). 8. EVENTS OF DEFAULT. The occurrence of any of the following events or existence of any of the following circumstances, unless waived in writing by the Bank, shall constitute an "Event of Default": 8.1 Nonpayment of Revolving Note. If the Borrowers shall fail to pay any principal of or interest on the Revolving Note as and when such payment shall become due and payable (whether at the stated maturity, upon a mandatory prepayment, or otherwise); or 8.2 Other Nonpayment. If the Borrowers shall fail to pay any other amount due and payable to the Bank, under the terms of the Loan Documents or otherwise, within five (5) days after the date such payment shall become due and payable; or 8.3 Representations and Warranties. If any representation, statement, certificate, schedule or report made or furnished to the Bank by or on behalf of either of the Borrowers shall prove to have been false or erroneous in any material respect as of the date on which such warranty or representation was made, or if any warranty shall cease to be complied with in any material respect; or 8.4 Breach of Covenants. If the Borrowers shall fail to perform or observe any of the covenants or agreements contained in Subsection 6.1, 6.2, 6.3, 6.5, 6.6, 6.7, 6.8, 6.9, 6.11, 6.12, 7.8.1, 7.8.2 or 7.8.3 of this Agreement and continuance thereof for thirty (30) days after written notice thereof from the Bank, or (ii) if the Borrowers shall fail to perform or observe any of the covenants or agreements contained in Subsections 3.1, 3.2, 6.4, 6.10, 7.1, 7.2, 7.3, 7.4, 7.5, 7.6, 7.7 or 7.8.4 of this Agreement; or 8.5 Other Breach of Covenants. If either of the Borrowers shall fail to perform or observe any covenants or agreements contained in any other Loan Documents and continuance thereof beyond the expiration of any applicable grace period expressly stated therein; or 8.6 Insolvency. If either of the Borrowers shall (i) apply for or consent to the appointment of a custodian, receiver, trustee or liquidator for itself or any of its Properties, (ii) admit in writing the inability to pay, or generally fail to pay, its debts as they become due, (iii) make a general assignment for the benefit of creditors, (iv) commence any proceeding relating to 21 22 the bankruptcy, reorganization, liquidation, receivership, conservatorship, insolvency, readjustment of debt, dissolution or liquidation, or if corporate action is taken for the purpose of effecting any of the foregoing, (v) suffer any such appointment or commencement of a proceeding as described in clause (i) or (iv) of this Subsection 8.6, which appointment or proceeding is not terminated or discharged within sixty (60) days, or (vi) become insolvent; or 8.7 Judgments. If either of the Borrowers shall enter into any binding settlement or settlements or have entered against them by any court a final judgment or judgments for amounts not covered by insurance for an aggregate amount in excess of $500,000; or 8.8 Default on Other Debt. If either of the Borrowers shall fail to pay any principal or interest on any Debt owing to any Person other than the Bank as and when the same shall become due and payable and such default shall continue beyond the expiration of any applicable grace period expressly provided, or if any default or event of default shall occur under the terms of any agreement or other document which would entitle the holder or holders thereof to accelerate the maturity thereof; or 8.9 Breach of Other Agreements. If either of the Borrowers shall be in breach of or default under any material agreement with any Person and such breach or default shall remain unremedied for a period of ten (10) days; or 8.10 Change in Management. If Vincent F. Orza, Jr., shall cease to serve as chief executive officer of Eateries, or if August A. Hehemann shall cease to serve as chief financial officer of Eateries; or 8.11 ERISA Non-Compliance. If any employee pension or other benefit plan or trust maintained by or related to the Borrowers shall incur any "accumulated funding deficiency," as such term is defined in Section 302(a)(2) of ERISA (whether or not waived by the Internal Revenue Service), or a reportable event, as such term is defined in Section 4043(b) of ERISA, shall occur with respect to any such plan or trust as a result of which the Borrowers could be obligated to make payments to PBGC aggregating in excess of five percent (5%) of the Borrowers' Tangible Net Worth, or in connection with the termination of any such plan or trust either of the Borrowers shall incur a liability to PBGC under Section 4062, 4063 or 4064 of ERISA; or 8.12 Unenforceability of Loan Documents. If any Loan Document or any provision thereof shall for any reason cease to be a valid, binding and enforceable obligation of either of the Borrowers, or if either of the Borrowers shall so state in writing; or 8.13 Material Adverse Change. If in the opinion of the Bank there shall occur any change in the condition (financial or otherwise) of either or both of the Borrowers which is likely to have a Material Adverse Effect and such change shall not be remedied or corrected within thirty (30) days after the Bank gives written notice thereof to the Borrowers. 22 23 9. REMEDIES 9.1 Acceleration of Obligations. If any Event of Default specified in Subsection 8.6 hereof shall occur, the obligations of the Bank hereunder (including the Revolving Commitment) shall automatically be terminated and the Revolving Note and all other Obligations shall become immediately due and payable, all without notice or demand. If any other Event of Default shall occur, the Bank may, at its option, without notice or demand, terminate its obligations hereunder (including the Revolving Commitment) and declare the Revolving Note and all other Obligations to be immediately due and payable, whereupon the same shall become forthwith due and payable. 9.2 Remedies. Upon the occurrence and during the continuation of any Event of Default, the Bank shall be entitled to exercise all remedies available to it under the Loan Documents or otherwise under applicable law. 9.3 Cumulative Remedies. No failure on the part of the Bank to exercise, and no delay in exercising, any right or remedy under the Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise by the Bank of any right thereunder preclude any other or further right or exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not alternative. 9.4 Waiver of Default. The Bank may, by an instrument in writing, waive any Default or Event of Default and any of the consequences of such Default or Event of Default, but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any consequence of such subsequent or other Default or Event of Default. 9.5 Deposits; Setoff. Regardless of the adequacy of any collateral security held by the Bank, any deposits or other sums credited by or due from the Bank to either of the Borrowers may at any time after the occurrence and during the continuation of any Event of Default be set off against the Obligations. The rights granted by this Subsection 9.5 shall be in addition to the rights of the Bank under any statutory banker's lien or the common law right of set off. This Subsection 9.5 shall not apply to any monies of which the applicable Borrower is not the beneficial owner, regardless of the name in which the money is deposited, nor shall this Subsection 9.5 apply to any monies which the applicable Borrower is contractually obligated to spend in whole or in part for the account of others, provided that such Borrower shall have established special accounts or given the Bank written notice that particular funds are beneficially owned by others, are dedicated for particular expenditures, or are subject to such Borrower's contractual obligation to spend for others. If the applicable Borrower fails to establish such special accounts and fails to give such notice, the Bank may assume that funds on deposit to the account of such Borrower belong solely to the named depositor and are subject to this Subsection 9.5. 9.6 Application of Payments. During the continuation of any Event of Default, all payments received by the Bank in respect of the Obligations may be applied by the Bank to any 23 24 liabilities, obligations or indebtedness included in the Obligations selected by the Bank in its sole and exclusive discretion. 10. GENERAL PROVISIONS. It is further agreed as follows: 10.1 Participating Lender. The Borrowers understand that, although the Revolving Note and other Loan Documents name the Bank as the holder thereof, the Bank may from time to time sell one or more participation interests in the Revolving Loan to one or more financial institutions which are Affiliates of the Bank or, upon the prior written consent of the Borrowers (such consent not to be unreasonably withheld), to one or more other financial institutions. Each of the Borrowers agree that, subject to the terms of the agreements of participation, each participating lender will be entitled to rely on the terms of this Agreement and the other Loan Documents as fully as if such participating lender had been named as the holder of the Revolving Note and other Loan Documents. 10.2 Hold Harmless. Except for a successful claim against the Bank by the Borrowers, each of the Borrowers will indemnify and hold the Bank and each participant in the Revolving Note harmless from all liability, loss, damages or expense, including reasonable attorney's fees, that the Bank or any such participant may incur in good faith as a result of entering into the Loan Documents or establishing the Revolving Loan, or in compliance with or in the enforcement of the terms of the Loan Documents. 10.3 Notices. All notices, requests and demands required or authorized hereunder shall be served in person, delivered by certified mail, return receipt requested, or transmitted by telefacsimile, addressed as follows: If to either or both of the Borrowers: - Eateries, Inc. 3240 W. Britton Road Suite 202 Oklahoma City, Oklahoma 73120-2032 Attn: August A. Hehemann Fax: (405) 751-7348 If to the Bank: - Liberty Bank and Trust Company of Oklahoma City, National Association 100 N. Broadway Oklahoma City, Oklahoma 73102 Attn: Judy Felder, Vice President Fax: (405) 231-6761 or at such other address as any party hereto shall designate for such purpose in a written notice to the other party hereto. Notices served in person shall be effective and deemed given when 24 25 delivered, notices sent by certified mail shall be effective and deemed given three (3) Business Days after being deposited in the U.S. mail, postage prepaid, and notices transmitted by telefacsimile will be deemed given when sent, as indicated by the sender's written confirmation of transmission. 10.4 Construction; Applicable Law. This Agreement and all other Loan Documents have been delivered to and accepted by the Bank in the State of Oklahoma, are to be performed in the State of Oklahoma and shall be deemed contracts made under the laws of the State of Oklahoma, and all rights and obligations hereunder, including matters of construction, validity and performance, shall be governed by the laws of the State of Oklahoma. Nothing in this Agreement shall be construed to constitute the Bank as a joint venturer with the Borrowers or to constitute a partnership. The descriptive headings of the Sections and Subsections of this Agreement are for convenience only and shall not be used in the construction of the content of this Agreement. 10.5 Binding Effect. This Agreement and the other Loan Documents shall be binding on, and shall inure to the benefit of, the parties hereto and their respective successors and assigns, provided that without the prior, written consent of the Bank, neither of the Borrowers will assign or transfer any of its interest, rights or obligations arising out of or relating to the Loan Documents. 10.6 Exhibits and Schedules. Exhibits and Schedules attached to this Agreement are incorporated herein for all purposes and shall be considered a part of this Agreement. 10.7 Entire Agreement; Conflicting Provisions. This Agreement constitutes the entire agreement of the parties hereto with respect to the Revolving Loan, and all matters arising out of or related thereto. In the event of any direct conflict between or among the provisions of this Agreement and the provisions of any other Loan Documents, the provisions of this Agreement shall control. 10.8 Waivers. No act, delay, omission or course of dealing between or among the parties hereto will constitute a waiver of their respective rights or remedies under this 25 26 Agreement or the other Loan Documents. No waiver, change, modification or discharge of any of the rights and duties of the parties hereto will be effective unless contained in a written instrument signed by the party sought to be bound. 10.9 Jurisdiction and Venue. All actions or proceedings with respect to this Agreement or any of the other Loan Documents may be instituted in any state or federal court sitting in Oklahoma City, Oklahoma, as the Bank may elect, and by execution and delivery of this Agreement, each of the Borrowers irrevocably and unconditionally (i) submits to the non-exclusive jurisdiction (both subject matter and person) of each such court, and (ii) waives (A) any objection that such Borrower may now or hereafter have to the laying of venue in any of such courts, and (B) any claim that any action or proceeding brought in any such court has been brought in an inconvenient forum. 10.10 Counterpart Execution. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument. This Agreement shall be binding only when a counterpart hereof has been executed by an authorized officer or representative of the Bank at its principal office in Oklahoma City, Oklahoma. IN WITNESS WHEREOF, the Borrowers and the Bank have caused this Agreement to be duly executed in multiple counterparts, each of which shall be considered an original, effective the date and year first above written. EATERIES, INC., an Oklahoma corporation By: ----------------------------------- Vincent F. Orza, Jr., President PEPPERONI GRILL, INC., an Oklahoma corporation By: ----------------------------------- Vincent F. Orza, Jr., President LIBERTY BANK AND TRUST COMPANY OF OKLAHOMA CITY, NATIONAL ASSOCIATION 26 27 LIST OF EXHIBITS AND SCHEDULES Exhibit A - Form of Revolving Note Exhibit B - Form of Disbursement Request Exhibit C - Form of Compliance Certificate Schedule I - Schedule of Existing Liens 27 28 EXHIBIT A-1 PROMISSORY NOTE (Revolving Note) Due: August 31, 1999 $5,000,000.00 Oklahoma City, Oklahoma July __, 1996 FOR VALUE RECEIVED, the undersigned, Eateries, Inc., an Oklahoma corporation, and Pepperoni Grill, Inc., an Oklahoma corporation ( collectively, the "Makers"), promise to pay to the order of Liberty Bank and Trust Company of Oklahoma City, National Association ("Bank"), at its principal office in Oklahoma City, Oklahoma, or at such other place as may be designated in writing by the holder of this Note, the principal sum of Five Million and No/100 Dollars ($5,000,000.00) or so much thereof as shall be disbursed and remain outstanding hereunder, together with interest thereon at the rate or rates specified in Subsection 2.5 of the Loan Agreement (hereinafter defined). This Note is executed and delivered by Makers pursuant to, and is entitled to the benefits of, that certain Loan Agreement dated August 31, 1995, as amended (the "Loan Agreement"), between Makers and Bank. Reference is hereby made to the Loan Agreement for terms and provisions regarding the collateral security for payment of this Note, the prepayment rights and obligations of Makers, the right of the holder of this Note to accelerate the maturity hereof on the occurrence or existence of any Event of Default specified therein, and for all other pertinent purposes. This Note is made, executed and delivered in renewal, extension, increase and replacement of (but not in payment or satisfaction of) that certain Promissory Note of Makers dated August 31, 1995, payable to the order of Bank in the principal amount of $3,000,000. Principal and interest hereunder shall be due and payable at such times and in such amounts as are specified in the Loan Agreement; provided that the entire unpaid principal balance hereof and all accrued interest thereon shall be due and payable on August 31, 1999. All payments, including prepayments, of principal of, or interest hereunder, shall be made to Bank at its principal office in Oklahoma City, Oklahoma, on or before 2:00 p.m., Oklahoma City time, on the date due, in immediately available funds. Whenever a payment is due on a day other than a business day, the due date shall be extended to the next succeeding business day and interest (if any) shall accrue during such extension. While any default exists hereunder, all sums herein promised to be paid shall bear interest at the rate equal to the Default Rate set forth in the Loan Agreement, accrued from the date of 29 default to the date on which such default is cured to the satisfaction of the holder hereof. All past due sums will be paid at the time of and as a condition precedent to the curing of any default hereunder. During the existence of any such default, the holder of this Note may apply payments received on any amount due hereunder or under the terms of any instrument now or hereafter evidencing or securing any said indebtedness as said holder may determine. It is the intent of Bank and Makers to conform strictly to all applicable usury laws, and any interest on the principal balance hereof in excess of that allowed by said usury laws shall be subject to reduction to the maximum amount of interest allowed under said laws. If any interest in excess of the maximum amount of interest allowable by said usury laws is inadvertently paid to the holder hereof, at any time, any such excess interest shall be refunded by the holder to the party or parties entitled to the same after receiving notice of payment of such excess interest. All advances and payments hereunder will be recorded by Bank in its books and records, and the unpaid principal balance so recorded shall be presumptive evidence of the amount owing on this Note. If, and as often as, this Note is placed in the hands of an attorney for collection or to defend or enforce any of the holder's right hereunder, Makers will pay to the holder hereof its reasonable attorneys' fees, together with all court costs and other expenses paid by such holder. Makers, endorsers, sureties, guarantors and all other parties who may become liable for all or any part of this Note severally waive demand, presentment, notice of dishonor, protest, notice of protest, and notice of non-payment, and consent to: (a) any and all extensions of time for any term or terms regarding any payment due under this Note, including partial payments or renewals before or after maturity; (b) any substitutions or release of collateral; and (c) the addition, substitution or release of any party liable for payment of this Note. No waiver of any payment or other right under this Note or any related agreement shall operate as a waiver of any other payment or right. All of the holder's rights hereunder are cumulative and not alternative. This Note shall inure to the benefit of the successors and assigns of Bank or other holder and shall be binding upon the successors and assigns of Makers. THIS NOTE HAS BEEN DELIVERED TO AND ACCEPTED BY THE BANK IN THE STATE OF OKLAHOMA, IS TO BE PERFORMED IN THE STATE OF OKLAHOMA AND SHALL BE DEEMED A CONTRACT MADE UNDER THE LAWS OF THE STATE OF OKLAHOMA, AND ALL RIGHTS AND INDEBTEDNESS HEREUNDER, INCLUDING MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, SHALL BE GOVERNED BY THE LAWS OF THE STATE OF OKLAHOMA. 30 IN WITNESS WHEREOF, Makers have executed this instrument as of the day and year first above written. EATERIES, INC., an Oklahoma corporation By: ------------------------------------- Vincent F. Orza, Jr. President PEPPERONI GRILL, INC., an Oklahoma corporation By: ------------------------------------- Vincent F. Orza, Jr., President 31 DISBURSEMENT REQUEST To: LIBERTY BANK AND TRUST COMPANY OF OKLAHOMA CITY, NATIONAL ASSOCIATION (the "Bank") Attn: Judy Barrett Felder, Vice President Reference is made to the Loan Agreement dated August 31, 1995 (herein, together with all amendments and supplements thereto, called the "Loan Agreement"), by and among Eateries, Inc., and Pepperoni Grill, Inc. (the "Borrowers"), and the Bank. Capitalized terms used but not otherwise defined herein have the meanings attributed to them in the Loan Agreement. The Borrowers hereby request an Advance under the Loan Agreement as follows: o Check as applicable: __ This Disbursement Request is an original request for an Advance under the Revolving Loan. __ This Disbursement Request confirms an oral request for an Advance under the Revolving Loan given to the Bank on ________, 199__. [Must be no more than three (3) Business Days earlier than the date of this Disbursement Request.] o The principal amount of the Advance will be $_______. o The requested date of disbursement will be _____, 199__. [Must be a Business Day.] o The proceeds of the Advance will be used (check as applicable): __ For working capital purposes; or __ To provide financing for the following acquisition or expansion of a new or existing Stores or for other Capital Expenditures (describe): 32 Very truly yours, EATERIES, INC., and PEPPERONI GRILL, INC. By: ---------------------------------- Title: ------------------------------- 33 COMPLIANCE CERTIFICATE To: LIBERTY BANK AND TRUST COMPANY OF OKLAHOMA CITY, NATIONAL ASSOCIATION (the "Bank") Attn: Judy Barrett Felder, Vice President Reference is made to the Loan Agreement dated August 31, 1995 (herein, together with all amendments and supplements thereto, called the "Loan Agreement"), by and among Eateries, Inc., and Pepperoni Grill, Inc. (the "Borrowers"), and the Bank. Capitalized terms used but not otherwise defined herein have the meanings attributed to them in the Loan Agreement. The undersigned hereby certifies, represents and warrants to you as follows: 1. The undersigned is the chief financial officer of Eateries, Inc. and in such capacity is authorized to execute and deliver this Compliance certificate on behalf of the Borrowers. 2. The undersigned has reviewed the activities of the Borrowers with a view to determining whether the Borrowers have fulfilled their respective obligations under the Loan Agreement and all other Loan Documents. 3. Except as set forth on Schedule I attached hereto, to the best knowledge of the undersigned: (a) the Borrowers are compliance in all material respects with all of the terms and provisions of the Loan Agreement and the other Loan Documents; (b) all representations and warranties made by the Borrowers in the Loan Agreement and the other Loan Documents are true and correct in all material respects as of the date hereof (other than representations and warranties which refer solely to an earlier specified date); and (c) no Default or Event of Default has occurred and is continuing under the Loan Agreement or any of the other Loan Documents. 4. As of __________, the Borrowers were in compliance with the financial covenants set forth in Section 7.8 of the Loan Agreement, as demonstrated by the computations set forth in Schedule II attached hereto. IN WITNESS WHEREOF, the undersigned has executed and delivered this Compliance Certificate this ___ day of ________, 19__. ------------------------------------- Name: August A. Hehemann Title: Chief Financial Officer 34 SCHEDULE I To Compliance Certificate Nature of Default or Event of Default or terms of Loan Documents that have not been complied with in all material respects: Steps being taken to correct such Default or Event of Default or noncompliance: 35 SCHEDULE II To Compliance Certificate Subsection 7.8.1 - Tangible Net Worth Consolidated net worth (per GAAP) $_________ MINUS: Intangible assets - _________ _________ Total consolidated Tangible Net Worth $_________ Minimum required under Subsection 7.8.1: Closing through April 30, 1996 $8,000,000 May 1, 1996 through April 30, 1997 $8,750,000 May 1, 1997 through August 31, 1988 $9,500,000 Subsection 7.8.2 - Total Debt to Net Worth A. Total consolidated Debt $_________ B. Tangible Net Worth $_________ Ratio (A divided by B) ____:1.00 Maximum allowed under Subsection 7.8.2 1.50:1.00 Subsection 7.8.3 - Current Ratio A. Total Current Assets $_________ B. Total Current Liabilities $_________ Ration (A divided by B) Minimum allowed under Subsection 7.8.3 ____:1.00 During fiscal year ending December 31, 1995 0.60:1.00 During fiscal year ending December 31, 1996 0.55:1.00 After December 31, 1996 0.50:1.00 36 Subsection 7.8.4 - Cash Flow Coverage Ratio A. Total consolidated net income (less extraordinary gains) for prior four fiscal quarters $_________ PLUS: Consolidated depreciation and amortization expense and other noncash expenses for prior four fiscal quarters +_________ ========== Total $_________ B. Current maturities of long-term Debt during subsequent four fiscal quarters (excluding the Revolving Loan) $_________ PLUS: Total amount of cash dividends paid during four fiscal quarters immediately preceding +_________ PLUS: $600,000 +_________ ========== Total $_________ C. Cash Flow Coverage Ratio (A divided by B) ____:1.00 Minimum required under Subsection 7.8.4 1.35:1.00 EX-10.31 9 FIRST AMENDMENT TO LOAN AGREEMENT 1 EXHIBIT 10.31 FIRST AMENDMENT TO LOAN AGREEMENT THIS FIRST AMENDMENT TO LOAN AGREEMENT ("Amendment") is made and entered into effective as of July __, 1996 by and among EATERIES, INC., an Oklahoma corporation ("Eateries"), PEPPERONI GRILL, INC., an Oklahoma corporation ("PGI") (Eateries and PGI are hereinafter collectively referred to as the "Borrowers" and individually as a "Borrower"), and LIBERTY BANK AND TRUST COMPANY OF OKLAHOMA CITY, NATIONAL ASSOCIATION (hereinafter referred to as the "Bank"). RECITALS A. The Borrowers and the Bank entered into that certain Loan Agreement dated August 31, 1995 (the "Loan Agreement"), pursuant to which the Bank agreed, on the terms and conditions set forth therein, to establish a revolving loan facility in favor of the Borrowers in the principal amount not to exceed $3,000,000 (the "Loan"). B. The Borrowers have requested that the Bank increase the aggregate principal amount that may be drawn under the Loan from $3,000,000 to $5,000,000 and have also requested that the Bank renew and extend the Loan for a one year period until August 31, 1999. C. The Bank is willing to increase the aggregate principal amount that may be drawn under the Loan to $5,000,000 and is willing to renew and extend the Loan to August 31, 1999, on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby amend the Loan Agreement as follows: 1. DEFINITIONS. 1.1 Definitions Incorporated by Reference. Capitalized terms used herein and not otherwise defined have the respective meanings assigned to them in the Loan Agreement. 1.2 Definition Used Only in This Amendment. For purposes of this Amendment only, the following term has the meaning indicated below: "REPLACEMENT REVOLVING NOTE" shall mean the promissory note to be executed and delivered by the Borrowers pursuant to this Amendment, in substantially the form attached hereto as Exhibit "A-1." 1.3 Amendments to Definitions in Loan Agreement. The definitions of the terms "Clean-Down Amount" and "Revolving Commitment" are hereby amended, from and after the date of this Amendment, to read as follows: 2 "CLEAN-DOWN AMOUNT" means $2,000,000 for each of the Clean-Down Periods commencing November 30, 1996, and ending January 31, 1999. "REVOLVING COMMITMENT" shall mean the sum of Five Million Dollars ($5,000,000), unless reduced by the Borrowers in accordance with the provisions of Subsection 2.10 hereof. The parties agree that, from and after the date of this Amendment, unless the context otherwise requires: (i) all references to the "Revolving Note" appearing in the Loan Agreement or any other Loan Documents shall mean and refer to the Replacement Revolving Note, together with any and all renewals, extensions or replacements thereof, amendments or modifications thereto or substitutions therefor, and (ii) the term "Loan Documents" shall include the Replacement Revolving Note. 2. EXTENSION OF REVOLVING LOAN AND MATURITY DATE. 2.1 Renewal and Extension of the Revolving Loan. Subject to the terms and conditions and relying on the representations and warranties contained herein and in the Loan Agreement, the Bank agrees to renew and increase the Revolving Loan from the original principal amount of $3,000,000 to the amended principal amount of $5,000,000, and further agrees to extend the maturity of the Revolving Loan to August 31, 1999. Accordingly, the Loan Agreement is amended as follows: (a) the definition of "Revolving Commitment" is amended as set forth in Subsection 1.3 above; (b) Subsection 2.1 of the Loan Agreement is amended by replacing the date "August 31, 1998" with the date "August 31, 1999"; and (c) Subsection 2.7.1 of the Loan Agreement is amended by replacing the date "August 31, 1998" with the date "August 31, 1999". 2.2 Revolving Note. The Borrowers agree to execute and deliver the Replacement Revolving Note in renewal, continuation and extension of the existing Revolving Note, but not in payment or satisfaction thereof. 3. AMENDMENTS TO NEGATIVE COVENANTS IN THE LOAN AGREEMENT. 3.1 Amendment to Subsection 7.5. Subsection 7.5 of the Loan Agreement is amended by replacing the phrase "(ii) more than fourteen (14) new Stores during the fiscal year ending December 31, 1996," with the new phrase "(ii) more than ten (10) new Stores during the fiscal year ending December 31, 1996." - 2 - 3 3.2 Amendment to Subsection 7.6. Subsection 7.6 of the Loan Agreement is amended by replacing the phrase "(ii) $6,400,000 during the fiscal year ending December 31, 1996," with the new phrase "(ii) $5,200,000 during the fiscal year ending December 31, 1996." 3.3 Amendment to Subsection 7.8.1. Subsection 7.8.1 of the Loan Agreement is hereby stricken, and a new Subsection 7.8.1 is hereby added to the Loan Agreement reading as follows: 7.8.1 Tangible Net Worth. The Tangible Net Worth of the Borrowers must not at any time be less than: (i) $8,300,000 for the period commencing on May 1, 1996, and ending April 30, 1997; (ii) $9,100,000 for the period commencing on May 1, 1997, and ending April 30, 1998; or (iii) $10,000,000 for the period commencing on May 1, 1998, and ending August 31, 1999. 4. CONDITIONS PRECEDENT. The closing of the transactions contemplated by this Amendment shall occur simultaneously with the execution and delivery hereof. At or as of such closing, each of the following conditions precedent shall be satisfied: 4.1 Execution of Documents. The following document shall have been duly and validly authorized, executed and delivered by the respective parties thereto, all in a form and substance satisfactory to the Bank: (a) This Amendment; and (b) The Replacement Revolving Note. 4.2 No Defaults. No Default or Event of Default shall have occurred or be continuing. 5. REPRESENTATIONS AND WARRANTIES. All representations and warranties of the Borrowers contained in the Loan Agreement are hereby restated and reaffirmed as of the date hereof (except to the extent any representation or warranty contained in the Loan Agreement as to the financial condition of the Borrowers relates solely to an earlier date) and shall survive the execution and delivery of this Amendment. The Borrowers further represent and warrant to the Bank as follows: 5.1 Binding Obligations. This Amendment, the Loan Agreement (as amended by this Amendment), and the Replacement Revolving Note constitute valid and legally binding obligations of the Borrowers, enforceable in accordance with their respective terms. 5.2 Conflicting Agreements and Restrictions. The Borrowers' execution, delivery and performance of this Amendment, the Loan Agreement (as amended by this Amendment), and the Replacement Revolving Note do not and will not (i) conflict with, or result in a breach of the - 3 - 4 terms, conditions or provisions of, or constitute a default under, or result in any violation of any agreement, instrument, undertaking, judgment, decree, order, writ, injunction, statute, law, rule or regulation to which the Borrowers are subject or by which any of their Properties are bound, or (ii) result in the creation or imposition of any Lien on any Property on any Property pursuant to the provisions of any mortgage, indenture, security agreement, contract, undertaking or other agreement, except for security interests created in favor of the Bank. 5.3 No Consent. The Borrowers' execution, delivery and performance of this Amendment, the Loan Agreement (as amended by this Amendment), and the Replacement Revolving Note, do not and will not require any authorization, consent, license, approval or authorization of or other action by, or notice or declaration to, or registration with, any Governmental Authority, or, to the extent that any such consent or other action may be required, either (i) such consent or other action has been validly procured or duly taken, or (ii) the Borrowers' failure to procure such consent or take such other action would not subject the Borrowers to a penalty, or otherwise have a Material Adverse Effect. 6. MISCELLANEOUS. 6.1 Effect of Amendment. The Loan Agreement, as amended, modified and supplemented by this Amendment, shall continue in full force and effect in accordance with its terms and is hereby reaffirmed in every respect as of the date hereof. To the extent that the terms of this Amendment are inconsistent with the terms of the Loan Agreement, this Amendment shall control and the Loan Agreement shall be amended, modified or supplemented so as to give full effect to the transactions contemplated by this Amendment. 6.2 Exhibits. All exhibits attached hereto are incorporated herein by reference and constitute a part of this Amendment. 6.3 Descriptive Headings. The descriptive headings of the several paragraphs of this Amendment are inserted for convenience only and shall not be used in the construction of the content of this Amendment. 6.4 Reimbursement of Expenses. The Borrowers agree to pay all reasonable out-of-pocket expenses, including, without limitation, filing fees, recording costs and attorney's fees and expenses, incurred by the Bank in connection with preparation of this Amendment and the consummation of the transactions contemplated hereby. - 4 - 5 IN WITNESS WHEREOF, the Borrowers and the Bank have caused this Amendment to be duly executed effective the day and year first above written. EATERIES, INC., an Oklahoma corporation By: /S/ VINCENT F. ORZA, JR. ------------------------------------- Vincent F. Orza, Jr., President PEPPERONI GRILL, INC., an Oklahoma corporation By: /S/ VINCENT F. ORZA, JR. ------------------------------------- Vincent F. Orza, Jr., President LIBERTY BANK AND TRUST COMPANY OF OKLAHOMA CITY, NATIONAL ASSOCIATION By: /S/ JUDY BARRETT FELDER ------------------------------------- Judy Barrett Felder, Vice President - 5 - EX-11.1 10 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.1 Page 1 of 3 EATERIES, INC. COMPUTATION OF NET INCOME PER SHARE
1994 Quarter Ended ------------------------------------------------------- March 31 June 30 September 30 December 31 ----------- ----------- ------------ ------------ Shares for net income per share computation: Weighted average shares: Common shares outstanding from beginning of period 3,608,001 3,627,192 3,628,872 3,677,268 Common shares issued upon exercise of stock options 11,301 -- 32,326 2,283 Treasury stock acquired -- -- (4,747) -- ----------- ----------- ------------ ------------ 3,619,302 3,627,192 3,656,451 3,679,551 Common stock equivalents: Shares issuable upon exercise of options (dilutive) 380,239 418,528 336,875 342,979 Assumed repurchase of outstanding shares up to 20% limitation (based on average market price for the quarter) (41,305) (104,658) (59,567) (96,587) ----------- ----------- ------------ ------------ 338,934 313,870 277,308 246,392 ----------- ----------- ------------ ------------ 3,958,236 3,941,062 3,933,759 3,925,943 =========== =========== ============ ============ Net income $ 77,911 $ 26,635 $ 105,906 $ 611,805 =========== =========== ============ ============ Net income per share $ .02 $ .01 $ .03 $ .16 =========== =========== ============ ============
Year Ended December 31, 1994 ----------------- Net income (sum of four quarters above) $ 822,257 ========== Weighted average number of common and common equivalent shares (average of four quarters above) 3,939,750 ========== Net income per share $ .21 ==========
2 EXHIBIT 11.1 Page 2 of 3 EATERIES, INC. COMPUTATION OF NET INCOME (LOSS) PER SHARE
1995 Quarter Ended ------------------------------------------------------- March 31 June 30 September 30 December 31 ----------- ----------- ------------ ------------ Shares for net income per share computation: Weighted average shares: Common shares outstanding from beginning of period 3,680,768 3,723,684 3,732,684 3,732,684 Common shares issued upon exercise of stock options 14,830 3,000 -- -- Common shares issued under employee stock purchase plan -- -- -- 4,182 Treasury shares acquired (682) -- -- -- ----------- ----------- ------------ ------------ 3,694,916 3,726,684 3,732,684 3,736,866 Common stock equivalents (unless anti-dilutive): Shares issuable upon exercise of options (dilutive) 394,813 -- -- 224,146 Assumed repurchase of outstanding shares up to 20% limitation (based on average market price for the quarter) (181,138) -- -- (56,982) ----------- ----------- ------------ ------------ 213,675 -- -- 167,164 ----------- ----------- ------------ ------------ 3,908,591 3,726,684 3,732,684 3,904,030 =========== =========== ============ ============ Net income (loss) $ 25,207 $ (45,071) $ (642,483) $ 848,188 =========== ============ ============ Net income (loss) per share $ 0.01 $ (0.01) $ (0.17) $ 0.22 =========== =========== ============ ============
Year Ended December 31, 1995 ----------------- Net income (sum of four quarters above) $ 185,841 ========== Weighted average number of common and common equivalent shares (average of four quarters above) 3,817,997 ========== Net income per share $ 0.05 ==========
3 EXHIBIT 11.1 Page 3 of 3 EATERIES, INC. COMPUTATION OF NET INCOME (LOSS) PER SHARE
1996 Quarter Ended ------------------------------------------------------- March 31 June 30 September 30 December 31 ----------- ----------- ------------ ------------ Shares for net income per share computation: Weighted average shares: Common shares outstanding from beginning of period 3,745,095 3,842,258 3,843,908 3,844,558 Common shares issued upon exercise of stock options 62,996 -- -- -- Common shares issued upon sale of common stock -- 198 50 -- Common shares issued upon common stock bonuses -- 948 593 -- Common shares issued under employee stock purchase plan -- -- -- 7,662 Treasury stock acquired -- -- -- (3,355) ----------- ----------- ------------ ------------ 3,808,091 3,843,404 3,844,551 3,848,865 Common stock equivalents (unless anti-dilutive): Shares issuable upon exercise of options (dilutive) 761,983 -- 864,483 676,983 Assumed repurchase of outstanding shares up to 20% limitation (based on average market price for the quarter) (637,961) -- (622,227) (437,530) ----------- ----------- ------------ ------------ 124,022 -- 242,256 239,453 ----------- ----------- ------------ ------------ 3,932,113 3,843,404 4,086,807 4,088,318 =========== =========== ============ ============ Net income (loss) $ 37,279 $ (165,853) $ 109,354 $ 600,719 =========== =========== ============ ============ Net income (loss) per share $ 0.01 $ (0.04) $ 0.03 $ 0.15 =========== =========== ============ ============
Year Ended December 31, 1996 ----------------- Net income (sum of four quarters above) $ 581,499 ========== Weighted average number of common and common equivalent shares (average of four quarters above) 3,987,661 ========== Net income per share $ 0.15 ==========
EX-23.1 11 CONSENT OF ERNST & YOUNG 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 29, 1996. ERNST & YOUNG LLP Oklahoma City, Oklahoma April 10, 1997 EX-27.1 12 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 29, 1996 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 29, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-29-1996 JAN-01-1996 DEC-29-1996 695 0 802 0 1,400 3,494 19,128 5,445 18,709 6,950 1,471 0 0 8 9,641 18,709 55,732 56,416 17,070 51,175 4,585 0 194 655 74 581 0 0 0 581 0.15 0.15
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