-----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, G9FNBD3iYc53YC6Vei4etfcjx1gEGObSH9UNB6m8MdkkAoId157AiCxMhAeWwVDT 0sIHBXVP5pkUBgnVPjLfMQ== 0000950134-98-003180.txt : 19980414 0000950134-98-003180.hdr.sgml : 19980414 ACCESSION NUMBER: 0000950134-98-003180 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971228 FILED AS OF DATE: 19980413 SROS: NONE 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: SEC FILE NUMBER: 000-14968 FILM NUMBER: 98592656 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 29, 1997 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 28, 1997 FILE NO. 0-14968 EATERIES, INC. (Exact name of registrant as specified in its charter) OKLAHOMA 73-1230348 (State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.) organization) 3240 W. BRITTON ROAD OKLAHOMA CITY, OKLAHOMA 73120 (Address of principal executive offices) (Zip code)
(405) 755-3607 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE, $.002 PER SHARE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. (X) The aggregate market value of the voting common stock held by non-affiliates of the registrant as of March 25, 1998 was $15,448,609. The Company has assumed that its directors and officers are the only affiliates, for purposes of this calculation. Number of shares outstanding as of March 25, 1998 - 3,914,669 shares. DOCUMENTS INCORPORATED BY REFERENCE Following is a list of annual reports, proxy statements, and Rule 424(b) or (c) prospectuses which are incorporated by reference into the Form 10-K and the Part of the Form 10-K into which the document is incorporated - The Company's Proxy Statement for its 1998 Annual Meeting of Shareholders is incorporated by reference in Part III, Items 10, 11, 12 and 13. 2 EATERIES, INC. FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 28, 1997 TABLE OF CONTENTS
PART 1 PAGE Item 1. Business....................................................................................... 1 Item 2. Properties..................................................................................... 7 Item 3. Legal Proceedings.............................................................................. 8 Item 4. Submission of Matters to a Vote of Security Holders........................................... 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................... 8 Item 6. Selected Financial Data........................................................................ 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................................... 10 Item 8. Financial Statements and Supplementary Data.................................................... 16 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure........................................................................... 16 PART III Item 10. Directors and Executive Officers of the Registrant............................................. 16 Item 11. Executive Compensation......................................................................... 16 Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 16 Item 13. Certain Relationships and Related Transactions................................................. 16 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 16 INDEX TO EXHIBITS.......................................................................................... 17 SIGNATURES................................................................................................. 18 INDEX TO FINANCIAL STATEMENTS.............................................................................. 19
i 3 ITEM 1. BUSINESS IN GENERAL Eateries, Inc. (the "Company") and its subsidiaries own, operate and franchise restaurants under the names: Garfield's Restaurant & Pub ("Garfield's"), Pepperoni Grill, Garcia's Mexican Restaurants ("Garcia's"), Casa Lupita and Carlos Murphy's. As of December 28, 1997, the Company-owned 62 (43 Garfield's, 10 Garcia's, five Casa Lupita's, two Carlos Murphy's and two Pepperoni Grills) and franchised 10 (eight Garfield's and two Garcia's) restaurants in 27 states. The Company opened its first restaurant, a Garfield's, in 1984 in Oklahoma City, Oklahoma. In 1986, the Company completed an initial public offering of its common stock. Prior to 1997, Garfield's was the Company's primary growth concept. Garfield's is a family-oriented concept, providing an upscale alternative to traditional fast-food. Garfield's are designed to appeal to a divergent customer base that grew up on fast-food, but now prefers a more sophisticated menu, the availability of alcoholic beverages, a comfortable ambiance, speed, value and convenience. The concept features a varied selection of moderately-priced, high quality food and beverage items with table service dining. In January 1995, the Company acquired substantially all the assets of the "Pepperoni Grill" restaurant located in Oklahoma City, Oklahoma, along with all rights to the use of the trademarks associated with the concept. Pepperoni Grill features a variety of Italian entrees with special emphasis on brick-oven baked pizza. In November 1997, the Company, through its wholly-owned subsidiary, Fiesta Restaurants, Inc., acquired 17 Mexican restaurants under the names: Garcia's (10), Casa Lupita (5) and Carlos Murphy's (2), along with the trademarks associated with these concepts. In February 1998, the Company sold three of the Casa Lupita locations to Chevy's, Inc. In connection with this transaction, the Company entered into an agreement to sell another Casa Lupita location to Chevy's conditioned upon, among other things, the transfer to Chevy's of the liquor license related to such restaurant. The decision to sell these restaurants was the result of a plan to consolidate operations and focus on the expansion of Garcia's. The Company plans to convert the remaining Casa Lupita and the two Carlos Murphy's to the Garcia's concept in 1998. In 1997, the Company constructed and opened three (3) Garfield's in major regional malls in addition to the acquisition noted above. The Company's future expansion of its existing concepts will be primarily focused on Garfield's and Garcia's. The Company expects to add up to five additional Garfield's and Garcia's restaurants in 1998. The primary expansion emphasis will be on Company-owned rather than franchised restaurants. However, management will visit with qualified, interested parties as potential franchisees. The Company also plans to pursue other acquisitions to further enhance shareholder value. The Company's principal offices are located at 3240 West Britton Road, Oklahoma City, Oklahoma 73120. Its telephone number is (405) 755-3607. GARFIELD'S RESTAURANT & PUB MENU Each Garfield's restaurant offers a diverse menu of freshly prepared traditional and innovative entrees, including steak, seafood, chicken, hamburgers, Mexican, Italian, and sandwiches along with a variety of appetizers, salads and desserts. Menu offerings are revised by the Company semi-annually to improve sales. The Company's senior management actively participates in the search for new menu items. Garfield's restaurants also offer a separate lower-priced children's menu. In an effort to further define the strengths of various mall-based Garfield's, management began testing six urban stores as "Garfield's Cafe's" during 1997. These units are located in major urban markets and lack the ability to be marketed due to exorbitant advertising costs. This lack of visibility negatively impacts sales and profitability. Thus, "Garfield's Cafe's" have repositioned menus that offer greater value, lower costs, a simpler and thus, faster mix of menu selections. Food costs for items in "Cafe" stores are lower than traditional Garfield's. "Cafe" stores also feature specials designed to drive sales and profits. Results of the "Cafe" stores have been encouraging. The Company will continue utilizing this concept in all six locations. As of December 28, 1997, no additional Garfield's have been converted to the "Cafe" concept.. RESTAURANT LAYOUT Garfield's restaurants are constructed in regional malls in accordance with uniform design specifications and are generally similar in appearance and interior decor. Restaurants are furnished and styled in a colorful motif, highlighting the travels of the Company's namesake, "Casey Garfield", including exhibits, photographs, souvenirs and other travel-related furnishings. Tables are covered with paper and customers are encouraged to doodle with crayons provided at each table. 1 4 The size and shape of Garfield's restaurants vary depending largely upon the location but typically average 4,500 to 5,500 square feet, and seat approximately 200 guests. The Company's prototype Garfield's to be constructed in 1998 will approximate 4,700 square feet. HOURS OF OPERATION Depending on location, most restaurants are open from 11:00 a.m. until 11:00 p.m. on weekdays and Sunday, and later on Friday and Saturday. UNIT ECONOMICS Historically, the cost of opening a new Garfield's restaurant has varied widely due to the different restaurant configuration and sizes, regional construction cost levels, and certain other factors. The Company currently leases the restaurant premises in major regional malls and builds-out the leased space to meet the Garfield's concept specifications of style and decor. Total construction costs for a typical Garfield's opened in 1997 were approximately $886,000, of which approximately $433,000 was funded through landlord finish-out allowances, bringing the Company's net investment to approximately $453,000 per unit. Management believes its unit economics are among the best in the industry. SITE SELECTION All Garfield's restaurants are located in regional shopping malls, primarily in the eastern half of the United States. The Company considers the location of a restaurant to be critical to its long-term success and has devoted significant effort to the investigation and evaluation of potential mall sites. The site selection process focuses on historical sales per foot by mall tenants and proximity to entertainment centers within and near the mall as well as accessibility to major traffic arteries. The Company also reviews potential competition in the area and utilizes an Equifax site selection model to "rate" each potential location based upon a multitude of different criteria. Senior management inspects and approves each mall restaurant site. The Company expects to locate future Garfield's in regional malls. It takes approximately 18 weeks to complete construction and open a Garfield's. RESTAURANT LOCATIONS The following table sets forth the locations of the existing Garfield's restaurants as of December 28, 1997.
COMPANY-OWNED RESTAURANTS FRANCHISED RESTAURANTS NO. OF NO. OF STATE UNITS STATE UNITS ----- --------- ----- ------- Alabama............................... 1 Colorado............................... 1 Arkansas.............................. 1 Iowa................................... 2 Florida............................... 3 Oklahoma............................... 5 Georgia............................... 1 ------- Illinois.............................. 4 Total............................. 8 Indiana............................... 4 ======= Kentucky.............................. 1 Louisiana............................. 2 Michigan.............................. 2 Mississippi........................... 4 Missouri.............................. 4 New York.............................. 2 North Carolina........................ 1 Ohio.................................. 2 Oklahoma.............................. 3 South Carolina........................ 1 Tennessee............................. 1 Texas................................. 2 West Virginia......................... 2 Wisconsin............................. 2 ========= Total............................ 43 =========
PEPPERONI GRILL RESTAURANTS The original Pepperoni Grill restaurant, located in Oklahoma City, Oklahoma, was purchased by the Company in January, 1995. Its menu features a variety of Italian entrees with special emphasis on brick-oven baked pizza. The warm European bistro 2 5 atmosphere is accented with an exhibition kitchen, light woods and booths covered in tapestry. All menu items are prepared on the premises with the entire entree presentation being performed within view of the guest, making the kitchen part of the restaurant's atmosphere. An in-store bakery makes all the breads and daily desserts. Pepperoni Grill's signature bakery item is a Tuscan parmesan black pepper bread that is served with all entrees along with the traditional olive oil and balsamic vinegar. Over 60 different wine selections are offered along with 25 wines available by the glass. The Company purchased the Pepperoni Grill restaurant primarily because of its many similarities to the existing Garfield's concept and its popular "Italian" based menu. The Pepperoni Grill restaurant concept is similar to Garfield's as it is a full service dinner house, located in a mall and is approximately the same size with many operational functions which parallel a Garfield's. The Company opened a second Pepperoni Grill restaurant in a regional mall located in Terre Haute, Indiana in November, 1995, next to an existing Garfield's. After evaluating the benefits of this strategy and the future growth potential of the Pepperoni Grill restaurant concept, management decided to open a free-standing Pepperoni Grill in Edmond, Oklahoma, to capitalize on its strong reputation in the Oklahoma City market. As part of this decision, management decided to convert the Terre Haute location into a test location for a Casa Ole' franchise and transferred assets with approximately $275,000 in net book value to the Edmond location. The Casa Ole test location was closed in November 1997. At this time, management does not expect any further development of Casa Ole'. FIESTA RESTAURANTS In November 1997, the Company, through its wholly-owned subsidiary, Fiesta Restaurants, Inc. ("Fiesta"), acquired from Famous Restaurants, Inc. and its subsidiaries ("Famous"), substantially all of the assets comprising 17 Mexican restaurants and the corporate headquarters of Famous (the "Famous Acquisition"). The acquired restaurants operate under the names: Garcia's (10), Casa Lupita (five) and Carlos Murphy's (two). The purchase price for the assets was approximately $10,652,000, of which $8,631,415 was paid in cash at closing and the balance represented estimated liabilities of Famous assumed by the Company and transaction costs. The cash portion of the purchase price was financed through a five-year term loan with a bank. This term loan bears interest at the three-month London Interbank Offered Rates ("LIBOR") plus 1.25% (6.94% as of December 28, 1997) and is secured by all of the Company's real estate (all of which was obtained through the Famous Acquisition). The term loan requires principal to be repaid based upon a seven-year amortization schedule, with all remaining unpaid principal due on the fifth anniversary of the loan. MENU Each Garcia's restaurant offers a traditional menu of high quality Mexican food. Alcoholic beverages are also offered in each location. Menus are generally standardized, although there are slight variations to accommodate regional taste preferences. RESTAURANT LAYOUT Garcia's restaurants have a distinctive southwestern design and decor. The existing restaurants generally measure 8,000 to 10,000 square feet and seat approximately 200 to 250 guests in the main dining area with an additional 75 to 125 seats in the bar area. RESTAURANT LOCATIONS The following table sets forth the locations of the existing Fiesta restaurants as of December 28, 1997.
COMPANY-OWNED RESTAURANTS FRANCHISED RESTAURANTS NO. OF NO. OF STATE UNITS STATE UNITS ----- --------- ----- ------- Arizona............................... 6 Iowa................................... 1 California............................ 2 Tennessee.............................. 1 Colorado.............................. 2 ------- Florida............................... 1 Total............................. 2 Idaho................................. 1 ======= Illinois.............................. 1 Michigan.............................. 1 New Jersey............................ 1 Ohio.................................. 1 Utah.................................. 1 ========= Total............................ 17 =========
3 6 SALE OF RESTAURANTS In February 1998, the Company sold substantially all of the assets, including real estate, comprising three of the Casa Lupita restaurants to Chevy's, Inc. ("Chevy's") for a cash price of approximately $5,300,000. The proceeds from this sale were used to pay-down debt primarily related to the Famous Acquisition. In connection with this transaction, the Company entered into an agreement to sell substantially all of the assets related to one additional Casa Lupita to Chevy's for a price of $1,000,000. Closing of this transaction is conditioned upon, among other things, the transfer to Chevy's of the liquor license related to such restaurant. Management currently expects closing of this transaction to occur during the second quarter of 1998. The decision to sell the four Casa Lupita locations was the result of a plan to consolidate Fiesta's operations and focus on the expansion of Garcia's. The Company plans to convert the remaining Casa Lupita and the two Carlos Murphy's to the Garcia's concept in 1998. Initial expansion plans are for Fiesta to open several new Garcia's in its core operating area in and around Phoenix, Arizona. In March 1998, the Company opened a new Garcia's food court facility in Bank One Ball Park, home of the Arizona Diamondbacks (a Major League Baseball team), in Phoenix, Arizona. This premier entertainment location will be open throughout the Major League Baseball season as well as for all special events and concerts held at the Ball Park. RESTAURANT OPERATIONS MANAGEMENT AND EMPLOYEES Responsibility for the Company's restaurant operations is organized geographically with restaurant general managers reporting to area directors of operations who, in turn, report to the respective divisional vice president of operations for Garfield's, Fiesta and Pepperoni Grill. A typical restaurant has a general manager, two to four assistant managers and average 57 employees, approximately 75% of whom are part-time. Area directors of operations as well as restaurant general managers and associate managers are eligible for cash and stock bonuses, travel incentives, professional training and attendance at industry conferences. Receipt of these incentives is based on reaching restaurant performance objectives. The Company's hourly employees are eligible for performance-based awards for superior service to the Company and its guests. Employee awards can include travel incentives, gift certificates, plaques and Company memorabilia. Most employees other than restaurant management and corporate management are compensated on an hourly basis. QUALITY CONTROL The Company has uniform operating standards and specifications relating to the quality, preparation and selection of menu items, maintenance and cleanliness of the premises, and employee conduct. Managers are responsible for assuring compliance with Company operating procedures. Executive and supervisory personnel routinely visit each restaurant to evaluate adherence to quality standards and employee performance. TRAINING The Company places a great deal of emphasis on the proper training of its hourly employees and general and associate managers. In 1995, the Company hired a full-time training director to oversee all areas of employee education. The outline for the training program is based on the individual expertise of the trainee and typically lasts about two weeks for hourly employees and up to eight weeks for managers. Managers must be certified in a number of skills in restaurant management, including technical proficiency and job functions, management techniques and profit and loss responsibilities. These skills are taught primarily in the restaurant along with classroom training and assigned projects. Manager training is performed in several geographically dispersed restaurants. Standard manuals regarding training and operations, products and equipment, and local marketing programs are provided by the Company. PURCHASING During 1994, the Company hired a purchasing director to oversee the relations and negotiations with manufacturers and regional distributors for most food and beverage products and to ensure uniform quality, competitive costs and adequate supplies of proprietary products. The Company and its franchisees purchase substantially all food and beverage products from several national and regional suppliers. The Company has not experienced any significant delays in receiving food and beverage inventories or restaurant supplies. ADVERTISING AND MARKETING The Company uses television, newspaper, radio and outdoor advertising to promote its restaurants. In markets where the Company shares a trade area with a franchisee, advertising cooperatives are utilized to maximize the Company's restaurant's visibility. 4 7 Franchisees of Garfield's units are generally required to expend up to 4% of sales on restaurant related marketing efforts. In addition, all Company and franchise restaurants contribute 1/2% of their sales to a marketing fund used to produce advertising, menu development and point-of-sale material to promote increased sales. The Company engages in a variety of local market promotional activities such as contributing goods, time and money to charitable, civic and educational programs, in order to increase public awareness of the Company's restaurants. RESTAURANT REPORTING Financial controls are implemented through the use of computerized cash registers and management information systems. Sales reports and food, beverage and labor cost data are prepared and reviewed weekly for operational control. During 1997, the Company implemented new systems to streamline the flow of sales, payroll and accounts payable information. EXPANSION STRATEGY The Company intends to open Garfield's restaurants in regional malls principally throughout the eastern half of the United States. This expansion strategy is designed to capitalize on the growing trend to include and expand dining and entertainment facilities in regional malls. Management believes this mall-based expansion strategy for Garfield's reduces the risks associated with locating restaurants in new markets because of the availability of historical trends regarding mall sales and customer traffic. Further, restaurant construction within a mall typically requires a substantially lower investment than construction of a free-standing restaurant. Management believes there are sufficient additional mall locations for its restaurant concepts, particularly as existing malls are expanded and remodeled with a view toward becoming entertainment and dining centers. The Company maintains relationships with several leading mall operators who provide the Company with an ongoing supply of potential mall locations for evaluation. This will not, however, preclude it from searching for other expansion opportunities such as free-standing sites. The Company intends to open Garcia's in free-standing sites primarily in its core operating area in and around Phoenix, Arizona. This strategy capitalizes on the strong reputation of the Garcia's concept in the Phoenix area. The Company has retained a Director of Real Estate to represent it in site negotiations. This individual is compensated on a success fee basis. The Company expects to focus its expansion primarily on the opening of Company-owned Garfield's and Garcia's restaurants. Additional franchising is possible but likely to be a minor part of expansion. Subsequent to December 28, 1997, the Company has opened one new Garfield's in Jasper, Alabama, and is currently developing one new Garfield's in Asheville, North Carolina. In March 1998, the Company opened a new Garcia's food court facility in the Bank One Ball Park in Phoenix, Arizona. Also, in March 1998, a new franchised Garfield's was opened in Vincennes, Indiana. The Company expects to open up to five Company-owned Garfield's and Garcia's restaurants in 1998 and up to ten Company-owned Garfield's and Garcia's restaurants in 1999. The Company also plans to convert the existing Casa Lupita's and Carlos Murphy's to the Garcia's concept during 1998. In addition, management is actively seeking possible merger or acquisition candidates that it believes will add value to the Company. FRANCHISE OPERATIONS GENERAL TERMS As of December 28, 1997, eight franchised Garfield's were operating pursuant to agreements granted by the Company. In March 1998, a new franchised Garfield's opened in Vincennes, Indiana, bringing the total count of franchised Garfield's to nine. The typical Garfield's franchise agreement provides for (i) the payment of an initial franchise fee of up to $35,000 and a monthly continuing royalty fee expressed as a percentage (typically 3% or 4%) of gross sales with a minimum fee of $2,000 to $2,500 per month; (ii) the payment of 1/2% of gross sales to the Garfield's Creative Marketing Fund; (iii) quality control and operational standards; (iv) development obligations for the opening of new restaurants under the franchise; and (v) the creation and use of advertising. The franchise term usually ranges from five to 10 years with five-year renewals. The grant of a franchise does not ensure that a restaurant will be opened. Under the Company's typical franchise agreement, the failure to open restaurants can cause a termination of the franchise. Although the Company largely relies upon standardized agreements for its franchises, it will continue to adjust its agreements as circumstances warrant. As of December 28, 1997, there were two franchised Garcia's restaurants. These franchise agreements provide for the monthly payment of continuing royalties of 1.5% to 2.0% of gross sales. 5 8 FUTURE FRANCHISE DEVELOPMENT The Company has elected to emphasize Company restaurant development but is studying the possibility of becoming more aggressive in its franchise development. The Company entered into one new franchise agreement in 1997 for a new Garfield's which opened in March 1998. The Company has not entered into any additional franchise agreements as of the date of this report. COMPANY MANAGED FRANCHISES The Company currently manages three of its franchised Garfield's restaurants in Oklahoma City pursuant to a management agreement with the franchisee who remains the owner of the restaurants. The Company receives fixed management and accounting fees in addition to its royalties and other charges under the franchise agreement. FRANCHISE REVENUE DATA The following table sets forth fees and royalties earned by the Company from franchisees for the years indicated.
1997 1996 1995 ---- ---- ---- Initial franchise fees $ -- $ -- $ 50,000 Continuing royalties 268,000 265,000 258,000
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. There are many well-established competitors with substantially greater financial and other resources than the Company. Some of the Company's competitors have been in existence for substantially longer periods than the Company and may be better established in the market area than the Company's restaurants. The restaurant business is often affected by changes in consumer taste, national, regional or local economic conditions, demographic trends, traffic patterns and type, number and location of competing restaurants. In addition, factors such as inflation, increased food, labor and benefit costs, and the lack of experienced management and hourly employees may adversely affect the restaurant industry in general and the Company's restaurants in particular. SERVICE MARKS "GARFIELD'S", "CASEY GARFIELD'S", "PEPPERONI GRILL", "GARCIA'S", "CASA LUPITA" and "CARLOS MURPHY'S" are Company service marks registered with the United States Patent and Trademark Office. The Company pursues any infringement of its marks within the United States and considers its marks to be crucial to the success of its operations. EMPLOYEES As of March 1, 1998, the Company employed 3,567 individuals, of whom 278 were management or administrative personnel (including 219 who were restaurant managers or trainees) and 3,289 were employed in non-management restaurant positions. As of this date, the Company employed 262 persons on a salaried basis and 3,305 persons on an hourly basis. Each restaurant employs an average of 57 people. Most employees, other than restaurant management and corporate management personnel, are paid on an hourly basis. The Company believes that it provides working conditions and wages that compare favorably with those of its competition. As the Company expands, it will need to hire additional management and its continued success will depend in large part on its ability to attract and retain good management employees. The Company's employees are not covered by a collective bargaining agreement. 6 9 SEASONALITY With 44 of the 62 Company-owned restaurants located in regional malls as of December 28, 1997, the resulting higher pedestrian traffic during the Thanksgiving to New Year holiday season has caused the Company to experience a substantial increase in food and beverage sales and profits in the Company's fourth fiscal quarter. However, as a result of the 1997 acquisition of 17 free-standing Mexican restaurants from Famous, the Company's management believes that its revenues and profits on a quarterly basis will be less affected by seasonality in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Impact of Seasonality." GOVERNMENT REGULATIONS The Company's restaurants are subject to licensing and regulation by alcoholic beverage control, health, sanitation, safety and fire agencies in each state and/or municipality in which restaurants are located. The Company has not experienced material difficulties in these areas, however, regulatory difficulties or failures in obtaining the required licenses or approvals could delay or prevent the opening of a new restaurant and affect profitability. Approximately 14% of the Company's food and beverage revenues in 1997 were attributable to the sale of alcoholic beverages. Alcoholic beverage control regulations require each of the Company's restaurants to apply to a state authority and, in certain locations, county or municipal authorities, for a license or permit to sell alcoholic beverages on the premises and to provide service for extended hours and on Sundays. Typically, such licenses or permits must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the Company's restaurants, including minimum age of patron and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages. In certain states the Company may be subject to "dram-shop" statutes, which generally provide a person injured by an intoxicated patron the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. The Company carries liquor liability coverage as part of its existing comprehensive general liability insurance. The Company's restaurant operations are also subject to federal and state laws governing such matters as minimum wages, working conditions, overtime and tip credits. Significant numbers of the Company's food service and preparation personnel are paid at rates equal to or based upon the federal minimum wage and, accordingly, further increases in the minimum wage could increase the Company's labor costs. The enactment of future legislation increasing employee benefits, such as mandated health insurance, could also significantly adversely affect the industry and the Company, as could future increases in workers' compensation rates. The Company is subject to Federal Trade Commission ("FTC") regulation and state laws that regulate the offer and sale of franchises. The Company may also become subject to state laws that regulate substantive aspects of the franchisor-franchisee relationship. The FTC requires the Company to furnish prospective franchisees a franchise offering circular containing prescribed information. A number of states in which the Company might consider franchising also regulate the offer and sale of franchises and require registration of the franchise offering with state authorities. The Company believes that it is in material compliance with such laws. The Americans With Disabilities Act ("ADA") prohibits discrimination in employment and public accommodations on the basis of disability. While the Company believes it is in substantial compliance with the ADA regulations, the Company could be required to expend funds to modify its restaurants to provide service to, or make reasonable accommodations for the employment of disabled persons. ITEM 2. PROPERTIES All but one of the Company's facilities are occupied under leases. The majority of the Company's restaurant leases provide for the payment of base rents plus real estate taxes, insurance and other expenses and for the payment of a percentage of the Company's sales in excess of certain sales levels. These leases typically provide for escalating rentals in future years and have initial terms expiring as follows:
NO. OF YEAR LEASE TERM EXPIRES FACILITIES * ----------------------- ------------ 1998-1999...................................... 3 2000-2001...................................... 10 2002-2003...................................... 9 2004-2005...................................... 19 2006-2007...................................... 10 2008 and beyond................................ 13
7 10 * Includes two leases which have been executed for locations that were under-development and had not opened as of December 28, 1997, and three leases for locations which were sold subsequent to December 28, 1997. The Company's executive offices, located in approximately 7,400 square feet of office space in Oklahoma City, Oklahoma, are occupied under a lease which expires in June, 1999. ITEM 3. LEGAL PROCEEDINGS The Company is not presently engaged in any legal proceedings the outcome of which is expected to have a material adverse effect upon its business or financial condition. However, in the ordinary course of its business, the Company is named in various lawsuits related to the operation of its restaurants, most of which relate to on-the-job injury claims by its employees and are typically handled by the Company's insurance carriers. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Company's security holders during its fourth fiscal quarter of 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock has been quoted on the NASDAQ National Market System under the symbol "EATS" since May 1994. Prior to that date, the Company's common stock was quoted on the NASDAQ Small-Cap Market. The following table sets forth, for the quarterly periods indicated, the high and low closing bid prices for the common stock, as reported by the NASDAQ Markets.
Low High --- ---- 1996 First Quarter.................................. $2.19 $3.50 Second Quarter................................. 3.25 5.75 Third Quarter.................................. 2.75 4.88 Fourth Quarter................................. 3.00 4.75 1997 First Quarter.................................. $2.94 $4.31 Second Quarter................................. 2.50 3.19 Third Quarter.................................. 2.56 4.38 Fourth Quarter................................. 3.69 5.00 1998 First Quarter (to March 25).................... $3.44 $5.50
Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. On March 25, 1998, the Company's stock transfer agent reported that the Company's common stock was held by 247 holders of record. However, management believes there are approximately 1,000 beneficial owners of the Company's common stock. The Company has paid no cash dividends on its common stock. The Board of Directors intends to retain earnings of the Company to support operations and to finance expansion and does not intend to pay cash dividends on the common stock for the foreseeable future. The payment of cash dividends in the future will depend upon such factors as earnings levels, capital requirements, the Company's financial condition and other factors deemed relevant by the Board of Directors. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data of the Company. The selected financial data in the table are derived from the consolidated financial statements of the Company. The following data should be read in conjunction with, and is qualified in its entirety by, the Company's consolidated financial statements and related notes and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. 8 11
(In thousands except per share amounts) Fiscal Year ------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- INCOME STATEMENT DATA: Revenues: Food and beverage sales .......................... $ 62,851 $ 55,733 $ 45,811 $ 38,869 $ 26,401 Franchise fees and royalties ..................... 268 265 307 267 488 Other income ..................................... 423 418 482 423 369 -------- -------- -------- -------- -------- 63,542 56,416 46,600 39,559 27,258 -------- -------- -------- -------- -------- Costs and Expenses: Costs of sales ................................... 17,840 17,070 13,968 12,052 8,231 Operating expenses ............................... 36,795 32,219 26,387 22,359 14,891 Pre-opening costs ................................ 279 726 830 568 591 General and administrative expenses .............. 4,049 3,666 3,067 2,467 2,101 Provision for restaurant closures and other disposals ............................ -- -- 897 -- -- Provision for impairment of long-lived assets .... 85 -- -- -- -- Depreciation and amortization .................... 2,216 1,886 1,337 927 601 Interest expense ................................. 310 194 41 48 50 -------- -------- -------- -------- -------- 61,574 55,761 46,527 38,421 26,465 -------- -------- -------- -------- -------- Income before provision (benefit) for income taxes and cumulative effect of change in accounting for income taxes ............. 1,968 655 73 1,138 793 Provision (benefit) for income taxes ................. 569 74 (113) 316 293 -------- -------- -------- -------- -------- Income before cumulative effect of change in accounting for income taxes .................... 1,399 581 186 822 500 Cumulative effect of change in accounting for income taxes .................................. -- -- -- -- 202 -------- -------- -------- -------- -------- Net income ........................................... $ 1,399 $ 581 $ 186 $ 822 $ 702 ======== ======== ======== ======== ======== Net income per common share (1): Income before cumulative effect of change in accounting for income taxes ....... $ 0.36 $ 0.15 $ 0.05 $ 0.23 $ 0.24 Cumulative effect of change in accounting for income taxes .................... -- -- -- -- 0.09 -------- -------- -------- -------- -------- Net income per common share ...................... $ 0.36 $ 0.15 $ 0.05 $ 0.23 $ 0.33 ======== ======== ======== ======== ======== Net income per common share assuming dilution (1): Income before cumulative effect of change in accounting for income taxes ....... $ 0.35 $ 0.15 $ 0.05 $ 0.21 $ 0.18 Cumulative effect of change in accounting for income taxes .................... -- -- -- -- 0.08 -------- -------- -------- -------- -------- Net income per common share assuming dilution .............................. $ 0.35 $ 0.15 $ 0.05 $ 0.21 $ 0.26 ======== ======== ======== ======== ======== Weighted average common shares ....................... 3,869 3,836 3,723 3,646 2,124 ======== ======== ======== ======== ======== Weighted average common shares assuming dilution ................................ 3,988 4,002 3,834 3,832 2,732 ======== ======== ======== ======== ======== BALANCE SHEET DATA (AT END OF PERIOD): Working capital (deficit) ........................ $ (4,844) $ (3,456) $ (1,677) 922 $ 2,021 Total assets ..................................... 29,775 18,709 16,596 12,933 11,363 Long-term obligations (2) ........................ 7,637 1,471 1,249 75 42 Stockholders' equity ............................. 10,993 9,650 8,912 8,625 7,690 OTHER DATA: Earnings before interest, depreciation and taxes (EBITDA) ............................. $ 4,493 $ 2,736 $ 1,451 $ 2,113 $ 1,444 System-wide sales ................................ 71,133 64,036 53,802 45,891 39,025
(1) In March 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 128, "Earnings Per Share," which requires the calculation of basic and diluted earnings per share (EPS). Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income available to common stockholders by the sum of the weighted-average number of common shares outstanding for the period plus common stock equivalents. The Company adopted the provisions of SFAS 128 in the fourth quarter of 1997, and, as required, has restated all prior period EPS amounts to conform to the new accounting standard. (2) Includes capital leases and long-term debt obligations, net of current portions. (See Note 5 of Notes to Consolidated Financial Statements.) 9 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS From time to time, the Company may publish forward-looking statements relating to certain matters including anticipated financial performance, business prospects, the future opening of Company-owned and franchised restaurants, anticipated capital expenditures, and other matters. All statements other than statements of historical fact contained in this Form 10-K or in any other report of the Company are forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of that safe harbor, the Company notes that a variety of factors, individually or in the aggregate, could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements including, without limitation, the following: consumer spending trends and habits; competition in the casual dining restaurant segment; weather conditions in the Company's operating regions; laws and government regulations; general business and economic conditions; availability of capital; success of operating initiatives and marketing and promotional efforts; and changes in accounting policies. In addition, the Company disclaims any intent or obligation to update those forward-looking statements. INTRODUCTION As of December 28, 1997, the Company owned and operated 62 (43 Garfield's, 10 Garcia's, five Casa Lupitas, two Carlos Murphy's and two Pepperoni Grills) and franchised 10 (eight Garfield's and two Garcia's) restaurants. Subsequent to December 28, 1997, the Company opened one new Garfield's and sold three Casa Lupitas. Additionally, one new franchised Garfield's was opened subsequent to December 28, 1997. The Company currently has one Garfield's and one Garcia's in development. As of the date of this report, the entire system includes 60 (44 Garfield's, 10 Garcia's, two Casa Lupitas, two Carlos Murphy's, and two Pepperoni Grills) Company-owned restaurants and 11 (nine Garfield's and two Garcia's) franchise restaurants. PERCENTAGE RESULTS OF OPERATIONS AND RESTAURANT DATA The following table sets forth, for the periods indicated, (i) the percentages that certain items of income and expense bear to total revenues, unless otherwise indicated, and (ii) selected operating data:
Fiscal Year ----------------------------------- 1997 1996 1995 --------- --------- --------- INCOME STATEMENT DATA: Revenues: Food and beverage sales ............................ 98.9% 98.8% 98.3% Franchise fees and royalties ....................... 0.4 0.5 0.7 Other income ....................................... 0.7 0.7 1.0 --------- --------- --------- 100.0 100.0 100.0 --------- --------- --------- Costs and Expenses: Costs of sales (1) ................................. 28.4 30.6 30.5 Operating expenses (1) ............................. 58.5 57.8 57.6 Pre-opening costs (1) .............................. 0.4 1.3 1.8 General and administrative expenses ................ 6.4 6.5 6.6 Provision for restaurant closures and other disposals .............................. -- -- 1.9 Provision for impairment of long-lived assets ... 0.1 -- -- Depreciation and amortization (1) .................. 3.5 3.4 2.9 Interest expense ................................... 0.5 0.3 0.1 --------- --------- --------- Income before provision (benefit) for income taxes ..... 3.1 1.1 0.2 Provision (benefit) for income taxes ................... 0.9 0.1 (0.2) --------- --------- --------- Net income ............................................. 2.2% 1.0% 0.4% ========= ========= ========= SELECTED OPERATING DATA: (Dollars in thousands) System-wide sales: Company restaurants ................................. $ 62,851 $ 55,733 $ 45,811 Franchise restaurants ............................... 8,282 8,303 7,991 --------- --------- --------- Total ............................................ $ 71,133 $ 64,036 $ 53,802 ========= ========= ========= Number of restaurants (at end of period): Company restaurants ................................. 62 45 41 Franchise restaurants ............................... 10 8 8 --------- --------- --------- Total ............................................ 72 53 49 ========= ========= =========
(1) As a percentage of food and beverage sales. 10 13 IMPACT OF SEASONALITY The concentration of restaurants in regional malls, where customer traffic increases substantially during the Thanksgiving to New Year holiday season, has resulted in the Company experiencing a substantial increase in restaurant sales and profits during the fourth quarter of each year. However, as a result of the acquisition of 17 free-standing Mexican restaurants from Famous, the Company's management believes that its revenues and profits on a quarterly basis will be less affected by seasonality in the future. The following table presents the Company's revenues, net income (loss) and certain other financial and operational data for each fiscal quarter of 1997, 1996 and 1995.
FISCAL QUARTERS ---------------------------------------------------------------------- 1ST 2ND 3RD 4TH ANNUAL ----------- ----------- ----------- ----------- ------------ (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1997: Revenues .................................... $ 14,203 $ 13,709 $ 14,735 $ 20,895 $ 63,542 Net income .................................. 229 24 225 921 1,399 Net income per common share ................. 0.06 0.01 0.06 0.24 0.36 Net income per common share assuming dilution ...................... 0.06 0.01 0.06 0.22 0.35 Weighted average common shares .............. 3,863 3,898 3,858 3,857 3,869 Weighted average common shares assuming dilution .............. 4,006 3,945 3,958 4,044 3,988 Pre-opening costs ........................... $ 18 $ 156 $ 92 $ 13 $ 279 Number of Company units at end of period (1) ....................... 43 45 46 62 62 Company restaurant operating months ......... 131 131 135 162 559 Sales per Company restaurant operating month ......................... $ 107 $ 103 $ 108 $ 128 $ 113 1996: Revenues .................................... $ 12,772 $ 13,426 $ 13,999 $ 16,219 $ 56,416 Net income (loss) ........................... 37 (166) 109 601 581 Net income (loss) per common share .......... 0.01 (0.04) 0.03 0.16 0.15 Net income per common share assuming dilution ....................... 0.01 (0.04) 0.03 0.15 0.15 Weighted average common shares .............. 3,808 3,843 3,845 3,849 3,836 Weighted average common shares assuming dilution ................ 3,894 3,843 4,004 4,007 4,002 Pre-opening costs ........................... $ 120 $ 154 $ 230 $ 222 $ 726 Number of Company units at end of period ........................... 42 43 44 45 45 Company restaurant operating months ......... 124 127 128 134 513 Sales per Company restaurant operating month ......................... $ 102 $ 104 $ 108 $ 119 $ 109 1995: Revenues .................................... $ 10,475 $ 10,682 $ 11,449 $ 13,994 $ 46,600 Net income (loss) (2) ....................... 25 (45) (642) 848 186 Net income (loss) per common share (2) .............................. 0.01 (0.01) (0.17) 0.23 0.05 Net income (loss) per common share assuming dilution (2) ............ 0.01 (0.01) (0.17) 0.22 0.05 Weighted average common shares ................................. 3,695 3,727 3,733 3,737 3,723 Weighted average common shares assuming dilution ............... 3,829 3,727 3,733 3,842 3,834 Pre-opening costs ........................... $ 143 $ 198 $ 223 $ 266 $ 830 Number of Company units at end of period ........................... 37 38 38 41 41 Company restaurant operating months ......... 107 114 113 119 453 Sales per Company restaurant operating month ......................... $ 96 $ 92 $ 100 $ 116 $ 101
(1) During the fourth quarter of 1997, the Company acquired 17 Mexican restaurants under the names: Garcia's (10), Casa Lupita (5) and Carlos Murphy's (2). (2) During the third quarter of 1995, the Company recorded a pre-tax charge of $897,000 to establish a provision for restaurant closures and other disposals. The effect of this provision on the reported net income (loss) and per share data for the third quarter and the fiscal year was $(639,000) or $(0.17) per share. 11 14 FISCAL YEARS 1997, 1996, AND 1995 REVENUES Revenues for the year ended December 28, 1997, increased 13% over the revenues reported for the year ended December 29, 1996. Revenues in 1996 increased 21% over 1995 levels. Revenues for the year ended December 31, 1995, increased 18% over the same period in 1994. The 1997, 1996 and 1995 increases were primarily due to increases in food and beverage sales. The number of restaurants operating at the end of each year, the number of operating months during that year and average sales per operating month were as follows:
1997 1996 1995 -------- -------- -------- Number of Company restaurants at year end ............. 62 45 41 Number of Company restaurant operating months ......... 559 513 453 Average sales per Company restaurant operating month ............................................. $112,500 $108,600 $101,100
A summary of sales and costs of sales expressed as a percentage of sales are listed below for the fiscal years:
1997 1996 1995 ------ ------ ------ SALES: Food ..................................... 85.6% 85.1% 83.5% Beverage ................................. 14.4% 14.9% 16.5% ------ ------ ------ Total ................................. 100.0% 100.0% 100.0% ====== ====== ====== COSTS OF SALES: Food ..................................... 28.7% 30.7% 30.6% Beverage ................................. 26.7% 30.5% 30.2% ------ ------ ------ Total ................................. 28.4% 30.6% 30.5% ====== ====== ======
Average monthly sales per unit were $112,500 during 1997 compared to $108,600 during 1996. The 1997 per unit monthly sales increased by $3,900 or 3.6% from 1996 levels. This increase is primarily due to the introduction of a new Garfield's menu design, a successful television advertising campaign during the fourth quarter, the success of continued radio and newspaper advertising, the implementation of a mall employee rewards program in selected locations, and the addition of 17 higher volume restaurants through the Famous Acquisition in the fourth quarter of 1997. The Company's management expects that average monthly sales per unit will increase in future periods due to the addition of the 17 new Mexican restaurants through the Famous Acquisition and the future openings of Garcia's. Average monthly sales per unit were $108,600 during 1996 compared to $101,100 during 1995. The 1996 per unit monthly sales increased by $7,500 or 7.4% from 1995 levels. The increase was primarily due to a stronger, more experienced senior-level management team in place at the beginning of 1996, the successful introduction of quarterly regional newspaper advertising programs which were used in the majority of the Company's restaurant markets in 1996, successful tests of radio and direct mail advertising campaigns in selected markets and two menu roll-outs (in July and October 1996), both of which included selective modest price increases (in-line with competitor pricing on comparable menu selections) and introduced several new product selections that were featured in the aforementioned newspaper, radio and direct mail advertising campaigns. Continuing royalties were $268,000 in 1997, $265,000 in 1996 and $258,000 in 1995. Continuing royalties were comparable as the same number of franchise restaurants (eight) were in operation during the three year period. During the second quarter of 1995, one franchise restaurant closed and a new one opened. Initial franchise fees recognized in 1995 were $50,000. No initial franchise fees were recorded in 1997 or 1996. COSTS AND EXPENSES The following is a comparison of costs of sales and labor costs (excluding payroll taxes and fringe benefits) as a percentage of food and beverage sales at Company-owned restaurants:
1997 1996 1995 ------ ------ ------ Costs of sales ................................... 28.4% 30.6% 30.5% Labor costs ...................................... 27.3% 27.6% 28.0% ------ ------ ------ Total ....................................... 55.7% 58.2% 58.5% ====== ====== ======
12 15 Costs of sales as a percentage of food and beverage sales decreased in 1997 (28.4%) from 1996 (30.6%). This decrease is primarily due to the Company's continued menu development, increased vendor rebates, and improved store-level food and beverage cost controls. Costs of sales as a percentage of food and beverage sales increased slightly in 1996 (30.6%) as compared to 1995 (30.5%) primarily due to higher meat and dairy product costs, partially offset by lower produce costs and improvements in the Company's purchasing techniques. The Company's labor costs as a percentage of food and beverage sales decreased in 1997 to 27.3% from 27.6% in 1996. Labor costs as a percentage of food and beverage sales decreased in 1996 from 28.0% in 1995. The 1997 decrease is primarily due to continued improvement of store-level monitoring of labor needs, continued refinement of restaurant operations resulting in reduced kitchen labor costs and a reduction in the average number of managers per store from 1996. The decrease in 1996 from 1995 is primarily due to the improvements of store-level monitoring of labor needs. Operating expenses (which include labor costs) as a percentage of food and beverage sales were 58.5% in 1997, 57.8% in 1996, and 57.6% in 1995. The increase in operating expenses as a percentage of food and beverage sales in 1997 as compared to 1996 was due primarily to higher promotional and advertising expenses and occupancy costs (primarily rent and utilities) partially offset by lower labor costs (as previously explained). The modest increase in operating expenses as a percentage of food and beverage sales in 1996 versus 1995 was attributable to higher advertising and promotional expenses partially offset by lower restaurant occupancy and labor costs. PRE-OPENING COSTS Unlike a majority of its publicly-held competitors which capitalize and amortize pre-opening costs over a period of up to 24 months, the Company expenses such costs as incurred. During each of the three years ended December 28, 1997, December 29, 1996, and December 31, 1995, the Company incurred and recognized as expense the following amounts for restaurant pre-opening costs relative to the corresponding number of restaurants opened:
1997 1996 1995 -------- -------- -------- Total pre-opening costs ............................... $279,000 $726,000 $830,000 Restaurants opened .................................... 3 8 9 Average pre-opening costs per restaurant opened ....... $ 93,000 $ 90,700 $ 92,200 Total pre-opening costs as a percentage of food and beverage sales ................................ 0.4% 1.3% 1.8%
Under the Company's policy of expensing pre-opening costs as incurred, income from operations, on an annual and quarterly basis, could be adversely affected during periods of restaurant development. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses decreased as a percentage of total revenues to 6.4% in 1997 from 6.5% in 1996. In 1996, general and administrative expenses decreased from 6.6% in 1995. The higher absolute levels of general and administrative expenses from 1995 to 1997 are related primarily to additional personnel costs and related costs of operating the Company's expanding restaurant group. General and administrative expenses as a percentage of total revenues decreased modestly in 1997 as compared to 1996 and in 1996 as compared to 1995, as a result of the Company's revenues increasing at a higher rate than its increase in general and administrative expenses. The Company anticipates that its costs of supervision and administration of Company and franchise stores will increase at a slower rate than revenue increases during the next few years. PROVISION FOR RESTAURANT CLOSURES AND OTHER DISPOSALS During 1995, the Company approved and began the implementation of a plan to close four under-performing restaurants. During 1996, the Company identified two additional locations for closure. As of December 28, 1997, the Company had disposed of all restaurants planned for closure in 1995 and 1996. These restaurants (the 1995 and 1996 identified closures) collectively accounted for $79,000, $1,784,000 and $3,498,000 of revenues and $(18,000), $(68,000) and $(223,000) of operating losses for fiscal years 1997, 1996 and 1995, respectively. Management expects the effect of closing these under-performing restaurants to result in improved margins and increased profitability for the Company in future periods. As a result of the plan to close under-performing restaurants, the Company recorded a pre-tax charge of $897,000 in the third quarter of 1995. The provision related to lease termination costs, litigation settlement costs, write-down of property, equipment and leasehold improvements, and other exits costs. As of December 28, 1997, the Company has a remaining reserve of approximately $51,000 for settlement of any remaining liabilities associated with the closures. 13 16 PROVISION FOR IMPAIRMENT OF LONG-LIVED ASSETS In 1996, the Company adopted the provisions of SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Pursuant to SFAS 121, the Company's restaurants are reviewed on an individual restaurant basis for indicators of impairment, whenever events or circumstances indicate that the carrying value of its restaurants may not be recoverable. The Company's primary test for an indicator of potential impairment is operating losses. In order to determine whether an impairment has occurred, the Company estimates the future net cash flows expected to be generated from the use of its restaurants and the eventual disposition, as of the date of determination, and compares such estimated future cash flows to the respective carrying amounts. Those restaurants which have carrying amounts in excess of estimated future cash flows are deemed impaired. The carrying value of these restaurants is adjusted to an estimated fair value by discounting the estimated future cash flows attributable to such restaurants using a discount rate equivalent to the rate of return the Company expects to achieve from its investment in newly-constructed restaurants. The excess is charged to expense and cannot be reinstated. Considerable management judgment and certain significant assumptions are necessary to estimate future cash flows. Significant judgments and assumptions used by the Company in evaluating its assets for impairment include, but may not be limited to: estimations of future sales levels, cost of sales, direct and indirect costs of operating the assets, the length of time the assets will be utilized and the Company's ability to utilize equipment, fixtures and other moveable long-lived assets in other existing or future locations. In addition, such estimates and assumptions include anticipated operating results related to certain profit improvement programs implemented by the Company during 1996 and 1997, as well as the continuation of certain rent reductions, deferrals, and other negotiated concessions from certain landlords. Actual results could vary significantly from management's estimates and assumptions and such variance could result in a change in the estimated recoverability of the Company's long-lived assets. Accordingly, the results of the changes in those estimates could have a material impact on the Company's future results of operations and financial position. During 1997, the Company recorded an $85,000 provision for impairment of long-lived assets related to three locations. Additionally, as of December 28, 1997, the Company had identified a total of six locations with indicators of impairment. Prior to adopting SFAS 121, the Company accounted for the impairment of long-lived assets by evaluating the recoverability of assets of restaurant locations for which management had identified and began a plan to close the location. The Company continues to use the guidance of FASB Emerging Issues Task Force ("EITF") Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity" for guidance in recognizing costs related to closing restaurants. In the normal course of business, management performs a regular review of the strength of its operating assets. It is management's plan to continue to make such decisions to close under-performing restaurants and/or dispose of other assets it considers in the best long-term interest of the Company's shareholders. DEPRECIATION AND AMORTIZATION EXPENSE Depreciation and amortization expense increased in 1997 to $2,216,000 (3.5% of restaurant sales) compared to $1,886,000 (3.4% of restaurant sales) in 1996 and $1,337,000 (2.9% of restaurant sales) in 1995. The increase in expense in 1997 as compared to 1996 is primarily attributable to the increase in net assets subject to depreciation and amortization in 1997 versus 1996 as the result of opening and acquisition of additional restaurants. The expense increase in 1996 versus 1995 relates principally to the increase in net assets subject to depreciation and amortization because of opening additional restaurants, the purchase of the Pepperoni Grill restaurant in January 1995, and the remodeling of existing restaurants. INTEREST EXPENSE Interest expense during each of the three years in the period ended December 28, 1997, was $310,000 in 1997, $194,000 in 1996, and $41,000 in 1995. Additionally, the Company has capitalized approximately $39,000, $62,000 and $72,000 of interest costs during 1997, 1996 and 1995, respectively. The increase in interest expense in 1997 as compared to 1996 is attributable to an increase in the 1997 average borrowing balances and a higher average interest rate under the Company's revolving credit agreements and the increase in the Company's long-term debt as a result of the Famous Acquisition. The increase in interest expense in 1996 versus 1995 is attributable to an increase in the average borrowing balance under the Company's revolving credit agreement in 1996 versus 1995. INCOME TAXES The Company records income taxes in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes." The provision (benefit) for income taxes was $569,000, $74,000 and $(131,000), respectively, for 1997, 1996 and 1995. At December 28, 1997, the Company has recorded a benefit for its deferred tax assets of approximately $2,869,000. Management believes that approximately $2,019,000 of the assets will be recognized through the reversal of existing taxable 14 17 temporary differences with the remainder to be recognized through realization of future income. It is management's opinion, based on the historical trend of normal and recurring operating results, present store development and forecasted operating results, that it is more likely than not that the Company will realize the approximately $2,300,000 in the future net income in the next two years necessary to recognize the deferred tax assets not otherwise offset by reversing taxable temporary differences; net operating loss carryforwards do not begin to expire until 2003 and general business tax credits until 2009. While management of the Company is not presently aware of any adverse matters, it is possible that the Company's ability to realize the deferred income tax assets could be impaired if there are significant future exercises of non-qualified stock options or if the Company were to experience declines in sales and/or profit margins as a result of loss of market share, increased competition or other adverse general economic conditions. Management intends to evaluate the realizability of the net deferred tax asset at least quarterly by assessing the need for a valuation allowance. NET INCOME PER SHARE AMOUNTS In March 1997, The Financial Accounting Standards Board ("FASB") issued SFAS 128, "Earnings Per Share," which requires the calculation of basic and diluted earnings per share (EPS). Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. The weighted-average common shares outstanding for the basic EPS calculation were 3,868,950, 3,836,228 and 3,722,788 in 1997, 1996, and 1995, respectively. Diluted EPS is computed by dividing net income available to common stockholders by the sum of the weighted-average number of common shares outstanding for the period plus dilutive common stock equivalents. The sum of the weighted-average common shares and common share equivalents for the diluted EPS calculation were 3,988,016, 4,002,359 and 3,833,956 in 1997, 1996, and 1995, respectively. The Company adopted the provisions of SFAS 128 in the fourth quarter of 1997, and, as required, has restated all prior period EPS amounts to conform to the new accounting standard. IMPACT OF INFLATION The impact of inflation on the cost of food and beverage products, labor and real estate can affect the Company's operations. Over the past few years, inflation has had a lesser impact on the Company's operations due to the lower rates of inflation in the nation's economy and the economic conditions in the Company's market area. Management believes the Company has historically been able to pass on increased costs through certain selected menu price increases and increased productivity and purchasing efficiencies, but there can be no assurance that the Company will be able to do so in the future. Management anticipates that the average cost of restaurant real estate leases and construction costs could increase in the future which could affect the Company's ability to expand. LIQUIDITY AND CAPITAL RESOURCES At December 28, 1997, the Company's working capital ratio increased to 0.53 to 1 compared to 0.50 to 1 at December 29, 1996. As is customary in the restaurant industry, the Company has consistently operated with negative working capital and has not historically required large amounts of working capital. Historically, the Company has leased the vast majority of its restaurant locations. For fiscal years 1997, 1996 and 1995, the Company's expenditures for capital improvements were $3,886,000, $7,307,000, and $7,789,000, respectively, which were funded out of cash flows from operating activities of $4,977,000, $2,438,000, and $3,318,000, respectively, landlord finish-out allowances of $1,742,000, $3,022,000, and $2,492,000, respectively, and borrowings under the Company's credit agreements. In addition, the Company expended approximately $529,000 in January 1995 for the acquisition of the Pepperoni Grill restaurant and trade name and approximately $8,939,000 for the Famous Acquisition in November 1997. The Famous Acquisition was financed primarily through a term loan with a bank (described below). During 1998, the Company expects to construct and open an aggregate total of five new Garfield's (in regional malls) and Garcia's (in free-standing sites). The Company believes the cash generated from its operations and borrowing availability under its credit facility (described below), will be sufficient to satisfy the Company's net capital expenditures and working capital requirements through 1998. In August 1995, the Company entered into an agreement with a bank for a revolving line of credit for $3,000,000. In July 1996, the Company's $3,000,000 revolving line of credit was increased to $5,000,000 and the term was extended by one year to August, 1999. In November 1997, the Company entered into a new loan agreement with a bank. This loan agreement provides for a $6,000,000 revolving line of credit and a term loan in the principal amount not to exceed the lesser of $9,500,000, or the actual acquisition cost of the assets purchased from Famous Restaurants, Inc. under the Asset Purchase Agreement dated November 14, 1997. As of December 28, 1997, the Company had borrowed $8,631,415 under the term loan feature. There were no outstanding borrowings under the revolving line of credit as of December 28, 1997. Outstanding borrowings under both the revolving line of credit and term loan bear interest at three-month LIBOR plus 1.25% (6.94% as of December 28, 1997). The interest rate is adjusted quarterly. There is no non-use fee related to either facility. The revolving line of credit has a five-year term with final maturity in November 2002. Under the term loan, outstanding principal and interest are payable quarterly in the amount necessary to fully amortize the outstanding principal balance over a seven-year period, with a final maturity in November 2002. Borrowings under this loan agreement are secured by all of the Company's real estate. This loan agreement contains, among other things, certain financial 15 18 covenants and restrictions. As of December 28, 1997, the Company was in compliance with these financial covenants and restrictions. The revolving credit facility included in this loan agreement provides the Company adequate borrowing capacity to continue its expansion plans for Garfield's and Garcia's for the next two years. In November 1997, the Company entered into an interest rate swap agreement with a bank to hedge its risk exposure to potential increases in LIBOR. This agreement has a term of five years and an initial notional amount of $9,500,000. The notional amount declines quarterly over the life of the agreement on a seven-year amortization schedule assuming a fixed interest rate of 7.68%. Under the terms of the interest rate swap agreement, the Company pays interest quarterly on the notional amount at a fixed rate of 7.68%, and receives interest quarterly on the notional amount at a floating rate of three-month LIBOR plus 1.25%. In April 1997, the Company's Board of Directors authorized the repurchase of up to 200,000 shares of the Company's common stock. In July, 1997, an additional 200,000 shares were authorized for repurchase. As of December 28, 1997, 55,100 shares had been repurchased under this plan for a total purchase price of approximately $160,000. No additional shares have been repurchased subsequent to December 28, 1997. Other The use by many existing computer systems of a two-digit year date format rather than four digits--the Year 2000 issue--impacts the company's business systems and facilities. The company is working with key suppliers, vendors and customers to ensure Year 2000 compliance. Although the ultimate outcome of the Year 2000 project cannot be guaranteed, management believes the cost of addressing the Year 2000 issue is not material to the consolidated results of operations or financial condition of the company. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements of the Company are included in a separate section of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III In accordance with General Instruction G(3), a presentation of information required in response to Items 10, 11, 12, and 13 appear in the Company's Proxy Statement to be filed pursuant to Regulation 14A within 120 days of the year end covered hereby, and shall be incorporated herein by reference when filed. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of the report: 1. Consolidated Financial Statements: Management's Responsibility for Financial Reporting Reports of Independent Auditors Consolidated Balance Sheets as of December 28, 1997 and December 29, 1996 Consolidated Statements of Income for each of the three years in the periods ended December 28, 1997, December 29, 1996 and December 31, 1995 Consolidated Statements of Stockholders' Equity for each of the three years in the periods ended December 28, 1997, December 29, 1996 and December 31, 1995 Consolidated Statements of Cash Flows for each of the three years in the periods ended December 28, 1997, December 29, 1996 and December 31, 1995 Notes to Consolidated Financial Statements 2. Consolidated Financial Statement Schedules: All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 3. Exhibits. The following exhibits are filed with this Form 10-K and are identified by the numbers indicated: EXHIBIT NUMBER DESCRIPTION OF DOCUMENT 3.1 Amended and Restated Articles of Incorporation.(1) 3.2 Amendment to the Amended and Restated Articles of Incorporation.(2) 3.3 Bylaws as amended.(1) 4.1 Specimen Stock Certificate.(3) 16 19 EXHIBIT NUMBER DESCRIPTION OF DOCUMENT 4.2 Form of Representative's Warrant.(3) 10.1 Employment Agreement between the Company and Vincent F. Orza, Jr., dated October 1, 1995.(10) 10.2 Employment Agreement between the Company and James M. Burke, dated October 1, 1995.(10) 10.4 Lease Agreement dated May 1, 1987 (as amended June 30, 1990, October 1, 1992 and October 1, 1993) between the Company and Colonial Center, LTD for the lease of the Company's corporate office facilities in Oklahoma City, Oklahoma. (3) 10.8 Franchise Agreement and Amendment dated August 31, 1993 between the Company and Wolsey Dublin Company for the Garfield's franchise in Sioux City, Iowa and non-exclusive development rights to two additional locations in seven cities in four states over the next two years. (3) 10.9 Amended and Restated Franchise Agreement and Modification of Amended and Restated Franchise Agreement dated December 31, 1992 between the Company and O.E., Inc. for the three Garfield's franchise locations in the Oklahoma City, Oklahoma metropolitan area. (3) 10.10 Form of Franchise Agreement (revised March 1, 1993).(7) 10.11 Management Agreement dated December 31, 1992 between the Company and O.E., Inc. for the supervision and accounting services provided by the Company for three Garfield's franchise locations in the Oklahoma City metropolitan area. (3) 10.12 Collateral Assignment Agreement dated January 20, 1991, between the Company and Vincent F. Orza, Jr. (5) 10.13 Collateral Assignment Agreement dated January 20, 1991, between the Company and James M. Burke. (5) 10.15 Stock Plan for Significant Employees of the Company, dated December 1, 1986. (6) 10.16 1987 Director Stock Incentive Plan. (6) 10.17 Eateries, Inc. Omnibus Equity Compensation Plan. (6) 10.18 Underwriting Agreement between the Company, Pauli & Company Incorporated, RAS Securities Corp. and certain shareholders of the Company dated November 15, 1993. (3) 10.22 Asset Sale Agreement dated January 9, 1995 between the Company and Pepperoni Grill, Inc. and Specialty Restaurants, involving the purchase of assets of Pepperoni Grill restaurant by the Company. (9) 10.23 Employment Agreement between the Company and Corey Gable, dated January 1, 1997. (10) 10.24 Employment Agreement between the Company and Peter L. Holloway, dated January 1, 1995. (9) 10.25 Employee Stock Purchase Plan dated June 15, 1994 (8). 10.26 Amended and restated Eateries, Inc. Omnibus Equity Compensation Plan dated as of June 15, 1994. (9) 10.27 Option Agreement between the Company and Vincent F. Orza, Jr., dated January 4, 1996 (10) 10.28 Option Agreement between the Company and James M. Burke, dated January 4, 1996 (10) 10.29 Option Agreement between the Company and Corey Gable, dated April 5, 1996 (10) 10.32 Asset Purchase Agreement dated November 14, 1997, by and between the Company, through its wholly-owned subsidiary, Fiesta Restaurants, Inc., and Famous Restaurants, Inc. and its subsidiaries. (11) 10.33 Agreement for Purchase and Sale of Assets and Licenses dated February 26, 1998, among the Company and Chevy's, Inc. (12) 10.34 Agreement for purchase and Sale of Assets dated February 26, 1998, between the Company and Chevy's, Inc. (12) 10.35 Loan Agreement dated as of November 18, 1997, by and between NationsBank, N.A. and the Company. 10.36 Stock Put Agreement dated April 2, 1997, by and among Vincent F. Orza, Jr. and the Company. 10.37 Stock Put Agreement dated April 2, 1997, by and among James M. Burke and the Company. 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of Ernst & Young LLP. 27.1 Financial Data Schedule. (1) Filed as exhibit to Registrant's Registration Statement on Form S-18 (File No. 33-6818-FW). (2) Filed as exhibit to Registrant's Quarterly Report on Form 10-Q for the six months ended June 30, 1988 (File No. 0-14968) and incorporated herein by reference. (3) Filed as exhibit to Registrant's Registration Statement on Form S-2 (File No. 33-69896). (4) Filed as exhibit to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (File No. 0-14968) and incorporated herein by reference. (5) Filed as exhibit to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 0-14968) and incorporated herein by reference. (6) Filed as exhibit to Registrant's Registration Statement on form S-8 (File No. 33-41279). (7) Filed as exhibit to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-14968) and incorporated herein by reference. (8) Filed as Appendix A to the Company's Notice of Annual Meeting of Shareholders dated April 29, 1994 and incorporated herein by reference. (9) Filed as exhibit to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 0-14968) and incorporated herein by reference. (10) Filed as exhibit to Registrant's Annual Report on Form 10-K for the fiscal year ended December 29, 1996 (File No. 0-14968) and incorporated herein by reference. (11) Filed as exhibit to Registrant's Current Report on Form 8-K dated December 8, 1997 (File No. 0-14968) and incorporated herein by reference. (12) Filed as exhibit to Registrant's Current Report on Form 8-K dated March 16, 1998 (File No. 0-14968) and incorporated herein by reference. (b) A Form 8-K was filed on December 8, 1997, with the Securities and Exchange Commission regarding the Registrant's acquisition of certain assets from Famous Restaurants, Inc. and its subsidiaries. 17 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REGISTRANT: EATERIES, INC. Date: April 10, 1998 By: /s/ Vincent F. Orza, Jr. -------------- ------------------------ Vincent F. Orza, Jr. President Chief Executive Officer Date: April 10, 1998 By: /s/Corey Cable -------------- ------------------------- Corey Gable Vice President/Treasurer Chief Financial and Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: April 10, 1998 By: /s/Vincent F. Orza, Jr. -------------- ------------------------- Vincent F. Orza, Jr. Chairman of the Board, President and Director Date: April 10, 1998 By: /s/James M. Burke -------------- ------------------------- James M. Burke Vice President of Operations, Assistant Secretary and Director Date: April 10, 1998 By: /s/Edward D. Orza -------------- ------------------------- Edward D. Orza, Director Date: April 10, 1998 By: /s/Patricia L. Orza --------------- ------------------------- Patricia L. Orza, Secretary and Director Date: April 10, 1998 By: /s/Thomas F. Golden --------------- ------------------------- Thomas F. Golden, Director Date: April 10, 1998 By: /s/Philip Friedman --------------- ------------------------- Philip Friedman, Director Date: April 10, 1998 By: /s/Larry Kordisch --------------- ------------------------- Larry Kordisch, Director 18 21 EATERIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- Management's Responsibility for Financial Reporting....................................................... F-1 Reports of Independent Auditors............................................................................ F-2 Consolidated Balance Sheets as of December 28, 1997 and December 29, 1996.................................. F-4 Consolidated Statements of Income for each of the three years in the period ended December 28, 1997.................................................................................... F-5 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 28, 1997................................................................... F-6 Consolidated Statements of Cash Flows for each of the three years in the period ended December 28, 1997.................................................................................... F-7 Notes to Consolidated Financial Statements................................................................. F-8
19 22 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The management of Eateries, Inc. has the responsibility for preparing the accompanying consolidated financial statements and for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles and include amounts that are based on management's best estimates and judgment where necessary. Management believes that all representations made to our external auditors during their examination of the financial statements were valid and appropriate. To meet its responsibility, management has established and maintains a comprehensive system of internal control that provides reasonable assurance as to the integrity and reliability of the consolidated financial statements, that assets are safeguarded, and that transactions are properly executed and reported. This system can provide only reasonable, not absolute, assurance that errors and irregularities can be prevented or detected. The concept of reasonable assurance is based on the recognition that the cost of a system of internal control is subject to close scrutiny by management and is revised as considered necessary. The Board of Directors of Eateries, Inc. have engaged Arthur Andersen LLP, independent auditors, to conduct an audit of and express an opinion as to the fairness of the presentation of the 1997 consolidated financial statements. Their report is included on the following page. /s/Vincent F. Orza, Jr. - ----------------------------- Vincent F. Orza, Jr. President and Chairman Chief Executive Officer /s/Corey Gable - ---------------------------- Corey Gable Vice President/Treasurer Chief Financial and Accounting Officer April 10, 1998 F-1 23 REPORT OF INDEPENDENT AUDITORS Board of Directors Eateries, Inc. Oklahoma City, Oklahoma We have audited the accompanying consolidated balance sheet of Eateries, Inc. and subsidiaries as of December 29, 1996 and the related consolidated statements of income, stockholders' equity and cash flows for each of the two years in the period ended December 29, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Eateries, Inc. and subsidiaries at December 29, 1996, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 29, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Oklahoma City, Oklahoma March 26, 1997, except for the last paragraph of Note 5, as to which the date is April 9, 1997 F-2 24 REPORT OF INDEPENDENT AUDITORS Board of Directors Eateries, Inc. Oklahoma City, Oklahoma We have audited the accompanying consolidated balance sheet of Eateries, Inc. and subsidiaries as of December 28, 1997 and the related consolidated statements of income, stockholders' equity and cash flows for year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Eateries, Inc. and subsidiaries at December 28, 1997, and the consolidated results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Oklahoma City, Oklahoma March 5, 1998, F-3 25 EATERIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 28, December 29, 1997 1996 ------------ ------------ ASSETS Current assets: Cash and cash equivalents ....................................... $ 1,331,363 $ 695,481 Receivables: Franchisees .............................................. 35,693 53,685 Insurance refunds ........................................ 488,594 164,219 Landlord finish-out allowances ........................... 106,250 188,866 Other .................................................... 490,828 394,776 Deferred income taxes (Note 8) .................................. 452,000 387,000 Inventories ..................................................... 2,296,282 1,400,262 Other current assets ............................................ 357,903 209,929 ------------ ------------ Total current assets ................................. 5,558,913 3,494,218 Property and equipment, at cost (Notes 4 and 5): Land and buildings .............................................. 5,234,000 125,167 Furniture and equipment ......................................... 11,076,626 9,322,453 Leasehold improvements .......................................... 26,026,890 23,453,916 Assets under capital leases ..................................... 123,420 123,420 ------------ ------------ 42,460,936 33,024,956 Less: Landlord finish-out allowances ............................ 14,880,564 13,896,522 ------------ ------------ 27,580,372 19,128,434 Less: Accumulated depreciation and amortization ................. 7,201,463 5,444,896 ------------ ------------ Net property & equipment ................................ 20,378,909 13,683,538 Deferred income taxes (Note 8) ....................................... 398,000 975,000 Goodwill, net ........................................................ 2,479,045 193,589 Other assets ......................................................... 959,817 362,356 ------------ ------------ $ 29,774,684 $ 18,708,701 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ................................................ $ 4,850,211 $ 4,359,571 Accrued liabilities: Compensation ............................................ 2,191,775 1,388,058 Taxes, other than income ................................ 815,039 456,681 Other (Note 6) .......................................... 1,480,055 572,022 Restaurant closure costs (Note 7) ....................... 51,281 145,575 Current portion of long-term obligations (Note 5) ............... 1,014,715 28,308 ------------ ------------ Total current liabilities ...................... 10,403,076 6,950,215 Deferred credit ...................................................... 658,638 575,517 Other liabilities .................................................... 82,500 62,500 Long-term obligations, net of current portion (Note 5) ............... 7,637,415 1,470,715 Commitments (Note 4) Stockholders' equity (Note 10): Preferred stock, $.002 par value, none outstanding .............. -- -- Common stock, $.002 par value, 4,221,785 and 4,143,391 shares outstanding at December 28, 1997 and December 29, 1996, respectively ............................................. 8,444 8,287 Additional paid-in capital ...................................... 9,486,594 9,340,519 Retained earnings ............................................... 3,065,300 1,666,092 ------------ ------------ 12,560,338 11,014,898 Treasury stock, at cost, 347,115 and 282,761 shares at December 28, 1997 and December 29, 1996, respectively ... (1,567,283) (1,365,144) ------------ ------------ Total stockholders' equity ..................... 10,993,055 9,649,754 ------------ ------------ $ 29,774,684 $ 18,708,701 ============ ============
See accompanying notes. F-4 26 EATERIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
December 28, December 29, December 31, 1997 1996 1995 ------------ ------------ ------------ Revenues: Food and beverage sales ....................... $ 62,850,893 $ 55,732,807 $ 45,810,664 Franchise fees and royalties .................. 267,785 264,954 307,653 Other ......................................... 422,842 418,476 482,123 ------------ ------------ ------------ Total revenues ........................... 63,541,520 56,416,237 46,600,440 Costs of sales ...................................... 17,840,104 17,070,384 13,967,757 ------------ ------------ ------------ 45,701,416 39,345,853 32,632,683 Operating expenses (Note 6) ......................... 36,795,093 32,218,754 26,387,127 Pre-opening costs (Note 2) .......................... 279,000 726,000 830,000 General and administrative expenses ................. 4,048,964 3,665,207 3,067,610 Provision for restaurant closures and other disposals (Note 7) ................. -- -- 897,000 Provision for impairment of long-lived assets (Note 8) .................... 85,000 -- -- Depreciation and amortization ....................... 2,215,640 1,886,323 1,336,919 Interest expense .................................... 309,511 194,070 41,186 ------------ ------------ ------------ 43,733,208 38,690,354 32,559,842 ------------ ------------ ------------ Income before provision (benefit) for income taxes .. 1,968,208 655,499 72,841 Provision (benefit) for income taxes (Note 9) ....... 569,000 74,000 (113,000) ------------ ------------ ------------ Net income .......................................... $ 1,399,208 $ 581,499 $ 185,841 ============ ============ ============ Net income per common share (Note 11) ............... $ 0.36 $ 0.15 $ 0.05 ============ ============ ============ Net income per common share assuming dilution (Note 11) ................... $ 0.35 $ 0.15 $ 0.05 ============ ============ ============
See accompanying notes. F-5 27 EATERIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ---------------------------------------------- SHARES TREASURY STOCK ----------------------------- ----------------------------- AUTHORIZED ISSUED AMOUNT SHARES AMOUNT ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1994 ......... 20,000,000 3,952,890 $ 7,906 272,122 $ (1,328,867) Issuance of common stock: Exercise of stock options ..... -- 53,833 107 -- -- Employee stock purchase plan .. -- 12,411 25 -- -- Tax benefit from the exercise of non-qualified stock options (Note 8) ...................... -- -- -- -- -- Treasury stock acquired (Note 9) ... -- -- -- 1,917 (5,751) Net income ......................... -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1995 ......... 20,000,000 4,019,134 8,038 274,039 (1,334,618) Issuance of common stock: Exercise of stock options ..... -- 97,163 194 -- -- Employee bonuses .............. -- 2,750 6 -- -- Employee stock purchase plan .. -- 24,044 48 -- -- Sale of common stock .......... -- 300 1 -- -- Tax benefit from the exercise of non-qualified stock options (Note 8) ...................... -- -- -- -- -- Treasury stock acquired (Note 9) ... -- -- -- 8,722 (30,526) Net income ......................... -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Balance, December 29, 1996 ......... 20,000,000 4,143,391 8,287 282,761 (1,365,144) Issuance of common stock: Exercise of stock options ..... -- 59,332 119 -- -- Employee bonuses .............. -- 2,500 5 -- -- Employee stock purchase plan .. -- 16,462 33 -- -- Sale of common stock .......... -- 100 -- -- -- Tax benefit from the exercise of non-qualified stock options (Note 8) ...................... -- -- -- -- -- Treasury stock acquired (Note 9) ... -- -- -- 64,354 (202,139) Net income ......................... -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Balance, December 28, 1997 ......... 20,000,000 4,221,785 $ 8,444 347,115 $ (1,567,283) ============ ============ ============ ============ ============ ADDITIONAL PAID-IN RETAINED CAPITAL EARNINGS TOTAL ------------ ------------ ------------ Balance, December 31, 1994 ......... $ 9,047,594 $ 898,752 $ 8,625,385 Issuance of common stock: Exercise of stock options ..... 33,476 -- 33,583 Employee stock purchase plan .. 26,350 -- 26,375 Tax benefit from the exercise of non-qualified stock options (Note 8) ...................... 47,000 -- 47,000 Treasury stock acquired (Note 9) ... -- -- (5,751) Net income ......................... -- 185,841 185,841 ------------ ------------ ------------ Balance, December 31, 1995 ......... 9,154,420 1,084,593 8,912,433 Issuance of common stock: Exercise of stock options ..... 60,533 -- 60,727 Employee bonuses .............. 10,941 -- 10,947 Employee stock purchase plan .. 57,432 -- 57,480 Sale of common stock .......... 1,193 -- 1,194 Tax benefit from the exercise of non-qualified stock options (Note 8) ...................... 56,000 -- 56,000 Treasury stock acquired (Note 9) ... -- -- (30,526) Net income ......................... -- 581,499 581,499 ------------ ------------ ------------ Balance, December 29, 1996 ......... 9,340,519 1,666,092 9,649,754 Issuance of common stock: Exercise of stock options ..... 51,214 -- 51,333 Employee bonuses .............. 8,595 -- 8,600 Employee stock purchase plan .. 48,941 -- 48,974 Sale of common stock .......... 325 -- 325 Tax benefit from the exercise of non-qualified stock options (Note 8) ...................... 37,000 -- 37,000 Treasury stock acquired (Note 9) ... -- -- (202,139) Net income ......................... -- 1,399,208 1,399,208 ------------ ------------ ------------ Balance, December 28, 1997 ......... $ 9,486,594 $ 3,065,300 $ 10,993,055 ============ ============ ============
See accompanying notes. F-6 28 EATERIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended ------------------------------------------------ December 28, December 29, December 31, 1997 1996 1995 ------------ ------------ ------------ Cash flows from operating activities: Net income .......................................... $ 1,399,208 $ 581,499 $ 185,841 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .................. 2,215,640 1,886,323 1,336,919 Gain on asset disposals ........................ (6,165) (42,544) (133,144) Common stock bonuses ........................... 8,600 10,947 -- Provision (benefit) for deferred income taxes .. 549,000 74,000 (113,000) (Increase) decrease in operating assets: Receivables ............................... (393,730) (7,869) (209,745) Inventories ............................... 46,320 (31,589) (268,464) Prepaid expenses and deposits ............. 10,041 (30,909) (45,213) Increase (decrease) in operating liabilities: Accounts payable .......................... 202,198 154,383 1,285,362 Accrued liabilities ....................... 842,299 (329,300) 1,171,977 Deferred credit ........................... 103,121 222,035 (4,659) Other liabilities ......................... -- (49,400) 111,900 ------------ ------------ ------------ Total adjustments .............................. 3,577,324 1,856,077 3,131,933 ------------ ------------ ------------ Net cash provided by operating activities ...... 4,976,532 2,437,576 3,317,774 ------------ ------------ ------------ Cash flows from investing activities: Capital expenditures ................................ (3,886,481) (7,306,987) (7,788,654) Landlord finish-out allowances ...................... 1,741,658 3,021,883 2,491,931 Net cash payments for restaurant acquisitions ....... (8,991,173) -- (529,083) Proceeds from the sale of property and equipment .... 15,063 53,001 426,214 Sales of marketable securities ...................... -- -- 514,737 Payments received for notes receivable .............. 11,620 -- -- Decrease (increase) in other assets ................. (72,784) (50,457) (24,143) ------------ ------------ ------------ Net cash used in investing activities .......... (11,182,097) (4,282,560) (4,908,998) ------------ ------------ ------------ Cash flows from financing activities: Sales of common stock ............................... 49,299 58,674 26,375 Payments on notes payable to vendor ................. -- (13,139) (434,362) Payments on long-term obligations ................... (28,308) (25,305) (70,619) Net borrowings under revolving credit agreement ..... (1,450,000) 250,000 1,200,000 Borrowings under note payable ....................... 8,631,415 -- -- Proceeds from issuance of stock on exercise of ...... 26,333 60,727 27,833 stock options Payment of withholding tax liabilities related to acquisition of treasury stock ................. (17,224) (30,526) -- Repurchase of treasury stock ........................ (159,915) -- -- Increase (decrease) in bank overdrafts included in accounts payable ................................. (210,153) 1,238,080 -- ------------ ------------ ------------ Net cash provided by financing activities ................................. 6,841,447 1,538,511 749,227 ------------ ------------ ------------ Net decrease in cash and cash equivalents ................. 635,882 (306,473) (841,997) Cash and cash equivalents at beginning period ............. 695,481 1,001,954 1,843,951 ============ ============ ============ Cash and cash equivalents at end of period ................ $ 1,331,363 $ 695,481 $ 1,001,954 ============ ============ ============
See accompanying notes. F-7 29 EATERIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION Eateries, Inc. (the "Company") was incorporated under the laws of the State of Oklahoma on June 1, 1984. The Company is engaged in the creation, design, management and operations of restaurants through Company-owned and franchise restaurants. The Company's restaurants are located primarily in regional malls in the Southwest, Midwest and Southeast regions of the United States. The Company's restaurants operate under the name "Garfield's Restaurant & Pub" ("Garfield's"), "Pepperoni Grill" and "Casa Ole" (as a franchisee). An analysis of Company-owned and franchised restaurants for the three years in the period ended December 28, 1997, is as follows:
Company Franchised Total Units Units Units --------- ---------- ----------- At December 31, 1994 34 8 42 Units opened 9 1 10 Units closed (3) (1) (4) Unit acquired 1 -- 1 --------- ---------- ----------- At December 31, 1995 41 8 49 Units opened 8 -- 8 Units closed (3) -- (3) Unit sold (1) -- (1) --------- ---------- ----------- At December 29, 1996 45 8 53 Units opened 3 -- 3 Units closed (3) -- (3) Units acquired 17 2 19 --------- ---------- ----------- At December 28, 1997 62 10 72 ========= ========== ===========
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Eateries, Inc. and its wholly-owned subsidiaries, Fiesta Restaurants, Inc., Pepperoni Grill, Inc. and Garfield's Management, Inc. All significant intercompany transactions and balances have been eliminated. FISCAL YEAR In 1996, the Company changed its fiscal year to a 52/53 week year ending on the last Sunday in December. CASH AND CASH EQUIVALENTS Cash and cash equivalents include certain highly liquid debt instruments with a maturity of three months or less when purchased. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market and consist primarily of food, beverages and smallwares. LANDLORD FINISH-OUT ALLOWANCES Amounts received or receivable from landlords for reimbursement of improvements to leased facilities are recorded as a reduction of the costs incurred by the Company for property and equipment. DEPRECIATION AND AMORTIZATION Property and equipment (which includes assets under capital leases) and landlord finish-out allowances are stated at cost (or amounts received with respect to landlord finish-out allowances) and are depreciated and amortized over the lesser of the estimated useful lives of the assets or the remaining term of the leases using the straight-line method. Estimated useful lives are as follows: F-8 30 Buildings....................... 15-30 Years Furniture and equipment......... 5-15 Years Leasehold improvements.......... 3-15 Years Landlord finish-out allowances.. 8-15 Years
ADVERTISING COSTS Costs incurred in connection with advertising and marketing of the Company's restaurants are expensed as incurred. Such costs amounted to $1,376,000 in 1997, $797,000 in 1996 and $647,000 in 1995. PRE-OPENING COSTS The costs related to the opening of restaurant locations are expensed when incurred. INCOME TAXES The Company is subject to Federal, State and local income taxes. The Company records income taxes in accordance with Statement of Financial Accounting Standards No. ("SFAS") 109 "Accounting for Income Taxes." Under SFAS 109, deferred income taxes are provided on the tax effect of presently existing temporary differences, net of existing net operating loss and tax credit carryforwards. The tax effect is measured using the enacted marginal tax rates and laws that will be in effect when the differences and carryforwards are expected to be reversed or utilized. Temporary differences consist principally of depreciation caused by using different lives for financial and tax reporting, the expensing of smallwares when incurred for tax purposes while such costs are capitalized for financial purposes and the expensing of costs related to restaurant closures and other disposals for financial purposes prior to being deducted for tax purposes. DEFERRED CREDIT Certain of the Company's long-term noncancellable operating leases for restaurant and corporate facilities include scheduled base rental increases over the term of the lease. The total amount of the base rental payments is charged to expense on the straight-line method over the term of the lease. The Company has recorded a deferred credit to reflect the net excess of rental expense over cash payments since inception of the leases. FRANCHISE ACTIVITIES The Company franchises the Garfield's Restaurant & Pub concept to restaurant operators and, at December 28, 1997 and December 29, 1996, eight restaurant units were operating under franchise agreements. During 1997, the Company signed an agreement for a new franchise location. This location was opened in March, 1998, increasing the total number of franchised Garfield's to nine. The initial franchise fee paid to the Company is recognized as income when substantially all services have been performed by the franchisor to each franchised location, which is typically when the related restaurant is opened. The franchisor provides initial services to the franchisee in the selection of a site, approval of architectural plans, assistance in the selection of equipment for the restaurant, distribution of operations manuals and training of franchisee's personnel prior to the opening of the restaurant. The Company recognized $50,000 of initial franchise fees for franchised restaurants during 1995 (none were recognized in 1996 or 1997). Continuing royalties are recognized as revenue based on the terms of each franchise agreement, generally as a percentage of sales of the franchised restaurants. During 1997, 1996 and 1995, the Company recognized $268,000, $265,000, and $258,000, respectively, of fees from continuing royalties. Franchisees are required to remit an amount equal to 1/2% of their sales to the Garfield's Creative Marketing Fund. The franchisees' payments, which were $41,000, $41,000, and $39,000 during 1997, 1996 and 1995, respectively, are combined with the franchisor's expenditures to purchase services for creative advertising and design, market research and other items to maintain and further enhance the Garfield's concept. Franchisee receivables at December 28, 1997 and, December 29, 1996 are comprised primarily of uncollected continuing royalties, which are generally unsecured; however, the Company has not experienced significant credit losses in prior years and is not aware of any significant uncollectible amounts at December 28, 1997. CAPITALIZATION OF INTEREST Interest attributed to funds used to finance restaurant construction projects is capitalized as an additional cost of the related assets. Capitalization of interest ceases when the related projects are substantially complete. The Company has capitalized F-9 31 approximately $39,000, $62,000 and $72,000 of interest costs during 1997, 1996 and 1995, respectively. These costs are included in leasehold improvements in the accompanying balance sheets. STOCK-BASED COMPENSATION In 1996, the Company adopted SFAS 123, "Accounting for Stock-Based Compensation." As permitted by SFAS 123, the Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under SFAS 123, requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. NET INCOME PER COMMON SHARE In March 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 128, "Earnings Per Share," which requires the calculation of basic and diluted earnings per share (EPS). Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income available to common stockholders by the sum of the weighted-average number of common shares outstanding for the period plus common stock equivalents. The Company adopted the provisions of SFAS 128 in the fourth quarter of 1997, and, as required, has restated all prior period EPS amounts to conform to the new accounting standard. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. STATEMENTS OF CASH FLOWS Interest of $277,000, $228,000 and $94,000 was paid for each of the three years 1997, 1996 and 1995, respectively. For the three years 1997, 1996 and 1995, the Company had the following non-cash investing and financing activities.
Fiscal Year ---------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Increase (decrease) in current receivables for landlord finish-out allowances ...................... $ (82,616) $ (559,422) $ 493,288 Increase (decrease) in non-current receivables for landlord finish-out allowances .......................... -- (429,000) 429,000 Sales of property and equipment in exchange for notes receivable .................................... 160,000 95,000 -- Borrowings for capital expenditures under notes payable to vendor ................................. -- -- 116,567 Acquisition of treasury stock upon exercise of stock options (Note 9) .................................. 25,000 -- 5,751 Increase in additional paid-in capital as a result of tax benefits from the exercise of non-qualified stock options ............................. 37,000 56,000 47,000 Asset write-offs related to restaurant closures and other disposals ............................ 13,334 71,932 -- Assumption of liabilities related to restaurant acquisition .. 1,618,773 -- --
FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating the fair values of financial instruments for purposes of complying with SFAS 107, "Disclosures About Fair Values of Financial Instruments": Cash and cash equivalents, accounts receivable, deposits, accounts payable and accrued liabilities - The carrying amounts reported in the consolidated balance sheets approximate fair values because of the short maturity of these instruments. F-10 32 Long-term obligations - The revolving credit agreement, which represents the material portion of long-term obligations in the accompanying consolidated balance sheets, bears interest at a variable rate, which is adjusted monthly. Therefore, the carrying values for these borrowings approximate their fair values. OTHER During 1997 and early 1998, the Financial Accounting Standards Board issued several pronouncements related to financial statement disclosure that will affect the Company's 1998 financial statement presentation. Following is a discussion of the new standards. Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income," established standards for the reporting and display of comprehensive income and its components as a part of the basic financial statements. The Company does not believe that comprehensive income will differ materially from net income. The disclosures will be required for the 1998 year-end financial statements, and abbreviated information will be required for the first quarter. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," establishes standards for determining segments and reporting information about a company's business segments, products and services, geographic areas and major customers in annual financial statements. Also required is selected information about operating segments in interim financial reports issued to shareholders. The Company does not anticipate the adoption of this new accounting standard will create additional business segment reporting requirements. SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," was issued in February 1998. This statement, effective for year-end 1998 financial statements, revises disclosures about pensions and other postretirement benefit plans. It does not change the measurement or recognition of costs associated with those plans. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Amounts capitalized or expensed by the Company for internal-use software projects are not expected to differ materially as a result of the SOP, since the prescribed accounting treatment is fairly consistent with the Company's current accounting policy. The SOP, the effect of which is to be recognized prospectively, is effective for 1999 financial statements. (3) RESTAURANT ACQUISITIONS In January 1995, the Company acquired substantially all of the assets of the "Pepperoni Grill' restaurant located in Oklahoma City, Oklahoma, along with rights to use trademarks associated with the restaurant, for a cash purchase price (including transaction expenses) of $529,000. Additionally, the Company assumed real estate and equipment leases for the restaurant. The acquisition has been accounted for under the purchase method. As a result, the Company recorded inventory, equipment and leasehold improvements totaling $199,000, trademarks of $125,000 and goodwill of approximately $205,000. The Company is amortizing the cost of the trademarks and goodwill over 20 years using the straight-line method and assesses the recoverability of such assets based upon the expected future cash flows from operations of the Pepperoni Grill concept. In November 1997, the Company, through its wholly-owned subsidiary, Fiesta Restaurants, Inc., acquired from Famous Restaurants, Inc. and its subsidiaries ("Famous"), substantially all of the assets comprising 17 Mexican restaurants, and the corporate headquarters of Famous (the "Famous Acquisition"). The acquired restaurants operate under the names: Garcia's (10), Casa Lupita (five) and Carlos Murphy's (two). The purchase price for the assets was approximately $10,652,000 of which $8,631,415 was paid in cash at closing and the balance represented estimated liabilities of Famous assumed by the Company and transaction costs. The acquisition has been accounted for under the purchase method. The following unaudited pro forma combined information for the years ended December 28, 1997 and December 29, 1996, give effect to the Famous Acquisition as if it had been consummated as of December 30, 1996 and January 1, 1996, respectively:
1997 1996 -------------- -------------- Total revenues $ 92,211,956 $ 88,583,645 Net income 1,549,630 678,932 Net income per common share 0.40 0.18 Net income per common share assuming dilution 0.39 0.17
The unaudited pro forma combined information is based upon the historical financial statements of the Company and Famous Restaurants, Inc., giving effect to the transaction under the purchase method of accounting and adjustments for: (1) amortization and depreciation of the property and equipment acquired, (2) amortization of goodwill recorded in connection with the acquisition, (3) interest expense related to the acquisition debt, and (4) the tax effects of the adjustments and pro forma results of the acquisition. The unaudited pro forma combined information has been prepared based on estimates and assumptions deemed by the Company to be appropriate and do not purport to be indicative of the results of operations which would actually have been obtained if the Famous Acquisition had occurred as presented in such information or which may be obtained in the future. The Company has developed and will apply its existing cost reduction practices beyond those assumed in these unaudited pro forma results to further reduce cost of sales, operating expenses and general and administrative expenses. The results of these cost saving practices are prospective in nature and although there are savings inherent in these techniques, such projected savings have not been incorporated into the pro forma combined information. (4) REAL ESTATE LEASES The Company leases the majority of its restaurant facilities and its corporate office under operating leases with initial terms expiring at various dates through the year 2009. Certain leases contain renewal options ranging from five to ten years. Most, but not all, leases require the Company to be responsible for the payment of taxes, insurance and/or maintenance and include percentage rent and fixed rent escalation clauses. In the normal course of business, the Company may grant a landlord lien on certain personal property upon an event of default by the Company. At December 28, 1997, the remaining minimum rental commitments under long-term noncancellable leases, excluding amounts related to taxes, insurance, maintenance and percentage rent, are as follows: 1998......................................... $ 5,269,000 1999......................................... 5,233,000 2000......................................... 5,158,000 2001......................................... 4,884,000 2002......................................... 4,323,000 Thereafter................................... 14,711,000 ----------- Total minimum rental commitments............. $39,578,000 ===========
F-11 33 Total minimum rental commitments include $1,649,000 related to two locations scheduled for opening in 1998 and $705,000 related to three locations which were sold subsequent to December 28, 1997. The components of rent expense for noncancellable operating leases are summarized as follows:
Fiscal Year ---------------------------------------- 1997 1996 1995 ---------- ---------- ---------- Minimum rents ................ $3,549,000 $2,912,000 $2,611,000 Percentage rents ............. 203,000 211,000 131,000 ---------- ---------- ---------- $3,752,000 $3,123,000 $2,742,000 ========== ========== ==========
(5) LONG-TERM OBLIGATIONS Long-term obligations consist of the following:
December 28, December 29, 1997 1996 ----------- ----------- Revolving line of credit with a bank, interest at the London Interbank Offered Rates ("LIBOR") plus 2.75% (8.35% at December 28, 1997) ...................................................... $ -- $ 1,450,000 Term loan with a bank, interest at LIBOR plus 1.25% (6.94% at December 28, 1997) ................................................... 8,631,415 -- Obligations under capital leases .................................................... 20,715 49,023 ----------- ----------- 8,652,130 1,499,023 Less current portion ................................................................ (1,014,715) (28,308) ----------- ----------- $ 7,637,415 $ 1,470,715 =========== ===========
At December 28, 1997 the future minimum lease payments for equipment under capital leases are $21,600 for 1998 and none for 1999 (amount representing interest is $885). Maturities of long-term obligations at December 28, 1997 are:
1998 $1,014,715 1999 1,064,000 2000 1,140,000 2001 1,221,000 2002 4,212,415 ---------- $8,652,130 ==========
In November 1997, the Company entered into a new loan agreement with a bank. This loan agreement provides for a $6,000,000 revolving line of credit and a term loan in the principal amount not to exceed the lesser of $9,500,000, or the actual acquisition cost of the assets purchased from Famous Restaurants, Inc. under the Asset Purchase Agreement dated November 14, 1997. As of December 28, 1997, the Company had borrowed $8,631,415 under the term loan feature. There were no outstanding borrowings under the revolving line of credit as of December 28, 1997. Outstanding borrowings under both the revolving line of credit and term loan bear interest at three-month LIBOR plus 1.25% (6.94% as of December 28, 1997). The interest rate is adjusted quarterly. There is no non-use fee related to either facility. The revolving line of credit has a five-year term with final maturity in November 2002. Under the term loan, outstanding principal and interest are payable quarterly in the amount necessary to fully amortize the outstanding principal balance over a seven-year period, with a final maturity in November 2002. Borrowings under this loan agreement are secured by all of the Company's real estate. This loan agreement contains, among other things, certain financial covenants and restrictions. As of December 28, 1997, the Company was in compliance with these financial covenants and restrictions. In November 1997, the Company entered into an interest rate swap agreement with a bank to hedge its risk exposure to potential increases in LIBOR. This agreement has a term of five years and an initial notional amount of $9,500,000. The notional amount declines quarterly over the life of the agreement on a seven-year amortization schedule assuming a fixed interest rate of 7.68%. Under the terms of the interest rate swap agreement, the Company pays interest quarterly on the notional amount at a fixed rate of 7.68%, and receives interest quarterly on the notional amount at a floating rate of three-month LIBOR plus 1.25%. In August 1995, the Company entered into a three-year unsecured revolving credit agreement with a bank (which replaced a $500,000 line of credit with another bank). This agreement was a three-year unsecured revolving facility allowing the Company to borrow at the national prime interest rate or the LIBOR plus 2.75% (the interest rate was reset monthly). The Company was also F-12 34 required to pay a non-use fee of 1/2of 1% per annum on the daily average of the unborrowed amount of the revolving loan facility. In July, 1996, the loan agreement was amended to allow the Company to borrow up to $5,000,000 through August 31, 1999. During the year ended December 29, 1996, the Company had not met a financial covenant and certain restriction provisions under this loan agreement. In April 1997, these violations were waived by the bank. This agreement was terminated in November 1997 and replaced by the loan agreement described above. (6) RELATED PARTY TRANSACTIONS An affiliate of the Company is providing marketing and advertising services. Total costs incurred for such services (primarily radio, television and print media) were approximately $554,000 in 1997, $168,000 in 1996 and $424,000 in 1995. A director of the Company is a partner in a law firm that provides legal services to the Company. During 1997, 1996 and 1995, the Company incurred approximately $132,000, $148,000 and $127,000, respectively, in legal services with the firm. During 1997 and 1996, the Company also acquired common stock from certain officers and directors (see Note 9). (7) PROVISION FOR RESTAURANT CLOSURES AND OTHER DISPOSALS During 1995, the Company approved and began the implementation of a plan to close four under-performing restaurants. During 1996, the Company identified two additional locations for closure. As of December 28, 1997, the Company had disposed of all restaurants planned for closure in 1995 and 1996. These restaurants (the 1995 and 1996 identified closures) collectively accounted for $79,000, $1,784,000 and $3,498,000 of revenues and $(18,000), $(68,000) and $(223,000) of operating losses for fiscal years 1997, 1996 and 1995, respectively. Management expects the effect of closing these under-performing restaurants to result in improved margins and increased profitability for the Company in future periods. As a result of the plan to close under-performing restaurants, the Company recorded a pre-tax charge of $897,000 in the third quarter of 1995. The provision related to lease termination costs, litigation settlement costs, write-down of property, equipment and leasehold improvements, and other exits costs. As of December 28, 1997, the Company has a remaining reserve of approximately $51,000 for settlement of its remaining liabilities associated with the closures. (8) PROVISION FOR IMPAIRMENT OF LONG-LIVED ASSETS In 1996, the Company adopted the provisions of SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed Of." Pursuant to SFAS 121, the Company's restaurants are reviewed on an individual restaurant basis for indicators of impairment, whenever events or circumstance indicate that the carrying value of its restaurants may not be recoverable. The Company's primary test for an indicator of potential impairment is operating losses. In order to determine whether an impairment has occurred, the Company estimates the future net cash flows expected to be generated from the use of its restaurants and the eventual disposition, as of the date of determination, and compares such estimated future cash flows to the respective carrying amounts. Those restaurants which have carrying amounts in excess of estimated future cash flows are deemed impaired. The carrying value of these restaurants is adjusted to an estimated fair value by discounting the estimated future cash flows attributable to such restaurants using a discount rate equivalent to the rate of return the Company expects to achieve from its investment in newly-constructed restaurants. The excess is charged to expense and cannot be reinstated. Considerable management judgment and certain significant assumptions are necessary to estimate future cash flows. Significant judgments and assumptions used by the Company in evaluating its assets for impairment include, but may not be limited to: estimations of future sales levels, cost of sales, direct and indirect costs of operating the assets, the length of time the assets will be utilized and the Company's ability to utilize equipment, fixtures and other moveable long-lived assets in other existing or future locations. In addition, such estimates and assumptions include anticipated operating results related to certain profit improvement programs implemented by the Company during 1996 and 1997 as well as the continuation of certain rent reductions, deferrals, and other negotiated concessions from certain landlords. Actual results could vary significantly from management's estimates and assumptions and such variance could result in a change in the estimated recoverability of the Company's long-lived assets. Accordingly, the results of the changes in those estimates could have a material impact on the Company's future results of operations and financial position. F-13 35 During 1997, the Company recorded an $85,000 provision for impairment of long-lived assets related to three locations. Additionally, as of December 28, 1997, the Company had identified a total of six locations with indicators of impairment. Prior to adopting SFAS 121, the Company accounted for the impairment of long-lived assets by evaluating the recoverability of assets of restaurant locations for which management had identified and began a plan to close the location. The Company continues to use the guidance of FASB Emerging Issues Task Force ("EITF") Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity" for guidance in recognizing costs related to closing restaurants. (9) INCOME TAXES The provision (benefit) for income taxes consists of the following (see Note 2):
1997 1996 1995 --------- --------- --------- Current: Federal $ -- $ -- $ -- State 20,000 -- -- --------- --------- --------- 20,000 -- -- --------- --------- --------- Deferred: Federal 450,000 44,000 (110,000) State 99,000 30,000 (3,000) --------- --------- --------- 549,000 74,000 (113,000) --------- --------- --------- Provision (benefit) for income taxes $ 569,000 $ 74,000 $(113,000) ========= ========= =========
The components of deferred tax assets and liabilities consist of the following:
December 28, December 29, 1997 1996 ---------- ---------- Deferred tax assets: Net operating loss carryforwards ......................... $1,646,000 $2,169,000 General business tax credits ............................. 972,000 687,000 Restaurant Closures and other disposals .................. 20,000 54,000 Deferred rent credit ..................................... 61,000 68,000 Other .................................................... 170,000 65,000 ---------- ---------- Total deferred tax assets .............................. 2,869,000 3,043,000 Valuation allowance for deferred tax assets .............. -- -- ---------- ---------- Total deferred tax assets, net of allowance ............ 2,869,000 3,043,000 Deferred tax liabilities: Smallwares expensed for tax purposes ..................... 578,000 338,000 Tax depreciation in excess of financial depreciation ..... 1,411,000 1,325,000 Other .................................................... 30,000 18,000 ---------- ---------- Total deferred tax liabilities ......................... 2,019,000 1,681,000 ---------- ---------- Net deferred tax assets .................................. $ 850,000 $1,362,000 ========== ==========
At December 28, 1997, the Company has recorded a benefit for its deferred tax assets of $2,869,000. Management believes that $2,019,000 of these assets will be recognized through the reversal of existing taxable temporary differences with the remainder to be recognized through realization of future income. It is management's opinion based on the historical trend of normal and recurring operating results, present store development, and forecasted operating results that it is more likely than not that the Company will realize the approximately $2,300,000 in future net income in the next three years necessary to realize the deferred tax assets not otherwise offset by reversing taxable temporary differences. Net operating loss carryforwards do not begin to expire until 2003 and general business tax credits until 2009. While management is not presently aware of any adverse matters, it is possible that the Company's ability to realize the deferred income tax assets could be impaired if there are significant future exercises of non-qualified stock options or the Company were to experience declines in sales and/or profit margins as a result of loss of market share, increased competition or other adverse general economic conditions. F-14 36 A reconciliation of theoretical income taxes follows:
Fiscal Year --------------------------------------- 1997 1996 1995 --------- --------- --------- Expected tax provision at 34% $ 669,000 $ 223,000 $ 24,800 Permanent differences (1,000) 12,100 8,500 State tax provisions, net of federal benefit 79,000 19,700 2,200 Tax effect of general business tax credits (178,000) (180,800) (149,000) Other, net -- -- 500 --------- --------- --------- Income tax provision (benefit) $ 569,000 $ 74,000 $(113,000) ========= ========= =========
The Company estimates that at December 28, 1997, the tax net operating loss carryforward was approximately $4,300,000 (which principally relates to the tax benefit from the exercise of non-qualified stock options, the benefit of which was recognized through paid-in capital) which is available for utilization in various years through 2011. (10) STOCKHOLDERS' EQUITY The Company has authorized 10,000,000 shares of $.002 par value preferred stock. None of the preferred stock has been issued. The rights, preferences and dividend policy have not been established and are at the discretion of the Company's Board of Directors. The Company has authorized 20,000,000 shares of common stock at a par value of $.002 per share. In conjunction with an offering of common stock in 1993, the Company issued to the underwriters warrants to purchase 67,500 common shares of the Company. Such warrants are exercisable beginning on November 22, 1994, at an initial exercise price of $5.89 per share. The exercise price escalates each anniversary date with a final exercise price of $6.56 per share on the fourth anniversary of the issuance of the warrants. The warrants expire on November 22, 1998. The exercise price and the number of shares of common stock for which the warrants are exercisable are subject to adjustment upon the occurrence of certain dilutive events. In May 1989, the Company's shareholders approved the Eateries, Inc. Omnibus Equity Compensation Plan ("the Plan") (which was amended in June 1994 by approval of the shareholders). The Plan consolidated the Company's equity based award programs which are described as follows: DIRECTOR OPTION PLAN Non-qualified stock options granted and outstanding include 343,661 director options. Under the Plan, each director receives options to purchase 50,000 shares of common stock upon initial election to the Board of Directors. These options vest over a five-year period at 20% per year and expire five years from the date vested (last expiring in 2007). As a result of an amendment to the Plan in 1994, any director who has served as a director of the Company for five years, upon election for any additional terms, shall be granted an option to purchase 10,000 shares of common stock for each additional year elected. These options fully vest after one year of additional service by the director and expire five years from the date vested (last expiring in 2003). MANAGEMENT OPTIONS Non-qualified stock options granted and outstanding include 517,500 management options, which are vested over three to five-year periods and expire five years from the date vested (last expiring in 2006). A summary of stock option activity under the Plan is as follows: F-15 37
Weighted Number Exercise Price Average of Shares Per Share Exercise Price ----------- ---------------------------- ------------------ Outstanding at December 31, 1994 (of which approximately 269,000 options are exercisable at weighted average prices of $.78) .......................................... 450,489 $ .50 -- $ 6.00 $ 2.15 Granted .................................................... 120,000 2.875 -- 3.875 3.20 Options exercised: Director ................................................. (23,333) .625 -- 1.00 .79 Management ............................................... (30,500) .50 .50 Forfeited .................................................. (65,000) 3.375 -- 5.50 5.01 --------- Outstanding at December 31, 1995 (of which approximately 283,000 options are exercisable at weighted average prices of $1.65) ......................................... 451,656 .625 -- 6.00 2.20 Granted .................................................... 495,000 2.625 -- 4.375 2.91 Options exercised: Director ................................................. (97,163) .625 .63 Forfeited .................................................. (20,000) 3.375 3.38 --------- Outstanding at December 29, 1996 (of which approximately 362,000 options are exercisable at weighted average prices of $2.51) ......................................... 829,493 .625 -- 6.00 2.77 Granted .................................................... 110,000 2.563 -- 3.00 2.76 Options exercised: Director ................................................. (53,332) .625 .63 Management ............................................. (6,000) 3.00 3.00 Forfeited .................................................. (19,000) 3.00 3.00 --------- ----------------------------- -------- Outstanding at December 28, 1997 (of which approximately 441,000 options are exercisable at weighted average prices of $3.02) ......................................... 861,161 $ .625 -- $ 6.00 $ 2.90 ========= ============================= ========
As of December 28, 1997, the Plan provides for issuance of options up to 2,554,989 shares and has 586,452 shares of common stock reserved for future grant under the Plan. RESTRICTED MANAGEMENT OPTIONS As of December 28, 1997 and December 29, 1996, there were 20,000 restricted stock options (not granted under the Plan) which had an original vesting date of 1999 and expire five years from the date vested (last expiring in 2004). These options included an acceleration feature which allowed for all or a portion of the options to vest in 1996, based on certain performance criteria. Based on these performance criteria, 10,000 of these options vested in 1996. The remaining 10,000 options will vest in 1999. A summary of restricted stock option activity is as follows:
Weighted Number Exercise Price Average of Shares Per Share Exercise Price ----------- ------------------------------ ----------------- Outstanding at December 31, 1994 ........................... -- -- -- Granted .................................................... 120,000 $ 3.00 -- $ 3.125 $ 3.02 --------- Outstanding at December 31, 1995 (none are exercisable) .... 120,000 3.00 -- 3.125 3.02 Forfeited .................................................. (100,000) 3.00 3.00 --------- ------------------------------- -------- Outstanding at December 28, 1997 and December 29, 1996 (of which 10,000 options are exercisable at a price of $3.13 per option share) ........................ 20,000 $ 3.125 $ 3.13 ========= ============================== ========
EMPLOYEE STOCK PURCHASE PLAN In June 1994, the Company's shareholders approved the Employee Stock Purchase Plan under the Company's Omnibus Equity Compensation Plan. The Stock Purchase Plan enables substantially all employees to subscribe to shares of common stock on an annual offering date at a purchase price of 85% of the fair market value of the shares on the offering date or, if lower, 85% of the fair market value of the shares on the exercise date, which is one year from the annual offering date. A maximum of 200,000 shares are F-16 38 authorized for subscription over the ten year term of the plan (30,000 shares reserved for issuance at December 28, 1997, for the offering period ending on December 1, 1998). During 1997, 1996 and 1995, 16,462, 24,044 and 12,411 shares, respectively, were issued under the Plan. STOCK BONUS PLAN The Plan provides for up to 200,000 shares of stock to be awarded to non-executive employees at the Compensation Committee's discretion over specified future periods of employment. A total of 20,961 shares have been issued under the Plan leaving 179,039 shares available for issuance. TREASURY STOCK TRANSACTIONS As provided for in each stock option agreement, option holders can satisfy amounts due for the exercise price and applicable required withholding taxes on the exercise by delivery to the Company shares of common stock having a fair market value equal to such amounts due to the Company. During 1997, 1996 and 1995, the Company acquired 9,254, 8,722 and 1,917 common shares, respectively, in lieu of cash for such amounts due to the Company related to the exercise of stock options. (Also see Note 8 regarding the tax benefits from the exercise of stock options.) PRO FORMA INFORMATION FOR STOCK OPTIONS Pro forma information regarding net income and earnings per share is required by SFAS 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994, under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black- Scholes option pricing model with the following weighted-average assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of 6.53%, 5.71% and 6.34%; a dividend yield of 0%; volatility factors of the expected market price of the Company's common stock of .38, .28 and .28 and a weighted-average expected life of the options of 7.6 years. The weighted average grant date fair value of options issued in 1997, 1996 and 1995 was $1.32, $1.08 and $1.21, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options and stock purchase plan have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options and stock purchase plan. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
1997 1996 1995 ------------- ----------- ----------- Pro forma net income .......................... $ 1,247,622 $ 419,269 $ 149,714 Pro forma net income per common share ......... 0.32 0.11 0.04 Pro forma net income per common share assuming dilution .......................... 0.31 0.10 0.04
Because SFAS 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until 2000. STOCK PUT AGREEMENTS In April, 1997, the Company entered into stock put agreements with two of its executive officers (who also serve on the Company's Board of Directors). Under the agreements, in the event of the officer's death while an employee of the Company, their respective estate or other legal representative has the right (but not the obligation) to compel the Company to purchase all or part of the common stock owned by or under stock option agreements with the deceased officer or the members of their immediate families (i.e. spouse or children) or controlled by any of them through trusts, partnership corporations or other entities on the date of their death. The per share purchase price payable by the Company for common stock purchased under the agreements is the greater of the highest closing stock price during the 60 days preceding the officer's death or two times the net book value per share as of the last day of the calendar month immediately preceding the officer's death. In any event, the total purchase price cannot exceed the proceeds payable to the Company from the key man life insurance policy maintained on the life of the respective officer. F-17 39 (11) EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
1997 1996 1995 ---------- ---------- ---------- Numerator: Net income $1,399,208 $ 581,499 $ 185,841 ========== ========== ========== Denominator: Denominator for basic earnings per share- weighted-average shares outstanding 3,868,950 3,836,228 3,722,788 Dilutive effect of nonqualified stock options 119,066 166,131 111,168 ---------- ---------- ---------- Denominator for diluted earnings per share 3,988,016 4,002,359 3,833,956 ========== ========== ========== Basic earnings per share $ 0.36 $ 0.15 $ 0.05 ========== ========== ========== Diluted earnings per share $ 0.35 $ 0.15 $ 0.05 ========== ========== ==========
As of December 28, 1997, there were outstanding options and warrants to purchase 177,500 shares of common stock at prices ranging from $4.38 per share to $6.56 per share, which were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive. (12) SUBSEQUENT EVENT In February 1998, the Company sold substantially all of the assets, including real estate, comprising three of the Casa Lupita restaurants to Chevy's Inc. ("Chevy's") for a cash price of approximately $5,300,000. The proceeds from this sale were used to pay-down debt primarily related to the Famous Acquisition. In connection with this transaction, the Company entered into an agreement to sell substantially all of the assets related to one additional Casa Lupita to Chevy's for a price of $1,000,000. Closing of this transaction is conditioned upon, among other things, the transfer to Chevy's of the liquor license related to such restaurant. Management currently expects closing of this transaction to occur during the second quarter of 1998. (13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (In thousands except per share data)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ANNUAL --------- ---------- ----------- ----------- ----------- 1997: Total revenues $ 14,203 $ 13,709 $ 14,735 $ 20,895 $ 63,542 Gross profit 10,121 9,913 10,624 15,043 45,701 Net income 229 24 225 921 1,399 Net income per common share 0.06 0.01 0.06 0.24 0.36 Net income per common share assuming dilution 0.06 0.01 0.06 0.22 0.35 1996: Total revenues $ 12,772 $ 13,426 $ 13,999 $ 16,219 $ 56,416 Gross profit 8,931 9,350 9,773 11,292 39,346 Net income (loss) 37 (166) 109 601 581 Net income (loss) per common 0.01 (0.04) 0.03 0.16 0.15 share Net income (loss) per common share assuming dilution 0.01 (0.04) 0.03 0.15 0.15 1995: Total revenues $ 10,475 $ 10,682 $ 11,449 $ 13,994 $ 46,600 Gross profit 7,261 7,399 8,096 9,877 32,633 Net income (loss) 25 (45) (642) 848 186 Net income (loss) per common share 0.01 (0.01) (0.17) 0.23 0.05 Net income (loss) per common share assuming dilution 0.01 (0.01) (0.17) 0.22 0.05
F-18 40 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 3.1 Amended and Restated Articles of Incorporation.(1) 3.2 Amendment to the Amended and Restated Articles of Incorporation.(2) 3.3 Bylaws as amended.(1) 4.1 Specimen Stock Certificate.(3) 4.2 Form of Representative's Warrant.(3) 10.1 Employment Agreement between the Company and Vincent F. Orza, Jr., dated October 1, 1995.(10) 10.2 Employment Agreement between the Company and James M. Burke, dated October 1, 1995.(10) 10.4 Lease Agreement dated May 1, 1987 (as amended June 30, 1990, October 1, 1992 and October 1, 1993) between the Company and Colonial Center, LTD for the lease of the Company's corporate office facilities in Oklahoma City, Oklahoma. (3) 10.8 Franchise Agreement and Amendment dated August 31, 1993 between the Company and Wolsey Dublin Company for the Garfield's franchise in Sioux City, Iowa and non-exclusive development rights to two additional locations in seven cities in four states over the next two years. (3) 10.9 Amended and Restated Franchise Agreement and Modification of Amended and Restated Franchise Agreement dated December 31, 1992 between the Company and O.E., Inc. for the three Garfield's franchise locations in the Oklahoma City, Oklahoma metropolitan area. (3) 10.10 Form of Franchise Agreement (revised March 1, 1993).(7) 10.11 Management Agreement dated December 31, 1992 between the Company and O.E., Inc. for the supervision and accounting services provided by the Company for three Garfield's franchise locations in the Oklahoma City metropolitan area. (3) 10.12 Collateral Assignment Agreement dated January 20, 1991, between the Company and Vincent F. Orza, Jr. (5) 10.13 Collateral Assignment Agreement dated January 20, 1991, between the Company and James M. Burke. (5) 10.15 Stock Plan for Significant Employees of the Company, dated December 1, 1986. (6) 10.16 1987 Director Stock Incentive Plan. (6) 10.17 Eateries, Inc. Omnibus Equity Compensation Plan. (6) 10.18 Underwriting Agreement between the Company, Pauli & Company Incorporated, RAS Securities Corp. and certain shareholders of the Company dated November 15, 1993. (3) 10.22 Asset Sale Agreement dated January 9, 1995 between the Company and Pepperoni Grill, Inc. and Specialty Restaurants, involving the purchase of assets of Pepperoni Grill restaurant by the Company. (9) 10.23 Employment Agreement between the Company and Corey Gable, dated January 1, 1997. (10) 10.24 Employment Agreement between the Company and Peter L. Holloway, dated January 1, 1995. (9) 10.25 Employee Stock Purchase Plan dated June 15, 1994 (8). 10.26 Amended and restated Eateries, Inc. Omnibus Equity Compensation Plan dated as of June 15, 1994. (9) 10.27 Option Agreement between the Company and Vincent F. Orza, Jr., dated January 4, 1996 (10) 10.28 Option Agreement between the Company and James M. Burke, dated January 4, 1996 (10) 10.29 Option Agreement between the Company and Corey Gable, dated April 5, 1996 (10) 10.32 Asset Purchase Agreement dated November 14, 1997, by and between the Company, through its wholly-owned subsidiary, Fiesta Restaurants, Inc., and Famous Restaurants, Inc. and its subsidiaries. (11) 10.33 Agreement for Purchase and Sale of Assets and Licenses dated February 26, 1998, among the Company and Chevy's, Inc. (12) 10.34 Agreement for purchase and Sale of Assets dated February 26, 1998, between the Company and Chevy's, Inc. (12) 10.35 Loan Agreement dated as of November 18, 1997, by and between NationsBank, N.A. and the Company. 10.36 Stock Put Agreement dated April 2, 1997, by and among Vincent F. Orza, Jr. and the Company. 10.37 Stock Put Agreement dated April 2, 1997, by and among James M. Burke and the Company. 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of Ernst & Young LLP. 27.1 Financial Data Schedule. (1) Filed as exhibit to Registrant's Registration Statement on Form S-18 (File No. 33-6818-FW). (2) Filed as exhibit to Registrant's Quarterly Report on Form 10-Q for the six months ended June 30, 1988 (File No. 0-14968) and incorporated herein by reference. (3) Filed as exhibit to Registrant's Registration Statement on Form S-2 (File No. 33-69896). (4) Filed as exhibit to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (File No. 0-14968) and incorporated herein by reference. (5) Filed as exhibit to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 0-14968) and incorporated herein by reference. (6) Filed as exhibit to Registrant's Registration Statement on form S-8 (File No. 33-41279). (7) Filed as exhibit to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-14968) and incorporated herein by reference. (8) Filed as Appendix A to the Company's Notice of Annual Meeting of Shareholders dated April 29, 1994 and incorporated herein by reference. (9) Filed as exhibit to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 0-14968) and incorporated herein by reference. (10) Filed as exhibit to Registrant's Annual Report on Form 10-K for the fiscal year ended December 29, 1996 (File No. 0-14968) and incorporated herein by reference. (11) Filed as exhibit to Registrant's Current Report on Form 8-K dated December 8, 1997 (File No. 0-14968) and incorporated herein by reference. (12) Filed as exhibit to Registrant's Current Report on Form 8-K dated March 16, 1998 (File No. 0-14968) and incorporated herein by reference.
EX-10.35 2 LOAN AGREEMENT 1 LOAN AGREEMENT This Loan Agreement (the "Agreement") dated as of November ______, 1997, is made by and between NationsBank, N.A., a national banking association ("Bank") and the Borrower described below. In consideration of the Loan or Loans described below and the mutual covenants and agreements contained herein, and intending to be legally bound hereby, Bank and Borrower agree as follows: 1. DEFINITIONS AND REFERENCE TERMS. In addition to any other terms defined herein, the following terms shall have the meaning set forth with respect thereto: "ACCOUNTING TERMS". All accounting terms not specifically defined or specified herein shall have the meanings generally attributed to such terms under generally accepted accounting principles ("GAAP"), as in effect from time to time, consistently applied throughout the periods involved, with respect to the financial statements referenced in Section 3.H. hereof. "AGREEMENT" shall mean the Loan Agreement and all Exhibits attached thereto, as the same may from time to time be amended, supplemented or modified. "ASSET PURCHASE AGREEMENT" shall mean the Asset Purchase Agreement dated November 14, 1997, by and among Fiesta Restaurants, Inc., as Buyer, and Famous Restaurants, Inc. and its various related and subsidiary companies, as Sellers, covering the terms and conditions of the sale of 17 Garcia's Mexican Restaurants, Casa Lupita Restaurants and Carlos Murphy's Restaurants to the Buyer, and all amendments, modifications and substitutions thereof. "BORROWER" shall mean, collectively, Eateries, Inc., an Oklahoma Corporation, and its successors, with an address of 3204 West Britton Road, Suite 202, Oklahoma City, Oklahoma 73120, and all of the Subsidiaries. "COLLATERAL" means all of the Borrower's right, title and interest in and to the real property and all improvements related to the Borrower's restaurant locations in Ft. Myers, Florida; Newark, Ohio; Naperville, Illinois and Lawrenceville, New Jersey, together with all rents, issues and profits related thereto, pursuant to such mortgages, deeds of trust, assignments, financing statements and other security documents as the Bank may require, all in form satisfactory to the Bank, together with all proceeds thereof. "CURRENT ASSETS" shall mean the aggregate amount of all of Borrower's assets which would, in accordance with GAAP, properly be defined as current assets. 2 2 "CURRENT LIABILITIES" shall mean the aggregate amount of all current liabilities as determined in accordance with GAAP, but in any event shall include all liabilities except those having a maturity date which is more than one year from the date as of which such computation is being made. "DEBT" means, as to any person, all indebtedness, liabilities and obligations of such person as may be required to be reflected on the balance sheet of such person as a liability, all capital lease obligations and all guaranties of indebtedness of other persons, all as determined in accordance with GAAP. "EBITDA" means the Borrower's net income before taxes and tax accruals, plus interest, depreciation and amortization expenses pursuant to GAAP, all during the period of the last four fiscal quarters immediately preceding the date of determination. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, together with all regulations issued pursuant thereto. "FUNDED DEBT" means, as of any date of determination, the amount outstanding on any long term Debt of the Borrower plus the current portion of long term Debt, including any capital leases. "HAZARDOUS MATERIALS" shall mean and include all materials defined as hazardous materials or substances under any local, state or federal environmental laws, rules or regulations, and petroleum, petroleum products, oil and asbestos. "LIEN" means any lien, mortgage, security interest, tax lien, pledge, encumbrance, conditional sale or title retention arrangement, or any other interest in property of the Borrower designed to secure the repayment of Debt of the Borrower, whether arising by agreement or under any statute or law, or otherwise. "LOAN" shall mean any loan described in Section 2 hereof and any subsequent loan which states that it is subject to this Loan Agreement. "LOAN DOCUMENTS" means this Loan Agreement and any and all promissory notes executed by Borrower in favor of Bank and all other documents, instruments, guarantees, certificates and agreements executed and/or delivered by Borrower, any guarantor or third party in connection with any Loan. "MATERIAL ADVERSE EFFECT" means any set of circumstances or events which (i) has an adverse effect upon the validity, performance or enforceability of this Agreement or any other Loan Documents, (ii) is material and adverse to the financial condition or business operations of the Borrower, (iii) materially impairs the ability of the Borrower to perform its obligations under this Agreement or any other Loan Documents, or (iv) constitutes an Event of Default. "NET WORTH" means the difference between Borrower's (i) Total Assets, and (ii) Total Liabilities, all as set forth in the consolidated financial statements of Borrower. 3 3 "PBGC" means the Pension Benefit Guaranty Corporation and any successor to all or any of its functions under ERISA. "PERMITTED LIENS" means: (i) pledges or deposits made to secure payment of workers' compensation insurance (or to participate in any fund in connection with workers' compensation insurance), unemployment insurance, pensions or social security programs, (ii) Liens imposed by mandatory provisions of law such as for materialmen's, mechanics', warehousemen's and other like Liens arising in the ordinary course of business, securing Debt whose payment is not yet due or if the same is due, it is being contested in good faith by appropriate proceedings and the imposition of which would not have a Material Adverse Effect on the Borrower, (iii) Liens for taxes, assessments and governmental charges or levies imposed upon a person or upon such person's income or profits or property, if the same are not yet due and payable or if the same are being contested in good faith by appropriate proceedings and the imposition of which would not have a Material Adverse Effect on the Borrower, (iv) pledges or deposits to secure public or statutory obligations and deposits to secure (or in lieu of) surety, stay, appeal or customs bonds and deposits to secure the payment of taxes, assessments, customs duties or other similar charges. "REGULATION D" means Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "REGULATION U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "REGULATION X" means Regulation X promulgated by the Board of Governors of the Federal Reserve System, as in effect from time to time. "SUBSIDIARIES" shall mean Fiesta Restaurants, Inc., an Oklahoma corporation, Pepperoni Grill, Inc., an Oklahoma corporation, and Garfield's Management, Inc. an Oklahoma corporation, and any of their successors. "TOTAL ASSETS" shall mean the Total Assets of Borrower as reflected on Borrower's financial statements and as accounted for under GAAP. "TOTAL LIABILITIES" shall mean the Total Liabilities of Borrower as reflected on Borrower's financial statements and as accounted for under GAAP. 2. LOANS. A. LOAN. Bank hereby agrees to make (or has made) one or more loans to Borrower in the aggregate principal face amount of $15,500,000.00. The obligation to repay the loans is evidenced by a promissory note or notes dated even date herewith (the promissory note or notes together with any and all renewals, extensions or rearrangements thereof being hereafter collectively referred to as the "Note") having a maturity date, repayment terms and interest rate as set forth in the 4 4 Note. Each of the Notes shall be executed by each Borrower and shall be the joint and several obligation of each Borrower. i . REVOLVING CREDIT FEATURE. One of the Loans in the principal face amount of $6,000,000.00 provides for a revolving line of credit (the "Line") under which Borrower may from time to time, borrow, repay and re-borrow funds. ii . TERM CREDIT FEATURE. One of the Loans in the principal amount of not to exceed the lesser of (a) $9,500,000.00, or (b) the actual acquisition cost of the assets of Famous Restaurants, Inc. under the Asset Purchase Agreement, provides for a term credit upon which Borrower shall receive a single advance at the closing of the Asset Purchase Agreement and thereafter repay in accordance with the terms and conditions of the Note evidencing such obligation. 3. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants to Bank as follows: A. GOOD STANDING. Borrower is an Oklahoma corporation, duly organized, validly existing and in good standing under the laws of the State of Oklahoma and has the power and authority to own its property and to carry on its business in each jurisdiction in which Borrower does business. B. AUTHORITY AND COMPLIANCE. Borrower has full power and authority to execute and deliver the Loan Documents and to incur and perform the obligations provided for therein, all of which have been duly authorized by all proper and necessary action of the appropriate governing body of Borrower. No consent or approval of any public authority or other third party is required as a condition to the validity of any Loan Document, and Borrower is in substantial compliance with all laws and regulatory requirements to which it is subject. C. BINDING AGREEMENT. This Agreement and the other Loan Documents executed by Borrower constitute valid and legally binding obligations of Borrower, enforceable in accordance with their terms. D. LITIGATION. There is no proceeding involving Borrower pending or, to the knowledge of Borrower, threatened before any court or governmental authority, agency or arbitration authority which could have a Material Adverse Effect on the Borrower. E. NO CONFLICTING AGREEMENTS. There is no charter, bylaw, stock provision, partnership agreement or other document pertaining to the organization, power or authority of Borrower and no provision of any existing agreement, mortgage, indenture or contract binding on Borrower or affecting its property, which would prevent, hinder or delay the execution, delivery or carrying out of the terms of this Agreement and the other Loan Documents. F. OWNERSHIP OF ASSETS. Borrower has good title to its assets, and its assets are free and clear of liens, except for Permitted Liens and as otherwise disclosed to Bank in writing prior to the date of this Agreement. 5 5 G. TAXES. All taxes and assessments due and payable by Borrower have been paid or are being contested in good faith by appropriate proceedings and the Borrower has filed all tax returns which it is required to file. H. FINANCIAL STATEMENTS. The financial statements of Borrower heretofore delivered to Bank have been prepared in accordance with GAAP applied on a consistent basis throughout the period involved and fairly present Borrower's financial condition as of the date or dates thereof, and there has been no material adverse change in Borrower's financial condition or operations since June 29, 1997. All factual information furnished by Borrower to Bank in connection with this Agreement and the other Loan Documents is and will be accurate and complete on the date as of which such information is delivered to Bank and is not and will not be incomplete by the omission of any material fact necessary to make such information not misleading. I. PLACE OF BUSINESS. Borrower's chief executive office is located at: 3240 W. Britton Road, Suite 202, Oklahoma City, Oklahoma 73120. J. ENVIRONMENTAL. The conduct of Borrower's business operations and the condition of Borrower's property does not and will not violate any federal laws, rules or ordinances for environmental protection, regulations of the Environmental Protection Agency, any applicable local or state law, rule, regulation or rule of common law or any judicial interpretation thereof relating primarily to the environment or Hazardous Materials. K. PERMITS. The Borrower has all licenses, permits, certificates, consents and franchises, and all necessary filings associated thereto have been made, in order to carry on its business as now being conducted and to own or lease and operate its properties as now owned, leased or operated. All such licenses, permits, certificates, consents, and franchises are valid and subsistent, and the Borrower is not in violation thereof to the extent such violation would cause a Material Adverse Effect. L. FULL DISCLOSURE. Except as otherwise disclosed to Bank in writing prior to the execution of this Agreement, there is no material fact known to Borrower that Borrower has not disclosed to Bank which could have a Material Adverse Effect on the properties, business, prospects or condition (financial or otherwise) of Borrower. Neither the financial statements referenced herein, nor any certificate or statement delivered herewith or heretofore by Borrower to Bank in connection with the negotiations of this Agreement, contains any untrue statement of a material fact or omits to state any material fact necessary to keep the statements contained herein or therein from being misleading which would have a Material Adverse Effect. M. USE OF PROCEEDS; MARGIN STOCK. The proceeds of the Loans will be used by Borrower solely for the purposes described herein. None of such proceeds will be used for the purpose of purchasing or carrying any "margin stock" as defined in Regulation U or Regulation X, or for the purpose of reducing or retiring any Debt which was originally incurred to purchase or carry a margin 6 6 stock or for any other purpose which might constitute this transaction a "purpose credit" within the meaning of such Regulation U or Regulation X. Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stocks. Borrowers have not taken or will not take any action which might cause the Loans or any of the other Loan Documents, including this Agreement, to violate Regulation U or Regulation X, or any other regulations of the Board of Governors of the Federal Reserve System or to violate Section 8 of the Securities Exchange Act of 1934 or any rule or regulation thereunder, in each case as now in effect or as the same may hereinafter be in effect. Borrower does not own margin stock. N. ERISA. Borrower is in compliance with all ERISA requirements and interpretations with respect to any employee benefit plan of the Borrower and has not incurred any liability to PBGC with respect to any such plan. O. COMPLIANCE WITH LAW. Borrower is not in material violation of any law, rule, regulation, order or decree which is applicable to Borrower or its properties the result of which could have a Material Adverse Effect. P. CASUALTIES. Neither the business nor the properties of Borrower are currently affected by any environmental hazard, fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or other casualty (whether or not covered by insurance), which could have a Material Adverse Effect. Q. NO EVENT OF DEFAULT. No Event of Default has occurred and is continuing. R. SURVIVAL OF REPRESENTATIONS. All representations and warranties made under this Agreement shall be deemed to be made at and as of the date hereof and at and as of the date of any advance under any Loan. All of the representations and warranties made by the Borrower herein and in any Loan Document will survive the delivery of the Loan Documents and any renewal and extension of the Loans hereunder. All statements contained in any certificate or other instrument delivered by or on behalf of the Borrower under or pursuant to the Loan Agreement or in connection with the transactions contemplated hereby shall constitute representations and warranties made by the Borrower hereunder as applicable. 4. CONDITIONS OF LENDING. The obligation of the Bank to perform this Agreement and to extend the Loans as described herein is subject to the performance of the following conditions precedent: A. LOAN DOCUMENTS. This Agreement and the other Loan Documents, and all other documents required by the Bank shall have been duly executed, acknowledged (where appropriate) and delivered to the Bank, all in form and substance satisfactory to the Bank. All of the Loan Documents which require filing or recordation for the perfection of Liens on any Collateral shall be properly filed or recorded in all appropriate recording offices and the Borrower shall have reimbursed the Bank for all costs, including reasonable attorney's fees, pertaining thereto. 7 7 B. INFORMATION. The Borrower shall have furnished to the Bank such financial statements and other information as the Bank shall have requested. C. NO DEFAULT, REPRESENTATIONS AND WARRANTIES. No Events of Default shall have occurred and be continuing under this Agreement or the Loan Documents. All representations and warranties contained herein shall be true and correct. D. AUTHORITY. The Borrower shall have delivered to the Bank such resolutions and other documents reasonably required to authorize the execution, delivery and performance of the Loan Documents, all in form and substance satisfactory to the Bank, together with certified copies of the Borrower's Certificate of Incorporation (and amendments), Bylaw (and amendments), and Good Standing Certificate from the State of Oklahoma. E. INCUMBENCY CERTIFICATE. The Bank shall have received a certificate of an officer of Borrower which shall certify the names of the persons authorized to sign each of the Loan Documents to be executed by such person and the other documents or certificates to be delivered by such person pursuant to the Loan Documents, together with the true signatures of each of such persons. Bank may conclusively rely on the certificates until Bank shall receive a further certificate of an officer of Borrowers canceling or amending the prior certificate and submitting the signatures of the persons named in such further certificate. F. OPINION OF COUNSEL. A favorable opinion of legal counsel for Borrower, in such form as shall be acceptable to Bank and Bank's counsel, shall have been delivered to the Bank, covering such matters as: (i) the Borrower's due organization and qualification under the laws of the State of Oklahoma, and good standing under the laws of the State of Oklahoma and all other states as may be required by applicable law; (ii) Borrower's authorization to enter into this Agreement and the other Loan Documents, and that such documents, when executed and delivered, will be the valid and binding obligations of the Borrower enforceable according to their respective terms; (iii) that the execution and delivery of this Agreement and the other Loan Documents shall not violate any applicable law, regulation or rule; and (iv) that the Loan Documents and other security documents evidencing the Liens of the Bank, when recorded, will be valid liens against the Collateral and that such documents will secure the payment and performance of the Loans and other obligations of the Borrower to the Bank as described herein. G. UCC INFORMATION. The Bank shall have received and reviewed copies of UCC Title Searches for the Borrower in such jurisdictions as the Borrower may require, and all Liens of any party as evidenced by such information shall have been released to the satisfaction of the Bank. H. TITLE INSURANCE. The Bank shall have received satisfactory marked-up commitments for the issuance of policies of mortgagee's title insurance covering the Collateral, and issued for amounts equal to the respective appraised values of the Collateral by companies approved by the Bank. The commitments for title insurance shall bind the title insurers to insure the Bank's first Lien mortgages on the respective properties being insured and insure that all future advances under the Notes will be secured by the first Lien of the Bank, subject only to such exceptions as are approved by the Bank. Prior to the date of closing the Loans, the Bank shall have received preliminary 8 8 commitments for such policies, subject only to those Liens which are to be paid prior to or at closing, routine utility easements and restrictions and current year's taxes not yet due and payable, together with copies of all documents evidencing restrictive covenants, easements, encumbrances and other exceptions of record covering the Collateral. The title policies shall not include an exception based on mechanics' and materialmen's liens or an exception for unpaid taxes other than the current year's taxes not yet due. I. ACQUISITION BY BORROWER. The Bank shall have reviewed a copy of the fully executed Asset Purchase Agreement and such parts of the other documentation, up to the whole thereof, of the Borrower's acquisition of assets of Famous Restaurants, Inc. and its related and subsidiary companies as described in the Asset Purchase Agreement, as the Bank may deem necessary, the results of such review being satisfactory to the Bank in all respects. J. EXPENSES. Each party shall have paid all of their respective costs and expenses, including reasonable fees of legal counsel, incurred in the negotiation and preparation of the Loan Documents and in closing and perfecting any rights and interests under the Loan Documents. 5. SECURITY. The Loans shall be secured by first and prior Liens on the Collateral in favor of the Bank pursuant to the Loan Documents, subject only to such other exceptions or other liens or encumbrances as may be consented to by the Bank in writing. From time to time during the term of this Agreement, the Bank may reasonably require the Borrower to execute and deliver other and further Loan Documents to confirm and further secure the interest of the Bank in the Collateral, which Borrower agrees it will so execute and deliver upon request. 6. AFFIRMATIVE COVENANTS. Until full payment and performance of all obligations of Borrower under the Loan Documents, Borrower will, unless Bank consents otherwise in writing (and without limiting any requirement of any other Loan Document): A. FINANCIAL CONDITION. Maintain Borrower's financial condition as follows, determined in accordance with GAAP applied on a consistent basis throughout the period involved except to the extent modified by the following definitions: i. NET WORTH. Borrower shall maintain a Net Worth of at least $9,000,000.00 during the term of this Agreement, and the Borrower shall increase its Net Worth by an amount of not less than fifty percent (50%) of the Borrower's annual net income for each calendar year. ii. FUNDED DEBT TO EBITDA. Borrower will not allow its ratio of Funded Debt to EBITDA to be in excess of 3.20 to 1.00 during the term of this Agreement. iii. DEBT COVERAGE. Borrower shall not permit the ratio of its (i) net income after taxes and tax accruals, plus interest, depreciation and amortization expenses, all during the period of the last four fiscal quarters immediately preceding the date of determination, to (ii) the sum of (a) the current portion of long term Debt of the Borrower for the last fiscal quarter, and (b) all interest expense of the Borrower, during the last four fiscal quarters after the date of determination, to be less 9 9 than 1.40 to 1.00. Such ratio shall be determined quarterly as of the close of each fiscal quarter, beginning with the second fiscal quarter of 1998. B. FINANCIAL STATEMENTS AND OTHER INFORMATION. Maintain a system of accounting satisfactory to Bank and in accordance with GAAP applied on a consistent basis throughout the period involved, permit Bank's officers or authorized representatives to visit and inspect Borrower's books of account and other records at such reasonable times and as often as Bank may desire, and pay the reasonable fees and disbursements of any accountants or other agents of Bank selected by Bank for the foregoing purposes. Unless written notice of another location is given to Bank, Borrower's books and records will be located at Borrower's chief executive office set forth above. All financial statements called for below shall be prepared in form and content acceptable to Bank and by independent certified public accountants acceptable to Bank. In addition, Borrower will: i. Furnish to Bank audited, consolidated, annual financial statements of Borrower for each fiscal year of Borrower, within 120 days after the close of each such fiscal year. ii. Furnish to Bank unaudited, consolidated quarterly financial statements (including a balance sheet and profit and loss statement) of Borrower for each fiscal quarter of each fiscal year of Borrower, within 60 days after the close of each such period. iii. Furnish to Bank a quarterly compliance certificate for (and executed by an authorized representative of) Borrower concurrently with and dated as of the date of delivery of each of the financial statements as required in paragraphs i and ii above, containing (a) a certification that the financial statements of even date are true and correct and that the Borrower is not in default under the terms of this Agreement, and (b) computations and conclusions, in such detail as Bank may request, with respect to compliance with this Agreement, and the other Loan Documents, including computations of all quantitative covenants. vii. Furnish to Bank promptly such additional information, reports and statements respecting the business operations and financial condition of Borrower, from time to time, as Bank may reasonably request including but not limited to: (a) all Quarterly and other periodic reports to the Securities and Exchange Commission (Forms 10Q, 10K, etc.) which, reports among other information provided, shall detail all new store openings and other material business matters of the Borrower; and (b) written notification, in form acceptable to the Bank, of any potential merger, acquisition, reorganization or sale of a material part of the assets of the Borrower to any other party. C. INSURANCE. Maintain insurance with responsible insurance companies on such of its properties, in such amounts and against such risks as is customarily maintained by similar businesses operating in the same vicinity, specifically to include fire and extended coverage insurance covering all assets, business interruption insurance, workers compensation insurance and liability insurance, all to be with such companies and in such amounts as are satisfactory to Bank and providing for at least 30 days prior notice to Bank of any cancellation thereof. Satisfactory evidence of 10 10 such insurance will be supplied to Bank prior to funding under the Loan(s) and 30 days prior to each policy renewal. D. EXISTENCE AND COMPLIANCE. Maintain its existence, good standing and qualification to do business, where required and comply with all laws, regulations and governmental requirements including, without limitation, environmental laws applicable to it or to any of its property, business operations and transactions. E. ADVERSE CONDITIONS OR EVENTS. Promptly advise Bank in writing of (i) any condition, event or act which comes to its attention that would or might materially adversely affect Borrower's financial condition or operations or Bank's rights under the Loan Documents, (ii) any material litigation filed by or against Borrower, (iii) any event that has occurred that would constitute an event of default under any Loan Documents and (iv) any uninsured or partially uninsured loss through fire, theft, liability or property damage in excess of an aggregate of $25,000.00. F. TAXES AND OTHER OBLIGATIONS. Pay, prior to delinquency, all of its taxes, assessments and other obligations, including, but not limited to taxes, costs or other expenses arising out of this transaction, as the same become due and payable, except to the extent the same are being contested in good faith by appropriate proceedings in a diligent manner. G. MAINTENANCE. Maintain all of its tangible property in good condition and repair and make all necessary replacements thereof, and preserve and maintain all licenses, trademarks, privileges, permits, franchises, certificates and the like necessary for the operation of its business. H. ENVIRONMENTAL. Immediately advise Bank in writing of (i) any and all enforcement, cleanup, remedial, removal, or other governmental or regulatory actions instituted, completed or threatened pursuant to any applicable federal, state, or local laws, ordinances or regulations relating to any Hazardous Materials affecting Borrower's business operations; and (ii) all claims made or threatened by any third party against Borrower relating to damages, contribution, cost recovery, compensation, loss or injury resulting from any Hazardous Materials. Borrower shall immediately notify Bank of any remedial action taken by Borrower with respect to Borrower's business operations. Borrower will not use or permit any other party to use any Hazardous Materials At any of Borrower's places of business or at any other property owned by Borrower except such materials as are incidental to Borrower's normal course of business, maintenance and repairs and which are handled in compliance with all applicable environmental laws. Borrower agrees to permit Bank, its agents, contractors and employees to enter and inspect any of Borrower's places of business or any other property of Borrower at any reasonable times upon three (3) days prior notice for the purposes of conducting an environmental investigation and audit (including taking physical samples) to insure that Borrower is complying with this covenant and Borrower shall reimburse Bank on demand for the costs of any such environmental investigation and audit. Borrower shall provide Bank, its agents, contractors, employees and representatives with access to and copies of any and all data and documents relating to or dealing with any Hazardous Materials used, generated, manufactured, stored or disposed of by Borrower's business operations within five (5) days of the request therefore. 11 11 I. AUTHORIZATIONS AND APPROVALS. Borrower shall promptly obtain, from time to time at its own expense, all such governmental licenses, authorizations, consents, permits and approvals which may be required or necessary in the Borrower's business or with respect to its assets and properties if the failure to obtain the same could have a Material Adverse Effect. J. ERISA COMPLIANCE. Borrower shall (i) at all times, make prompt payment of all contributions required under all employee benefit plans and as required to meet the minimum funding standard set forth in ERISA with respect to its plans, (ii) notify Bank immediately of any fact, including, but not limited to, any reportable event arising in connection with any of its plans, which might constitute grounds for termination thereof by the PBGC or for the appointment by the appropriate United States District Court of a trustee to administer such plan, together with a statement, if requested by Bank, as to the reason therefor and the action, if any, proposed to be taken with respect thereto, and (iii) furnish to Bank, upon its request, such additional information concerning any of their plans as may be reasonably requested. K. MAINTENANCE OF COLLATERAL. Borrower will do all things necessary to maintain, preserve, protect and keep all the Collateral in good condition, and make all necessary and proper repairs, renewals and replacements thereto so that the business anticipated by the Borrower through the ownership, operation or use of the Collateral can be performed and conducted at all times. 7. NEGATIVE COVENANTS. Until full payment and performance of all obligations of Borrower under the Loan Documents, Borrower will not, without the prior written consent of Bank (and without limiting any requirement of any other Loan Documents): A. CAPITAL EXPENDITURES. Make capital expenditures during each fiscal year (including capitalized leases) exceeding in the aggregate the lesser of $5,000,000.00. B. TRANSFER OF ASSETS OR CONTROL. Sell, lease, assign or otherwise dispose of or transfer any assets, except in the normal course of its business, or enter into any merger or consolidation, or transfer control or ownership of the Borrower or form or acquire any subsidiary. C. LIENS. Grant, suffer or permit any contractual or noncontractual lien on or security interest in its assets, except in favor of Bank, or fail to promptly pay when due all lawful claims, whether for labor, materials or otherwise which would have a Material Adverse Effect. D. EXTENSIONS OF CREDIT. Make or permit any subsidiary to make, any loan or advance to any person or entity (other than one of the Borrowers), or purchase or otherwise acquire, or permit any subsidiary to purchase or otherwise acquire, any capital stock, assets, obligations, or other securities of, make any capital contribution to, or otherwise invest in or acquire any interest in any entity (other than one of the Borrowers), or participate as a partner or joint venturer with any person or entity, except for the purchase of direct obligations of the United States or any agency thereof with maturities of less than one year. 12 12 E. BORROWINGS. Create, incur, assume or become liable in any manner for any indebtedness (for borrowed money, deferred payment for the purchase of assets, lease payments, as surety or guarantor for the debt for another, or otherwise) other than to Bank, except debts incurred in the ordinary course of Borrower's business, and except for existing indebtedness disclosed to Bank in writing and acknowledged by Bank prior to the date of this Agreement. F. CHARACTER OF BUSINESS. Change the general character of business as conducted at the date hereof, or engage in any type of business not reasonably related to its business as presently conducted. G. MANAGEMENT CHANGE. Make any substantial change in its present executive or management personnel. 8. DEFAULT. Borrower shall be in default under this Agreement and under each of the other Loan Documents if it shall: (i) default in the payment of any amounts due and owing under the Loan and it shall have failed to cure such default within five (5) days after written notice thereof to Borrower as provided herein; or (ii) fail to timely and properly observe, keep or perform any term, covenant, agreement or condition in any Loan Document or in any other loan agreement, promissory note, security agreement, deed of trust, deed to secure debt, mortgage, assignment or other contract securing or evidencing payment of any indebtedness of Borrower to Bank or any affiliate or subsidiary of NationsBank Corporation, and it shall have failed to cure such default within twenty (20) days after written notice thereof to Borrower as provided herein. 9. REMEDIES UPON DEFAULT. If an event of default shall occur, Bank shall have all rights, powers and remedies available under each of the Loan Documents as well as all rights and remedies available at law or in equity. 10. NOTICES. All notices, requests or demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to the other party at the following address: Borrower: Eateries, Inc. 3240 West Britton Road, Suite 202 Oklahoma City, Oklahoma 73120 Attention: Vincent F. Orza, Jr., President Fax. No. 405-____________ With a copy to: Thomas F. Golden, Esq. Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C. 320 South Boston, Suite 400 Tulsa, Oklahoma 74103-3708 Fax. No. 918-594-0505 Bank: NationsBank, N.A. 13 13 211 North Robinson Oklahoma City, Oklahoma 73102 Attention: Kelly H. Sachs Fax No. 405-230-4089 With a copy to: Clyde V. Crutchmer, Esq. McKinney, Stringer & Webster, P.C. 101 N. Broadway Oklahoma City, Oklahoma 73102 Fax. No. 405-239-7902 or to such other address as any party may designate by written notice to the other party. Each such notice, request and demand shall be deemed given or made as follows: A. If sent by mail, upon the earlier of the date of receipt or five (5) days after deposit in the U.S. Mail, first class postage prepaid; B. If sent by any other means, upon delivery. 11. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank immediately upon demand the full amount of all costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel if permitted by applicable law), incurred by Bank in connection with (a) the enforcement of this Agreement and each of the Loan Documents, and (b) all other costs and attorneys' fees incurred by Bank for which Borrower is obligated to reimburse Bank in accordance with the Terms of the Loan Documents. 12. MISCELLANEOUS. Borrower and Bank further covenant and agree as follows, without limiting any requirement of any other Loan Document: A. CUMULATIVE RIGHTS AND NO WAIVER. Each and every right granted to Bank under any Loan Document, or allowed it by law or equity shall be cumulative of each other and may be exercised in addition to any and all other rights of Bank, and no delay in exercising any right shall operate as a waiver thereof, nor shall any single or partial exercise by Bank of any right preclude any other or future exercise thereof or the exercise of any other right. Borrower expressly waives any presentment, demand, protest or other notice of any kind, including but not limited to notice of intent to accelerate and notice of acceleration. No notice to or demand on Borrower in any case shall, of itself, entitle Borrower to any other or future notice or demand in similar or other circumstances. B. APPLICABLE LAW. This Loan Agreement and the rights and obligations of the parties hereunder shall be governed by and interpreted in accordance with the laws of Oklahoma and applicable United States federal law. C. AMENDMENT. No modification, consent, amendment or waiver of any provision of this Loan Agreement, nor consent to any departure by Borrower therefrom, shall be effective unless 14 14 the same shall be in writing and signed by an officer of Bank, and then shall be effective only in the specified instance and for the purpose for which given. This Loan Agreement is binding upon Borrower, its successors and assigns, and inures to the benefit of Bank, its successors and assigns; however, no assignment or other transfer of Borrower's rights or obligations hereunder shall be made or be effective without Bank's prior written consent, nor shall it relieve Borrower of any obligations hereunder. There is no third party beneficiary of this Loan Agreement. D. DOCUMENTS. All documents, certificates and other items required under this Loan Agreement to be executed and/or delivered to Bank shall be in form and content satisfactory to Bank and its counsel. E. PARTIAL INVALIDITY. The unenforceability or invalidity of any provision of this Loan Agreement shall not affect the enforceability or validity of any other provision herein and the invalidity or unenforceability of any provision of any Loan Document to any person or circumstance shall not affect the enforceability or validity of such provision as it may apply to other persons or circumstances. F. INDEMNIFICATION. Notwithstanding anything to the contrary contained in Section 10(G), Borrower shall indemnify, defend and hold Bank and its successors and assigns harmless from and against any and all claims, demands, suits, losses, damages, assessments, fines, penalties, costs or other expenses (including reasonable attorneys' fees and court costs) arising from or in any way related to any of the transactions contemplated hereby, including but not limited to actual or threatened damage to the environment, agency costs of investigation, personal injury or death, or property damage, due to a release or alleged release of Hazardous Materials, arising from Borrower's business operations, any other property owned by Borrower or in the surface or ground water arising from Borrower's business operations, or gaseous emissions arising from Borrower's business operations or any other condition existing or arising from Borrower's business operations resulting from the use or existence of Hazardous Materials, whether such claim proves to be true or false. Borrower further agrees that its indemnity obligations shall include, but are not limited to, liability for damages resulting from the personal injury or death of an employee of the Borrower, regardless of whether the Borrower has paid the employee under the workmen' s compensation laws of any state or other similar federal or state legislation for the protection of employees. The term "property damage" as used in this paragraph includes, but is not limited to, damage to any real or personal property of the Borrower, the Bank, and of any third parties. The Borrower's obligations under this paragraph shall survive the repayment of the Loan and any deed in lieu of foreclosure or foreclosure of any Deed of Trust, Security Agreement or Mortgage securing the Loan. G. SURVIVABILITY. All covenants, agreements, representations and warranties made herein or in the other Loan Documents shall survive the making of the Loan and shall continue in full force and effect so long as the Loan is outstanding or the obligation of the Bank to make any advances under the Line shall not have expired. 13. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR 15 15 RELATING TO THIS, INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS AGREEMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE CITY OF THE BORROWER'S DOMICILE AT THE TIME OF THE EXECUTION OF THIS INSTRUMENT, AGREEMENT OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS. B. RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION PROVISION SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS ARBITRATION PROVISION; OR (II) BE A WAIVER BY THE BANK OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF THE BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. THE BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES. 16 16 14. NO ORAL AGREEMENT. THIS WRITTEN LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 17 17 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed under seal by their duly authorized representatives as of the date first above written. BORROWER: BANK: Eateries, Inc. NationsBank, N.A. By: ----------------------------------- By: ------------------------------ Name: Vincent F. Orza, Jr., Name: Kelly H. Sachs Title: President Title: Vice President Fiesta Restaurants, Inc. By: ----------------------------------- Name: Vincent F. Orza, Jr., Title: President Pepperoni Grill, Inc. By: ----------------------------------- Name: Vincent F. Orza, Jr., Title: President Garfield's Management, Inc. By: ----------------------------------- Name: Vincent F. Orza, Jr., Title: President EX-10.36 3 STOCK PUT AGREEMENT (VINCENT ORZA) 1 STOCK PUT AGREEMENT THIS STOCK PUT AGREEMENT is made and entered into as of the 2 day of April, 1997, by and among VINCENT F. ORZA, JR. ("Orza") and EATERIES, INC. (the "Company"). RECITALS A. Orza is President of the Company. B. In order to retain the services of Orza, the Company desires to grant Orza's estate or legal representative the right in the event of his death to cause the Company to purchase shares of common stock of the Company (the "Common Stock") owned or controlled, directly or indirectly, by Orza or members of his immediate family on the date of his death. NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: 1. GRANT OF PUT. The Company hereby grants Orza and his estate or other legal representative the right (but not the obligation) to compel the Company to purchase all or part of the Common Stock owned by Orza or members of his immediate family (i.e. spouse or children) or controlled by any of them through trusts, partnerships, corporations or other entities on the date of Orza's death and any Common Stock acquired by Orza's estate or other legal representative after Orza's death pursuant to the exercise of stock options held by Orza at the time of his death. 2. PURCHASE PRICE. The per share purchase price payable by the Company for Common Stock purchased under this Agreement shall be the greater of (a) the highest closing price (as hereinafter defined) of a share of Common Stock during the sixty (60) days preceding the date of Orza's death or (b) two times the net book value per share of Common Stock as of the last day of the calendar month immediately preceding the month of Orza's death as reflected in the Company's regularly maintained financial records; provided, that, in any event the total purchase price shall not exceed the proceeds payable to the Company from the key man life insurance policy maintained on the life of Orza. The "closing price" shall be (x) if the Common Stock is then traded on the over-the-counter market, the mean between the highest closing bid and lowest closing asked prices for a share of the Common Stock as reported by the National Association of Securities Dealers Automated Quotation System, or if not reported by that system, the mean between the closing bid and asked prices as quoted by a source designated by the Board of Directors of the Company, or (y) if the Common Stock is listed on a national or regional stock exchange, the closing sales price per share on such exchange. The Company shall escrow proceeds from the key man life insurance policy maintained on the life of Orza on terms mutually acceptable to Orza's estate or other legal representative until such time as the put right granted in this Agreement has been fully exercised or has fully expired. 2 3. TERM OF PUT. The put right granted under this Agreement shall commence on the date of this Agreement and shall continue for a period of one year after the date of Orza's death provided that Orza is a full-time employee of the Company (or its successor) on the date of his death (the "Put Period"). If Orza shall for any reason cease to be a full-time employee of the Company prior to his death, then this Agreement and the rights and obligations of the parties hereunder shall terminate on the date of such cessation of employment. 4. CLOSING. Orza's estate or other legal representative shall exercise the put right granted under this Agreement by giving written notice of exercise to the Company during the Put Period. Closing of the exercise of the put right shall take place at a time selected by the Company within ninety (90) days of the date written notice of exercise is given even if the Closing occurs beyond the Put Period. At the Closing, the Company shall deliver to Orza's estate or other legal representative payment for the full amount of the purchase price, which payment shall be made by cashiers check, wire transfer or other mutually-agreeable methods. 5. ASSIGNMENT. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto without the prior written consent of the other parties. 6. MISCELLANEOUS. (a) All costs and expenses incurred in connection with this Agreement and the transaction contemplated hereby shall be paid by the party incurring such expense. (b) This Agreement may not be amended except by an instrument in writing signed by the parties hereto. (c) This Agreement shall be governed by and construed in accordance with the laws of the State of Oklahoma. (d) All notices or other communications required or permitted hereunder shall be in writing and shall be delivered in person or sent by United States certified or registered mail, postage prepaid, return receipt requested, or by overnight express mail, or by telex, facsimile or telecopy to the address of the party set forth below. Any such notice shall be effective upon receipt or three days after being placed in the mail, whichever is earlier. If to Eateries: Eateries, Inc. 3240 W. Britton Road, Suite 202 Oklahoma City, OK 73120-2032 Attn: Vincent F. Orza, Jr. Facsimile: (405) 748-3576 -2- 3 If to Orza: [To be provided.] (e) Time is of the essence in the performance and interpretation of the terms of this Agreement. Executed effective as of the date first set forth above. /S/ ------------------------ Vincent F. Orza, Jr. EATERIES, INC. By: /S/ --------------------- Its: /S/ -------------------- -3- EX-10.37 4 STOCK PUT AGREEMENT (JAMES BURKE) 1 STOCK PUT AGREEMENT THIS STOCK PUT AGREEMENT is made and entered into as of the 2 day of April, 1997, by and among JAMES M. BURKE ("Burke") and EATERIES, INC. (the "Company"). RECITALS A. Burke is a senior executive employee of the Company. B. In order to retain the services of Burke, the Company desires to grant Burke's estate or legal representative the right in the event of his death to cause the Company to purchase shares of common stock of the Company (the "Common Stock") owned or controlled, directly or indirectly, by Burke or members of his immediate family on the date of his death. NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: 1. GRANT OF PUT. The Company hereby grants Burke and his estate or other legal representative the right (but not the obligation) to compel the Company to purchase all or part of the Common Stock owned by Burke or members of his immediate family (i.e. spouse or children) or controlled by any of them through trusts, partnerships, corporations or other entities on the date of Burke's death and any Common Stock acquired by Burke's estate or other legal representative after Burke's death pursuant to the exercise of stock options held by Burke at the time of his death. 2. PURCHASE PRICE. The per share purchase price payable by the Company for Common Stock purchased under this Agreement shall be the greater of (a) the highest closing price (as hereinafter defined) of a share of Common Stock during the sixty (60) days preceding the date of Burke's death or (b) two times the net book value per share of Common Stock as of the last day of the calendar month immediately preceding the month of Burke's death as reflected in the Company's regularly maintained financial records; provided, that, in any event the total purchase price shall not exceed the proceeds payable to the Company from the key man life insurance policy maintained on the life of Burke. The "closing price" shall be (x) if the Common Stock is then traded on the over-the-counter market, the mean between the highest closing bid and lowest closing asked prices for a share of the Common Stock as reported by the National Association of Securities Dealers Automated Quotation System, or if not reported by that system, the mean between the closing bid and asked prices as quoted by a source designated by the Board of Directors of the Company, or (y) if the Common Stock is listed on a national or regional stock exchange, the closing sales price per share on such exchange. The Company shall escrow proceeds from the key man life insurance policy maintained on the life of Burke on terms mutually acceptable to Burke's estate or other legal representative until such time as the put right granted in this Agreement has been fully exercised or has fully expired. 2 3. TERM OF PUT. The put right granted under this Agreement shall commence on the date of this Agreement and shall continue for a period of one year after the date of Burke's death provided that Burke is a full-time employee of the Company (or its successor) on the date of his death (the "Put Period"). If Burke shall for any reason cease to be a full-time employee of the Company prior to his death, then this Agreement and the rights and obligations of the parties hereunder shall terminate on the date of such cessation of employment. 4. CLOSING. Burke's estate or other legal representative shall exercise the put right granted under this Agreement by giving written notice of exercise to the Company during the Put Period. Closing of the exercise of the put right shall take place at a time selected by the Company within ninety (90) days of the date written notice of exercise is given even if the Closing occurs beyond the Put Period. At the Closing, the Company shall deliver to Burke's estate or other legal representative payment for the full amount of the purchase price, which payment shall be made by cashiers check, wire transfer or other mutually-agreeable methods. 5. ASSIGNMENT. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto without the prior written consent of the other parties. 6. MISCELLANEOUS. (a) All costs and expenses incurred in connection with this Agreement and the transaction contemplated hereby shall be paid by the party incurring such expense. (b) This Agreement may not be amended except by an instrument in writing signed by the parties hereto. (c) This Agreement shall be governed by and construed in accordance with the laws of the State of Oklahoma. (d) All notices or other communications required or permitted hereunder shall be in writing and shall be delivered in person or sent by United States certified or registered mail, postage prepaid, return receipt requested, or by overnight express mail, or by telex, facsimile or telecopy to the address of the party set forth below. Any such notice shall be effective upon receipt or three days after being placed in the mail, whichever is earlier. If to Eateries: Eateries, Inc. 3240 W. Britton Road, Suite 202 Oklahoma City, OK 73120-2032 Attn: Vincent F. Orza, Jr. Facsimile: (405) 748-3576 -2- 3 If to Burke: [To be provided.] (e) Time is of the essence in the performance and interpretation of the terms of this Agreement. Executed effective as of the date first set forth above. /S/ ------------------------ James M. Burke EATERIES, INC. By: /S/ --------------------- Its: /S/ -------------------- -3- EX-23.1 5 CONSENT OF ARTHUR ANDERSEN LLP 1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-41279) pertaining to the Eateries, Inc. Omnibus Equity Compensation Plan of our report dated March 5, 1998, with respect to the consolidated financial statements of Eateries, Inc. included in the Annual Report (Form 10-K) for the year ended December 28, 1997. ARTHUR ANDERSEN LLP Oklahoma City, Oklahoma April 10, 1998 EX-23.2 6 CONSENT OF ERNST & YOUNG LLP 1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-41279) pertaining to the Eateries, Inc. Omnibus Equity Compensation Plan of our report dated March 26, 1997, except for the last paragraph of Note 5, as to which the date is April 9, 1997, with respect to the consolidated financial statements of Eateries, Inc. included in the Annual Report (Form 10-K) for the year ended December 28, 1997. ERNST & YOUNG LLP Oklahoma City, Oklahoma April 10, 1998 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 28, 1997 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 YEAR DEC-28-1997 DEC-30-1996 DEC-28-1997 1,331 0 1,121 0 2,296 5,559 27,580 7,201 29,775 10,403 7,637 0 0 8 10,985 29,775 62,851 63,542 17,840 56,851 4,722 0 310 1,968 569 1,399 0 0 0 1,399 0.36 0.35
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