-----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, TVtFleggRS15mXV1+mU47eKpfjJBQHKOOjkt0GFHCtJYoa0uZ7Z15OMk5ZYqknAl Z94MbWZzvi2Qra1On+OU7A== 0000950134-99-003863.txt : 19990513 0000950134-99-003863.hdr.sgml : 19990513 ACCESSION NUMBER: 0000950134-99-003863 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990328 FILED AS OF DATE: 19990512 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: 1227 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14968 FILM NUMBER: 99617638 BUSINESS ADDRESS: STREET 1: 3240 W BRITTON RD STE 202 CITY: OKLAHOMA CITY STATE: OK ZIP: 73120 BUSINESS PHONE: 4057553607 10-Q 1 FORM 10-Q FOR QUARTER ENDED MARCH 28, 1999 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Act of 1934 for the Quarterly Period ended March 28, 1999. Commission File Number: 0-14968 ------------------------------------------------------- EATERIES, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Oklahoma 73-1230348 - ---------------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3240 W. Britton Rd., Ste. 202, Oklahoma City, Oklahoma 73120 - ---------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code) (405) 755-3607 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X]Yes [ ]No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of May 10, 1999, 2,882,343 common shares, $.002 par value, were outstanding. 2 EATERIES, INC. AND SUBSIDIARIES FORM 10-Q INDEX
Page ---- Part I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets March 28, 1999 (unaudited) and December 27, 1998 ...................................................................... 4 Condensed Consolidated Statements of Income (unaudited) Thirteen weeks ended March 28, 1999 and March 29, 1998...................................................................... 5 Condensed Consolidated Statements of Cash Flows (unaudited) Thirteen weeks ended March 28, 1999 and March 29, 1998...................................................................... 6 Notes to Condensed Consolidated Financial Statements (unaudited)..................................................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................................. 11 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K.............................................................. 22
2 3 PART I FINANCIAL INFORMATION 3 4 ITEM 1. FINANCIAL STATEMENTS. EATERIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
March 28, December 27, 1999 1998 ------------ ------------ (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,472,634 $ 1,297,638 Receivables 1,224,675 1,121,814 Deferred income taxes 387,000 387,000 Inventories 735,264 833,672 Other 2,932,471 2,129,146 ------------ ------------ Total current assets 7,752,044 5,769,270 ------------ ------------ PROPERTY AND EQUIPMENT 43,208,577 42,229,238 Less landlord finish-out allowances (15,615,564) (15,490,564) Less accumulated depreciation and amortization (10,772,052) (9,971,946) ------------ ------------ Net property and equipment 16,820,961 16,766,728 ------------ ------------ DEFERRED INCOME TAXES 264,000 328,000 GOODWILL 2,284,046 2,325,417 OTHER ASSETS, net 629,513 630,426 ------------ ------------ $ 27,750,564 $ 25,819,841 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 3,792,955 $ 4,294,032 Accrued liabilities 4,351,949 4,398,877 Current portion of long-term obligations 993,489 436,514 ------------ ------------ Total current liabilities 9,138,393 9,129,423 ------------ ------------ OTHER NONCURRENT LIABILITIES 857,913 830,078 ------------ ------------ LONG-TERM OBLIGATIONS, net of current portion 10,631,542 3,409,356 ------------ ------------ COMMITMENTS STOCKHOLDERS' EQUITY: Preferred stock, none issued -- -- Common stock 8,724 8,694 Additional paid-in capital 10,011,311 9,952,216 Retained earnings 4,495,412 4,248,487 ------------ ------------ 14,515,447 14,209,397 Treasury stock, at cost, 1,479,677 and 384,015 shares at March 28, 1999 and December 27, 1998, respectively (7,392,731) (1,758,413) Total stockholders' equity 7,122,716 12,450,984 ------------ ------------ $ 27,750,564 $ 25,819,841 ============ ============
See notes to condensed consolidated financial statements. 4 5 EATERIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Thirteen Weeks Ended March 28, March 29, 1999 1998 ------------ ------------ REVENUES: Food and beverage sales $ 22,904,457 $ 23,132,879 Franchise fees and royalties 67,838 106,593 Other income 101,525 260,553 ------------ ------------ 23,073,820 23,500,025 ------------ ------------ COSTS AND EXPENSES: Costs of sales 6,269,749 6,327,769 Operating expenses 13,924,863 13,962,645 Pre-opening costs 99,000 131,000 General and administrative 1,440,493 1,451,451 Depreciation and amortization 843,040 728,758 Interest expense 145,750 140,130 ------------ ------------ 22,722,895 22,741,753 ------------ ------------ INCOME BEFORE INCOME TAXES 350,925 758,272 PROVISION FOR INCOME TAXES 104,000 224,000 ------------ ------------ NET INCOME $ 246,925 $ 534,272 ============ ============ BASIC EARNINGS PER SHARE $ 0.07 $ 0.14 ============ ============ DILUTED EARNINGS PER SHARE $ 0.07 $ 0.13 ============ ============
See notes to condensed consolidated financial statements. 5 6 EATERIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Thirteen Weeks Ended March 28, March 29, 1999 1998 ------------ ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: Cash flows from operating activities: Net income $ 246,925 $ 534,272 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation & amortization 843,040 728,758 Gain on sale of assets -- (942) Deferred income taxes 80,000 204,000 (Increase) decrease in: Receivables (104,439) 93,393 Inventories 98,408 (39,273) Other (803,326) (288,259) Increase (decrease) in: Accounts payable 242,897 (857,511) Accrued liabilities (46,927) (679,065) Other noncurrent liabilities 27,835 8,681 ------------ ------------ Total adjustments 337,488 (830,218) ------------ ------------ Net cash provided by (used in) operating activities 584,413 (295,946) ------------ ------------ Cash flows from investing activities: Capital expenditures (979,342) (1,564,086) Landlord allowances 125,000 206,250 Net cash paid for restaurant acquisitions -- (6,329) Proceeds from sale of property and equipment -- 5,182,341 Payments received on notes receivable 1,579 42,501 Increase in other assets (650) (31,439) ------------ ------------ Net cash provided by (used in) investing activities (853,413) 3,829,238 ------------ ------------ Cash flows from financing activities: Payments on long-term obligations -- (4,864,885) Borrowings under long-term obligations 5,463,333 -- Net borrowings under revolving credit agreements 2,315,829 200,000 Increase (decrease) in bank overdraft included in accounts payable (743,973) 534,902 Repurchase of treasury stock (5,634,318) -- Proceeds from exercise of stock options 43,125 24,999 ------------ ------------ Net cash provided by (used in) financing activities (1,443,996) (4,104,984) ------------ ------------ Net increase (decrease) in cash & cash equivalents 1,174,996 (571,692) Cash and cash equivalents at beginning of period 1,297,638 1,331,363 ------------ ------------ Cash and cash equivalents at end of period $ 2,472,634 $ 759,671 ============ ============
See notes to condensed consolidated financial statements. 6 7 EATERIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1 - Basis of Preparation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the thirteen weeks ended March 28, 1999 are not necessarily indicative of the results that may be expected for the year ended December 26, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 27, 1998. Note 2 - Balance Sheet Information Receivables are comprised of the following:
March 28, December 27, 1999 1998 ------------ ------------ Franchisees...................... $ 64,968 $ 73,274 Insurance refunds................ 264,984 270,084 Landlord finish-out allowances... 10,000 10,000 Other............................ 884,723 768,456 ------------ ------------ $ 1,224,675 $ 1,121,814 ============ ============
Accrued liabilities are comprised of the following:
March 28, December 27, 1999 1998 ------------ ------------ Compensation.................... $ 2,223,651 $ 2,087,295 Taxes, other than income........ 849,135 888,209 Other........................... 1,279,163 1,423,373 ------------ ------------ $ 4,351,949 $ 4,398,877 ============ ============
Note 3 - Supplemental Cash Flow Information For the thirteen-week periods ended March 28, 1999 and March 29, 1998, the Company had the following non-cash investing activity: 7 8
Thirteen Weeks Ended March 28, March 29, 1999 1998 -------------- -------------- Net decrease in receivables for landlord finish-out allowances $ - $ 106,250 Increase in additional paid-in capital as a result of tax benefits from the exercise of non-qualified stock options 16,000 50,000
Note 4 - Stock Repurchases In April 1997, the Company's Board of Directors authorized the repurchase of up to 200,000 shares of the company's common stock. In July 1997, an additional 200,000 shares were authorized for repurchase. As of March 28, 1999, 130,262 shares had been repurchased under this plan for a total purchase price of approximately $556,000. No additional shares have been repurchased subsequent to March 28, 1999. In February 1999, the Company purchased 1,056,200 shares of its common stock from Astoria Capital Partners, L.P., Montavilla Partners, L.P., and MicroCap Partners L.P. ("Sellers") for a purchase price of $5.125 per share or an aggregate purchase price of $5,413,025. The shares purchased from the Sellers represented 26.7% of the outstanding common stock of the Company, prior to the transaction. The purchase price was financed by the Company through a term loan with a bank. Note 5 - Restaurant Acquisitions and Dispositions In February 1998, the Company sold substantially all of the assets, including real estate, comprising three 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. In connection with this transaction, the Company entered into an agreement to sell substantially all of the assets related to one additional Casa Lupita to Chevy's for a price of approximately $1,000,000. This transaction closed in May 1998. The proceeds from this transaction were used to pay-down debt. In March 1998, the Company acquired a Garcia's Mexican Restaurant from Famous Restaurants, Inc. ("Famous"). In connection with this transaction, Famous paid the Company $70,000 to assume the real estate lease associated with this location and approximately $60,000 to assume certain liabilities related to this location. The liabilities assumed by the Company cannot exceed the amount paid to the Company by Famous. 8 9 In July 1998, the Company acquired all of the outstanding common stock of O.E., Inc. for a cash purchase price of $107,000. O.E., Inc. owns and operates three Garfield's Restaurant & Pub locations in Oklahoma. The acquisition has been accounted for under the purchase method. Pro forma operating results for the thirteen week period ended March 29, 1998, assuming that the acquisition had been made at the beginning of fiscal year 1998, would not be materially different than the results reported. Note 6 - Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share ("EPS"):
Thirteen Weeks Ended ------------------------------ March 28, March 29, 1999 1998 ------------- ------------- Numerator: Net income ............................................. $ 246,925 $ 534,272 ============= ============= Denominator: Denominator for basic EPS- weighted average shares outstanding 3,518,991 3,898,406 Dilutive effect of nonqualified stock options .......... 206,390 218,253 ------------- ------------- Denominator for diluted EPS .......................... 3,725,381 4,116,659 ============= ============= Basic EPS .................................................... $ 0.07 $ 0.14 ============= ============= Diluted EPS .................................................. $ 0.07 $ 0.13 ============= =============
Note 7 - New Accounting Standards In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Amounts capitalized or expensed by the Company for internal-use software projects are not expected to differ materially as a result of SOP 98-1, as the prescribed accounting treatment is consistent with the Company's current accounting policy. SOP 98-1, the effect of which is to be recognized prospectively, is effective for 1999 financial statements. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-up Activities," which requires start-up costs to be expensed as incurred. SOP 98-5 is effective for fiscal years beginning after December 15, 1998, although earlier application is encouraged. The Company does not expect the adoption of SOP 9 10 98-5 to have a material effect on its financial position or results of operations, as the prescribed accounting treatment is consistent with the Company's current accounting policy regarding start-up costs. 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. From time to time, the Company may publish forward-looking statements relating to certain matters including anticipated financial performance, business prospects, the future opening of Company-owned and franchised restaurants, anticipated capital expenditures, and other matters. All statements other than statements of historical fact contained in this Form 10-Q or in any other report of the Company are forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of that safe harbor, the Company notes that a variety of factors, individually or in the aggregate, could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements including, without limitation, the following: consumer spending trends and habits; competition in the casual dining restaurant segment; weather conditions in the Company's operating regions; laws and government regulations; general business and economic conditions; availability of capital; success of operating initiatives and marketing and promotional efforts; and changes in accounting policies. In addition, the Company disclaims any intent or obligation to update those forward-looking statements. INTRODUCTION As of March 28, 1999, the Company owned and operated 65 (48 Garfield's, 14 Garcia's, two Pepperoni Grills and one Carlos Murphy's) and franchised eight (six Garfield's and two Garcia's) restaurants. Subsequent to March 28, 1999, the Company closed one under-performing Garfield's. The Company currently has three new Garfield's in development. As of the date of this report, the entire system includes 72 restaurants of which 64 are Company-owned (47 Garfield's, 14 Garcia's, one Carlos Murphy's, and two Pepperoni Grills) and eight are franchised (six Garfield's and two Garcia's). In February 1998, the Company sold substantially all of the assets, including real estate, comprising three 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. In connection with this transaction, the Company entered into an agreement to sell substantially all of the assets related to one additional Casa Lupita to Chevy's for a price of approximately $1,000,000. This second transaction closed in May 1998. The decision to sell the four Casa Lupita locations was the result of a plan to consolidate the Company's Mexican food 11 12 operations and focus on the expansion of Garcia's. During 1998, the Company converted one Carlos Murphy's location to a Garcia's. PERCENTAGE RESULTS OF OPERATIONS AND RESTAURANT DATA The following table sets forth, for the periods indicated, (i) the percentages that certain items of income and expense bear to total revenues, unless otherwise indicated, and (ii) selected operating data:
Thirteen Weeks Ended March 28, March 29, 1999 1998 ---------- ---------- Statements of Income Data: Revenues: Food and beverage sales ................ 99.3% 98.4% Franchise fees and royalties ........... 0.3% 0.5% Other income ........................... 0.4% 1.1% ---------- ---------- 100.0% 100.0% Costs and Expenses: Costs of sales (1) ..................... 27.4% 27.4% Operating expenses (1) ................. 60.8% 60.4% Pre-opening costs (1) .................. 0.4% 0.6% General and administrative ............. 6.2% 6.2% Depreciation and amortization (1) ...... 3.7% 3.2% Interest expense ....................... 0.6% 0.6% ---------- ---------- 98.5% 96.8% ---------- ---------- Income before income taxes .................. 1.5% 3.2% Provision for income taxes .................. 0.4% 1.0% ---------- ---------- Net income .................................. 1.1% 2.2% ========== ========== Selected Operating Data: (Dollars in thousands) System-wide sales: Company restaurants .................... $ 22,904 $ 23,133 Franchise restaurants .................. 2,217 2,925 ---------- ---------- Total ............................. $ 25,121 $ 26,058 ========== ========== Number of restaurants (at end of period): Company restaurants .................... 65 62 Franchise restaurants .................. 8 11 ---------- ---------- Total ............................. 73 73 ========== ==========
(1) As a percentage of food and beverage sales. RESULTS OF OPERATIONS For the quarter ended March 28, 1999, the Company recorded net income of $247,000 ($0.07 per common share; $0.07 per common 12 13 share assuming dilution) on revenues of $23,074,000. This compares to net income of $534,000 ($0.14 per common share; $0.13 per common share assuming dilution) for the quarter ended March 29, 1998 on revenues of $23,500,000. REVENUES Company revenues for the quarter ended March 28, 1999 decreased 2% versus the revenues reported for the same period in 1998. This decrease is primarily attributable to the sale of four Casa Lupita locations in February and May 1998. The number of Company restaurants operating at the end of each quarter and the number of operating months during that quarter are as follows:
Number Period of Number of Average Monthly Ended Units Open Operating Months Sales Per Unit - --------------------------- --------------- ------------------------- ----------------------------- Garfield's (1) March 28, 1999 50 150 $109,000 March 29, 1998 46 136 113,300 Garcia's (2) March 28, 1999 14 41 $159,600 March 29, 1998 16 48 161,000
(1) Includes Pepperoni Grill. (2) Includes Carlos Murphy's and Casa Lupita; excludes the Garcia's concession operation at BankOne Ball Park in Phoenix, Arizona. Average monthly sales per unit for Garfield's decreased by $4,300 or 3.8% during the first quarter of 1999 versus 1998. This decrease is primarily attributable to increased competition in certain markets, partially offset by increased sales in other markets. Average monthly sales per unit for Garcia's decreased by $1,400 or 0.9%. This decrease is primarily due to sales decreases in the Phoenix, Arizona market resulting from a vendor contaminated food product problem and the related negative publicity. Franchise fees and continuing royalties decreased to $68,000 during the quarter ended March 28, 1999, versus $107,000 during the quarter ended March 29, 1998. This decrease is primarily due to the recognition of the initial franchise fee related to the opening of a new franchised Garfield's during the first quarter of 1998. No new franchised restaurants were opened during the quarter ended March 28, 1999. Other income for the quarter ended March 28, 1999 was $102,000 as compared to the previous year's amount of $261,000. During the first quarter of 1998, the Company was paid a fee of $120,000 to terminate an agreement under which the Company managed a Carlos Murphy's restaurant owned by an independent third party. Under 13 14 this agreement, the Company was paid a fee equal to 4% of sales to manage the restaurant for a term of two years. This management agreement termination fee is included in other income for the quarter ended March 29, 1998. 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:
Thirteen Weeks Ended ------------------------- March 29, March 29, 1999 1998 ---------- ---------- Garfield's (1): Costs of sales ........ 27.9% 28.3% Labor costs ........... 28.3% 28.5% ---------- ---------- Total ............... 56.2% 56.8% ========== ========== Garcia's (2): Costs of sales ........ 26.0% 25.4% Labor costs ........... 28.3% 29.6% ---------- ---------- Total ............... 54.3% 55.0% ========== ========== Total Company: Costs of sales ........ 27.4% 27.4% Labor costs ........... 28.3% 28.9% ---------- ---------- Total ............... 55.7% 56.3% ========== ==========
(1) Includes Pepperoni Grill. (2) Includes Carlos Murphy's and Casa Lupita. Costs of sales as a percentage of food and beverage sales for Garfield's decreased to 27.9% in the quarter ended March 28, 1999 versus 28.3% in the quarter ended March 29, 1998. This decrease primarily relates to continued menu development, increased vendor rebates and continued improvements in store-level food and beverage cost controls. Garcia's costs of sales as a percentage of food and beverage sales increased to 26.0% in the quarter ended March 28, 1999 versus 25.4% in the quarter ended March 29, 1998. Labor costs for Garfield's decreased to 28.3% of food and beverage sales during the quarter ended March 28, 1999, versus 28.5% during the 1998 comparable period. 14 15 Garcia's labor costs decreased to 28.3% of food and beverage sales during the quarter ended March 28, 1999, versus 29.6% in the quarter ended March 29, 1998. For the quarter ended March 28, 1999, operating expenses as a percentage of food and beverage sales increased to 60.8% from 60.4% in the quarter ended March 29, 1998. This increase principally relates to increased advertising, marketing and occupancy costs during the quarter ended March 28, 1999, partially offset by decreased labor costs in Garfield's and Garcia's. Restaurant pre-opening costs, which are expensed as incurred, were $99,000 in the quarter ended March 28, 1999 (0.4% of food and beverage sales) versus $131,000 (0.6% of food and beverage sales) in the comparable period in 1998. One restaurant was opened in the first quarter of both 1998 and 1999. Under the Company's policy of expensing pre-opening costs as incurred, income from operations, on an annual and quarterly basis, could be adversely affected during periods of restaurant development. However, the Company believes that its initial investment in the restaurant pre-opening costs yields a long-term benefit of increased operating income in subsequent periods. In April 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") No. 98-5, "Reporting on the Costs of Start-up Activities," which requires start-up costs to be expensed as incurred. SOP No. 98-5 is effective for fiscal years beginning after December 15, 1998. The adoption of SOP No. 98-5 did not have a material effect on the Company's financial position or the results of its operations, as the prescribed accounting treatment is consistent with the Company's existing accounting policy regarding pre-opening costs. During the quarters ended March 28, 1999 and March 29, 1998, general and administrative costs as a percentage of total revenues were 6.2%. Depreciation and amortization expense increased during the first quarter of 1999 to $843,000 (3.7% of food and beverage sales) compared to $729,000 (3.2% of food and beverage sales) in 1998. The increase primarily relates to the increase in net assets subject to depreciation and amortization in 1999 versus 1998 because of the opening or acquisition of new restaurants, the remodel of existing restaurants, and the installation of new point-of-sale register systems in most Garcia's locations and certain Garfield's locations since March 29, 1998. Interest expense during the first quarter of 1999 was $146,000 (0.6% of total revenues) versus $140,000 (0.6% of total revenues) in the first quarter of 1998. 15 16 INCOME TAXES The Company's provision for income taxes was $104,000 during the first quarter of 1999 versus $224,000 during 1998. The effective tax rate for the Company during the first quarter of 1999 was 29.6% versus 29.5% during the previous year's first quarter. EARNINGS PER SHARE AMOUNTS Basic earnings per share ("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 3,518,991 and 3,898,406 in the quarters ended March 28, 1999 and March 29, 1998, 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 3,725,381 and 4,116,659 for the quarters ended March 28, 1999 and March 29, 1998, respectively. IMPACT OF INFLATION The impact of inflation on the costs of food and beverage products, labor and real estate can affect the Company's operations. Over the past few years, inflation has had a lesser impact on the Company's operations due to the lower rates of inflation in the nation's economy and the economic conditions in the Company's market areas. Management believes the Company has historically been able to pass on increased costs through certain selected menu price increases and increased productivity and purchasing efficiencies, but there can be no assurance that the Company will be able to do so in the future. Management anticipates that the average cost of restaurant real estate leases and construction costs could increase in the future which could affect the Company's ability to expand. In addition, mandated health care and an increase in the Federal or state minimum wages could significantly increase the Company's costs of doing business. LIQUIDITY AND CAPITAL RESOURCES At March 28, 1999, the Company's current ratio was 0.85 to 1 compared to 0.63 to 1 at December 27, 1998. The Company's working capital was $(1,386,000) at March 28, 1999 versus $(3,360,000) at December 27, 1998. As is customary in the restaurant industry, the Company has operated with negative working capital and has not required large amounts of working capital. Historically, the Company has leased the majority of its restaurant locations and through a strategy of controlled 16 17 growth financed its expansion from operating cash flow, proceeds from the sale of common stock and utilizing the Company's revolving line of credit. During the quarter ended March 28, 1999, the Company had net cash provided by operating activities of $584,000 as compared to net cash used in operating activities of $(296,000) during the comparable 1998 period. The Company plans to open up to six units during 1999 in restaurant locations leased in regional malls and in free-standing sites. The Company believes the cash generated from its operations and borrowing availability under its credit facility (described below), will be sufficient to satisfy the Company's net capital expenditures and working capital requirements during 1999. In November 1997, the Company entered into a loan agreement with a bank. This loan agreement provided 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. In February 1999, the Company entered into a new credit facility with a bank in the aggregate amount of $14,600,000, of which a maximum of $6,000,000 is available to the Company under a revolving line of credit and $8,600,000 was available to the Company under a term loan. Certain proceeds of the term loan (approximately $5.4 million) were used to repurchase 1,056,200 shares of the Company's common stock (transaction described below). The balance of the proceeds under the term loan (approximately $3.2 million) and the initial proceeds under the revolving line of credit were used to retire indebtedness under the Company's existing loan agreement. As of March 28, 199, the Company had outstanding borrowings of approximately $8,559,000 under the term loan feature and approximately $3,066,000 of outstanding borrowings under the revolving line of credit. Outstanding borrowings under both the revolving line of credit and term loan bear interest at three-month LIBOR plus 1.50% (6.50% as of March 28, 1999). The interest rate is reset quarterly. There is no non-use fee related to either facility. The revolving line of credit has a two-year term with final maturity in February 2001. 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 February 2004. The term loan converts to a five-year amortization schedule if the Company's debt coverage ratio, as defined in the loan agreement, exceeds a certain level. Also, the floating interest rate on both facilities is subject to changes in the Company's ratio of total loans and capital leases to net worth. Under the terms of these notes, the Company's minimum floating rate is three-month LIBOR plus 1.25% and the maximum floating rate is three-month LIBOR plus 1.75%. Borrowings under this loan agreement are unsecured. The loan 17 18 agreement does contain certain financial covenants and restrictions. As of the date of this report, the Company is in compliance with these 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 March 28, 1999, 130,262 shares had been repurchased under this plan for a total purchase price of approximately $556,000. No additional shares have been repurchased subsequent to March 28, 1999. In February 1999, the Company purchased 1,056,200 shares of its common stock from Astoria Capital Partners, L.P., Montavilla Partners, L.P., and MicroCap Partners L.P. ("Sellers") for a purchase price of $5.125 per share or an aggregate purchase price of $5,413,025. The shares purchased from the Sellers represented 26.7% of the outstanding common stock of the Company, prior to the transaction. The purchase price of these shares were financed through a term loan with a bank (described above). YEAR 2000 The year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive or embedded computer chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations which could disrupt the Company's normal business activities. The Company has completed its initial assessment of the year 2000 compliance issue. The assessment was conducted reviewing internal and external year 2000 compliance issues. Based on the assessments, the Company has developed a plan to prepare for the year 2000 issue. The plan involves: 1. Review of hardware and software systems for compliance, 2. Replacement, remediation or modification of non compliant systems, 3. Testing existing, 18 19 replaced, remediated or modified systems to confirm compliance, and 4. Implementation. The Company has determined, based on its assessment that a substantial amount of software and hardware used internally will require modification or replacement. The Company believes that with modifications and replacements of software and hardware systems currently identified, the risk associated with the year 2000 issue can be mitigated. If the modifications and replacements of critical hardware and software systems used by the Company were not completed timely, the year 2000 issue could have a material impact on the operations of the Company. In addition to assessing internal year 2000 compliance, the Company is continuing to gather information pertaining to key third parties conducting business with the Company and their year 2000 compliance status. As of March 28, 1999, the Company is in excess of 70% complete on the modification and remediation of existing software and hardware. Completion of modification and remediation is expected by May 31, 1999. Testing of these systems is expected to be complete by June 30, 1999. These internal systems relate primarily to financial and management information systems. The Company's non-informational technology systems consist primarily of restaurant operating equipment including its point-of-sale systems. The assessment of these systems has indicated that 90% of the systems are year 2000 compliant. The Company plans to replace the non-compliant point-of-sale systems prior to year end 1999. While the Company believes that 90% of the non-information systems are year 2000 compliant, it plans to continue testing its operating equipment and expects to complete testing by June 30, 1999. The Company's significant third party business partners consists principally of suppliers, banks, and its franchisees. The Company does not have any material or significant systems interfaces with third parties. An initial inventory of significant third parties has been completed and information requests regarding year 2000 compliance have been sent. The Company is developing contingency plans by June 30, 1999 for any significant third parties that appear to be year 2000 non-compliant. The Company is using internal and external sources to review and identify, remediate, test and implement systems for year 2000 readiness. The cost of the year 2000 compliance, excluding internal personnel costs, as of December 26, 1999 are estimated to be approximately $365,000 of which approximately $350,000 are capitalized as equipment and software. The Company estimates that an additional $175,000, exclusive of internal personnel costs, will be spent before December 1999 on year 2000 compliance 19 20 of which approximately $150,000 is estimated to be capitalized equipment and software. The Company believes it has in place a plan that will resolve its year 2000 issue in a timely manner. Due to the forward looking nature and lack of historical experience with year 2000 issues however, it is difficult to predict with certainty the results of year 2000 compliance issues after December 31, 1999. It is likely, despite the Company's efforts, that there will be disruptions and unexpected business problems during the year 2000. In addition, despite the Company's efforts it may experience unanticipated third party failures, general public infrastructure failures and or failures to successfully conclude its remediation efforts as planned. The Company may be required to utilize manual processing of certain otherwise automated processes primarily related to payroll and cash management. Any of these unforeseen events could have a material adverse impact on the Company's results of operations, financial condition, and or cash flows in 1999 and beyond. The amount of potential loss cannot be reasonably estimated at this time. 20 21 PART II OTHER INFORMATION 21 22 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibit 27.1 - Financial Data Schedule. A Form 8-K was filed on March 3, 1999, with the Securities and Exchange Commission ("SEC") regarding the Registrant's purchase of 1,056,200 shares of its outstanding common stock and the related financing. 22 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EATERIES, INC. Registrant Date: May 10, 1999 By: /s/ BRADLEY L. GROW --------------------------------- Bradley L. Grow Vice President Chief Financial Officer 23 24 EXHIBIT INDEX
Exhibit Number Description - ------- ----------- 27.1 Financial Data Schedule.
EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 28, 1999 AND THE CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE THIRTEEN WEEKS ENDED MARCH 28, 1999. 1,000 3-MOS DEC-28-1999 DEC-28-1998 MAR-28-1999 2,473 0 1,225 0 735 7,752 27,593 10,772 27,751 9,138 10,632 0 0 9 7,114 27,751 22,904 23,074 6,270 21,038 1,685 0 146 351 104 247 0 0 0 247 0.07 0.07
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