-----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, PVHhvSq+OCrhvH8b2xfAzMod/wAGvux+ImKdgPZ87FnTuJlbF3kFslY+Lslbwl8f RwESjUJQHF84s0pNCVnulw== 0000950134-99-009672.txt : 19991111 0000950134-99-009672.hdr.sgml : 19991111 ACCESSION NUMBER: 0000950134-99-009672 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990926 FILED AS OF DATE: 19991110 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: 99745599 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 SEPTEMBER 26, 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 September 26, 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.) 1220 South Santa Fe Avenue, Edmond, Oklahoma 73003 - -------------------------------------------- --------------------------------- (Address of principal executive offices) (Zip Code) (405) 705-5000 - -------------------------------------------------------------------------------- (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 November 1, 1999, 2,996,876 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 September 26, 1999 (unaudited) and December 27, 1998..................................................... 4 Condensed Consolidated Statements of Income (unaudited) Thirteen weeks ended September 26, 1999 and September 27, 1998................................................ 5 Thirty-nine weeks ended September 26, 1999 and September 27, 1998................................................ 6 Condensed Consolidated Statements of Cash Flows (unaudited) Thirty-nine weeks ended September 26, 1999 and September 27, 1998................................................ 7 Notes to Condensed Consolidated Financial Statements (unaudited)................................................... 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................ 12 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K............................................ 24
2 3 PART I FINANCIAL INFORMATION 3 4 ITEM 1. FINANCIAL STATEMENTS. EATERIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
September 26, December 27, 1999 1998 ------------- ------------ (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents .............. $ 1,379,220 $ 1,297,638 Receivables ............................ 1,293,129 1,121,814 Deferred income taxes .................. 387,000 387,000 Inventories ............................ 791,797 833,672 Other .................................. 2,236,046 2,129,146 ------------ ------------ Total current assets ............... 6,087,192 5,769,270 ------------ ------------ PROPERTY AND EQUIPMENT ...................... 46,590,053 42,229,238 Less landlord finish-out allowances ......... (16,150,505) (15,490,564) Less accumulated depreciation and amortization ........................... (12,349,458) (9,971,946) ------------ ------------ Net property and equipment ......... 18,090,090 16,766,728 ------------ ------------ DEFERRED INCOME TAXES ....................... 1,067,171 328,000 GOODWILL, net ............................... 2,766,703 2,325,417 OTHER ASSETS, net ........................... 617,586 630,426 ------------ ------------ $ 28,628,742 $ 25,819,841 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ....................... $ 3,485,076 $ 4,294,032 Accrued liabilities .................... 4,715,582 4,398,877 Current portion of long-term obligations ........................ 1,228,571 436,514 ------------ ------------ Total current liabilities ...... 9,429,229 9,129,423 ------------ ------------ OTHER NONCURRENT LIABILITIES ................ 947,351 830,078 ------------ ------------ LONG-TERM OBLIGATIONS, net of current portion ........................ 11,570,135 3,409,356 ------------ ------------ COMMITMENTS STOCKHOLDERS' EQUITY: Preferred stock, none issued ........... -- -- Common stock ........................... 8,755 8,694 Additional paid-in capital ............. 10,040,535 9,952,216 Retained earnings ...................... 3,529,459 4,248,487 ------------ ------------ 13,578,749 14,209,397 Treasury stock, at cost, 348,315 and 347,115 shares at September 26, 1999 and December 27, 1998, respectively .... (6,896,722) (1,758,413) ------------ ------------ Total stockholders' equity ..... 6,682,027 12,450,984 ------------ ------------ $ 28,628,742 $ 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 September 26, September 27, 1999 1998 ------------- ------------- REVENUES: Food and beverage sales ........... $ 23,072,004 $ 21,080,926 Franchise fees and royalties ...... 68,577 81,983 Other income ...................... 75,870 102,970 ------------ ------------ 23,216,451 21,265,879 ------------ ------------ COSTS AND EXPENSES: Cost of sales ..................... 6,411,761 5,833,133 Operating expenses ................ 14,977,340 13,153,034 Pre-opening costs ................. 342,000 187,000 General and administrative ........ 1,582,892 1,266,629 Depreciation and amortization ..... 884,969 720,797 Interest expense .................. 205,292 99,882 ------------ ------------ 24,404,254 21,260,475 ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES ...... (1,187,803) 5,404 PROVISION (BENEFIT)FOR INCOME TAXES .... (669,425) 2,000 ------------ ------------ NET INCOME (LOSS) ...................... $ (518,378) $ 3,404 ============ ============ NET INCOME (LOSS) PER COMMON SHARE .... $ (0.17) $ 0.00 ============ ============ NET INCOME PER COMMON SHARE ASSUMING DILUTION .................... $ N/A $ 0.00 ============ ============
See notes to condensed consolidated financial statements. 5 6 EATERIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Thirty-nine Weeks Ended September 26, September 27, 1999 1998 ------------- ------------- REVENUES: Food and beverage sales .......... $ 68,691,050 $ 65,330,269 Franchise fees and royalties ..... 204,784 294,559 Other income ..................... 281,759 488,473 ------------ ------------ 69,177,593 66,113,301 ------------ ------------ COSTS AND EXPENSES: Costs of sales ................... 18,943,019 17,930,288 Operating expenses ............... 43,240,566 40,117,050 Pre-opening costs ................ 624,000 457,000 General and administrative ....... 4,497,337 4,044,687 Depreciation and amortization .... 2,606,941 2,146,537 Interest expense ................. 558,506 304,985 ------------ ------------ 70,470,369 65,000,547 ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES ..... (1,292,776) 1,112,754 PROVISION (BENEFIT) FOR INCOME TAXES .. (685,171) 329,000 ------------ ------------ NET INCOME (LOSS) ..................... $ (607,605) $ 783,754 ============ ============ NET INCOME (LOSS) PER COMMON SHARE .... $ (0.19) $ 0.20 ============ ============ NET INCOME PER COMMON SHARE ASSUMING DILUTION ................... $ N/A $ 0.19 ============ ============
See notes to condensed consolidated financial statements. 6 7 EATERIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Thirty-nine Weeks Ended September 26, September 27, 1999 1998 ------------- ------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: Cash flows from operating activities: Net income (Loss) ........................................... $ (607,605) $ 783,754 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization ........................ 2,606,941 2,146,537 Gain on sale of assets ............................. -- Common stock bonuses ............................... -- Deferred income taxes .............................. (709,171) 309,000 (Increase) decrease in: Receivables .................................. (172,323) 150,440 Inventories .................................. 78,498 (93,057) Other ........................................ 49,457 (124,796) Increase (decrease) in: Accounts payable ............................. (981,446) (1,629,435) Accrued liabilities .......................... 233,345 (726,014) Other noncurrent liabilities ................. 103,806 36,650 ----------- ----------- Net cash provided by operating activities ....................... 601,502 853,079 ----------- ----------- Cash flows from investing activities: Capital expenditures ........................................ (4,127,208) (4,128,915) Landlord allowances ......................................... 659,941 706,250 Net cash paid for restaurant acquisitions ................... (702,154) (445,486) Proceeds from sale of property and equipment ................ -- 6,152,393 Payments received on notes receivable ....................... 3,574 72,778 Decrease (increase) in other assets ......................... 8,151 (932) Property written off to reserve at cost ...................... (90,822) -- ----------- ----------- Net cash provided by (used in) investing activities ............. (4,248,518) 2,356,088 ----------- ----------- Cash flows from financing activities: Payments on long-term obligations .......................... (738,499) (5,397,803) Borrowings under note payable .............................. 5,463,333 -- Net borrowings under revolving credit agreement ............ 4,195,000 2,250,000 Decrease in bank overdraft included in accounts payable .... -- (151,801) Proceeds from exercise of stock options .................... 58,380 221,142 Reissue treasury stock for acquisition ..................... 384,702 -- Purchases of treasury stock ................................ (5,634,318) -- ----------- ----------- Net cash provided by (used in) financing activities ............. 3,728,598 (3,078,462) ----------- ----------- Net increase (decrease) in cash & cash equivalents .............. 81,582 130,705 Cash and cash equivalents at beginning of period ................ 1,297,638 1,331,363 ----------- ----------- Cash and cash equivalents at end of period ...................... $ 1,379,220 $ 1,462,068 =========== ===========
See notes to condensed consolidated financial statements. 7 8 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 and thirty-nine week periods ended September 26, 1999, are not necessarily indicative of the results that may be expected for the year ending 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:
September 26, 1999 December 27, 1998 ------------------ ----------------- Franchisees.............................................. $ 74,194 $ 73,274 Insurance refunds........................................ 230,344 270,084 Landlord finish-out allowances........................... 10,000 10,000 Vendor rebates........................................... 561,894 493,107 Other.................................................... 416,697 275,349 ------------------ ----------------- $ 1,293,129 $ 1,121,814 ================== =================
Accrued liabilities are comprised of the following:
September 26, 1999 December 27, 1998 ------------------ ----------------- Compensation............................................ $ 2,427,704 $ 2,087,295 Taxes, other than income................................. 984,246 888,209 Other.................................................... 1,303,632 1,423,373 ------------------ ----------------- $ 4,715,582 $ 4,398,877 ================== =================
8 9 Note 3 - Supplemental Cash Flow Information For the thirty-nine week periods ended September 26, 1999 and September 27, 1998, the Company had the following non-cash investing and financing activities:
Thirty-nine Weeks Ended September 26, September 27, 1999 1998 ------------- ------------- Net decrease in receivables for landlord finish-out allowances................ $ -- $ (1,250) Increase in additional paid-in capital as a result of tax benefits from the exercise of non-qualified stock options.................. 30,000 124,000 Acquisition of treasury stock upon exercise of stock options................ -- 8,550 Asset write-offs related to restaurant closures........................... 42,352 -- Issuance of treasury stock for acquisition............................... 384,702 --
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 September 26, 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 September 26, 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 of 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. 9 10 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. 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. owned and operated three Garfield's Restaurant & Pub locations in Oklahoma. The lease pertaining to one of the acquired restaurants expired in June 1999 and operations ceased at that location. The acquisition was accounted for under the purchase method. Pro forma operating results for the thirteen and thirty-nine week periods ended September 26, 1999 and September 27, 1998, assuming that the acquisition had been made at the beginning of fiscal year 1998, would not be materially different than the results reported. In May 1999, the Company acquired all of the outstanding common stock of K & L Restaurants, Inc. for 36,101 shares of the Company's common stock and $125,000 in cash. K & L Restaurants, Inc. owned and operated Bellini's, a restaurant located on Waterford Boulevard in Oklahoma City, Oklahoma. The acquisition was accounted for under the purchase method. Pro forma operating results for the thirteen and thirty-nine week periods ended September 26, 1999 and September 27, 1998, assuming that the acquisition had been made at the beginning of fiscal year 1998, would not be materially different than the results reported. In May 1999, the Company acquired all of the outstanding common stock of B & C Development Company for 36,101 shares of the Company's common stock and $125,000 in cash. B & C Development Company owned and operated Tommy's Italian-American Grill located at North Park Mall in Oklahoma City, Oklahoma. The acquisition was accounted for under the purchase method. Pro forma operating results for the thirteen and thirty-nine week periods ended September 26, 1999 and September 27, 1998, assuming that the acquisition had been made at the beginning of fiscal year 1998, would not be materially different than the results reported. In May 1999, the Company acquired certain assets of Bellini's Ristorante and Grill of Edmond, LLC for 27,076 shares of the Company's common stock. Bellini's Ristorante and Grill of Edmond, LLC owned and operated Bellini's, a restaurant located in Edmond, Oklahoma. Assuming the acquisition had been made at the beginning of the fiscal year 1998, pro forma operating results for the thirteen and thirty-nine week periods ended September 26, 1999 and September 27, 1998, would not be materially different than the results reported. 10 11 No Company owned restaurants were closed during the thirteen weeks ended September 26, 1999. The Company terminated the lease on one underperforming Garfield's Restaurant during the thirteen week period ended June 27, 1999 located in Shreveport, Louisiana. In addition, the Company did not renew leases and ceased operations at two other Garfield's Restaurants. Note 6 - Earnings Per Share The following tables set forth the computation of basic and diluted EPS for the thirteen week and thirty-nine week periods ended September 26, 1999, and September 27, 1998:
Thirteen Weeks Ended ------------------------------- September 26, September 27, 1999 1998 --------------- -------------- Numerator: Net income (Loss)....................................... $ (518,378) $ 3,404 =============== ============== Denominator: Denominator for basic EPS- weighted average shares outstanding........................................... 2,996,876 3,970,969 Dilutive effect of nonqualified stock options........... -- 215,266 --------------- -------------- Denominator for diluted EPS........................... 2,996,876 4,186,235 =============== ============== Basic EPS..................................................... $ (0.17) $ 0.00 =============== ============== Diluted EPS................................................... N/A $ 0.00 =============== ==============
Thirty-Nine Weeks Ended ------------------------------- September 26, September 27, 1999 1998 --------------- -------------- Numerator: Net income (Loss)....................................... $ (607,605) $ 783,754 =============== ============== Denominator: Denominator for basic EPS- weighted average shares outstanding........................................... 3,151,279 3,937,183 Dilutive effect of nonqualified stock options........... -- 241,454 --------------- -------------- Denominator for diluted EPS........................... 3,151,279 4,178,637 =============== ============== Basic EPS..................................................... $ (0.19) $ 0.20 =============== ============== Diluted EPS................................................... N/A $ 0.19 =============== ==============
11 12 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 September 26, 1999, the Company owned and operated 68 (48 Garfield's, 14 Garcia's, two Pepperoni Grills, two Bellini's, one Tommy's Italian-American Restaurant, and one Carlos Murphy's) and six franchised Garfield's and two licensed Garcia's restaurants. The Company currently has one Garfield's Restaurant under construction located in Pennsylvania. In addition, the Company is working with a franchisee on the development of a restaurant located in Indiana. The Company currently has one additional new Garfield's and two additional new Garcia's in development. As of the date of this report, the entire system includes 76 restaurants of which 68 are Company-owned. 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 primarily related to the Famous Acquisition. In connection with this transaction, the Company entered into an agreement to sell substantially all of the assets related to one additional Casa Lupita to Chevy's for a price of approximately $1,000,000. This second transaction closed in May 1998. 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. During 1998, the Company converted one Carlos Murphy's location to a Garcia's. 12 13 In 1999, the Company hired Mr. Larry Bader as Vice President of Franchising. Mr. Bader formerly held a similar position at KFC and more recently at Applebee's. The Company has prepared a new franchise program and an updated franchise and development agreement for Garfield's Restaurant & Pub. The development agreement is new to the Company and will allow a franchisee to have an exclusive territory in which to build out the Garfield's brand over a specified time period. The uniform franchise offering circular (called the UFOC that contains the franchise and development agreement) is currently being registered nationally. The Company has initiated a national advertising campaign seeking prospective franchisees. The intention is to find candidates or organizations who have a substantial net worth, a proven track record in multi-unit food service, retail or hospitality, and interest in developing and operating multiple casual dining restaurants. In 1999, the Company hired Marc Buehler as Vice President of Marketing. Mr. Buehler formerly held a similar position with Applebee's. His responsibilities with the Company include a focus around one central theme--enhancing the guest experience in all the Company concepts. Each program is designed with the guest in mind, to develop concept marketing plans to improve guest satisfaction in the areas of food, value, and service. The Company continues to offer a broad range of products that guests' desire while striving to deliver the food in a fast and friendly manner. Utilizing multiple mediums such as television, local cable, radio, outdoor and print, the Company is able to deliver messages to the guest in the most efficient way. The restaurant managers are also encouraged to be involved in the community and to use proven local store marketing programs to drive their business. Key priorities for the remainder of 1999 include enhancing brand image along with developing menus that please the customer and improve the company bottom line at the same time. 13 14 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 operated.
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED ------------------------------------ ---------------------------------- September 26, September 27, September 26, September 27, 1999 1998 1999 1998 ----------------- ----------------- ---------------- ---------------- Statements of Income Data: Revenues: Food and beverage sales................. 99.4% 99.1% 99.3% 98.8% Franchise fees and royalties............ 0.3% 0.4% 0.3% 0.5% Other income............................ 0.3% 0.5% 0.4% 0.7% ----------------- ----------------- ---------------- ---------------- 100.0% 100.0% 100.0% 100.0% Costs and Expenses: Costs of sales(1) ...................... 27.8% 27.7% 27.6% 27.4% Operating expenses(1) .................. 64.9% 62.4% 62.9% 61.4% Pre-opening costs(1) ................... 1.5% 0.9% 0.9% 0.7% General and administrative.............. 6.9% 6.0% 6.5% 6.1% Depreciation and amortization(1) ....... 3.8% 3.4% 3.8% 3.3% Interest expense........................ 0.9% 0.5% 0.8% 0.5% ----------------- ----------------- ---------------- ---------------- 105.1% 100.0% 101.9% 98.3% ----------------- ----------------- ---------------- ---------------- Income (Loss) before income taxes............ (5.1)% 0.0% (1.9)% 1.7% Provision (Benefit) for income taxes......... (2.9)% 0.0% (1.0)% 0.5% ----------------- ----------------- ---------------- ---------------- Net income (Loss)............................ (2.2)% 0.0% (0.9)% 1.2% ================= ================= ================ ================ Selected Operating Data: (Dollars in thousands) System-wide sales: Company restaurants..................... $ 23,072 $ 21,081 $ 68,691 $ 65,330 Franchise restaurants................... 2,058 2,521 6,481 8,482 ----------------- ----------------- ---------------- ---------------- Total............................... $ 25,130 $ 23,602 $ 75,172 $ 73,812 ================= ================= ================ ================ Number of restaurants (at end of period): Company restaurants..................... 68 64 Franchise restaurants................... 8 8 ----------------- ----------------- Total............................... 76 72 ================= =================
(1) As a percentage of food and beverage sales. RESULTS OF OPERATIONS For the quarter ended September 26, 1999, the Company recorded a net loss of $(518,378)($0.17)per common share; on revenues of $23,216,451. This compares to net income of $3,000 ($0.00 per common share; $0.00 per common share assuming dilution) for the quarter ended September 27, 1998, on revenues of $21,265,879. For the thirty-nine weeks ended September 26, 1999, the Company reported a net loss of $(607,605)($0.19)per common share; compared to net income of $783,754 ($0.20 per common share; $0.19 per common share assuming dilution) for the thirty-nine weeks ended September 27, 1998. 14 15 REVENUES Company revenues for the thirteen and thirty-nine week periods ended September 26, 1999, increased 9.2% and 4.6%, respectively, over the revenues reported for the same periods in 1998. The revenue increase relates primarily to increased food and beverage sales during the thirteen and thirty-nine week periods in 1999. The number of Company restaurants operating at the end of each respective period and the number of operating months during each period were as follows:
Number of Average Monthly Operating Months Sales Per Unit --------------------------------- --------------------------------- Period Number of Thirteen Thirty-nine Thirteen Thirty-nine Ended Units Open Weeks Weeks Weeks Weeks - ---------------------------- ---------------- ------------ ----------------- ------------ ----------------- Garfield's (1) September 26, 1999........ 53 156 459 $125,383 $109,190 September 27, 1998........ 50 147 423 $105,600 $108,500 Garcia's (2) September 26, 1999........ 15 45 131 $122,436 $137,981 September 27, 1998........ 13 40 132 $133,200 $143,800
(1) Includes ROMA Foods, Inc.; which includes Pepperoni Grill's, Bellini's Restaurante's and Tommy's Italian American Grill. (2) Includes Carlos Murphy's and Casa Lupita; excludes the Garcia's concession operation at the Bank One Ballpark in Phoenix, Arizona. For the thirteen weeks ended September 26, 1999, average monthly sales per unit for Garfield's increased $19,783 or 18.7% versus the quarter ended September 27, 1998. Average monthly sales per unit for Garfield's increased by $690 or .6% for the thirty-nine weeks ended September 26, 1999 versus the previous year's results. Franchise fees and continuing royalties decreased to $204,784 during the thirty-nine weeks ended September 26, 1999 versus $294,559 during the thirty-nine weeks ended September 27, 1998. This decrease is primarily due to the Company's acquisition of three existing franchised Garfield's as well as an initial franchise fee related to the opening of a new franchised Garfield's recognized in the first quarter of 1998. No new franchised restaurants were opened during the thirty-nine weeks ended September 26,1999. Other income for the thirty-nine weeks ended September 26, 1999 was $281,759 as compared to the previous year's amount of $488,473. During the first quarter of 1998, the Company was paid a fee of $120,000 to terminate an agreement under which the Company managed a Carlos Murphy's restaurant owned by an independent third party. Under this agreement, the Company was paid a fee equal to 4% of sales to manage the restaurant for a term of two years. This management agreement termination fee is included in other income for the thirty-nine weeks ended September 27, 1998. 15 16 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 Thirty-nine Weeks Ended --------------------------------------------- --------------------------------------------- September 26, 1999 September 27, 1998 September 26, 1999 September 27, 1998 -------------------- --------------------- --------------------- --------------------- Garfield's (1): Cost of sales....... 28.4% 27.8% 28.2% 28.0% Labor costs......... 30.1% 27.8% 29.3% 28.2% -------------------- --------------------- --------------------- --------------------- Total............. 58.5% 55.6% 57.5% 56.2% ==================== ===================== ===================== ===================== Garcia's (2): Cost of sales....... 25.9% 27.2% 25.9% 26.1% Labor costs......... 30.4% 31.7% 29.5% 30.2% -------------------- --------------------- --------------------- --------------------- Total............. 56.3% 58.9% 55.4% 56.3% ==================== ===================== ===================== ===================== Total Company: Cost of sales....... 27.8% 27.7% 27.6% 27.4% Labor costs......... 30.1% 28.8% 29.3% 28.8% -------------------- --------------------- --------------------- --------------------- Total............. 57.9% 56.5% 56.9% 56.2% ==================== ===================== ===================== =====================
(1) Includes ROMA Foods, Inc. (2) Includes Carlos Murphy's and Casa Lupita. For the thirteen weeks ended September 26, 1999 depreciation and amortization expense increased to $884,969 (3.8% of food and beverage sales) compared to $720,797 (3.4% of food and beverage sales) in the thirteen weeks ended September 27, 1998. For the thirty-nine weeks ended September 26, 1999 depreciation and amortization expense increased to $2,606,941 (3.8% of food and beverage sales) compared to $2,146,537 (3.3% of food and beverage sales) in the thirty-nine weeks ended September 27, 1998. The increase principally relates to the increase in net assets subject to depreciation and amortization in 1999 versus 1998 because of additional restaurants opened or acquired since September 27, 1998 and the remodeling of older restaurants. The difference between the thirteen weeks ended September 26, 1999 and September 27, 1998 was $164,172. This amount equates to $0.06 per share of the total loss for the period. The difference between the thirty-nine weeks ended September 26, 1999 and September 27, 1998 was $460,404. This amount equates to $0.15 per share of the total loss for the period. 16 17 For the thirteen weeks ended September 26, 1999 interest expense was $205,292(.9% of total revenues) versus $99,882 (0.5% of total revenues) for the thirteen weeks ended September 27, 1998. For the thirty-nine week period ended September 26, 1999, interest expense increased to $558,506 (.8% of total revenues) from $304,985 (.5% of total revenues) in the comparable 1998 period. The increase primarily related to the term loan to repurchase stock. The difference between the thirteen weeks ended September 26, 1999 and September 27, 1998 was $105,410. The amount equates to $0.04 per share of the total loss for the period. The difference between the thirty-nine weeks ended September 26, 1999 and September 27, 1998 was $253,521. The amount equates to $0.08 per share of the year to date loss for the period. The slight increase in cost of sales percentages for Garfield's during the thirteen and thirty-nine week periods ended September 26, 1999 versus the 1998 comparable periods relates to continued menu development and certain promotions. Labor costs for Garfield's increased to 30.1% from 27.8% for the thirteen weeks in the period this year versus the same period last year and to 29.3% of food and beverage sales during the thirty-nine weeks ended September 26, 1999, versus 28.2% during the 1998 comparable period. This increase is primarily due to increased kitchen labor and restaurant-level management salaries and incentive compensation. For the thirteen weeks ended September 26, 1999, operating expenses as a percentage of food and beverage sales increased to 64.9% from 62.4% in the thirteen weeks ended September 27, 1998. For the thirty-nine weeks ended September 26, 1999, operating expenses increased to 62.9% of food and beverage sales versus 61.4% in the 1998 period. These increases primarily relate to the addition of the Garcia's and Carlos Murphy's which generally have higher labor costs than Garfield's due to more labor intensive kitchen operations. Additionally, the increase in operating expenses as a percentage of food and beverage sales during the thirty-nine weeks ended September 26, 1999, is partially attributable to Garfield's increased labor costs for the same period (as previously explained). Restaurant pre-opening costs, which are expensed as incurred, were $342,000 and $187,000 for the thirteen weeks ended September 26, 1999 and September 27, 1998, respectively, and $624,000 and $457,000 for the thirty-nine week periods ended September 26, 1999 and September 27, 1998, respectively. The Company has opened three new Garfield's and one new Garcia's during the thirty-nine weeks ended September 26, 1999 versus two new Garfield's and one Garcia's during the comparable period in 1998. The Company currently has three under development. 17 18 INCOME TAXES The Company's benefit for income taxes was $(685,171) during the thirty-nine weeks ended September 26, 1999 versus a provision of $329,000 for the 1998 comparable period. The effective tax rates for the periods ended September 26, 1999 and September 27, 1998, are as follows:
Thirteen Weeks Thirty-nine Weeks ------------------------------ -------------------------------- 1999 1998 1999 1998 ------------- ------------- -------------- --------------- Effective income tax rates........................ 56.4% 37.0% 53.0% 29.6%
EARNINGS PER SHARE 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 2,996,876 and 3,970,969 in the thirteen weeks ended September 26, 1999 and September 27, 1998, respectively, and 3,151,279 and 3,937,183 in the thirty-nine weeks ended September 26, 1999 and September 27, 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 was 4,186,235 for the quarter ended September 26, 1998, and 4,178,637 for the thirty-nine weeks ended September 27, 1998. The Company adopted the provisions of SFAS No. 128 in the fourth quarter of 1998, and, as required, has restated all prior period EPS amounts to conform to the new accounting standard, accordingly no calculation for diluted EPS was presented for the thirteen weeks and thirty-nine weeks ended September 26, 1999 since the Company incurred a loss and such calculation would be anti-dilutive. 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 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 has offset increased costs by 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 cost could increase in the future 18 19 which could affect the Company's ability to expand. In addition, mandated health care or additional increases in the Federal or state minimum wages could significantly increase the Company's costs of doing business. Under the Company's policy of expensing pre-opening costs as incurred, income from operations, on an annual and quarterly basis, could be adversely affected during periods of restaurant development; however, the Company believes that its initial investment in the restaurant pre-opening costs yields a long-term benefit of increased operating income in subsequent periods. During the thirteen and thirty-nine week periods ended September 26, 1999 and September 27, 1998, general and administrative costs as a percentage of total revenues increased to 6.9% and 6.5% from 6.0% and 6.1%, respectively. The increase primarily relates to the addition of franchising and marketing personnel as well as costs related to the registration of a Uniformed Franchise Agreement. The higher absolute levels of general and administrative costs from 1998 to 1999 are also related to additional personnel costs and related costs of operating the expanding restaurant system. The Company anticipates that its costs of supervision and administration of Company and franchise stores will increase at a slower rate than revenue increases during the next few years. LIQUIDITY AND CAPITAL RESOURCES At September 26, 1999, the Company's current ratio was .65 to 1 compared to .63 to 1 at December 27, 1998. The Company's working capital deficit was $3,342,037 at September 26, 1999 versus $3,360,153 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 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 thirty-nine weeks ended September 26, 1999, the Company had net cash provided by operating activities of $601,502 compared to $853,079 during the comparable 1998 period. The Company plans to open five units (four of which have already been opened as of September 26, 1999) 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. 19 20 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 September 26, 1999, the Company had outstanding borrowings of approximately $4,950,000 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% (6.7313% as of September 26, 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 maximum floating rate is three-month LIBOR plus 1.75%. Borrowings under this loan agreement are unsecured. The loan agreement contains certain financial covenants and restrictions. As of the date of this report, the Company is in compliance with majority of 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%. 20 21 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 September 26, 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 September 26, 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, replaced, remediated or modified systems to confirm compliance, and 4. Implementation. 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. As of September 26, 1999, the Company has materially completed the modification and remediation of existing software and hardware. Additional testing of these systems is expected to be complete by December 1, 1999. These internal systems relate primarily to financial and management information systems. 21 22 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 materially all of the systems are year 2000 compliant. The Company has replaced the non-compliant point-of-sale systems. While the Company believes that the non-information systems are year 2000 compliant, it plans to continue testing its operating equipment. 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. 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 inventory of significant third parties has been completed and information requests regarding year 2000 compliance have been sent. The company has developed contingency plans 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 $435,000 of which approximately $420,000 are capitalized as equipment and software. The Company believes the plan in place 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, 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. 22 23 PART II OTHER INFORMATION 23 24 Item 4. Submission of Matters to a Vote of Security Holders. (a) the Company's Annual Meeting was held on June 22, 1999. The total number of shares of the Company's common stock, $.002 par value, outstanding at April 26, 1999, the record date for the Annual Meeting, was 2,886,643. (b) Proxies were solicited by the Company's management pursuant to Regulation 14 under the Securities Exchange Act of 1934. There was no solicitation in opposition, and all of management's nominees were elected pursuant to the vote of the stockholders as follows: Nominee/Elected Director ------------------------ James M. Burke Philip Friedman Thomas F. Golden Larry Kordisch Edward D. Orza Patricia L. Orza Vincent F. Orza, Jr. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibit 27.1 - Financial Data Schedule. (b) No reports on Form 8-K were filed during the thirteen weeks ended September 26, 1999. 24 25 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: November 9, 1999 By: /s/ BRADLEY L. GROW ------------------------- Bradley L. Grow Vice President Chief Financial Officer 25 26 INDEX TO EXHIBITS
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 DATED SEPTEMBER 26, 1999 AND THE CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE THIRTY NINE WEEKS ENDING SEPTEMBER 26, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH. 1,000 9-MOS DEC-26-1999 JUN-28-1999 SEP-26-1999 1,379 0 1,293 0 792 6,087 30,440 12,349 28,629 9,429 0 0 0 9 6,673 28,629 68,691 69,178 18,943 64,791 5,680 0 559 (1,293) (685) (608) 0 0 0 (608) (.19) 0
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