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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 June 30, 2002.
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 S. Santa Fe Ave.
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 August 9, 2002, 2,967,417
common shares, $.002 par value, were outstanding.
EATERIES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited)
June 30, 2002 and December 30, 2001........................... 4
Condensed Consolidated Statements of
Income (unaudited)
Thirteen weeks ended June 30, 2002
and July 1, 2001.............................................. 5
Twenty-six weeks ended June 30, 2002
and July 1, 2001.............................................. 6
Condensed Consolidated Statements of
Cash Flows (unaudited)
Twenty-six weeks ended June 30, 2002
and July 1, 2001.............................................. 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 1. Legal Proceedings................................................... 20
Item 6. Exhibits and Reports on Form 8-K.................................... 20
2
PART I
FINANCIAL INFORMATION
3
ITEM 1. FINANCIAL STATEMENTS
EATERIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 30,
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 808,799 $ 999,533
Receivables 1,148,998 1,378,018
Inventories 871,230 958,354
Deferred income taxes 362,663 362,663
Prepaid expenses and other 1,711,725 706,306
------------ ------------
Total current assets 4,903,415 4,404,874
Property and equipment, at cost 54,978,740 54,626,252
Less: Landlord finish-out allowances (17,168,866) (17,459,166)
Less: Accumulated depreciation and amortization (17,791,757) (15,935,445)
------------ ------------
Net property and equipment 20,018,117 21,231,641
Deferred income taxes 1,692,179 1,796,378
Goodwill, net 2,079,833 2,180,833
Other assets 687,309 642,744
------------ ------------
Total assets $ 29,380,853 $ 30,256,470
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,477,430 $ 7,736,378
Accrued liabilities 3,324,729 4,091,094
Current portion of long-term debt 2,228,571 1,228,571
------------ ------------
Total current liabilities 11,030,730 13,056,043
Deferred credit 1,484,946 998,509
Other liabilities 256,125 303,625
Long-term obligations, net of current portion 8,813,230 8,682,486
Commitments and contingencies -- --
------------ ------------
Total liabilities 21,585,031 23,040,663
Stockholders' equity:
Preferred stock, none issued -- --
Common stock 9,044 9,044
Additional paid-in capital 10,370,359 10,370,359
Accumulated other comprehensive income (loss), net of tax (60,000) (171,000)
Retained earnings 4,838,736 4,330,646
Treasury stock, at cost (7,362,317) (7,323,242)
------------ ------------
Total stockholders' equity 7,795,822 7,215,807
Total liabilities and stockholders' equity $ 29,380,853 $ 30,256,470
============ ============
See notes to condensed consolidated financial statements.
4
EATERIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Thirteen Weeks Ended
June 30, July 1,
2002 2001
------------ ------------
REVENUES
Food and beverage sales $ 23,640,297 $ 23,396,845
Franchise fees and royalties 166,808 83,269
Other income 121,951 174,558
------------ ------------
Total revenues 23,929,056 23,654,672
COSTS AND EXPENSES
Costs of sales 6,254,237 6,466,952
Operating expenses 15,048,058 15,196,574
(Gain) loss on disposal of assets (356,429) 120,000
Pre-opening costs -- 69,000
General and administrative 1,401,579 1,552,820
Depreciation and amortization 1,028,620 1,035,404
Interest expense 180,365 233,702
------------ ------------
Total costs and expenses 23,556,430 24,674,452
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 372,626 (1,019,780)
PROVISION (BENEFIT) FOR INCOME TAXES 106,500 (359,123)
------------ ------------
NET INCOME (LOSS) $ 266,126 $ (660,657)
============ ============
BASIC EARNINGS (LOSS) PER SHARE $ .09 $ (.22)
============ ============
DILUTED EARNINGS (LOSS) PER SHARE $ .09 $ (.22)
============ ============
See notes to condensed consolidated financial statements.
5
EATERIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Twenty-six Weeks Ended
June 30, July 1,
2002 2001
------------ ------------
REVENUES
Food and beverage sales $ 49,218,938 $ 48,903,062
Franchise fees and royalties 259,717 260,251
Other income 258,741 358,060
------------ ------------
Total revenues 49,737,396 49,521,373
COSTS AND EXPENSES
Costs of sales 13,267,223 13,397,009
Operating expenses 30,603,020 30,996,094
(Gain) loss on disposal of assets (135,236) 270,000
Pre-opening costs -- 330,000
General and administrative 2,835,049 2,919,740
Depreciation and amortization 2,074,908 2,084,526
Interest expense 376,842 516,004
------------ ------------
Total costs and expenses 49,021,806 50,513,373
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 715,590 (992,000)
PROVISION (BENEFIT) FOR INCOME TAXES 207,500 (352,930)
------------ ------------
NET INCOME (LOSS) $ 508,090 $ (639,070)
============ ============
BASIC EARNINGS (LOSS) PER SHARE $ .17 $ (.22)
============ ============
DILUTED EARNINGS (LOSS) PER SHARE $ .17 $ (.22)
============ ============
See notes to condensed consolidated financial statements.
6
EATERIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-six Weeks Ended
June 30, July 1,
2002 2001
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 508,090 $ (639,070)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 2,074,908 2,084,526
Provision for income taxes 207,500 (352,930)
Deferred income taxes (103,301) (359,671)
Loss on sale of note receivables -- 23,078
(Gain) loss on disposal of assets (135,236) 270,000
(Increase) decrease in operating assets:
Receivables 250,029 (515,699)
Inventories 87,124 169,772
Prepaids and other current (1,005,419) 772,977
Other 8,144 --
Increase (decrease) in operating liabilities:
Accounts payable (2,258,948) (1,921,838)
Accrued liabilities (655,365) (2,292,490)
Other liabilities 438,937 551,146
------------ ------------
Total adjustments (1,091,627) (1,571,130)
------------ ------------
Net cash used in operating activities (583,537) (2,210,200)
------------ ------------
Cash flows from investing activities:
Capital expenditures (1,178,566) (1,666,918)
Landlord allowances 129,700 731,000
Proceeds from sale of restaurant 500,000 252,107
Payments made for lease termination (150,000) --
Proceeds from sale of note receivable -- 115,500
Payments received on notes receivable -- 9,269
------------ ------------
Net cash used in investing activities (698,866) (559,042)
------------ ------------
Cash flows from financing activities:
Payments on long-term obligations (616,256) (614,285)
Borrowings under revolving credit agreements 17,897,000 18,422,000
Payments under revolving credit agreements (16,150,000) (15,190,000)
Purchase of treasury stock (39,075) (139,219)
Proceeds from exercise of stock options -- 11,374
------------ ------------
Net cash provided by financing activities 1,091,669 2,489,870
------------ ------------
Decrease in cash and cash equivalents (190,734) (279,372)
Cash and cash equivalents at beginning of period 999,533 875,892
------------ ------------
Cash and cash equivalents at end of period $ 808,799 $ 596,520
============ ============
See notes to condensed consolidated financial statements.
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 twenty-six week period ended June 30,
2002, are not necessarily indicative of the results that may be expected for the
year ending December 29, 2002. 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 30, 2001.
Certain reclassifications have been made to the previously presented 2001
balances to conform to the 2002 presentation. Such reclassifications had no
impact on total assets or net income.
Note 2 - Balance Sheet Information
Receivables are comprised of the following:
June 30, December 30,
2002 2001
----------- -----------
General ...................... $ 291,000 $ 159,000
Vendor rebates ............... 488,000 254,000
Franchisees .................. 120,000 38,000
Banquets ..................... 80,000 33,000
Insurance refunds ............ 85,000 191,000
Legal reimbursement .......... -- 516,000
Other ........................ 85,000 187,000
----------- -----------
$ 1,149,000 $ 1,378,000
=========== ===========
Accrued liabilities are comprised of the following:
June 30, December 30,
2002 2001
----------- -----------
Compensation ................. $ 1,523,000 $ 1,542,000
Taxes, other than income ..... 791,000 831,000
Other ........................ 1,011,000 1,718,000
----------- -----------
$ 3,325,000 $ 4,091,000
=========== ===========
Note 3 - Supplemental Cash Flow Information
Interest of $375,556 and $537,725 was paid for the twenty-six weeks ended June
30, 2002 and July 1, 2001, respectively.
8
For the twenty-six-week periods ended June 30, 2002 and July 1, 2001, the
Company had the following non-cash investing and financing activities:
Twenty-six Weeks Ended
June 30, July 1,
2002 2001
--------- -----------
Increase in additional paid-in capital as a result of tax
benefits from the exercise of non-qualified
stock options .............................................. $ -- $ 6,496
Asset write-offs related to restaurant closures ................. 408,048 587,418
Decrease in goodwill from sale of restaurant .................... 101,000 --
Decrease in accumulated other comprehensive income .............. 111,000 --
Increase in notes receivable from finance of sale of restaurant . 73,720 --
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 September 1997, an
additional 200,000 shares were authorized for repurchase. During the second
quarter of 2002, 12,900 shares were repurchased for $39,075. As of June 30,
2002, 210,662 shares have been repurchased under this plan for a total purchase
price of approximately $734,075. Subsequent to June 30, 2002, an additional
20,000 shares were repurchased for $60,000.
Note 5 - Restaurant Acquisitions and Dispositions
In 2001, the Company sold two Garcia's Mexican Restaurant's located in
Davie, FL and Pleasant Hill, CA. No gain or loss was recorded on the disposal.
In July 2001, the Company terminated the lease on one under-performing
Garfield's Restaurant & Pub in Anderson, SC, resulting in a charge to restaurant
closure expense of approximately $36,000. Leases on four Company-owned
restaurants that expired in January (2), May and June 2001 were not renewed,
resulting in the closing of the locations. A charge of approximately $242,000
was recorded to loss on disposal of assets.
In March 2002, the Company terminated the lease on one Garfield's located
in North Riverside, IL. As part of the agreement, the Company agreed to pay
$210,000 in lieu of future rent to the landlord. This amount has been accrued
for and charged to restaurant closure expense, which is included in the
consolidated statements of income. In June 2002, the Company sold one Garcia's
Mexican Restaurant located in Denver, CO, to the local operator who signed a
franchise agreement for this location and a development agreement for two future
locations in the Denver area. A gain of approximately $357,000 ($250,000 net of
tax) is included in gain on disposal of assets on the consolidated statements of
income, which included a goodwill write-off of $101,000. The amount of goodwill
written off in the gain calculation was determined by comparing the Company's
estimate of the fair value of the sold location to the fair value of the concept
to which the goodwill relates.
9
Note 6 - Earnings Per Share ("EPS")
The following tables set forth the computation of basic and diluted EPS for the
twenty-six week periods ended June 30, 2002, and July 1, 2001:
Thirteen Weeks Ended
-----------------------------
June 30, July 1,
2002 2001
------------ ------------
Numerator:
Net income (loss) .................................... $ 266,126 $ (660,657)
============ ============
Denominator:
Denominator for basic EPS- weighted average shares
outstanding ........................................ 2,997,169 2,958,065
Dilutive effect of nonqualified stock options ........ 108,061 --
------------ ------------
Denominator for diluted EPS ........................ 3,105,230 2,958,065
============ ============
Basic EPS .................................................. $ .09 $ (.22)
============ ============
Diluted EPS ................................................ $ .09 $ (.22)
============ ============
Twenty-six Weeks Ended
-----------------------------
June 30, July 1,
2002 2001
------------ ------------
Numerator:
Net income (loss) .................................... $ 508,090 $ (639,070)
============ ============
Denominator:
Denominator for basic EPS- weighted average shares
outstanding ........................................ 2,998,743 2,961,359
Dilutive effect of nonqualified stock options ........ 64,231 --
------------ ------------
Denominator for diluted EPS ........................ 3,062,974 2,961,359
============ ============
Basic EPS .................................................. $ .17 $ (.22)
============ ============
Diluted EPS ................................................ $ .17 $ (.22)
============ ============
Note 7 - Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142
"Goodwill and Other Intangible Assets," which established financial accounting
and reporting for acquired goodwill and other intangible assets and superseded
APB Opinion No. 17, "Intangible Assets". It addresses how intangible assets that
are acquired individually or with a group of other assets (but not those
acquired in a business combination) should be accounted for in financial
statements upon their acquisition, and after they have been initially recognized
in the financial statements. The provisions of this Statement were effective
starting with fiscal years beginning after December 15, 2001. The Company
adopted SFAS No. 142 effective December 31, 2001. Due to the adoption of SFAS
No. 142, the Company no longer amortizes goodwill. For the twenty-six weeks
ended July 1, 2001, the Company recorded $63,229 to goodwill amortization. Pro
forma net loss for the twenty-six weeks ended July 1, 2001, would have been
$575,841 ($0.19 basic and diluted loss per share) if SFAS No. 142 would have
been effective during that period. The Company's impairment test of goodwill did
not indicate any impairment on the balance as of June 30, 2002, other than the
amount allocated and written off due to the sale of the one Garcia's location.
10
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets". This
statement addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This statement superseded SFAS No. 121,
"Accounting for Impairment of Long-Lived Assets to be Disposed Of." This
statement requires (1) recognition of an impairment loss only if the carrying
amount of a long-lived asset is not recoverable from its undiscounted future
cash flows and (2) measurement of an impairment loss as the difference between
the carrying amount and the fair value of the asset. The Company adopted the
statement effective December 31, 2001 with no material impact on the Company's
results of operations or financial position.
Note 8 - Long-term Obligations
In February 1999, the Company entered into a senior 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 June 30, 2002, the Company
had outstanding borrowings of approximately $5,721,000 under the revolving line
of credit. Outstanding borrowings under the term loan bear interest at
three-month LIBOR plus 2.50% (4.40% as of June 30, 2002). Outstanding borrowings
under the revolving line of credit bear interest at the greater of three month
LIBOR plus 2.50% or 5.00% (5.00% at June 30, 2002). The interest rate is reset
quarterly. There is no non-use fee related to either facility. The Company
amended its revolving credit facility as of June 30, 2002, extending the
maturity of the revolving line of credit to September 30, 2003. Accordingly, the
debt has been classified as long-term as of June 30, 2002, on the accompanying
consolidated condensed balance sheet. 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. As of June 30, 2002, the outstanding balance of the term loan was
$4,320,631. 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. Additionally, 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 2.50%. 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
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 March 2001, the Company entered into an additional credit facility with a
bank in the amount of $1,000,000 that is available to the Company under a
revolving line of credit. As of June 30, 2002 the Company had outstanding
borrowings of $1,000,000 under the revolving line of credit. The credit facility
bears interest at the greater of the prime rate of interest or 5.00% (5.00% at
June 30, 2002), and is set monthly. There is a one-quarter of a percent (.25%)
non-use fee relate to this facility. This credit facility was amended on June
30, 2002 and matures on September 30, 2002.
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%. The notional amount as of June 30, 2002 was $3,985,066. The unrealized
losses for the periods ended June 30, 2002 and December 30, 2001 are included in
accumulated other comprehensive income on the consolidated balance sheets.
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 June 30, 2002, the Company owned and operated 65 locations (47 Garfield's,
16 Garcia's, 2 Pepperoni Grills), franchised 9 Garfield's and 1 Garcia's and
licensed 1 Garcia's restaurants. The Company is working with franchisees on the
development of restaurants located in Arizona, Colorado, Indiana, Florida,
Nebraska and Nevada. As of the date of this report, the entire system includes
76 restaurants of which 65 are Company-owned. The Company expects that 3
additional franchised locations will open in 2002.
The Company has successfully initiated a national advertising campaign to seek
prospective franchisees. The intention is to find candidates or organizations
that have a substantial net worth, a proven track record in multi-unit food
service, retail or hospitality, and an interest in developing and operating
multiple casual dining restaurants. As of the date of this report, franchise
agreements have been signed for 71 new Garfield's Restaurants.
The Company's uniform franchise offering circular (called the UFOC that contains
the franchise and development agreement) is registered nationally.
The Company's marketing strategies are focused 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 2002 include enhancing brand image along with developing menus that
please the customer and improve the company bottom line at the same time.
LEGAL PROCEEDINGS
In 1999 the Company filed suit against one of its food purveyors, J.R.
Simplot Co. in federal court. This suit stems from the receipt of contaminated
food product that caused a food borne illness outbreak at the Company's Garcia's
Mexican restaurants in the Phoenix, Arizona area in July 1998. In 2001, Simplot
admitted that it did in fact ship contaminated product to Company-owned Garcia's
in July 1998. The suit was litigated in August 2001 in order to determine the
amount of damages to be awarded the Company. Initially, the Company was awarded
approximately $6,551,000 in damages plus attorney's fees and costs. The Company
filed a motion to reconsider, based on a technical error in the calculation of
damages and was awarded an additional amount of $1,854,000, bringing the total
to approximately $8,405,000 plus attorneys fees and costs. During the first
quarter, the Company received approximately $516,000 for reimbursement of legal
fees. No amounts related to actual damages awarded have been included in the
consolidated statements of income. As of the date of this report, the case is
currently in appeal by both parties.
The Company has other lawsuits pending but does not believe the outcome of the
lawsuits, individually or collectively will materially impair the Company's
financial and operational condition.
12
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 TWENTY-SIX WEEKS
ENDED ENDED
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Statements of Operations Data:
Revenues:
Food and beverage sales ............. 98.8% 98.9% 99.0% 98.8%
Franchise fees and royalties ........ 0.7% 0.4% 0.5% 0.5%
Other income ........................ 0.5% 0.7% 0.5% 0.7%
--------- --------- --------- ---------
100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Costs of sales (1) .................. 26.5% 27.6% 27.0% 27.4%
Operating expenses (1) .............. 63.7% 65.0% 62.2% 63.4%
(Gain) loss on disposal of assets ... (1.5)% 0.5% (0.3)% 0.5%
Pre-opening costs (1) ............... 0.0% 0.3% 0.0% 0.7%
General and administrative .......... 5.9% 6.6% 5.7% 5.9%
Depreciation and amortization (1) ... 4.4% 4.4% 4.2% 4.3%
Interest expense .................... 0.8% 1.0% 0.8% 1.0%
--------- --------- --------- ---------
Income before income taxes ............... 1.6% (4.3)% 1.4% (2.0)%
Provision for income taxes ............... 0.4% (1.5)% 0.4% (0.7)%
--------- --------- --------- ---------
Net income ............................... 1.1% (2.8)% 1.0% (1.3)%
========= ========= ========= =========
Selected Operating Data:
(Dollars in thousands)
System-wide sales:
Company restaurants ................. $ 23,640 $ 23,397 $ 49,219 $ 48,903
Franchise restaurants ............... 3,716 2,288 6,149 4,758
--------- --------- --------- ---------
Total ........................... $ 27,356 $ 25,685 $ 55,368 $ 53,661
========= ========= ========= =========
Number of restaurants
(at end of period):
Company restaurants ................. 65 65 65 65
Franchise restaurants ............... 11 7 11 7
--------- --------- --------- ---------
Total ........................... 76 72 76 72
========= ========= ========= =========
(1) As a percentage of food and beverage sales.
RESULTS OF OPERATIONS
For the quarter ended June 30, 2002, the Company recorded net income of $266,126
($0.09 per common share) on revenues of $23,929,056. This compares to a net loss
of $(660,657) (($0.22) per common share) for the quarter ended July 1, 2001, on
revenues of $23,654,672. For the twenty-six weeks ended June 30, 2002, the
Company recorded net income of $508,090 ($0.17 per common share) on revenues of
$49,737,396. This compares to a net loss of $(639,070) (($0.22) per common
share) for the twenty-six weeks ended July 1, 2001.
13
REVENUES
Company revenues for the thirteen and twenty-six week periods ended June 30,
2002, increased 1.2% and 0.4% over the revenues reported for the same periods in
2001. The revenue increase relates primarily to same store sales increases in
2002. The number of Company restaurants operating at the end of each respective
period and the number of operating weeks during each period were as follows:
Number of Operating Average Weekly Sales Per
Weeks Unit
-------------------- ------------ ---------------------------- -----------------------------
Period Number of Thirteen Twenty-six Thirteen Twenty-six
Ended Units Open Weeks Weeks Weeks Weeks
-------------------- ------------ ------------ ------------ ------------- ------------
Garfield's:
June 30, 2002 48 624 1,248 $26,761 $28,024
July 1, 2001 48 627 1,259 $26,230 $27,211
Garcia's:
June 30, 2002 15 206 414 $29,338 $30,088
July 1, 2001 15 204 412 $28,554 $30,485
Pepperoni Grill:
June 30, 2002 2 26 52 $32,884 $33,107
July 1, 2001 2 26 52 $33,749 $34,945
For the thirteen weeks ended June 30, 2002, average weekly sales per unit for
Garfield's increased $531 or 2.0% versus the quarter ended July 1, 2001. Average
weekly sales per unit for Garfield's increased by $813 or 3.0% for the
twenty-six weeks ended June 30, 2002, versus the previous year's results. The
primary reason for the increase is due to higher check averages.
For the thirteen weeks ended June 30, 2002, average weekly sales per unit for
Garcia's increased $784 or 2.7% versus the quarter ended July 1, 2001. Average
weekly sales per unit for Garcia's decreased by $397 or 1.3% for the twenty-six
weeks ended June 30, 2002, versus the previous year. This increase is primarily
due to higher check averages.
For the thirteen weeks ended June 30, 2002, average weekly sales per unit for
Pepperoni Grill decreased $865 or 2.6% versus the same period in 2001. Average
weekly sales per unit for Pepperoni Grill decreased by $1,838 or 5.3% for the
twenty-six weeks ended June 30, 2002, versus the previous year. This decrease is
primarily due to one of the mall-based units losing an anchor and a movie
theater, driving less traffic into the mall.
Franchise fees and continuing royalties decreased to $259,717 during the
twenty-six weeks ended June 30, 2002 versus $260,251 during the twenty-six weeks
ended July 1, 2001.
Other income for the twenty-six weeks ended June 30, 2002 was $258,741 as
compared to the previous year's amount of $358,060. This decrease is due
primarily to the Company collecting an insurance claim in 2001 that was
previously denied by the insurance company for store related repairs expensed in
2000 that were reimbursable under the Company's property insurance coverage.
14
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 Twenty-six Weeks Ended
------------------------ ------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
--------- --------- --------- ---------
Garfield's:
Costs of sales ... 26.8% 27.9% 27.5% 27.7%
Labor costs ...... 29.1% 29.0% 28.1% 28.8%
--------- --------- --------- ---------
Total .......... 55.9% 56.9% 55.6% 56.5%
========= ========= ========= =========
Garcia's:
Cost of sales .... 25.6% 26.9% 25.7% 26.5%
Labor costs ...... 30.5% 28.8% 29.8% 29.6%
--------- --------- --------- ---------
Total .......... 56.1% 55.7% 55.5% 56.1%
========= ========= ========= =========
Pepperoni Grill:
Cost of sales .... 25.4% 27.3% 25.7% 27.1%
Labor costs ...... 29.3% 28.4% 29.4% 28.3%
--------- --------- --------- ---------
Total .......... 54.7% 55.7% 55.1% 55.4%
========= ========= ========= =========
Total Company:
Cost of sales .... 26.5% 27.6% 27.0% 27.4%
Labor costs ...... 29.5% 29.0% 28.6% 29.0%
--------- --------- --------- ---------
Total .......... 56.0% 56.6% 55.6% 56.4%
========= ========= ========= =========
Costs of sales as a percentage of food and beverage sales for Garfield's in the
quarters ended June 30, 2002 and July 1, 2001 was 26.8% and 27.9% respectively.
This decrease is primarily due to promotions with lower cost items and better
overall cost control in the second quarter.
Garcia's costs of sales as a percentage of food and beverage sales was 25.6% in
the quarter ended June 30, 2002 versus 26.9% in the quarter ended July 1, 2001.
This decrease is primarily due to promotions with lower cost items and better
overall cost control in the second quarter.
Costs of sales as a percentage of food and beverage revenue for Pepperoni Grill
was 25.4% for the quarter ended June 30, 2002 compared to 27.3% for the quarter
ended July 1, 2001. This decrease is primarily due to promotions with lower cost
items and better overall cost control in the second quarter.
Labor costs for Garfield's increased to 29.1% of food and beverage sales during
the quarter ended June 30, 2002, versus 29.0% during the 2001 comparable period.
Garcia's labor costs increased to 30.5% of food and beverage sales during the
quarter ended June 30, 2002, versus 28.8% in the quarter ended July 1, 2001.
This increase is due to lower sales volumes in the four mall-based Garcia's.
Labor cost in Pepperoni Grill increased to 29.3% during the quarter ended June
30, 2002 versus 28.4% during the 2001 comparable period. This increase was due
to lower sales volumes in the Penn Square location, which has higher fixed
management labor costs.
15
For the thirteen weeks ended June 30, 2002, operating expenses as a percentage
of food and beverage sales decreased to 63.7% from 65.5% in the thirteen weeks
ended July 1, 2001. For the twenty-six weeks ended June 30, 2002, operating
expenses increased to 62.2% of food and beverage sales versus 63.9% in the 2001
period. This decrease primarily related to decreased store closure, utilities
and benefit costs.
Restaurant pre-opening costs, which are expensed as incurred, were $69,000 for
the quarter ended July 1, 2001, and $330,000 for the twenty-six week period
ended July 1, 2001. The Company did not have any units under construction during
the twenty-six weeks ended June 30, 2002.
During the thirteen and twenty-six week periods ended June 30, 2002 and July 1,
2001, general and administrative costs as a percentage of total revenues changed
to 5.9% and 5.7% from 6.6% and 5.9%, respectively. The decrease for the
thirteen-week period ended June 30, 2002 is primarily due to effective cost
cutting measures throughout the Company.
For the thirteen weeks ended June 30, 2002 depreciation and amortization expense
was $1,028,620 (4.4% of food and beverage sales) compared to $1,035,404 (4.4% of
food and beverage sales) in the thirteen weeks ended July 1, 2001. For the
twenty-six weeks ended June 30, 2002, depreciation and amortization expense was
$2,074,908 (4.2% of food and beverage sales) compared to $2,084,526 (4.3% of
food and beverage sales) in the twenty-six weeks ended July 1, 2001.
For the thirteen weeks ended June 30, 2002 interest expense decreased to
$180,365 (0.8% of total revenues) from $233,702 (1.0% of total revenues) for the
thirteen weeks ended July 1, 2001. For the twenty-six week period ended June 30,
2002, interest expense decreased to $376,842 (0.8% of total revenues) from
$516,004 (1.0% of total revenues) in the comparable 2001 period. The decrease
primarily related to lower interest rates and average debt balance, which is a
result of term loan payments and less construction than in the prior year.
INCOME TAXES
The Company's provision for income taxes was $106,500 and $207,500 for the
thirteen and twenty-six weeks ended June 30, 2002, versus a benefit of $359,123
and $352,930, respectively, for the 2001 comparable periods. The effective tax
rates for the periods ended June 30, 2002 and July 1, 2001, are as follows:
Thirteen Weeks Twenty-six Weeks
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
--------- --------- --------- ---------
Effective income tax rates.......... 29.0% (35.2)% 29.0% (35.6)%
Effective income tax rates are lower during periods with net income due to the
large amount of FICA tax credits on tipped employees that the Company is allowed
as a reduction of its calculated income tax liability.
EARNINGS PER SHARE ("EPS")
Basic EPS includes no dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. The weighted-average common shares outstanding for the basic EPS
calculation were 2,997,169 and 2,958,065 in the quarters ended June 30, 2002 and
July 1, 2001, respectively, and 2,998,743 and 2,961,359 in the twenty-six weeks
ended June 30, 2002 and July 1, 2001, 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 3,105,230 and
2,958,065 in the quarters ended June 30, 2002 and July 1, 2001, respectively,
and 3,062,974 and 2,961,359 in the twenty-six weeks ended June 30, 2002 and July
1, 2001, respectively. Diluted EPS is not calculated for periods where the
Company had a net loss as the result would be antidilutive.
16
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, however there can be no assurance that the Company
will be able to do so in the future. Market conditions will determine the
Company's ability to pass through such additional costs and expenses. 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 as well as substantial increases in utility costs experienced
by the Company. Due to accounting standards requiring 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.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, the Company's current ratio was 0.45 to 1 compared to 0.34 to
1 at December 30, 2001. The Company's working capital deficit was $(6,127,000)
at June 30, 2002 versus $(8,651,000) at December 30, 2001. 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 twenty-six weeks ended June 30, 2002, the Company had net cash used
in operating activities of $584,000 as compared to $2,200,000 during the
comparable 2001 period.
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 2002.
In February 1999, the Company entered into a senior 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 June 30, 2002, the Company
had outstanding borrowings of approximately $5,721,000 under the revolving line
of credit. Outstanding borrowings under the term loan bear interest at
three-month LIBOR plus 2.50% (4.40% as of June 30, 2002). Outstanding borrowings
under the revolving line of credit bear interest at the greater of three month
LIBOR plus 2.50% or 5.00% (5.00% at June 30, 2002). The interest rate is reset
quarterly. There is no non-use fee related to either facility. The Company
amended its revolving credit facility as of June 30, 2002, extending the
maturity of the revolving line of credit to September 30, 2003. Accordingly, the
debt has been classified as long-term as of June 30, 2002, on the accompanying
consolidated condensed balance sheet. 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. As of June 30, 2002, the outstanding balance of the term loan was
$4,320,631. 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. Additionally, 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 2.50%. 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
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.
17
In March 2001, the Company entered into an additional credit facility with a
bank in the amount of $1,000,000 that is available to the Company under a
revolving line of credit. As of June 30, 2002 the Company had outstanding
borrowings of $1,000,000 under the revolving line of credit. The credit facility
bears interest at the greater of the prime rate of interest or 5.00% (5.00% at
June 30, 2002), and is set monthly. There is a one-quarter of a percent (.25%)
non-use fee relate to this facility. This credit facility was amended on June
30, 2002 and matures on September 30, 2002.
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%. The notional amount as of June 30, 2002 was $3,985,066. The unrealized
losses for the periods ended June 30, 2002 and December 30, 2001 are included in
accumulated other comprehensive income on the consolidated balance sheets.
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 September 1997, an
additional 200,000 shares were authorized for repurchase. During the second
quarter of 2002, 12,900 shares were repurchased for $39,075. As of June 30,
2002, 210,662 shares have been repurchased under this plan for a total purchase
price of approximately $734,075. Subsequent to June 30, 2002, an additional
20,000 shares were repurchased for $60,000.
18
PART II
OTHER INFORMATION
19
Item 1. Legal Proceedings.
(a) Information on developments during the quarter in the Company's
lawsuit with JR Simplot are provided under the caption "Legal
Proceedings" in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and such information is
incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) Filed as exhibit to Registrant's Current Report on Form 8-K dated
June 25, 2002, (File No. 0-14968) and incorporated by reference
herein.
20
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: August 9, 2002 By: /s/ BRADLEY L. GROW
-----------------------------------
Bradley L. Grow
Vice President
Chief Financial Officer
21
OFFICER CERTIFICATIONS
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002, the undersigned,
being the duly elected and appointed chief executive officer and chief financial
officer of Eateries, Inc., an Oklahoma corporation (the "Company"), hereby
certify that to the best of their knowledge and belief:
1. The Company's quarterly report on Form 10-Q for the quarter ended June
30, 2002 fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d);
and
2. That information contained in such periodic report fairly presents, in
all material respect, the financial condition and results of
operations of the Company.
Date: August 9, 2002 By: /s/ VINCENT F. ORZA, JR.
-----------------------------
Vincent F. Orza, Jr.
Chief Executive Officer
Date: August 9, 2002 By: /s/ BRADLEY L. GROW
-----------------------------
Bradley L. Grow
Chief Financial Officer
22