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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 29, 2002

File No. 0-14968

EATERIES, INC.

(Exact name of registrant as specified in its charter)

Oklahoma

73-1230348

(State or other jurisdiction of incorporation or
organization)

(I.R.S. Employer 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)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value, $.002 per share

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X   No____

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. ( )

Indicate by check mark whether the registrant is an accelerated filer (as definted in Rule 12b-2 of the Act). Yes ___ No _X__

The aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 2002, was $4,852,685. The registrant has assumed that its directors and officers are the only affiliates, for purposes of this calculation. As of June 30, 2002, the registrant had 2,987,417 shares of common stock outstanding.


EATERIES, INC.
FORM 10-K
For the Fiscal Year Ended December 29, 2002

TABLE OF CONTENTS

PART I

Page

Item 1. Business

1

Item 2. Properties

8

Item 3. Legal Proceedings

9

Item 4. Submission of Matters to a Vote of Security Holders

9

PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

10

Item 6. Selected Financial Data

11

Item 7. Management’s Discussion and Analysis of Financial Condition and
             Results of Operations

12

Item 8. Financial Statements and Supplementary Data

23

Item 9. Changes in and Disagreements With Accountants on Accounting and
             Financial Disclosure

23

PART III
Item 10. Directors and Executive Officers of the Registrant

23

Item 11. Executive Compensation

23

Item 12. Security Ownership of Certain Beneficial Owners and Management

23

Item 13. Certain Relationships and Related Transactions

23

Item 14. Controls and Procedures

23

PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

24

INDEX TO EXHIBITS

24

SIGNATURES

26

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

27


ITEM 1. BUSINESS

In General

Eateries, Inc. (the "Company") and its subsidiaries own, operate and franchise restaurants under the names: Garfield’s Restaurant & Pub ("Garfield’s"), Garcia’s Mexican Restaurants ("Garcia’s") and Pepperoni Grill. As of December 29, 2002, the Company owned 53 (47 Garfield’s, 4 Garcia’s and 2 Pepperoni Grills) and franchised or licensed 11 Garfield’s restaurants in 20 states. The Company also provides management services for 12 Garcia’s.

The Company opened its first restaurant, a Garfield’s, in 1984 in Oklahoma City, Oklahoma. In 1986, the Company completed an initial public offering of its common stock. Prior to 1997, Garfield’s was the Company’s primary restaurant concept. Garfield’s is a family-oriented concept, designed to appeal to a divergent customer base that grew up on fast food, but now prefers a more sophisticated menu, the availability of alcoholic beverages, a comfortable ambiance, speed, value and convenience. The concept features a varied selection of moderately priced, high quality food and beverage items with table service dining.

In January 1995, the Company acquired substantially all the assets of the "Pepperoni Grill" restaurant located in Oklahoma City, Oklahoma, along with all rights to the use of the trademarks associated with the concept. Pepperoni Grill features a variety of Northern Italian entrees with special emphasis on brick-oven baked pizza.

In November 1997, the Company, through its wholly owned subsidiary, Fiesta Restaurants, Inc., acquired 17 Mexican restaurants under the names: Garcia’s (10), Casa Lupita (5) and Carlos Murphy’s (2), along with the trademarks associated with these concepts. In February 1998, the Company sold three of the Casa Lupita locations to Chevy’s, Inc. ("Chevy’s"). In connection with this transaction, the Company entered into an agreement to sell another Casa Lupita location to Chevy’s. This second transaction closed in May 1998. The decision to sell these restaurants was the result of a plan to consolidate operations and focus on the expansion of Garcia’s. During 1998, the Company closed its one remaining Casa Lupita and converted one of its Carlos Murphy’s to a Garcia’s. The remaining Carlos Murphy’s was converted to a Garcia’s in 1999. Currently, the Company has no locations open utilizing the names "Casa Lupita" or "Carlos Murphy’s".

In 2000 the Company constructed and opened one Garfield's and three Garcia's, converted one Carlos Murphy's to a Garcia's and sold the two Bellini's Italian Ristorante’s and one Tommy's Italian American Grill it acquired in 1999. Additionally, the Company opened two Garfield’s and two Garcia’s, all in major regional malls in 2001.

In 2002, the Company sold thirteen Garcia’s located in Arizona, California, Colorado, Idaho and Utah, leaving the Company with four Garcia’s located in Oklahoma (3) and Missouri (1). In conjunction with this sale, the Company also sold the franchise and trademark rights and retained a license agreement under which it operates the remaining Garcia’s.

The Company’s future expansion of its existing concepts will be primarily focused on the construction and franchising of Garfield’s. The Company may also pursue other acquisitions to further enhance shareholder value.

The Company’s principal offices are located at 1220 South Santa Fe Avenue, Edmond, Oklahoma 73003. Its telephone number is (405) 705-5000 and website is www.eats-inc.com .

Garfield’s Restaurant & Pub

Menu

Each Garfield’s restaurant offers a diverse menu of freshly prepared traditional and innovative entrees, including steaks, seafood, chicken, hamburgers, Mexican, Italian, and sandwiches along with a variety of appetizers, salads and desserts. The Company revises menu offerings semi-annually to improve sales. The Company’s senior management actively participates in the search for new menu items. Garfield’s also offers a separate lower-priced children’s menu.


Restaurant Layout

Historically, the majority of Garfield’s restaurants have been constructed in regional malls in accordance with uniform design specifications and are generally similar in appearance and interior decor. Over the last two years the Company has begun to develop freestanding locations as well. Both the freestanding and mall restaurants are furnished and styled in a colorful motif, highlighting the travels of the Company’s namesake, "Casey Garfield", including exhibits, photographs, souvenirs and other travel-related furnishings. Tables are covered with paper and customers are encouraged to doodle with crayons provided at each table. During 2002, five franchisees each opened one new freestanding Garfield’s. During 2000 the Company and a Franchisee each opened one new freestanding Garfield’s. There were no freestanding units opened in 2001 or 1999.

The size and shape of Garfield’s restaurants vary depending upon the location but typically average 4,500 to 5,500 square feet, and seat approximately 200 guests.

Hours of Operation

Depending on location, most restaurants are open from 11:00 a.m. until 11:00 p.m. on weekdays and Sunday, and later on Friday and Saturday.

Unit Economics

Historically, the cost of opening a new Garfield’s restaurant has varied widely due to the different restaurant configuration and sizes, regional construction cost levels, and certain other factors. The Company currently leases restaurant premises in existing freestanding facilities as well as in major regional malls and builds-out the leased space to meet the Garfield’s concept specifications of style and decor. Gross construction costs for a typical Garfield’s opened in 2001 and 2000 were approximately $1,005,000 and $920,000, respectively. However, landlord's typically provide substantial tenant construction allowances (approximately $459,000 in 2001 and $450,000 in 2000). After tenant allowances the Company’s net investment was approximately $546,000 and $470,000 per unit for 2001 and 2000, respectively.

Site Selection

All Garfield's restaurants are located in regional shopping malls and freestanding buildings, primarily in the eastern half of the United States. The Company considers the location of a restaurant to be critical to its long-term success and has devoted significant effort to the investigation and evaluation of potential mall sites. The mall site selection process focuses on historical sales per foot by mall tenants and proximity to entertainment centers within and near the mall as well as accessibility to major traffic arteries. The Company also reviews potential competition in the area and utilizes site selection models to evaluate each potential location based upon a multitude of criteria. Senior management inspects and approves each restaurant site. It takes approximately 18 weeks to complete construction and open a Garfield’s.

Market Concentration

Although Garfield's are spread primarily throughout the eastern half of the United States there are areas of concentration. These areas allow the Company to use advertising dollars in an effective way. In the future as franchises build out market areas this will assist the marketing and advertising effectiveness by further targeting areas of concentration.


Restaurant Locations

The following table sets forth the locations of the existing Garfield’s as of December 29, 2002.

Company-Owned Restaurants

Franchised Restaurants

State

No. of Units

State

No. of Units

Alabama

3

Florida

2

Arkansas

1

Indiana

5

Florida

3

Iowa

2

Georgia

1

Nevada

   1   

Illinois

3

Oklahoma

   1   

Indiana

4

Total

11

Maryland

1

Michigan

2

Mississippi

4

Missouri

4

New York

2

North Carolina

2

Ohio

3

Oklahoma

5

Pennsylvania

2

South Carolina

1

Tennessee

1

West Virginia

3

Wisconsin

   2   

Total

47

Garcia’s Mexican Restaurants

Menu

Each Garcia’s restaurant offers a traditional menu of high quality fresh Mexican food. Alcoholic beverages are also offered in each location. Menus are generally standardized, although there are slight variations to accommodate regional taste preferences.

Restaurant Layout

Garcia’s restaurants have a distinctive southwestern design and decor. In 2001 and 2000, the Company built four new Garcia's in malls. These mall-based locations are between 4,800 and 6,200 square feet and seat 175 to 200 people.

Restaurant Locations

The following table sets forth the locations of the existing Garcia’s as of December 29, 2002.

Company-Owned Restaurants

State

No. of Units

Missouri

1

Oklahoma

3

     Total

4


Pepperoni Grill

Menu

Each Pepperoni Grill offers a menu that features a variety of Italian and Mediterranean entrees with special emphasis on brick-oven baked pizza. The warm European bistro atmosphere is accented with an exhibition kitchen, light foods and booths covered in tapestry. All menu items are prepared on the premises with the entire entree presentation being performed within view of the guest, making the kitchen part of the restaurant’s atmosphere. An in-store bakery makes all the breads and daily desserts. Pepperoni Grill’s signature bakery item is Tuscan Parmesan black pepper bread that is served with all entrees along with traditional olive oil and balsamic vinegar. Over 60 different wine selections are offered along with 25 wines available by the glass.

Restaurant Locations

Both Pepperoni Grill locations are in Oklahoma.

RESTAURANT OPERATIONS

Management And Employees

Responsibility for the Company’s restaurant operations is organized geographically with restaurant general managers reporting to area directors of operations who, in turn, report to the respective Regional Vice-Presidents of Operations for Garfield’s, Garcia’s and Pepperoni Grill. A typical restaurant has a general manager, two to four assistant managers and average 54 employees, approximately 72% of who are part-time.

Regional VP’s of Operations, Area Directors of Operations as well as restaurant general managers and associate managers are eligible for cash and stock bonuses, professional training and attendance at industry conferences. Receipt of these incentives is based on reaching restaurant performance objectives. As of December 29, 2002 approximately 50% of the general managers are a part of the Company’s Owner/Operator Program, which allows approved managers to purchase up to 10% of their locations net profits. The Company’s hourly employees are eligible for performance-based awards for superior service to the Company and its guests. Employee awards can include travel incentives, gift certificates, plaques and Company memorabilia. Most employees other than restaurant management and corporate management are compensated on an hourly basis.

Quality Control

The Company has uniform operating standards and specifications relating to the quality, preparation and selection of menu items, maintenance and cleanliness of the premises, and employee conduct. Managers are responsible for assuring compliance with Company operating procedures. Executive and supervisory personnel routinely visit each restaurant to evaluate adherence to quality standards and employee performance.

Training

The Company has instituted "The Best in Town" program which places a great deal of emphasis on the proper training of its hourly employees and general and associate managers. To insure our restaurants are "The Best in Town", all training is tailored to ensure our guests receive the best experience we can offer in our restaurants. This commitment to quality food and service demands both traditional and creative training techniques. The Company employs a full time corporate training staff to oversee all areas of employee education. The outline for the training programs is based on the individual expertise of the trainee and typically lasts about two weeks for hourly employees and up to eight weeks for managers. Managers are certified in a number of skills in restaurant management, including technical proficiency and job functions, quality service, sales, cost management, team development and profit and loss responsibilities. The Company sponsors further management training and certification in food safety using the ServeSafe program as developed by the National Restaurant Association Educational Foundation. Skills are taught primarily in the restaurant with a combination of hands-on experience, classroom training and assigned projects. Management training is performed in several geographically dispersed restaurants and includes further training at our corporate offices. The Company provides standard manuals regarding training and operations, products and equipment and local marketing programs.


Employee Conduct

The Company maintains a no tolerance policy on harassment or discrimination of any kind. The managers and employees of the Company are required to acknowledge and obey these policies at all times. The Company maintains the right to terminate any employee for violation of its harassment or discrimination policies as well as any conduct that is inappropriate, at any time.

Purchasing

The Company employs a purchasing director to oversee the relations and negotiations with manufacturers and regional distributors for most food and beverage products and to ensure uniform quality, competitive costs and adequate supplies of proprietary products. The Company and its franchisees purchase substantially all food and beverage products from several national and regional suppliers. The Company has not experienced any significant delays in receiving food and beverage inventories or restaurant supplies.

Advertising and Marketing

Marketing at Eateries Inc. is focused on enhancing the guest experience in all of our concepts. The Company develops marketing plans to improve guest satisfaction in the areas of food, value and service. We offer a broad range of products our guests’ desire while striving to deliver the food in a fast, friendly manner. Utilizing multiple mediums such as television, local cable television, radio, outdoor and print advertising, we are able to deliver our messages to the guests in the most efficient way. Our restaurant managers are also encouraged to be involved in the community and to use proven local store marketing programs to drive their individual business. In markets where the Company shares a trade area with a franchisee, advertising cooperatives are utilized to maximize the Company’s restaurant’s visibility. Franchisees of Garfield’s units are generally required to expend up to 4% of sales on restaurant related marketing efforts. In addition, all Company and franchise restaurants contribute 1/2% of their sales to a marketing fund used to produce advertising, menu development and point-of-sale material to promote increased sales. The Company engages in a variety of local market promotional activities such as contributing goods, time and money to charitable, civic and educational programs, in order to increase public awareness of the Company’s restaurants.

Restaurant Reporting

Financial controls are implemented through the use of computerized point of sales and management information systems. Sales reports and food, beverage and labor cost data are prepared and reviewed weekly for operational control. The Company has implemented new systems to streamline the flow of sales, payroll and accounts payable information and has continued to enhance these systems in 2002 and will continue in 2003.

 

MANAGEMENT INFORMATION SYSTEM

The Company in a concerted effort to enhance its accounting and information systems hired Jaroslav Lajos as Director of Management Information Systems in 1999. Mr. Lajos has completed his class work at Oklahoma State University related to a PhD. in computer science, and is in the process of writing his thesis. Currently Mr. Lajos is designing, writing and implementing several new computer software programs designed to advance the Company with MIS technology in the future. In 2001, Mr. Lajos was promoted to Vice President of Management Information Systems.

EXPANSION STRATEGY

The Company’s primary expansion emphasis is gradually shifting from constructing new Company-owned restaurants to franchise development.

The Company has customarily opened Garfield’s restaurants in regional malls principally throughout the eastern half of the United States. This mall-based expansion strategy for Garfield’s reduced the risks associated with locating restaurants in new markets because of the availability of historical trends regarding mall sales and customer traffic. Restaurant construction within a mall typically required a lower investment than construction of a freestanding restaurant.


The Company has developed a freestanding building and also has utilized existing buildings as conversion vehicles for Garfield’s expansion. It is Management’s intention to continue the expansion of Garfield’s through the development and construction of higher volumed freestanding locations as well as in regional malls. The Company maintains relationships with several leading real estate developers who provide the Company with an ongoing supply of potential locations for evaluation.

In 2001 Company also opened two new Garfield's in Pennsylvania and Alabama and two new Garcia's in Oklahoma and Missouri. In 2000, the Company opened one new Garfield’s in Maryland and converted one Oklahoma mall-based Garfield’s to a freestanding location. The Company also opened two mall-based Garcia’s in Oklahoma. Additionally, five franchised locations opened in 2002 in Indiana, Nevada and Florida and one franchised location opened in Indiana in 2000.

Because of its commitment to supporting franchise openings, the Company did not develop or open any company owned restaurants in 2002. However, the Company expects to open up to 3 Garfield’s locations in 2003. Additionally, the Company expects approximately 5 franchised Garfield's will be opened in 2003.

FRANCHISE OPERATIONS

General Terms

As of December 29, 2002, 11 franchised Garfield’s were operating pursuant to agreements granted by the Company. The typical Garfield’s franchise agreement provides for (i) the payment of an initial franchise fee of $30,000 and a monthly continuing royalty fee of 4.0% of gross sales with a minimum fee of $3,000 per month; (ii) the payment of 1/2% of gross sales to the Garfield’s Creative Marketing Fund; (iii) quality control and operational standards; (iv) development obligations for the opening of new restaurants under the franchise; and (v) the creation and use of advertising. The franchise term is for ten years with five-year renewals. The grant of a franchise does not ensure that a restaurant will be opened. Under the Company’s typical franchise agreement, the failure to open restaurants can cause a termination of the franchise. Although the Company largely relies upon standardized agreements for its franchises, it will continue to adjust its agreements as circumstances warrant.

Future Franchise Development

In 1999, the Company hired Laurence Bader as Vice President of Franchising. Mr. Bader formerly held a similar position at KFC and more recently at Applebee’s International, Inc. The Company finalized a new franchise program and updated franchise and development agreements for Garfield’s Restaurant and Pubs. The uniform franchise offering circular (called the UFOC that contains the franchise and development agreement) was registered nationally in 2000, and since registration the Company has aggressively pursued franchise development.

In 2000 the Company began its aggressive marketing of franchises under the UFOC registered during the year. The Company signed commitments for forty-six and twenty-five franchise restaurants in 2001 and 2000, respectively. One new freestanding franchise restaurant was opened in 2000 and five new freestanding locations were opened in 2002. The forty-six franchise restaurants committed to in 2001 included thirty-five in Indiana, ten in Nevada and one in Florida. The twenty-five franchise restaurants committed to during 2000 include twelve in Florida, ten in Nebraska and three in Indiana. In 2002, the franchisee in Nebraska defaulted under the Development Agreement and forfeited its investment in Garfield’s. At December 29, 2002, sixty-five new franchise restaurants remain under commitment.

During 2001, the Company developed plans for two prototypes for Garfield’s freestanding units.

Franchise Revenue Data

The following table sets forth fees and royalties earned by the Company from franchisees for the years indicated:

2002

2001

2000

Initial franchise fees

$   92,000

$  218,000

$  161,000 

Continuing royalties

   527,000

   323,000

  274,000 

   Total

$  619,000

$  541,000

$  435,000 


Compliance with Franchise Standards

All franchisees are required to operate their restaurants in compliance with the Company’s methods, standards and specifications regarding such matters as menu items, ingredients, materials, supplies, services, fixtures, furnishings, decor and signs, although the franchisee has the discretion to determine the menu prices to be charged. However, as a practical matter, all franchisees utilize the Company’s standardized menu. In addition, all franchisees are required to purchase all food, ingredients, supplies and materials from suppliers approved by the Company. These standards are addressed in the UFOC agreement and the Company enforces the standards required of franchisees. Such enforcement may result in the closure or non-renewal of certain franchise units, but any such closings or non-renewals are not expected to have a material adverse effect upon the Company’s results of operations or financial position.

COMPETITION

The restaurant industry is intensely competitive with respect to price, service, location, food type and quality. There are many well-established competitors with substantially greater financial and other resources than the Company. Some of the Company’s competitors have been in existence for substantially longer periods than the Company and may be better established in the market area than the Company’s restaurants. The restaurant business is often affected by changes in consumer taste, national, regional or local economic conditions, demographic trends, traffic patterns and type, number and location of competing restaurants. In addition, factors such as inflation, increased food, labor and benefit costs, and the lack of experienced management and hourly employees may adversely affect the restaurant industry in general and the Company’s restaurants in particular.

SERVICE MARKS

"GARFIELD’S", "CASEY GARFIELD’S", "PEPPERONI GRILL", "CASA LUPITA" and "CARLOS MURPHY’S", AND "BELLINI’S RISTORANTE" are Company service marks registered with the United States Patent and Trademark Office. The Company pursues any infringement of its marks within the United States and considers its marks to be crucial to the success of its operations. The Company has no locations open at this time using "Casa Lupita", "Carlos Murphy's" or "Bellini's Ristorante" trade names.

EMPLOYEES

As of December 29, 2002, the Company employed 2,889 individuals, of whom 211 were management or administrative personnel (including 159 who were restaurant managers or trainees) and 2,678 of whom were employed in non-management restaurant positions. As of this date, the Company employed 201 persons on a salaried basis and 2,688 persons on an hourly basis. Each restaurant employs an average of 54 people.

Most employees, other than restaurant management and corporate management personnel, are paid on an hourly basis. The Company believes that it provides working conditions and wages that compare favorably with those of its competition. As the Company expands, it will need to hire additional management and its continued success will depend in large part on its ability to attract and retain good management employees. The Company’s employees are not covered by a collective bargaining agreement.

SEASONALITY

With 51 of the 53 Company-owned restaurants located in regional malls as of December 29, 2002, the resulting higher pedestrian traffic during the Thanksgiving to New Year holiday season has caused the Company to experience a substantial increase in food and beverage sales and profits in the Company’s fourth and first fiscal quarters. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Impact of Seasonality."

GOVERNMENT REGULATIONS

The Company’s restaurants are subject to licensing and regulation by alcoholic beverage control, health, sanitation, safety and fire agencies in each state and/or municipality in which restaurants are located. The Company has not experienced material difficulties in these areas, however, regulatory difficulties or failures in obtaining the required licenses or approvals could delay or prevent the opening of a new restaurant and affect profitability.


Approximately 13% of the Company’s food and beverage revenues in 2002 were attributable to the sale of alcoholic beverages. Alcoholic beverage control regulations require each of the Company’s restaurants to apply to a state authority and, in certain locations, county or municipal authorities, for a license or permit to sell alcoholic beverages on the premises and to provide service for extended hours and on Sundays. Typically, such licenses or permits must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the Company’s restaurants, including minimum age of patron and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages.

In certain states the Company may be subject to "dram-shop" statutes, which generally provide a person injured by an intoxicated patron the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. The Company carries liquor liability coverage as part of its existing comprehensive general liability insurance.

The Company’s restaurant operations are also subject to federal and state laws governing such matters as minimum wages, working conditions, overtime and tip credits. Significant numbers of the Company’s food service and preparation personnel are paid at rates equal to or based upon the federal minimum wage and, accordingly, further increases in the minimum wage could increase the Company’s labor costs. The enactment of future legislation increasing employee benefits, such as mandated health insurance, could also significantly adversely affect the industry and the Company, as could future increases in workers’ compensation rates.

The Company is subject to Federal Trade Commission ("FTC") regulation and state laws that regulate the offer and sale of franchises. The Company may also become subject to state laws that regulate substantive aspects of the franchisers/franchisee relationship. The FTC requires the Company to furnish prospective franchisees a franchise offering circular containing prescribed information. A number of states in which the Company might consider franchising also regulate the offer and sale of franchises and require registration of the franchise offering with state authorities. The Company believes that it is in material compliance with such laws.

The Americans with Disabilities Act ("ADA") prohibits discrimination in employment and public accommodations on the basis of disability. While the Company believes it is in substantial compliance with the ADA regulations, the Company could be required to expend funds to modify its restaurants to provide service to, or make reasonable accommodations for the employment of disabled persons.

ITEM 2. PROPERTIES

All of the Company’s facilities are occupied under leases. The majority of the Company’s restaurant leases provide for the payment of base rents plus real estate taxes, insurance and other expenses and for the payment of a percentage of the Company’s sales in excess of certain sales levels. These leases typically provide for escalating rentals in future years and have initial terms expiring as follows:

Year Lease Term Expires

No. of
Facilities

2003-2004

11

2005-2006

11

2007-2008

10

2009-2010

13

2011-2012

6

2012-2013

1

2014

1

Total

53


ITEM 3. 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, bringing the total to approximately $8,405,000 plus attorney’s fees and costs. In 2002, the Company was awarded an additional $516,000 for attorney’s fees and costs, bringing the total to approximately $8,921,000. As of December 30, 2001, approximately $516,000 was included in accounts receivable for reimbursement of legal fees and was subsequently paid to the Company related to the suit. Both the Company and Simplot have appealed the award. Oral arguments were heard in the Federal Court of Appeals in November 2002. No amounts related to actual damages have been included in Consolidated Stataments of Income. As of the date of this report, the case is on 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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of the Company’s security holders during its fourth fiscal quarter of 2002.


PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY

                AND RELATED STOCKHOLDER MATTERS

The Company’s common stock was quoted on the NASDAQ National Market System under the symbol "EATS" from May 1994 to January 2003 when the Company’s common stock was transferred and is now quoted on NASDAQ Small-Cap Market. The transfer in 2003 was a result of increased requirements for inclusion on NASDAQ National Market System. Prior to May 1994, the Company’s common stock was quoted on the NASDAQ Small-Cap Market. The following table sets forth, for the quarterly periods indicated, the high and low sales price for the common stock, as reported by the NASDAQ Markets.

Low

High

2001
First Quarter

$1.93 

$3.88 

Second Quarter

2.48 

3.45 

Third Quarter

2.30 

4.05 

Fourth Quarter

1.57 

2.70 

2002
First Quarter

$2.20 

$3.55

Second Quarter

$2.75

$3.45

Third Quarter

$2.35

$3.02

Forth Quarter

$1.51

    $2.35
2003
First Quarter (March 4)

$1.40 

$2.70

On March 4, 2003, the Company’s stock transfer agent reported that the Company’s common stock was held by 181 holders of record. However, management believes there are in excess of 500 beneficial owners of the Company’s common stock.

The Company has paid no cash dividends on its common stock. The Board of Directors intends to retain earnings of the Company to support operations and to finance expansion and does not intend to pay cash dividends on the common stock for the foreseeable future. The payment of cash dividends in the future will depend upon such factors as earnings levels, capital requirements, level of debt, the Company’s financial condition and other factors deemed relevant by the Board of Directors.


ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial data of the Company. The selected financial data in the table are derived from the consolidated financial statements of the Company. The following data should be read in conjunction with, and is qualified in its entirety by, the Company’s consolidated financial statements and related notes and with "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. All amounts are reported in thousands except for per share amounts.

2002

2001

2000 (3)

1999

1998

Income Statement Data:
Revenues:
     Food and beverage sales

$ 95,167

$ 98,324 

$103,480 

$   93,846 

$   88,190 

     Franchise fees and royalties

621

541 

435 

319 

358 

     Other income

465

     618 

     690 

      413 

      637 

            Total revenues

96,253

 99,483 

 104,605 

  94,578 

  89,185 

Costs and Expenses:
     Costs of sales

25,784

26,846 

28,319 

25,841 

24,261 

     Operating expenses

59,778

61,727 

63,473 

57,779 

53,824 

     Pre-opening costs

---

592 

790 

691 

535 

     General and administrative expenses

5,814

5,835 

5,806 

5,968 

5,548 

      Provision for impairment of long-lived assets

2,135

339 

340 

300 

41 

      Loss on disposal of assets

2,110

            ---

           ---

               ---

                 ---

      Depreciation and amortization

4,183

4,245 

3,889 

3,377 

2,964 

      Interest expense

706

     986 

     974 

      776 

      410 

             Total costs and expenses

100,510

 100,570 

 103,591 

  94,732 

  87,583 

Income(loss) before provision (benefit) for income
    taxes

(4,257)

(1,087)

1,014 

(154)

1,602 

Provision for (benefit from) income taxes

2,070

   (407)

            103

    (116)

      419 

Net income (loss)

$ (6,327)

$      (679)

$       911 

$        (38)

$    1,183 

Net income (loss) per common share

$ (2.12)

$     (0.23)

$      0.30 

$     (0.01)

$      0.30 

Net income (loss) per common share assuming dilution

$ (2.12)

$     (0.23)

$      0.29 

$     (0.01)

$      0.28 

Weighted average common shares

2,978

2,961 

3,044 

3,151 

3,942 

Weighted average common shares
      assuming dilution

2,978

2,961 

3,145 

3,151 

4,177 

Balance Sheet Data (at end of period):
      Working capital (deficit)

$ (2,751)

$  (8,480)

$ (11,039)

$   (8,320)

$   (3,360)

      Total assets

$ 21,169

$   30,256

$  33,102 

$  31,090 

$  25,820 

      Long-term debt obligations

$ 9,165

$     8,682

$    8,440 

$    9,092 

$    3,409 

      Stockholders’ equity

$ 960

$     7,216

$    8,099 

$    7,319 

$  12,451 

Other Data:
     Cash provided by operating activities

$ 1,709

$     1,365

$    5,354 

$    7,497 

$    2,945 

     Cash (used in) provided by investing activities

$ (1,069)

$   (1,323)

$   (6,338)

$   (7,516)

$    1,566 

     Cash (used in) provided by financing                 activities

$ (846)

$       81

$      (383)

$       964 

$   (4,545)

     EBITDA (1)

$ 632

$    4,144 

$    5,877 

$    4,000 

$    4,977 

     System-wide sales (2)

$108,648

$106,843 

$112,217 

$102,665 

$  98,923 

(1)  Earnings before interest, taxes, depreciation and amortization ("EBITDA") is calculated by adding the following to GAAP net income: interest expense, provision/benefit for income taxes and depreciation and amortization. EBITDA is not a calculation provided by GAAP and similarly is not an alternative to operating income or net income and is not a measure of liquidity. Additionally, EBITDA may be calculated differently by other companies sharing the same industry as Eateries, Inc.

(2)  System-wide sales include annual Company sales and annual sales as reported to the Company by its franchisees and licensees. Franchisee and licensee gross sales are not included in revenues in the consolidated financial statements and are not GAAP revenue for Eateries, Inc.

(3)  Included 53rd week of operations for the fiscal year ended December 31, 2000.

 


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND                  RESULTS OF OPERATIONS

From time to time, the Company may publish "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Some examples of forward-looking statements are statements related to anticipated financial performance, business prospects, the future opening of Company-owned and franchised restaurants, anticipated capital expenditures, future liquidity and capital resource needs, and other matters. In addition, forward-looking statements often (though not always) may be identified by the use of such terms as "may", "will", "expect", "intend", "project", "estimate", "anticipate", "believe", "think", "continue" or variations of such terms and similar terminology. All statements other than statements of historical fact contained in this Form 10-K or in any other report of the Company are forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of that safe harbor, the Company notes that a variety of factors, individually or in the aggregate, could cause the Company’s actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company’s forward-looking statements including, without limitation, the following: consumer spending trends and habits; competition in the casual dining restaurant segment; weather conditions in the Company’s operating regions; laws and government regulations; general business and economic conditions; availability of capital; success of operating initiatives and marketing and promotional efforts; and changes in accounting policies. In addition, the Company disclaims any intent or obligation to update those forward-looking statements. However, the Company may be required to amend its filings if information becomes materially misleading.

INTRODUCTION

As of December 29, 2002, the Company owned and operated 53 (47 Garfield’s, 4 Garcia’s, 2 Pepperoni Grills), franchised or licensed 11 Garfield’s restaurants and provided management and administrative services for 12 Garcia’s. The Company currently has three Garfield’s in development. As of the date of this report, the entire system includes 52 (46 Garfield’s, 4 Garcia’s, 2 Pepperoni Grills) Company-owned restaurants and 11 Garfield’s franchised or licensed restaurants.


Percentage Results of Operations and Restaurant Data

The following table sets forth, for the periods indicated, (i) the percentages that certain items of income and expense bear to total revenues, unless otherwise indicated, and (ii) selected operating data:

Fiscal Year

  2002

  2001

  2000

Income Statement Data:
Revenues:
    Food and beverage sales

98.9%    

98.9%

98.9%

    Franchise fees and royalties

0.6

0.5   

0.4   

    Other income

0.5

     0.6   

     0.7   

100.0

  100.0   

  100.0   

Costs and Expenses:
    Costs of sales (1)

27.1

27.3   

27.4   

    Operating expenses (1)

62.8

62.8  

61.3   

    Pre-opening costs (1)

0.0

0.6   

0.8   

    General and administrative expenses

6.0

5.9   

5.6   

    Provision for impairment of long-lived assets

2.2

0.3   

0.3   

    Loss on disposal of assets

2.2

        ---

        ---

    Depreciation and amortization (1)

4.4

4.3   

3.8   

    Interest expense

0.7

     1.0   

     0.9   

Income before provision for (benefit from) income taxes…….

(4.4)

(1.1)  

1.0   

Provision for (benefit from) income taxes

2.2

        

     (0.4)  

          0.1

Net income (loss)

(6.6)%  

(0.7)%

0.9% 

Selected Operating Data:
(Dollars in thousands)
System-wide sales:
   Company restaurants

$ 95,167

$ 98,324  

$103,480  

   Franchise restaurants

13,481

   8,515  

   8,737  

          Total

$108,648

$106,843  

$112,217  

Number of restaurants (at end of period):
   Company restaurants

53

67  

69  

   Franchise restaurants

11

        7  

        8  

          Total

64

74  

77  

(1) As a percentage of food and beverage sales.

IMPACT OF SEASONALITY

The concentration of Garfield’s restaurants in regional malls, where customer traffic increases substantially during the Thanksgiving to New Year holiday season, has historically resulted in the Company experiencing a substantial increase in restaurant sales and profits during the fourth quarter of each year. However, since the Company’s acquisition of 17 freestanding Mexican restaurants from Famous in 1997, Company revenues and profits have been less affected by seasonality. The disposition of most of these Mexican restaurants in 2002 will likely result in a greater concentration of 2003 revenues into the fourth quarter of the year.The following table presents the Company’s revenues, net income (loss) and certain other financial and operational data for each fiscal quarter of 2002, 2001 and 2000.

Fiscal Quarters

1st

2nd

3rd

4th

Annual

(In thousands except per share amounts)

2002:

Revenues

$25,808

$23,929

$22,029

$24,487

$96,254

Net income (loss)

242

266

(479)

(6,356)

(6,327)

Net income (loss) per common share

0.08

0.09

(0.16)

(2.13)

(2.12)

Net income (loss) per common share
     assuming dilution

0.08

0.09

(0.16)

(2.13)

(2.12)

Weighted average common shares

3,000

2,997

2,979

2,979

2,978

Weighted average common
     shares assuming dilution

3,039

3,105

2,979

2,979

2,978

Pre-opening costs

---

---

---

---

---

Number of Company units at
     end of period

66

65

63

53

53

Company restaurant operating
     weeks

858

856

826

798

3,338

Sales per Company restaurant
     operating week

$ 30

$ 28

$ 26

$ 30

$ 29

2001:
Revenues

$  25,867 

$  23,655 

$  23,559 

$  26,403 

$99,483 

Net income (loss)

22 

(661)

(468)

428 

(679) 

Net income (loss) per common share

0.01 

(0.22)

(0.16)

0.14 

(0.23) 

Net income (loss) per common share
     assuming dilution

0.01 

(0.22)

(0.16)

0.14 

(0.23) 

Weighted average common shares

3,092 

2,958 

2,959 

2,959 

2,961 

Weighted average common
     shares assuming dilution

3,412 

2,958 

2,959 

2,960 

2,961 

Pre-opening costs

$      261 

$      69 

$      99 

$      163 

$      592 

Number of Company units at
     end of period

66 

65 

67 

67 

67 

Company restaurant operating
     weeks

866 

857 

852 

867 

3,442 

Sales per Company restaurant
     operating week

$        30 

$        28 

$        28 

$        30 

$        29 

2000:
Revenues

$  25,108 

$  24,797 

$  25,069 

$  29,631 

$104,605 

Net income (loss)

324 

(181)

(249)

1,017 

911 

Net income (loss) per common share

0.11 

(0.06)

(0.08)

0.33 

0.30 

Net income (loss) per common share
     assuming dilution

0.10 

(0.06)

(0.08)

0.32 

0.29 

Weighted average common shares

2,997 

3,004 

3,011 

3,055 

3,044 

Weighted average common
     shares assuming dilution

3,094 

3,004 

3,011 

3,156 

3,145 

Pre-opening costs

$      209 

$      311 

$      127 

$      143 

$      790 

Number of Company units at
     end of period

69 

71 

71 

69 

69 

Company restaurant operating
     weeks

884 

907 

923 

1,004 

3,718 

Sales per Company restaurant
     operating week

$        28 

$        27 

$        26 

$        29 

$        28 


FISCAL YEARS 2002, 2001, AND 2000

The Company’s fiscal year 2002 was affected by the sale of 14 Garcia’s, the write down of the assets of the remaining Garcia’s and the provision to fully reserve all of the deferred tax assets. These non-cash charges totaled approximately $7,908,000. The Company decided to dispose of these Garcia’s based on the lack of recovery in the Arizona market after the food borne contamination in 1998 caused by J.R. Simplot Co. The total loss on the sale of all Garcia’s in 2002 totaled approximately $1,900,000 and included a writedown of goodwill of approximately $1,811,000. In conjunction with this sale and accordance with SFAS 144, management determined that an impairment existed relating to the remaining Garcia’s in the amount of approximately $2,135,000. The provision to fully reserve the deferred tax assets totaled approximately $3,873,000. The Company plans to aggressively pursue the continued expansion and success of Garfield’s in the coming years through the construction of corporate and franchise locations.

The Company’s fiscal year 2001 was highlighted by the judgment received against J.R. Simplot Co., which awarded $6,551,000 in damages plus legal fees and expenses. In 2002, the Company’s motion to reconsider the calculation of the judgment was granted and the Company was awarded an additional $1,854,000, bringing the total award to $8,405,000. Additionally, in 2002, the Company was awarded and received $516,000 for legal fees and costs. The Company’s diligent and aggressive handling of this matter resulted in a favorable result and outlook for the Company’s future. Although, the matter is currently on appeal by both parties, the Company intends to aggressively pursue its legal options until a judgment award is collected.

Results of Operations

The Company's results of operations for the year ended December 29, 2002 decreased over prior year. The Company had increases in same store sales over prior year (0.5% increase for Garfield’s), however the sales, closing and disposition of fourteen restaurants in 2002 and ten restaurants in 2001, has resulted in an overall decrease in food and beverage sales. During 2002, the Company sold all of its Garcia’s locations in the western half of the United States as a result of the lack of recovery from the 1998 contamination and for the purpose of being able to fully concentrate on growing its Company-owned and franchise-owned Garfield’s base. This resulted in a net loss on disposal of assets of approximately $1,900,000 (which included a write off of goodwill in the amount of approximately $1,800,000) and a one-time SFAS 144 impairment of its remaining Garcia’s of approximately $2,135,000. During 2001, the Company focused on improving its inventory of restaurants, by selling, closing or disposing of locations that were either not profitable, not in favorably concentrated market locations or did not provide enough cash flow to substantiate the renewal of the lease term. The Company continued its focus on training, continuing to improve the quality of food preparation and customer service in all locations. This focus resulted in greater repeat business in 2001 and 2002. Additionally, the Company is maintaining the focus it began in 1999 to grow its franchise business. As a result, the Company experienced growth through its campaign to recruit additional franchisees, opening one new franchise location in 2000 and signing agreements for additional 46 units in 2001 and 25 units in 2000. Five new franchise locations opened in 2002. The Company also experienced slightly better food and labor costs, despite increasing wages and liquor costs throughout its territories. This is primarily due to increased same store sales and higher check averages. The Company successfully opened one freestanding Garfield's location in 2000, which experienced higher sales than its mall based locations. The Company has experienced occassional spikes in utility costs as reflected in 2000, which can significantly impact unit level profits. The increase in 2000 was approximately $300,000 over 1999. Increasing property and health insurance costs as well as legal fees, also negatively impacted operational results. However, management believes that its current restaurant inventory as of December 29, 2002 is stronger than in prior years and will provide a base for overall financial improvement.

Revenues

Company revenues for the year ended December 29, 2002, decreased 3.2% over the revenues reported for the year ended December 30, 2001. Revenues for the year ended December 30, 2001, decreased 4.9% over the revenues reported for the year ended December 31, 2000. These decreases are mainly due to restaurant dispositions throughout the three fiscal years. Systemwide revenues (including all franchisees) in 2002 increased 0.7% over systemwide revenues in 2001.


The number of restaurants operating at the end of each year, the number of operating months during that year and average sales per operating week were as follows:

2002

2001

2000

Garfield’s:
Number of Company restaurants at year end

47

48 

50 

Number of Company restaurant operating weeks

2,470

2,516 

2,629 

Average sales per Company restaurant operating
     Week

$28,402

$27,917 

$26,649 

Garcia’s: (1)
Number of Company restaurants at year end

4

16 

17 

Number of Company restaurant operating weeks

764

822 

825 

Average sales per Company restaurant operating
     Week

$27,507

$28,988 

$29,910 

ROMA Foods:(2)
Number of Company restaurants at year end

2

Number of Company restaurant operating weeks

104

104 

265 

Average sales per Company restaurant operating
     Week

$33,125

$35,132 

$30,893 

All Concepts (3):
Number of Company restaurants at year end

53

66 

69 

Number of Company restaurant operating weeks

3,338

3,442 

3,719 

Average sales per Company restaurant operating
     Week

$28,510

$28,390 

$27,675 

(1) Excludes the Garcia’s concession operation at the BankOne Ball Park in Phoenix, Arizona.

(2) Includes Pepperoni Grill, Bellini’s and Tommy’s; the two Bellini's and Tommy's were sold in December 2000.

(3) Includes Garfield’s, Pepperoni Grill, Bellini’s, Tommy’s, and Garcia’s; excludes the Garcia’s concession operation at the BankOne Ball Park in Phoenix, Arizona.

 

A summary of sales and costs of sales expressed as a percentage of sales are listed below for the fiscal years:

2002

2001

2000

Sales:
   Food

87.3%

87.0%

86.5%

   Beverage

12.7%

    13.0%

    13.5%

      Total

100.0%

100.0%

100.0%

Costs of Sales:
   Food

27.6%

27.8%

27.6%

   Beverage

23.8%

    24.1%

    25.8%

      Total

27.1%

27.3%

27.4%

Average weekly sales per unit for Garfield’s were $28,402 during 2002 compared to $27,917 during 2001. The 2002 per unit weekly sales increased by $485 or 1.7% from 2001 levels. Garfield’s units continue to have strong performance and increased same store sales over prior years due to concentrated marketing strategies and new menu items. Average weekly sales per unit for Garcia’s were $27,507 during 2002 versus $28,988 in 2001. Garcia’s 2002 average weekly sales per unit decreased $1,481 or 5.1%. This decrease is mainly attributable to the sale of higher volumed restaurants in 2002.

Average weekly sales per unit for Garfield’s were $27,917 during 2001 compared to $26,649 during 2000. The 2001 per unit weekly sales increased by $1,268 or 4.8% from 2000 levels. The increase was primarily due to the introduction of a new menu design, a successful television advertising campaign and the success of continued radio and newspaper advertising. Average weekly sales per unit for Garcia's were $28,988 during 2001 versus $29,910 in 2000. This decrease is primarily related to four mall-based locations constructed in 2000 and 2001 which have lower volumes.


Continuing royalties were $527,000 in 2002, $323,000 in 2001, and $274,000 in 2000. The increase in 2002 is a result of five new franchise locations which opened during the year. The increase in 2001 over 2000 is a result of the higher volumed franchised locations and the opening of one additional unit in October 2000.

Other revenues during 2002 were $465,000 compared to $618,000 in 2001 and $690,000 in 2000. The decrease in 2002 as compared to 2001 is primarily due to a decrease in vending and other miscellaneous income.

During 2002, 2001 and 2000 other revenues consisted of the following:

2002

2001

2000

Vending

$106,000

$159,000 

$125,000 

Audio/Video Rental

88,000

66,000 

112,000 

Banquet Rental

43,000

46,000 

55,000 

Other Rental

45,000

50,000 

60,000 

Marketing Fund Revenues

59,000

43,000 

39,000 

Interest

34,000

31,000 

38,000 

Merchandise Sales

1,000

15,000 

31,000 

Miscellaneous

89,000

  208,000 

  230,000 

Total

$465,000

$618,000 

$690,000 

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:

2002

2001

2000

Garfield’s:
   Costs of sales

27.6%

27.6%

27.5%

   Labor costs

28.1%

    28.6%

    28.3%

       Total

55.7%

56.2%

55.8%

Garcia’s:
   Costs of sales

25.6%

26.6%

26.3%

   Labor costs

30.4%

    30.0%

    31.5%

       Total

56.0%

56.6%

57.8%

Pepperoni Grill (1):
   Costs of sales

25.8%

26.7%

29.7%

   Labor costs

28.8%

    28.8%

    30.4%

       Total

54.6%

55.5%

60.1%

All Concepts (2):
   Costs of sales

27.1%

27.3%

27.4%

   Labor costs

28.7%

    29.0%

    29.3%

       Total

55.8%

56.3%

56.7%

(1) Includes Bellini's and Tommy's, which were sold in December 2000.
(2) Includes Garfield’s, Garcia’s, Pepperoni Grill, Bellini’s, and Tommy’s.

Garfield’s costs of sales as a percentage of food and beverage sales in 2002 and 2001 were 27.6% and increased from 27.5% in 2000. Garcia’s costs of sales as a percentage of food and beverage sales decreased to 25.6% in 2002 from 26.6% in 2001 and 26.3% in 2000. This decrease is primarily due to previous high liquor costs resulting from a rise in tequila prices. Additionally, some of the locations disposed of had higher costs of sales than those not disposed of. Pepperoni Grill cost of sales as a percentage of sales decreased in 2002 to 25.8% from 26.7% in 2001. This decrease was due to the sale of Bellini's and Tommy's in December 2000 which had higher cost of sales due to its product mix.

Garfield’s labor costs as a percentage of food and beverage sales decreased in 2002 to 28.1% from 28.6% in 2001, which increased from 28.3% in 2000. The decrease in 2002 was primarily due to better cost control of management and hourly labor and lower turnover. Labor costs for Garcia’s as a percentage of food and beverage sales increased to 30.4% in 2002 from 30.0% in 2001, which decreased from 31.5% in 2000. Labor costs for Pepperoni Grill in 2002 was 28.8% of food and beverage sales compared to 28.8% in 2001, which decreased from 30.4% in 2000. The decrease from 2000 to 2001 was mainly due to the sale of Bellini’s and Tommy’s in December 2000, which carried higher labor costs.

Operating expenses (which include labor costs) as a percentage of food and beverage sales were 62.8% in 2002 and 2001, and 61.3% in 2000. The increase in operating expenses as a percentage of food and beverage sales in 2001 compared to 2000 was due primarily to increased utility and health and property insurance costs.

Pre-Opening Costs

The Company expenses pre-opening costs as incurred. During each of the three years in the period ended December 29, 2002, the Company incurred and recognized as expense the following amounts for restaurant pre-opening costs relative to the corresponding number of restaurants opened:

2002

2001

2000

Total pre-opening costs

---

$592,000

$790,000 

Restaurants opened

---

4

Average pre-opening costs per restaurant opened

---

 $148,000

$131,667 

Total pre-opening costs as a percentage of food
      and beverage sales

---

0.6%

0.8%

The increase in average pre-opening costs between 2001 and 2000 is due to a delay in the opening of one Garcia’s unit in the first quarter of 2000. The Company did not open any restaurants in 2002.

General and Administrative Expenses

General and administrative expenses increased as a percentage of total revenues to 6.0% in 2002 from 5.9% in 2001 as compared to 5.6% in 2000. The lower absolute levels of general and administrative expenses from 2000 are related primarily to the Company's ability to increase revenues without incurring large corresponding addition to personnel costs. 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. The slight increase in 2002 and 2001 is due to revenue reductions from store sales and closures.

Provision for Impairment of Long-Lived Assets

The Company’s restaurants are reviewed on an individual restaurant basis for indicators of impairment whenever events or circumstance indicate that the carrying value of its restaurants may not be recoverable. The Company’s primary test for an indicator of potential impairment is operating losses. In order to determine whether an impairment has occurred, the Company estimates the future net cash flows expected to be generated from the use of its restaurants and the eventual disposition, as of the date of determination, and compares such estimated future cash flows to the respective carrying amounts. Those restaurants, which have carrying amounts in excess of estimated future cash flows, are deemed impaired. The carrying value of these restaurants is adjusted to an estimated fair value by discounting the estimated future cash flows attributable to such restaurants using a discount rate equivalent to the rate of return the Company expects to achieve from its investment in newly-constructed restaurants. The excess is charged to expense and cannot be reinstated.


Considerable management judgment and certain significant assumptions are necessary to estimate future cash flows. Significant judgments and assumptions used by the Company in evaluating its assets for impairment include, but may not be limited to: estimations of future sales levels, cost of sales, direct and indirect costs of operating the assets, the length of time the assets will be utilized and the Company’s ability to utilize equipment, fixtures and other moveable long-lived assets in other existing or future locations. In addition, such estimates and assumptions include anticipated operating results related to certain profit improvement programs implemented by the Company during 2002, 2001 and 2000 as well as the continuation of certain rent reductions, deferrals, and other negotiated concessions from certain landlords. Actual results could vary significantly from management’s estimates and assumptions and such variance could result in a change in the estimated recoverability of the Company’s long-lived assets. Accordingly, the results of the changes in those estimates could have a material impact on the Company’s future results of operations and financial position.

During 2002, 2001 and 2000, the Company recorded a $2,135,000, $339,000 and $340,000, respectively as a provision for impairment of long-lived assets. As a result of their negative cash flow and of the sales of all of the Garcia’s in all states except Oklahoma and Missouri during 2002, the Company determined that the remaining locations would not be able to realize the full net book value of the related assets. As such, the Company determined the salvage value of the assets at $100,000 per location and recorded a charge to SFAS 144 write-offs on the consolidated statement of income for the difference of approximately $2,135,000. The remaining value of $400,000 is classified as furniture and equipment and is included on the consolidated balance sheet as of December 29, 2002.

In the normal course of business, management performs a regular review of the strength of its operating assets. It is management’s plan to continue to make such decisions to close under-performing restaurants and/or dispose of other assets it considers in the best long-term interest of the Company’s shareholders.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased in 2002 to $4,183,000 (4.4% of food and beverage sales) compared to $4,245,000 (4.3% of food and beverage sales) in 2001 and $3,889,000 (3.8% of food and beverage sales) in 2000. The increase in 2001 compared to 2000 is primarily attributable to the increase in net assets subject to depreciation and amortization in 2001 versus 2000 as the result of the opening of additional restaurants in 2001 and 2000. Additionally, unit economics of recent store developments are higher than those of many of the aging locations whose leases were not renewed.

Interest Expense

Interest expense during each of the three years in the period ended December 29, 2002, was $706,000 in 2002, $986,000 in 2001, and $974,000 in 2000. Additionally, the Company has capitalized approximately $44,000 and $71,000 of interest costs during 2001 and 2000, respectively. The decrease in interest expense in 2002 compared to 2001 and 2000 is attributable to lower interest rates on the Company’s lines of credit and the expiration of the interest rate swap in November 2002.

Income Taxes

The provision for income tax was $2,070,000 and $103,000 in 2002 and 2000, respectively. The benefit for income taxes was $407,000 in 2001.

At December 29, 2002, the Company has recorded a valuation allowance against its deferred tax assets resulting in zero net deferred tax assets. Net operating loss carryforwards do not begin to expire until 2008 and general business tax credits until 2009. It is possible that the Company’s ability to realize the deferred income tax assets could be impaired if there are significant future exercises of non-qualified stock options or the Company were to experience declines in sales and/or profit margins as a result of loss of market share, increased competition or other adverse general economic conditions.

Earnings Per Share Amounts

Basic Earnings Per Share ("EPS") includes no dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. The weighted-average common shares outstanding for the basic EPS calculation were 2,977,994, 2,960,999 and 3,044,195 in 2002, 2001 and 2000, respectively. EPS for 2002 and 2001 were anti-dilutive. 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 to the extent such common stock equivalents are not anti-dilutive. The sum of the weighted-average common shares and common share equivalents for the diluted EPS calculation were 2,977,994, 2,960,999 and 3,144,515 in 2002, 2001 and 2000, respectively.


Impact of Inflation

The impact of inflation on the cost of food and beverage products, labor and real estate can affect the Company’s operations. Over the past few years, inflation has had a lesser impact on the Company’s operations due to the lower rates of inflation in the nation’s economy and the economic conditions in the Company’s market area, with the exception of spikes in utility costs and surcharges by food distributors.

Management believes the Company has historically been able to pass on increased costs through certain selected menu price increases and increased productivity and purchasing efficiencies, but there can be no assurance that the Company will be able to do so in the future. Management anticipates that the average cost of restaurant real estate leases and construction costs could increase in the future which could affect the Company’s ability to expand.

Liquidity and Capital Resources

At December 29, 2002, the Company’s working capital ratio was .71 to 1 compared to .34 to 1 at December 30, 2001. As is customary in the restaurant industry, the Company has consistently operated with negative working capital and has not historically required large amounts of working capital. Historically, the Company has leased the vast majority of its restaurant locations. For fiscal years 2002, 2001 and 2000, the Company’s expenditures for capital improvements were $2,315,000, $3,509,000 and $8,876,000, respectively, which were funded out of cash flows from operating activities of approximately $1,709,000, $1,368,000 and $5,354,000, respectively, landlord finish-out allowances of approximately $130,000, $1,302,000 and $2,023,000 respectively, and borrowings under the Company’s credit agreements.

During 2003, the Company expects to continue to make expenditures for capital improvements to its existing and future locations. The Company believes the cash generated from its operations and borrowing availability under its credit facility (described below), will be sufficient to satisfy the Company’s net capital expenditures and working capital requirements through 2003.

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%. This agreement expired in November, 2002.

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. In 2001, an additional 67,500 shares were purchased for an aggregate purchase price of approximately $139,000. In 2002, an additional 32,900 shares were purchased for an aggregate purchase price of approximately $99,000. As of December 29, 2002 a total of 230,662 shares had been repurchased for an aggregate purchase price of approximately $794,000. Subsequent to year end, the Company’s Board of Directors authorized an additional 330,000 shares for repurchase. Remaining shares authorized to be repurchased total 499,338.

In February 1999, the Company’s Board of Directors authorized the repurchase of 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. In connection with this transaction, 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 for the stock purchase from the Sellers. The balance of the proceeds under the term loan (approximately $3.2 million) and the proceeds under the revolving line of credit were used to retire indebtedness under the Company’s existing loan agreement. The revolving line of credit expires in March 2003 and initially bears interest at a floating rate of three month LIBOR plus 1.50% (initially 6.5%), which is reset quarterly. The term loan also provides for an initial floating rate of interest equal to three month LIBOR plus 1.50% and requires quarterly installments of principal and interest in the amount necessary to fully amortize the outstanding principal balance over a seven-year period, with a final maturity on the fifth anniversary of the note. 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 was subject to changes in the Company’s ratio of total loans and capital leases to net worth. Under the terms of these notes, the Company’s minimum floating rate was LIBOR plus 1.25% and the maximum floating rate was LIBOR plus 2.50%. Borrowings under this loan agreement were unsecured. The loan agreement does contain certain financial covenants and restrictions.


Effective March 15, 2001, the Company entered into an overline of credit with a maximum draw amount of $1,000,000. This overline had a term of six months, which was extended to March 31, 2002 and initially bears interest at a rate equal to the greater of the national prime rate or 5.0%, payable monthly. No amounts were outstanding at December 29, 2002.

Subsequent to year end, the Company entered into a new credit facility with GE Capital Franchise Finance in the aggregate amount of $15,000,000. $10,000,000 was drawn initially for the purposes of retiring its current credit facility. Another $5,000,000 is restricted and is available under this facility for use upon notice by GE Capital for certain specified purposes. Borrowings are at a rate of 30-day LIBOR plus 3.50%, which is reset monthly. The Company is required to make debt payments annually to reduce the amount outstanding to certain maximum balances. The debt under this agreement is secured by the Company’s furniture, fixtures and equipment. The loan agreement does contain certain financial covenants and restrictions and retirement of the loan is subject to certain prepayment penalties. The Company is in compliance with these covenants as of the date of this report.

Contracted Cash Obligations

The Company leases the majority of its restaurant facilities and its corporate office under operating leases with initial terms expiring at various dates through the year 2015. Certain leases contain renewal options ranging from five to ten years. Most, but not all, leases require the Company to be responsible for the payment of taxes, insurance and/or maintenance and include percentage rent and fixed rent escalation clauses. In the normal course of business, the Company may grant a landlord lien on certain personal property upon an event of default by the Company.

The future maturities of long-term obligations and remaining minimum rental commitments under long-term noncancellable leases, excluding amounts related to taxes, insurance, maintenance and percentage rent, are as follows:

Lease Commitments

Debt Maturities

Total

2003

$4,428,880

---

$4,428,880

2004

3,979,397

$850,000

4,829,397

2005

3,389,273

1,325,000

4,714,273

2006

3,018,025

1,225,000

4,243,025

2007

2,635,061

1,300,000

3,935,061

Thereafter

6,796,214

5,300,000

12,096,214

Total minimum rental commitments

$24,246,850

$10,000000

$34,246,850

Contingencies

In the ordinary course of business, the Company is subject to legal actions and complaints. In the opinion of management, based in part on the advice of legal counsel, and based on available facts and proceedings to date, the ultimate liability, if any, arising from such legal actions currently pending will not have a material adverse effect on the Company’s financial position or future results of operations.

In the course of disposing of eleven Garcia’s restaurants in 2002, the Company was required by the landlord to remain as guarantor of the tenant lease in order the complete the assignments to the purchasors. The Company was released from its liabilities and commitments, however is contingently liable in the event of default of the Assignees. However, the Company has retained the right to control the operations of the locations if the party should default and recover any amounts paid under the guaranty. The Company’s guarantees will expire at the expiration of the assigned lease terms. At December 29, 2002, the remaining minimum rental commitments under these noncancellable lease commitments by the assignees, excluding amounts related to taxes, insurance, maintenance and percentage rent, are $9,927,351.

Stock Put Agreements

In April 1997, the Company entered into stock put agreements with two of its executive officers (who also serve on the Company’s Board of Directors). Under the agreements, in the event of the officer’s death while an employee of the Company, their respective estate or legal representative has the right (but not the obligation) to compel the Company to purchase all or part of the common stock owned by or under stock option agreements with the decreased officers or members of their immediate families (i.e. spouse or children) or controlled by any of them through trusts, partnership corporations or other entities on the date of their death. The agreement calls for a calculation of the per share price payable by the Company. The purchase price cannot exceed the proceeds payable to the Company from the key man life insurance policy maintained on the life of the respective officer. The Company expects the source of funding for this commitment to come from the proceeds of the key man life insurance policy for the respective officer.


Quantitative and Qualitative Disclosures About Market Risk

As of the date of this report, the Company has an available line of credit in the amount of $15,000,000, and outstanding borrowings under this loan of approximately $10,000,000. The loan bears interest at floating rate of 30-day LIBOR plus 3.5%. Thus, the Company is exposed to the risk of earnings losses due to increases in 30-day LIBOR. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for a discussion of the terms of the Company’s credit.

Critical Accounting Policies

PROVISION FOR IMPAIRMENT OF LONG-LIVED ASSETS

The Company’s restaurants are reviewed on an individual restaurant basis for indicators of impairment whenever events or circumstance indicate that the carrying value of its restaurants may not be recoverable. The Company’s primary test for an indicator of potential impairment is operating losses. In order to determine whether an impairment has occurred, the Company estimates the future net cash flows expected to be generated from the use of its restaurants and the eventual disposition, as of the date of determination, and compares such estimated future cash flows to the respective carrying amounts. Those restaurants, which have carrying amounts in excess of estimated future cash flows, are deemed impaired. The carrying value of these restaurants is adjusted to an estimated fair value by discounting the estimated future cash flows attributable to such restaurants using a discount rate equivalent to the rate of return the Company expects to achieve from its investment in newly-constructed restaurants. The excess is charged to expense and cannot be reinstated.

Considerable management judgment and certain significant assumptions are necessary to estimate future cash flows. Significant judgments and assumptions used by the Company in evaluating its assets for impairment include, but may not be limited to: estimations of future sales levels, cost of sales, direct and indirect costs of operating the assets, the length of time the assets will be utilized and the Company’s ability to utilize equipment, fixtures and other moveable long-lived assets in other existing or future locations. In addition, such estimates and assumptions include anticipated operating results related to certain profit improvement programs implemented by the Company during 2002, 2001 and 2000 as well as the continuation of certain rent reductions, deferrals, and other negotiated concessions from certain landlords. Actual results could vary significantly from management’s estimates and assumptions and such variance could result in a change in the estimated recoverability of the Company’s long-lived assets. Accordingly, the results of the changes in those estimates could have a material impact on the Company’s future results of operations and financial position.

INCOME TAXES

The Company is subject to Federal, state and local income taxes. Deferred income taxes are provided on the tax effect of presently existing temporary differences, existing net operating loss and tax credit carryforwards. The tax effect is measured using the enacted marginal tax rates and laws that will be in effect when the differences and carryforwards are expected to be reversed or utilized. Temporary differences consist principally of depreciation caused by using different lives for financial and tax reporting, the expensing of smallwares when incurred for tax purposes while such costs are capitalized for financial purposes and the expensing of costs related to restaurant closures and other disposals for financial purposes prior to being deducted for tax purposes. When the Company cannot determine that it is more likely than not that the deferred tax assets will be realized, a valuation allowance against the deferred tax asset is recorded.

REVENUE

Revenue from food and beverage sales is recorded at the date services are provided. Typically all customers pay at the time the service is provided, however, due to the company opening a new banquet facility, the company allows certain parties to pay in arrears. The revenue from banquets is also recorded when the service is provided and any uncollected amounts are recorded to other receivables included on the Consolidated Balance Sheets.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements of the Company are included in a separate section of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

                ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III

In accordance with General Instruction G(3), a presentation of information required in response to Items 10, 11, 12 and 13 will appear in the Company’s Proxy Statement to be filed pursuant to Regulation 14A within 120 days of the year end covered hereby, and shall be incorporated herein by reference when filed.

ITEM 14. CONTROLS AND PROCEDURES

Within 90 days prior to the date of this report, an evaluation was carried out under the supervision and with the participation of the Company’s management, including it’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including it’s consolidated subsidiaries) required to be included in the Company’s periodic Securities and Exchange Commission filings. There were no significant changes in our internal controls or in other factors that could significantly effect these controls subsequent to the date of their evaluation.


PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,

                  AND REPORTS ON FORM 8-K

(a)   The following documents are filed as part of the report:

1. 

Consolidated Financial Statements:
Management’s Responsibility for Financial Reporting
Report of Independent Auditors
Consolidated Balance Sheets as of December 29, 2002 and December 30, 2001
Consolidated Statements of Income for each of the three years in the period ended December 29, 2002
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 29, 2002
Consolidated Statements of Cash Flows for each of the three years in the period ended December 29, 2002
Notes to Consolidated Financial Statements

2. 

Consolidated Financial Statement Schedules:
All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.

3. 

Exhibits.
The following exhibits are filed as part of Form 10-K and are identified by the numbers indicated:

 

INDEX TO EXHIBITS

Exhibit

Number

 

Description of Document

3.1 

Amended and Restated Articles of Incorporation. (1)

3.2 

Amendment to the Amended and Restated Articles of Incorporation. (2)

3.3 

Second Amendment to the Amended and Restated Articles of Incorporation. (11)

3.4 

Bylaws as amended. (1)

3.5 

Amendment to Bylaws. (11)

4.1 

Specimen Stock Certificate. (3)

10.1 

Employment Agreement between the Company and Vincent F. Orza, Jr., dated January 22, 2001. (12)

10.2 

Employment Agreement between the Company and James M. Burke, dated January 22, 2001. (12)

10.3 

Employment Agreement between the Company and Bradley L. Grow, dated January 1, 2001. (12)

10.4 

Lease Amendment dated May 1, 1999 between the Company and Great Places, L.L.C. for the lease of the Company's corporate office facilities in Edmond, Oklahoma. (12)

10.5 

Franchise Agreement and Amendment dated August 31, 1993 between the Company and Wolsey Dublin Company for the Garfield’s franchise in Sioux City, Iowa and non-exclusive development rights to two additional locations in seven cities in four states over the next two years. (3)

10.6 

Form of Franchise Agreement for Garfield's and Garcia's dated March 20, 2000. (12)

10.7 

Collateral Assignment Agreement dated January 20, 1991, between the Company and Vincent F. Orza, Jr. (5)

10.8 

Collateral Assignment Agreement dated January 20, 1991, between the Company and James M. Burke. (5)

10.9 

Employee Stock Purchase Plan dated June 15, 1994 (6).

10.10 

Amended and restated Eateries, Inc. Omnibus Equity Compensation Plan dated as of June 15, 1994. (7)

10.11 

Amendment to Amended and Restated Eateries, Inc. omnibus equity compensation plan. (11)

10.12 

Asset Purchase Agreement dated November 14, 1997, by and between the Company, through its wholly-owned subsidiary, Fiesta Restaurants, Inc., and Famous Restaurants, Inc. and its subsidiaries. (8)

10.13 

Agreement for Purchase and Sale of Assets and Licenses dated February 26, 1998, among the Company and Chevy’s, Inc. (9)

10.14 

Agreement for purchase and Sale of Assets dated February 26, 1998, between the Company and Chevy’s, Inc. (9)

10.15 

Stock Put Agreement dated April 2, 1997, by and among Vincent F. Orza, Jr. and the Company. (4)

10.16 

Stock Put Agreement dated April 2, 1997, by and among James M. Burke and the Company. (4)

10.17 

Stock Purchase Agreement dated as of February 17, 1999, between Eateries, Inc. and Astoria Capital Partners, L.P., Montavilla Partners, L.P. and Microcap Partners L.P. (10)

10.18 

Loan Agreement dated effective February 19, 1999, among Eateries, Inc., Fiesta Restaurants, Inc. , Pepperoni Grill, Inc., Garfield’s Management, Inc. and Local Federal Bank, F.S.B. (10)

10.19 

Revolving Promissory Note in the principal amount of $6,000,000 dated February 19, 1999, by Eateries, Inc., Fiesta Restaurants, Inc. , Pepperoni Grill, Inc. and Garfield’s Management, Inc. in favor of Local Federal Bank, F.S.B. (10)

10.20 

Term Promissory Note in the principal amount of $8,600,000 dated February 19, 1999, by Eateries, Inc., Fiesta Restaurants, Inc., Pepperoni Grill, Inc., and Garfield’s Management, Inc. in favor of Local Federal Bank, F.S.B. (10)

10.21 

Lease Amendment dated August 1, 1999 between the Company and Great Places of Shawnee L.L.C. for the lease of the Company's Garfield's Restaurant in Shawnee, Oklahoma. (12)

10.22 

Loan Agreement Amendment dated September 30, 2000 between Eateries, Inc., Fiesta Restaurants, Inc. , Pepperoni Grill, Inc., Garfield’s Management, Inc. and Local Federal Bank, F.S.B. (13)

10.23 

Amended Term Promissory Note dated September 30, 2000 between Eateries, Inc., Fiesta Restaurants, Inc. , Pepperoni Grill, Inc., Garfield’s Management, Inc. and Local Federal Bank, F.S.B. (13)

10.24 

Amended Revolving Promissory Note in the principal amount of $6,000,000 dated September 30, 2000, by Eateries, Inc., Fiesta Restaurants, Inc. , Pepperoni Grill, Inc. and Garfield’s Management, Inc. in favor of Local Federal Bank, F.S.B. (13)

10.25

Acquisition Agreement among Fiesta, L.L.C., Fiesta Restaurants, Inc. and Eateries, Inc. dated December 16, 2002. (14)

10.26

Acquisition Agreemenr among Fiesta-Shea, L.L.C., Fiesta Restaurants, Inc. and Eateries, Inc. dated as of December 16, 2002. (14)

10.27

Management Agreement between Eateries, Inc. and Fiesta, L.L.C. dated as of December 23, 2002. (14)

21.1 

Subsidiaries of Eateries, Inc. (12)

99.0

Certifications

FOOTNOTES TO INDEX TO EXHIBITS

(1) 

Filed as exhibit to Registrant's Registration Statement on Form S-18 (File Nol 33-6818-FW) and incorporated herein by reference.

(2) 

Filed as exhibit to Registrant’s Quarterly Report on Form 10-Q for the six months ended June 30, 1988 (File No. 0-14968) and incorporated herein by reference.

(3) 

Filed as exhibit to Registrant’s Registration Statement on Form S-2 (File No. 33-69896) and incorporated herein by reference.

(4) 

Filed as exhibit to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 28, 1997 (File No. 0-14968) and incorporated herein by reference.

(5) 

Filed as exhibit to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 0-14968) and incorporated herein by reference.

(6) 

Filed as Appendix A to the Company’s Notice of Annual Meeting of Shareholders dated April 29, 1994 and incorporated herein by reference.

(7) 

Filed as exhibit to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (File No. 0-14968) and incorporated herein by reference.

(8) 

Filed as exhibit to Registrant’s Current Report on Form 8-K dated December 8, 1997 (File No. 0-14968) and incorporated herein by reference.

(9) 

Filed as exhibit to Registrant’s Current Report on Form 8-K dated March 16, 1998 (File No. 0-14968) and incorporated herein by reference.

(10) 

Filed as exhibit to Registrant’s Current Report on Form 8-K dated March 3, 1999 (File No. 0-14968) and incorporated herein by reference.

(11) 

Filed as exhibit to registrant's proxy statement filed with the Commission on June 6, 2000 and incorporated herein by reference.

(12) 

Filed as exhibit to registrant's Annual Report of Form 10-K for fiscal year ended December 31, 2000 dated March 21, 2001
(File No. 0-14968) and incorporated herein by reference.

(13) 

Filed as exhibit to registrant's Annual Report of Form 10-K Amendment No. 1 for fiscal year ended December 31, 2000 dated May 16, 2001 (File No. 0-14968) and incorporated herein by reference.

       (14)

Filed as exhibit to registrant’s Current Report on Form 8-K dated December 23, 2002 (File No. 0-14968) and incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

REGISTRANT:

EATERIES, INC.

Date: March 4 , 2003                                    By: /s/Vincent F. Orza, Jr.

                                                                                Vincent F. Orza, Jr.

                                                                                Chief Executive Officer

 

Date: March 4, 2003                                    By: /s/Bradley L. Grow

                                                                                Bradley L. Grow

                                                                                Vice President

                                                                                Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Date: March 4, 2003                                  By: /s/Vincent F. Orza, Jr.

                                                                                Vincent F. Orza, Jr.

                                                                                Chairman of the Board

                                                                                and Director

 

Date: March 4, 2003                                   By: /s/James M. Burke

                                                                               James M. Burke

                                                                              Assistant Secretary and Director

Date: March 4, 2003                                  By: /s/Edward D. Orza

                                                                              Edward D. Orza,

                                                                              Director

Date: March 4, 2003                                  By: /s/Patricia L. Orza

                                                                              Patricia L. Orza,

                                                                              Secretary and Director

Date: March 4, 2003                                  By: /s/Thomas F. Golden

                                                                             Thomas F. Golden,

                                                                             Director

Date: March 4, 2003                                  By: /s/Philip Friedman

                                                                             Philip Friedman,

                                                                             Director

Date: March 4, 2003                                 By: /s/Larry Kordisch

                                                                             Larry Kordisch,

                                                                             Director


EATERIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Management’s Responsibility for Financial Reporting

F-1

Report of Independent Auditors

F-2

Consolidated Balance Sheets as of December 29, 2002 and December 30, 2001

F-4

Consolidated Statements of Income for each of the three years in the period ended
      December 29, 2002

F-5

Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended
      December 29, 2002

F-6

Consolidated Statements of Cash Flows for each of the three years in the period ended
      December 29, 2002

F-7

Notes to Consolidated Financial Statements      F-8

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING

The management of Eateries, Inc. has the responsibility for preparing the accompanying consolidated financial statements and for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles and include amounts that are based on management’s best estimates and judgment where necessary. Management believes that all representations made to our external auditors during their examination of the financial statements were valid and appropriate.

To meet its responsibility, management has established and maintains a comprehensive system of internal control that provides reasonable assurance as to the integrity and reliability of the consolidated financial statements, that assets are safeguarded, and that transactions are properly executed and reported. This system can provide only reasonable, not absolute, assurance that errors and irregularities can be prevented or detected. The concept of reasonable assurance is based on the recognition that the cost of a system of internal control is subject to close scrutiny by management and is revised as considered necessary.

The Board of Directors of Eateries, Inc. have engaged Ernst and Young LLP, independent auditors, to conduct an audit of and express an opinion as to the fairness of the presentation of the 2002 consolidated financial statements. Their report is included on the following page.

 

 

/s/Vincent F. Orza, Jr.
Vincent F. Orza, Jr.
Chairman and
Chief Executive Officer

 

 

/s/Bradley L. Grow
Bradley L. Grow
Vice President
Chief Financial Officer

 

 

March 4, 2003


REPORT OF INDEPENDENT AUDITORS

Board of Directors
Eateries, Inc.

 

We have audited the accompanying consolidated balance sheet of Eateries, Inc. and subsidiaries as of December 29, 2002 and the related consolidated statements of income, stockholders’ equity and other comprehensive income and cash flows for the fiscal year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The Consolidated financial statements of Eateries, Inc. and subsidiaries for the years ended December 30, 2001 and December 31, 2000 were audited by other auditors who have ceased operations and whose report dated February 27, 2002, expressed an unqualified opinion on those statements.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Eateries, Inc. and subsidiaries at December 29, 2002, and the consolidated results of its operations and its cash flows for the fiscal year then ended December 29, 2002, in conformity with accounting principles generally accepted in the United States.

As discussed above, the financial statements of Eateries, Inc. and subsidiaries as of December 29, 2001 and December 31, 2000, and for the fiscal years then ended were audited by other auditors who have ceased operations. As disclosed in Note 2 under the heading "Stock-based Compensation", the Company accounts for fixed price stock options in accordance with Accounting Principles Bulletin Opinion No. 25. The 2001 and 2000 financial statements have been revised to include the additional disclosures required by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, which was adopted by the Company as of December 29, 2002. Our audit procedures with respect to these disclosures in Note 2 relating to 2001 and 2000 included (a) agreeing the previously reported net income to the previously issued financial statements, the previously reported pro forma net income to the previously issued financial statements and the pro forma compensation cost to underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of reported net income to pro forma net income, and the related basic and diluted income per share amounts. In our opinion, the disclosures for 2001 and 2000 in Note 2 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 financial statements taken as a whole.

 

                                                                                                                                         ERNST AND YOUNG LLP

 

Oklahoma City, Oklahoma
March 4, 2003


We have not been able to obtain, after reasonable efforts, the reissued report or consent of Arthur Andersen LLP related to the 2001 financial statements included in this Annual Report on Form 10-K. Therefore, we have included a copy of their previously issued report and have relied on Rule 437a under the Securities Act of 1933 to dispense with the requirement to file a written consent from Arthur Andersen LLP consenting to the incorporation by reference of their report into a previously filed Annual Report on Forma 10-K. As a result, an investor’s ability to assert claims against Arthur Andersen LLP may be limited. Since we have been unable to obtain the written consent of Arthur Andersen LLP, an investor may not be able to recover against Arthur Andersen LLP under Section 11 of the Secutirites Act of 1933 for any untrue statements of material fact contained in such report or financial statements or any omissions to state a material fact required to be stated therein.

 

REPORT OF INDEPENDENT AUDITORS

 

Board of Directors
Eateries, Inc.
Oklahoma City, Oklahoma

 

 

We have audited the accompanying consolidated balance sheets of Eateries, Inc. and subsidiaries (an Oklahoma Corporation) as of December 30, 2001 and December 31, 2000 and the related consolidated statements of income, stockholders’ equity and other comprehensive income and cash flows for each of the three years in the period ended December 30, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Eateries, Inc. and subsidiaries at December 30, 2001 and December 31, 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 30, 2001, in conformity with accounting principles generally accepted in the United States.

 

 

                                                                                                                                                     ARTHUR ANDERSEN LLP

 

Oklahoma City, Oklahoma
February 27, 2002


EATERIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

December 29,
2002

December 30,
2001

ASSETS
Current assets:
     Cash and cash equivalents

$ 794,675

$   999,533

     Receivables:
            Franchisees

111,306

37,956

            Insurance refunds

2,905

191,463

            Vendor rebates

437,455

253,616

            Other

3,558,564

894,983

     Deferred income taxes (Note 9)

---

362,633

     Inventories

716,077

958,354

     Prepaid expenses and deposits

1,066,417

  706,306

                   Total current assets

6,687,399

4,404,874

Property and equipment, at cost:
     Land and buildings

---

338,800

     Furniture and equipment

14,458,238

18,170,963

     Leasehold improvements

30,449,274

36,116,489

44,907,512

54,626,252

     Less: Landlord finish-out allowances

15,543,866

17,459,166

29,363,646

37,167,086

     Less: Accumulated depreciation and amortization

16,312,585

15,935,445

                   Net property and equipment

13,051,061

21,231,641

Deferred income taxes (Note 9)

---

1,796,378

Goodwill, net

370,191

2,180,925

Other assets

1,060,403

    642,651

$21,169,054

$30,256,470

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
     Accounts payable

$ 5,503,040

$ 7,736,379

     Accrued liabilities:
              Compensation

1,879,931

1,542,262

              Taxes, other than income

694,893

831,125

              Other

1,360,154

1,717,707

     Current portion of long-term obligations (Note 6)

---

  1,228,571

                        Total current liabilities

9,438,018

13,056,043

Deferred credit

1,077,190

998,509

Other liabilities

528,870

303,625

Long-term obligations, net of current portion (Note 6)

9,164,641

 8,682,486

Commitments and contingencies (Note 5 and 11)

---

                  ---

                        Total liabilities

20,208,719

23,040,663

Stockholders’ equity (Note 10):
     Preferred stock, $.002 par value, none outstanding

--- 

--- 

     Common stock, $.002 par value 4,521,914 shares
            issued at December 29, 2002 and December 30, 2001

9,044

9,044

     Additional paid-in capital

10,370,359

10,370,359

     Accumulated other comprehensive income (loss), net of tax

---

(171,000)

     Retained earnings (accumulated deficit)

(1,996,727)

  4,330,646

8,382,676

14,539,049

     Treasury stock, at cost 1,554,497 and 1,521,597 shares at
            December 29, 2002 and December 30, 2001, respectively

(7,422,341)

(7,323,242)

                        Total stockholders’ equity

960,335

  7,215,807

$21,169,054

$30,256,470

See accompanying notes.

EATERIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

December 29,
2002

December 30,
2001

December 31,
2000

Revenues:
     Food and beverage sales

$ 95,167,396

$ 98,324,145 

$103,479,815 

     Franchise fees and royalties

620,720

541,196 

435,381 

     Other

465,460

     617,633 

     689,791 

               Total revenues

96,253,576

99,482,974 

104,604,987 

Costs of sales

25,784,064

26,845,855 

28,318,905 

               Gross profit

70,469,512

72,637,119 

76,286,082 

Operating expenses (Note 7)

59,777,713

61,727,252 

63,472,674 

Pre-opening costs (Note 2)

---

592,000 

790,000 

General and administrative expenses

5,814,176

5,835,170 

5,805,974 

Provision for impairment of long-lived assets (Note 8)

2,135,472

338,695 

340,000 

Loss on disposal of assets (Note 3)

2,109,934

                  ---

               ---

Depreciation and amortization

4,183,119

4,245,198 

3,889,419 

Interest expense

706,310

     985,759 

     974,190 

               Total expenses

74,726,723

73,724,074 

75,272,257 

Income (loss) before income taxes

(4,257,212)

(1,086,955) 

1,013,825 

Provision for (benefit from) income taxes (Note 9)

2,070,161

     (407,695) 

     102,957 

Net income (loss)

$      (6,327,373)

$     (679,260) 

$      910,868 

Net income (loss) per common share (Note 2)

$             (2.12)

$           (0.23) 

$            0.30 

Net income (loss) per common share assuming dilution (Note 2)

$             (2.12)

$           (0.23) 

$            0.29 

See accompanying notes.

EATERIES, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND OTHER COMPREHENSIVE INCOME

Accumulated

Other

Additional

Other

Comprehensive

Common Stock

Treasury Stock

Paid-in

Comprehensive

Retained

Income (Loss)

Issued

Amount

Shares

Amount

Capital

Income (Loss)

Earnings

Total

Balance, December 26, 1999

-

4,408,065

$8,816

1,380,399

$(6,896,721)

$10,114,079

-

$4,099,038

$7,325,212

Issuance of common stock:
     Exercise of      stock options

-

37,030

74

-

-

91,325

-

-

91,399

     Employee stock       purchase plan

-

23,170

47

-

-

54,114

-

-

54,161

Tax benefit from the        exercise of
     non-qualified stock        options

-

-

-

-

-

4,700

-

-

4,700

Treasury stock acquired (Note 10)

-

-

-

10,070

(56,650)

-

-

-

(56,650)

Treasury stock acqiored from sale of assets

-

-

-

63,328

(230,652)

-

-

-

(230,652)

Net income

910,868

-

-

-

-

-

-

910,868

910,868

Other Comprehensive Income

910,868

Balance, December 31, 2000

4,468,265

$8,937

1,454,097

$(7,184,023)

$10,264,218

-

$5,009,906

$8,099,038

Issuance of common stock:
    Exercise of stock       options

-

14,397

29

-

-

19,978

-

-

20,007

    Employee stock purchase plan

-

39,252

78

-

-

79,667

-

-

79,745

Tax benefit from the     exercise of non-qualified stock     options

-

-

-

-

-

6,496

-

-

6,496

Treasury stock acquired (Note 10)

-

-

-

67,500

(139,219)

-

-

-

(139,219)

Derivatives marked to market, net of tax (Note 2)

(171,000)

-

-

-

-

-

(171,000)

-

(171,000)

Net loss

(679,260)

-

-

-

-

-

-

(679,260)

(679,260)

Other Comprehensive Income

$(850,260)

Balance, December 30, 2001

4,521,914

$9,044

1,521,597

$(7,323,242)

$10,370,359

$(171,000)

$4,330,646

$7,215,807

Treasury stock acquired (Note 10)

-

-

-

32,900

(99,099)

(99,099)

Derivatives marked to market, net of tax (Note 2)

171,000

-

-

-

-

-

171,000

-

171,000

Net loss

(6,327,373)

-

-

-

-

-

-

(6,327,373)

(6,327,373)

Other comprehensive income (loss)

$(6,156,373)

Balance, December 29, 2002

4,521,914

$9,044

1,554,497

$(7,422,341)

$10,370,359

-

$(1,996,727)

$ 960,335

See accompanying notes.

EATERIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended

December 29,
2002

December 30,
2001

December 31,
2000

Cash flows from operating activities:
     Net income (loss)

$   (6,327,373)

$    (679,260)

$ 910,868 

     Adjustments to reconcile net income (loss) to
            net cash provided by operating activities:
          Depreciation and amortization

4,183,119

4,245,198

3,889,419 

          Provision (benefit) for income taxes

1,794,000

(407,695)

102,957 

          Provision for impairment of long-lived assets

2,135,472

---

                  ---

          Loss on disposal of assets

2,109,934

---

                  ---

          (Increase) decrease in operating assets:
               Receivables

357,556

(121,496)

271,392 

               Deferred income taxes

(227,644)

(994,135)

207,294 

               Inventories

242,277

52,277

(73,533)

               Prepaid expenses and deposits

(360,111)

879,078

(905,479)

               Other assets

(283,498)

51,886

(495,470)

          Increase (decrease) in operating liabilities:
               Accounts payable

(2,233,339)

(804,019)

1,505,246 

               Accrued liabilities

14,884

(1,363,259)

(218,113)

               Other liabilities

303,926

506,458

      59,314 

          Total adjustments

8,036,576

2,041,703

   4,343,027 

          Net cash provided by operating activities

1,709,203

1,365,033

   5,253,895 

Cash flows from investing activities:
     Capital expenditures

(2,314,535)

(3,507,259)

(8,776,530)

     Landlord finish-out allowances

129,700

1,302,191

2,022,784 

     Proceeds from the sale of property and equipment

1,300,000

752,107

511,825 

     Cash paid for lease termination

(210,000)

---

                    ---

     Proceeds from the sale of notes receivable

---

115,500

--- 

     Payments received for notes receivable

26,289

14,764

3,597 

          Net cash used in investing activities

(1,068,546)

(1,322,697)

   (6,238,324)

Cash flows from financing activities:
     Sales of common stock

---

79,745

54,161 

     Payments on long-term obligations

(1,343,416)

(1,353,398)

(1,228,571)

     Borrowings under revolving credit agreement

23,997,000

28,814,170

34,405,000 

     Payments under revolving credit agreement

(23,400,000)

(27,340,000)

(33,705,000)

     Proceeds from issuance of stock on exercise of
            stock options …

---

20,007

91,399 

     Repurchase of treasury stock

(99,099)

(139,219)

--- 

          Net cash (used in) provided by financing activities ……..

(845,515)

81,305

     (383,011)

Net (decrease) increase in cash and cash equivalents

(204,858)

123,641

(1,367,440)

Cash and cash equivalents at beginning period

999,533

875,892

   2,243,332 

Cash and cash equivalents at end of period

$ 794,675

$ 999,533

$    875,892 

See accompanying notes.

EATERIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  Organization

Eateries, Inc. (the "Company") was incorporated under the laws of the State of Oklahoma on June 1, 1984. The Company is engaged in the creation, design, management and operations of restaurants through Company-owned and franchised restaurants. The Company’s restaurants are located primarily in the Southwest, Midwest and Southeast regions of the United States. The Company’s restaurants operate under the name Garfield’s Restaurant & Pub ("Garfield’s"), Pepperoni Grill and Garcia’s Mexican Restaurants ("Garcia’s"). An analysis of Company-owned and franchised restaurants for the three years in the period ended December 29, 2002, is as follows:

Company
Units

Franchised
Units

Total
Units

At December 26, 1999

69 

78 

    Units opened

--- 

              4

    Units closed

(1)

(1)

(2)

    Units acquired

(3)

--- 

(3)

At December 31, 2000

69 

77 

    Units opened

--- 

              4

    Units closed

(5)

(1)

(6)

    Units sold

(1)

---

(1)

At December 30, 2001

67 

7

74 

    Units opened

           ---

5

             5

    Units closed

(1)

---

           (1)

    Units sold

(13)

(1)

(14)

At December 29, 2002

           53

11

            64

(2) Summary of Significant Accounting Policies

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Eateries, Inc. and its wholly owned subsidiaries, Fiesta Restaurants, Inc. and Roma Foods, Inc. All significant intercompany transactions and balances have been eliminated.

FISCAL YEAR

The Company’s fiscal year is a 52/53-week year ending on the last Sunday in December. The Company operated 52, 52 and 53-week fiscal years for the years ended December 29, 2002, December 30, 2001 and December 31, 2000, respectively.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include certain highly liquid debt instruments with a maturity of three months or less when purchased.

OTHER RECEIVABLES

Other receivables included on the consolidated balance sheets consist primarily of banquet receivables which are recorded at the time the service is provided and amounts due the Company for reimbursement of legal services provided in conjuntion with a legal suit filed by the Company against a food purveyor (See Note 12).


Receivables are comprised of the following:

December 29,
2002

December 30,
2001

General

$               --

$ 159,000

Banquets

129,000

33,000

Legal reimbursement

---

516,000

Notes receivable

219,000

110,000

Notes receivable from Fiesta, L.L.C.

3,146,000

--

Other

65,000

77,000

$ 3,559,000

$ 895,000

 

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or market and consist primarily of food and beverages and supplies.

PROPERTY AND EQUIPMENT

Property and equipment (which includes assets under capital leases) and landlord finish-out allowances are stated at cost (or amounts received with respect to landlord finish-out allowances) and are depreciated and amortized over the lesser of the estimated useful lives of the assets or the remaining term of the leases using the straight-line method. Estimated useful lives are as follows:

Buildings

15-30 Years

Furniture and equipment

3-15 Years

Leasehold improvements

3-15 Years

Landlord finish-out allowances

8-15 Years

Amounts received or receivable from landlords for reimbursement of improvements to leased facilities are recorded as a reduction of the costs incurred by the Company for property and equipment.

GOODWILL

The Company records goodwill in connection with acquisitions. Goodwill is recorded in the amount of the purchase price in excess of the fair value of the assets acquired. Goodwill is tested for impairment in accordance with SFAS No. 142. Any impairment could result in a write-down of the amount recorded. As of December 29, 2002, no impairment existed. Prior to the adoption of SFAS 142 on December 31, 2001, goodwill was amortized over 20 years, which resulted in amortization expense in the amount of $86,485 and $119,198 in 2001 and 2000, respectively.

REVENUE

Revenue from food and beverage sales is recorded at the date services are provided. Typically all customers pay at the time the service is provided, however, due to the company opening a new banquet facility, the company allows certain parties to pay in arrears. The revenue from banquets is also recorded when the service is provided and any uncollected amounts are recorded to other receivables included on the Consolidated Balance Sheets.

ADVERTISING COSTS

Costs incurred in connection with advertising and marketing of the Company’s restaurants are expensed as incurred. Such costs amounted to $2,778,000, $3,311,000 and $3,199,000 in 2002, 2001 and 2000 and are included in Operating expenses on the Consolidated Statements of Income.


PRE-OPENING COSTS

The costs related to the opening of restaurant locations are expensed when incurred.

PROVISION FOR IMPAIRMENT OF LONG-LIVED ASSETS

The Company’s restaurants are reviewed on an individual restaurant basis for indicators of impairment whenever events or circumstance indicate that the carrying value of its restaurants may not be recoverable. The Company’s primary test for an indicator of potential impairment is operating losses. In order to determine whether an impairment has occurred, the Company estimates the future net cash flows expected to be generated from the use of its restaurants and the eventual disposition, as of the date of determination, and compares such estimated future cash flows to the respective carrying amounts. Those restaurants, which have carrying amounts in excess of estimated future cash flows, are deemed impaired. The carrying value of these restaurants is adjusted to an estimated fair value by discounting the estimated future cash flows attributable to such restaurants using a discount rate equivalent to the rate of return the Company expects to achieve from its investment in newly-constructed restaurants. The excess is charged to expense and cannot be reinstated (See Note 8).

Considerable management judgment and certain significant assumptions are necessary to estimate future cash flows. Significant judgments and assumptions used by the Company in evaluating its assets for impairment include, but may not be limited to: estimations of future sales levels, cost of sales, direct and indirect costs of operating the assets, the length of time the assets will be utilized and the Company’s ability to utilize equipment, fixtures and other moveable long-lived assets in other existing or future locations. In addition, such estimates and assumptions include anticipated operating results related to certain profit improvement programs implemented by the Company during 2002, 2001 and 2000 as well as the continuation of certain rent reductions, deferrals, and other negotiated concessions from certain landlords. Actual results could vary significantly from management’s estimates and assumptions and such variance could result in a change in the estimated recoverability of the Company’s long-lived assets. Accordingly, the results of the changes in those estimates could have a material impact on the Company’s future results of operations and financial position.

INCOME TAXES

The Company is subject to Federal, state and local income taxes. Deferred income taxes are provided on the tax effect of presently existing temporary differences, existing net operating loss and tax credit carryforwards. The tax effect is measured using the enacted marginal tax rates and laws that will be in effect when the differences and carryforwards are expected to be reversed or utilized. Temporary differences consist principally of depreciation caused by using different lives for financial and tax reporting, the expensing of smallwares when incurred for tax purposes while such costs are capitalized for financial purposes and the expensing of costs related to restaurant closures and other disposals for financial purposes prior to being deducted for tax purposes. The Company has fully reserved for its deferred income taxes, thus net deferred tax assets at December 29, 2002 are zero.

DEFERRED CREDIT

Certain of the Company’s long-term noncancellable operating leases for restaurant and corporate facilities include scheduled base rental increases over the term of the lease. The total amount of the base rental payments is charged to expense on the straight-line method over the term of the lease. The Company has recorded a deferred credit to reflect the net excess of rental expense over cash payments since inception of the leases.

FRANCHISE ACTIVITIES

The Company franchises and licenses the Garfield’s concept to restaurant operators. As of December 29, 2002 and December 30, 2001, eleven and seven restaurant units, respectively, were operating under franchise and license agreements. The initial non-refundable franchise fee paid to the Company is recognized as income in the year received. The franchisor provides initial services to the franchisee in the selection of a site, approval of architectural plans, assistance in the selection of equipment for the restaurant, distribution of operations manuals and training of franchisee’s personnel prior to the opening of the restaurant. The Company recognized $92,000, $218,000 and $161,000 of initial franchise fees for franchised restaurants during 2002, 2001, and 2000, respectively.

Continuing royalties are recognized as revenue based on the terms of each franchise agreement, generally as a percentage of sales of the franchised restaurants. During 2002, 2001 and 2000, the Company recognized $527,000, $323,000 and $274,000, respectively, of fees from continuing royalties.


Garfield’s franchisees are required to remit an amount equal to 1/2% of their sales to the Garfield’s Creative Marketing Fund. The franchisees’ payments, which were $61,000, $43,000 and $39,000, during 2002, 2001 and 2000, respectively, are combined with the franchisor’s expenditures to purchase services for creative advertising and design, market research and other items to maintain and further enhance the Garfield’s concept.

Franchisee receivables at December 29, 2002 and December 30, 2001 are comprised primarily of uncollected continuing royalties, which are generally unsecured; however, the Company has not experienced significant credit losses in prior years and is not aware of any significant uncollectible amounts at December 29, 2002.

CAPITALIZATION OF INTEREST

Interest attributed to funds used to finance restaurant construction projects is capitalized as an additional cost of the related assets. Capitalization of interest ceases when the related projects are substantially complete. The Company has capitalized approximately $44,000 and $71,000 of interest costs during 2001 and 2000, respectively. These costs are included in leasehold improvements in the accompanying balance sheets. No interest costs were capitalized in 2002.

STOCK-BASED COMPENSATION

As permitted by SFAS 123, "Accounting for Stock-Based Compensation," the Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under SFAS 123, requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

Following are pro forma net income and earnings per share as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994, under the fair value method. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2002, 2001 and 2000, respectively: risk-free interest rates of 4.29%, 4.72% and 4.85% a dividend yield of 0%; volatility factors of the expected market price of the Company’s common stock of .45%, .45% and .90 and a weighted average expected life of the options of 7.5 years. The weighted average grant date fair value of options issued in 2002, 2001 and 2000 was $1.27, $1.49 and $2.12, respectively.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options and stock purchase plan have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options and stock purchase plan.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma information follows:

2002

2001

2000

Net income (loss), as reported

$(6,327,373)

$ (679,260)

$ 910,868

Deduct: Total Stock-based employee compensation                   

    expense determined under fair value based method for

    all awards, net of related tax effects

$ (245,484)

$ (365,364)

$(285 045) 

Pro forma net income (loss)

$(6,572,857)

$ (1,044,624)

$ 625,823 

Earnings (loss) per share
    Basic – as reported

$ (2.12)

$ (0.23)

$       0.30 

    Basic – pro forma

$ (2.21)

$ (0.35)

$       0.21 

    Diluted – as reported

$ (2.12)

$  (0.23)

$       0.29 

    Diluted – pro forma

$ (2.21)

$  (0.35)

$       0.02 


EARNINGS PER COMMON 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. Diluted EPS is computed by dividing net income available to common stockholders by the sum of the weighted average number of common shares outstanding for the period plus common stock equivalents.

The following table sets forth the computation of basic and diluted earnings per share:

2002

2001

2000

Numerator:
     Net income

$ (6,327,373)

$ (679,260) 

$ 910,868 

Denominator:
     Denominator for basic earnings

         per share-weighted average

         shares outstanding

 

2,977,994

2,960,999 

3,044,195 

     Dilutive effect of nonqualified

         stock options

----

         ---- 

  100,320 

     Denominator for diluted

         earnings per share

2,977,994

2,960,999 

3,144,515 

Basic earnings per share

$ (2.12)

$ (0.23) 

$ 0.30 

Diluted earnings per share

$ (2.12)

$ (0.23) 

$ 0.29 

As of December 29, 2002, and December 30, 2000 there were outstanding options and warrants to purchase 130,000 shares of common stock, at prices ranging from $6.00 per share to $6.88 per share, which were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive. Dilutive earnings per share were equivalent to basic earnings per share in 2002 and 2001 due to the net loss for the year causing the impact of options and warrants to be anti-dilutive.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

STATEMENTS OF CASH FLOWS

Interest of $735,707, $991,301 and $978,000 was paid for 2002, 2001 and 2000, respectively. Cash paid for income taxes was $67,000 and $203,147 for 2002 and 2001, respectively.


For 2002, 2001 and 2000, the Company had the following non-cash investing and financing activities.

Fiscal Year

2002

2001

2000

Decrease in current receivables
      for landlord finish-out allowances

$ ---

$ 10,000

$          --- 

Decrease in stockholder's equity as a result of the receipt of
      treasury stock related to restaurant sale

---

--- 

(230,652)

Acquisition of treasury stock upon exercise of
      stock options (Note 10)

---

--- 

56,650 

Increase in additional paid-in capital as a result
      of tax benefits from the exercise of non-qualified stock
      options

---

6,496 

4,700 

Increase in notes receivable from finance of sale of restaurants

273,720

---

---

Asset write-offs related to restaurant
      closures and other disposals

2,135,472

338,695 

222,988 

Decrease in goodwill as a result of sale of restaurants

1,810,643

--- 

230,651 

Note receivable from Fiesta, L.L.C. resulting from sale of                     restaurants .

3,020,000

               ---

              ---

FAIR VALUES OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Company in estimating the fair values of financial instruments:

Cash and cash equivalents, accounts receivable, deposits, accounts payable and accrued liabilities - The carrying amounts reported in the consolidated balance sheets approximate fair values because of the short maturity of these instruments.

Long-term obligations - The revolving credit agreement and term loan, which represent the material portion of long-term obligations in the accompanying consolidated balance sheets, bear interest at a variable rate, which is adjusted quarterly. Therefore, the carrying values for these borrowings approximate their fair values.

DERIVATIVES

In accordance with SFAS No. 133, "Accounting for Derivative Instruments and for Hedging Activities", the Company records every derivative instrument in the balance sheet as either an asset or liability measured at its fair value. Changes in the derivative's fair value are recognized currently in earnings unless specific hedging accounting criteria are met.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board issued SFAS No. 142 "Goodwill and Other Intangible Assets," which establishes financial accounting and reporting for acquired goodwill and other intangible assets and supersedes 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 are effective starting with fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 142 effective December 31, 2001. The adoption of this standard did not have a material impact on the Company’s financial position or results of operation.

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 supersedes 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 December 31, 2001 with no material impact on the Company's results of operations or financial position.


(3) Restaurant Dispositions

In December 2000, the Company sold the two Bellini’s Ristorante and Grill’s and one Tommy’s Italian-American Grill, located in the Oklahoma City, Oklahoma area, back to their founder, Tommy Byrd, for $500,000 and 63,628 shares of the Company's Common Stock. No gain or loss was recognized in the sale. The Company retained the rights to the name and trademark "Bellini's Ristorante and Grill" outside of Oklahoma and Texas.

In January 2001, the Company sold one Garcia’s Mexican Restaurant located in Davie, Florida. The amount unrecoverable of $79,000 was previously charged off under SFAS 121 provisions in 2000. In April 2001, the Company sold one Garcia’s Mexican Restaurant located in Pleasant Hill, California. The amount unrecoverable of $248,000 was previously charged off under SFAS 121 in 2000. In July 2001, the Company terminated the lease on one under-performing Garfield’s Restaurant & Pub in Anderson, South Carolina 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 restaurant closure expense. In November 2001, the Company sold a building to its lessee in Newark, Ohio, the Golden Dragon Chinese Restaurant. A charge of approximately $54,000 was recorded to restaurant closure expense.

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 loss on disposal of assets on 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. In conjunction with this sale, the Company retained a note in the amount of $73,720 amortized over 3 years. In August 2002, the Company sold one Garcia’s Mexican Restaurant located in Carmichael, CA, and one located in Idaho Falls, ID. The purchaser signed a franchise agreement for these locations. A gain of approximately $259,000 is included in gain on disposal of assets on the consolidated statements of income. This gain included a goodwill write-off of $304,000. In conjunction with this sale, the Company retained a note in the amount of $200,000 amortized over 5 years. In November 2002, the Company sold one Garcia’s Mexican Restaurant located in Layton, UT. The purchaser signed a franchise agreement for this location. A loss of approximately $115,000 is included in loss on disposal of assets on the consolidated statements of income. This loss included a goodwill write-off of $49,000. The amounts of goodwill written off in the gain calculation were determined by comparing the Company’s estimate of the fair value of the sold locations to the fair value of the concept to which the goodwill relates.

In December 2002, the Company sold all of the assets of its nine Garcia’s locations in the Phoenix, AZ and Tucson, AZ areas to Fiesta, L.L.C. for $3,020,000 which was intitally financed through a note payable to the Company. In addition to the assets, the Company sold the trademark and franchise rights for Garcia’s Mexican Restaurant. The Company retained a license agreement under which it will continue to operate its remaining Garcia’s located in the Oklahoma City, OK and Joplin, Mo markets. In conjunction with the sale, the Company entered into a management contract with Fiesta, L.L.C. whereby it will continue to provide operational and administrative services for a fee. The Company was required by the landlords of the various locations sold to remain as guarantor of the leases (See Note 11). A loss of approximately $2,401,000 was recorded on loss on disposal of assets on the consolidated statement of income. In conjunction with the loss, the remaining goodwill associated with Garcia’s in the amount of $1,357,000 was written off. In conjunction with this sale, the Company impaired substantially all of the assets of the remaining Garcia’s (See Note 7). Additionally, the Company guaranteed certain leases assigned to Fiesta, L.L.C. (See Note 11). Subsequent to year end, the Company received the $3,020,000 due from the sale which was included in accounts receivable at December 29, 2002.

(4) Owner/Operator Liability

The Company provides for a program whereby certain general managers at their election and approval by management may purchase a 10% interest in the net profits of the location they manage. The purchase price is calculated based on a percentage of the locations trailing twelve month cash flow. Monthly payments are made to the owner operators based on store level profits. The Company requires a down payment and retains a note receivable from the respective managers, amortized over 3 years. If the manager leaves the Company or wishes to sell back his or her interest within 3 years, the Company is required to return only the net cash paid at that time. If the manager leaves or wishes to sell back his or her interest after 3 years, the Company, at its option may purchase it back based on the purchase price calculation above for the most recent trailing twelve month cash flow. Based on this calculation, the value of the net profits interest may substantially increase or decrease. At the time of the purchase, the down payment is recorded to cash, the note receivable is recorded to receivables and the total of the down payment and the note receivable is recorded to owner/operator liability which is included in other liabilities. After a manager reaches the 3 year vesting date, the Company values the net profits interest based on the purchase calculation and adjusts the liability to the fair value. As of December 29, 2002, the total amount of owner/operator liability included in other liabilities was $416,970. The value of the owner/operator net profits interests if all owner/operators were vested as of December 29, 2002 would be $545,000.


(5) Commitments

The Company leases the majority of its restaurant facilities and its corporate office under operating leases with initial terms expiring at various dates through the year 2015. Certain leases contain renewal options ranging from five to ten years. Most, but not all, leases require the Company to be responsible for the payment of taxes, insurance and/or maintenance and include percentage rent and fixed rent escalation clauses. In the normal course of business, the Company may grant a landlord lien on certain personal property upon an event of default by the Company.

At December 29, 2002, the remaining minimum rental commitments under long-term noncancellable leases, excluding amounts related to taxes, insurance, maintenance and percentage rent, are as follows:

2003

$  4,428,880

2004

3,979,397

2005

3,389,273

2006

3,018,025

2007

2,635,061

Thereafter

  6,796,214

Total minimum rental commitments

$24,246,850

 

The components of rent expense for noncancellable operating leases are summarized as follows:

Fiscal Year

2002

2001

2000

Minimum rents

$ 5,993,359

$ 6,222,000 

$ 6,133,000 

Percentage rents

473,215

    439,000 

    542,000 

$ 6,466,574

$ 6,661,000 

$ 6,675,000 

(6) Long-term Obligations

Long-term obligations consist of the following:

December 29,
2002

December 30, 2001

Revolving line of credit with a bank, variable interest at the greater of three month London Interbank Offered Rates ("LIBOR") plus 2.50% or 5.00% (5.00% at December 30, 2001)

$5,581,152

$4,974,170 

Term loan with a bank, variable interest at the three-month
    LIBOR plus 2.50% (4.63% at December 30, 2001)

3,583,489

4,934,917 

Bank Loan , Interest fixed at 10% at December 30, 2001

---

      1,970 

9,164,641

9,911,057 

Less current portion

---

(1,228,571)

     Total long-term obligation

$9,164,641

$8,682,486 

 

In February 1999, the Company entered into a 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 from the term loan (approximately $5.4 million) were used to repurchase $1,056,200 shares of the Company’s common stock (see Note 10). The balance of the proceeds under the term loan (approximately $3.2 million) and the proceeds under the revolving line of credit were used to retire indebtedness under the Company’s existing loan agreement. The revolving line of credit expires in March 2003 and initially bears interest at the greater of a floating rate of three month LIBOR plus 2.50% or 5.00%, which is reset quarterly. The term loan also provides for an initial floating rate of interest equal to three month LIBOR plus 2.50% and requires quarterly installments of principal and interest in the amount necessary to fully amortize the outstanding principal balance over a seven-year period, with a final maturity on the fifth anniversary of the note. 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 minimum floating rate is LIBOR plus 1.25% and the maximum floating rate is LIBOR plus 2.50%. Borrowings under this loan agreement are unsecured. The loan agreement does contain certain financial covenants and restrictions. For the year ended December 31, 2000, the Company violated a certain financial commitment relating to a limit on capital expenditures. The bank waived the violation of this covenant.


In March 2001, the Company entered into an additional credit facility with a bank in the amount of $1,000,000 which is available to the Company under a revolving line of credit. The credit facility bears interest at the greater of the prime rate of interest or 5.00% and is set monthly. There is a one-quarter of a percent (0.25%) non-use fee related to this facility. As of December 30, 2001 the Company had no outstanding borrowings under this facility.

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 expired as of November 21, 2002, thus there was no unrealized gain or loss as of December 29, 2002. The unrealized gain as of December 31, 2000 was immaterial. The unrealized loss as of December 30, 2001 was $171,000 and is included in Other Comprehensive Income according to the provisions of SFAS No. 133.

Subsequent to year end, the Company entered into a new credit facility with GE Capital Franchise Finance in the aggregate amount of $15,000,000. $10,000,000 was drawn initially for the purposes of retiring its current credit facility. Another $5,000,000 is restricted and is available under this facility for use upon notice by GE Capital for certain specified purposes. Borrowings are at a rate of 30-day LIBOR plus 3.50%, which is reset monthly. The Company is required to make debt payments annually to reduce the amount outstanding to certain maximum balances. The debt under this agreement is secured by the Company’s furniture, fixtures and equipment. The loan agreement does contain certain financial covenants and restrictions and retirement of the loan is subject to certain prepayment penalties. The Company is in compliance with these covenants as of the date of this report.

Maturities of long-term obligations under the refinanced credit facility at December 29, 2002 are:

2003

--- 

2004

850,000

2005

1,325,000

2006

1,225,000

2007

1,300,000

Thereafter

5,300,000

$10,000,000

 

(7) Related Party Transactions

An affiliate of the Company is providing marketing and advertising services. Total costs incurred for such services (primarily radio, television and print media) were approximately $454,000, $1,297,000 and $1,056,000 in 2002, 2001 and 2000, respectively. A director of the Company is a retired partner in a law firm that provides legal services to the Company. During 2002, 2001 and 2000, the Company incurred approximately $166,635, $184,000 and $208,000, respectively, in legal services with the firm. The Company leases two buildings from affiliates. During 2002, 2001 and 2000 the lease payments related to these buildings were $225,181, $214,000 and $214,000, respectively.


(8) Provision for Impairment of Long-Lived Assets

During 2002, 2001 and 2000, the Company recorded a $2,135,000, $339,000 and $340,000, respectively as a provision for impairment of long-lived assets. As a result of their negative cash flow and of the sales of all of the Garcia’s in all states except Oklahoma and Missouri during 2002, the Company determined that the remaining locations would not be able to realize the full net book value of the related assets. As such, the Company determined the salvage value of the assets at $100,000 per location and recorded a charge to provision for impairment of long-lived assets on the consolidated statement of income for the difference of approximately $2,135,000. The remaining value of $400,000 is classified as furniture and equipment and is included on the consolidated balance sheet as of December 29, 2002.

(9) Income Taxes

The provision (benefit) for income taxes consists approximately of the following (see Note 2):

2002

2001

2000

Current:
     Federal

$   217,000

$    232,000

$    (15,000)

     State

59,000

43,000

91,000 

276,000

275,000

76,000 

Deferred:
     Federal

2,006,000

(575,000)

23,000 

     State

(212,000)

(108,000)

4,000 

1,794,000

(683,000)

27,000 

Provision for income taxes

$ 2,070,000

$  (408,000)

$   103,000 

The components of deferred tax assets and liabilities consist approximately of the following:

December 29,
2002

December 30,
2001

Deferred tax assets:
     Net operating loss carryforwards

$    666,000

$    743,000 

     General business tax credits

2,645,000

1,860,000 

     Alternative minimum tax credit

495,000

583,000 

     Tax depreciation in excess of financial depreciation

135,000

                   ---

     Reserve for restaurant closing

                    ---

48,000 

     Impairment of property and equipment

812,000

                  ---

     Accrued vacation

72,000

72,000 

     Gift certificate liability

158,000

81,000 

     Deferred rent credit

184,000

48,000 

     Other

109,000

    95,000 

          Total deferred tax assets

5,276,000

3,530,000 

Deferred tax liabilities:
     Smallwares expensed for tax purposes

1,230,000

738,000 

     Tax depreciation in excess of financial depreciation

---

462,000 

     Tax amortization in excess of financial amortization

63,000

83,000 

     Other

110,000

    88,000 

          Total deferred tax liabilities

1,403,000

  1,371,000 

     Net deferred tax assets

3,873,000

2,159,000 

     Less: valuation allowance

(3,873,000)

---

     Net deferred tax assets

$               ---

$2,159,000 

At December 29, 2002, the Company has recorded a valuation to fully reserve its net deferred tax assets. Due to historical losses incurred, the timing and amount of future taxable income is uncertain and the Company could not determine that it was more likely than not that such deferred tax assets would be realized. Net operating loss carryforwards do not begin to expire until 2008 and general business tax credits until 2009. It is possible that the Company’s ability to realize the deferred income tax assets could be impaired if there are significant future exercises of non-qualified stock options or the Company were to experience declines in sales and/or profit margins as a result of loss of market share, increased competition or other adverse general economic conditions.


A reconciliation of the provision (benefit) for income taxes follows:

Fiscal Year

2002

2001

2000

Expected tax provision at 34%

$ (1,447,000)

$ (369,000) 

$ 345,000 

Permanent differences

17,000

4,000 

26,000 

State tax provisions (benefits), net of federal benefit

(170,000)

(43,000) 

41,000 

Tax effect of general business tax credits

(380,000)

        --- 

(309,000)

Valuation allowance

3,873,000

        --- 

        --- 

Other, net

177,000

              ---

               ---

Provision (benefit) for income taxes

$ 2,070,000

$ (408,000) 

$ 103,000 

The Company estimates that at December 29, 2002, the federal tax net operating loss carryforward was approximately $1,802,000 which is available for utilization in various years through 2011.

(10) Stockholders’ Equity

The Company has authorized 10,000,000 shares of $.002 par value preferred stock. None of the preferred stock has been issued. The rights, preferences and dividend policy have not been established and are at the discretion of the Company’s Board of Directors.

The Company has authorized 20,000,000 shares of common stock at a par value of $.002 per share.

In May 1989, the Company’s shareholders approved the Eateries, Inc. Omnibus Equity Compensation Plan ("the Plan"), which was amended in June 1994 by approval of the shareholders. The Plan consolidated the Company’s equity based award programs, which are described as follows:

DIRECTOR OPTION PLAN

Non-qualified stock options granted and outstanding include 460,000 director options. Under the Plan, each director receives options to purchase 50,000 shares of common stock upon initial election to the Board of Directors. These options vest over a five-year period at 20% per year and expire five years from the date vested (last expiring in 2007). Any director who has served as a director of the Company for five years, upon election for any additional terms, shall be granted an option to purchase 10,000 shares of common stock for each additional year elected. These options fully vest after one year of additional service by the director and expire five years from the date vested (last expiring in 2007).


MANAGEMENT OPTIONS

Non-qualified stock options granted and outstanding include 575,000 management options, which are vested over three- to five-year periods and expire five years from the date vested (last expiring in 2008). A summary of stock option activity under the Plan is as follows:

Number
of Shares

Exercise Price
Per Share

Weighted
Average
Exercise Price

Outstanding at December 31, 2000 (of which approximately
    639,397 options are exercisable at weighted average
    prices of $3.36)

950,897

$1.00

$6.88

$3.22

Granted

240,000

$2.13

$3.03

$2.57

Options exercised:
     Director

(11,397)

$1.00

$1.00

$1.00

     Management

(3,000)

$2.88

$2.88

$2.88

Forfeited

(201,500)

$2.63

$4.13

$3.26

Outstanding at December 30, 2001 (of which approximately

839,500 options are exercisable at weighted average

prices of $2.39)

975,000

$2.13

$6.88

$3.08

Granted

190,000

$2.30

$3.00

$2.62

Forfeited

(130,000)

$2.63

$4.38

$3.43

Outstanding at December 29, 2002 (of which approximately

945,500 options are exercisable at weighted average

prices of $2.96)

1,035,000

$2.13

$6.88

$2.97

As of December 29, 2002, the Plan provides for issuance of options up to 2,756,742 shares and has 309,076 shares of common stock reserved for future grant under the Plan.

RESTRICTED MANAGEMENT OPTIONS

As of December 30, 2001 and December 31, 2000, there were 210,000 restricted stock options (not granted under the Plan) which had original vesting dates from 1999 to 2004 and expire five to eight years from the date vested (last expiring in 2009). Certain options include an acceleration feature, which allowed for all or a portion of the options to vest in 2000, based on certain performance criteria. Based on these performance criteria, 60,000 of these options vested in 2000. A summary of restricted stock option activity is as follows:

Number
of Shares

Exercise Price
Per Share

Weighted
Average
Exercise Price

Outstanding at December 31, 2000 (of which 20,000 options are

     exercisable at a price of $3.13 per option share and 60,000 are

     exercisable at a price of $6.00 per option share)

170,000 

$  3.13 

$  6.00 

$  5.66 

Granted

150,000 

$  2.50 

$  2.50 

$  2.50 

Forfeited

(110,000) 

$  3.13 

$  6.00 

$  5.48 

Outstanding at December 29, 2002 and December 30, 2001 (of

     which 90,000 options are exercisable at a price of $2.50 per

     option share and 60,000 are exercisable at a price of $6.00 per

     option share)

210,000 

$  2.50 

$  6.00 

$  3.50 

EMPLOYEE STOCK PURCHASE PLAN

In June 1994, the Company’s shareholders approved the Employee Stock Purchase Plan under the Company’s Omnibus Equity Compensation Plan. The Employee Stock Purchase Plan enables substantially all employees to subscribe to shares of common stock on an annual offering date at a purchase price of 85% of the fair market value of the shares on the offering date or, if lower, 85% of the fair market value of the shares on the exercise date, which is one year from the annual offering date. A maximum of 200,000 shares are authorized for subscription over the ten-year term of the plan (30,000 shares reserved for issuance at December 29, 2002, for the offering period ending on November 30, 2002). During 2002 and 2001, 26,585 and 39,252 shares, respectively, were issued under the Plan. The plan was concluded during 2002, as the maximum shares authorized for subscription had been issued.


STOCK BONUS PLAN

The Plan provides for up to 200,000 shares of stock to be awarded to non-executive employees at the Compensation Committee’s discretion over specified future periods of employment. A total of 179,039 shares have been issued under the Plan leaving 20,961 shares available for issuance. No shares were issued during 2002, 2001, or 2000.

TREASURY STOCK TRANSACTIONS

As provided for in each stock option agreement, option holders can satisfy amounts due for the exercise price and applicable required withholding taxes on the exercise by delivery to the Company shares of common stock having a fair market value equal to such amounts due to the Company. During 2000 the Company acquired 10,070 common shares, respectively, in lieu of cash for such amounts due to the Company related to the exercise of stock options.

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. In 2001, an additional 67,500 shares were purchased for an aggregate purchase price of approximately $139,000. In 2002, an additional 32,900 shares were purchased for an aggregate purchase price of approximately $99,000. As of December 29, 2002 a total of 230,662 shares had been repurchased for an aggregate purchase price of approximately $794,000. Subsequent to year end, the Company’s Board of Directors authorized an additional 330,000 shares for repurchase. Remaining shares authorized to be repurchased total 499,338.

In February 1999, the Company’s Board of Directors authorized the repurchase of 1,056,200 shares of its common stock from Astoria Capital Partners, L.P., Montavilla Partners, L.P., and MicroCap Partners L.P. ("Sellers") for a purchase price of $5.125 per share or an aggregate purchase price of $5,413,025. The shares purchased from the Sellers represented 26.7% of the outstanding common stock of the Company, prior to the transaction. The purchase price was financed by the Company through a term loan with a bank (See Note 6).

STOCK PUT AGREEMENTS

In April 1997, the Company entered into stock put agreements with two of its executive officers (who also serve on the Company’s Board of Directors). Under the agreements, in the event of the officer’s death while an employee of the Company, their respective estate or other legal representative has the right (but not the obligation) to compel the Company to purchase all or part of the common stock owned by or under stock option agreements with the deceased officer or the members of their immediate families (i.e. spouse or children) or controlled by any of them through trusts, partnership corporations or other entities on the date of their death. The per share purchase price payable by the Company for common stock purchased under the agreements is the greater of the highest closing stock price during the 60 days preceding the officer’s death or two times the net book value per share as of the last day of the calendar month immediately preceding the officer’s death. In any event, the total purchase price cannot exceed the proceeds payable to the Company from the key man life insurance policy maintained on the life of the respective officer. The maximum commitment as of the date of this report is $3,167,000.

(11) Contingencies

In the ordinary course of business, the Company is subject to legal actions and complaints. In the opinion of management, based in part on the advice of legal counsel, and based on available facts and proceedings to date, the ultimate liability, if any, arising from such legal actions currently pending will not have a material adverse effect on the Company’s financial position or future results of operations.


In the course of disposing of eleven Garcia’s restaurants in 2002, the Company was required by the landlord to remain as guarantor of the tenant lease in order the complete the assignments to the purchasors. The Company was released from its liabilities and commitments, however is contingently liable in the event of default of the Assignees. However, the Company has retained the right to control the operations of the locations if the party should default and recover any amounts paid under the guaranty. The Company’s guarantees will expire at the expiration of the assigned lease terms. At December 29, 2002, the remaining minimum rental commitments under these noncancellable lease commitments by the assignees, excluding amounts related to taxes, insurance, maintenance and percentage rent, are as follows:

2003

$  1,451,812

2004

1,464,508

2005

1,477,780

2006

1,263,762

2007

1,112,550

Thereafter

  3,156,939

Total minimum rental commitments

$9,927,351

 

 

(12) 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, bringing the total to approximately $8,405,000 plus attorney’s fees and costs. In 2002, the Company was awarded an additional $516,000 for attorney’s fees and costs, bringing the total to approximately $8,921,000. As of December 30, 2001, approximately $516,000 was included in accounts receivable for reimbursement of legal fees and was subsequently paid to the Company related to the suit. Both the Company and Simplot have appealed the award. Oral arguments were heard in the Federal Court of Appeals in November 2002. No amounts related to actual damages have been included in Consolidated Stataments of Income. As of the date of this report, the case is on 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.


(13) Quarterly Financial Information (unaudited)

(In thousands except per share data)

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Annual

2002:
Total revenues

$25,808

$23,929

$22,029

$24,487

$96,253

Gross profit

18,795

17,675

16,105

17,895

70,470

Net income (loss)

242

266

(479)

(6,356)

(6,327)

Net income (loss) per common

     share

0.08

0.09

(0.16)

(2.13)

(2.12)

Net income (loss) per common

     share assuming dilution

0.08

0.09

(0.16)

(2.13)

(2.12)

2001:
Total revenues

$25,867 

$23,655 

$23,559 

$26,403 

$99,483 

Gross profit

18,936 

17,188 

17,097 

19,416 

72,637 

Net income (loss)

22 

(661)

(468)

428 

(679) 

Net income (loss) per common

     share

0.01 

(0.22)

(0.16)

0.14 

(0.23) 

Net income (loss) per common
     share assuming dilution

0.01 

(0.22)

(0.16)

0.14 

(0.23) 

2000:
Total revenues

$25,108 

$24,797 

$25,069 

$29,631 

$104,605 

Gross profit

18,295 

18,082 

18,314 

21,595 

76,286 

Net income (loss)

324 

(181)

(361)

1,017 

911 

Net income (loss) per common

     share

0.11 

(0.06)

(0.08)

0.33 

0.30 

Net income (loss) per common

     share assuming dilution

0.10 

(0.06)

(0.08)

0.32 

0.29 


EXHIBIT 99.0

CERTIFICATIONS

 

CHIEF EXECUTIVE OFFICER CERTIFICATION

I, Vincent F. Orza, certify that:

1. I have reviewed this annual report on Form 10-K of Eateries, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: March 4, 2003     By: /s/ VINCENT F. ORZA, JR.

                               Vincent F. Orza, Jr.

                               Chief Executive Officer


CHIEF FINANCIAL OFFICER CERTIFICATION

 

I, Bradley L. Grow, certify that:

1. I have reviewed this annual report on Form 10-K of Eateries, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: March 4, 2003       By: /s/ BRADLEY L. GROW

                                               Bradley L. Grow

                                               Chief Financial Officer

 


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 annual report on Form 10-K for the year ended December 29, 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: March 4, 2003      By: /s/ VINCENT F. ORZA, JR.

                                                                                                                 Vincent F. Orza, Jr.

                                                                                                                 Chief Executive Officer

 

Date: March 4, 2003      By: /s/ BRADLEY L. GROW

                                                                                                                 Bradley L. Grow

                                                                                                                 Chief Financial Officer