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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

 

 

[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Act of 1934 for the Quarterly Period ended

     June 29, 2003.

Commission File Number: 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 S. Santa Fe Ave.

Edmond, Oklahoma

 

73003

(Address of principal executive offices)

(Zip Code)

(405) 705-5000

(Registrant’s telephone number, including area code)

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

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

As of July 24, 2003, 2,822,417 common shares, $.002 par value, were outstanding.

 


EATERIES, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

Page

Part I. FINANCIAL INFORMATION
     Item 1. Financial Statements
          Condensed Consolidated Balance Sheets (unaudited)
               June 29, 2003 and December 29, 2002

4

          Condensed Consolidated Statements of
               Operations (unaudited)
                    Thirteen weeks ended June 29, 2003
                    and June 30, 2002

5

                    Twenty-six weeks ended June 29, 2003
                    and June 30, 2002

6

          Condensed Consolidated Statements of
               Cash Flows (unaudited)
                    Twenty-six weeks ended June 29, 2003
                    and June 30, 2002

7

          Notes to Condensed Consolidated Financial
               Statements (unaudited)

8

     Item 2. Management's Discussion and Analysis of
          Financial Condition and Results of
          Operations

13

     Item 4. Controls and Procedures

20

Part II. OTHER INFORMATION
     Item 6. Exhibits and Reports on Form 8-K

22


 

 

PART I

 

FINANCIAL INFORMATION

 

 


Item 1. Financial Statements

EATERIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

June 29,

December 29,

2003

2002

ASSETS

Current assets:

     Cash and cash equivalents

$ 628,854

$ 794,675

     Receivables

718,736

4,110,230

     Inventories

665,596

716,077

     Prepaid expenses and other

1,571,246

1,066,417

          Total current assets

3,584,432

6,687,399

Property and equipment, at cost

44,856,420

44,907,512

Less: Landlord finish-out allowances

(15,148,866)

(15,543,866)

Less: Accumulated depreciation and amortization

(16,961,572)

(16,312,585)

     Net property and equipment

12,745,982

13,051,061

Goodwill, net

370,191

370,191

Other assets

1,113,621

1,060,403

     Total assets

$ 17,814,226

$ 21,169,054

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
     Accounts payable

$ 3,963,291

$ 5,503,040

     Accrued liabilities

2,884,549

3,934,978

          Total current liabilities

6,847,840

9,438,018

Deferred credit

790,915

1,077,190

Other liabilities

443,541

528,870

Long-term obligations, net of current portion

10,440,000

9,164,641

Commitments and contingencies

---

---

     Total liabilities

18,522,296

20,208,719

Stockholders’ equity:
     Preferred stock, none issued

---

---

     Common stock

9,044

9,044

     Additional paid-in capital

10,370,359

10,370,359

     Accumulated deficit

(3,223,624)

(1,996,727)

     Treasury stock, at cost

(7,863,849)

(7,422,341)

          Total stockholders’ equity

(708,070)

960,335

     Total liabilities and stockholders’ equity

$ 17,814,226

$ 21,169,054

See notes to condensed consolidated financial statements.

EATERIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Thirteen Weeks Ended

June 29,

June 30,

2003

2002

REVENUES

     Food and beverage sales

$ 17,849,591

$ 23,640,297

     Franchise fees and royalties

183,112

166,808

     Other income

162,221

121,951

          Total revenues

18,194,924

23,929,056

COSTS AND EXPENSES

     Costs of sales

4,949,252

6,254,237

     Operating expenses

11,677,140

15,048,058

     Pre-opening costs

60,000

---

     Restaurant closure expenses

160,000

---

     (Gain) loss on disposal of assets

11,325

(356,429)

     General and administrative

1,404,645

1,401,579

     Depreciation and amortization

627,607

1,028,620

     Interest expense

141,075

180,365

          Total costs and expenses

19,031,044

23,556,430

INCOME (LOSS) BEFORE INCOME TAXES

(836,120)

372,626

PROVISION FOR INCOME TAXES

54,672

106,500

NET INCOME (LOSS)

$ (890,792)

$ 266,126

BASIC INCOME (LOSS) PER COMMON SHARE

$ (0.31)

$ 0.09

DILUTED INCOME (LOSS) PER COMMON SHARE

$ (0.31)

$ 0.09

See notes to condensed consolidated financial statements.

EATERIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Twenty-six Weeks Ended

June 29,

June 30,

2003

2002

REVENUES

     Food and beverage sales

$ 36,930,533

$ 49,218,938

     Franchise fees and royalties

402,132

259,717

     Other income

275,129

258,741

          Total revenues

37,607,794

49,737,396

COSTS AND EXPENSES

     Costs of sales

10,293,641

13,267,223

     Operating expenses

23,845,565

30,603,020

     Pre-opening costs

60,000

---

     Restaurant closure expenses

160,000

---

     (Gain) loss on disposal of assets

11,325

(135,236)

     General and administrative

2,830,265

2,835,049

     Depreciation and amortization

1,252,024

2,074,908

     Interest expense

267,142

376,842

          Total costs and expenses

38,719,962

49,021,806

INCOME (LOSS) BEFORE INCOME TAXES

(1,112,168)

715,590

PROVISION FOR INCOME TAXES

114,730

207,500

NET INCOME (LOSS)

$ (1,226,897)

$ 508,090

BASIC INCOME (LOSS) PER COMMON SHARE

$ (0.42)

$ 0.17

DILUTED INCOME (LOSS) PER COMMON SHARE

$ (0.42)

$ 0.17

See notes to condensed consolidated financial statements.

EATERIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Twenty-six Weeks Ended

June 29,

June 30,

2003

2002

Cash flows from operating activities:

     Net income (loss)

$ (1,226,897)

$ 508,090

     Adjustments to reconcile net income (loss) to net cash

     used in operating activities:

          Depreciation and amortization

1,252,024

2,074,908

          Provision for income taxes

---

207,500

          Deferred income taxes

---

(103,301)

          (Gain) loss on disposal of assets

---

(135,236)

          (Increase) decrease in operating assets:

               Receivables

304,564

250,029

               Inventories

50,481

87,124

               Prepaids and other current

(504,829)

(1,005,419)

               Other

(53,618)

8,144

          Increase (decrease) in operating liabilities:
               Accounts payable

(1,539,749)

(2,258,948)

               Accrued liabilities

(1,050,429)

(655,365)

               Other liabilities

(371,604)

438,937

          Total adjustments

(1,913,160)

(1,091,627)

          Net cash used in operating activities

(3,140,057)

(583,537)

Cash flows from investing activities:
     Capital expenditures

(1,086,546)

(1,178,566)

     Landlord allowances

140,000

129,700

     Proceeds from sale of restaurants

3,020,000

500,000

     Payments received on notes receivable

66,931

(150,000)

          Net cash provided by (used in) investing activities

2,140,385

(698,866)

Cash flows from financing activities:
     Borrowings under long-term obligations

10,440,000

---

     Payments on long-term obligations

(3,583,489)

(616,256)

     Borrowings under revolving credit agreements

---

17,897,000

     Payments under revolving credit agreements

(5,581,152)

(16,150,000)

     Purchase of treasury stock

(441,508)

(39,075)

          Net cash provided by financing activities

833,851

1,091,669

Decrease in cash and cash equivalents

(165,821)

(190,734)

Cash and cash equivalents at beginning of period

794,675

999,533

Cash and cash equivalents at end of period

$ 628,854

$ 808,799

See notes to condensed consolidated financial statements.

EATERIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 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 East, 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 trailing twelve months in the period ended June 29, 2003, is as follows:

Company
Units

Franchised
Units

Total
Units

At June 30, 2002

65

11

76

     Units opened

---

---

---

     Units closed

2

1

3

     Units sold

12

---

12

At June 29, 2003

51

10

61

Note 2 – Significant Accounting Policies

BASIS OF PREPARATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the thirteen week period ended June 29, 2003, are not necessarily indicative of the results that may be expected for the year ending December 28, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 29, 2002.

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 will operate a 52-week fiscal year for the year ended December 28, 2003. The Company operated a 52-week fiscal year for the year ended December 29, 2002.

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.

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 2003 and 2002 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 June 29, 2003 and December 29, 2002 are zero. Due to the deferred income tax reserve, it is possible that the Company could have future income without recognizing income tax expense. Additionally, the Company could have charges to income tax expense during periods of net losses.

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:

Thirteen Weeks Ended

June 29,

June 30,

2003

2002

Net income (loss), as reported

$ (890,792)

$ 266,126

Deduct: Total stock-based employee compensation

     expense determined under fair value based method for

     all awards, net of related tax effects

$ (2,340)

$ (114,902)

Pro forma net income (loss)

$ (893,132)

$ 151,224

Earnings (loss) per share
     Basic – as reported

$ (0.31)

$ 0.09

     Basic – pro forma

$ (0.31)

$ 0.05

     Diluted – as reported

$ (0.31)

$  0.09

     Diluted – pro forma

$ (0.31)

$ 0.05

 

Twenty-six Weeks Ended

June 29,

June 30,

2003

2002

Net income (loss), as reported

$ (1,226,897)

$ 508,090

Deduct: Total stock-based employee compensation

     expense determined under fair value based method for

     all awards, net of related tax effects

$ (2,880)

$ (170,239)

Pro forma net income (loss)

$ (1,229,777)

$ 337,851

Earnings (loss) per share
     Basic – as reported

$ (0.42)

$ 0.17

     Basic – pro forma

$ (0.42)

$ 0.11

     Diluted – as reported

$ (0.42)

$  0.17

     Diluted – pro forma

$ (0.42)

$ 0.11


EARNINGS PER SHARE

Basic Earnings Per Share ("EPS") includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. 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 tables set forth the computation of basic and diluted EPS for the twenty-six week periods ended June 29, 2003, and June 30, 2002:

Thirteen Weeks Ended

June 29,

June 30,

2003

2002

Numerator:
                          Net income (loss)

$ (890,792)

$ 266,126

Denominator:

Denominator for basic EPS - weighted average shares outstanding

2,881,043

2,997,169

Dilutive effect of nonqualified stock options

---

108,061

                                           Denominator for diluted EPS

2,881,043

3,105,230

Basic EPS

$ (0.31)

$ 0.09

Diluted EPS

$ (0.31)

$ 0.09

Twenty-six Weeks Ended

June 29,

June 30,

2003

2002

Numerator:
                          Net income (loss)

$ (1,226,897)

$ 508,090

Denominator:

Denominator for basic EPS - weighted average shares outstanding

2,924,230

2,998,743

Dilutive effect of nonqualified stock options

---

64,231

                                           Denominator for diluted EPS

2,924,230

3,062,974

Basic EPS

$ (0.42)

$ 0.17

Diluted EPS

$ (0.42)

$ 0.17


Note 3 - Balance Sheet Information

Receivables are comprised of the following:

June 29,
2003

December 29,
2002

General

$ 107,000

$ 68,000

Vendor rebates

426,000

437,000

Franchisees

109,000

111,000

Banquets

---

129,000

Notes receivable

77,000

219,000

Notes receivable from Fiesta, L.L.C.

---

3,146,000

$ 719,000

$ 4,110,000

Accrued liabilities are comprised of the following:

June 29,

2003

December 29,

2002

Compensation

$ 1,560,000

$ 1,880,000

Taxes, other than income

523,000

695,000

Other

802,000

1,360,000

$ 2,885,000

$ 3,935,000

Note 4 - Supplemental Cash Flow Information

Interest of $260,286 and $375,556 was paid for the thirteen weeks ended June 29, 2003 and June 30, 2002, respectively.

For the twenty-six week periods ended June 29, 2003 and June 30, 2002, the Company had the following non-cash investing and financing activities:

Twenty-six Weeks Ended

June 29,

2003

June 30,

2002

Decrease in accumulated other comprehensive income

$ ---

$111,000

Gross asset retirements related to restaurant closures

602,637

408,048

Decrease in goodwill from sale of restaurant

---

101,000

Increase in notes receivable from finance of sale of restaurant

---

73,720


Note 5 - Stock Repurchases

In April 1997, the Company’s Board of Directors authorized the repurchase of up to 200,000 shares of the Company’s common stock. In September 1997, an additional 200,000 shares were authorized for repurchase. In March 2003, an additional 330,000 shares were authorized for repurchase, bringing the total amount authorized for repurchase to 730,000 shares. During the second quarter, the Company purchased a total of 145,000 shares for $441,508. As of June 29, 2003, 375,662 shares have been repurchased under this plan for a total purchase price of approximately $1,236,000.

Note 6 - Restaurant Acquisitions and Dispositions

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 operating expenses on the consolidated statements of income for the twenty-six weeks ended June 30, 2002.

In June 2002, the Company sold one Garcia’s Mexican Restaurant located in Denver, CO, to the local operator who signed a franchise agreement for this location and a development agreement for two future locations in the Denver area. A gain of approximately $357,000 ($250,000 net of tax) is included in gain on disposal of assets on the consolidated statements of income, which included a goodwill write-off of $101,000. The amount of goodwill written off in the gain calculation was determined by comparing the Company’s estimate of the fair value of the sold location to the fair value of the concept to which the goodwill relates.

In August 2002, the Company sold one Garcia’s located in Carmichael, CA, and one located in Idaho Falls, ID. In November 2002, the Company sole one Garcia’s located in Layton, UT. In December 2002, the Company sold nine Garcia’s located in Arizona for $3,020,000. In conjunction with the sale, the Company retained a short-term note receivable from Fiesta, L.L.C. for the proceeds. During the first quarter, the Company was paid in full for the note.

In January 2003, the Company’s lease expired on one Garfield’s location in Savannah, GA. In June 2003, the Company’s lease expired on one Garfield’s location in Mobile, AL. No gain or loss was associated with these dispositions. In June 2003, the Company paid $160,000 for the future lease termination of one of its locations. This amount was recorded to restaurant closure expense and is included on the consolidated statements of operations for the thirteen week ended June 29, 2003.

Note 7 – 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 to complete the assignments to the purchasers. 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 June 29, 2003, the remaining minimum base rental commitments under these noncancellable lease commitments by the assignees, excluding amounts related to taxes, insurance, maintenance and percentage rent, are approximately $9,201,000.

Note 8 – Long-term Obligations

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. 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 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. These notes were paid in full on December 30, 2002 and the related loan agreements were cancelled.


On December 30, 2002, 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 the current credit facility. Another $5,000,000 is restricted and available under this facility for use upon notice to 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 specific 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. As of June 29, 2003, $10,440,000 was outstanding under this agreement at a rate of 4.8%.

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 had 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 on November 21, 2002, thus there was no unrealized gain or loss as of December 29, 2002 or March 30, 2003. The unrealized loss as of June 30, 2002 was $60,000 and is included in Other Comprehensive Income according to the provisions of SFAS No. 133.

Note 9 – Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51." Interpretation No. 46 requires the consolidation of entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Currently, entities are generally consolidated by an enterprise when it has a controlling financial interest through ownership of a majority voting interest in the entity.

Interpretation No. 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. Interpretation No. 46 may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. The Company does not believe the issuance of Interpretation No. 46 will impact the accounting for its franchisees and/or its guarantee of the remaining lease payments on previously sold Garcia’s locations.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

From time to time, the Company may publish forward-looking statements relating to certain matters including anticipated financial performance, business prospects, the future opening of Company-owned and franchised restaurants, anticipated capital expenditures, and other matters. All statements other than statements of historical fact contained in this Form 10-Q or in any other report of the Company are forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of that safe harbor, the Company notes that a variety of factors, individually or in the aggregate, could cause the Company’s actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company’s forward-looking statements including, without limitation, the following: consumer spending trends and habits; competition in the casual dining restaurant segment; weather conditions in the Company’s operating regions; laws and government regulations; general business and economic conditions; availability of capital; success of operating initiatives and marketing and promotional efforts; and changes in accounting policies. In addition, the Company disclaims any intent or obligation to update those forward-looking statements.

Introduction

As of June 29, 2003, the Company owned and operated 51 locations (45 Garfield’s, 4 Garcia’s, 2 Pepperoni Grills), franchised 10 Garfield’s. As of June 30, 2002, the Company owned and operated 65 locations (47 Garfield’s, 16 Garcia’s, 2 Pepperoni Grills), franchised 9 Garfield’s and one Garcia’s and licensed one Garcia’s. The Company is working with franchisees on the development of restaurants located in Arkansas, Indiana, Florida, Maryland, Michigan, Mississippi, and Nevada. The Company sold 13 of its 17 Garcia’s during 2002. As of the date of this report, the entire system includes 61 restaurants of which 51 are Company-owned. The Company expects that at least 1 company-owned and 1 franchised-owned locations will open in 2003.


The Company has successfully initiated an advertising campaign to seek prospective franchisees. The intention is to find candidates or organizations that have a substantial net worth, a proven track record in multi-unit food service, retail or hospitality, and an interest in developing and operating multiple casual dining restaurants. During the first quarter of 2003, the Company sold two Designated Market Areas ("DMA") to one new franchisee in Mississippi for a total of six future locations. Subsequent to quarter end, the Company sold one DMA to a new franchisee in Arkansas for a total of three future locations. During the second quarter of 2003, the Company sold one DMA to one new franchisee in Maryland for a total of 5 future locations and one DMA to one new franchisee in Michigan for a total of two future locations. As the date of this report, seventy-one new franchise restaurants are under commitment.

The Company’s uniform franchise offering circular (called the UFOC that contains the franchise and development agreement) is registered nationally.

The Company’s marketing strategies are focused around one central theme, enhancing the guest experience in all the Company concepts. Each program is designed with the guest in mind, to develop concept marketing plans to improve guest satisfaction in the areas of food, value, and service. The Company continues to offer a broad range of products that guests’ desire while striving to deliver the food in a fast and friendly manner. Utilizing multiple mediums such as television, local cable, radio, outdoor and print, the Company is able to deliver messages to the guest in the most efficient way. The restaurant managers are also encouraged to be involved in the community and to use proven local store marketing programs to drive their business. Key priorities for the remainder of 2003 include enhancing brand image along with developing menus that please the customer and improve the company bottom line at the same time.

Seasonality

With 49 of the 51 Company-owned restaurants located in regional malls as of June 29, 2003, 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, cash flow from operations and profits in the Company’s fourth and first fiscal quarters.

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. 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 Statements 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.


Percentage Results of Operations and Restaurant Data

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

THIRTEEN WEEKS

ENDED

TWENTY-SIX WEEKS

ENDED

June 29,

2003

June 30,

2002

June 29,

2003

June 30,

2002

Statements of Operations Data:

Revenues:

     Food and beverage sales

98.1%

98.8%

98.2%

99.0%

     Franchise fees and royalties

1.0%

0.7%

1.1%

0.5%

     Other income

0.9%

0.5%

0.7%

0.5%

100.0%

100.0%

100.0%

100.0%

Costs and Expenses:

     Costs of sales (1)

27.7%

26.5%

27.9%

27.0%

     Operating expenses (1)

65.4%

63.7%

64.5%

62.2%

     Restaurant pre-opening expenses (1)

0.3%

0.0%

0.2%

0.0%

     Restaurant closure expense (1)

0.9%

---

0.4%

---

     (Gain) loss on disposal of assets

0.1%

(1.5)%

0.0%

(0.3)%

     General and administrative

7.7%

5.9%

7.5%

5.7%

     Depreciation and amortization (1)

3.5%

4.4%

3.4%

4.2%

     Interest expense

0.8%

0.8%

0.7%

0.8%

Income (loss) before income taxes

(4.6)%

1.6%

(3.0)%

1.4%

Provision for income taxes

0.3%

0.4%

0.3%

0.4%

Net income (loss)

(4.9)%

1.2%

(3.3)%

1.0%

Selected Operating Data:

System-wide sales (in thousands)(2):

     Company restaurants

$17,850

$23,640

$36,930

$49,219

     Franchise restaurants

3,550

3,716

7,449

6,149

          Total

$21,400

$27,356

$44,379

$55,368

Number of restaurants

(at end of period):

     Company restaurants

51

65

51

65

     Franchise restaurants

10

11

10

11

          Total

61

76

61

76

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

(2) System-wide sales are calculated by adding Company and franchise sales together. However, franchise sales are not included in food and beverage sales on the Consolidated Statements of Operations.


Results of Operations

For the quarter ended June 29, 2003, the Company recorded a net loss of $(890,792) (($0.31) per common share) on revenues of $18,194,924. This compares to net income of $266,126 ($0.09 per common share) for the quarter ended June 30, 2002, on revenues of $23,929,056.

For the twenty-six weeks ended June 29, 2003, the Company recorded a net loss of $(1,226,897) (($0.42) per common share) on revenues of $37,607,794. This compares to net income of $508,090 ($0.17 per common share) for the twenty-six weeks ended June 30, 2002, on revenues of $49,737,396.

 

Revenues

Company revenues for the thirteen and twenty-six week periods ended June 29, 2003, decreased 24.0% over the revenues reported for the same periods in 2002. The revenue decrease relates primarily to the sale of thirteen Garcia’s in 2002 as well as negative economic trends in the first half of 2003. The number of Company restaurants operating at the end of each respective period and the number of operating weeks during each period were as follows:

Number of Operating Weeks

Average Weekly Sales Per Unit

Period

Ended

Number of

Units Open

Thirteen

Weeks

Twenty-

six Weeks

Thirteen Weeks

Twenty-

six Weeks

Garfield’s:
June 29, 2003

45

596

1207

$27,197

$27,769

June 30, 2002

48

624

1248

$26,761

$28,024

Garcia's:
June 29, 2003

4

52

104

$15,612

$16,685

June 30, 2002

15

206

414

$29,338

$30,088

Pepperoni Grill:
June 29, 2003

2

26

52

$31,850

$32,261

June 30, 2002

2

26

52

$32,884

$33,107

For the thirteen weeks ended June 29, 2003, average weekly sales per unit for Garfield's increased $436 or 1.6% versus the quarter ended June 30, 2002. Average weekly sales per unit for Garfield’s decreased by $(255) or 0.9% for the twenty-six weeks ended June 29, 2003, versus the previous year’s results.

For the thirteen weeks ended June 29, 2003, average weekly sales per unit for Garcia’s decreased $(13,726) or 46.8% versus the quarter ended June 30, 2002. Average weekly sales per unit for Garcia’s decreased by $(13,403) or 44.5% for the twenty-six weeks ended June 29, 2003, versus the previous year. This decrease is primarily due to the sale of thirteen higher volume units in 2002.

For the thirteen weeks ended June 29, 2003, average weekly sales per unit for Pepperoni Grill decreased $(1,034) or 3.1% versus the same period in 2002. Average weekly sales per unit for Pepperoni Grill decreased by $(846) or 2.6% for twenty-six weeks ended June 29, 2003, versus the previous year. This decrease is primarily due to adverse economic conditions.

Franchise fees and continuing royalties increased to $402,132 during the twenty-six weeks ended June 29, 2003 versus $259,717 during the twenty-six weeks ended June 30, 2002. This increase is due to the opening of five new franchise locations in 2002 as well as the execution of three new development agreements during 2003.


Costs and Expenses

The following is a comparison of costs of sales and labor costs (excluding payroll taxes and fringe benefits) as a percentage of food and beverage sales at Company-owned restaurants:

Thirteen Weeks Ended

Twenty-six Weeks Ended

June 29,

2003

June 30,

2002

June 29,

2003

June 30,

2002

Garfield's:

     Costs of sales .

27.6%

26.8%

27.8%

27.5%

     Labor costs

28.3%

29.1%

27.8%

28.1%

          Total

55.9%

55.9%

55.6%

55.6%

Garcia's:

     Cost of sales

29.9%

25.6%

29.9%

25.7%

     Labor costs

41.3%

30.5%

39.0%

29.8%

          Total

70.4%

56.1%

68.9%

55.5%

Pepperoni Grill:

     Cost of sales

26.8%

25.4%

27.5%

25.7%

     Labor costs

30.9%

29.3%

30.7%

29.4%

          Total

57.7%

54.7%

58.2%

55.1%

Total Company:

     Cost of sales

27.7%

26.5%

27.9%

27.0%

     Labor costs

29.0%

29.5%

28.5%

28.6%

          Total

56.7%

56.0%

56.4%

55.6%

 

Costs of sales as a percentage of food and beverage sales for Garfield’s in the quarters ended June 29, 2003 and June 30, 2002 was 27.6% and 26.8% respectively. Costs of sales for the twenty-six weeks ended June 29, 2003 and June 30, 2002 were 27.8% and 27.5%, respectively. The increase is primarily due to new higher cost items on the menu.

Garcia’s costs of sales as a percentage of food and beverage sales was 29.9% in the quarter ended June 29, 2003 versus 25.6% in the quarter ended June 30, 2002, and 29.9% and 25.7% for the twenty-six weeks ended June 29, 2003 and June 30, 2002, respectively. This increase is primarily due to the sale of 13 Garcia’s locations in 2002 which had lower cost of sales than the mall-based units.

Costs of sales as a percentage of food and beverage revenue for Pepperoni Grill was 26.8% for the quarter ended June 29, 2003 compared to 25.4% for the quarter ended June 30, 2002, and 27.5% and 25.7% for the twenty-six weeks ended June 29, 2002 and June 30, 2002, respectively. This increase is primarily due to the addition of several new seafood items.

Labor costs for Garfield’s decreased to 28.3% of food and beverage sales during the quarter ended June 29, 2003, versus 29.1% during the 2002 comparable period due to better management labor control.

Garcia’s labor costs increased to 41.3% of food and beverage sales during the quarter ended June 29, 2003, versus 30.5% in the quarter ended June 30, 2002. This increase is due to the sale of thirteen locations with overall higher sales volumes and lower labor costs.

Labor cost in Pepperoni Grill was 30.9% during the quarter ended June 29, 2003 versus 29.3% during the 2002 comparable period. This increase is due to lower sales compared with its consistent fixed labor costs for kitchen labor and management.


For the thirteen weeks ended June 29, 2003, operating expenses as a percentage of food and beverage sales increased to 65.4% from 63.7% in the thirteen weeks ended June 30, 2002. For the twenty-six weeks ended June 29, 2003, operating expenses increased to 64.6% of food and beverage sales versus 62.2% in the 2002 period. This increase is primarily related to constant fixed costs compared to lower revenues and higher promotional costs.

During the thirteen and twenty-six week periods ended June 29, 2003 and June 30, 2002, general and administrative costs as a percentage of total revenues changed to 7.7% and 7.5% from 5.9% and 5.7%respectively. The increase is primarily due to a management agreement to provide general and administrative services to the buyers of Garcia’s through July, 2003.

For the thirteen weeks ended June 29, 2003, depreciation and amortization expense was $627,607 (3.5% of food and beverage sales) compared to $1,028,620 (4.4% of food and beverage sales) in the thirteen weeks ended June 30, 2002. For the twenty-six weeks ended June 29, 2003, depreciation and amortization expense was $1,252,024 (3.4% of food and beverage sales) compared to $2,074,908 (4.2% of food and beverage sales in the twenty-six weeks ended June 30, 2002. This decrease is due to the sale of thirteen Garcia’s in 2002 which had higher depreciation charges per location than other Company locations and the write down in 2002 on the remaining Garcia’s assets.

For the thirteen weeks ended June 29, 2003 interest expense decreased to $141,075 (0.8% of total revenues) from $180,365 (0.8% of total revenues) for the thirteen weeks ended June 30, 2002. For the twenty-six week period ended June 29, 2003, interest expense decreased to $267,142 (0.7% of total revenues) from $376,842 (0.8% of total revenues) in the comparable 2002 period. The decrease primarily related to lower interest rates, average debt balance and the expiration of the swap agreement in 2002 which was fixed at 7.65%.

Income Taxes

The Company's provision for income taxes was $54,672 and $114,730 for the thirteen and twenty-six weeks ended June 29, 2003, versus $106,500 and $207,500, respectively, for the 2002 comparable period. The effective tax rates for the periods ended June 29, 2003 and June 30, 2002, are as follows:

 

Thirteen Weeks

Twenty-six Weeks

June 29,

June 30

June 29,

June 30

2003

2002

2003

2002

Effective income tax rates

6.5%

28.6%

10.3%

29.0%

Effective income tax rates are lower during periods with net income due to the large amount of FICA tax credits on tipped employees that the Company is allowed as a reduction of its calculated income tax liability.

Earnings Per Share ("EPS")

Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. The weighted-average common shares outstanding for the basic EPS calculation were 2,881,043 and 2,997,169 in the quarters ended June 29, 2003 and June 30, 2002, respectively and 2,924,230 and 2,998,743 in the twenty-six weeks ended June 29, 2003 and June 30, 2002, respectively. Diluted EPS is computed by dividing net income available to common stockholders by the sum of the weighted-average number of common shares outstanding for the period plus dilutive common stock equivalents. The sum of the weighted-average common shares and common share equivalents for the diluted EPS calculation was 2,949,056 and 3,105,230 in the quarters ended June 29, 2003 and June 30, 2002, respectively, and 2,959,288 and 3,062,974 in the twenty-six weeks ended June 29, 2003 and June 30, 2002, respectively. Diluted EPS is not calculated for periods where the Company had a net loss as the result would be antidilutive.


Impact of Inflation

The impact of inflation on the costs of food and beverage products, labor and real estate can affect the Company's operations. Over the past few years, inflation has had a lesser impact on the Company's operations due to the lower rates of inflation in the nation's economy and the economic conditions in the Company's market areas.

Management believes the Company has historically been able to pass on increased costs through certain selected menu price increases and increased productivity and purchasing efficiencies, however there can be no assurance that the Company will be able to do so in the future. Market conditions will determine the Company's ability to pass through such additional costs and expenses. Management anticipates that the average cost of restaurant real estate leases and construction costs could increase in the future which could affect the Company's ability to expand. In addition, mandated health care and an increase in the Federal or state minimum wages could significantly increase the Company's costs of doing business. Due to accounting standards requiring expensing pre-opening costs as incurred, income from operations, on an annual and quarterly basis, could be adversely affected during periods of restaurant development; however, the Company believes that its initial investment in the restaurant pre-opening costs yields a long-term benefit of increased operating income in subsequent periods.

Liquidity and Capital Resources

At June 29, 2003, the Company’s current ratio was 0.52 to 1 compared to 0.71 to 1 at December 29, 2002. The Company’s working capital deficit was $(3,263,408) at June 29, 2003 versus $(2,750,619) at December 29, 2002. As is customary in the restaurant industry, the Company has operated with negative working capital and has not required large amounts of working capital. Historically, the Company has leased the majority of its restaurant locations and through a strategy of controlled growth, financed its expansion from operating cash flow, proceeds from the sale of common stock and utilizing the Company’s credit facility.

Although the Company has sustained losses in each of the first two quarters of 2003, management believes the cash generated from its operations and borrowing availability under its credit facility (described below), will be sufficient to satisfy the Company’s net capital expenditures and working capital requirements during 2003. Additionally, management believes that the decision to sell Garcia’s enhanced its liquid resources. In 2003, management began certain transitional steps to reduce general and administrative costs, associated with the operations of Garcia’s, which should be completed and positively affect earnings by year-end. Additionally, sales trends have recently returned to better than historical levels. Should this continue, the Company’s financial condition should continue to strengthen. At June 29, 2003, the Company has $4,560,000 available for use under its credit facility with GE Capital.

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. The revolving line of credit 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. These notes were paid in full on December 30, 2002 and the related loan agreements were cancelled.

On December 30, 2002, 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 was restricted and available under this facility for use upon notice to 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 specific 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. Non-compliance with these covenants could affect the Company’s ability to borrow under the terms of the credit facility. As of June 29, 2003, $10,440,000 was outstanding under this agreement at a rate of 4.8%.


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 had 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 on November 21, 2002, thus there was no unrealized gain or loss as of December 29, 2002 or June 29, 2003. The unrealized loss as of March 31, 2002 was $84,000 and is included in Other Comprehensive Income according to the provisions of SFAS No. 133.

In April 1997, the Company’s Board of Directors authorized the repurchase of up to 200,000 shares of the Company’s common stock. In September 1997, an additional 200,000 shares were authorized for repurchase. In March 2003, an additional 330,000 shares were authorized for repurchase, bringing the total amount authorized for repurchase to 730,000 shares. During the second quarter, the Company purchased a total of 145,000 shares for $441,508. As of June 29, 2003, 375,662 shares have been repurchased under this plan for a total purchase price of approximately $1,236,000.

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.

 

Item 4. Controls and Procedures

Evaluation of Disclosure controls and Procedures

We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the reports we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the rules of the SEC. Within 90 days prior to the filing of this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the design and operation of these disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including our consolidated subsidiaries) required to be included in our periodic SEC filings.

Changes in Internal controls

There were no significant changes in internal controls or other factors that could significantly affect our internal controls subsequent to the date of our evaluation.


 

 

PART II

OTHER INFORMATION

 

 


Item 6. Exhibits and Reports on Form 8-K.

 

(a)  Exhibits:

(1) Officer certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b)  During the twenty-six weeks ended June 29, 2003, the following reports on Form 8-K were filed:

(a)   On January 7, 2003, a report on Form 8-K was filed, reporting the Company’s     disposition of most of its Garcia’s restaurants. On March 29, 2003, an amendment to this report on Form 8-K was filed which contained pro forma financial information for the Company as of December 29, 2002.

(b)   On March 21, 2003, a report on Form 8-K was filed, setting forth a press release issued by the Company regarding financial results for the year ended December 29, 2002.

(c)   On April 17, 2003, a report on Form 8-K was filed, setting forth a press release issued by the Company regarding delisting from Nasdaq Small Cap Market.

(d)   On April 29, 2003, a report on Form 8-K was filed, setting forth a press release issued by the Company regarding listing on the OTC Bulletin Board.

(e)   On May 6, 2003, a report on Form 8-K was filed, setting forth a press release issued by the Company regarding financial results for the quarter ended March 30, 2003.


SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EATERIES, INC.

Registrant

Date: July 30, 2003

By: /s/ BRADLEY L. GROW

Bradley L. Grow

Vice President

Chief Financial Officer

 


CERTIFICATION

 

I, Vincent F. Orza, certify that:

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

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation Date"); and

c) presented in this quarterly 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 quarterly 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: July 30, 2003

By: /s/ VINCENT F. ORZA, JR.

Vincent F. Orza, Jr.

Chief Executive Officer


CERTIFICATION

 

I, Bradley L. Grow, certify that:

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

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation Date"); and

c) presented in this quarterly 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 quarterly 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: July 30, 2003

By: /s/ BRADLEY L. GROW

Bradley L. Grow

Chief Financial Officer


Exhibit (a)(1)

OFFICER CERTIFICATIONS

 

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, being the duly elected and appointed chief executive officer and chief financial officer of Eateries, Inc., an Oklahoma corporation (the "Company"), hereby certify that to the best of their knowledge and belief:

1. The Company’s quarterly report on Form 10-Q for the quarter ended June 29, 2003 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: July 30, 2003

By: /s/ VINCENT F. ORZA, JR.

Vincent F. Orza, Jr.

Chief Executive Officer

Date: July 30, 2003

By: /s/ BRADLEY L. GROW

Bradley L. Grow

Chief Financial Officer