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 forthe Quarterly Period ended

September 28, 2003.

| Commission File Number:    0-14968                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  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| **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 reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months, and (2) has been subject to such filing requirements for the past90 days. **Yes X No____
Indicate by check mark whether the registrant is an acceleratedfiler (as defined in Rule 12b-2 of the Act). Yes ___ No _X__

As of October 21, 2003, 2,702,728 common shares, $.002par value, were outstanding. **EATERIES,    INC. AND SUBSIDIARIES

FORM 10-Q**
INDEX
PagePart I. FINANCIAL    INFORMATION        Item 1. Financial Statements             Condensed Consolidated Balance Sheets (unaudited)                  September 28, 2003 and December 29, 2002 
4             Condensed Consolidated Statements of                  Operations (unaudited)                       Thirteen weeks ended September 28, 2003                       and September 29, 2002 
5                       Thirty-nine weeks ended September 28, 2003                       and September 29, 2002 
6             Condensed Consolidated Statements of                  Cash Flows (unaudited)                       Thirty-nine weeks ended September 28, 2003                  and September 29, 2002 
7             Notes to Condensed Consolidated Financial                  Statements (unaudited) 
8        Item 2. Management's Discussion and Analysis of             Financial Condition and Results of             Operations 
14        Item 4. Controls and Procedures 
20Part 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)
September    28,
December    29,
2003
2002**ASSETS**
Current    assets:
     Cash    and cash equivalents
$ 791,090
$ 794,675    
     Receivables
799,046
4,110,230
     Inventories
659,306
716,077
     Prepaid    expenses and other
897,705
1,066,417
          Total    current assets
3,147,147
6,687,399Property and equipment, at    cost
45,793,072
44,907,512Less: Landlord finish-out    allowances
(15,423,866)
(15,543,866)Less: Accumulated    depreciation and amortization
(17,590,277)
(16,312,585)        Net property and equipment
12,778,929
13,051,061Goodwill, net
370,191
370,191Other assets
1,161,676
1,060,403        Total assets
$ 17,457,943 
$ 21,169,054**LIABILITIES AND    STOCKHOLDERS’ EQUITY (DEFICIT)**Current liabilities:        Accounts payable
$    3,380,617
$    5,503,040         Accrued liabilities
2,984,302
3,934,978             Total current liabilities
6,364,919
9,438,018Deferred credit
635,089
1,077,190Other liabilities
361,956
528,870Long-term obligations, net    of current portion
11,510,000
9,164,641Commitments and    contingencies
---
---             Total liabilities
18,871,964
20,208,719Stockholders’ equity    (deficit):        Preferred stock, none issued
---
---        Common stock
9,044
9,044        Additional paid-in capital
10,370,359
10,370,359        Accumulated deficit
(3,528,708)
(1,996,727)        Treasury stock, at cost
(8,264,716)
(7,422,341)             Total stockholders’ equity (deficit)
(1,414,021)
960,335Total liabilities and    stockholders’ equity (deficit)
$ 17,457,943
$ 21,169,054See notes to condensed    consolidated financial statements.**EATERIES,    INC. AND SUBSIDIARIES**CONDENSED    CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Thirteen Weeks Ended
September    28,
September    29,
2003
2002**REVENUES**
        Food and beverage sales
$    18,374,997 
$    21,753,474 
        Franchise fees and royalties
153,744
164,252
        Other income
122,376
111,486
             Total revenues
18,651,117
22,029,212**COSTS    AND EXPENSES
        Costs of sales
5,161,160
5,924,638        Operating expenses
11,574,629
14,453,118        Pre-opening costs
140,000
---        (Gain) loss on disposal of assets
5,000
(258,429)        General and administrative
1,415,217
1,407,723        Depreciation and amortization
643,017
1,004,316        Interest expense
126,338
172,326             Total costs and expenses
19,065,361
22,703,692**LOSS BEFORE INCOME    TAXES**
(414,244)
(674,480)**BENEFIT FROM INCOME    TAXES**
109,160
195,500**NET LOSS**
$ (305,084) 
$ (478,980) **BASIC LOSS PER COMMON    SHARE**
$ (0.11) 
$ (0.16) **DILUTED LOSS PER COMMON    SHARE**
$ (0.11) 
$ (0.16) See notes to condensed    consolidated financial statements.**EATERIES,    INC. AND SUBSIDIARIES**CONDENSED    CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Thirty-nine Weeks Ended
September    28,
September    29,
2003
2002**REVENUES**
        Food and beverage sales
$    55,305,530 
$    70,972,412 
        Franchise fees and royalties
555,875
423,969
        Other income
397,505
370,226
             Total revenues
56,258,910
71,766,607**COSTS    AND EXPENSES
        Costs of sales
15,454,801
19,191,861        Operating expenses
35,420,193
45,056,138        Pre-opening costs
200,000
---        Restaurant closure expenses
160,000
---        (Gain) loss on disposal of assets
16,325
(393,665)        General and administrative
4,245,482
4,242,772        Depreciation and amortization
1,895,041
3,079,224        Interest expense
393,480
549,167             Total costs and expenses
57,785,322
71,725,497**INCOME (LOSS) BEFORE    INCOME TAXES**
(1,526,412)
41,110**PROVISION FOR INCOME    TAXES**
(5,570)
(12,000)**NET INCOME (LOSS)**
$ (1,531,982) 
$ 29,110 **BASIC INCOME (LOSS) PER    COMMON SHARE**
$ (0.53) 
$ 0.01 **DILUTED INCOME (LOSS)    PER COMMON SHARE**
$ (0.53) 
$ 0.01 See notes to condensed    consolidated financial statements.**EATERIES,    INC. AND SUBSIDIARIES**CONDENSED    CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirty-nineWeeks Ended
September    28,
September    29,
2003
2002Cash flows from operating    activities:
        Net income (loss)
$    (1,531,982) 
$ 29,110 
        Adjustments to reconcile net income (loss) to net cash 
        used in operating activities:
             Depreciation and amortization
1,895,041
3,079,224
             Provision for income taxes
---
12,000
             Deferred income taxes
---
(112,262)
             (Gain) loss on disposal of assets
16,325
(393,665)
             (Increase) decrease in operating assets:
                  Receivables
213,169
413,412                  Inventories
56,771
159,057                  Prepaids and other current
168,712
(85,272)                  Other
(101,672)
47,685             Increase (decrease) in operating liabilities:                  Accounts payable
(2,122,423)
(3,363,520)                  Accrued liabilities
(950,676)
(646,029)                  Other liabilities
(609,015)
282,632             Total adjustments
(1,433,768)
(606,738)             Net cash used in operating activities
(2,965,750)
(577,628)Cash flows from investing    activities:        Capital expenditures
(2,053,834)
(1,584,533)        Landlord allowances
415,000
129,700        Proceeds from sale of restaurants
3,020,000
1,250,000        Payments made for lease termination
---
(210,000)        Payments received on notes receivable
78,015
5,549             Net cash provided by (used in) investing activities
1,459,181
(409,284)Cash flows from financing    activities:        Borrowings under long-term obligations
11,510,000
---        Payments on long-term obligations
(3,583,489)
(1,044,286)        Borrowings under revolving credit agreements
---
23,997,000        Payments under revolving credit agreements
(5,581,152)
(22,000,000)        Purchase of treasury stock
(842,375)
(99,099)             Net cash provided by financing activities
1,502,984
853,615Decrease in cash and cash    equivalents
(3,585)
(133,297)Cash and cash equivalents    at beginning of period
794,675
999,533Cash and cash equivalents    at end of period
$ 791,090 
$ 866,236 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 thelaws 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 franchisedrestaurants. The Company’s restaurants are located primarily in the East, Southwest,Midwest and Southeast regions of the United States. The Company’s restaurants operateunder the name Garfield’s Restaurant & Pub ("Garfield’s"),Pepperoni Grill andGarcia’s Mexican Restaurants("Garcia’s"). An analysis of Company-owned and franchised restaurants forthe trailing twelve months in the period ended September 28, 2003, is as follows:
Company    Units
Franchised    Units
Total    UnitsAt September 29, 2002 
63
13
76        Units opened 
1
0
1        Units closed 
(3)
(1)
(4)        Units sold 
(10)
(2)
(12)At September 28, 2003 
51
10
61
Note 2 – Significant Accounting Policies

BASIS OF PREPARATION

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with generally accepted accounting principles for interimfinancial information and with the instructions to Form 10-Q and Article 10 of RegulationS-X. Accordingly, they do not include all of the information and footnotes required bygenerally accepted accounting principles for complete financial statements. In the opinionof management, all adjustments (consisting of normal recurring accruals) considerednecessary for a fair presentation have been included. Operating results for the thirteenweek period ended September 28, 2003, are not necessarily indicative of the results thatmay be expected for the year ending December 28, 2003. For further information, refer tothe consolidated financial statements and footnotes thereto included in the Company'sAnnual 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. Allsignificant intercompany transactions and balances have been eliminated.

FISCAL YEAR

The Company’s fiscal year is a 52/53-week year ending on the lastSunday in December. The Company will operate a 52-week fiscal year for the year endedDecember 28, 2003. The Company operated a 52-week fiscal year for the year ended December29, 2002.

REVENUE

Revenue from food and beverage sales is recorded at the date servicesare 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 restaurantbasis for indicators of impairment whenever events or circumstance indicate that thecarrying value of its restaurants may not be recoverable. The Company’s primary testfor an indicator of potential impairment is operating losses. In order to determinewhether an impairment has occurred, the Company estimates the future net cash flowsexpected to be generated from the use of its restaurants and the eventual disposition, asof the date of determination, and compares such estimated future cash flows to therespective carrying amounts. Those restaurants, which have carrying amounts in excess ofestimated future cash flows, are deemed impaired. The carrying value of these restaurantsis adjusted to an estimated fair value by discounting the estimated future cash flowsattributable to such restaurants using a discount rate equivalent to the rate of returnthe Company expects to achieve from its investment in newly-constructed restaurants. Theexcess is charged to expense and cannot be reinstated (See Note 8).

Considerable management judgment and certain significant assumptionsare necessary to estimate future cash flows. Significant judgments and assumptions used bythe 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 operatingthe assets, the length of time the assets will be utilized and the Company’s abilityto utilize equipment, fixtures and other moveable long-lived assets in other existing orfuture locations. In addition, such estimates and assumptions include anticipatedoperating results related to certain profit improvement programs implemented by theCompany during 2003 and 2002 as well as the continuation of certain rent reductions,deferrals, and other negotiated concessions from certain landlords. Actual results couldvary significantly from management’s estimates and assumptions and such variancecould result in a change in the estimated recoverability of the Company’s long-livedassets. Accordingly, the results of the changes in those estimates could have a materialimpact 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 temporarydifferences, existing net operating loss and tax credit carryforwards. The tax effect ismeasured using the enacted marginal tax rates and laws that will be in effect when thedifferences and carryforwards are expected to be reversed or utilized. Temporarydifferences consist principally of depreciation caused by using different lives forfinancial and tax reporting, the expensing of smallwares when incurred for tax purposeswhile such costs are capitalized for financial purposes and the expensing of costs relatedto restaurant closures and other disposals for financial purposes prior to being deductedfor tax purposes. The Company has fully reserved for its deferred income taxes, thus netdeferred tax assets at September 28, 2003 and December 29, 2002 are zero. Due to thedeferred income tax reserve, it is possible that the Company could have future incomewithout recognizing income tax expense. Additionally, the Company could have charges toincome tax expense during periods of net losses.

STOCK-BASED COMPENSATION

As permitted by SFAS 123, "Accounting for Stock-BasedCompensation," the Company has elected to follow Accounting Principles Board OpinionNo. 25, "Accounting for Stock Issued to Employees" ("APB 25"), andrelated interpretations in accounting for its employee stock options because thealternative fair value accounting provided for under SFAS 123, requires use of optionvaluation models that were not developed for use in valuing employee stock options. UnderAPB 25, because the exercise price of the Company’s employee stock options equals themarket price of the underlying stock on the date of grant, no compensation expense isrecognized.

Following are pro forma net income and earnings per share as if theCompany 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 thedate of grant using a Black-Scholes option pricing model with the following weightedaverage assumptions for 2002, 2001 and 2000, respectively: risk-free interest rates of4.29%, 4.72% and 4.85% a dividend yield of 0%; volatility factors of the expected marketprice of the Company’s common stock of .45%, .45% and .90 and a weighted averageexpected life of the options of 7.5 years. The weighted average grant date fair value ofoptions 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 inestimating the fair value of traded options, which have no vesting restrictions and arefully transferable. In addition, option valuation models require the input of highlysubjective assumptions including the expected stock price volatility. Because theCompany’s employee stock options and stock purchase plan have characteristicssignificantly different from those of traded options, and because changes in thesubjective input assumptions can materially affect the fair value estimate, inmanagement’s opinion, the existing models do not necessarily provide a reliablesingle 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 theoptions is amortized to expense over the options’ vesting period. The Company’spro forma information follows:************************ |