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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 September 28, 2003. 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 (Registrants
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 October 21, 2003
Commission File Number:
0-14968
EATERIES, INC. AND SUBSIDIARIES FORM 10-Q INDEX |
|
Page |
|
Part 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 | 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) |
||||
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 |
6,687,399 |
||
Property and equipment, at cost | 45,793,072 |
44,907,512 |
||
Less: 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 |
13,051,061 |
||
Goodwill, net | 370,191 |
370,191 |
||
Other 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 |
9,438,018 |
||
Deferred credit | 635,089 |
1,077,190 |
||
Other liabilities | 361,956 |
528,870 |
||
Long-term obligations, net of current portion | 11,510,000 |
9,164,641 |
||
Commitments and contingencies | --- |
--- |
||
Total liabilities | 18,871,964 |
20,208,719 |
||
Stockholders 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) |
960,335 |
||
Total liabilities and stockholders equity (deficit) | $ 17,457,943 |
$ 21,169,054 |
||
See 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-nine Weeks Ended |
||||
September 28, |
September 29, |
|||
2003 |
2002 |
|||
Cash 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 |
853,615 |
||
Decrease in cash and cash equivalents | (3,585) |
(133,297) |
||
Cash and cash equivalents at beginning of period | 794,675 |
999,533 |
||
Cash 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 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 Companys restaurants are located primarily in the East, Southwest, Midwest and Southeast regions of the United States. The Companys restaurants operate under the name Garfields Restaurant & Pub ("Garfields"), Pepperoni Grill and
Garcias Mexican Restaurants ("Garcias"). An analysis of Company-owned and franchised restaurants for the trailing twelve months in the period ended September 28, 2003, is as follows:Company |
Franchised |
Total |
||||||||
At 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 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 September 28, 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 Companys 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 Companys 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 Companys 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 Companys 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 managements estimates and assumptions and such variance could result in a change in the estimated recoverability of the Companys long-lived assets. Accordingly, the results of the changes in those estimates could have a material impact on the Companys 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 September 28, 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 Companys 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 Companys 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 Companys 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 managements 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 Companys pro forma information follows:
Thirteen Weeks Ended |
||||
September 28, |
September 29, |
|||
2003 |
2002 |
|||
Net loss, as reported | $ (305,084) |
$ (478,980) |
||
Deduct: Total
stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
$ 1,904 |
$ 27,726 |
||
Pro forma net loss | $ (306,988) |
$ (506,706) |
||
Loss per share | ||||
Basic as reported | $ (0.11) |
$ (0.16) |
||
Basic pro forma | $ (0.11) |
$ (0.17) |
||
Diluted as reported | $ (0.11) |
$ (0.16) |
||
Diluted pro forma | $ (0.11) |
$ (0.17) |
Thirty-nine Weeks Ended |
||||
September 29, |
September 28, |
|||
2003 |
2002 |
|||
Net income (loss), as reported | $ (1,531,982) |
$ 29,110 |
||
Deduct: Total
stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
$ 4,784 |
$ 197,965 |
||
Pro forma net loss | $ (1,536,766) |
$ (168,855) |
||
Earnings (loss) per share | ||||
Basic as reported | $ (0.53) |
$ 0.10 |
||
Basic pro forma | $ (0.53) |
$ (0.06) |
||
Diluted as reported | $ (0.53) |
$ 0.10 |
||
Diluted pro forma | $ (0.53) |
$ (0.06) |
EARNINGS (LOSS) PER COMMON SHARE
Basic Earnings (Loss) Per Common 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 thirty-nine week periods ended September 28, 2003, and September 29, 2002:
Thirteen Weeks Ended |
||||
September 28, |
September 29, |
|||
2003 |
2002 |
|||
Numerator: | ||||
Net loss | $ (305,084) |
$ (478,980) |
||
Denominator: | ||||
|
2,810,534 |
2,979,147 |
||
|
--- |
--- |
||
Denominator for diluted EPS |
2,810,534 |
2,979,147 |
||
Basic EPS |
$ (0.11) |
$ (0.16) |
||
Diluted EPS |
$ (0.11) |
$ (0.16) |
||
Thirty-nine Weeks Ended |
||||
September 28, |
September 29, |
|||
2003 |
2002 |
|||
Numerator: | ||||
Net income (loss) | $ (1,531,982) |
$ 29,110 |
||
Denominator: | ||||
|
2,900,727 |
2,988,960 |
||
|
--- |
99,021 |
||
Denominator for diluted EPS |
2,900,727 |
3,087,981 |
||
Basic EPS |
$ (0.53) |
$ 0.01 |
||
Diluted EPS |
$ (0.53) |
$ 0.01 |
Note 3 - Balance Sheet Information
Receivables are comprised of the following: | |||||
September 28, |
December 29, |
||||
General | $112,000 |
$ 68,000 |
|||
Vendor rebates | 341,000 |
437,000 |
|||
Income taxes | 135,000 |
--- |
|||
Franchisees | 81,000 |
111,000 |
|||
Insurance | 75,000 |
--- |
|||
Banquets | --- |
129,000 |
|||
Notes receivable | 55,000 |
219,000 |
|||
Notes receivable from Fiesta, L.L.C. | --- |
3,146,000 |
|||
$799,000 |
$ 4,110,000 |
||||
Accrued liabilities are comprised of the following: | |||
September 28, 2003 |
December 29, 2002 |
||
Compensation |
$ 1,592,000 |
$ 1,880,000 |
|
Taxes, other than income |
523,000 |
695,000 |
|
Other |
869,000 |
1,360,000 |
|
$ 2,984,000 |
$ 3,935,000 |
Note 4 - Supplemental Cash Flow Information
Interest of $385,397 and $554,108 was paid for the thirty-nine weeks ended September 28, 2003 and September 29, 2002, respectively.
For the thirty-nine week periods ended September 28, 2003 and September 29, 2002, the Company had the following non-cash investing and financing activities:
Thirty-nine Weeks Ended |
|||
September 28, 2003 |
September 29, 2002 |
||
Decrease in accumulated other comprehensive income |
$ --- |
$ 146,000 |
|
Gross asset retirements related to restaurant closures |
633,274 |
1,003,469 |
|
Decrease in goodwill from sale of restaurant |
--- |
405,000 |
|
Increase in notes receivable from finance of sale of restaurant |
--- |
273,720 |
Note 5 - Stock Repurchases
In April 1997, the Companys Board of Directors authorized the repurchase of up to 200,000 shares of the Companys 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 2003, the Company purchased a total of 264,689 shares for $842,375. As of September 28, 2003, 495,351 shares have been repurchased under this plan for a total purchase price of approximately $1,637,000.Note 6 - Restaurant Acquisitions and Dispositions
In March 2002, the Company terminated the lease on one Garfields 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 Garcias 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 Companys 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 Garcias located in Carmichael, CA, and one located in Idaho Falls, ID. In November 2002, the Company sole one Garcias located in Layton, UT. In December 2002, the Company sold nine Garcias 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 Companys lease expired on one Garfields location in Savannah, GA. In June 2003, the Companys lease expired on one Garfields location in Mobile, AL. No gain or loss was associated with these dispositions. In June 2003, the Company paid $160,000 for the lease termination of one Garcias located in Shawnee, OK. This amount was recorded to restaurant closure expense and is included on the consolidated statements of operations for the thirteen weeks ended June 29, 2003.
In August 2003, the Company opened one Garfields located in Uniontown, PA. Subsequent to quarter end, the Company purchased one Garfields located in Sioux City, IA, from a franchisee.
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 Companys financial position or future results of operations.
In the course of disposing of eleven Garcias restaurants in 2002, the Company was required by the landlords to remain as guarantor of the tenant leases 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 Companys guarantees will expire at the expiration of the assigned lease terms. At September 28, 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 $8,838,000.
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 Companys 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 Companys 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 Companys 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 Companys ratio of total loans and capital leases to net worth. Under the terms of these notes, the Companys 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 Companys 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 September 28, 2003, $11,510,000 was outstanding under this agreement at a rate of 4.62%.
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 September 28, 2003. The unrealized loss as of September 29, 2002, was $25,000 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 entitys expected losses, receives a majority of the entitys 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 Garcias locations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This accounting treatment differs from the provisions of EITF 94-3, under which liabilities associated with exit or disposal activities were generally recognized upon the Companys commitment to, and communication of, an exit or disposal activity. This statement also states that fair value is the objective for initial measurement of the liability. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Company adopted this new standard during 2003 with no material impact on the Companys operations.
Note 10 Subsequent Events
On October 6, 2003, the U.S. Court of Appeals, 10th Circuit, affirmed the awarded amount of $8,200,607 to the Company for diminution of value damages from J.R. Simplot Co., a suit filed in 1999. It reversed the awarded amount of $204,813 related to additional insurance costs. In an agreement to forgo any further litigation rights, Simplot agreed to pay the Company $8,584,932, which includes the $8,200,607 award for diminution of value, $355,644 of accrued interest, $25,000 in attorneys fees and $3,681 for the original cost of the contaminated product purchased from J.R. Simplot Co. This total amount was paid to the Company on October 24, 2003, which brings the total amount paid by J.R. Simplot Co. to $9,101,495, $516,563 of which was paid and recorded in 2002. The Company will record the affirmed award, interest and attorneys fees, totaling $8,584,932 as revenue in the fourth quarter as well as related accrued attorneys fees and costs.
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 Companys actual results and experience to differ materially from the anticipated results or other expectations expressed in the Companys forward-looking statements including, without limitation, the following: consumer spending trends and habits; competition in the casual dining restaurant segment; weather conditions in the Companys operating regions; laws and government regulations; general business and economic conditions; availability of capital; success of operating initiatives and marketing and promotional efforts; and changes in accounting policies. In addition, the Company disclaims any intent or obligation to update those forward-looking statements.
Introduction
As of September 28, 2003, the Company owned and operated 51 locations (46 Garfields, 3 Garcias, 2 Pepperoni Grills) and franchised 10 Garfields. As of September 29, 2002, the Company owned and operated 63 locations (47 Garfields, 14 Garcias, 2 Pepperoni Grills), franchised 9 Garfields and 3 Garcias and licensed one Garcias. 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 Garcias during 2002. As of the date of this report, the entire system includes 61 restaurants of which 51 are Company-owned.
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. 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. During the third quarter, the Company sold one DMA to a new franchisee in Arkansas for a total of three future locations. As the date of this report, seventy-one new franchise restaurants are under commitment.
The Companys uniform franchise offering circular (called the UFOC that contains the franchise and development agreement) is registered nationally.
The Companys 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 September 28, 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 Companys 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 Garcias in July 1998. The suit was litigated in August 2001 in order to determine the amount of damages to be awarded the Company. In November 2001, the Company was initially awarded approximately $6,551,000 in damages plus attorneys fees and costs. The Company filed a motion to reconsider, based on a technical error in the calculation of damages, and in January 2002 was awarded an additional amount, bringing the total to $8,405,420 plus attorneys fees and costs. In February 2002, the Company was awarded an additional $516,563 for attorneys fees and costs (paid and recorded in March 2002), bringing the total to approximately $8,921,983. Both the Company and Simplot appealed the award. Subsequent to quarter end, on October 6, 2003, the U.S. Court of Appeals, 10th Circuit, affirmed the awarded amount of $8,200,607 for diminution of value damages. It reversed the awarded amount of $204,813 related to additional insurance costs. In an agreement to forgo any further litigation rights, Simplot agreed to pay the Company $8,584,932, which includes the $8,200,607 award for diminution of value, $355,644 of accrued interest, $25,000 in attorneys fees and $3,681 for the original cost of the contaminated product purchased from J.R. Simplot Co. This total amount was paid to the Company on October 24, 2003, which brings the total amount paid by J.R. Simplot Co. to $9,101,495. The Company will record the affirmed award, interest and attorneys fees, totaling $8,584,932 in the fourth quarter of 2003.
The Company has other lawsuits pending but does not believe the outcome of the lawsuits, individually or collectively will materially impair the Companys 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 |
THIRTY-NINE WEEKS ENDED |
|||||
September 28, 2003 |
September 29, 2002 |
September 28, 2003 |
September 29, 2002 |
|||
Statements of Operations Data: |
||||||
Revenues: |
||||||
Food and beverage sales |
98.5% |
98.7% |
98.3% |
98.9% |
||
Franchise fees and royalties |
0.8% |
0.8% |
1.0% |
0.6% |
||
Other income |
0.7% |
0.5% |
0.7% |
0.5% |
||
100.0% |
100.0% |
100.0% |
100.0% |
|||
Costs and Expenses: |
||||||
Costs of sales (1) |
28.1% |
27.2% |
27.9% |
27.0% |
||
Operating expenses (1) |
63.0% |
66.4% |
64.0% |
63.5% |
||
Restaurant pre-opening expenses (1) |
0.8% |
0.0% |
0.4% |
0.0% |
||
Restaurant closure expense (1) |
0.0% |
0.0% |
0.3% |
0.0% |
||
(Gain) loss on disposal of assets |
0.0% |
(1.2)% |
0.0% |
(0.5)% |
||
General and administrative |
7.6% |
6.4% |
7.5% |
5.9% |
||
Depreciation and amortization (1) |
3.5% |
4.6% |
3.4% |
4.3% |
||
Interest expense |
0.7% |
0.8% |
0.7% |
0.8% |
||
Income (loss) before income taxes |
(2.2)% |
(3.1)% |
(2.7)% |
0.1% |
||
Provision for income taxes |
(0.6)% |
(0.9)% |
0.0% |
0.0% |
||
Net income (loss) |
(1.6)% |
(2.2)% |
(2.7)% |
0.1% |
||
Selected Operating Data: |
||||||
System-wide sales (in thousands)(2): |
||||||
Company restaurants |
$18,375 |
$21,753 |
$55,305 |
$70,972 |
||
Franchise restaurants |
2,751 |
3,336 |
10,200 |
9485 |
||
Total |
$21,126 |
$25,089 |
$65,505 |
$80,457 |
||
Number of restaurants |
||||||
(at end of period): |
||||||
Company restaurants |
51 |
63 |
51 |
63 |
||
Franchise restaurants |
10 |
13 |
10 |
13 |
||
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 September 28, 2003, the Company recorded a net loss of $(305,084) (($0.11) per common share) on revenues of $18,651,117. This compares to net income of $(478,980) (($0.16) per common share) for the quarter ended September 29, 2002, on revenues of $22,029,212.
For the thirty-nine weeks ended September 28, 2003, the Company recorded a net loss of $(1,531,982) (($0.53) per common share) on revenues of $56,258,910. This compares to net income of $29,110 ($0.01 per common share) for the thirty-nine weeks ended September 29 2002, on revenues of $71,766,607.
Revenues
Company revenues for the thirteen and thirty-nine week periods ended September 28, 2003, decreased 15.3% and 21.6% over the revenues reported for the same periods in 2002. The revenue decrease relates primarily to the sale of thirteen Garcias 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 |
Thirty- nine Weeks |
Thirteen Weeks |
Thirty- nine Weeks |
|||||
Garfields: | ||||||||||
September 28, 2003 | 46 |
592 |
1,799 |
$28,273 |
$27,935 |
|||||
September 29, 2002 | 47 |
611 |
1,858 |
$26,403 |
$27,491 |
|||||
Garcia's: | ||||||||||
September 28, 2003 | 3 |
49 |
153 |
$16,502 |
$16,626 |
|||||
September 29, 2002 | 13 |
189 |
603 |
$22,915 |
$29,581 |
|||||
Pepperoni Grill: | ||||||||||
September 28, 2003 | 2 |
26 |
78 |
$31,870 |
$32,131 |
|||||
September 29, 2002 | 2 |
26 |
78 |
$31,799 |
$32,671 |
For the thirteen weeks ended September 28, 2003, average weekly sales per unit for Garfield's increased $1,870 or 7.1% versus the quarter ended September 29, 2002. Average weekly sales per unit for Garfields increased $444 or 1.6% for the thirty-nine weeks ended September 28, 2003, versus the previous years results.
For the thirteen weeks ended September 28, 2003, average weekly sales per unit for Garcias decreased $(6,413) or 28.0% versus the quarter ended September 29, 2002. Average weekly sales per unit for Garcias decreased by $(12,955) or 43.8% for the thirty-nine weeks ended September 28, 2003, versus the previous year. These decreases are primarily due to the sale of thirteen higher volume units in 2002.
For the thirteen weeks ended September 28, 2003, average weekly sales per unit for Pepperoni Grill increased $71 or 0.2% versus the same period in 2002. Average weekly sales per unit for Pepperoni Grill decreased by $(540) or 1.7% for thirty-nine weeks ended September 28, 2003, versus the previous year. This decrease is primarily due to adverse economic conditions.
Franchise fees and continuing royalties increased to $555,875 during the thirty-nine weeks ended September 28, 2003 versus $423,969 during the thirty-nine weeks ended September 29, 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 |
Thirty-nine Weeks Ended |
|||||||
September 28, 2003 |
September 29, 2002 |
September 28, 2003 |
September 29, 2002 |
|||||
Garfield's: |
||||||||
Costs of sales . | 28.0% |
27.8% |
27.9% |
27.6% |
||||
Labor costs | 27.5% |
28.7% |
27.7% |
28.3% |
||||
Total |
55.5% |
56.5% |
55.6% |
55.9% |
||||
Garcia's: |
||||||||
Cost of sales | 29.9% |
25.5% |
27.7% |
25.7% |
||||
Labor costs | 35.2% |
31.1% |
37.8% |
30.1% |
||||
Total | 65.1% |
56.6% |
65.5% |
55.8% |
||||
Pepperoni Grill: |
||||||||
Cost of sales | 27.6% |
25.9% |
27.5% |
25.8% |
||||
Labor costs | 30.4% |
28.6% |
30.6% |
29.1% |
||||
Total |
58.0% |
54.5% |
58.1% |
54.9% |
||||
Total Company: |
||||||||
Cost of sales | 28.1% |
27.2% |
27.9% |
27.0% |
||||
Labor costs | 28.0% |
29.2% |
28.3% |
28.8% |
||||
Total | 56.1% |
56.4% |
56.2% |
55.8% |
Costs of sales as a percentage of food and beverage sales for Garfields in the quarters ended September 28, 2003 and September 29, 2002 was 28.0% and 27.8% respectively. Costs of sales for the thirty-nine weeks ended September 28, 2003 and September 29, 2002 were 27.9% and 27.6%, respectively. The increase is primarily due to new higher cost items on the menu.
Garcias costs of sales as a percentage of food and beverage sales was 29.9% in the quarter ended September 28, 2003 versus 25.5% in the quarter ended September 29, 2002, and 27.7% and 25.7% for the thirty-nine weeks ended September 28, 2003 and September 29, 2002, respectively. This increase is primarily due to the sale of 13 Garcias 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 27.6% for the quarter ended September 28, 2003 compared to 25.9% for the quarter ended September 29, 2002, and 27.5% and 25.8% for the thirty-nine weeks ended September 28, 2003 and September 29, 2002, respectively. This increase is primarily due to the addition of several new seafood items and discounted lunch specials.
Labor costs for Garfields decreased to 27.5% and 27.7% of food and beverage sales during the quarter and thirty-nine weeks ended September 28, 2003, versus 28.7% and 28.3%, respectively, during the 2002 comparable period due to better management labor control.
Garcias labor costs increased to 35.2% and 37.8% of food and beverage sales during the quarter and thirty-nine weeks ended September 28, 2003, versus 31.1% and 30.1%, respectively, in the quarter ended September 29, 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 30.4% during the quarter ended September 28, 2003 versus 28.6% 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 September 28, 2003, operating expenses as a percentage of food and beverage sales decreased to 63.0% from 66.4% in the thirteen weeks ended September 29, 2002
. For the thirty-nine weeks ended September 28, 2003, operating expenses increased to 64.0% of food and beverage sales versus 63.5% in the 2002 period.During the thirteen and thirty-nine week periods ended September 28, 2003 and September 29, 2002, general and administrative costs as a percentage of total revenues changed to 7.6% and 7.5% from 6.4% and 5.9%respectively. The increase is primarily due to a management agreement to provide general and administrative services to the buyers of Garcias through July, 2003.
For the thirteen weeks ended September 28, 2003, depreciation and amortization expense was 643,017 (3.5% of food and beverage sales) compared to $1,004,316 (4.6% of food and beverage sales) in the thirteen weeks ended September 29, 2002. For the thirty-nine weeks ended September 28, 2003, depreciation and amortization expense was $1,895,041 (3.4% of food and beverage sales) compared to $3,079,224 (4.3% of food and beverage sales in the thirty-nine weeks ended September 29, 2002. This decrease is due to the sale of thirteen Garcias in 2002 which had higher depreciation charges per location than other Company locations and the write down in 2002 on the remaining Garcias assets.
For the thirteen weeks ended September 28, 2003 interest expense decreased to $126,338 (0.7% of total revenues) from $172,326 (0.8% of total revenues) for the thirteen weeks ended September 29, 2002. For the thirty-nine week period ended September 28, 2003, interest expense decreased to $393,480 (0.7% of total revenues) from $549,167 (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 (benefit from) income taxes was $(109,160) and $5,570 for the thirteen and thirty-nine weeks ended September 28, 2003, versus $(195,500) and $12,000, respectively, for the 2002 comparable period. The effective tax rates for the periods ended September 28, 2003 and September 29, 2002, are as follows:
Thirteen Weeks |
Thirty-nine Weeks |
|||||||
September 28, |
September 29, |
September 28, |
September 29, |
|||||
2003 |
2002 |
2003 |
2002 |
|||||
Effective income tax rates |
(26.4)% |
(29.0)% |
0.3% |
29.2% |
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 2,810,534 and 2,979,147 in the quarters ended September 28, 2003 and September 29, 2002, respectively and 2,900,727 and 2,988,960 in the thirty-nine weeks ended September 28, 2003 and September 29, 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 2,810,534 and 2,979,147 in the quarters ended September 28, 2003 and September 29, 2002, respectively, and 2,900,727 and 3,087,981 in the thirty-nine weeks ended September 28, 2003 and September 29, 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 September 28, 2003, the Companys current ratio was 0.49 to 1 compared to 0.71 to 1 at December 29, 2002. The Companys working capital deficit was $(3,217,772) at September 28, 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 Companys credit facility.
Although the Company has sustained losses in each of the first three quarters of 2003, management believes the cash generated from its operations, borrowing availability under its credit facility (described below) and the amounts collected from judgment against J.R. Simplot Co., will be sufficient to satisfy the Companys net capital expenditures and working capital requirements during 2003. Additionally, management believes that the decision to sell Garcias enhanced its liquid resources. In 2003, management began certain transitional steps to reduce general and administrative costs, associated with the operations of Garcias, 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 Companys financial condition should continue to strengthen. The Company anticipates a one-time loan reduction in conjunction with and as a result of the award from J.R. Simplot Co. At September 28, 2003, the Company has $3,490,000 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 bore interest at the greater of a floating rate of three month LIBOR plus 2.50% or 5.00%, which was reset quarterly. The term loan also provided for an initial floating rate of interest equal to three month LIBOR plus 2.50% and required 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 converted to a five-year amortization schedule if the Companys debt coverage ratio, as defined in the loan agreement, exceeds a certain level. Additionally, the floating interest rate on both facilities was subject to changes in the Companys ratio of total loans and capital leases to net worth. Under the terms of these notes, the Companys minimum floating rate was LIBOR plus 1.25% and the maximum floating rate was LIBOR plus 2.50%. Borrowings under this loan agreement were unsecured. The loan agreement contained 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 Companys 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 Companys ability to borrow under the terms of the credit facility. As of September 28, 2003, $11,510,000 was outstanding under this agreement at a rate of 4.62%.
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 September 28, 2003. The unrealized loss as of September 29, 2002 was $25,000 and is included in Other Comprehensive Income according to the provisions of SFAS No. 133.
In April 1997, the Companys Board of Directors authorized the repurchase of up to 200,000 shares of the Companys 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 2003, the Company purchased a total of 264,689 shares for $842,375. As of September 28, 2003, 495,351 shares have been repurchased under this plan for a total purchase price of approximately $1,637,000.
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 Companys 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 1. Legal Proceedings.
Incorporated herein by reference is the discussion of the Companys litigation with J.R. Simplot Co. set forth in "Managements Discussion and Analysis of Financial Condition and Results of Operation Legal Proceedings."
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 thirty-nine weeks ended September 28, 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 Companys disposition of most of its Garcias 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. |
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Registrant |
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Date: October 29, 2003 |
By: /s/ BRADLEY L. GROW |
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Bradley L. Grow |
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Vice President |
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Chief Financial Officer |
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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 registrants 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 registrants 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 registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors:
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants 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 registrants internal controls; and
6. The registrants 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: October 29, 2003 |
By: /s/ VINCENT F. ORZA, JR. |
Vincent F. Orza, Jr. |
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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 registrants 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 registrants 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 registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors:
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants 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 registrants internal controls; and
6. The registrants 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: October 29, 2003 |
By: /s/ BRADLEY L. GROW |
Bradley L. Grow |
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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 Companys quarterly report on Form 10-Q for the quarter ended September 28, 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: October 29, 2003 |
By: /s/ VINCENT F. ORZA, JR. |
Vincent F. Orza, Jr. |
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Chief Executive Officer |
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Date: October 29, 2003 |
By: /s/ BRADLEY L. GROW |
Bradley L. Grow |
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Chief Financial Officer |