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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 14, 2002 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ____________
COMMISSION FILE NUMBER 0-14837
ELMER'S RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-0836824
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
11802 S.E. Stark St. (503) 252-1485
Portland, Oregon 97216 (REGISTRANT'S TELEPHONE NUMBER,
(ADDRESS OF PRINCIPAL (ZIP CODE) INCLUDING AREA CODE)
EXECUTIVE OFFICES)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
___________
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Number of shares of Common Stock outstanding at November 22, 2002: 2,041,809
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ELMER'S RESTAURANTS, INC.
-------------------------
INDEX
PAGE
NUMBER
------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets,
October 14, 2002 (Unaudited) and April 1, 2002 3
Condensed Consolidated Statements of Income,
12 and 28 weeks ended October 14, 2002 (Unaudited)
and October 15, 2001 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows,
28 weeks ended October 14, 2002 (Unaudited) and
October 15, 2001 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Statements (Unaudited) 8
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 12
Item 4. Controls and Procedures 13
PART II: OTHER INFORMATION AND SIGNATURES
Item 5. Submission of Matters to a Vote of Security Holders 13
Item 6. Other Information 14
Item 7. Exhibits and Reports on Form 8-K 14
Signatures 15
2
ITEM 1
ELMER'S RESTAURANTS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 14, APRIL 1,
2002 2002
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 981,000 $ 654,211
Marketable securities 1,213,501 1,149,171
Accounts receivable 213,237 315,063
Notes receivable - related parties, current portion 107,792 372,712
Inventories 383,192 411,008
Prepaid expenses and other 466,669 133,424
Income taxes receivable 49,028 114,117
------------ ------------
Total current assets 3,414,419 3,149,706
Notes receivable - related parties,
net of current portion 264,732 --
Property, buildings and equipment, net 7,175,996 7,654,097
Goodwill and intangible assets 5,477,566 5,301,873
Principal debt service account for
convertible debt 170,238 305,019
Other assets 351,200 274,588
------------ ------------
Total assets $ 16,854,151 $ 16,685,283
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, current portion $ 277,333 $ 277,333
Accounts payable 1,301,847 1,483,823
Accrued expenses 271,901 174,120
Accrued payroll and related taxes 470,746 403,141
------------ ------------
Total current liabilities 2,321,827 2,338,417
Notes payable, net of current portion 4,644,987 5,366,050
Deferred income taxes 688,490 691,724
------------ ------------
Total liabilities 7,655,304 8,396,191
------------ ------------
Commitments and contingencies
Shareholders' equity
Common stock, no par value; 10,000,000 shares
authorized, 2,041,809 and 2,058,034 shares issued
and outstanding at October 14, 2002 and April 1,
2002 respectively 7,283,155 7,371,400
Retained earnings 1,932,411 929,266
Accumulated other comprehensive loss, net of taxes (16,719) (11,574)
------------ ------------
Total shareholders' equity 9,198,847 8,289,092
------------ ------------
Total liabilities and shareholders' equity $ 16,854,151 $ 16,685,283
============ ============
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
ELMER'S RESTAURANTS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWENTY-EIGHT FOR THE TWELVE
WEEKS ENDED WEEKS ENDED
---------------------------- ----------------------------
October 14, October 15, October 14, October 15,
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES $ 16,823,634 $ 18,461,381 $ 7,385,565 $ 8,193,871
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of restaurant sales:
Food and beverage 4,746,403 5,250,563 2,096,650 2,331,362
Labor and related costs 5,974,312 6,656,457 2,553,016 2,930,126
Restaurant operating costs 2,302,103 2,533,051 1,030,466 1,140,109
Occupancy costs 1,077,754 1,143,130 465,195 507,075
Depreciation and amortization 389,808 391,888 168,776 173,390
Restaurant opening and closing expenses 9,717 68,338 -- 27,958
General and administrative expenses 1,242,611 1,285,524 555,283 579,896
------------ ------------ ------------ ------------
15,742,708 17,328,951 6,869,386 7,689,916
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 1,080,926 1,132,430 516,179 503,955
OTHER INCOME (EXPENSE):
Interest income 94,648 57,832 22,301 23,866
Interest expense (227,816) (314,319) (93,665) (132,461)
Loss on debt extinguishment (97,500) -- -- --
Loss on sale of marketable securities (55,934) -- -- --
Net gain (loss) on disposition of property 735,910 (4,047) (3,256) (4,047)
------------ ------------ ------------ ------------
Income before provision for income taxes 1,530,234 871,896 441,559 391,313
Income tax provision (527,089) (300,804) (151,496) (135,008)
------------ ------------ ------------ ------------
Net Income $ 1,003,145 $ 571,092 $ 290,063 $ 256,305
============ ============ ============ ============
PER SHARE DATA:
Net income per share - Basic $ 0.49 $ 0.28 $ 0.14 $ 0.12
============ ============ ============ ============
Weighted average number of
common shares outstanding - Basic 2,051,684 2,059,728 2,043,218 2,059,728
============ ============ ============ ============
Net income per share - Basic
common shares outstanding $ 0.46 $ 0.27 $ 0.14 $ 0.12
============ ============ ============ ============
Weighted average number of
common shares outstanding - Diluted 2,172,384 2,084,942 2,095,777 2,084,942
============ ============ ============ ============
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
ELMER'S RESTAURANTS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-EIGHT
WEEKS ENDED
----------------------------
OCTOBER 14, OCTOBER 15,
2002 2001
------------ ------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 1,003,145 $ 571,092
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 389,808 391,888
Net gain on disposition of property (735,910) --
Loss on sale of marketable securities 55,934 --
Loss on debt extinguishment 97,500 --
Changes in assets and liabilities:
Current assets (159,278) 152,274
Other assets 58,169 30,364
Accounts payable and accrued expenses (44,664) (18,781)
Income taxes 61,855 (54,606)
------------ ------------
Net cash provided by operating activities 726,559 1,072,231
------------ ------------
Cash flows from investing activities:
Acquisitions of property, buildings and equipment (432,634) (720,009)
Restaurant acquisitions (314,263) --
Proceeds from restaurant dispositions 1,303,176 912,279
Purchased goodwill -- (51,340)
Net purchases of available for sale securities (125,409) (802,901)
Issuance of note receivable (129,488) (76,668)
Principal collected on note receivables 280,193 19,978
------------ ------------
Net cash provided by (used in) investing activities 581,575 (718,661)
------------ ------------
Cash flows from financing activities:
Repurchase of convertible notes (747,500) --
Issuance of ten year term notes -- 2,806,944
Retirement of term debt -- (3,224,865)
Payments on notes payable (145,600) (177,442)
Repurchase of common stock (88,245) (9,400)
------------ ------------
Net cash used in financing activities (981,345) (604,763)
------------ ------------
Net change in cash and cash equivalents 326,789 (251,193)
Cash and cash equivalents, beginning of period 654,211 1,141,016
------------ ------------
Cash and cash equivalents, end of period $ 981,000 $ 889,823
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 214,039 $ 314,319
============ ============
Income taxes $ 462,000 $ 361,541
============ ============
Supplemental disclosures of non cash transactions:
Sale of property and equipment for notes receivable $ 455,631 $ --
============ ============
Forgiveness of notes receivable as partial
consideration for purchase of property,
equipment and goodwill $ 175,625 $ --
============ ============
Notes payable issued or assumed in conjunction
with acquisition of certain restaurants $ 74,538 $ --
============ ============
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
ELMER'S RESTAURANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with the instructions to form 10-Q and Rule 10-01 of Regulation S-X.
These interim financial statements do not include all the information and
footnotes necessary for a fair presentation of financial position and results of
operations and cash flows in conformity with generally accepted accounting
principles in the United States of America. These condensed financial statements
should be read in conjunction with the financial statements and related notes
contained in the Company's Annual Report on Form 10-K for the year ended April
1, 2002. Operating results reflected in the interim consolidated financial
statements are not necessarily indicative of the results that may be expected
for the year ended March 31, 2003.
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting solely of normal recurring adjustments)
necessary to present fairly the financial position of the Company and its
subsidiaries, and their results of operations and cash flows.
The Company has included additional detail in the Statement of Operations.
Restaurant operating expenses are now broken out on a separate line. These costs
include such items as advertising, repairs and maintenance and credit card
discounts. Historically, most of these items have been included under general
and administrative. All information presented herein has been reclassified to
conform to the new format. The Company believes that this new format will
improve comparability between the Company and its peers.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires business combinations initiated after June 30,
2001, to be accounted for using the purchase method of accounting, and broadens
the criteria for recording intangible assets separate from goodwill. Recorded
goodwill and intangibles have been evaluated against this new criteria and no
changes were considered necessary to the previously recorded intangibles. SFAS
No. 142 requires the use of a nonamortization approach to account for purchased
goodwill and certain intangibles. Under a nonamortization approach, goodwill and
certain intangibles (those deemed to have an indefinite life) will be reviewed
for impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles are
determined to be more than their fair value. The Company's intangible assets
were tested for impairment in the third quarter of the fiscal year ended April
1, 2002 and no impairment was found.
The Company adopted SFAS No. 142 effective April 3, 2001. The changes in the
carrying value of goodwill and intangible assets for the 28 weeks ended October
14, 2002, are as follows:
Goodwill Intangibles
------------- -------------
Balance as of April 1, 2002 $ 4,699,164 $ 602,709
Acquired during the year 215,299 --
Disposed during the year (39,606) --
------------- -------------
Balance as of October 14, 2002 $ 4,474,857 $ 602,709
============= =============
Using the early application provision of SFAS No. 142 the Company adopted the
provisions of SFAS No. 142 beginning April 3, 2001. These standards only permit
prospective application of the new accounting; accordingly adoption of these
standards will not affect previously reported financial information. The
principal effect of implementing SFAS No. 142 was the cessation of the
amortization of goodwill.
6
All net income per share amounts and weighted average number of common shares
outstanding have been retroactively adjusted to reflect a 5% stock dividend,
which had a record date in March 2002.
RECENT TRANSACTIONS
Sale of Southern Oregon Elmer's.
- --------------------------------
As previously reported on the Company's Form 8-K filed on May 17, 2002,
effective May 7, 2002 Elmer's Restaurants, Inc. (the "Company") executed asset
purchase and franchise agreements with Southern Oregon Elmer's LLC (the
"Buyer"), refranchising three of the Company's Elmer's restaurants located in
Grants Pass, Medford and Roseburg, Oregon. The Company sold substantially all
the assets of those locations in consideration for $1,385,500 in cash and
promissory notes valued at $349,500. The Buyer has signed 25-year franchise
agreements for each location and will operate the locations under the Elmer's
Breakfast-Lunch-Dinner (TM) name.
The Buyer signed a development agreement to open an additional two units within
five years. The first unit, located in Klamath Falls, Oregon, opened October 23,
2002.
The principals of Southern Oregon Elmer's LLC, Robert Brutke and David Thomason,
have substantial industry experience. They are both past-presidents of the
Oregon Restaurant Association. Mr. Thomason operates a 10-unit Carl's Jr.
franchise from Carl Karcher Enterprises and Mr. Brutke has operated a number of
independent concepts in the southern Oregon market, including Brutke's Wagon
Wheel in Roseburg, Oregon.
As a result of this transaction, the Company posted a one-time gain of
approximately $504,000 or 25 cents per share, (net of tax effect) in the quarter
ending July 22, 2002. For the 28 weeks ended October 15, 2001, revenues from the
three restaurants were $2.7 million, contributing $144,000 in earnings before
taxes and interest expense. If these three restaurants had been franchised
during the 28 weeks ended October 15, 2001, pro forma franchise fee income would
have been approximately $134,000.
The Company agreed to provide a limited amount of seller financing. The Company
issued a $270,000 note bearing interest at 9% per year payable in 84 equal
monthly payments; an approximately $79,500 note bearing interest at 9% payable
in 24 equal monthly payments; an approximately $106,000 inventory note bearing
interest at 12% and due in 90 days. To assist with the development of the
Klamath Falls restaurant, the Company granted an extension of the inventory
note, which has now been paid in full.
In valuing the restaurants, the Company considered discounted historical cash
flows, future capital spending requirements, as well as the impact on the
Company's franchise program. The Company believes the consideration paid to be
fair, from a financial point of view, to the Company's shareholders. The
franchise agreements with the Buyer are comparable to other recent Company
franchise agreements.
The Company has assigned its rights and obligations under the occupancy leases
for the Medford and Roseburg locations. The Company remains a guarantor of the
Medford lease until April 2007. The Company's guarantee of the Roseburg lease
could extend until 2018 if the Buyer exercises its options in 2003, 2008 and
2013. The Company has subleased the Grants Pass location to the Buyer for five
years under substantially the same terms and conditions as the underlying master
lease. Provided all parties are in good standing under the lease at the end of
the sublease, the Grants Pass landlord has agreed to lease directly to the Buyer
under substantially similar terms.
The Buyer has indemnified the Company against all losses incurred as a result of
the Company's obligations as a Guarantor. This indemnification is personally
guaranteed by Mssrs. Brutke and Thomason and their spouses. However, in the
event of default by the Buyer of the terms of the occupancy leases, and the
failure of Mssrs. Brutke and Thomason to make good on their personal guarantees,
the Company could be required to pay all rent and other amounts due under the
terms of the lease for the remainder of the guarantee term. In the event of
default, the Company expects it would exercise its right to reoccupy and
continue to operate the restaurants as Elmer's Breakfast-Lunch-Dinner(TM).
7
The Buyer's obligations under the franchise agreements, promissory notes, lease
assignments and sublease are guaranteed by the Buyer and personally by Mssrs.
Brutke and Thomason and their spouses.
Purchase of Vancouver Washington Elmer's
- ----------------------------------------
April 15, 2002 the Company acquired an Elmer's restaurant located in Vancouver,
Washington from franchisee and former board member, Paul Welch for approximately
$250,000 in cash and assumed liabilities. The Company has entered into a
long-term occupancy lease at the same location, and continues to operate the
location as an Elmer's restaurant. The purchase price was allocated to the
tangible assets of the restaurant. As of October 14, 2002, the Company has
spent approximately $125,000 remodeling the facility.
Relocation of Richard's Deli & Pub
- ----------------------------------
May 28, 2002 the Company relocated one of two Hillsboro, Oregon units to a
nearby retail mall. The prior landlord's bankruptcy, combined with the
superiority of the new space, made the decision to move compelling. The Company
terminated its occupancy lease and recorded a $77,000 loss on the surrender of
leasehold improvements. The Company entered into a five-year lease for
approximately 4,000 sq. ft. at the new location. This is larger than the
operating requirement, therefore the Company has subleased 1,900 sq. ft. of the
new space to a non-competing use.
Repurchase of convertible debt
- ------------------------------
June 28, 2002 the Company repurchased half ($650,000) of its 10% convertible
notes, paying a 15% premium over face value. As permitted by the early adoption
provisions of SFAS No. 145 - Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13 and Technical Corrections, the total premium
of $97,500 was recorded as a loss on extinguishment. In addition to reducing the
Company's debt, this transaction eliminates the potential obligation to issue up
to 105,000 shares of common stock upon conversion and reduces the Company's
required balances in the debt service account by half.
Purchase of Cooper's Deli and Pub
- ---------------------------------
July 1, 2002, the Company acquired three Cooper's Deli units located in Salem,
Oregon, from Cooper's Inc. The Cooper's units are substantially similar to the
Company's existing deli operations. Purchase consideration included $100,000
cash, a $66,500, two-year promissory note, $11,500 assumed liabilities and the
forgiveness of a $155,000 promissory note due to the Company. The acquisition
cost of $334,000 included $120,000 in tangible assets and $214,000 in goodwill.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Elmer's Restaurants, Inc. (the "Company" or "Elmer's") (NASDAQ Small Cap Market
symbol: ELMS), located in Portland, Oregon, is a franchisor and operator of
full-service, family oriented restaurants under the names "Elmer's Breakfast-
Lunch-Dinner" and "Mitzel's American Kitchen" and an operatoR of delicatessen
restaurants under the names "Ashley's" and "Richard's Deli and Pub." The Company
is an Oregon corporation and was incorporated in 1983. Walter Elmer opened the
first Elmer's restaurant in Portland, Oregon in 1960, and the first franchised
restaurant opened in 1966. The Company acquired the Elmer's franchising
operation in January 1984 from the Elmer family.
The Company currently owns and operates 10 Elmer's restaurants and is a party to
franchise agreements for 22 Elmer's restaurants in six western states. The
Company owns and operates five Mitzel's American Kitchen restaurants in the
Puget Sound area of Washington state.
The Company franchises or operates a total of 37 full-service, family-oriented
restaurants, with a warm, friendly atmosphere and comfortable furnishings. Most
of the restaurants are decorated in a home style, with fireplaces in the dining
rooms. The restaurants are primarily freestanding buildings, ranging in size
from 4,600 to approximately 9,000 square feet with seating capacities ranging
from 120 to 220. A portion of the dining room in most restaurants may also be
used for private group meetings by closing it off from the public dining areas.
The menu offers an extensive selection of items for breakfast, lunch and dinner.
8
CRITICAL ACCOUNTING POLICIES
The Company's reported results are affected by the application of certain
accounting policies that require subjective or complex judgments. These
judgments involve estimates that are inherently uncertain and may have a
significant impact on our quarterly or annual results of operations and
financial condition. Changes in these estimates and judgments could have
significant effects on the Company's results of operations and financial
condition in future years. We believe the Company's most critical accounting
policies cover accounting for long-lived assets - specifically property,
buildings and equipment depreciation thereon and the valuation of intangible
assets. Additional critical accounting policies govern revenue recognition and
accounting for stock options.
Property, Buildings and Equipment
- ---------------------------------
When the Company purchases fixed assets, those assets are recorded at cost.
However, when the Company acquires an operating restaurant or business, the
Company must allocate the purchase price between the fair market value of the
tangible assets acquired and any excess to goodwill. The fair market value of
restaurant equipment fixtures and furnishings in an operating restaurant is
difficult to separate from the going concern value of the restaurant. Most of
the value of the equipment is due to the fact that it is in the restaurant and
working. The Company values in place equipment with reference to replacement
cost, age and condition, and utility in its intended use.
Depreciation
- ------------
Property, buildings and equipment are depreciated using the straight-line method
over their estimated useful lives. Leasehold improvements are amortized on a
straight-line method over their estimated useful lives or the term of the
related lease, whichever is shorter. Differences between the realized lives and
the estimated lives could result in changes to the Company's results from
operations in future years, as well as changes in the rate of recurring capital
expenditures.
Revenue Recognition
- -------------------
The Company's revenue is primarily from cash and credit card transactions. As
such, restaurant revenue is generally recognized upon receipt of cash or credit
cards receipts. Franchise fees based upon a percent of the franchisees gross
sales are recognized as the franchisees' sales occur. Revenue from the lottery,
which includes traditional ticket based games and video poker games is recorded
on a commission basis, that is net of state regulated payouts. Expenses are
recorded using accrual accounting based upon when goods and services are used.
Stock Options
- -------------
The Company accounts for its stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. Based on this
methodology the Company has not recorded any compensation costs related to its
stock options since all options have been issued at an exercise price equal to
or greater than the market value of the Company's stock at the time of issuance.
HIGHLIGHTS OF HISTORICAL RESULTS. The Company reported net income of $290,063
and $1,003,145 or $.14 and $.49 in basic earnings per share for the 12 and 28
week periods ended October 14, 2002. These results are compared to reported net
income of $256,305 and $571,092, or $.12 and $.28 per share for the 12 and 28
week periods ended October 15, 2001. The approximately $34,000 increase in net
income for the 12 weeks ended October 14, 2002 is the result of improved
operating income as well as reduced interest expense as a result of reductions
in the company's interest bearing debt. The $432,000 increase in net income for
the 28 weeks ended October 14, 2002 is largely attributable to the gain of 25
cents per share, net of tax, on sale of the three Southern Oregon restaurants in
the first quarter, partially offset by losses totaling seven cents per share on
the debt repurchase, relocation and losses on the sale of investments. The
Company's total assets as of October 14, 2002 were $16.9 million, which is an
increase of approximately $169,000 over total assets as of April 1, 2002. In the
28 weeks ended October 14, 2002, working capital increased approximately
$281,000 while notes payable (net of current portion) decreased $721,000. Cash
provided by operating activities totaled $726,559 for the 28 weeks ended October
14, 2002 compared to $1,072,231 for the 28 weeks ended October 15, 2001. The
decrease in cash provided from operations is substantially attributable to the
paydown of negative working capital from the sale of the three Southern Oregon
units. The Company has also placed a temporary $350,000 deposit with the
9
Company's primary food vendor in exchange for improved pricing. The Company is
developing an electronic funds transfer (EFT) invoicing system with this vendor.
Once the EFT system is in place the deposit wil be returned or offset by future
purchases. The paydowns and deposit increased prepaid expenses and reduced cash
provided by operations.
COMPARISON OF RESULTS OF OPERATIONS. The following discussion and analysis
presents the Company's results of operations for the 12 and 28 weeks ended
October 14, 2002 and the 12 and 28 weeks ending October 15, 2001 respectively.
For the 12 and 28 week periods ended October 14, 2002, the Company's net income
increased 75.7% and 13.2% from net income for the comparable periods in 2001.
Net income as a percentage of total revenue increased from 3.1% for both the 12
and 28 week period ended October 15, 2001, to 3.9% and 6.0% for the 12 and 28
weeks ended October 14, 2002.
Dollar amounts in thousands except per share data
RESULTS OF OPERATIONS RESULTS OF OPERATIONS
FOR THE 28 WEEKS ENDED FOR THE 28 WEEKS ENDED
OCTOBER 14, 2002 OCTOBER 15, 2001
---------------- ----------------
Percent of Percent of
Amount Revenues Amount Revenues
------ -------- ------ --------
Revenues 16,824 100.0% $18,461 100.0%
Restaurant costs and expenses 14,500 86.2% 16,043 86.9%
General and administrative expenses 1,243 7.4% 1,286 7.0%
Income from operations 1,081 6.4% 1,132 6.1%
Non operating income (expense) 449 2.7% (261) (1.4)%
Net income 1,003 6.0% 571 3.1%
Basic earnings per share $0.49 $0.28
REVENUES. Revenues for the 12 and 28 weeks ended October 14, 2002 were 9.9% and
8.9% less, respectively, than the comparable periods in 2001, reflecting the two
fewer operating restaurants in the current year. Revenues from same store
restaurant operations showed an increase of 1.3% and 0.9% for the 12 and 28
weeks ended October 14, 2002 over the comparable period in 2001. Same store
sales at the core Elmer's brand increased 2.9% in both the 12 and 28 weeks ended
October 14, 2002.
Dollar amounts in thousands
REVENUES REVENUES
FOR THE 28 WEEKS ENDED FOR THE 28 WEEKS ENDED
OCTOBER 14, 2002 OCTOBER 15, 2001
---------------- ----------------
Percent of Percent of
Amount Revenues Amount Revenues
------ -------- ------ --------
Restaurant operations:
Restaurant sales $14,265 84.8% $16,060 87.0%
Lottery 1,939 11.5 1,835 9.9
------- ------- ------- -------
16,204 96.3 17,895 96.9
Franchise operations 620 3.7 566 3.1
------- ------- ------- -------
Total revenue $16,824 100.0% $18,461 100.0%
======= ======= ======= =======
10
RESTAURANT COSTS AND EXPENSES. Restaurant costs and expenses, (which consists of
six categories including food, beverage and supply costs, labor and labor
related costs, restaurant operating costs, occupancy costs, and depreciation and
amortization, and restaurant pre-opening expenses) decreased to 85.5% and 86.2%
of revenue for the 12 and 28 weeks ended October 14, 2002, respectively,
compared to 86.8% and 86.9% for the 12 and 28 weeks ended October 15, 2001.
Food, beverage and supply costs as a percentage of total revenues were 28.4% and
28.2% for the 12 and 28 weeks ended October 14, 2002 compared to 28.5% and 28.4%
for the comparable periods in 2001. Labor expenses totaled 34.6% and 35.5% of
revenues for the 12 and 28 weeks ended October 14, 2002 down from 35.8% and
36.1% of revenues for the 12 and 28 weeks ended October 15, 2001. Compared to
the prior year, Restaurant operating costs increased 0.1% to 14.0% for the 12
weeks ended October 14, 2002, and unchanged at 13.7% for the 28 weeks ended
October 14, 2002. Occupancy costs as a percentage of revenues increased from
6.2% for both the 12 and 28 weeks ended October 15, 2001 to 6.3% and 6.4% for
the 12 and 28 weeks ended October 14, 2002. Depreciation and amortization
expense as a percentage of revenues rose from 2.1% for both the 12 and 28 weeks
ended October 15, 2001 to 2.3% for both the 12 and 28 weeks ended October 14,
2002.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative ("G&A") expenses
were 7.5% and 7.4% of total revenue for the 12 and 28 weeks ended October 14,
2002 compared to 7.1% and 7.0% of revenues in the comparable period in 2001.
This increase reflects the reduction in the number of operating restaurants and
the time required to make the appropriate overhead adjustments.
NON-OPERATING INCOME (EXPENSE). Non-operating expense was (1.0%) and 2.7% of
total revenue for the 12 and 28 weeks ended October 14, 2002 compared to (1.4%)
of total revenue for the comparable periods in 2001.
LIQUIDITY AND CAPITAL RESOURCES. As of October 14, 2002, the Company had cash
and equivalents of approximately $981,000 representing an increase from April 1,
2002 of approximately $327,000. Cash provided by operations was $727,000. Cash
provided by investing activities was $582,000. Proceeds of $1.3 million from the
sale of the Southern Oregon units were offset by capital expenditures of
$430,000 and cash used to purchase the Vancouver Elmer's and the Cooper's deli's
of $314,000. Cash used in financing activities totaled $981,000, primarily for
the repurchase of 10% convertible notes.
The Company repurchased 16,225 shares of its common stock during the quarter
ended October 14, 2002 for $88,245. These purchases were made in the NASDAQ
market through the Company's broker. The board of directors has authorized the
Company to repurchase shares valued, in aggregate, at less than $300,000. This
authorization is ongoing and the Company may make additional purchases from time
to time.
The Company's primary liquidity needs arise from debt service on indebtedness,
operating lease requirements and the funding of capital expenditures. The
Company's primary source of liquidity during the year is the operation of its
restaurants, franchise fees earned from its franchisees, cash on hand, and
borrowings. As of October 14, 2002, the Company's primary indebtedness was $2.6
million with GE Capital, $1.6 million in real estate debt with Wells Fargo Bank
and $650,000 in convertible notes.
In April 2002, the Company granted non-executive incentive stock options for
34,000 shares to employees of the Company. The options vest over five years and
have a ten-year term. The exercise price of $5.00 was equal to the market value
of the Company's stock on the grant date.
In August 2002, the Company elected to fix the interest rate on the $925,000
portion of the GE Capital loan that had a variable interest rate. The new rate
is 7.1% per annum.
The remaining Wells Fargo real estate debt has a weighted-average maturity of
7.2 years, bears interest at an average of 8.2%, requires monthly payments of
principal and interest, and is collateralized by three real estate assets.
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The $650,000 in convertible notes have a remaining maturity of approximately
five years, bear interest at 10%, requires monthly interest-only payments,
straight line principal amortization into a Company-held sinking fund, and are
subordinated to the other Company funded debt. The notes include a convertible
feature that permits the holder to convert the principal of the note into common
stock at any time at $6.19 per share. The Company may call the notes with a five
percent premium beginning December 2003.
Certain of the Company's debt agreements require compliance with debt covenants.
The most restrictive covenants require the Company to maintain a maximum ratio
of total liabilities, excluding subordinated debt, to tangible net worth plus
subordinated debt of 3.25 to 1.0, and a ratio of cash generation (defined as net
income before taxes, interest expense, depreciation and amortization) to total
interest expense plus the prior period current maturities of long-term debt of
at least 2.25 to 1.0. Management believes that the Company is in compliance with
such requirements. The Company obtained a waiver from Wells Fargo Bank
permitting the repurchase of the convertible notes.
Elmer's Restaurants, Inc., like most restaurant businesses, is able to operate
with nominal or deficit working capital because sales are for cash and inventory
turnover is rapid. Renovation and/or remodeling of existing restaurants is
either funded directly from available cash or, in some instances, is financed
through outside lenders. Construction or acquisition of new restaurants is
generally, although not always, financed by outside lenders.
The Company believes that it will continue to be able to obtain adequate
financing on acceptable terms for new restaurant construction and acquisitions
and that cash generated from operations will be adequate to meet its financial
needs and to pay operating expenses for the foreseeable future, although no
assurances can be given.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
Certain statements in this form 10-Q constitute "forward-looking statements"
which we believe are reasonable and within the meaning of the Securities Act of
1933, as amended and the Securities Exchange Act of 1934, as amended. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors relating to the Company's business, financial condition, and
operations which may cause the actual results, performance, or achievements of
Elmer's Restaurants, Inc. (individually and collectively with its subsidiaries,
herein the "Company") to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: general economic
and business conditions; the ability to accomplish stated goals and objectives;
successful integration of acquisitions; the impact of competitive products and
pricing; success of operating initiatives; development and operating costs;
advertising and promotional efforts; adverse publicity; acceptance of new
product offerings; consumer trial and frequency; availability, locations, and
terms of sites for restaurant development; changes in business strategy or
development plans; changes in regulations effecting lottery commissions; quality
of management; availability, terms and deployment of capital; the results of
financing efforts; business abilities and judgment of personnel; availability of
qualified personnel; food, labor and employee benefit costs; changes in, or the
failure to comply with, government regulations; continued NASDAQ listing;
weather conditions; construction and remodeling schedules; and other factors
referenced in this Form 10-Q.
Market Risks
- ------------
The Company invests excess cash beyond its working capital requirements in
liquid marketable securities. These securities include corporate and government
bond mutual funds focusing on issues with medium and short term maturities. The
Company actively manages its portfolio to reduce interest rate risk. However, an
increase in interest rate levels will tend to reduce the value of the portfolio.
Certain of the Company's outstanding financial instruments are subject to market
risks, including interest rate risk. Such financial instruments are not
currently subject to foreign currency risk or commodity price risk. A rise in
12
prevailing interest rates could have adverse effects on the Company's financial
condition and results of operations. The fair value of financial instruments
approximate the book value at October 14, 2002.
ITEM 4. CONTROLS AND PROCEDURES
The Company's President and its Corporate Controller, after evaluating the
effectiveness of the Company's disclosure controls and procedures (as defined in
the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) as of a date
within 90 days of the filing date of this quarterly report on Form 10-Q (the
"Evaluation Date"), have concluded that as of the Evaluation Date, The Company's
disclosure controls and procedures were adequate and effective to ensure that
material information relating to the Company and its consolidated subsidiaries
would be made known to them by others within those entities, particularly during
the period in which this quarterly report on Form 10-Q was being prepared.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect the Company's disclosure controls and
procedures subsequent to the Evaluation Date, nor any significant deficiencies
or material weaknesses in such disclosure controls and procedures requiring
corrective actions. As a result, no corrective actions were taken.
PART II - OTHER INFORMATION
ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On August 12, 2002, at the Company's Annual Meeting, the holders of the
Company's outstanding Common Stock took the action described below. At August
12, 2002, 2,058,034 shares of Common Stock were issued and outstanding and
eligible to vote at the Annual Meeting.
PROPOSAL I: ELECTION OF DIRECTORS.
- ----------------------------------
The shareholders elected Bruce N. Davis and Donald W. Woolley to the Company's
Board of Directors for a one-year term expiring at the year 2003 annual meeting
of Shareholders by the votes indicated below.
Bruce N. Davis 1,749,103 shares in favor 18,345 shares against or withheld
Donald W. Woolley 1,752,470 shares in favor 18,345 shares against or withheld
The shareholders elected William W. Service and Richard Williams to the
Company's Board of Directors for a three-year term expiring at the year 2005
annual meeting of Shareholders by the votes indicated below.
William W. Service 1,748,371 shares in favor 18,345 shares against or withheld
Richard Williams 1,752,470 shares in favor 18,345 shares against or withheld
PROPOSAL II: RATIFICATION AND APPROVAL OF APPOINTMENT OF MOSS ADAMS, LLP AS
- ---------------------------------------------------------------------------
INDEPENDENT PUBLIC ACCOUNTANTS FOR THE FISCAL YEAR ENDED APRIL 1, 2002
- ----------------------------------------------------------------------
1,765,131 shares in favor 5,369 shares against or withheld
PROPOSAL III: RATIFICATION AND APPROVAL TO TRANSACT ANY OTHER BUSINESS THAT
- ---------------------------------------------------------------------------
PROPERLY COMES BEFORE THE MEETING
- ---------------------------------
1,625,023 shares in favor 29,497 shares against or withheld
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Each Director whose term continued after the meeting:
Director Term Expires
-------- ------------
William Service 2005
Bruce Davis 2003
Richard Williams 2005
Donald Woolley 2003
Corydon Jensen 2004
Thomas Connor 2004
ITEM 6. OTHER INFORMATION
As previously reported in the Company's Form 8-K dated October 15, 2002, William
W. Service, Chief Executive Officer of the registrant, has resigned his current
position for personal reasons. The Board granted the request effective November
1, 2002. Bruce Davis, the Company's President and Chairman, will assume the
responsibilities of the C.E.O. Mr. Service will remain an active member of the
Board and continue to serve as a strategic advisor to the Company.
In accordance with amendments adopted on May 21, 1998 to Rule 14a-4 under the
Securities and Exchange Act of 1934, if notice of a shareholder proposal to be
raised at the annual meeting of shareholders is received at the principal
executive offices of the Company after May 15, 2003 (45 days prior to the month
and date in 2003 corresponding to the date on which the Company mailed its proxy
materials for the 2002 annual meeting), proxy voting on that proposal when and
if raised at the 2003 annual meeting will be subject to the discretionary voting
authority of the designated proxy holders. Any shareholder proposal to be
considered for inclusion in proxy materials for the Company's 2003 annual
meeting must be received at the principal executive office of the Company no
later than January 21, 2003.
ITEM 7. EXHIBITS AND REPORTS OF FORM 8-K
a) Exhibits:
Exhibits required to be attached by Item 601 of Regulation S-K are listed
in the Index to Exhibits of this Form 10-Q, and are incorporated herein by this
reference.
b) Reports on Form 8-K:
The Company filed a report on Form 8-K dated October 15, 2002 noting the
resignation of the CEO William W. Service effective November 1, 2002. Bruce N.
Davis, the Company's President and Chairman, will assume the responsibilities of
the C.E.O. Mr. Service will remain in active member of the Board and continue to
serve as a strategic advisor to the Company.
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, Elmer's Restaurants, Inc. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Elmer's Restaurants, Inc.
By: /s/ BRUCE N. DAVIS
---------------------------
Bruce N. Davis
President
Dated: November 25, 2002
15
CERTIFICATION
I, Bruce N. Davis, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Elmer's
Restaurants, 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
respect the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Quarterly Report;
4. The registrant's other certifying officer 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 we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this Quarterly Report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this Quarterly Report (the "Evaluation Date"); and
(c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the Audit Committee
of registrant's Board of Directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officer and I have indicated in this
Quarterly Report whether or not 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.
/s/ Bruce N. Davis
- -----------------------
Bruce N. Davis
President
November 25, 2002
16
CERTIFICATION
I, Dennis R. Miller, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Elmer's
Restaurants, 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
respect the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Quarterly Report;
4. The registrant's other certifying officer 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 we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this Quarterly Report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this Quarterly Report (the "Evaluation Date"); and
(c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the Audit Committee
of registrant's Board of Directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officer and I have indicated in this
Quarterly Report whether or not 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.
/s/ Dennis R. Miller
- ------------------------
Dennis R. Miller
Corporate Controller
November 25, 2002
17
EXHIBIT INDEX
Exhibit Sequential
No. Description Page No.
3(i) * Restated Articles of Incorporation of the
Company (Incorporated herein by reference from
Exhibit No. 3.1 to the Company's Annual Report
on Form 10-K for the year ended March 31, 1988.)
3(ii) * By-Laws of the Company, as amended. (Incorporated
herein by reference from Exhibit 3.2 of the
Company's Annual Report on Form 10-K for the year
ended March 31, 1990.)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Chief
Executive Officer.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
Corporate Controller.
18