Back to GetFilings.com



================================================================================

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 JANUARY 6, 2003 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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

11802 S.E. Stark St.
Portland, Oregon 97216 (503) 252-1485
(ADDRESS OF PRINCIPAL (ZIP CODE) (REGISTRANT'S TELEPHONE NUMBER,
EXECUTIVE OFFICES) INCLUDING AREA CODE)

Securities registered pursuant to Section 2(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 February 17, 2003: 2,041,709

================================================================================




ELMER'S RESTAURANTS, INC.
-------------------------
INDEX

PAGE
NUMBER
------

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets,
January 6, 2003 (Unaudited) and April 1, 2002

Condensed Consolidated Statements of Income, 4
12 and 40 weeks ended January 6, 2003 (Unaudited)
and January 7, 2002 (Unaudited)

Condensed Consolidated Statements of Cash Flows, 5
40 weeks ended January 6, 2003 (Unaudited) and
January 7, 2002 (Unaudited)

Notes to Condensed Consolidated Financial Statements 6
(Unaudited)

Item 2. Management's Discussion and Analysis of Financial 9
Statements (Unaudited)

Item 3. Quantitative and Qualitative Disclosures about Market 14
Risk

Item 4. Controls and Procedures 14

PART II: OTHER INFORMATION AND SIGNATURES

Item 5. Other Information 15

Item 6. Exhibits and Reports on Form 8-K 15

Signatures 16





2


ELMER'S RESTAURANTS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

January 6, 2003 April 1, 2002
------------ ------------
(Unaudited)
ASSETS

Current assets:
Cash and cash equivalents $ 1,495,213 $ 654,211
Marketable securities 1,241,975 1,149,171
Accounts receivable 309,851 315,063
Notes receivable - franchisees and related parties, current portion 76,972 372,712
Inventories 413,838 411,008
Prepaid expenses and other 507,293 133,424
Income taxes receivable -- 114,117
------------ ------------

Total current assets 4,045,142 3,149,706

Notes receivable - franchisees and related parties, net of current portion 234,413 --
Property, buildings and equipment, net 7,113,576 7,654,097
Goodwill 4,872,487 4,699,164
Intangible assets 602,709 602,709
Principal debt service account for convertible debt 193,452 305,019
Other assets 397,053 274,588
------------ ------------

Total assets $ 17,458,832 $ 16,685,283
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, current portion $ 332,308 $ 277,333
Accounts payable 1,529,531 1,483,823
Accrued expenses 221,570 174,120
Accrued payroll and related taxes 610,266 403,141
Accrued income tax 91,366 --
------------ ------------

Total current liabilities 2,785,041 2,338,417

Notes payable, net of current portion 4,504,357 5,366,050
Deferred income taxes 693,875 691,724
------------ ------------

Total liabilities 7,983,273 8,396,191
------------ ------------
Commitments and contingencies

Shareholders' equity
Common stock, no par value; 10,000,000 shares authorized, 2,041,709 and
2,058,034 shares issued and outstanding at January 6, 2003 and April 1,
2002 respectively 7,283,155 7,371,400
Retained earnings 2,200,556 929,266
Accumulated other comprehensive loss, net of taxes (8,152) (11,574)
------------ ------------
Total shareholders' equity 9,475,559 8,289,092
------------ ------------

Total liabilities and shareholders' equity $ 17,458,832 $ 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 forty weeks ended For the twelve weeks ended
--------------------------------- ---------------------------------
January 6, January 7, January 6, January 7,
2003 2002 2003 2002
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)

REVENUES $ 24,399,010 $ 26,366,999 $ 7,575,376 $ 7,905,618
------------ ------------ ------------ ------------
COSTS AND EXPENSES:

Cost of restaurant sales:
Food and beverage 6,940,314 7,489,687 2,193,911 2,239,124
Labor and related costs 8,620,142 9,418,484 2,645,830 2,762,027
Restaurant operating costs 3,366,526 3,643,203 1,064,423 1,110,152
Occupancy costs 1,573,461 1,643,527 495,707 500,397
Depreciation and amortization 562,210 592,099 172,402 200,211
Restaurant opening and closing expenses 9,717 68,338 -- --
General and administrative expenses 1,761,557 1,899,471 518,946 613,947
------------ ------------ ------------ ------------

22,833,927 24,754,809 7,091,219 7,425,858
------------ ------------ ------------ ------------

INCOME FROM OPERATIONS 1,565,083 1,612,190 484,157 479,760

OTHER INCOME (EXPENSE):
Interest income 126,314 78,995 31,666 21,163
Interest expense (334,887) (442,621) (107,071) (128,302)
Loss on debt extinguishment (97,500) -- -- --
Loss on sale of marketable securities (55,934) -- -- --
Net gain (loss) on disposition of property 736,197 (5,764) 287 (1,717)
------------ ------------ ------------ ------------

Income before provision for income taxes 1,939,273 1,242,800 409,039 370,904

Income tax provision (667,983) (428,766) (140,894) (127,962)
------------ ------------ ------------ ------------

Net Income $ 1,271,290 $ 814,034 $ 268,145 $ 242,942
============ ============ ============ ============

PER SHARE DATA:

Net income per share - Basic $ 0.62 $ 0.40 $ 0.13 $ 0.12
============ ============ ============ ============

Weighted average number of
common shares outstanding - Basic 2,048,722 2,059,211 2,041,709 2,058,003
============ ============ ============ ============
Net income per share - Diluted
common shares outstanding $ 0.60 $ 0.39 $ 0.13 $ 0.12
============ ============ ============ ============

Weighted average number of
common shares outstanding - Diluted 2,119,193 2,083,413 2,082,363 2,082,870
============ ============ ============ ============


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 forty weeks ended
-------------------------------
January 6, January 7,
2003 2002
----------- -----------
(Unaudited) (Unaudited)


Cash flows from operating activities:
Net income $ 1,271,290 $ 814,034
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 562,210 592,099
Net gain on disposition of property (735,910) 5,764
Loss on sale of marketable securities 55,934 --
Loss on debt extinguishment 97,500 --


Changes in assets and liabilities:
Current assets (327,162) 80,188
Other assets (10,898) (66,124)
Accounts payable and accrued expenses 274,579 69,661
Income taxes 207,634 (49,725)
----------- -----------

Net cash provided by operating activities 1,395,177 1,445,897
----------- -----------

Cash flows from investing activities:
Acquisitions of property, buildings and equipment (542,614) (774,624)
Restaurant acquisitions (314,263) --
Proceeds from restaurant dispositions 1,303,176 906,515
Purchased goodwill -- (143,569)
Net purchases of available for sale securities (145,316) (1,175,064)
Issuance of note receivable (129,488) (110,535)
Principal collected on note receivables 341,331 123,319
----------- -----------

Net cash provided by (used in) investing activities 512,826 (1,173,958)
----------- -----------

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 (231,256) (244,670)
Repurchase of common stock (88,245) (9,400)
----------- -----------

Net cash used in financing activities (1,067,001) (671,991)
----------- -----------

Net change in cash and cash equivalents 841,002 (400,052)

Cash and cash equivalents, beginning of period 654,211 1,141,016
----------- -----------

Cash and cash equivalents, end of period $ 1,495,213 $ 740,964
=========== ===========

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 321,110 $ 442,621
=========== ===========

Income taxes $ 462,500 $ 478,491
=========== ===========

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 are
tested for impairment in the third quarter of each fiscal year. Testing was
completed for the year ended April 1, 2002 and no impairment was found.
Management does not anticipate that testing in the current year will show any
impairment of the intangible assets.

The Company adopted SFAS No. 142 effective April 3, 2001. The changes in the
carrying value of goodwill and intangible assets for the 40 weeks ended January
6, 2003, are as follows:

Goodwill Intangibles
---------- ----------
Balance as of April 1, 2002 $4,699,164 $ 602,709
Acquired during the year 212,929 --
Disposed during the year (39,606) --
---------- ----------
Balance as of January 6, 2003 $4,872,487 $ 602,709
========== ==========



Since the Company utilized the early application provision of SFAS No. 142 the
Company adopted the provisions of SFAS No. 142 beginning April 3, 2001 thus
provisions of SFAS No. 142 have been implemented on both years of financial
statements presented. These standards only permit prospective application of the
new accounting; accordingly adoption of these standards will not affect

6

previously reported financial information. The principal effect of implementing
SFAS No. 142 was the cessation of the amortization of goodwill.

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. No dividends were declared in the 40
weeks ended January 6, 2003.

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 o Lunch o 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 40 weeks ended January 7, 2002, revenues from the
three restaurants were $3.8 million, contributing $253,000 in earnings before
taxes and interest expense. If these three restaurants had been franchised
during the 40 weeks ended January 7, 2002, pro forma franchise fee income would
have been approximately $191,000. The franchise fee income from these three
restaurants for the 40 weeks ended January 6, 2003 was approximately $213,000.

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; and 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

7

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 o Lunch o Dinner (TM).

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 January 6, 2003, 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.

Purchase of Cornell Oaks Property
- ----------------------------------
January 6, 2003 the Company entered into a Sales and Purchase Agreement for a
one acre site in Beaverton, Oregon. The Company has placed a $30,000 deposit on
the property and the balance of the purchase price, $745,000, is due and payable
at closing which is expected to be in July, 2003. If the Company is able to
obtain the necessary land use and other governmental approvals prior to July 7,
2003, the Company plans on building a prototype restaurant at this location.

RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure--an
Amendment of FASB Statement No. 123." This statement amends FASB Statement No.
123, "Accounting for Stock-Based Compensation," to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this statement
amends the disclosure requirements of statement No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. Management intends to continue using the intrinsic
value method for stock-based employee compensation arrangements and, therefore,
does not expect that the application provisions of this statement will have a
material impact on the Company's
8


condensed consolidated financial statements. Additional required disclosures
will be included in future financial statements.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities. The Company
has adopted this statement and there was no material impact on the condensed
consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
Among other things, this statement rescinds FASB Statement No. 4, "Reporting
Gains and Losses from Extinguishment of Debt," and an amendment of that
statement, FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." The Company adopted the provisions of SFAS No. 145
under its early application provisions in the first quarter of 2003. The Company
recorded a loss on extinguishment of debt totaling $97,500 that is included in
"Other income (expense)" on the condensed consolidated financial statements.

In November 2002, FASB issued Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This interpretation elaborates on the
disclosures to be made by a guarantor about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing a guarantee. The Company has complied with
the disclosure requirements of FIN 45. The initial recognition and initial
measurement provisions shall be applied on a prospective basis to guarantees
issued or modified after December 31, 2002. Management does not expect that the
application of the provisions of this interpretation will have a material impact
on the Company's condensed consolidated financial statements.

PART I - FINANCIAL INFORMATION

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 o
Lunch o 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 reached a termination agreement with the Twin Falls franchisee in
December 2002 and the Longview franchisee in January 2003. For the 40 weeks
ended January 6, 2003, the Company recorded less than $10,000 in franchise fee
revenues from these locations.

The Company franchises or operates a total of 35 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.

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

9


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 property, buildings and equipment, the 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.

Intangible Assets
- -----------------
The Company reviews the valuation of its intangible assets annually based on its
third quarter financial statements. If the fair values of the intangibles were
less than their recorded values, an impairment loss would be recognized. The
fair values of the reporting units are estimated using multiples of earnings
before interest, taxes, depreciation and amortization. The market for these
intangibles is limited and the realizable value will differ from the fair values
estimated by using a multiple of earnings.

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 $268,145
and $1,271,290 or $.13 and $.62 in basic earnings per share for the 12 and 40
week periods ended January 6, 2003. These results are compared to reported net
income of $242,942 and $814,034, or $.12 and $.40 per share for the 12 and 40
week periods ended January 7, 2002. The approximately $25,000 increase in net
income for the 12 weeks ended January 6, 2003 is the result of reduced general
and administrative expense as well as reduced interest expense due to reductions
in the company's interest bearing debt. The $457,000 increase in net income for
the 40 weeks ended

10


January 6, 2003 is largely attributable to the gain of $.25 per share, net of
tax, on sale of the three Southern Oregon restaurants in the first quarter,
partially offset by losses totaling $.07 per share on the debt repurchase,
relocation and losses on the sale of investments. The Company's total assets as
of January 6, 2003 were $17.4 million, which is an increase of approximately
$652,000, over total assets as of April 1, 2002. In the 40 weeks ended January
6, 2003, working capital increased approximately $449,000 while notes payable
(net of current portion) decreased $862,000. Cash provided by operating
activities totaled $1,395,177 for the 40 weeks ended January 6, 2003 compared to
$1,445,897 for the 40 weeks ended January 7, 2002. The Company has also placed a
temporary $350,000 deposit with the 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 is in place the deposit
will 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 40 weeks ended
January 6, 2003 and the 12 and 40 weeks ending January 7, 2002 respectively.

For the 12 and 40 week periods ended January 6, 2003, the Company's net income
increased 10.3% and 56.2% from the comparable periods in 2002. The Company
posted a net after tax gain of approximately $.18 per share in the first fiscal
quarter of this year, accounting for much of the $.22 per share improvement in
earnings per share. Excluding the net gain posted in the first quarter, the
Company's earnings have increased approximately 11% for the forty weeks ended
January 6, 2003. Net income as a percentage of total revenue increased from 3.1%
for the 40-week period ended January 7, 2002, to 5.2% for the 40 weeks ended
January 6, 2003. Net income as a percentage of total revenue increased from 3.1%
for the 12-week period ended January 7, 2002, to 3.5% for the 12 weeks ended
January 6, 2003.


RESULTS OF OPERATIONS RESULTS OF OPERATIONS
Dollar amounts in thousands FOR THE 40 WEEKS ENDED FOR THE 40 WEEKS ENDED
except per share data JANUARY 6, 2003 JANUARY 7, 2002
--------------- ---------------
Percent of Percent of
Amount Revenues Amount Revenues
------ -------- ------ --------

Revenues $24,399 100.0% $26,367 100.0%
Restaurant costs and expenses 21,072 86.4 22,856 86.7
General and administrative expenses 1,762 7.2 1,899 7.2
Operating income 1,565 6.4 1,612 6.1
Non operating income (expense) 374 1.5 (369) (1.4)
Net income 1,271 5.2 814 3.1

Basic earnings per share $0.62 $0.40



RESULTS OF OPERATIONS RESULTS OF OPERATIONS
Dollar amounts in thousands FOR THE 12 WEEKS ENDED FOR THE 12 WEEKS ENDED
except per share data JANUARY 6, 2003 JANUARY 7, 2002
--------------- ---------------
Percent of Percent of
Amount Revenues Amount Revenues
------ -------- ------ --------

Revenues $7,575 100.0% $7,906 100.0%
Restaurant costs and expenses 6,572 86.8 6,812 86.2
General and administrative expenses 519 6.9 614 7.8
Operating income 484 6.4 480 6.1
Non operating income (expense) (75) (1.0) (109) (1.4)
Net income 268 3.5 243 3.1

Basic earnings per share $0.13 $0.12

11

REVENUES. Revenues for the 12 and 40 weeks ended January 6, 2003 were 4.2% and
7.5% less, respectively, than the comparable period in 2002, reflecting fewer
operating restaurants for most of the current year. Revenues from same store
restaurant operations showed an increase of 3.9% and 1.8% for the 12 and 40
weeks ended January 6, 2003 respectively, over the comparable period in 2002.
Same store sales at the core Elmer's brand increased 5.7% and 3.8% for the 12
and 40 weeks ended January 6, 2003.


REVENUES REVENUES
Dollar amounts in thousands FOR THE 40 WEEKS ENDED FOR THE 40 WEEKS ENDED
JANUARY 6, 2003 JANUARY 7, 2002
--------------- ---------------
Percent of Percent of
Amount Revenues Amount Revenues
------ -------- ------ --------

Restaurant operations:
Restaurant sales $20,624 84.6% $22,785 86.4%
Lottery 2,865 11.7 2,638 10.0
------- ----- ------- -----
23,489 96.3 25,423 96.4

Franchise operations 910 3.7 944 3.6
------- ----- ------- -----
Total revenue $24,399 100.0% $26,367 100.0%
======= ===== ======= =====



REVENUES REVENUES
Dollar amounts in thousands FOR THE 12 WEEKS ENDED FOR THE 12 WEEKS ENDED
JANUARY 6, 2003 JANUARY 7, 2002
--------------- ---------------
Percent of Percent of
Amount Revenues Amount Revenues
------ -------- ------ --------

Restaurant operations:
Restaurant sales $6,359 84.0% $6,818 86.2%
Lottery 926 12.2 803 10.2
------- ----- ------- -----
7,285 96.2 7,621 96.4

Franchise operations 290 3.8 285 3.6
------- ----- ------- -----
Total revenue $7,575 100.0% $7,906 100.0%
======= ===== ======= =====


RESTAURANT COSTS AND EXPENSES. A comparison of restaurant costs and expenses as
a percent of revenue for the 40 weeks and 12 weeks ended January 6, 2003 and
January 7, 2002 are as follows:

FOR THE FORTY FOR THE TWELVE
WEEKS ENDED WEEKS ENDED
------------------ ------------------
January 6, January 7, January 6, January 7,
2003 2002 2003 2002
------ ------ ------ ------

Cost of restaurant sales:
Food and beverage 28.4% 28.4% 29.0% 28.3%
Labor and related costs 35.5% 35.8% 34.9% 35.1%
Restaurant operating costs 13.8% 13.8% 14.1% 14.0%
Occupancy costs 6.4% 6.2% 6.5% 6.3%
Depreciation and amortization 2.3% 2.2% 2.3% 2.5%
Restaurant opening and closing expenses 0.0% 0.3% 0.0% 0.0%
------ ------ ------ ------
Total Cost of Restaurant Sales 86.4% 86.7% 86.8% 86.2%
====== ====== ====== ======

12


GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative ("G&A") expenses
were 6.9% and 7.2% of total revenue for the 12 and 40 weeks ended January 6,
2003 compared to 7.8% and 7.2% of revenues in the comparable period in 2002.
Following the sale of the three Southern Oregon restaurants, the Company has
worked to reduce G&A expense in conjunction with the reduction in the number of
Company owned restaurants. The time required to achieve these cost savings
accounts for the increase in G&A expense as a percentage of sales in the first
half of the year. These savings and reductions in the cost of the administrative
services contract have resulted in a reduction in G&A expense as a percentage of
sales in the most recent quarter.

NON-OPERATING (INCOME)/EXPENSE. Non-operating expense was 1.0% of total revenues
for the 12 weeks ended January 6, 2003 compared to 1.4% of total revenues in the
comparable period in 2002. For the 40 week period ending January 6, 2003,
Non-operating income was 1.5% of sales compared to an expense of 1.4% for the
comparable period in 2002. The change reflects a net gain of 2.4% of sales on
the sale of restaurants, sale of securities and repurchase of debt discussed
earlier.

LIQUIDITY AND CAPITAL RESOURCES. As of January 6, 2003, the Company had cash and
equivalents of approximately $1,495,000 representing an increase from April 1,
2002 of approximately $841,000. Cash provided by operations was $1.4 million.
Cash provided by investing activities was $513,000. Proceeds of $1.3 million
from the sale of the Southern Oregon units were offset by capital expenditures
of $543,000 and cash used to purchase the Vancouver Elmer's and the Cooper's
delis of $314,000. Cash used in financing activities totaled $1.1 million,
including $747,500 spent 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
annually. 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 January 6, 2003, the Company's primary indebtedness was $2.5
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
7.1 years, bears interest at an average of 8.2%, requires monthly payments of
principal and interest, and is collateralized by three real estate assets.

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

13


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
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 January 6, 2003.

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.

14


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. 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, has assumed the
responsibilities of the C.E.O. Mr. Service remains an active member of the Board
and continues 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 6. 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:

None.

.










15


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: February 19, 2003




















16


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 am 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
February 19, 2003

17


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 am 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
February 19, 2003

18


EXHIBIT INDEX


Exhibit
No. Description


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.




















19