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 5, 2004
| | 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 executive offices) (Zip Code) (Registrant's telephone
number, including area code)
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 February 13, 2004: 1,814,656
ELMER'S RESTAURANTS, INC.
INDEX
Page
Number
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets,
January 5, 2004 (Unaudited) and
March 31, 2003
Condensed Consolidated Statements of Operations, 4
12 and 40 weeks ended January 5, 2004 (Unaudited)
and January 6, 2003 (Unaudited)
Statement of Changes in Shareholders' Equity, 5
January 5, 2004 (Unaudited)
Condensed Consolidated Statements of Cash Flows, 6
40 weeks ended January 5, 2004 (Unaudited) and
January 6, 2003 (Unaudited)
Notes to Condensed Consolidated Financial Statements 7
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial 12
Statements (Unaudited)
Item 3. Quantitative and Qualitative Disclosures about Market 17
Risk
Item 4. Controls and Procedures 18
PART II: OTHER INFORMATION AND SIGNATURES
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
ELMER'S RESTAURANTS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 5, 2004 March 31, 2003
--------------- --------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,474,004 $ 2,200,263
Marketable securities 903,359 760,441
Accounts receivable 313,428 260,848
Notes receivable - franchisees and
related parties, current portion 89,174 81,771
Inventories 366,835 430,737
Prepaid expenses and other 487,179 227,142
Income taxes receivable - 121,617
------------ ------------
Total current assets 4,633,979 4,082,819
Notes receivable - franchisees and
related parties, net of current portion 199,015 212,026
Property, buildings and equipment, net 9,021,911 7,075,969
Goodwill 4,897,743 4,897,743
Intangible assets 602,709 602,709
Principal debt service account for
convertible debt - 208,929
Other assets 170,993 309,108
------------ ------------
Total assets $ 19,526,350 $ 17,389,303
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, current portion $ 387,434 $ 332,810
Accounts payable 1,535,850 1,118,167
Accrued expenses 512,480 314,136
Accrued payroll and related taxes 556,805 486,915
Accrued income tax 267,883 -
------------ ------------
Total current liabilities 3,260,452 2,252,028
Notes payable, net of current portion 4,666,100 4,439,170
Deferred income taxes 967,532 948,000
------------ ------------
Total liabilities 8,894,084 7,639,198
------------ ------------
Commitments and contingencies
Shareholders' equity
Common stock, no par value; 10,000,000 shares authorized
2,016,709 shares issued and outstanding 7,170,016 7,283,139
Retained earnings 3,431,036 2,486,879
Accumulated other comprehensive gain
(loss), net of taxes 31,214 (19,913)
------------ ------------
Total shareholders' equity 10,632,266 9,750,105
------------ ------------
Total liabilities and shareholders' equity $ 19,526,350 $ 17,389,303
============ ============
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 5, January 6, January 5, January 6,
2004 2003 2004 2003
------------- ------------ ------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES $ 25,600,462 $24,399,010 $ 7,705,568 $ 7,575,376
------------- ------------ ------------- -------------
COSTS AND EXPENSES:
Cost of restaurant sales:
Food and beverage 7,689,431 6,940,314 2,248,565 2,193,911
Labor and related costs 8,494,869 8,620,142 2,582,048 2,645,830
Restaurant operating costs 3,515,805 3,366,526 1,077,687 1,064,423
Occupancy costs 1,581,561 1,573,461 473,752 495,707
Depreciation and amortization 632,967 562,210 191,710 172,402
Restaurant opening and closing expenses 127,776 9,717 127,776 -
General and administrative expenses 1,868,970 1,761,557 517,039 518,946
Net loss (gain) on disposition of property 4,071 (736,197) - (287)
------------- ------------ ------------- -------------
23,915,450 22,097,730 7,218,577 7,090,932
------------- ------------ ------------- -------------
INCOME FROM OPERATIONS 1,685,012 2,301,280 486,991 484,444
OTHER INCOME (EXPENSE):
Interest income 65,524 126,314 23,801 31,666
Interest expense (294,090) (334,887) (85,560) (107,071)
Loss on debt extinguishment (32,500) (97,500) (32,500) -
Gain (loss) on sale of marketable securities 57,838 (55,934) 43,419 -
------------- ------------ ------------- -------------
Income before provision for income taxes 1,481,784 1,939,273 436,151 409,039
Income tax provision (499,000) (667,983) (147,000) (140,894)
------------- ------------ ------------- -------------
Net Income $ 982,784 $ 1,271,290 $ 289,151 $ 268,145
============= ============ ============= =============
PER SHARE DATA:
Net income per share - Basic $ 0.48 $ 0.62 $ 0.14 $ 0.13
============= ============ ============= =============
Weighted average number of
common shares outstanding - Basic 2,036,441 2,048,722 2,024,149 2,041,709
============= ============ ============= =============
Net income per share - Diluted $ 0.46 $ 0.60 $ 0.14 $ 0.13
============= ============ ============= =============
Weighted average number of
common shares outstanding - Diluted 2,134,112 2,119,193 2,138,528 2,082,363
============= ============ ============= =============
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
ELMER'S RESTAURANTS, INC., AND SUBSIDIARIES
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated other Total
Common Stock comprehensive gain shareholders
Shares Amount Retained earnings (loss) equity
--------- ----------- ----------------- ------------------- -------------
BALANCE, April 1, 2003 2,041,709 $ 7,283,139 $ 2,486,879 $ (19,913) $ 9,750,105
Comprehensive income:
Repurchase of common stock (25,000) (113,123) (38,627) (151,750)
Net Income - - 982,784 - 982,784
Change in net unrealized gain (loss)
on available for sale securities,
net of taxes - - - 53,541 53,541
Change in fair market value of interest
rate swap agreement, net of taxes - - - (2,414) (2,414)
--------- ----------- ----------- --------- -------------
Total comprehensive income 1,033,911
--------- ----------- ----------- --------- -------------
BALANCE, January 5, 2004 2,016,709 $ 7,170,016 $ 3,431,036 $ 31,214 $ 10,632,266
========= =========== =========== ========= =============
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
ELMER'S RESTAURANTS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the 40 weeks ended
-------------------------------
January 5, January 6,
2004 2003
------------- ------------
Cash flows from operating activities:
Net income $ 982,784 $ 1,271,290
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 632,967 562,210
Net loss (gain) on disposition of property 4,071 (735,910)
(Gain) loss on sale of marketable securities (57,838) 55,934
Loss on debt extinguishment 32,500 97,500
Changes in assets and liabilities:
Current assets (371,715) (327,162)
Other assets 138,115 (122,465)
Accounts payable 452,683 45,708
Accrued expenses 233,234 228,871
Income taxes 389,500 207,634
------------- ------------
Net cash provided by operating activities 2,436,301 1,283,610
------------- ------------
Cash flows from investing activities:
Additions to property, buildings and equipment (2,587,880) (542,614)
Purchases of available-for-sale securities (1,097,384) (145,316)
Proceeds from sale of available-for-sale securities 1,086,986 -
Business acquisition - (314,263)
Issuance of note receivable - (129,488)
Principal collected on note receivables 128,608 341,331
Proceeds from sale of assets 4,900 1,303,176
------------- ------------
Net cash (used in) provided by investing activities (2,464,770) 512,826
------------- ------------
Cash flows from financing activities:
Repurchase of convertible notes (682,500) (747,500)
Construction financing 1,199,648 -
Net change in principal debt service accounts 208,929 111,567
Repurchase of common stock (151,750) (88,245)
Payments on notes payable (272,117) (231,256)
------------- ------------
Net cash provided by (used in) financing activities 302,210 (955,434)
------------- ------------
Net change in cash and cash equivalents 273,741 841,002
Cash and cash equivalents, beginning of period 2,200,263 654,211
------------- ------------
Cash and cash equivalents, end of period $ 2,474,004 $ 1,495,213
============= ============
Continued on page 6a
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 294,090 $ 321,110
============= ============
Income taxes $ 109,500 $ 462,500
============= ============
Supplemental disclosures of non-cash transactions:
Sale of equipment for note receivable $ - $ 455,631
============= ============
Change in unrealized gain (loss) on available-for-sale
securities, net of taxes $ 44,809 $ (3,482)
============= ============
Change in fair market value of interest rate swap
agreement, net of taxes $ (2,414) $ -
============= ============
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
============= ============
Note receivable issued for franchise fee receivable $ 123,000 $ -
============= ============
The accompanying notes are an integral part of the condensed consolidated financial statements.
6a
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 March
31, 2003. 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 29, 2004.
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 had comprehensive income of $51,127 for the 40 weeks ended January
5, 2004. This was composed of an increase in the market value of
available-for-sale securities of $53,541 (net of taxes) partially offset by the
liability associated with an interest rate swap agreement of $2,414 (net of
taxes).
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 March
31, 2003 and no impairment was found. No events have occurred since the last
test for impairment that would indicate an impairment of the Company's
intangible assets. The Company is in the process of performing its annual
impairment test based upon the results of the 40 week period ended January 5,
2004.
Interest rate swap agreement - In June 2003, and in conjunction with the
modification of the Wells Fargo real estate debt agreement discussed below, the
Company entered into an interest rate swap agreement with Wells Fargo to reduce
the impact of changes in interest rates on its floating rate mortgage. The debt
modification and related swap agreement effectively changes the Company's
interest rate exposure on the Wells Fargo real estate debt to a fixed percentage
of 6.17%. The interest rate swap agreement matures May 24, 2010.
Under the terms of the swap agreement, the Company has committed to paying or
receiving interest on the spread between 30-day LIBOR and a fixed rate of 3.92%.
If 30-day LIBOR exceeds 3.92%, the Company receives interest income from the
bank equal to the spread. If 30-day LIBOR is less than 3.92%, the Company makes
interest payments to the bank equal to the spread. The 30-day LIBOR rate is
fixed on a monthly basis by the bank.
The swap is inversely correlated to the related hedged long-term debt and is
therefore considered an effective cash flow hedge of the underlying long-term
debt. The level of effectiveness of the hedge is measured by changes in the fair
value of the hedged long-term debt resulting from fluctuations in interest
rates. As a matter of policy, the Company does not enter into derivative
transactions for trading or speculative purposes.
7
The interest rate swap agreement qualifies as a cash flow hedge under Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS no. 133 requires that the fair value of
derivative instruments to be recorded and changes in the fair value of the
derivative instruments to be recognized in other comprehensive income. As of
January 5, 2004 the fair market value of this agreement results in a liability
of $2,414 (net of tax effect) and recognition of $2,414 in other comprehensive
loss. This is a reduction of $2,219 from the liability that was recognized in
the prior period ended October 13, 2003.
Stock options - SFAS No. 123, Accounting for Stock-Based Compensation, defines a
fair value-based method of accounting for employee stock options and similar
equity instruments, and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. It encourages,
but does not require, the companies to record compensation costs for stock-based
employee compensation plans at fair value. The Company has chosen to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations.
SFAS No. 123 was amended by SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - An Amendment of FASB Statement No.
123, which among other things, requires more prominent disclosures in both
annual and interim financial statements. The Company has adopted the disclosure
provisions of SFAS No. 148.
The Company complies with the disclosure-only provisions of SFAS No. 148 and no
compensation cost has been recognized for the plan. Had compensation cost for
the stock-based compensation plan been determined, based on the fair value of
options at the date of grant consistent with the provisions of SFAS No. 123, the
Company's pro forma net income and pro forma earnings per share would have been
as follows:
January 5, 2004 January 6, 2003
--------------- ---------------
12 weeks 40 weeks 12 weeks 40 weeks
-------- -------- -------- --------
Net income - as reported $289,151 $982,784 $268,145 $1,271,290
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (18,326) (61,087) (24,852) (82,841)
--------------- ------------ ------------ -------------
Net income - pro forma $270,825 $921,697 $243,293 $1,188,449
=============== ============ ============ =============
Diluted earnings per share - as reported $0.14 $0.46 $0.13 $0.60
Diluted earnings per share - pro forma $0.13 $0.43 $0.12 $0.56
As of January 5, 2004 the Company had outstanding option grants for 460,624
shares, of which 280,502 were vested. As of January 6, 2003 the Company had
outstanding grants for 393,937 shares with 188,006 shares vested.
Guarantees - As a result of the sale of three Elmer's restaurants to Southern
Oregon Elmer's LLC (the "Buyer"), the Company is a guarantor on Grants Pass and
Medford real estate leases until April 2007 and on a Roseburg real estate lease
which could extend until 2018 if all options are exercised by the Buyer. The
Company is also a guarantor on a franchisee lease in Nampa, Idaho until 2007. In
all cases, the franchisees have indemnified the Company against all losses
incurred as guarantor. In addition, the franchisees' principals and their
spouses have personally guaranteed the indemnification.
In the event of default by the Buyer, the Company could be required to pay all
rent and other payments due under the terms of the leases. As of January 5,
2004, the maximum potential liability under these guarantees is $1,233,550. In
the event of default, the Company expects it would exercise its right to
reoccupy and continue to operate the restaurants.
8
SUBSEQUENT EVENTS
On October 22, 2003, the Board of Directors directed the Company to prepare a
tender offer for 204,200 shares of the Company's common stock. The Company
commenced the tender offer on December 10, 2003 to purchase 204,200 shares of
its common stock at a purchase price of $6.43 per share.
Based on the final count by the depository for the tender offer (OTR, Inc.) on
January 14, 2004, 568,564 shares of common stock were properly tendered and not
withdrawn. The Company accepted for purchase 204,255 shares, representing
approximately 10% of outstanding shares, at a purchase price of $6.43 per share
in accordance with the terms of the offer. The Company purchased 36% of the
shares tendered. The aggregate price of the shares purchased by the Company
through the tender offer is approximately $1,313,000. Fees and expenses
associated with the tender offer were approximately $17,000 which will be
expensed in the Company's 4th Quarter. All shares repurchased by the Company are
retired.
RECENT TRANSACTIONS
Opening of Cornell Oaks Restaurant
July 29, 2003 the Company purchased a one-acre site in Beaverton, Oregon for
$775,000. Construction has been completed and the restaurant opened December 29,
2003. The Company has secured financing of approximately $1.6 million and as of
January 5, 2004, had drawn $1,199,648.
Repurchase of Convertible Debt
December 1, 2003, the Company repurchased the balance ($650,000) of its 10%
convertible notes, paying a 5% premium over face value. The total premium as
December 1, 2003 of $32,500 was recorded as a loss on extinguishment.
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, these transactions eliminates the
potential obligation to issue up to 210,000 shares of common stock upon
conversion. All convertible debt has now been repurchased.
Franchise Opening
Elmer's newest franchised restaurant opened on July 21, 2003. The 5,000 square
foot restaurant in Coeur d'Alene, Idaho occupies a converted Village Inn site.
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 in assumed liabilities and
the assumption of a $155,000 promissory note due to the Company. The acquisition
cost of $333,000 included $100,000 in tangible assets and $233,000 in goodwill.
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.
9
Sale of Southern Oregon Elmer's Restaurants
The quarter ended July 22, 2002 results include a gain on sale of building and
equipment related to the sale of three company owned restaurants. 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 signed 25-year franchise agreements for each
location and operates the locations under the Elmer's Breakfast o Lunch o
Dinner(TM) name.
The Buyer has signed a development agreement to open an additional two units
within five years. The first unit 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 after tax gain of
approximately $504,000 or $.25 per share in the quarter ending July 22, 2002.
For the year ended April 1, 2002, revenues from the three restaurants were $5.07
million, contributing $332,000 in earnings before taxes and interest expense.
The Company agreed to provide a limited amount of seller financing. The Company
holds notes receivable totaling $325,000, all but $189,000 is due within the
next year.
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 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.
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. The Company has spent approximately $148,000
remodeling the facility.
10
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS No. 150 establishes standards for classification
and measurement of certain financial instruments with characteristics of both
liabilities and equity. This statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period after June 15, 2003. The Company's
management does not expect that the application of the provisions of this
statement will have a material effect on the Company's consolidated financial
statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial accounting and reporting for derivative instruments
including certain derivatives embedded in other contracts. This statement is
effective for contracts entered into or modified after June 30, 2003. The
Company's management does not expect that the application of the provisions of
this statement will have a material effect on the Company's consolidated
financial statements.
In January 2003, FASB issued Interpretation No. 46 (FIN 46), Consolidation of
Variable Interest Entities, which was subsequently revised through
Interpretation No. 46R (FIN No. 46R). This interpretation and its revision
clarify the application of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, and requires existing unconsolidated variable interest
entities to be consolidated by their primary beneficiaries if the entities do
not effectively disperse risks among parties involved. The Company's management
does not expect that the application of the provisions of this interpretation
will have a material impact on the Company's consolidated financial statements.
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 condensed consolidated financial statements. Additional required
disclosures have been included in the 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.
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
11
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 in the prior year and
$32,500 in the current year and current quarter that is included in "Other
income (expense)" on the 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", "Cooper'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 franchises or operates a total of 36 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 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 and goodwill annually
based on its third quarter financial statements. If the fair values of the
intangibles and goodwill 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 and goodwill is limited and the
realizable value will differ from the fair values estimated by using a multiple
of earnings.
Depreciation
12
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 $289,151
and $984,784 or $.14 and $.48 in basic earnings per share for the 12 and 40 week
periods ended January 5, 2004. These results are compared to reported net income
of $268,000 and $1,271,000, or $.13 and $.62 per share for the 12 and 40 week
periods ended January 6, 2003. The approximately $21,000 increase in net income
for the 12 weeks ended January 5, 2004 reflects lower net interest expense. The
$288,500 decrease in net income for the 40 weeks ended January 5, 2004 is
largely attributable to the gain on the sale of the three Southern Oregon
restaurants in the first quarter 2002, partially offset by losses on the debt
repurchase, relocation and losses on the sale of investments. The Company's
total assets as of January 5, 2004 were $19.5 million, which is an increase of
approximately $2.1 million over total assets as of March 31, 2003. In the 40
weeks ended January 5, 2004, working capital decreased approximately $457,000
while notes payable (net of current portion) increased $227,000. Cash provided
by operating activities totaled $2,436,301 for the 40 weeks ended January 5,
2004 compared to $1,283,610 for the 40 weeks ended January 6, 2003. The Company
has also placed a $325,000 deposit with the Company's primary food vendor in
exchange for improved pricing. The deposit increased prepaid expenses and
reduced cash provided by operations. The deposit will be returned to the Company
when an electronic funds transfer agreement is finalized with this food vendor.
The Billings, Montana franchise agreement expired on December 21, 2003 and was
not renewed. Franchise fee revenue for fiscal 2004 was $7,035 and $13,069 for
fiscal 2003.
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 5, 2004 and January 6, 2003.
For the 12 and 40 week periods ended January 5, 2004, the Company's net income
increased 7.8% and decreased 22.7% from the comparable periods in 2003. Net
income as a percentage of total revenue decreased from 5.2% for the 40-week
period ended January 6, 2003, to 3.8% for the 40 weeks ended January 5, 2004 due
to last years net gain on the sale of three Southern Oregon units. Net income as
a percentage of total revenue increased from 3.5% for the 12-week period ended
January 6, 2003, to 3.8% for the 12 weeks ended January 5, 2004.
13
Results of Operations Results of Operations
Dollar amounts in thousands except per share For the 40 Weeks Ended for the 40 Weeks Ended
data January 5, 2004 January 6, 2003
--------------- ---------------
Percent of Percent of
Amount Revenues Amount Revenues
------- -------- -------- --------
Revenues $25,600 100.0% $24,399 100.0%
Restaurant costs and expenses 22,042 86.1% 21,072 86.4%
General and administrative expenses 1,869 7.3% 1,762 7.2%
Loss (Gain) on sale of land, buildings and
equipment 4 -- (736) (3.0)%
Operating income 1,685 6.6% 2,301 9.4%
Non operating income (expense) (203) (.8)% (362) (1.5)%
Net income 983 3.8% 1,271 5.2%
Basic earnings per share $0.48 $0.62
Results of Operations Results of Operations
Dollar amounts in thousands except per share For the 12 Weeks Ended for the 12 Weeks Ended
data January 5, 2004 January 6, 2003
--------------- ---------------
Percent of Percent of
Amount Revenues Amount Revenues
------- -------- -------- --------
Revenues $7,705 100.0% $7,575 100.0%
Restaurant costs and expenses 6,701 87.0% 6,572 86.8%
General and administrative expenses 517 6.7% 519 6.9%
Loss on disposition of equipment -- -- -- --
Operating income 487 6.3% 484 6.4%
Non operating income (expense) (51) (.7)% (75) (1.0)%
Net income 289 3.8% 268 3.5%
Basic earnings per share $0.14 $0.13
REVENUES. Revenues for the 12 and 40 weeks ended January 5, 2004 were 1.7% and
4.9% more, respectively, than the comparable period in 2003. Revenues from same
store restaurant operations showed an increase of .8% and an increase of 3.7%
for the 12 and 40 weeks ended January 5, 2004 respectively, over the comparable
period in 2003. Same store sales at the core Elmer's brand decreased .2% and
increased 2.7% for the 12 and 40 weeks ended January 5, 2004. The Company
defines same store sales as restaurants that were company owned and operated
continuously from April 1, 2002 through January 5, 2004.
Revenues Revenues
Dollar amounts in thousands For the 40 Weeks Ended for the 40 Weeks Ended
January 5, 2004 January 6, 2003
--------------- ---------------
Percent of Percent of
Amount Revenues Amount Revenues
------- -------- -------- --------
Restaurant operations:
Restaurant sales $21,476 83.9% $20,624 84.6%
Lottery 3,268 12.8% 2,865 11.7%
-------- ----- ------- -----
24,744 96.7% 23,489 96.3%
Franchise operations 856 3.3% 910 3.7%
-------- ---- ------- ----
14
Total revenue $25,600 100.0% 24,399 100.0%
======= ====== ====== ======
Revenues Revenues
Dollar amounts in thousands For the 12 Weeks Ended for the 12 Weeks Ended
January 5, 2004 January 6, 2003
--------------- ---------------
Percent of Percent of
Amount Revenues Amount Revenues
------- -------- -------- --------
Restaurant operations:
Restaurant sales $6,477 84.0% $6,359 84.0%
Lottery 992 12.9% 926 12.2%
------ ----- --- -----
7,469 96.9% 7,285 96.2%
Franchise operations 236 3.1% 290 3.8%
----- ---- --- ----
Total revenue $7,705 100.0% $7,575 100.0%
====== ====== ====== ======
RESTAURANT COSTS AND EXPENSES. A comparison of restaurant costs and expenses and
as a percent of revenue for the 40 weeks and 12 weeks ended January 5, 2004 and
January 6, 2003 are as follows:
Restaurant Costs & Expenses Restaurant Costs & Expenses
Dollar amounts in thousands For the 40 Weeks Ended for the 40 Weeks Ended
January 5, 2004 January 6, 2003
--------------- ---------------
Amount Percent Amount Percent
------- ------- ------- -------
Cost of restaurant sales:
Food and beverage $7,689 30.0% $6,940 28.4%
Labor and related costs 8,495 33.2% 8,620 35.5%
Restaurant operating costs 3,516 13.7% 3,367 13.8%
Occupancy costs 1,581 6.2% 1,573 6.4%
Depreciation and amortization 633 2.5% 562 2.3%
Restaurant opening and closing
expenses 128 .5% 10 .0%
------- ------- ------- -------
Total Cost of Restaurant Sales $22,042 86.1% $21,072 86.4%
======= ===== ======= =====
Restaurant costs & Expenses Restaurant Costs & Expenses
Dollar amounts in thousands For the 12 Weeks Ended for the 12 Weeks Ended
January 5, 2004 January 6, 2003
--------------- ---------------
Amount Percent Amount Percent
------ ------- ------ -------
Cost of restaurant sales:
Food and beverage $2,248 29.2% 2,194 29.0%
Labor and related costs 2,582 33.5% 2,646 34.9%
Restaurant operating costs 1,078 14.0% 1,064 14.1%
Occupancy costs 474 6.1% 496 6.5%
Depreciation and amortization 192 2.5% 172 2.3%
Restaurant opening and closing
expenses 128 1.7% -- --
------- ------- ------- -------
Total Cost of Restaurant Sales $6,701 87.0% $6,572 86.8%
====== ===== ====== =====
The addition of three delis to the Company's restaurant portfolio on July 1,
2003 had the effect of increasing food and beverage costs as a percentage of
sales and decreasing labor and related costs as a percentage of sales.
15
Deli operations typically experience higher food costs and lower labor costs as
a percentage of sales, than the Company's full service Elmer's and Mitzel's
concepts. Food and beverage costs at the Company's Elmer's restaurants for the
12 and 40 weeks ended January 5, 2004 decreased .3% and increased .5% of sales
while labor and related costs declined .8% and 1.1%.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative ("G&A") expenses
were 6.7% and 7.3% of total revenue for the 12 and 40 weeks ended January 5,
2004 compared to 6.9% and 7.2% in the comparable period in 2003. Directors and
Officers' insurance and employment practices insurance has increased $10,500
over the previous year. Accounting fees have increased $9,000 due to additional
SEC requirements. Franchise expense is up $80,000 over the previous year as we
have been more aggressive in recruiting new franchisees as well as providing
more assistance from the corporate office for new store opening. Training and
development expenses are up $26,000 due to additional training of new store
management.
LOSS (GAIN) ON SALE OF BUILDINGS AND EQUIPMENT. Gain/Loss on sale of buildings
and equipment declined from a gain of 3.0% for the 40 weeks ending January 6,
2003 to a loss of less than .1% for the 40 weeks ending January 5, 2004. The
Company has sold no restaurants in fiscal 2004 compared to three in the first
quarter 2003.
INCOME FROM OPERATIONS. Income from operations decreased $616,000 to $1,685,000
for the 40 weeks ending January 5, 2004 and increased $2,500 to $487,000 for the
12 weeks ending January 5, 2004. For the 40 weeks ending January 5, 2004,
decreases in gain on sale of $740,000 were offset by increased contribution from
restaurant and franchise operations of $124,000.
NON-OPERATING INCOME/(EXPENSE). Non-operating expense was (.7)% and (.8)% of
total revenues for the 12 and 40 weeks ended January 5, 2004 compared to (1.0)%
and (1.5)% of total revenues in the comparable period in 2003. The Company had a
net gain on marketable securities and debt extinguishments of $11,000 for the 12
weeks ending January 5, 2004 with no gains or losses in the 12 weeks ending
January 6, 2003. For the 40 weeks ending January 5, 2004 net gains on marketable
securities and debt extinguishments were $25,000 compared to a loss of $153,000
in marketable securities and debt extinguishment last year.
LIQUIDITY AND CAPITAL RESOURCES. As of January 5, 2004 the Company had cash and
cash equivalents of approximately $2.5 million representing an increase from
March 31, 2003 of approximately $274,000. Cash provided by operations was $2.4
million. Cash used in investing activities was $2.5 million. Construction of
Cornell Oaks used $2.0 million while other additions to property buildings and
equipment used $580,000. Net purchases of available for sale securities were
$10,000. Net cash provided by financing activities was $302,000. Cash was
provided by draws in the construction loan for the Cornell Oaks restaurant of
$1.2 million and offset by repurchase of convertible notes of $683,000 and
repurchase of common stock of $152,000.
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 5, 2004, the Company had outstanding indebtedness of
$3.5 million with GE Capital and $1.5 million in real estate debt with Wells
Fargo Bank.
On January 14, 2004 the Company purchased 204,255 shares, representing
approximately 10% of outstanding shares, at a purchase price of $6.43 per share
in accordance with the terms of the tender offer. The aggregate price of the
shares purchased by the Company through the tender offer is approximately
$1,313,000. Fees and expenses associated with the tender offer were
approximately $17,000 which will be expensed in the Company's 4th Quarter.
In May 2003, the Company granted non-executive incentive stock options for
45,000 shares to employees of the Company. The options vest over five years and
have a ten-year term. The exercise price of $5.48 was equal to the market value
of the Company's stock on the grant date.
16
The Wells Fargo real estate debt agreement was amended June 2003 changing the
fixed interest rate of 8% to a variable interest rate based on LIBOR. In
conjunction with this modification, the Company entered into an interest rate
swap agreement, which effectively fixed the interest rate at 6.17%. The
mortgages now have a weighted-average maturity of 7.5 years, bear interest at an
average of 6.0%, require monthly payments of principal and interest, and are
collateralized by three real estate assets.
The Company entered into a financing agreement with GE Capital to fund
approximately $1.6 million toward the Cornell Oaks land, building and equipment.
The loans can be drawn as needed to fund the construction. The loans have a
variable interest rate and terms of seven and 15 years. As of January 5, 2004,
the Company has drawn $1,200,000 on the notes.
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 3.5 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 2.0 to 1.0. Management believes that the Company is in compliance with
such requirements.
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.
CONTRACTUAL OBLIGATIONS
The Company makes a range of contractual commitments in the ordinary course of
business and in conjunction with the acquisition and sale of restaurants. The
following table shows the Company's contractual obligations:
Commitment expiration period
Total amount committed 1 year or less 1-3 years 4-5 years 5 years or more
- -----------------------------------------------------------------------------------------------------------------
Term debt $5,053,534 $387,434 $896,677 $1,310,673 $2,458,750
Operating Leases 5,757,161 1,410,839 2,202,205 1,198,354 945,763
Guarantees 1,233,550 268,962 575,319 320,246 69,023
- -----------------------------------------------------------------------------------------------------------------
Totals $12,044,245 $2,067,235 $3,674,201 $2,829,273 $3,473,536
============ ========== ========== ========== ==========
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
17
development; changes in business strategy or development plans; changes in
regulations affecting 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 consist primarily of domestic and
international corporate and government bond mutual funds focusing on issues with
medium and short term maturities and dividend yielding mutual funds. 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 July 21, 2003.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and 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. OTHER INFORMATION
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, 2004 (45 days prior to the month
and date in 2004 corresponding to the date on which the Company mailed its proxy
materials for the 2003 annual meeting), proxy voting on that proposal when and
if raised at the 2004 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 2004 annual
meeting must be received at the principal executive office of the Company no
later than January 21, 2004.
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
18
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
Chief Executive Officer and President
Dated: February 18, 2004
19
CERTIFICATION
I, Bruce N. Davis, Chief Executive Officer and President of Elmer's
Restaurants, Inc. (the "Company"), 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 and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to
materially affect the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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.
/s/ Bruce N. Davis
- ------------------------------------
Bruce N. Davis
Chief Executive Officer and President
February 18, 2004
20
CERTIFICATION
I, Dennis R. Miller, Corporate Controller of Elmer's Restaurants, Inc.
(the "Company"), 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 and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to
materially affect the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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.
/s/ Dennis R. Miller
- ------------------------------------
Dennis R. Miller
Corporate Controller
February 18, 2004
21
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. 23
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. 24
22