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SECURITIES AND EXCHANGE COMMISSION
----------------------------------
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 3, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO _________________
COMMISSION FILE NUMBER 0-14837
ELMER'S RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
OREGON _______ 93-0836824
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
11802 S.E. Stark St.
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 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 [X]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Exchange Act Rule 12b-2). Yes [ ] No [X]
Number of shares of Common Stock outstanding at February 15, 2005: 1,842,945
ELMER'S RESTAURANTS, INC.
INDEX
PAGE
NUMBER
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets,
January 3, 2005 (Unaudited) and March 29, 2004
Condensed Consolidated Statements of Income, 4
12 and 40 weeks ended January 3, 2005 (Unaudited)
and January 5, 2004 (Unaudited)
Condensed Statement of Changes in Shareholders' Equity, 5
Forty weeks ended January 3, 2005 (Unaudited)
Condensed Consolidated Statements of Cash Flows, 6
Forty weeks ended January 3, 2005 (Unaudited)
and January 5, 2004 (Unaudited)
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 16
Item 4. Controls and Procedures 17
PART II: OTHER INFORMATION AND SIGNATURES
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
PART 1 - Financial Information
Item 1. Financial Statements
ELMER'S RESTAURANTS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 3, 2005 March 29, 2004
---------------------- ---------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,495,403 $ 1,601,378
Marketable securities 821,616 930,196
Accounts receivable 337,775 261,669
Notes receivable - franchisees and related parties, current portion 48,838 41,036
Inventories 377,809 372,707
Prepaid expenses and other 528,568 476,159
Income taxes receivable - 159,877
---------------------- ---------------------
Total current assets 4,610,009 3,843,022
Notes receivable - franchisees and related parties, net of current portion 146,479 191,244
Property, buildings and equipment, net 8,863,175 9,325,050
Goodwill 4,897,743 4,897,743
Intangible assets 602,709 602,709
Market value of interest rate swap agreement 164 -
Other assets 346,603 185,561
---------------------- ---------------------
Total assets $ 19,466,882 $ 19,045,329
====================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, current portion $ 449,237 $ 416,278
Accounts payable 1,262,473 1,496,905
Accrued expenses 453,192 500,536
Accrued payroll and related taxes 438,274 662,253
Accrued income tax 69,078 -
---------------------- ---------------------
Total current liabilities 2,672,254 3,075,972
Notes payable, net of current portion 4,637,094 4,916,157
Deferred income taxes 1,397,473 1,396,000
Deferred lease obligation 145,000 -
Obligation under interest rate swap - 33,005
---------------------- ---------------------
Total liabilities 8,851,821 9,421,134
---------------------- ---------------------
Commitments and contingencies
Shareholders' equity
Common stock, no par value; 10,000,000 shares authorized, 1,840,900
shares issued and outstanding. 6,359,550 6,216,136
Retained earnings 4,237,722 3,391,413
Accumulated other comprehensive gain (loss), net of taxes 17,789 16,646
---------------------- ---------------------
Total shareholders' equity 10,615,061 9,624,195
---------------------- ---------------------
Total liabilities and shareholders' equity $ 19,466,882 $ 19,045,329
====================== =====================
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 3, January 5, January 3, January 5,
2005 2004 2005 2004
------------------ ------------------ ------------------ ------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES $ 25,499,856 $ 25,600,462 $ 7,862,082 $ 7,705,568
------------------ ------------------ ------------------ ------------------
COSTS AND EXPENSES:
Cost of restaurant sales:
Food and beverage 7,488,581 7,689,431 2,334,374 2,248,565
Labor and related costs 8,596,177 8,494,869 2,593,672 2,582,048
Restaurant operating costs 3,622,354 3,515,805 1,119,212 1,077,687
Occupancy costs 1,582,137 1,581,561 474,396 473,752
Depreciation and amortization 710,224 632,967 242,730 191,710
Restaurant opening costs - 127,776 - 127,776
General and administrative expenses 2,003,878 1,868,970 577,018 517,039
Net (gain) loss on disposition of property (128,278) 4,071 731 -
Net loss on impairment of equipment 140,000 - - -
------------------ ------------------ ------------------ ------------------
24,015,073 23,915,450 7,342,133 7,218,577
------------------ ------------------ ------------------ ------------------
INCOME FROM OPERATIONS 1,484,783 1,685,012 519,949 486,991
OTHER INCOME (EXPENSE):
Interest income 55,895 65,524 23,248 23,801
Interest expense (307,042) (294,090) (82,705) (85,560)
Loss on debt extinguishment - (32,500) - (32,500)
Gain (loss) on sale of marketable securities 10,673 57,838 (136) 43,419
------------------ ------------------ ------------------ ------------------
Income before provision for income taxes 1,244,309 1,481,784 460,356 436,151
Income tax provision (398,000) (499,000) (147,000) (147,000)
------------------ ------------------ ------------------ ------------------
NET INCOME $ 846,309 $ 982,784 $ 313,356 $ 289,151
================== ================== ================== ==================
PER SHARE DATA:
Net income per share - Basic $ 0.46 $ 0.48 $ 0.17 $ 0.14
================== ================== ================== ==================
Weighted average number of
common shares outstanding - Basic 1,825,276 2,036,441 1,836,514 2,024,149
================== ================== ================== ==================
Net income per share - Diluted $ 0.44 $ 0.46 $ 0.16 $ 0.14
================== ================== ================== ==================
Weighted average number of
common shares outstanding - Diluted 1,927,132 2,134,112 1,948,265 2,138,528
================== ================== ================== ==================
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
Common Stock Total
----------------------- Retained Accumulated other shareholders'
Shares Amount earnings comprehensive gain (loss) equity
------------------------------------ ------------------------- ------------------
BALANCE, March 29, 2004 1,816,335 $6,216,136 $3,391,413 $ 16,646 $ 9,624,195
Stock option exercise 24,565 124,414 124,414
Tax benefit from disqualified stock option
exercise 19,000 19,000
Comprehensive income:
Net Income - - 846,309 - 846,309
Change in net unrealized gain (loss) on
available for sale securities, net of taxes (18,556) (18,556)
Change in fair market value of interest rate
swap agreement, net of taxes 19,699 19,699
- -------------------------------------------------------------------------------------- ------------------------- ------------------
Total comprehensive income 846,309 1,143 847,452
------------------------------------ ------------------------- ------------------
BALANCE, January 3, 2005 1,840,900 $6,359,550 $4,237,722 $ 17,789 $10,615,061
==================================== ========================= ==================
(unaudited)
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 forty weeks ended
------------------------------------------
January 3, January 5,
2005 2004
------------------- -----------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 846,309 $ 982,784
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 710,224 632,967
(Gain) loss on disposition of equipment (128,278) 4,071
Loss of impairment of equipment 140,000 -
Gain on sale of marketable securities (10,673) (57,838)
Loss on debt extinguishment - 32,500
Changes in assets and liabilities:
Current assets (108,757) (371,715)
Other assets (56,042) 138,115
Accounts payable (234,432) 452,683
Accrued expenses (75,869) 163,344
Accrued payroll and related taxes (223,979) 69,890
Income taxes 247,955 389,500
------------------- -----------------
Net cash provided by operating activities 1,106,458 2,436,301
------------------- -----------------
Cash flows from investing activities:
Additions to property, buildings and equipment (639,703) (2,587,880)
Purchases of available-for-sale securities (353,100) (1,097,384)
Proceeds from sale of available-for-sale securities 441,599 1,086,986
Principal collected on note receivables 36,963 128,608
Proceeds from sale of assets 423,500 4,900
Construction in progress - -
------------------- -----------------
Net cash provided by (used in) investing activities (90,741)
------------------- -----------------
Cash flows from financing activities:
Issuance of notes payable 68,493 1,199,648
Repurchase of convertible notes - (682,500)
Net change in principal debt service accounts - 208,929
Payments on notes payable (314,599) (272,117)
Repurchase of common stock - (151,750)
Sale of common stock under stock option plan 124,414 -
------------------- -----------------
Net cash (used in) provided by financing activities (121,692) 302,210
------------------- -----------------
Net change in cash and cash equivalents 894,025 273,741
Cash and cash equivalents, beginning of period 1,601,378 2,200,263
------------------- -----------------
Cash and cash equivalents, end of period $ 2,495,403 $ 2,474,004
=================== =================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 224,337 $ 208,530
=================== =================
Income taxes $ 114,957 $ 53,500
=================== =================
Supplemental disclosures of non-cash transactions:
Deferred lease obligation recognized on lease renewal $ 145,000 $ -
=================== =================
Change in unrealized (gain) loss on available-for-sale securities, net of taxes $ (18,556) $ 60,572
=================== =================
Change in fair market value of interest rate swap agreement, net of taxes $ 19,699 $ (4,633)
=================== =================
Tax benefit from disqualified stock option exercise 19,000 -
=================== =================
Note receivable issued for franchise fee receivable $ - $ 123,000
=================== =================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
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
29, 2004. Operating results reflected in the interim consolidated financial
statements are not necessarily indicative of the results that may be expected
for the year ending March 28, 2005.
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 $847,452 for the forty weeks ended
January 3, 2005. This was composed of net income of $846,309 and an increase in
the market value of an interest rate swap agreement of $19,699 (net of taxes),
offset by a decline in the market value of available-for-sale securities of
$18,556 (net of taxes).
INTEREST RATE SWAP AGREEMENT - In June 2003, in conjunction with the
modification of the Wells Fargo Bank real estate debt agreement discussed below,
the Company entered into an interest rate swap agreement with Wells Fargo Bank
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 Bank real estate debt to a
fixed percentage rate of 6.17%. The notional amount of the swap agreement as of
January 3, 2005 was $1.0 million. 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.
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 be recorded and changes in the fair value of the
derivative instruments be recognized in other comprehensive income. As of
January 3, 2005 the market value of the swap agreement was $164 and results in
the recognition of $19,699 (net of tax effect) in other comprehensive gain
during the 40 weeks then ended.
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 companies to adopt that method of
accounting for all of their employee stock compensation plans. It encourages,
but does not require, 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
7
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations.
Under SFAS No. 123 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 3, 2005 January 5, 2004
--------------- ---------------
12 weeks 40 weeks 12 weeks 40 weeks
-------- -------- -------- --------
Net income - as reported (unaudited) $313,356 $846,309 $289,151 $982,784
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (7,242) (24,138) (18,326) (61,087)
--------------- ------------ ------------ -------------
Net income - pro forma $306,114 $822,171 $270,825 $921,697
=============== ============ ============ =============
Basic earnings per share - as reported $0.17 $0.46 $0.14 $0.48
Diluted earnings per share - as reported $0.16 $0.44 $0.14 $0.46
Basic earnings per share - pro forma $0.17 $0.46 $0.13 $0.45
Diluted earnings per share - pro forma $0.16 $0.43 $0.13 $0.43
As of January 3, 2005 the Company had outstanding option grants for 413,537
shares, of which 307,419 options were vested. As of January 5, 2004 the Company
had outstanding option grants for 460,624, shares of which 280,502 options were
vested.
GUARANTEES - In connection with the sale of three Elmer's restaurants to
Southern Oregon Elmer's LLC (the "Buyer") in May 2002, the Company agreed to
guarantee Grants Pass and Medford real estate leases until April 2007 and 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. The Company is a guarantor of the lease on the
Company's recently refranchised Palm Springs location until April 2007 and on a
rolling twelve-month basis thereafter until 2020. 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 franchisee's indemnification obligation.
In the event of default by the franchisee of the guaranteed lease, the Company
could be required to pay all rent and other payments due under the terms of the
leases. As of January 3, 2005, the maximum potential liability under these
guarantees is $1,009,223. In the event of default, the Company expects it would
exercise its right to reoccupy and continue to operate the restaurants.
RECENT TRANSACTIONS AND EVENTS
Receipt of Going Private Offer
- ------------------------------
August 6, 2004, the Company announced that it had received a non-binding
proposal for a going private transaction from a purchaser group led by Bruce N.
Davis, the Company's Chairman of the Board, Chief Executive Officer and
President, and consisting of the Company's Board of Directors and 12 additional
shareholders. A copy of the proposal was attached to the Press Release dated
August 6, 2004 and available in the 8-K filed with the SEC on August 6, 2004.
The 8-K is also available on the Company's website www.elmers-restaurants.com.
The acquisition group filed a Schedule TO with the SEC on December 20, 2004. The
tender offer is an offer to purchase all outstanding shares not owned by the
acquisition group at a cash price of $7.50 per share. February 17, 2005 the
acquisition group extended the tender offer until March 10, 2005. The group
reported that
8
sufficient shares had been tendered as of February 2, 2005 to control 89% of the
outstanding shares of the Company's stock. The acquisition group has announced
their intent, if successful in the tender offer, to take the Company private and
to de-register the Company as a reporting company under the Securities Exchange
Act of 1934. Copies of all SEC filings related to the tender offer are
available, free of charge, at the SEC's website www.sec.gov, or at the Company's
website, www.elmers-restaurants.com.
Sale of Palm Springs Restaurant
- -------------------------------
March 30, 2004, the Company refranchised the Company's Elmer's Restaurant in
Palm Springs, California. The buyer executed a 25-year franchise agreement and
assumed the Company's operating lease obligations. The Company remains a
guarantor of the lease until April 2007 and on a rolling twelve-month basis
thereafter until 2020. The sales price of $415,000 was received in cash and
resulted in a pretax gain of approximately $129,000. Assets sold included
prepaids and inventory of approximately $16,000, transaction expenses of $28,000
and equipment of approximately $242,000.
Franchise Opening
- -----------------
Elmer's newest franchised restaurant opened on January 24, 2005. This 5,900
square foot restaurant in Walla Walla, Washington was constructed next to a new
Holiday Inn Express also owned by the franchise group.
On January 24, 2005 the Company signed a 25-year franchise agreement with the
new owner of the franchised Elmer's located in Vancouver, Washington (Andresen
location).
On September 7, 2004 a franchised restaurant opened in Eugene, Oregon. The 6,000
square foot restaurant in Eugene, Oregon occupies a converted Izzy's restaurant
site.
On June 28, 2004 the company signed a 25-year franchise agreement with the new
owner of the franchised Elmer's located in Pocatello, ID.
On March 15, 2004 a 4,500 square foot franchise restaurant in Corvallis, Oregon
opened. It occupies a converted Lyon's restaurant site.
On July 21, 2003 a 5,000 square foot franchise restaurant in Coeur d'Alene,
Idaho opened. It occupies a converted Village Inn site.
Lottery Commission
- ------------------
March 31, 2004, the Oregon Lottery Commission approved a new six-year retailer
contract effective June 27, 2004. The impact of this contract is discussed
further under Revenues on page 13.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 123 (revised 2004) - In December
2004, the FASB revised SFAS No. 123, "Accounting for Stock Based Compensation."
This statement supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and its related implementation guidance. The Statement requires a
public entity to measure the cost of employee services received in exchange for
an award of equity instruments based on the grant date fair value of the award.
The cost will be recognized over the period during which an employee is required
to provide service in exchange for the award - the requisite service period
(usually the vesting period).
This Statement is effective for public entities as of the beginning of the first
interim reporting period that begins after June 15, 2005. Management estimates
that the effect of adopting this Statement will result in the recognition of
approximately $16,600 of additional compensation expense, net of taxes, during
fiscal year 2006.
On September 30, 2004, FASB issued a proposed Board-directed Staff Position, FSP
EITF Issue 03-1-a, "Implementation Guidance for the Application of Paragraph
16," of EITF issue No. 03-1, "The Meaning of
9
Other-Than-Temporary Impairment and Its Application to Certain Investments." The
proposed FSP will provide implementation guidance with respect to debt
securities that are impaired solely due to interest rates and/or sector spreads
and analyzed for other-than-temporary impairment under paragraph 16 of EITF
Issue 03-1. The Board has delayed the effective date to provide further
implementation guidance. This delay does not suspend the requirement to
recognize other-than-temporary impairments as required by existing authoritative
literature. The delay of the effective date for paragraphs 10 through 20 of EITF
Issue 03-1 will be superseded concurrent with the final issuance of FSB EITF
Issue 03-1-a. Management does not anticipate adoption of EITF Issue 03-1-a will
have a significant impact upon the Company's consolidated financial statements.
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 34 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 the acquisition
and depreciation of property, buildings and equipment, 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 goodwill and intangible assets annually
based on its third quarter financial statements and assesses for events
occurring in the interim indicating possible impairment. 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
Company has 7 reporting units. The reporting units are made up of the franchise
business,
10
operating restaurants or groups of operating restaurants. The determination of a
reporting unit is made at the time of acquisition. 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. The useful lives of the individual assets are
estimated by the Company's management based upon their experience in the
restaurant industry. Generally buildings are depreciated over 35 years and
equipment is depreciated over a range of 3 to 10 years. Leasehold improvements
are amortized on a straight-line method over their estimated useful lives or the
term of the related lease, whichever is shorter. Periodically the Company
reviews the net book value of its depreciable assets to determine if there is
any possible impairment of value. The Company recognized a $140,000 impairment
loss on the write down of property and equipment with a carrying value of
approximately $155,000 to a fair value of $15,000 during the twelve weeks ended
July 19, 2004. 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.
The Company recently undertook a comprehensive review of its accounting
practices for leases and amortization of leasehold improvements, in light of a
public letter published February 7, 2005 by Donald T. Nicolaisen, Chief
Accountant for the Securities and Exchange Commission. The Company has
determined that any resulting variances would not have a material affect on the
Company's financial statements.
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, 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.
In Note 1 Basis of Presentation, we provide pro forma disclosures of net income
and earnings per share as if the method prescribed by SFAS No. 123, Accounting
for Stock-Based Compensation, had been applied in measuring compensation
expense. A change to recognize compensation expense for all options granted
using a fair value approach in regularly reported financial results would have a
significant impact on our results of operations.
HIGHLIGHTS OF HISTORICAL RESULTS. The Company reported net income of $313,356
and $846,309, or $.17 and $.46 in basic earnings per share, for the 12 and
40-week periods ended January 3, 2005. These results are compared to reported
net income of $289,151 and $982,784, or $.14 and $.48 per share for the 12 and
40-week periods ended January 5, 2004. The Company's total assets as of January
3, 2005 were $19.3 million, which is an increase of approximately $.3 million
over total assets as of March 29, 2004. In the 40 weeks ended January 3, 2005,
working capital increased approximately $1,111,000 while notes payable (net of
current portion) decreased $279,000. Cash provided by operating activities
totaled ($1,106,458) for the 40 weeks ended January 3, 2005 compared to
$2,436,301 for the 40 weeks ended January 5, 2004. The decrease in cash provided
from operations is primarily attributable to the timing of payroll tax and
worker's compensation insurance premiums as well as pay down of negative working
capital attributable to the sale of the Palm Springs restaurant.
COMPARISON OF RESULTS OF OPERATIONS. The following discussion and analysis
presents the Company's results of operations for the 12 and 40-week periods
ended January 3, 2005 and January 5, 2004.
11
For the 12 and 40-week periods ended January 3, 2005, the Company's net income
increased 8.4% and decreased 13.9% from the comparable periods ended January 5,
2004. Net income as a percentage of total revenue decreased from 3.8% for the
40-week period ended January 5, 2004, to 3.3% for the 40 weeks ended January 3,
2005, primarily due to changes in the lottery contract with the State of Oregon.
Net income as a percentage of total revenue increased from 3.8% for the 12-week
period ended January 5, 2004, to 4.0% for the 12 weeks ended January 3, 2005.
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 3, 2005 JANUARY 5, 2004
--------------- ---------------
Percent of Percent of
Amount Revenues Amount Revenues
Revenues $25,500 100.0 % $25,600 100.0 %
Restaurant costs and expenses 21,999 86.3 % 22,042 86.1 %
General and administrative expenses 2,004 7.9 % 1,869 7.3 %
Loss (Gain) on sale of land, buildings and
equipment and loss on impairment 12 .1 % 4 --
Income from operations 1,485 5.8 % 1,685 6.6 %
Non operating income (expense) (240) (.9)% (203) (.8)%
Net income 846 3.3 % 983 3.8 %
Basic earnings per share $0.46 $0.48
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 3, 2005 JANUARY 5, 2004
--------------- ---------------
Percent of Percent of
Amount Revenues Amount Revenues
Revenues $7,862 100.0 % $7,705 100.0 %
Restaurant costs and expenses 6,764 86.0 % 6,701 87.0 %
General and administrative expenses 577 7.4 % 517 6.7 %
Loss (Gain) on sale of land, buildings and
equipment and loss on impairment 1 -- % -- -- %
Income from operations 520 6.6 % 487 6.3 %
Non operating income (expense) (60) (.8)% (51) (.7)%
Net income 313 4.0 % 289 3.8 %
Basic earnings per share $0.17 $0.14
12
REVENUES REVENUES
Dollar amounts in thousands FOR THE 40 WEEKS ENDED FOR THE 40 WEEKS ENDED
JANUARY 3, 2005 JANUARY 5, 2004
--------------- ---------------
Percent of Percent of
Amount Revenues Amount Revenues
------------ ------------ ------------ ------------
Restaurant operations:
Restaurant sales $21,281 83.5% $21,476 83.9%
Lottery 3,197 12.5% 3,268 12.8%
------------ ------------ ------------ ------------
24,478 96.0% 24,744 96.7%
Franchise operations 1,022 4.0% 856 3.3%
------------ ------------ ------------ ------------
Total revenues $25,500 100.0% $25,600 100.0%
============ ============ ============ ============
REVENUES REVENUES
Dollar amounts in thousands FOR THE 12 WEEKS ENDED FOR THE 12 WEEKS ENDED
JANUARY 3, 2005 JANUARY 5, 2004
--------------- ---------------
Percent of Percent of
Amount Revenues Amount Revenues
------------ ------------ ------------ ------------
Restaurant operations:
Restaurant sales $6,544 83.2% $6,477 84.0%
Lottery 1,044 13.3% 992 12.9%
------------ ------------ ------------ ------------
7,588 96.5% 7,469 96.9%
Franchise operations 274 3.5% 236 3.1%
------------ ------------ ------------ ------------
Total revenues $7,862 100.0% $7,705 100.0%
============ ============ ============ ============
REVENUES. Revenues for the 12 and 40 weeks ended January 3, 2005 were 2.0% more
and .4% less, respectively, than for the comparable periods in 2004. Revenues
from same store restaurant operations showed an increase of 3.3% and (0.6%) for
the 12 and 40 weeks ended January 3, 2005 respectively, over the comparable
periods in 2004. Same store sales at the core Elmer's brand increased 1.6% and
decreased 0.3% for the 12 and 40 weeks ended January 3, 2005. The Company
defines same store sales as restaurants that were Company owned and operating
continuously from April 1, 2003 through January 3, 2005. Revenue from franchise
operations increased $38,000 in the third quarter due to increases in initial
franchise fees as well as increases in royalty income.
March 31, 2004, the Oregon Lottery Commission approved a new six-year retailer
contract effective June 27, 2004. If the new commission structure had been
applied to sales for the year ended March 29, 2004, it would have reduced
commissions by approximately $435,000, or 10%. The following table shows the pro
forma impact by quarter.
Quarter ended: Adverse impact
--------------- --------------
July 19, 2004 $93,000
October 11, 2004 250,000
January 3, 2005 96,000
March 28, 2005 (10,000)
July 25, 2005 6,000
13
The Lottery has installed additional terminals in most Company locations and the
Company expects year over year sales increases to reduce, but not eliminate, the
impact of the new lower rates. The $93,000 impact in the quarter ended July 19,
2004 was more than offset by increased sales prior to the contracts effective
date of June 27, 2004. For the quarter ended October 11, 2004, lottery
commissions declined by $135,000 from the prior year. For the quarter ended
January 3, 2005 lottery commissions increased by $52,000 from the prior year.
RESTAURANT COSTS AND EXPENSES. A comparison of restaurant costs and expenses as
a percent of revenue for the 40 and 12 weeks ended January 3, 2005 and January
5, 2004 are as follows:
RESTAURANT COSTS & EXPENSES RESTAURANT COSTS & EXPENSES
Dollar amounts in thousands FOR THE 40 WEEKS ENDED FOR THE 40 WEEKS ENDED
JANUARY 3, 2005 JANUARY 5, 2004
--------------- ---------------
Amount Percent Amount Percent
---------- ----------- ---------- -----------
Cost of restaurant sales:
Food and beverage $7,489 29.4% $7,689 30.0%
Labor and related costs 8,596 33.7% 8,495 33.2%
Restaurant operating costs 3,622 14.2% 3,516 13.7%
Occupancy costs 1,582 6.2% 1,581 6.2%
Depreciation and amortization 710 2.8% 633 2.5%
Restaurant opening and closing
expenses -- -- 128 .5%
---------- ----------- ---------- -----------
Total Cost of Restaurant Sales $21,999 86.3% $22,042 86.1%
========== =========== ========== ===========
RESTAURANT COSTS & EXPENSES RESTAURANT COSTS & EXPENSES
Dollar amounts in thousands FOR THE 12 WEEKS ENDED FOR THE 12 WEEKS ENDED
JANUARY 3, 2005 JANUARY 5, 2004
--------------- ---------------
Amount Percent Amount Percent
---------- ----------- ---------- -----------
Cost of restaurant sales:
Food and beverage $2,334 29.7% $2,248 29.2%
Labor and related costs 2,594 33.0% 2,582 33.5%
Restaurant operating costs 1,119 14.2% 1,078 14.0%
Occupancy costs 474 6.0% 474 6.1%
Depreciation and amortization 243 3.1% 192 2.5%
Restaurant opening and closing
expenses -- -- 128 1.7%
---------- ----------- ---------- -----------
Total Cost of Restaurant Sales $6,764 86.0% $6,701 87.0%
========== =========== ========== ===========
The Company operated 15 restaurants and 13 delis during 2003 and 2004.
Restaurant costs and expenses as a proportion of sales decreased 1.0% for the
12-week period ended January 3, 2005 over the comparable period in 2004. For the
40-week period ended January 3, 2005, food and beverage expenses increased by
..5% of sales, principally due to a decline in sales of low margin items at the
Company's deli operations during the first fiscal quarter. Food and beverage
costs at the Company's Elmer's restaurants increased .54% of sales while labor
and related costs increased 1.0%.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative ("G&A") expenses
were 7.4% and 7.9% of total revenue for the 12 and 40 weeks ended January 3,
2005, compared to 6.7% and 7.3% in the comparable periods in 2004. Corporate
wages were up $100,000 due to additional marketing and franchise support
expenses.
LOSS (GAIN) ON LAND, BUILDINGS AND EQUIPMENT. Loss on sale of land, buildings
and equipment increased from 0.0% of sales for the 12 weeks ending January 5,
2004 to .1% for the current quarter. The Company sold
14
the Palm Springs restaurant to a franchisee for a net gain of approximately
$129,000. The Company recognized a $140,000 impairment loss on the write down of
property and equipment from a carrying value of approximately $155,000 to a fair
value of $15,000. The Company was not prepared to exercise its renewal option
without significant rent concessions from the landlord, and over six months of
negotiations, the landlord had not indicated any willingness to do so. A loss
was recognized when management determined that it was likely that a restaurant
lease would not be renewed. However, in December 2004, the Company reached a
five-year renewal agreement with the landlord which included a $145,000 rent
concession. The rent concession is recorded as a deferred lease obligation and
will be amortized over the renewal period as a reduction to rent expense.
INCOME FROM OPERATIONS. Income from operations decreased $200,229 to $1,484,783
year to date when compared with the prior year to date period.
NON-OPERATING INCOME/(EXPENSE). Non-operating expense was (.8)% and (.9)% of
total revenues for the 12 and 40 weeks ended January 3, 2005 compared to (.7)%
and (.8)% of total revenues in the comparable period in 2004. The Company had a
loss on marketable securities of $136 for the 12 weeks ending January 3, 2005
against a gain of $8,800 for the 12 weeks ending January 5, 2004. For the 40
weeks ending January 3, 2005 gains on marketable securities were $10,673
compared to a gain of $10,800 in marketable securities last year.
LIQUIDITY AND CAPITAL RESOURCES. As of January 3, 2005 the Company had cash and
cash equivalents of approximately $2.5 million representing an increase from
March 29, 2004 of approximately $900,000. Cash provided by operations was
$1,100,000. Cash used in investing activities was $91,000, principally from the
capital expenditures of $640,000 and partially offset by sale of the Palm
Springs restaurant.
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 3, 2005, the Company had outstanding indebtedness of
$3.7 million with GE Capital and $1.4 million in real estate debt with Wells
Fargo Bank.
On January 14, 2004 the Company purchased 204,255 shares of its Common Stock,
representing approximately 10% of the then outstanding shares, at a purchase
price of $6.43 per share in accordance with the terms of a tender offer. The
aggregate price of the shares purchased by the Company through the tender offer
was approximately $1,313,000. Fees and expenses associated with the tender offer
were approximately $17,000, which was expensed in the Company's 4th Quarter
ended March 29, 2004.
The Wells Fargo Bank real estate debt agreement was amended in June 2003 to
change 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 rate of 6.0%, require monthly payments of principal and interest, and
are collateralized by three real estate assets. As of January 3, 2005 the market
value under this agreement was $164 and resulted in the recognition of $19,699
(net of tax effect) in other comprehensive gain.
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.
15
The Company believes that it will continue to be able to obtain adequate
financing on acceptable terms for new restaurant construction, acquisitions and
franchising 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 $5,086,331 $449,237 $1,214,578 $1,152,141 $2,270,375
Operating leases 4,783,266 1,214,302 1,831,244 1,194,795 542,925
Guarantees 1,009,223 393,115 592,373 23,735 -
- -------------------------------------------------------------------------------------------------------------------------
Totals $10,878,820 $2,056,654 $3,638,195 $2,370,671 $2,813,300
=========== ========== ========== ========== ==========
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 and contracts for restaurant development; changes in business
strategy or development plans; changes in regulations affecting lottery
commissions; availability of gambling outlets that compete with lottery games;
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 costs associated with compliance, 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 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
approximated the book value at January 3, 2005.
16
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 January
3, 2005 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, 2005 (45 days prior to the month
and date in 2005 corresponding to the date on which the Company mailed its proxy
materials for the 2004 annual meeting), proxy voting on that proposal when and
if raised at the 2005 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 2005 annual
meeting must be received at the principal executive office of the Company no
later than January 21, 2005.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibits required to be attached by Item 601 of Regulation S-K
are listed in the Exhibit Index of this Form 10-Q and are
incorporated herein by this reference.
b) Reports on Form 8-K:
June 23, 2004 reporting fiscal year end financial results.
August 6, 2004 reporting going private proposal.
September 2, 2004 reporting first quarter financial results.
November 18, 2004 reporting second quarter financial results.
December 21, 2004 reporting receipt of tender offer proposal
for going private transaction.
February 18, 2005 reporting a potential change to a material
contract.
17
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 22, 2005
18
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.)
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
of Chief Executive Officer and President. 20
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
of Secretary and Corporate Controller. 21
32.1 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 and President. 22
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
of Secretary and Corporate Controller. 23