SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 13, 2003 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO _________________
COMMISSION FILE NUMBER 0-14837
ELMER'S RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
OREGON ___________ 93-0836824
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11802 S.E. Stark St.
Portland, Oregon 97216 (503) 252-1485
(ADDRESS OF PRINCIPAL 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 November 17, 2003: 2,016,709
ELMER'S RESTAURANTS, INC.
INDEX
PAGE
NUMBER
------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets,
October 13, 2003 (Unaudited) and
March 31, 2003
Condensed Consolidated Statements of Operations, 4
12 and 28 weeks ended October 13, 2003 (Unaudited)
and October 14, 2002 (Unaudited)
Statement of Changes in Shareholders' Equity, 5
October 13, 2003
Condensed Consolidated Statements of Cash Flows, 6
28 weeks ended October 13, 2003 (Unaudited) and
October 14, 2002 (Unaudited)
Notes to Condensed Consolidated Financial Statements 7
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial 11
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. Submission of Matters to a Vote of Security Holders 18
Item 6. Other Information 19
Item 7. Exhibits and Reports on Form 8-K 19
Signatures 19
2
ELMER'S RESTAURANTS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 13, 2003 MARCH 31, 2003
------------------- -------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,327,731 $ 2,200,263
Marketable securities 1,158,232 760,441
Accounts receivable 138,653 260,848
Notes receivable - franchisees and
related parties, current portion 153,944 81,771
Inventories 407,206 430,737
Prepaid expenses and other 422,596 227,142
Income taxes receivable - 121,617
------------------- -------------------
Total current assets 4,608,362 4,082,819
Notes receivable - franchisees and
related parties, net of current portion 192,355 212,026
Property, buildings and equipment, net 6,998,380 7,075,969
Construction in progress 1,207,457 -
Goodwill 4,897,743 4,897,743
Intangible assets 602,709 602,709
Principal debt service account for
convertible debt 263,095 208,929
Other assets 197,382 309,108
------------------- -------------------
Total assets $ 18,967,483 $ 17,389,303
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, current portion $ 332,308 $ 332,810
Accounts payable 1,219,351 1,118,167
Accrued expenses 435,018 314,136
Accrued payroll and related taxes 476,344 486,915
Accrued income tax 164,855 -
------------------- -------------------
Total current liabilities 2,627,876 2,252,028
Notes payable, net of current portion 4,856,940 4,439,170
Deferred income taxes 982,990 948,000
------------------- -------------------
Total liabilities 8,467,806 7,639,198
------------------- -------------------
Commitments and contingencies
Shareholders' equity
Common stock, no par value; 10,000,000 shares authorized,
2,041,709 shares issued and outstanding 7,283,139 7,283,139
Retained earnings 3,180,512 2,486,879
Accumulated other comprehensive gain
(loss), net of taxes 36,026 (19,913)
------------------- -------------------
Total shareholders' equity 10,499,677 9,750,105
------------------- -------------------
Total liabilities and shareholders' equity $ 18,967,483 $ 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 TWENTY-EIGHT WEEKS ENDED FOR THE TWELVE WEEKS ENDED
--------------------------------- ---------------------------------
OCTOBER 13, October 14, OCTOBER 13, October 14,
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES $ 17,894,894 $ 16,823,634 $ 7,835,882 $ 7,385,565
--------------- --------------- --------------- ---------------
COSTS AND EXPENSES:
Cost of restaurant sales:
Food and beverage 5,440,866 4,746,403 2,340,907 2,096,650
Labor and related costs 5,912,821 5,974,312 2,514,260 2,553,016
Restaurant operating costs 2,438,118 2,302,103 1,059,444 1,030,466
Occupancy costs 1,107,809 1,077,754 472,004 465,195
Depreciation and amortization 441,257 389,808 189,110 168,776
Restaurant opening and closing expenses - 9,717 - -
General and administrative expenses 1,351,931 1,242,611 681,029 555,283
Net loss (gain) on disposition of property 4,071 (735,910) - 3,256
--------------- --------------- --------------- ---------------
16,696,873 15,006,798 7,256,754 6,872,642
--------------- --------------- --------------- ---------------
INCOME FROM OPERATIONS 1,198,021 1,816,836 579,128 512,923
OTHER INCOME (EXPENSE):
Interest income 41,723 94,648 16,967 22,301
Interest expense (208,530) (227,816) (92,537) (93,665)
Loss on debt extinguishment - (97,500) - -
Gain (loss) on sale of marketable securities 14,419 (55,934) 10,970 -
--------------- --------------- --------------- ---------------
Income before provision for income taxes 1,045,633 1,530,234 514,528 441,559
Income tax provision (352,000) (527,089) (184,000) (151,496)
--------------- --------------- --------------- ---------------
NET INCOME $ 693,633 $ 1,003,145 $ 330,528 $ 290,063
=============== =============== =============== ===============
PER SHARE DATA:
Net income per share - Basic $ 0.34 $ 0.49 $ 0.16 $ 0.14
=============== =============== =============== ===============
Weighted average number of
common shares outstanding - Basic 2,041,709 2,051,684 2,041,709 2,043,218
=============== =============== =============== ===============
Net income per share - Diluted $ 0.32 $ 0.46 $ 0.15 $ 0.14
=============== =============== =============== ===============
Weighted average number of
common shares outstanding - Diluted 2,135,709 2,172,684 2,147,709 2,095,777
=============== =============== =============== ===============
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 Accumulated other Total
------------ Retained comprehensive gain shareholders
Shares Amount Earnings (loss) equity
--------- ----------- ------------ ------------------ ------------
BALANCE, April 1, 2003 2,041,709 $ 7,283,139 $ 2,486,879 $ (19,913) $ 9,750,105
Comprehensive income:
Net Income - - 693,633 - 693,633
Change in net unrealized gain (loss) on available
for sale securities, net of taxes - - - 60,572 60,572
Change in fair market value of interest rate swap
agreement, net of taxes - - - (4,633) (4,633)
--------- ----------- ----------- ---------- ------------
Total comprehensive income 749,572
BALANCE, October 13, 2003 2,041,709 $ 7,283,139 $ 3,180,512 $ 36,026 $10,499,677
========= ============ =========== ========== ============
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 28 weeks ended
------------------------------------------
OCTOBER 13, October 14,
2003 2002
------------------- -----------------
Cash flows from operating activities:
Net income $ 693,633 $ 1,003,145
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 441,257 389,808
Net loss (gain) on disposition of property 4,071 (735,910)
Gain (loss) on sale of marketable securities (14,419) 55,934
Loss on debt extinguishment - 97,500
Changes in assets and liabilities:
Current assets (172,728) (159,278)
Other assets 111,726 (76,612)
Accounts payable 101,184 (181,976)
Accrued expenses 110,312 137,312
Income taxes 286,472 61,855
------------------- -----------------
Net cash provided by operating activities 1,561,508 591,778
------------------- -----------------
Cash flows from investing activities:
Additions to property, buildings and equipment (372,640) (432,634)
Construction in progress (1,207,457) -
Purchases of available-for-sale securities (874,928) (125,409)
Proceeds from sale of available-for-sale securities 590,207 -
Business acquisition - (314,263)
Issuance of note receivable - (129,488)
Principal collected on note receivables 70,498 280,193
Proceeds from sale of assets 4,900 1,303,176
------------------- -----------------
Net cash (used in) provided by investing activities (1,789,420) 581,575
------------------- -----------------
Cash flows from financing activities:
Repurchase of convertible notes - (747,500)
Construction in progress financing 592,400 -
Net change in principal debt service accounts (54,166) 134,781
Repurchase of common stock - (88,245)
Payments on notes payable (182,854) (145,600)
------------------- -----------------
Net cash used in financing activities 355,380 (846,564)
------------------- -----------------
Net change in cash and cash equivalents 127,468 326,789
Cash and cash equivalents, beginning of period 2,200,263 654,211
------------------- -----------------
Cash and cash equivalents, end of period $ 2,327,731 $ 981,000
=================== =================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 208,530 $ 214,039
=================== =================
Income taxes $ 53,500 $ 462,000
=================== =================
Continued on page 6a
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
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 $ 60,572 $ 5,145
=================== =================
Change in fair market value of interest rate swap agreement $ (4,633) $ -
=================== =================
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 $36,026 for the twenty eight weeks ended
October 13, 2003. This was composed of an increase in the market value of
available-for-sale securities of $40,659 (net of taxes) partially offset by the
liability associated with an interest rate swap agreement of $4,633 (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.
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.
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
7
derivative instruments to be recognized in other comprehensive income. As of
October 13, 2003 the fair market value of this agreement results in a liability
of $4,633 (net of tax effect) and recognition of $4,633 in other comprehensive
loss.
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:
October 13, 2003 October 14, 2002
---------------- ----------------
12 weeks 28 weeks 12 weeks 28 weeks
-------- -------- -------- --------
Net income - as reported $330,528 $693,633 $290,063 $1,003,145
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects (18,327) (42,762) (24,852) (57,988)
--------- --------- --------- -----------
Net income - pro forma $312,201 $650,871 $265,211 $945,157
========= ========= ========= ===========
Diluted earnings per share - as reported $0.15 $0.32 $0.14 $0.46
Diluted earnings per share - pro forma $0.15 $0.30 $0.13 $0.44
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 October 13,
2003, the maximum potential liability under these guarantees is $2,149,777. In
the event of default, the Company expects it would exercise its right to
reoccupy and continue to operate the restaurants.
8
Subsequent Events
-----------------
Subsequent to quarter end, the Board of Directors directed the Company
to prepare a tender offer for 204,200 shares of the Company's common
stock. In January 2004 the Company will repurchase 10% of its
outstanding shares at a cost of approximately $1.33 million. The
purchase price has not yet been finalized, but will not exceed $6.50 per
share. In the event more than 204,200 shares are tendered, the Company
will accept odd lot tenders first, and all other tenders on a pro rata
basis. The Company has also elected to redeem its remaining 10%
convertible notes on December 1, 2003 at a cost of $682,500 including
the 5% call premium.
RECENT TRANSACTIONS
Purchase of Cornell Oaks Property
---------------------------------
July 29, 2003 the Company purchased a one-acre site in Beaverton, Oregon for
$775,000. Construction has begun and the restaurant is expected to open
late-December, 2003. The Company has secured financing of approximately $1.6
million and as of October 13, 2003, had drawn $592,400.
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.
Repurchase of Convertible Debt
------------------------------
June 28, 2002 the Company repurchased half ($650,000) of its 10% convertible
notes, paying a 15% premium over face value. As permitted by the early adoption
provisions of SFAS No. 145 - Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13 and Technical Corrections, the total premium
of $97,500 was recorded as a loss on extinguishment. In addition to reducing the
Company's debt, this transaction eliminates the potential obligation to issue up
to 105,000 shares of common stock upon conversion and reduced the Company's
required balances in and contributions to, the debt service account by half.
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.
10
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.
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. This interpretation clarifies 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
11
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
statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. The Company adopted the provisions of SFAS No. 145
under its early application provisions in the first quarter of 2003. The Company
recorded a loss on extinguishment of debt totaling $97,500 that is included in
"Other income (expense)" on the condensed consolidated financial statements.
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.
12
Property, Buildings and Equipment
---------------------------------
When the Company purchases property, buildings and equipment, the assets are
recorded at cost. However, when the Company acquires an operating restaurant or
business, the Company must allocate the purchase price between the fair market
value of the tangible assets acquired and any excess to goodwill. The fair
market value of restaurant equipment fixtures and furnishings in an operating
restaurant is difficult to separate from the going concern value of the
restaurant. Most of the value of the equipment is due to the fact that it is in
the restaurant and working. The Company values in place equipment with reference
to replacement cost, age and condition, and utility in its intended use.
Intangible Assets
-----------------
The Company reviews the valuation of its intangible assets annually based on its
third quarter financial statements. If the fair values of the intangibles were
less than their recorded values, an impairment loss would be recognized. The
fair values of the reporting units are estimated using multiples of earnings
before interest, taxes, depreciation and amortization. The market for these
intangibles is limited and the realizable value will differ from the fair values
estimated by using a multiple of earnings.
Depreciation
------------
Property, buildings and equipment are depreciated using the straight-line method
over their estimated useful lives. Leasehold improvements are amortized on a
straight-line method over their estimated useful lives or the term of the
related lease, whichever is shorter. Differences between the realized lives and
the estimated lives could result in changes to the Company's results from
operations in future years, as well as changes in the rate of recurring capital
expenditures.
Revenue Recognition
-------------------
The Company's revenue is primarily from cash and credit card transactions. As
such, restaurant revenue is generally recognized upon receipt of cash or credit
cards receipts. Franchise fees based upon a percent of the franchisees gross
sales are recognized as the franchisees' sales occur. Revenue from the lottery,
which includes traditional ticket based games and video poker games is recorded
on a commission basis, that is net of state regulated payouts. Expenses are
recorded using accrual accounting based upon when goods and services are used.
Stock Options
-------------
The Company accounts for its stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. Based on this
methodology the Company has not recorded any compensation costs related to its
stock options since all options have been issued at an exercise price equal to
or greater than the market value of the Company's stock at the time of issuance.
HIGHLIGHTS OF HISTORICAL RESULTS. The Company reported net income of $330,528
and $693,633 or $.16 and $.34 in basic earnings per share for the 12 and 28 week
periods ended October 13, 2003. These results are compared to reported net
income of $290,063 and $1,003,145, or $.14 and $.49 per share for the 12 and 28
week periods ended October 14, 2002. The approximately $40,500 increase in net
income for the 12 weeks ended October 13, 2003 is the result of improved
operating income. The $309,500 decrease in net income for the 28 weeks ended
October 13, 2003 is largely attributable to the gain on the sale of the three
Southern Oregon restaurants in the first quarter 2002, partially offset by
13
losses on the debt repurchase, relocation and losses on the sale of investments.
The Company's total assets as of October 13, 2003 were $19.0 million, which is
an increase of approximately $1.6 million over total assets as of March 31,
2003. In the 28 weeks ended October 13, 2003, working capital increased
approximately $150,000 while notes payable (net of current portion) increased
$417,800. Cash provided by operating activities totaled $1,562,000 for the 28
weeks ended October 13, 2003 compared to $592,000 for the 28 weeks ended October
14, 2002. 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.
COMPARISON OF RESULTS OF OPERATIONS. The following discussion and analysis
presents the Company's results of operations for the 12 and 28 weeks ended
October 13, 2003 and October 14, 2002.
For the 12 and 28 week periods ended October 13, 2003, the Company's net income
increased 14.0% and decreased 31.0% from the comparable periods in 2002. Net
income as a percentage of total revenue decreased from 6.0% for the 28-week
period ended October 14, 2002, to 3.9% for the 28 weeks ended October 13, 2003
due to last years net gain on the sale of three Southern Oregon units. Net
income as a percentage of total revenue increased from 3.9% for the 12-week
period ended October 14, 2002, to 4.3% for the 12 weeks ended October 13, 2003.
RESULTS OF OPERATIONS RESULTS OF OPERATIONS
Dollar amounts in thousands except per share FOR THE 28 WEEKS ENDED FOR THE 28 WEEKS ENDED
data OCTOBER 13, 2003 OCTOBER 14, 2002
---------------- ----------------
Percent of Percent of
Amount Revenues Amount Revenues
-------- ---------- --------- ----------
Revenues $17,895 100.0% $16,824 100.0%
Restaurant costs and expenses 15,341 85.7% 14,500 86.2%
General and administrative expenses 1,352 7.6% 1,243 7.4%
Loss (Gain) on sale of land, buildings and 4 0.1% (736) (4.4)%
equipment
Operating income 1,198 6.7% 1,817 10.8%
Non operating income (expense) (152) (.9)% (287) (1.7)%
Net income 694 3.9% 1,003 6.0%
Basic earnings per share $0.34 $0.49
RESULTS OF OPERATIONS RESULTS OF OPERATIONS
Dollar amounts in thousands except per share FOR THE 12 WEEKS ENDED FOR THE 12 WEEKS ENDED
data OCTOBER 13, 2003 OCTOBER 14, 2002
---------------- ----------------
Percent of Percent of
Amount Revenues Amount Revenues
-------- ---------- --------- ----------
Revenues $ 7,836 100.0% $7,386 100.0%
Restaurant costs and expenses 6,576 83.9% 6,314 85.5%
General and administrative expenses 681 8.7% 555 7.5%
Loss on disposition of equipment 0 0.0% 3 0.0%
Operating income 579 7.4% 513 6.9%
Non operating income (expense) (65) (.8)% (71) (1.0)%
Net income 331 4.3% 290 3.9%
Basic earnings per share $0.16 $0.14
14
REVENUES. Revenues for the 12 and 28 weeks ended October 13, 2003 were 6.1% and
6.4% more, respectively, than the comparable period in 2002. Revenues from same
store restaurant operations showed an increase of 4.3% and 5.2% for the 12 and
28 weeks ended October 13, 2003 respectively, over the comparable period in
2002. Same store sales at the core Elmer's brand increased 2.9% and 4.1% for the
12 and 28 weeks ended October 13, 2003. The Company defines same store sales as
restaurants that were company owned and operated continuously from April 1, 2002
through October 13, 2003.
REVENUES REVENUES
Dollar amounts in thousands FOR THE 28 WEEKS ENDED FOR THE 28 WEEKS ENDED
OCTOBER 13, 2003 OCTOBER 14, 2002
---------------- ----------------
Percent of Percent of
Amount Revenues Amount Revenues
------- ------ ------- ------
Restaurant operations:
Restaurant sales $14,999 83.8% $14,265 84.8%
Lottery 2,276 12.7% 1,939 11.5%
------- ----- ------- -----
17,275 96.5% 16,204 96.3%
Franchise operations 620 3.5% 620 3.7%
------- ------ ------- ------
Total revenue $17,895 100.0% $16,824 100.0%
======= ====== ======= ======
REVENUES REVENUES
Dollar amounts in thousands FOR THE 12 WEEKS ENDED FOR THE 12 WEEKS ENDED
OCTOBER 13, 2003 OCTOBER 14, 2002
---------------- ----------------
Percent of Percent of
Amount Revenues Amount Revenues
------- ------ ------- ------
Restaurant operations:
Restaurant sales $ 6,452 82.3% $ 6,132 83.0%
Lottery 1,148 14.7% 1,020 13.8%
------- ------ ------- ------
7,600 97.0% 7,152 96.8%
Franchise operations 236 3.0% 234 3.2%
------- ------ ------- ------
Total revenue $ 7,836 100.0% $ 7,386 100.0%
======= ====== ======= ======
RESTAURANT COSTS AND EXPENSES. A comparison of restaurant costs and expenses and
as a percent of revenue for the 28 weeks and 12 weeks ended October 13, 2003 and
October 14, 2002 are as follows:
15
RESTAURANT COSTS & EXPENSES RESTAURANT COSTS & EXPENSES
Dollar amounts in thousands FOR THE 28 WEEKS ENDED FOR THE 28 WEEKS ENDED
OCTOBER 13, 2003 OCTOBER 14, 2002
---------------- ----------------
Amount Percent Amount Percent
------- ---- ------- ----
Cost of restaurant sales:
Food and beverage $5,441 30.4% $4,746 28.2%
Labor and related costs 5,913 33.0% 5,974 35.5%
Restaurant operating costs 2.438 13.6% 2,302 13.7%
Occupancy costs 1,108 6.2% 1,078 6.4%
Depreciation and amortization 441 2.5% 390 2.3%
Restaurant opening and closing
expenses -- -- 10 .1%
------- ---- ------- ----
Total Cost of Restaurant Sales $15,341 85.7% $14,500 86.2%
======= ===== ======= =====
RESTAURANT COSTS & EXPENSES RESTAURANT COSTS & EXPENSES
Dollar amounts in thousands FOR THE 12 WEEKS ENDED FOR THE 12 WEEKS ENDED
OCTOBER 13, 2003 OCTOBER 14, 2002
---------------- ----------------
Amount Percent Amount Percent
------ ----- ------ -----
Cost of restaurant sales:
Food and beverage $2,341 29.9% $2,097 28.4%
Labor and related costs 2,514 32.1% 2,553 34.5%
Restaurant operating costs 1,060 13.5% 1,030 14.0%
Occupancy costs 472 6.0% 465 6.3%
Depreciation and amortization 189 2.4% 169 2.3%
Restaurant opening and closing
expenses -- -- -- --
------ ----- ------ -----
Total Cost of Restaurant Sales $6,576 83.9% $6,314 85.5%
====== ===== ====== =====
The Company was operating 15 restaurants and 10 delis in 2002 and 15 restaurants
and 13 delis in 2003. The addition of three delis to the Company's restaurant
portfolio 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. 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 28 weeks ended October 13, 2003 increased .7% and .9% of sales while
labor and related costs declined 2.0% and 1.4%.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative ("G&A") expenses
were 8.7% and 7.6% of total revenue for the 12 and 28 weeks ended October 13,
2003 compared to 7.5% and 7.4% in the comparable period in 2002. The Company has
experienced increased corporate training costs for the Cornell Oaks project
scheduled to open in December and additional franchise support expenses.
16
LOSS (GAIN) ON SALE OF BUILDINGS AND EQUIPMENT. Gain/Loss on sale of buildings
and equipment declined from a gain of 4.4% for the 28 weeks ending October 14,
2002 to a loss of less than .1% for the 28 weeks ending October 13, 2003. The
Company has sold no restaurants in fiscal 2004 compared to three in the first
quarter 2003.
INCOME FROM OPERATIONS. Income from operations decreased $619,000 to $1,198,000
for the 28 weeks ending October 13, 2003 and increased $66,000 to $579,000 for
the 12 weeks ending October 13, 2003. For the 28 weeks ending October 13, 2003,
decreases in gain on sale of $740,000 were offset by increased contribution from
restaurant and franchise operations of $121,000.
NON-OPERATING INCOME/(EXPENSE). Non-operating expense was (.8)% and (.9)% of
total revenues for the 12 and 28 weeks ended October 13, 2003 compared to (1.0)%
and (1.7)% of total revenues in the comparable period in 2002. The Company had a
gain on marketable securities of $11,000 for the 12 weeks ending October 13,
2003 with no gains or losses in the 12 weeks ending October 14, 2002. For the 28
weeks ending October 13, 2003 gains on marketable securities were $14,000
compared to a loss of $153,000 in marketable securities and debt extinguishment
last year.
LIQUIDITY AND CAPITAL RESOURCES. As of October 13, 2003 the Company had cash and
cash equivalents of approximately $3.5 million representing an increase from
March 31, 2003 of approximately $525,000. Cash provided by operations was $1.6
million. Cash used in investing activities was $1.8 million. Construction in
progress used $1.2 million while additions to property buildings and equipment
used $372,000. Net purchases of available for sale securities were $285,000. Net
cash provided by financing activities totaled $355,000, the first draw on the
construction loan for the Cornell Oaks restaurant was partially offset by
payments on notes payable.
The Company's primary liquidity needs arise from debt service on indebtedness,
operating lease requirements and the funding of capital expenditures. The
Company's primary source of liquidity during the year is the operation of its
restaurants, franchise fees earned from its franchisees, cash on hand, and
borrowings. As of October 13, 2003, the Company had outstanding indebtedness of
$3.0 million with GE Capital, $1.55 million in real estate debt with Wells Fargo
Bank and $650,000 in convertible notes.
On November 20, 2003, the Company expects to announce a tender offer for 204,200
shares of the Company's common stock. The Company will repurchase 10% of its
outstanding shares at a cost of approximately $1.33 million. The purchase price
has not yet been finalized, but will not exceed $6.50 per share. In the event
more than 204,200 shares are tendered, the Company will accept odd lot tenders
first, and all other tenders on a pro rata basis. The Company has also decided
to redeem its remaining 10% convertible notes on December 1, 2003 at a cost of
$682,500 including the 5% call premium.
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.
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.
17
The $650,000 in convertible notes have a remaining maturity of approximately
five and a half years, bear interest at 10%, require monthly interest-only
payments, straight line principal amortization into a Company-held sinking fund,
and are subordinated to the other Company funded debt. The notes include a
convertible feature that permits the holder to convert the principal of the note
into common stock at any time at $6.19 per share.
The Company 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 October 31, the
Company has drawn $716,000 of the note.
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 $4,539,248 $332,308 $777,819 $1,179,342 $2,249,779
Convertible debt 650,000 650,000
Operating Leases 5,698,231 1,402,832 2,188,079 1,171,903 935,417
Guarantees 2,149,777 268,962 575,319 320,246 985,250
-------------------------------------------------------------------------------------------------------
Totals $13,037,256 $2,654,102 $3,541,217 $2,671,491 $4,170,446
============ ========== ========== ========== ==========
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
18
forward-looking statements involve known and unknown risks, uncertainties, and
other factors relating to the Company's business, financial condition, and
operations which may cause the actual results, performance, or achievements of
Elmer's Restaurants, Inc. (individually and collectively with its subsidiaries,
herein the "Company") to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: general economic
and business conditions; the ability to accomplish stated goals and objectives;
successful integration of acquisitions; the impact of competitive products and
pricing; success of operating initiatives; development and operating costs;
advertising and promotional efforts; adverse publicity; acceptance of new
product offerings; consumer trial and frequency; availability, locations, and
terms of sites for restaurant development; changes in business strategy or
development plans; changes in regulations 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 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.
19
PART II - OTHER INFORMATION
ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On August 12, 2003, at the Company's Annual Meeting, the holders of the
Company's outstanding Common Stock took the action described below. At August
12, 2003, 2,032,632 shares of Common Stock were issued and outstanding and
eligible to vote at the Annual Meeting.
Proposal I: Election of Directors.
----------------------------------------
The shareholders elected Bruce N. Davis, Donald W. Woolley and Dennis M. Waldron
to the Company's Board of Directors for a three-year term expiring at the year
2006 annual meeting of Shareholders by the votes indicated below.
Bruce N. Davis 1,823,744 shares in favor 99,990 shares against or withheld
Donald W. Woolley 1,916,814 shares in favor 6,920 shares against or withheld
Dennis M. Waldron 1,916,209 shares in favor 7,525 shares against or withheld
Proposal II: Ratification and Approval of Appointment of Moss Adams, LLP as
--------------------------------------------------------------------------------
Independent Public Accountants for the fiscal year ended March 31, 2003
-----------------------------------------------------------------------
1,922,757 shares in favor 977 shares against or withheld
Proposal III: Ratification and Approval to Transact any other Business that
--------------------------------------------------------------------------------
properly comes before the meeting
---------------------------------
1,818,253 shares in favor 105,481 shares against or withheld
Each Director whose term continued after the meeting:
Director Term Expires
-------- ------------
Corydon Jensen 2004
Thomas Connor 2004
Richard Williams 2005
William Service 2005
Bruce Davis 2006
Donald Woolley 2006
Dennis M. Waldron 2006
ITEM 6. 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.
20
ITEM 7. EXHIBITS AND REPORTS OF FORM 8-K
a) Exhibits:
Exhibits required to be attached by Item 601 of Regulation S-K are
listed in the Index to Exhibits of this Form 10-Q and are incorporated
herein by this reference.
b) Reports on Form 8-K:
None
21
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: November 20, 2003
22
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 am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Quarterly Report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures 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
November 20, 2003
23
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 am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Quarterly Report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures 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
November 20, 2003
24
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. 23
25
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Elmer's Restaurants, Inc. (the
"Company") on Form 10-Q for the period ended October 13, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Bruce
N. Davis, President and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been
provided to Elmer's Restaurants, Inc. and will be retained by Elmer's
Restaurants, Inc. and furnished to the Securities and Exchange Commission or its
staff upon request.
/s/ Bruce N. Davis
-------------------------------------
Bruce N. Davis
Chief Executive Officer and President
November 20, 2003
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Elmer's Restaurants, Inc. (the
"Company") on Form 10-Q for the period ended October 13, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Dennis
R. Miller, Corporate Controller of the Company, certify, pursuant to 18 U.S.C.
ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002,
that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been
provided to Elmer's Restaurants, Inc. and will be retained by Elmer's
Restaurants, Inc. and furnished to the Securities and Exchange Commission or its
staff upon request.
/s/ Dennis R. Miller
-------------------------------------
Dennis R. Miller
Corporate Controller
November 20, 2003
26