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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 JULY 23, 2001 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.
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(Exact name of registrant as specified in its charter)
OREGON 93-0836824
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11802 S.E. Stark St.
Portland, Oregon 97216 (503) 252-1485
(ADDRESS OF PRINCIPAL (ZIP CODE) (REGISTRANT'S TELEPHONE
EXECUTIVE OFFICES) 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
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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 September 5, 2001: 1,962,032
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ELMER'S RESTAURANTS, INC.
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INDEX
PAGE
NUMBER
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets,
July 23, 2001 (Unaudited) and April 2, 2001 3
Condensed Consolidated Statements of Operations,
Sixteen weeks ended July 23, 2001 and July 24, 2000
(Unaudited) 4
Condensed Consolidated Statements of Cash Flows,
Sixteen weeks ended July 23, 2001 and July 24, 2000
(Unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Statements 6
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 10
PART II: OTHER INFORMATION AND SIGNATURES
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
2
ITEM 1
ELMER'S RESTAURANTS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 23, 2001 April 2, 2001
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 982,498 $ 1,141,016
Accounts receivable 418,791 337,266
Notes receivable - related parties, current portion 267,878 180,213
Inventories 396,744 368,059
Prepaid expenses and other 262,774 237,681
Income taxes receivable 22,239 61,625
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Total current assets 2,350,924 2,325,860
Notes receivable - related parties, net of current portion 167,263 203,045
Property, buildings and equipment, net 8,835,566 8,441,867
Intangible assets, net of accumulated amortization of $362,244 and $241,925 5,350,150 5,280,714
Other assets 125,305 122,661
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Total assets $ 16,829,208 $ 16,374,147
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, current portion $ 280,373 $ 569,327
Accounts payable 1,524,888 1,389,195
Accrued expenses 249,124 209,821
Accrued payroll and related taxes 442,068 390,825
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Total current liabilities 2,496,453 2,559,168
Notes payable, net of current portion 6,001,758 5,798,769
Deferred income taxes 772,000 772,000
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Total liabilities 9,270,211 9,129,937
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Commitments and contingencies
Shareholders' equity
Common stock, no par value; 10,000,000 shares authorized,
1,962,032 shares issued and outstanding 6,871,190 6,871,190
Retained earnings 687,807 373,020
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Total shareholders' equity 7,558,997 7,244,210
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Total liabilities and shareholders' equity $ 16,829,208 $ 16,374,147
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The accompanying notes are an integral part
of the condensed consolidated financial statements.
3
ELMER'S RESTAURANTS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIXTEEN WEEKS ENDED
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JULY 23, July 24,
2001 2000
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(Unaudited) (Unaudited)
REVENUES $10,267,510 $ 7,231,139
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COSTS AND EXPENSES:
Cost of restaurant sales:
Food and beverage 2,919,201 2,043,186
Labor and related costs 3,428,677 2,293,991
Occupancy costs 627,131 398,304
Depreciation and amortization 218,498 199,237
Restaurant opening and closing expenses 40,380 --
General and administrative expenses 2,405,148 1,691,066
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9,639,035 6,625,784
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INCOME FROM OPERATIONS 628,475 605,355
OTHER INCOME (EXPENSE):
Interest income 33,966 51,594
Interest expense (181,858) (187,317)
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Income before provision for income taxes 480,583 469,632
Income tax provision (165,796) (161,515)
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NET INCOME $ 314,787 $ 308,117
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PER SHARE DATA:
Net income per share - Basic $ 0.16 $ 0.17
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Weighted average number of
common shares outstanding - Basic 1,962,032 1,832,032
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Net income per share - Diluted $ 0.16 $ 0.17
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Weighted average number of
common shares outstanding - Diluted 1,987,997 1,863,781
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The accompanying notes are an integral part
of the condensed consolidated financial statements.
4
ELMER'S RESTAURANTS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the sixteen weeks ended
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JULY 23, July 24,
2001 2000
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(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 314,787 $ 308,117
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 218,498 199,237
Changes in assets and liabilities:
Current assets (80,388) --
Other assets (57,561) 53,803
Accounts payable and accrued expenses 173,485 (76,921)
Income taxes 39,386 (285,205)
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Net cash provided by operating activities 608,207 199,031
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Cash flows from investing activities:
Additions to property, buildings and equipment (588,147) (230,193)
Additions to intangible assets (40,730) --
Issuance of note receivable (74,620) --
Principal collected on note receivables 22,737 --
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Net cash used in investing activities (680,760) (230,193)
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Cash flows from financing activities:
Issuance of ten year term notes 2,806,944 --
Retirement of term debt (2,789,231) --
Payments on notes payable (103,678) (112,638)
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Net cash used in financing activities (85,965) (112,638)
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Net decrease in cash and cash equivalents (158,518) (143,800)
Cash and cash equivalents, beginning of period 1,141,016 1,640,210
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Cash and cash equivalents, end of period $ 982,498 $ 1,496,410
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Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 181,858 $ 187,317
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Income taxes $ 126,410 $ 444,000
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The accompanying notes are an integral part
of the condensed consolidated financial statements.
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ELMER'S RESTAURANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with the instructions to form 10-Q and Rule 10-01 of Regulation S-X.
These interim financial statements do not include all the information and
footnotes necessary for a fair presentation of financial position and results of
operations and cash flows in conformity with generally accepted accounting
principles in the United States of America. These condensed financial statements
should be read in conjunction with the financial statements and related notes
contained in the Company's Annual Report on Form 10-K for the year ended April
2, 2001. Operating results reflected in the interim consolidated financial
statements are not necessarily indicative of the results that may be expected
for the year ended April 1, 2002.
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.
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 will be evaluated against this new criteria and may
result in certain intangibles being subsumed into goodwill, or alternatively,
amounts initially recorded as goodwill may be separately identified and
recognized apart from goodwill. Management does not believe that adoption of
SFAS No. 141 will have a material effect on the condensed consolidated financial
statements. 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 will not be amortized into results of
operations, but instead 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 has adopted the provisions of SFAS No. 142 beginning the sixteen
weeks ended July 23, 2001. These standards only permit prospective application
of the new accounting; accordingly adoption of these standards will not affect
previously reported financial information. The principal effect of implementing
SFAS No. 142 was the cessation of the amortization of goodwill in the current
period; however, impairment reviews may result in future write-downs. Any
impairment losses for goodwill and certain intangibles that arise from the
initial application of the SFAS will be reported as a change in accounting
principle. The Company has not determined the effect of the initial application
at this time. Goodwill amortization in the previous comparable quarter amounted
to $47,600 or $.02 per diluted share.
All net income per share amounts and weighted average number of common shares
outstanding have been retroactively adjusted to reflect a 10% stock dividend,
which had a record date in August 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Elmer's Restaurants, Inc. (the "Company" or "Elmer's") (NASDAQ Small Cap Market
symbol: ELMS), located in Portland, Oregon, is a franchisor and operator of
full-service, family oriented restaurants under the names "Elmer's Breakfast.
Lunch. Dinner." and "Mitzel's American Kitchen" and an operator of delicatessen
restaurants under the names "Ashley's" and "Richard's Deli and Pub." The Company
is an Oregon corporation and was incorporated in 1983. Walter Elmer opened the
first Elmer's restaurant in Portland, Oregon in 1960, and the first franchised
restaurant opened in 1966. The Company acquired the Elmer's franchising
operation in January 1984 from the Elmer family.
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The Company currently owns and operates 12 Elmer's restaurants and is a party to
franchise agreements for 19 Elmer's restaurants in six western states. The
Company owns and operates five Mitzel's American Kitchen restaurants in the
Puget Sound area of Washington state.
The Company franchises or operates a total of 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.
The Elmer's breakfast menu, which is available all day, contains a wide variety
of selections with particular emphasis on pancakes, waffles, omelets, crepes,
country platters and other popular breakfast items.
On April 12, 2001 the Company acquired the Sandpiper restaurant in Roseburg
Oregon. The restaurant reopened as an Elmer's restaurant June 29, 2001. The
acquisition cost of $164,000 included $124,000 in tangible assets and $40,000 in
goodwill. In July, 2001 the Company sold a 25-year franchise license in
Woodburn, Oregon to a current franchisee and in a separate transaction the
Company renewed the franchise of a Portland area restaurant for 25-years.
HIGHLIGHTS OF HISTORICAL RESULTS. The Company reported net income of $314,787 or
$.16 per share for the quarter ended July 23, 2001, on sales of $10.27 million
as compared to reported net income of approximately $308,117 or $.17 per share
for the first quarter ended July 24, 2000. The $6,670 increase in net income is
attributable to the acquisition of five Mitzels American Kitchen restaurants in
December 2000. The Company's total assets as of July 23, 2001 were $16.8
million, which is an increase of $455,061 over total assets as of April 2, 2001.
In the sixteen weeks ended July 23, 2001, working capital increased $87,779
while notes payable decreased $85,965. Cash provided by operating activities
totaled $608,205 for the period ended July 23, 2001 compared to $199,031 for the
period ended July 24, 2000. The increase in cash provided from operations is
primarily attributable to the timing of the payment of liabilities and income
taxes.
COMPARISON OF RESULTS OF OPERATIONS. The following discussion and analysis
presents the Company's results of operations for the 112 days ended July 23,
2001 and the 115 days ending July 24, 2000.
For the period ended July 23, 2001, the Company's net income and earnings per
share increased 20% over net income and earnings per share for the comparable
period in 1999. Net income as a percentage of total revenue decreased from 4.3%
for the period ended July 24, 2000, to 3.1% for the period ended July 23, 2001.
7
Dollar amounts in thousands RESULTS OF OPERATIONS RESULTS OF OPERATIONS
except per share data (unaudited) FOR THE SIXTEEN WEEKS ENDED FOR THE SIXTEEN WEEKS ENDED
JULY 23, 2001 JULY 24, 2000
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Percent of Percent of
Amount Revenues Amount Revenues
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Revenue $10,268 100.0% $ 7,231 100.0%
Restaurant costs and expenses 7,234 70.5 4,935 68.2
General and administrative expenses 2,405 23.4 1,691 23.4
Operating income 628 6.1 605 8.4
Non operating expenses (148) (1.4) (136) (1.9)
Net income 315 3.1 308 4.3
Basic earnings per share $ 0.16 $ 0.17
Weighted average shares outstanding 1,962,032 1,832,032
REVENUE REVENUE
FOR THE SIXTEEN WEEKS ENDED FOR THE SIXTEEN WEEKS ENDED
JULY 23, 2001 JULY 24, 2000
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Percent of Percent of
Amount Revenues Amount Revenues
------- ------- ------- -------
Restaurant operations:
Restaurant sales $ 8,914 86.8% $ 6,030 83.4%
Lottery 951 9.3 920 12.7
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9,865 96.1 6,950 96.1
Franchise operations 403 3.9 281 3.9
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Total revenue $10,268 100.0% $ 7,231 100.0%
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REVENUES. Revenues for the period ended July 23, 2001 were 42.0% greater than
the three-day longer comparable period in 2000, reflecting the additional
revenue generated by the five Mitzel's restaurants acquired in December, 2000
and two new Elmer's units opened November, 2000 and July, 2001. Revenues from
same store restaurant operations were unchanged compared to the sixteen weeks
ended July 24, 2000. Revenue from franchise operations increased 43.4%
principally due to administrative services fees of $104,000 earned in the
current period.
RESTAURANT COSTS AND EXPENSES. Restaurant costs and expenses, which consists of
five categories including food, beverage and supply costs, labor and labor
related costs, occupancy costs, depreciation and amortization, and restaurant
opening and closing expenses increased to 70.5% of revenue for the quarter ended
July 23, 2001 compared to 68.2% for the comparable period in 2000. Food,
beverage and supply costs as a percentage of total revenues were 28.4% for the
sixteen weeks ended July 23, 2001 compared to 28.3% for the comparable period
ended July 24, 2000. Labor expenses totaled 33.4% of revenues for the quarter
ended July 23, 2001 compared to 31.7% of revenues for the same period in 2000.
The increase in labor as a percentage of revenues in the first quarter of 2001
over first quarter 2000 is driven by increased restaurant sales as a percentage
8
of total sales as well as increases in mandated minimum wage levels in
Washington state. Occupancy costs as a percentage of revenues increased from
5.5% for the sixteen weeks ended July 24, 2000 to 6.1% for the same period ended
July 23, 2001, due to an increase in the proportion of leased properties.
Depreciation and amortization expense as a percentage of revenues dropped from
2.8% of revenues for the quarter ended July 24, 2000 to 2.1% of revenues for the
quarter ended July 23, 2001, due to the elimination of amortization expense
pursuant to the adoption of SFAS No. 142.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative ("G&A") expenses
were 23.4% of total revenue in each of the first quarter of 2001 and 2002
NON OPERATING INCOME (EXPENSES). Net non-operating expenses were 1.4% of total
revenues in the first quarter of fiscal 2002 compared to 1.9% of total revenues
in the comparable period in fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES. As of July 23, 2001, the Company had cash and
equivalents of approximately $982,000 representing a decrease from April 2, 2001
of approximately $159,000. The decrease resulted from cash used to acquire and
remodel the new Roseburg Elmer's. Cash used by financing activities was $85,965
primarily from payments on notes payable. Cash used in investing activities was
$680,760 principally for the acquisition and remodel of the Roseburg property.
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 was the operation of its
restaurants, franchise fees earned from its franchisees, cash on hand, and
borrowings, as discussed above. As of July 23, 2001, the Company had outstanding
indebtedness of $2.8 million with GE Capital, $2.2 million in real estate debt
with Wells Fargo and $1.3 million in convertible notes.
The GE Capital loan was originated in June 2001 with proceeds used to retire
(without penalty) approximately $1.55 million in Wells Fargo term debt and $1.25
million in a term loan facility with Eagles View Management. The GE Capital loan
fully amortizes over ten years, $1.80 million of the loan has a fixed interest
rate of 8.95%. Interest is variable at 385 basis points over 30 day commercial
paper (currently approximately 7.4%) on the remaining $1.00 million portion of
the note. The variable portion of the note can be fixed (385 basis points above
five year treasuries) without penalty within the first two years. In addition,
GE Capital has provided the Company with a option for up to $1.5 million of
additional financing over the next year on similar terms for the Company's
growth purposes. No amounts had been drawn on the $1.5 million facility as of
July 23, 2001. The loan is collateralized by substantially all of the assets
owned by Elmer's Restaurants, Inc. (except for real estate assets).
The remaining Wells Fargo real estate debt has a weighted-average maturity of
eight years, bears interest at an average of 8.18%, require monthly payments of
principal and interest, and is collateralized by four real estate assets.
The $1.3 million of convertible notes have a remaining maturity of approximately
six and a half years, bear interest at 10%, requires monthly interest-only
payments, straight line principal amortization into a Company-held sinking fund,
and are subordinated to the other Company funded debt. The notes include a
convertible feature that permits the holder to convert the principal of the note
into common stock at any time at $6.50 per share.
Certain of the Company's debt agreements require compliance with debt covenants.
The most restrictive covenants require the Company to maintain a maximum ratio
of total liabilities, excluding subordinated debt, to tangible net worth plus
subordinated debt of 3.25 to 1.0, and a ratio of cash generation (defined as net
income before taxes, interest expense, depreciation and amortization) to total
interest expense plus the prior period current maturities of long-term debt of
at least 2.25 to 1.0. Management believes that the Company is in compliance with
such requirements. 9
Elmer's Restaurants, Inc., like most restaurant businesses, is able to operate
with nominal or deficit working capital because sales are for cash and inventory
turnover is rapid. Renovation and/or remodeling of existing restaurants is
either funded directly from available cash or, in some instances, is financed
through outside lenders. Construction or acquisition of new restaurants is
generally, although not always, financed by outside lenders.
The Company believes that it will continue to be able to obtain adequate
financing on acceptable terms for new restaurant construction and acquisitions
and that cash generated from operations will be adequate to meet its financial
needs and to pay operating expenses for the foreseeable future, although no
assurances can be given.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
Certain statements in this form 10-q constitute "forward-looking statements"
which we believe are reasonable and within the meaning of the securities act of
1933, as amended and the securities exchange act of 1934, as amended. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors relating to the company's business, financial condition, and
operations which may cause the actual results, performance, or achievements of
elmer's restaurants, inc. (individually and collectively with its subsidiaries,
herein the "Company") to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: general economic
and business conditions; the ability to accomplish stated goals and objectives;
successful integration of acquisitions; the impact of competitive products and
pricing; success of operating initiatives; development and operating costs;
advertising and promotional efforts; adverse publicity; acceptance of new
product offerings; consumer trial and frequency; availability, locations, and
terms of sites for restaurant development; changes in business strategy or
development plans; changes in regulations effecting lottery commissions; quality
of management; availability, terms and deployment of capital; the results of
financing efforts; business abilities and judgment of personnel; availability of
qualified personnel; food, labor and employee benefit costs; changes in, or the
failure to comply with, government regulations; continued nasdaq listing;
weather conditions; construction and remodeling schedules; and other factors
referenced in this form 10-Q.
The Company holds no financial instruments of any kind for trading purposes.
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. The
Company's major market risk exposure is potential loss arising from changing
interest rates and the impact of such changes on its long-term debt. Of the
Company's long-term debt outstanding at July 23, 2001, $1,000,000 principal
amount was accruing interest at a variable rate of 3.85% over 30 day Commercial
Paper. 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 23, 2001.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On August 9, 2000, the Board of Directors approved a 10% stock dividend payable
to all shareholders of record as of August 18, 2000. The board directed that the
dividend be paid on September 15, 2000 and that no consideration for fractional
shares be issued or paid.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
a) Exhibits:
Exhibits required to be attached by Item 601 of Regulation S-K are listed
in the Index to Exhibits of this Form 10-Q and are incorporated herein by this
reference.
b) Reports on Form 8-K:
None.
10
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/ WILLIAM W. SERVICE
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William W. Service
Chief Executive Officer
Dated: September 5, 2001
11