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 19, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO _________________
COMMISSION FILE NUMBER 0-14837
ELMER'S RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
OREGON ______ 93-0836824
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
11802 S.E. Stark St.
Portland, Oregon 97216 (503) 252-1485
(ADDRESS OF PRINCIPAL (ZIP CODE) (REGISTRANT'S TELEPHONE NUMBER,
EXECUTIVE OFFICES) INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section12(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 September 1, 2004: 1,828,463
ELMER'S RESTAURANTS, INC.
INDEX
PAGE
NUMBER
------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets,
July 19, 2004 (Unaudited) and March 29, 2004
Condensed Consolidated Statements of Operations, 4
Sixteen weeks ended July 19, 2004 and July 21, 2003
(Unaudited)
Condensed Statement of Changes in Shareholders' Equity, 5
Sixteen weeks ended July 19, 2004 (Unaudited)
Condensed Consolidated Statements of Cash Flows, 6
Sixteen weeks ended July 19, 2004 and July 21, 2003
(Unaudited)
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 10
Statements
Item 3. Quantitative and Qualitative Disclosures about Market 15
Risk
Item 4. Controls and Procedures 15
PART II: OTHER INFORMATION AND SIGNATURES
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 16
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 19, 2004 March 29, 2004
-------------------- ------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,062,396 $ 1,601,378
Marketable securities 781,716 930,196
Accounts receivable 243,966 261,669
Notes receivable - franchisees and related parties, current portion 48,817 41,036
Inventories 359,980 372,707
Prepaid expenses and other 485,320 476,159
Income taxes receivable 34,522 159,877
-------------------- ------------------
Total current assets 4,016,717 3,843,022
Notes receivable - franchisees and related parties, net of current portion 165,401 191,244
Property, buildings and equipment, net 8,915,682 9,325,050
Goodwill 4,897,743 4,897,743
Intangible assets 602,709 602,709
Market value of interest rate swap agreement 1,043 0
Other assets 231,548 185,561
-------------------- ------------------
Total assets $ 18,830,843 $ 19,045,329
==================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, current portion $ 429,889 $ 416,278
Accounts payable 1,348,520 1,496,905
Accrued expenses 445,295 500,536
Accrued payroll and related taxes 414,192 662,253
-------------------- ------------------
Total current liabilities 2,637,896 3,075,972
Notes payable, net of current portion 4,859,092 4,916,157
Deferred income taxes 1,397,179 1,396,000
Obligation under interest rate swap 0 33,005
-------------------- ------------------
Total liabilities 8,894,167 9,421,134
-------------------- ------------------
Commitments and contingencies
Shareholders' equity
Common stock, no par value; 10,000,000 shares authorized, 1,816,335
shares issued and outstanding 6,216,136 6,216,136
Retained earnings 3,703,252 3,391,413
Accumulated other comprehensive gain, net of taxes 17,288 16,646
-------------------- ------------------
Total shareholders' equity 9,936,676 9,624,195
-------------------- ------------------
Total liabilities and shareholders' equity $ 18,830,843 $ 19,045,329
==================== ==================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the sixteen weeks ended
---------------------------------------------
July 19, July 21,
2004 2003
-------------------- ---------------------
(Unaudited) (Unaudited)
REVENUES $ 9,804,684 $ 10,059,012
-------------------- ---------------------
COSTS AND EXPENSES:
Cost of restaurant sales:
Food and beverage 2,843,050 3,099,959
Labor and related costs 3,417,091 3,398,561
Restaurant operating costs 1,383,053 1,378,674
Occupancy costs 619,454 635,805
Depreciation and amortization 267,140 252,147
General and administrative expenses 731,586 670,902
(Gain) loss on sale of land, buildings and equipment (145,303) 4,071
Loss on impairment of equipment 140,000 -
-------------------- ---------------------
9,256,071 9,440,119
-------------------- ---------------------
INCOME FROM OPERATIONS 548,613 618,893
OTHER INCOME (EXPENSE):
Interest income 17,798 24,756
Interest expense (109,546) (115,993)
Gain (loss) on sale of marketable securities 1,974 3,449
-------------------- ---------------------
Income before provision for income taxes 458,839 531,105
Income tax provision (147,000) (168,000)
-------------------- ---------------------
NET INCOME $ 311,839 $ 363,105
==================== =====================
PER SHARE DATA:
Net income per share - Basic $ 0.17 $ 0.18
==================== =====================
Weighted average number of
common shares outstanding - Basic 1,816,335 2,041,728
==================== =====================
Net income per share - Diluted $ 0.16 $ 0.17
==================== =====================
Weighted average number of
common shares outstanding - Diluted 1,947,823 2,131,478
==================== =====================
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
comprehensive gain Total shareholders
Shares Amount Retained earnings (loss) equity
---------------- -------------- ------------------ -------------------- --------------------
BALANCE, March 29, 2004 1,816,335 $ 6,216,136 $ 3,391,413 $ 16,646 $ 9,624,195
Comprehensive income:
Net Income - - 311,839 - 311,839
Change in net unrealized gain
(loss) on available for sale
securities, net of taxes (19,787) (19,787)
Change in fair market value of
interest rate swap agreement,
net of taxes 20,429 20,429
---------------- -------------- ------------------ -------------------- --------------------
Total comprehensive income 311,839 642 312,481
---------------- -------------- ------------------ -------------------- --------------------
BALANCE, July 19, 2004 1,816,335 $ 6,216,136 $ 3,703,252 $ 17,288 $ 9,936,676
(Unaudited) ================ ============== ================== ==================== ====================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the 16 weeks ended
------------------------------------------------
JULY 19, July 21
2004 2003
---------------------- --------------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 311,839 $ 363,105
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 267,140 252,147
(Gain) loss on disposition of equipment (145,303) 4,071
Loss of impairment of equipment 140,000
Gain on sale of marketable securities (1,974) (3,449)
Changes in assets and liabilities:
Current assets (6,305) (383,953)
Other assets (45,987) 24,401
Accounts payable (148,385) 42,397
Accrued expenses (55,241) 107,486
Accrued payroll and related taxes (248,061) (10,877)
Income taxes 125,355 115,500
---------------------- --------------------
Net cash provided by (used in) operating activities 193,078 510,828
---------------------- --------------------
Cash flows from investing activities:
Additions to property, buildings and equipment (239,928) (220,119)
Purchases of available-for-sale securities (198,711) (146,100)
Proceeds from sale of available-for-sale securities 316,971 230,611
Principal collected on note receivables 18,062 29,416
Proceeds from sale of assets 415,000 2,500
---------------------- --------------------
Net cash provided by (used in) investing activities 311,394 (103,692)
---------------------- --------------------
Cash flows from financing activities:
Issuance of notes payable 68,493 -
Net change in principal debt service accounts - (30,952)
Payments on notes payable (111,947) (93,548)
---------------------- --------------------
Net cash provided by (used in) financing activities (43,454) (124,500)
---------------------- --------------------
Net change in cash and cash equivalents 461,018 282,636
Cash and cash equivalents, beginning of period 1,601,378 2,200,263
---------------------- --------------------
Cash and cash equivalents, end of period $ 2,062,396 $ 2,482,899
====================== ====================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 109,546 $ 115,993
====================== ====================
Income taxes $ 21,645 $ 52,500
====================== ====================
Supplemental disclosures of non-cash transactions:
Change in unrealized (gain) loss on available-for-sale securities, net of taxes $ (19,787) $ 48,471
====================== ====================
Change in fair market value of interest rate swap
agreement, net of taxes $ 20,429 $ (11,083)
====================== ====================
Note receivable issued for franchise fee receivable $ - $ 123,000
====================== ====================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
ELMER'S RESTAURANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
These interim financial statements do not include all the information and
footnotes necessary for a fair presentation of financial position and results of
operations and cash flows in conformity with generally accepted accounting
principles in the United States of America. These condensed financial statements
should be read in conjunction with the financial statements and related notes
contained in the Company's Annual Report on Form 10-K for the year ended March
29, 2004. Operating results reflected in the interim consolidated financial
statements are not necessarily indicative of the results that may be expected
for the year ending April 4, 2005.
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting solely of normal recurring adjustments)
necessary to present fairly the financial position of the Company and its
subsidiaries, and their results of operations and cash flows.
The Company had comprehensive income of $312,481 for the sixteen weeks ended
July 19, 2004. This was composed of net income of $311,839 and an increase in
the market value an interest rate swap agreement of $20,429 (net of taxes),
which was partially offset by a decline in the market value of
available-for-sale securities of $19,787 (net of taxes).
INTEREST RATE SWAP AGREEMENT - In June 2003, and in conjunction with the
modification of the Wells Fargo Bank real estate debt agreement discussed below,
the Company entered into an interest rate swap agreement with Wells Fargo Bank
to reduce the impact of changes in interest rates on its floating rate mortgage.
The debt modification and related swap agreement effectively changes the
Company's interest rate exposure on the Wells Fargo Bank real estate debt to a
fixed percentage of 6.17%. The notional amount of the swap agreement as of July
19, 2004 was $1.0 million. The interest rate swap agreement matures May 24,
2010.
Under the terms of the swap agreement, the Company has committed to paying or
receiving interest on the spread between 30-day LIBOR and a fixed rate of 3.92%.
If 30-day LIBOR exceeds 3.92%, the Company receives interest income from the
bank equal to the spread. If 30-day LIBOR is less than 3.92%, the Company makes
interest payments to the bank equal to the spread. The 30-day LIBOR rate is
fixed on a monthly basis by the bank.
The swap is inversely correlated to the related hedged long-term debt and is
therefore considered an effective cash flow hedge of the underlying long-term
debt. The level of effectiveness of the hedge is measured by changes in the fair
value of the hedged long-term debt resulting from fluctuations in interest
rates. As a matter of policy, the Company does not enter into derivative
transactions for trading or speculative purposes.
The interest rate swap agreement qualifies as a cash flow hedge under Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires that the fair value of
derivative instruments be recorded and changes in the fair value of the
derivative instruments be recognized in other comprehensive income. As of July
19, 2004 the fair market value of this agreement was $1,043 and results in the
recognition of $20,429 (net of tax effect) in other comprehensive gain during
the quarter then ended.
STOCK OPTIONS - SFAS No. 123, Accounting for Stock-Based Compensation, defines a
fair value-based method of accounting for employee stock options and similar
equity instruments, and encourages all companies to adopt that method of
accounting for all of their employee stock compensation plans. It encourages,
but does not require, companies to record compensation costs for stock-based
employee compensation plans at fair value. The Company has chosen to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations.
Under SFAS No. 123 no compensation cost has been recognized for the plan. Had
compensation cost for the stock-based compensation plan been determined, based
on the fair value of options at the date of grant consistent with the provisions
of SFAS No. 123, the Company's pro forma net income and pro forma earnings per
share would have been as follows:
July 19, 2004 July 21, 2003
16 weeks 16 weeks
--------------- ---------------
Net income - as reported $311,839 $363,105
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects 9,655 24,435
--------------- ------------
Net income - pro forma $302,184 $338,670
=============== ============
Basic earnings per share - as reported $0.17 $0.18
Diluted earnings per share - as reported $0.16 $0.17
Basic earnings per share - pro forma $0.17 $0.17
Diluted earnings per share - pro forma $0.16 $0.16
As of July 19, 2004 the Company had outstanding option grants for 450,638
shares, of which 327,116 were vested. As of July 21, 2003 the Company had
outstanding grants for 459,624 shares with 295,330 shares vested.
GUARANTEES - As a result of the sale of three Elmer's restaurants to Southern
Oregon Elmer's LLC (the "Buyer") in May 2002, 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. The Company is a guarantor of the lease on the Company's recently
refranchised Palm Springs location until April 2007 and on a rolling
twelve-month basis thereafter until 2020. In all cases, the franchisees have
indemnified the Company against all losses incurred as guarantor. In addition,
the franchisees' principals and their spouses have personally guaranteed the
franchisee's indemnification.
In the event of default by the franchisee, the Company could be required to pay
all rent and other payments due under the terms of the leases. As of July 19,
2004, the maximum potential liability under these guarantees is $1,186,069. In
the event of default, the Company expects it would exercise its right to
reoccupy and continue to operate the restaurants.
SUBSEQUENT EVENTS
Receipt of Going Private Offer
------------------------------
August 6, 2004, the Company announced that it had received a non-binding
proposal for a going private transaction from a purchaser group led by Bruce N.
Davis, the Company's Chairman of the Board, Chief Executive Officer and
President, and consisting of the Company's Board of Directors and 12 additional
shareholders. A copy of the proposal was attached to the Press Release dated
August 6, 2004 and available in the 8-K filed with the SEC on August 6, 2004.
The 8-K is also available on the Company's website www.elmers-restaurants.com.
RECENT TRANSACTIONS
Impairment Loss On Future Store Closing
---------------------------------------
The Company recognized a $140,000 impairment loss this quarter on the write down
of property and equipment with a carrying value of approximately $155,000 to a
fair value of $15,000. The loss arises from the anticipated closure of a
restaurant when the lease will not be renewed.
Sale of Palm Springs Restaurant
-------------------------------
March 30, 2004, the Company refranchised the Company's Elmer's Restaurant in
Palm Springs, California. The buyer executed a 25-year franchise agreement and
assumed the Company's operating lease obligations. The Company remains a
guarantor of the lease until April 2007 and on a rolling twelve-month basis
thereafter until 2020. The sales price of $415,000 was received in cash and
resulted in a pretax gain of approximately $145,000. Assets sold included
prepaids and inventory of approximately $28,000 and equipment of approximately
$242,000.
Franchise Opening
-----------------
Elmer's newest franchised restaurant opened on March 15, 2004. The 4,500 square
foot restaurant in Corvallis, Oregon occupies a converted Lyons restaurant site.
On July 21, 2003 a 5,000 square foot franchise restaurant in Coeur d'Alene,
Idaho opened. It occupies a converted Village Inn site.
Lottery Commission
------------------
March 31, 2004, the Oregon Lottery Commission approved a new six-year retailer
contract effective June 27, 2004. The impact of this contract is discussed
further under Revenues on page 12.
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
adoption of FASB No. 150 did not 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 adoption of the provisions of this statement did not 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. This interpretation explains how to identify variable
interest entities and how an enterprise assesses its interests in a variable
interest entity to decide whether to consolidate the entities. In December 2003,
FASB issued FIN 46R, which made revisions and delayed implementation of certain
provisions of FIN 46. As a public entity that is not a "Small Business Issuer,"
the Company is now required to apply FIN 46R to all unconsolidated variable
interest entities no later than March 29, 2004, with the exception of
unconsolidated special purpose entities, which had an implementation deadline of
December 31, 2003. The Company's adoption of the provisions of this
interpretation had no 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. The Company's adoption of the provisions of this statement did not have
a material impact on the Company's 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 37 full-service, family-oriented
restaurants, with a warm, friendly atmosphere and comfortable furnishings. Most
of the restaurants are decorated in a home style, with fireplaces in the dining
rooms. The restaurants are primarily freestanding buildings, ranging in size
from 4,600 to approximately 9,000 square feet with seating capacities ranging
from 120 to 220. A portion of the dining room in most restaurants may also be
used for private group meetings by closing it off from the public dining areas.
The menu offers an extensive selection of items for breakfast, lunch and dinner.
CRITICAL ACCOUNTING POLICIES
The Company's reported results are affected by the application of certain
accounting policies that require subjective or complex judgments. These
judgments involve estimates that are inherently uncertain and may have a
significant impact on our quarterly or annual results of operations and
financial condition. Changes in these estimates and judgments could have
significant effects on the Company's results of operations and financial
condition in future years. We believe the Company's most critical accounting
policies cover accounting for long-lived assets - specifically property,
buildings and equipment depreciation thereon and the valuation of intangible
assets. Additional critical accounting policies govern revenue recognition and
accounting for stock options.
Property, Buildings and Equipment
---------------------------------
When the Company purchases property, buildings and equipment, the assets are
recorded at cost. However, when the Company acquires an operating restaurant or
business, the Company must allocate the purchase price between the fair market
value of the tangible assets acquired and any excess to goodwill. The fair
market value of restaurant equipment fixtures and furnishings in an operating
restaurant is difficult to separate from the going concern value of the
restaurant. Most of the value of the equipment is due to the fact that it is in
the restaurant and working. The Company values in place equipment with reference
to replacement cost, age and condition, and utility in its intended use.
Intangible Assets
-----------------
The Company reviews the valuation of its intangible assets annually based on its
third quarter financial statements and assesses for events occurring in the
interim indicating possible impairment. If the fair values of the intangibles
were less than their recorded values, an impairment loss would be recognized.
The fair values of the reporting units are estimated using multiples of earnings
before interest, taxes, depreciation and amortization. The market for these
intangibles is limited and the realizable value will differ from the fair values
estimated by using a multiple of earnings.
Depreciation
------------
Property, buildings and equipment are depreciated using the straight-line method
over their estimated useful lives. The useful lives of the individual assets are
estimated by the Company's management based upon their experience in the
restaurant industry. Generally buildings are depreciated over 35 years and
equipment is depreciated over a range of 3 to 10 years. Leasehold improvements
are amortized on a straight-line method over their estimated useful lives or the
term of the related lease, whichever is shorter. Periodically the Company
reviews the net book value of its depreciable assets to determine if there is
any possible impairment of value. The Company recognized a $140,000 impairment
loss on the write down of property and equipment with a carrying value of
approximately $155,000 to a fair value of $15,000. 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, net of state regulated payouts. Expenses are recorded
using accrual accounting based upon when goods and services are used.
Stock Options
-------------
The Company accounts for its stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. Based on this
methodology the Company has not recorded any compensation costs related to its
stock options since all options have been issued at an exercise price equal to
or greater than the market value of the Company's stock at the time of issuance.
In Section 1 Basis of Presentation, we provide pro forma disclosures of net
income and earnings per share as if the method prescribed by SFAS No. 123,
Accounting for Stock-Based Compensation, had been applied in measuring
compensation expense. A change to recognize compensation expense for all options
granted using a fair value approach in regularly reported financial results
would have a significant impact on our results of operations.
HIGHLIGHTS OF HISTORICAL RESULTS. The Company reported net income of $311,839 or
$.17 per share for the quarter ended July 19, 2004, on sales of $9.8 million as
compared to reported net income of $363,105 or $.18 per share on sales of $10.1
million for the first quarter ended July 21, 2003. The Company's total assets at
July 19, 2004 were $18.8 million, a decrease of $260,000 from March 29, 2004.
During the sixteen weeks ended July 19, 2004, working capital increased
$612,000. Cash provided by operating activities totaled $193,000 for the quarter
ended July 19, 2004 compared to $511,000 for the quarter ended July 21,2003. The
decrease in cash provided from operations is primarily attributable to the
timing of payroll tax and worker's compensation insurance payments as well as
pay down of negative working capital attributable to the sale of the Palm
Springs restaurant. The franchised Pocatello, Idaho restaurant was sold. The
franchisee signed a new 25-year franchise agreement at the current 4% franchise
fee. The $35,000 initial franchise fee was recorded in the quarter.
COMPARISON OF RESULTS OF OPERATIONS. The following discussion and analysis
presents the Company's results of operations for the 16 weeks ended July 19,
2004 and July 21, 2003.
For the period ended July 19, 2004, the Company's net income and earnings per
share decreased 14.1% and 5.6%, respectively, from the comparable period in
2003. Net income as a percentage of total revenue decreased from 3.6% for the
period ended July 21, 2003, to 3.2% for the period ended July 19, 2004.
Dollar amounts in thousands except per share RESULTS OF OPERATIONS RESULTS OF OPERATIONS
data (unaudited) FOR THE SIXTEEN WEEKS ENDED FOR THE SIXTEEN WEEKS ENDED
JULY 19, 2004 JULY 21, 2003
--------------------------- ---------------------------
Percent of Percent of
Amount Revenues Amount Revenues
----------- ------------ --------- --------------
Revenues $9,805 100.0% $10,059 100.0%
Restaurant costs and expenses 8,530 87.0% 8,765 87.1%
General and administrative expenses 731 7.5% 671 6.7%
Loss (Gain) on sale of land buildings and
equipment and loss on impairment (5) (.1)% 4 0.1%
Income from operations 549 5.6% 619 6.1%
Non operating income (expense) (90) (.9)% (88) (0.9)%
Net income 312 3.2% 363 3.6%
Basic earnings per share $0.17 $0.18
Weighted average shares outstanding 1,816,335 2,041,728
REVENUE REVENUE
FOR THE SIXTEEN WEEKS ENDED FOR THE SIXTEEN WEEKS ENDED
JULY 19, 2004 JULY 21, 2003
--------------------------- ---------------------------
Percent of Percent of
Amount Revenues Amount Revenues
-------- ------------ -------- ------------
Restaurant operations:
Restaurant sales $8,243 84.1% $8,547 85.0%
Lottery 1,140 11.6% 1,128 11.2%
-------- ------------ -------- ------------
9,383 95.7% 9,675 96.2%
Franchise operations 422 4.3% 384 3.8%
-------- ------------ -------- ------------
Total revenue $9,805 100.0% $10,059 100.0%
======== ============ ======== ============
REVENUES. Revenues for the period ended July 19, 2004 were 2.5% less than for
the comparable period in 2003. Revenues from same store restaurant operations
were up .2% compared to the sixteen weeks ended July 21, 2003. Same store sales
at the Company's Elmer's restaurants were down 1.7%. The Company defines same
store sales as restaurants that were Company owned and operating continuously
from April 1, 2003 through July 19, 2004. Revenue from franchise operations
increased $38,000 attributable to increases in initial franchise fees as well as
increases in royalty income.
March 31, 2004, the Oregon Lottery Commission approved a new six-year retailer
contract effective June 27, 2004. If the new commission structure had been
applied to sales for the year ended March 29, 2004, it would have reduced
commissions by approximately $435,000, or 10%. The following table shows the
expected impact by quarter.
Quarter ended : Adverse impact
--------------- --------------
July 19, 2004 $93,000
October 11, 2004 250,000
January 3, 2005 96,000
April 4, 2005 (10,000)
July 4, 2005 6,000
The Lottery has installed additional terminals in most Company locations and the
Company expects year over year sales increases to reduce, but not eliminate, the
impact of the new lower rates. The $93,000 impact in the quarter ended July 19,
2004 was more than offset by increased sales prior to the contracts effective
date of June 27, 2004. As a result of timing features of the new contract, most
of the adverse impact will be felt in the Company's second quarter ending the
second Monday in October.
RESTAURANT COSTS AND EXPENSES. A comparison of restaurant costs and expenses as
a percent of revenue for the 16 weeks ended July 19, 2004 and July 21, 2003 are
as follows:
RESTAURANT COSTS AND EXPENSES RESTAURANT COSTS AND EXPENSES
FOR THE SIXTEEN WEEKS ENDED FOR THE SIXTEEN WEEKS ENDED
------------------------------- ----------------------------------
JULY 19, 2004 JULY 21, 2003
------------------------------- ----------------------------------
Cost of restaurant sales:
Food and beverage $2,843 29.0% $3,100 30.8%
Labor and related costs 3,417 34.9% 3,398 33.8%
Restaurant operating costs 1,383 14.1% 1,379 13.7%
Occupancy costs 620 6.3% 636 6.3%
Depreciation and amortization 267 2.7% 252 2.5%
Restaurant opening and closing expenses -- -- -- 0.0%
-------------- ------------- -------------- ---------------
Total cost of restaurant sales $8,530 87.0% $8,765 87.1%
============== ============= ============== ===============
The Company was operating 15 restaurants and 13 delis in 2003 and 2004. 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. A decline in revenues from deli operations was principally in low
margin products. In spite of decreased revenue, deli gross profits increased 2%.
This increase in gross margins accounts for the decline in food and beverage
costs of 1.8% and increase in labor costs of 1.1% as a percentage of sales. Food
and beverage costs at the Company's Elmer's restaurants increased 0.8% of sales
while labor and related costs declined 1.0%
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative ("G&A") expenses
were 7.5% of total revenue for the 16 weeks ended July 19, 2004 compared to 6.7%
in the comparable period in 2003. Accounting fees increased $21,000 in the first
quarter over the previous year and corporate wages were up $39,000 due to
additional marketing and franchise support expenses.
LOSS (GAIN) ON LAND BUILDINGS AND EQUIPMENT. Gain on sale of land, buildings and
equipment increased from (.1%) of sales for the quarter ended July 21, 2003 to
0.1% for the current quarter. The Company sold the Palm Springs restaurant to a
franchisee for a net gain of approximately $145,000. The Company recognized a
$140,000 impairment loss on the write down of property and equipment from a
carrying value of approximately $155,000 to a fair value of $15,000. The loss
arises from the anticipated closure of a restaurant when the lease will not be
renewed.
INCOME FROM OPERATIONS. Income from operations decreased $70,000 to $549,000.
NON-OPERATING INCOME/(EXPENSE). Non-operating expense was 0.9% of total revenues
for the 16 weeks ended July 19, 2004 compared to .9% of total revenues in the
comparable period in 2003.
LIQUIDITY AND CAPITAL RESOURCES. As of July 19, 2004 the Company had cash and
cash equivalents of approximately $2.0 million representing an increase from
March 29, 2004 of approximately $461,000. Cash provided by operations was
$193,000. Cash provided by investing activities was $311,000, principally from
the sale of the Palm Springs restaurant.
The Company's primary liquidity needs arise from debt service on indebtedness,
operating lease requirements and the funding of capital expenditures. The
Company's primary source of liquidity during the year is the operation of its
restaurants, franchise fees earned from its franchisees, cash on hand, and
borrowings. As of July 19, 2004, the Company had outstanding indebtedness of
$3.8 million with GE Capital and $1.5 million in real estate debt with Wells
Fargo Bank.
On January 14, 2004 the Company purchased 204,255 shares of its Common Stock,
representing approximately 10% of the then outstanding shares, at a purchase
price of $6.43 per share in accordance with the terms of a tender offer. The
aggregate price of the shares purchased by the Company through the tender offer
was approximately $1,313,000. Fees and expenses associated with the tender offer
were approximately $17,000, which was expensed in the Company's 4th Quarter
ended March 29, 2004.
The Wells Fargo Bank real estate debt agreement was amended in June 2003 to
change the fixed interest rate of 8% to a variable interest rate based on LIBOR.
In conjunction with this modification, the Company entered into an interest rate
swap agreement, which effectively fixed the interest rate at 6.17%. The
mortgages now have a weighted-average maturity of 7.5 years, bear interest at an
average of 6.0%, require monthly payments of principal and interest, and are
collateralized by three real estate assets. As of July 19, 2004 the fair market
value of this agreement was $1,043 and results in the recognition of $20,429
(net of tax effect) in other comprehensive gain.
Certain of the Company's debt agreements require compliance with debt covenants.
The most restrictive covenants require the Company to maintain a maximum ratio
of total liabilities, excluding subordinated debt, to tangible net worth plus
subordinated debt of 3.5 to 1.0, and a ratio of cash generation (defined as net
income before taxes, interest expense, depreciation and amortization) to total
interest expense plus the prior period current maturities of long-term debt of
at least 2.0 to 1.0. Management believes that the Company is in compliance with
such requirements.
Elmer's Restaurants, Inc., like most restaurant businesses, is able to operate
with nominal or deficit working capital because sales are for cash and inventory
turnover is rapid. Renovation and/or remodeling of existing restaurants is
either funded directly from available cash or, in some instances, is financed
through outside lenders. Construction or acquisition of new restaurants is
generally, although not always, financed by outside lenders.
The Company believes that it will continue to be able to obtain adequate
financing on acceptable terms for new restaurant construction and acquisitions
and that cash generated from operations will be adequate to meet its financial
needs and to pay operating expenses for the foreseeable future, although no
assurances can be given.
CONTRACTUAL OBLIGATIONS
The Company makes a range of contractual commitments in the ordinary course of
business and in conjunction with the acquisition and sale of restaurants. The
following table shows the Company's contractual obligations:
Commitment expiration period
Total amount committed 1 year or less 1-3 years 4-5 years 5 years or more
----------------------------------------------------------------------------------------------------------------------
Term debt $5,288,981 $429,889 $989,336 $1,389,900 $2,479,856
Operating Leases 4,873,662 1,277,158 1,763,240 1,089,350 743,914
Guarantees 1,186,069 385,846 729,019 71,204 -
----------------------------------------------------------------------------------------------------------------------
Totals $11,348,712 $2,092,893 $3,481,595 $2,550,454 $3,223,770
=========== ========== ========== ========== ==========
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 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 corporate
and government bond mutual funds focusing on issues with medium and short term
maturities. The Company actively manages its portfolio to reduce interest rate
risk. However, an increase in interest rate levels will tend to reduce the value
of the portfolio.
Certain of the Company's outstanding financial instruments are subject to market
risks, including interest rate risk. Such financial instruments are not
currently subject to foreign currency risk or commodity price risk. A rise in
prevailing interest rates could have adverse effects on the Company's financial
condition and results of operations. The fair value of financial instruments
approximated the book value at July 19, 2004.
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 July
19, 2004 on Form 10-Q (the "Evaluation Date"), have concluded that as of the
Evaluation Date, the Company's disclosure controls and procedures were adequate
and effective to ensure that material information relating to the Company and
its consolidated subsidiaries would be made known to them by others within those
entities, particularly during the period in which this quarterly report on Form
10-Q was being prepared.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect the Company's disclosure controls and
procedures subsequent to the Evaluation Date, nor any significant deficiencies
or material weaknesses in such disclosure controls and procedures requiring
corrective actions. As a result, no corrective actions were taken.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
In accordance with amendments adopted on May 21, 1998 to Rule 14a-4 under the
Securities and Exchange Act of 1934, if notice of a shareholder proposal to be
raised at the annual meeting of shareholders is received at the principal
executive offices of the Company after May 15, 2005 (45 days prior to the month
and date in 2005 corresponding to the date on which the Company mailed its proxy
materials for the 2004 annual meeting), proxy voting on that proposal when and
if raised at the 2005 annual meeting will be subject to the discretionary voting
authority of the designated proxy holders. Any shareholder proposal to be
considered for inclusion in proxy materials for the Company's 2005 annual
meeting must be received at the principal executive office of the Company no
later than January 21, 2005.
ITEM 6. EXHIBITS AND REPORTS 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:
June 23, 2004 reporting fiscal year end financial results.
August 6, 2004 reporting going private proposal.
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: September 2, 2004
EXHIBIT INDEX
Exhibit Sequential
No. Description Page No.
3(i)* Restated Articles of Incorporation of the Company (Incorporated herein
by reference from Exhibit No. 3.1 to the Company's Annual Report on
Form 10-K for the year ended March 31, 1988.)
3(ii)* By-Laws of the Company, as amended. (Incorporated herein by reference
from Exhibit 3.2 of the Company's Annual Report on Form 10-K for the
year ended March 31, 1990.)
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002, of Chief Executive
Officer and President. 18
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002, of Secretary and
Corporate Controller. 19
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, of Chief Executive
Officer and President. 20
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, of Secretary and
Corporate Controller. 21