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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 22, 2002 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
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11802 S.E. Stark St.
Portland, Oregon 97216
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(503) 252-1485
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(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 September 3, 2002: 2,041,779
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ELMER'S RESTAURANTS, INC.
INDEX
PAGE
NUMBER
------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets,
July 22, 2002 (Unaudited) and
April 1, 2002
Condensed Consolidated Statements of Operations, 4
Sixteen weeks ended July 22, 2002 and July 23, 2001
(Unaudited)
Condensed Consolidated Statements of Cash Flows, 5
Sixteen weeks ended July 22, 2002 and July 23, 2001
(Unaudited)
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Statements
Item 3. Quantitative and Qualitative Disclosures about Market 12
Risk
PART II: OTHER INFORMATION AND SIGNATURES
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
2
Item 1
ELMER'S RESTAURANTS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 22, 2002 April 1, 2002
------------ ------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 728,662 $ 654,211
Marketable securities 1,208,558 1,149,171
Accounts receivable 268,021 315,063
Notes receivable - related parties, current portion 350,092 372,712
Inventories 370,691 411,008
Prepaid expenses and other 467,488 133,424
Income taxes receivable -- 114,117
------------ ------------
Total current assets 3,393,512 3,149,706
Notes receivable - related parties, net of current portion 264,732 --
Property, buildings and equipment, net 7,214,053 7,654,097
Goodwill 4,873,121 4,699,164
Intangible assets 602,709 602,709
Principal debt service account for convertible debt 147,024 305,019
Other assets 330,417 274,588
------------ ------------
Total assets $ 16,825,568 $ 16,685,283
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, current portion $ 285,460 $ 277,333
Accounts payable 1,208,506 1,483,823
Accrued expenses 292,333 174,120
Accrued payroll and related taxes 442,184 403,141
Accrued income tax 201,376
------------ ------------
Total current liabilities 2,429,859 2,338,417
Notes payable, net of current portion 4,700,737 5,366,050
Deferred income taxes 692,858 691,724
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Total liabilities 7,823,454 8,396,191
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Commitments and contingencies
Shareholders' equity
Common stock, no par value; 10,000,000 shares
authorized, 2,058,034 shares issued and outstanding 7,371,400 7,371,400
Retained earnings 1,642,348 929,266
Accumulated other comprehensive loss, net of taxes (11,634) (11,574)
------------ ------------
Total shareholders' equity 9,002,114 8,289,092
------------ ------------
Total liabilities and shareholders' equity $ 16,825,568 $ 16,685,283
============ ============
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 22, July 23,
2002 2001
------------ ------------
(Unaudited) (Unaudited)
REVENUES $ 9,438,069 $ 10,267,510
------------ ------------
COSTS AND EXPENSES:
Cost of restaurant sales:
Food and beverage 2,649,753 2,919,201
Labor and related costs 3,421,296 3,726,331
Restaurant operating costs 1,271,637 1,392,942
Occupancy costs 612,559 636,055
Depreciation and amortization 221,032 218,498
Restaurant opening and closing expenses 9,717 40,380
General and administrative expenses 687,328 705,628
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8,873,322 9,639,035
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INCOME FROM OPERATIONS 564,747 628,475
OTHER INCOME (EXPENSE):
Interest income 72,347 33,966
Interest expense (134,151) (181,858)
Loss on debt extinguishment (97,500)
Loss on sale of marketable securities (55,934)
Net gain on disposition of property 739,166
------------ ------------
Income before provision for income taxes 1,088,675 480,583
Income tax provision (375,593) (165,796)
------------ ------------
Net Income $ 713,082 $ 314,787
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PER SHARE DATA:
Net income per share - Basic $ 0.35 $ 0.15
============ ============
Weighted average number of
common shares outstanding - Basic 2,058,003 2,060,103
============ ============
Net income per share - Diluted $ 0.32 $ 0.15
============ ============
Weighted average number of
common shares outstanding - Diluted 2,229,839 2,087,397
============ ============
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
-----------------------------
July 22, July 23,
2002 2001
------------ ------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 713,082 $ 314,787
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 221,032 218,498
Net gain on disposition of property (739,166)
Loss on sale of marketable securities 55,934
Loss on debt extinguishment 97,500
Prepaid expenses and other 0
Changes in assets and liabilities:
Current assets (202,380) (80,388)
Other assets 102,166 (57,561)
Accounts payable and accrued expenses (141,143) 173,485
Income taxes 316,627 39,386
------------ ------------
Net cash provided by operating activities 423,652 608,207
------------ ------------
Cash flows from investing activities:
Acquisitions of property, buildings and equipment (301,913) (588,147)
Restaurant acquisitions (314,263)
Proceeds from restaurant dispositions 1,303,176
Purchased goodwill (40,730)
Net purchases of available for sale securities (115,381)
Issuance of note receivable (129,488) (74,620)
Principal collected on note receivables 37,893 22,737
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Net cash provided by (used in) investing activities 480,024 (680,760)
------------ ------------
Cash flows from financing activities:
Repurchase of convertible notes (747,500)
Issuance of ten year term notes 2,806,944
Retirement of term debt (2,789,231)
Payments on notes payable (81,725) (103,678)
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Net cash used in financing activities (829,225) (85,965)
------------ ------------
Net change in cash and cash equivalents 74,451 (158,518)
Cash and cash equivalents, beginning of period 654,211 1,141,016
------------ ------------
Cash and cash equivalents, end of period $ 728,662 $ 982,498
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 134,151 $ 181,858
============ ============
Income taxes $ 60,100 $ 126,410
============ ============
Supplemental disclosures of non cash transactions:
Sale of property and equipment for notes receivable $ 455,631
============
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
============
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
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
1, 2002. 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 31, 2003.
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 has included additional detail in the Statement of Operations.
Restaurant operating expenses are now broken out on a separate line. These costs
include such items as advertising, repairs and maintenance and credit card
discounts. Historically, most of these items have been included under general
and administrative. All information presented herein has been reclassified to
conform to the new format. The Company believes that this new format will
substantially improve comparability between the Company and its peers.
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 regorded 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 indefinate 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 April
1, 2002 and no impairment was found.
Using the early application provision of SFAS No. 142 the Company adopted the
provisions of SFAS No. 142 beginning April 3, 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.
All net income per share amounts and weighted average number of common shares
outstanding have been retroactively adjusted to reflect a 5% stock dividend,
which had a record date in March 2002.
RECENT TRANSACTIONS
Sale of Southern Oregon Elmer's.
--------------------------------
As previously reported on the Company's Form 8-K filed on May 17, 2002,
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 has signed 25-year franchise
agreements for each location and will operate the locations under the Elmer's
Breakfast. Lunch. Dinner.(TM) name.
6
The Buyer has signed a development agreement to open an additional two units
within five years. Conversion of the first unit, in Klamath Falls, Oregon, has
begun and it is expected to open in early November 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 gain of
approximately $504,000 or 25 cents per share, (net of tax effect) 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. If these three restaurants had been franchised during the
year ended April 1, 2002, pro forma franchise fee income would have been
approximately $245,000.
The Company agreed to provide a limited amount of seller financing. The Company
holds a $270,000 note bearing interest at 9% per year payable in 84 equal
monthly payments; an approximately $79,500 note bearing interest at 9% payable
in 24 equal monthly payments; an approximately $106,000 inventory note bearing
interest at 12% and due in 90 days. To assist with the development of the
Klamath Falls restaurant, the Company has granted an extension of the inventory
note, which is now due in full by October 22, 2002.
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. Lunch. Dinner(TM).
The Buyer's obligations under the franchise agreements, promissory notes, lease
assignments and sublease are guaranteed by the Buyer and personally by Mssrs.
Brutke and Thomason.
Purchase of Vancouver Washington Elmer's
----------------------------------------
April 15, 2002 the Company acquired an Elmer's restaurant located in Vancouver,
Washington from franchisee and former board member, Paul Welch for approximately
$250,000 in cash and assumed liabilities. The Company has entered into a
long-term occupancy lease at the same location, and will continue to operate the
location as an Elmer's restaurant. The purchase price was allocated to the
tangible assets of the restaurant.
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
7
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.
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 - Recission 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 reduces the Company's
required balances in the debt service account by half.
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 assumed liabilities and the
forgiveness of a $155,000 promissory note due to the Company. The acquisition
cost of $333,000 included $120,000 in tangible assets and $213,000 in goodwill.
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", "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 currently owns and operates 10 Elmer's restaurants and is a party to
franchise agreements for 21 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, omelets, crepes, country
platters and other popular breakfast items.
CRITICAL ACCOUNTING POLICIES
The Company's reported results are affected by the application of certain
accounting policies that require subjective or complex judgements. These
judgements 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 judgements 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.
8
Property, Buildings and Equipment
---------------------------------
When the Company purchases fixed assets, those 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.
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
record 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 $713,082 or
$.35 per share for the quarter ended July 22, 2002, on sales of $9.4 million as
compared to reported net income of $314,787 or $.15 per share for the first
quarter ended July 23, 2001. The $398,000 increase in net income is attributable
gain on sale of the three Southern Oregon restaurants of $504,000 or 25 cents
per share net of tax, partially offset by losses totaling seven cents per share
from the debt repurchase, relocation and losses on investments. The Company's
total assets as of July 22, 2002 were $16.8 million, which is an increase of
$140,000 over total assets as of April 1, 2002. In the sixteen weeks ended July
22, 2002, working capital increased $152,000 while notes payable decreased
$657,000. Cash provided by operating activities totaled $424,000 for the period
ended July 22, 2002 compared to $608,000 for the period ended July 23, 2001. The
decrease in cash provided from operations is primarily attributable to the
paydown of negative working capital attributable to the sale of the three
Southern Oregon units. The Company has also placed a $350,000 deposit with the
Company's primary food vendor in exchange for improved pricing, resulting in
increased prepaid expenses and reducing cash provided by operations.
COMPARISON OF RESULTS OF OPERATIONS. The following discussion and analysis
presents the Company's results of operations for the 16 weeks ended July 22,
2002 and July 23, 2001.
For the period ended July 22, 2002, the Company's net income and earnings per
share increased 127% over net income and earnings per share for the comparable
period in 2001. Net income as a percentage of total revenue increased from 3.1%
for the period ended July 23, 2001, to 7.6% for the period ended July 22, 2002.
Excluding gains and losses, earnings before tax increased from 4.7% of sales to
5.3% of sales.
9
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 22, 2002 JULY 23, 2001
------------- -------------
Percent of Percent of
Amount Revenues Amount Revenues
Revenues $9,438 100.0% $10,268 100.0%
Restaurant costs and expenses 8,186 86.7 8,934 87.0
General and administrative expenses 687 7.3 706 6.9
Income from operations 565 6.0 628 6.1
Non operating income (expense) 524 5.6 (148) (1.4)
Net income 713 7.6 315 3.1
Basic earnings per share $0.35 $0.15
Weighted average shares outstanding 2,058,003 2,060,103
REVENUE REVENUE
FOR THE SIXTEEN WEEKS ENDED FOR THE SIXTEEN WEEKS ENDED
JULY 22, 2002 JULY 23, 2001
------------- -------------
Percent of Percent of
Amount Revenues Amount Revenues
Restaurant operations:
Restaurant sales $8,133 86.2% $8,914 86.8%
Lottery 919 9.7 951 9.3
------ ----- ------- -----
9,052 95.9 9,865 96.1
Franchise operations 386 4.1 403 3.9
------ ----- ------- -----
Total revenue $9,438 100.0% $10,268 100.0%
====== ===== ======= =====
REVENUES. Revenues for the period ended July 22, 2002 were 8.1% less than
comparable period in 2001, reflecting the sale of three and purchase of one
Elmer's restaurants in April, 2002. Revenues from same store restaurant
operations were up 1.4% compared to the sixteen weeks ended July 23, 2001. Same
store sales at the Company's Elmer's restaurants were up 3.%. Revenue from
franchise operations decreased 5% due to a decrease in administrative services
fees of $70,000 earned in the current period, offset by increased franchise fees
from the addition of franchised units to the system.
RESTAURANT COSTS AND EXPENSES. Restaurant costs and expenses, which consists of
six categories including food, beverage and supply costs, labor and labor
related costs, restaurant operating costs, occupancy costs, depreciation and
amortization, and restaurant opening and closing expenses decreased to 86.7% of
revenue for the quarter ended July 22, 2002 compared to 87.0% for the comparable
period in 2001. Food, beverage and supply costs as a percentage of total
revenues were 28.1% for the sixteen weeks ended July 22, 2002 compared to 28.4%
for the comparable period ended July 23, 2001. Labor expenses totaled 36.2% of
revenues for the quarter ended July 22, 2002 compared to 36.3% of revenues for
the same period in 2001. Occupancy costs as a percentage of revenues increased
from 6.2% for the sixteen weeks ended July 23, 2001 to 6.5% for the same period
ended July 22, 2002. Depreciation and amortization expense as a percentage of
revenues rose from 2.1% of revenues for the quarter ended July 23, 2001 to 2.3%
of revenues for the quarter ended July 22, 2002.
10
Restaurant opening and closing expenses decreased 0.3% of sales. The takeover
cost of the Vancouver restaurant was significantly less than the startup cost
for the Roseburg restaurant in the prior year. Generally the Company has seen
improvements in controllable expenses (food, labor and operating expenses)
partially offset by increases in other operating costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative ("G&A") expenses
increased from 6.9% to 7.3% of total revenue in each of the first quarter of
2001 and 2002 due to decreased revenues.
NON-OPERATING EXPENSES. Net non-operating income was 5.6% of total revenues in
the first quarter of fiscal 2002 compared to an expense of 1.4% of total
revenues in the comparable period in fiscal 2001. Increased interest income and
decreased interest expense augmented the large gain on sale.
LIQUIDITY AND CAPITAL RESOURCES. As of July 22, 2002, the Company had cash and
equivalents of approximately $729,000 representing an increase from April 1,
2002 of approximately $74,000. Cash used by financing activities was $829,000
primarily from the repurchase of 10% convertible notes. Cash provided by
investing activities was $480,000. The 1.3 million received from the sale of the
Southern Oregon restaurants was offset by $302,000 in capital expenditures and
$314,000 used to acquire the Vancouver Elmer's and the Cooper's delis.
Additional funds were used to purchase marketable securities and issue notes
receivable.
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 22, 2002, the Company had outstanding indebtedness of
$2.7 million with GE Capital, $1.6 million in real estate debt with Wells Fargo
Bank and $650,000 in convertible notes.
In April 2002, the Company granted non-executive incentive stock options for
34,000 shares to employees of the Company. The options vest over five years and
have a ten-year term. The exercise price of $5.00 was equal to the market value
of the Company's stock on the grant date.
In August, 2002 the Company elected to fix the interest rate on the $925,000
portion of the GE Capital loan that had a variable interest rate. The new rate
is 7.1% per annum.
The remaining Wells Fargo real estate debt has a weighted-average maturity of
7.5 years, bears interest at an average of 8.2%, requires monthly payments of
principal and interest, and is collateralized by three real estate assets.
The $650,000 in convertible notes have a remaining maturity of approximately
five 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 $6.19 per share. The Company may call the notes
with a five percent premium beginning December 2003.
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. The Company obtained a waiver from Wells Fargo Bank
permitting the repurchase of the convertible notes.
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.
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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.
Market Risks
------------
The Company invests excess cash beyond its working capital requirements in
liquid marketable securities. These securities include 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
approximate the book value at July 22, 2002.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
a) Exhibits:
99.1 Certification of Chief Executive and Principal Financial Officer.
99.2 Certification of President
99.3 Certification of officers pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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:
The Company's Form 8-K filed on May 17, 2002, which discussed the sale
of three Elmer's restaurants, is incorporated herein by reference.
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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
---------------------------------
William W. Service
Chief Executive Officer
Dated: September 3, 2002
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