SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM
_________________ TO _________________
Commission file number 0-14837
ELMER'S RESTAURANTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OREGON 93-0836824
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR IDENTIFICATION NO.)
ORGANIZATION)
11802 S.E. Stark St.
P.O. Box 16938
Portland, Oregon 97292-0938
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
(503) 252-1485
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
P.O. Box 16938, Portland, Oregon 97292-0938
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Number of shares of Common Stock outstanding at November 4,
1998: 1,311,109
<PAGE>
ELMER'S RESTAURANTS, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets, 1
September 30, 1998 (Unaudited) and
March 31, 1998
Condensed Consolidated Statements of Income, 2
six months and three ended September 30, 1998,
and 1997 (Unaudited)
Condensed Consolidated Statements of Cash Flows, 3
six months ended September 30, 1998 and 1997
(Unaudited)
Note to Condensed Consolidated Financial 4-5
Statements (Unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6-9
PART II. OTHER INFORMATION AND SIGNATURES
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
<TABLE>
<CAPTION>
ELMER'S RESTAURANTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS September 30, 1998 March 31, 1998
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents $1,437,712 $1,875,136
Accounts receivable 208,735 140,717
Note receivable-current
portion 81,033 81,033
Inventories 215,086 216,537
Prepaid expenses and
deposits 154,311 101,425
------- -------
Total current assets 2,096,877 2,414,848
Property, buildings and
equipment - net 4,809,817 4,696,507
Intangible assets - net 937,724 973,643
Note receivable - long-
term portion 11,271 16,709
Other assets 75,173 78,903
------ ------
Total assets $7,930,862 $8,180,610
========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Notes payable - current
portion $ 389,433 $ 405,266
Accounts payable 527,274 612,107
Accrued payroll and
related taxes 243,386 311,782
Accrued expenses 33,512 47,447
Accrued income taxes 74,477 195,387
---------- ----------
Total current liabilities 1,268,082 1,571,989
Notes payable long-term
portion 2,842,532 3,061,284
Deferred income taxes 40,000 40,000
---------- ----------
Total liabilities 4,150,614 4,673,273
---------- ----------
Common stock 1,417,034 1,417,034
Retained earnings 2,363,214 2,090,303
---------- ----------
Total shareholders' equity 3,780,248 3,507,337
---------- ----------
Total liabilities and
shareholders' equity $7,930,862 $8,180,610
========== ==========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
ELMER'S RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended Three Months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
REVENUES
Restaurant
sales $7,943,485 $7,838,609 $3,972,537 $3,920,472
Franchise
operations 334,896 326,169 175,951 172,597
Lottery 123,476 70,014 65,364 38,316
---------- --------- ---------- ---------
8,401,857 8,234,792 4,213,852 4,131,385
---------- ---------- ---------- ----------
COSTS AND
EXPENSES:
Cost of
restaurant
sales
Food and
beverage 2,143,050 2,130,609 1,079,622 1,068,680
Labor and
related 2,772,882 2,658,120 1,401,300 1,341,942
Occupancy
costs 503,088 496,696 257,855 251,904
Depreciation
and
amortization 353,426 327,138 175,923 163,569
General and
administrative
expenses 2,137,005 2,021,579 1,071,935 1,021,568
---------- ---------- ---------- ----------
7,909,451 7,634,142 3,986,635 3,847,663
---------- ---------- ---------- ----------
INCOME FROM
OPERATIONS
BEFORE OTHER
INCOME
(EXPENSE) 492,406 600,650 227,217 283,722
OTHER INCOME
(EXPENSE):
Interest and
other income 36,815 32,894 18,834 17,134
Interest
expense <151,427> <168,418> <75,885> <83,219>
Gain on
disposition of
assets 35,707 35,707
---------- ---------- ---------- ----------
Income before
income taxes 413,501 465,126 205,873 217,637
Provision for
income taxes <140,590> <158,150> <70,090> <74,005>
---------- ---------- --------- ----------
NET INCOME $272,911 $306,976 $135,783 $143,632
========== ========== ========== ==========
PER SHARE
DATA:
Net income $ 0.21 $ 0.22 $ 0.10 $ 0.10
========== ========== ========== ==========
Weighted
average number
of common
shares 1,311,109 1,404,686 1,311,109 1,404,686
outstanding ========== ========== ========== ==========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
ELMER'S RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
September 30,
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997
<S> <C> <C>
Net income $ 272,911 $ 306,976
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 314,041 282,750
Amortization 39,385 44,388
Gain on disposition of assets <35,707>
Changes in assets and liabilities:
Receivables <62,580> <57,832>
Inventories 1,451 <21,254>
Prepaid expenses <52,886> <13,333>
Accounts payable <167,164> <5,925>
Accrued income taxes <120,910> 56,240
---------- ---------
Net cash provided by operating
activities 188,541 592,010
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings and
equipment <443,190> <271,576>
Proceeds from sale of assets 51,546
--------- ----------
Net cash used by investing activities <391,644> <271,576>
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in other non-current assets 264 <1,745>
Payments on notes payable <234,585> <246,249>
---------- ----------
Net cash used in financing activities <234,321> <247,994>
---------- ----------
Net increase (decrease) in cash and
cash equivalents <437,424> 72,440
Cash and cash equivalents, beginning of
period 1,875,136 1,678,876
--------- ---------
Cash and cash equivalents, end of
period $1,437,712 $1,751,316
========== ==========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 151,427 $ 168,418
========= =========
Income taxes $ 261,500 $ 149,795
========= =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
</TABLE>
ELMER'S RESTAURANTS, INC.
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements have been
prepared by Elmer's Restaurants, Inc. (the "Company"), in
accordance with the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have
been condensed or omitted in accordance with such rules and
regulations. The March 31, 1998, balance sheet was derived from
audited financial statements, but does not include all of the
disclosures required by generally accepted accounting principles.
In the opinion of management, the accompanying unaudited
financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the
financial position of the Company, and its results of operations
and cash flows. These financial statements should be read in
conjunction with the audited financial statements and notes
thereto for the years ended March 31, 1998, 1997 and 1996
respectively, included in the Company's Annual Report on Form 10-
K for the year ended March 31, 1998.
The results of operations for the six months ended September
30, 1998, are not necessarily indicative of the results that may
be expected for the year ending March 31, 1999, or any other
future interim report.
2. Impact of Recently Issued Accounting Standards
The Company has adopted Financial Accounting Standards Board
(FASB) SFAS No. 130, "Reporting Comprehensive Income," which
establishes requirements for disclosure of comprehensive income.
The objective of SFAS 130 is to report a measure of all changes
in equity that result from transactions and economic events other
than transactions with owners. Comprehensive income is the total
of net income and all other non-owner changes in equity.
Comprehensive income did not differ from reported net income in
the periods presented.
The Company has also adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which
may change the way public companies report information about
segments of their business in their annual financial statements
and requires them to report selected segment information in their
quarterly reports issued to shareholders. It also requires
entity-wide disclosures about the products and services an entity
provides, the material countries in which it holds assets and
earns revenues and its major customers.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that
every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS
No. 133 also requires that changes in the derivative instrument's
fair value be recognized currently in results of operations
unless specific hedge accounting criteria are met. SFAS No. 133
is effective for fiscal years beginning after June 15, 1999. The
Company's management has studied the implications of SFAS 133
and, based on the initial evaluation, expects the adoption to
have no impact on the Company's financial condition or results of
operations.
ELMER'S RESTAURANTS, INC.
MANAGEMENTS' DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities and Exchange Act of
1934, as amended. Actual results could differ materially from
those projected in the forward-looking statements.
RESULTS OF OPERATIONS
Revenues
Revenues increased $82,467 (2.0%) and $167,065 (2.0%) for
the three months and six months ended September 30, 1998,
respectively, compared to the corresponding periods of fiscal
1998. These increases resulted primarily from a $52,065 (1.3%)
and a $104,876 (1.3%) increase in revenues from restaurant sales
and $27,048 (70.6%) and $53,462 (76.4%) net revenues from the
lottery for the three months and six months ended September 30,
1998, respectively, compared to the corresponding periods of
fiscal 1998. Revenues from franchise operations increased $3,354
(1.9%) and $8,727 (2.7%) for the three months and six months
ended September 30, 1998, respectively, compared to the
corresponding periods of fiscal 1998.
Cost and Expenses
Costs and expenses increased $138,972 (3.6%) and $275,309
(3.6%) for the three months and six months ended September 30,
1998, respectively compared to the corresponding periods of
fiscal 1998, primarily due to increased costs related to the
operation of the Company-owned restaurants and increased general
and administrative expenses. Food and beverage costs of
restaurant sales increased $10,942 (1.0%) and $12,441 (0.6%),
respectively, for the three months and six months ended September
30, 1998, respectively, compared to the corresponding periods of
fiscal 1998. As a percentage of restaurant sales, food and
beverage was 27.2% and 27.0% for the three months and six months
ended September 30, 1998, respectively, compared to 27.3% and
27.2% for the three months and six months ended September 30,
1997, respectively. Labor and labor related costs of restaurant
sales increased $59,358 (4.4%) and $114,762 (4.3%) for the three
months and six months ended September 30, 1998, respectively,
compared to the corresponding periods of fiscal 1998. As a
percentage of restaurant sales the labor and labor related costs
were 35.3% and 34.9% for the three months and six months ended
September 30, 1998, respectively, compared to 34.2% and 33.9% for
the three months and six months ended September 30, 1997,
respectively, due primarily to increased minimum wage rates in
the State of Oregon. Occupancy costs increased $5,951 (2.4%) and
$6,392 (1.3%) for the three months and six months ended September
30, 1998, respectively, compared to the three months and six
months ended September 30, 1997. Depreciation and amortization
increased $12,354 (7.6%) and $26,288 (8.0%) for the three months
and six months ended September 30, 1998, respectively, compared
to the corresponding periods of fiscal 1998, due to the
acquisition of equipment and refurbishing of some of the Company
restaurants. General and administrative expenses as a percentage
of revenues were 25.4% for the three months and six months ended
September 30, 1998, respectively, compared to 24.7% and 24.5% for
the corresponding periods of fiscal 1998, primarily due to
increased operating expenses and administrative wage increases in
the Company-owned restaurants.
Income from Operations
Income from operations for the three months and six months
ended September 30, 1998, respectively, decreased $56,506 (19.9%)
and 108,245 (18.0%), respectively, compared to the corresponding
periods of fiscal 1998, due to increased operating expenses of
the Company-owned restaurants.
Other Income and Expenses
Interest and other income increased $1,700 (9.9%) and $3,921
(11.9%) for the three months and six months ended September 30,
1998, respectively, compared to the corresponding periods of
fiscal 1998, due primarily to the increase of the interest rate
on investments. Interest expense decreased $7,334 (8.8%) and
$16,991 (10.1%) for the three months and six months ended
September 30, 1998, respectively, due primarily to the reduction
of the principal balance of outstanding debt. Gain on
disposition of assets ($35,707, at September 30, 1998), was
primarily due to the sale of Company-owned automobiles.
Income Taxes
The Company's income tax rate was 34% of income before
income taxes for the three months and six months ended September
30, 1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital as at September 30, 1998,
totaled $828,795, a decrease of $14,064 from working capital of
$842,859 as at March 31, 1998. Cash provided by operations
totaled $188,541 for the six months ended September 30, 1998,
compared to $592,010 for the six months ended September 30, 1997.
The primary reasons for the decrease in cash provided from
operations were an increase in accounts receivable and the timing
of payments of certain liabilities. Cash used to repay
indebtedness totaled $234,585 for the six months ended September
30, 1998.
Cash used to acquire assets totaled $443,190 for the six
months ended September 30, 1998, primarily for the acquisition of
equipment for and improvements to the Company's existing
restaurants.
The Company believes that the cash and cash equivalents on
hand as at September 30, 1998, together with funds provided by
operations, will be sufficient to fund the Company's continuing
operations.
Change in Control.
As previously reported in a Schedule 13D filing dated September
3, 1998, CBW Inc. ("CBW"), a corporation incorporated under the
laws of the State of Oregon, acquired, in a private transaction,
705,000 shares (the "Shares") of common stock (the "Common
Stock") in the Company (representing approximately 53.8% of the
total number of shares issued and outstanding), from Anita
Goldberg and Rudolph Mazurosky ("Sellers") on August 25, 1998
(the "Transaction"). The consideration paid by CBW for the Shares
was $4,504,950. CBW's financing for its acquisition of the
Shares was drawn from two sources: (1) $600,000 from the purchase
by Thomas Connor and Donald Woolley of shares representing 25% of
the issued and outstanding common stock of CBW and (2) $3,904,950
from a loan to CBW by Eagle's View Management Company, Inc.
("EVM"). EVM is affiliated with Donald Woolley and members of his
family. The loan from EVM is for a total of $4,000,000, matures
in 21 months, bears interest at 12% per annum for the first 15
months of the loan and 15% thereafter, and is secured by a pledge
of the Shares, personal guaranties by all but one of CBW's
shareholders, and a pledge of all outstanding shares of common
stock of CBW.
In connection with the acquisition of the Shares, the Company's
Board of Directors named Thomas Connor ("Connor"), Bruce Davis
("Davis"), Corydon Jensen ("Jensen"), William Service ("Service),
and Donald Woolley ("Woolley") as directors and appointed Service
as Chief Executive Officer, Davis as President, and Jerry Scott
as Vice President. These individuals (other than Jerry Scott)
currently occupy analogous positions with CBW. Two directors not
connected with CBW remain on the Company's Board of Directors,
Anita Goldberg (the former President of the Company) and Paul
Welch (a Company franchisee). The Board of Directors is currently
actively seeking another director independent of CBW who would
replace Anita Goldberg as a director.
<TABLE>
<C> AMOUNT AND NATURE OF <C> PERCENT
<C> Name <C> BENEFICIAL OWNERSHIP <C> OF CLASS
<C> (1)
CBW Inc. 705,000 53.8%
Bruce Davis, President 705,400 (2) 53.8%
and Director of CBW
William Service, Chief 705,400(2) 53.8%
Executive Officer and
Director of CBW
Corydon Jensen, 705,000(2) 53.8%
Director and Executive
Officer of CBW
Thomas Connor, 705,000(2) 53.8%
Director of CBW
Donald Woolley, 705,000(2) 53.8%
Director of CBW
Linda Bolton, Director 705,000(2) 53.8%
of CBW
All directors and 705,800(2) 53.8%
executive officers as
a group (as of May 20,
1998, giving
retroactive effect to
the completion of the
Transaction)
</TABLE>
(1) Unless otherwise indicated by footnote, the persons named in
the table have sole voting and investment power with respect
to the shares of Common Stock beneficially owned.
(2) Includes indirect beneficial ownership of 705,000 shares of
Common Stock owned by CBW. Each of these individuals
disclaims beneficial ownership of shares of Common Stock
owned by CBW.
CBW acquired the Shares pursuant to a Stock Purchase Agreement
attached as Exhibit 1 to the Schedule 13D filing (all references
to Exhibits 1-9 incorporate corresponding exhibits in the
Schedule 13D filing). The Company, CBW, and Sellers are the
parties to a Shareholder Agreement, dated as of August 21, 1998
and attached as Exhibit 2 (the "Shareholder Agreement"). Under
the Shareholder Agreement, CBW is required to use its best
efforts to identify and recruit independent directors and to vote
its shares in order that the greater of (1) 25% of the members of
the Board of Directors or (2) two of such members, are
independent directors. The Shareholder Agreement contains a
definition of "independent director." The Shareholder Agreement
also calls on CBW to use its best efforts to cause the Board of
Directors to form audit and compensation committees, the majority
of the members of each of which shall be independent directors.
The Shareholder Agreement also provides for certain amendments to
the Company's Bylaws to require independent director approval of
various transactions, including all transactions between the
Company and CBW or CBW's affiliates, and to prescribe the duties
of the audit and compensation committees. In addition, the
Shareholder Agreement includes certain indemnities of the Company
by Sellers and CBW with respect to the Transaction. CBW has
obtained a loan in the amount of $4 million from EVM, an
affiliate of Woolley, who is a director of the Company and of CBW
pursuant to an Amended and Restated Loan Agreement attached (with
pertinent exhibits) as Exhibit 3. The loan from EVM matures in 21
months, bears interest at 12% per annum for the first 15 months
of the loan and 15% thereafter, and is secured by a pledge of the
Shares, joint and several personal guaranties by all but one of
CBW's shareholders, and a pledge of all outstanding shares of
common stock of CBW. In the event of a merger between the Company
and CBW, the loan would be secured by the assets of the Company,
rather than the collateral that currently secures the loan. EVM
has agreed to subordinate its loan to up to $3.4 million of first-
priority financing in the event of a merger between the Company
and CBW and a concurrent or subsequent refinancing of the
Company's debt. If the Company elects to pursue such a
refinancing, EVM will be granted the first opportunity to fund
the refinancing. If there is a default under the loan following a
merger between the Company and CBW, EVM has the right to convert
to the balance owing to Common Stock at a conversion price based
on the trading price of the Common Stock for the period
immediately preceding the default. Under the terms of the loan,
Davis and Service are required to remain actively engaged in the
management of the borrower. CBW also acquired $600,000 in funding
for the Transaction in connection with the purchase of shares of
common stock in CBW pursuant to a Stock Purchase Agreement
attached as Exhibit 4. In connection with the personal guaranty
by Linda Bolton of the EVM loan, Davis, Jensen, and Service have
agreed, jointly and severally, to reimburse Linda Bolton for any
liability she may incur under the guaranty in excess of her
proportionate share of the guaranty liability based on her
relative shareholdings in CBW pursuant to a letter agreement
attached as Exhibit 5. Under a Share Transfer Agreement among CBW
and its shareholders, as amended, attached as Exhibit 8 (the
"Share Transfer Agreement"), each shareholder is required to
reimburse any other shareholder that is liable under a guaranty
of CBW's obligations in proportion to their relative
shareholdings in CBW. This reimbursement obligation is secured by
a pledge of each shareholder's shares in CBW. The Share Transfer
Agreement also includes a right of first refusal with respect to
proposed transfers of shares of CBW. The Share Transfer Agreement
provides that it will apply equally to any shares of the Company
that may be acquired by shareholders of CBW in the event of a
merger between CBW and the Company.
In connection with the acquisition by Connor and Woolley of
shares of common stock of CBW, two companies affiliated with CBW
that are engaged in the same business as CBW, Oregon Food
Management, Inc. and Jaspers Food Management, Inc., agreed that
they would limit the expansion of their existing business
pursuant to a letter agreement attached as Exhibit 6. The
shareholders of CBW are parties to an Owner and Voting Agreement,
as amended, attached as Exhibit 7 (the "Owner and Voting
Agreement"). The Owner and Voting Agreement contains various
provisions relating to the election of CBW directors. In
addition, the Owner and Voting Agreement requires the
shareholders of CBW to vote in favor of such transaction if a
merger of the Company and CBW that satisfies certain conditions
is proposed and, in the event of such a merger, calls on the
shareholders to vote any shares of Common Stock that they may
receive in the merger such that (1) Connor, Davis, Jensen,
Service, and Woolley are elected to the Board of Directors of the
Company, as well as such other persons as 80% of these directors
may designate, (2) none of these directors is removed from the
Board of Directors without cause, and (3) the number of directors
of the Company does not exceed eight. In addition, the
shareholders of CBW other than Connor and Woolley may enter into
a voting trust in the event of a merger between the Company and
CBW under which Davis, Jensen, and Service would serve as voting
trustees.
CBW's stated purpose in acquiring the Shares is to build on the
Company's strong product and reputation and pursue both internal
and external growth opportunities. The initial focus of the new
management will be on improving the growth of Company-owned
restaurants. In particular, new management will seek
opportunities to increase food and beverage sales and margins at
Company-owned locations, although no assurances can be given that
these efforts will result in positive growth of sales and
attendant margins. The new management's efforts in attaining
those particular goals are expected to include (1) assessing the
usability and/or viability of an improved incentive compensation
program with general managers that would maximize
employer/employee goal congruence by tying higher compensation
with higher restaurant earnings, (2) exploring menu pricing
strategies with a view to revamping these where necessary, (3)
evaluating opportunities to expand the daytime and evening trade,
(4) evaluating the addition of grill capacity to accommodate
higher weekend business, and (5) seeking to increase the video
lottery revenues at the Company-owned locations in Oregon,
including possibly adding video lottery terminal capacity to the
Albany and Beaverton locations. With respect to external growth,
the new management team expects to focus initially on expanding
market presence in the Pacific Northwest, where it believes the
Company enjoys its strongest name identification. Management will
also consider exploring new franchising opportunities, possibly
including a smaller, less capital-intensive Elmer's footprint,
although no assurances can be given that this will occur. The new
Company management team is actively evaluating several
acquisition opportunities. An Elmer's franchisee has expressed
interest in selling his restaurant. The Company has a first right
of refusal and is currently in discussions with the franchisee
regarding this sale. Management is also exploring the acquisition
of restaurant properties in Oregon located in attractive markets
along the Interstate 5 corridor which are currently not served by
the Company. Although no assurances can be given, the new
Management believes that the purchase and retrofit of these
establishments could be less costly than building a new facility
and could offer significant revenue and earnings growth.
Management hopes to actively explore the acquisition of several
non-Elmer's restaurant chains that would be managed as separate
operating divisions.
The failure of the Company to execute such a strategy may lead to
decreased or static market share, or brand loyalty, which may
have a material adverse effect on the Company's business, results
of operations, financial condition and prospects. Acquisition
transactions are accompanied by a number of risks, including,
among other things, the difficulty of integrating the operations
and personnel of the acquired companies, the potential disruption
of the Company's ongoing businesses, the inability of management
to maximize the financial and strategic position of the combined
companies through the successful incorporation into the Company's
businesses, expenses associated with the transactions, the
maintenance of uniform standards, controls, procedures and
policies, the impairment of relationships with employees and
customers as a result of any integration of new management
personnel, and the potential unknown liabilities associated with
acquired businesses. There can be no assurance that the Company
would be successful in overcoming these risks or any other
problems encountered in connection with any such acquisitions.
Further, no assurance can be given that if any acquisition(s)
occurs, that such an acquisition will not materially and
adversely affect the Company or that any such acquisition will be
successful in enhancing the Company's businesses. If the Company
proceeds with additional significant acquisitions in which the
consideration consists of cash, a substantial portion of the
Company's available cash could be used to consummate the
acquisitions. If the Company were to consummate one or more
acquisitions in which the consideration consisted of stock,
stockholders of the Company could suffer dilution of their
interests in the Company.
The new management team also intends to consider whether the
Company should institute an employee stock option plan. The
Company formerly adopted a stock option plan, but the plan lapsed
at the end of its initial year term. The new management believes
that adoption of a stock option plan may benefit the Company by
providing incentives to Company personnel to improve performance.
Impact of the Year 2000 Issue:
As a result of computer software programs being written
using two digits rather than four digits to define the applicable
year, any of the Company's computer programs or hardware that
have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000 ("Year
2000 Issue"). This could result in a system failure or
miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business
activities.
Based on recent assessments, the Company determined that it
will be required to replace portions of hardware and software so
that those systems will properly utilize dates beyond December
31, 1999. The Company presently believes that with replacement
of portions of existing hardware and software, the Year 2000
Issue can be mitigated. However, if such replacements are not
made, or are not completed in a timely manner, the Year 2000
Issue could have a material impact on the operations of the
Company.
The Company's plan to resolve the Year 2000 Issue involves
four phases; assessment, remediation, testing and implementation.
To date, the Company has fully completed its assessment of all
material systems that could be affected by the Year 2000 Issue.
The completed assessment indicated that most of the Company's
significant information technology systems would not be affected.
The only affected systems would be the accounts payable and
general ledger applications.
For its information technology exposures, to date the
Company is 100% complete on the assessment and remediation, and
90% complete on the testing and implementation of its information
technology systems. The Company expects to complete the
remaining 10% of testing and implementation of replacement
software and hardware no later than June, 1999. These
arrangements are designed to minimize disruptions caused by the
Year 2000 Issue, and the effect on operations is not
determinable.
With respect to third parties, at this time the only direct
interface is with the payroll vendor. The Company has been
assured that the payroll vendor's system is in compliance with
the Year 2000 Issue. The Company has queried its important
suppliers that do not involve system interface. To date, the
Company is not aware of any problems that would materially impact
results of operations, liquidity, or capital resources. The
Company has no means of ensuring that these vendors will be Year
2000 ready. The inability of those parties to complete their
Year 2000 resolution process could materially impact the Company.
The effects of non-compliance by third parties where no system
interface exists is not determinable.
The Company has utilized both internal and external
resources to implement the software and hardware for Year 2000
modifications. The total cost of the Year 2000 project is
estimated at $325,000 and is being funded through operating cash
flows. Three years ago the Company contracted to have a Point of
Sale (POS) software program written for the eleven Company-owned
restaurants and as of August 1998, the new system has been
installed in all the Company-owned restaurants. The cost
incurred for the POS system and installation was approximately
$275,000 which has been capitalized for new systems and
equipment. The Company's assessment and remediation for the
Company's headquarters is 100% complete. The Company's
headquarters has purchased 75% of the equipment needed o
implement a new general ledger and accounts payable application.
The cost incurred to date has been approximately $14,000 for the
hardware and base operating systems. The Company estimates the
remaining project costs to be approximately $36,000, which are
attributable to the purchase of software and the remaining
hardware. All such costs will be capitalized.
The Company's plan to complete the Year 2000 modifications
are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the
continued availability of certain resources, and other factors.
Estimates on the status of completion and the expected completion
dates are based on costs incurred to date compared to total
expected costs. However, there can be no guarantee that these
estimates will be achieved and actual results could differ from
those plans. Specific factors that might cause such differences
include, but are not limited to, the availability and cost of
personnel trained in this area and similar uncertainties.
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, as
amended, 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 1, 1999 (45 days prior
to the month and date in 1999 corresponding to the date on which
the Company mailed its proxy materials for the 1998 annual
meeting), proxy voting on that proposal when and if raised at the
1999 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 1999 annual meeting must be received at the
principal executive office of the Company no later than February
5, 1999.
Item. 6. Exhibits and Reports on Form 8-K
(a) Exhibits. Exhibits required to be attached by Item
601 of Regulation S-K are listed in the Index to Exhibits on page
11 of this Form 10-Q, and are incorporated herein by this
reference.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Date: November 13, 1998 ELMER'S RESTAURANTS, INC.
By__/s/ Bruce Davis______
Bruce Davis, President
By__/s/ William Service___
William Service, CEO
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.)
MATERIAL CONTRACTS
10(i)(a) * Stock Purchase Agreement, dated as of July 9, 1998,
between Anita Goldberg and Rudolph Mazurosky and CBW Inc.
(Incorporated herein by reference from Exhibit 1 of the Schedule
13D filing dated September 3, 1998.)
10(i)(a) * Shareholder Agreement, dated as of August 21, 1998,
among Elmer's Restaurants, Inc., CBW Inc., Anita Goldberg, and
Rudolph Mazurosky. (Incorporated herein by reference from Exhibit
2 of the Schedule 13D filing dated September 3, 1998.)
10(i)(a) * Amended and Restated Loan Agreement, dated as of
August 24, 1998, between CBW Inc. and Eagle's View Management
Company, Inc. (Incorporated herein by reference from Exhibit 3 of
the Schedule 13D filing dated September 3, 1998.)
10(i)(a) * Stock Purchase Agreement, dated as of July 9, 1998,
between CBW Inc. and Thomas Connor and Donald Woolley.
(Incorporated herein by reference from Exhibit 4 of the Schedule
13D filing dated September 3, 1998.)
10(i)(a) * Letter to Linda Bolton, dated as of August 25, 1998,
from Bruce Davis, Corydon Jensen, and William Service.
(Incorporated herein by reference from Exhibit 5 of the Schedule
13D filing dated September 3, 1998.)
10(i)(a) * Letter to Thomas Connor and Donald Woolley, dated as
of August 25, 1998, from Jaspers Food Management, Inc. and Oregon
Food Management, Inc. (Incorporated herein by reference from
Exhibit 6 of the Schedule 13D filing dated September 3, 1998.)
10(i)(a) * Owner and Voting Agreement, dated as of May 22, 1997,
among various parties, as amended by a First Amendment to Owner
and Voting Agreement, dated as of July 9, 1998. (Incorporated
herein by reference from Exhibit 7 of the Schedule 13D filing
dated September 3, 1998.)
10(i)(a) * Share Transfer Agreement, dated as of May 22, 1997,
among various parties, as amended by a First Amendment to Share
Transfer Agreement, dated as of August 25, 1998. (Incorporated
herein by reference from Exhibit 8 of the Schedule 13D filing
dated September 3, 1998.)
10(i)(a) * Agreement dated as of September 3, 1998 among CBW
Inc., Bruce N. Davis, William W. Service, Corydon H. Jensen,
Thomas C. Connor, Donald Woolley, and Linda E. Bolton.
(Incorporated herein by reference from Exhibit 9 of the Schedule
13D filing dated September 3, 1998.)
27.1 Financial Data Schedule
ELMER'S RESTAURANTS, INC. 10Q DATA
FINANCIAL DATA SCHEDULE
PERIOD TYPE SIX MOS
QUARTER END SEP-30-1998
PERIOD START APR-01-1998
PERIOD END SEP-30-1997
CASH 1,437,712
SECURITIES ---------
RECEIVABLES 289,768
ALLOWANCES (5,000)
INVENTORY 215,086
CURRENT ASSETS 2,096,877
FF&E 12,368,650
DEPRECIATION 7,558,833
TOTAL ASSETS 7,930,862
CURRENT LIABILITIES 1,268,082
BONDS, MTGS 2,842,532
COMMON 1,417,034
PREFERRED MANDATORY ---------
PREFERRED ---------
OTHER SE 2,363,213
TOTAL LIABILITY AND EQUITY 7,930,862
SALES 7,943,485
TOTAL REVENUES 8,401.857
CGS 4,915,932
TOTAL COSTS 7,909,451
OTHER EXPENSES ---------
LOSS PREVENTION ---------
INTEREST EXPENSE 151,427
INCOME PRETAX 413,501
INCOME TAX 140,590
INCOME CONTINUING 272,911
DISCOUNTED ---------
EXTRAORDINARY
CHANGES ---------
NET INCOME 272,911
EPS PRIMARY 0.21
EPS DILUTED .21
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