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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 2, 2001 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO _________________
COMMISSION FILE NUMBER 0-14837
ELMER'S RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
OREGON ___________ 93-0836824
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11802 S.E. Stark St.
Portland, Oregon 97216 (503) 252-1485
(ADDRESS OF PRINCIPAL (ZIP CODE (REGISTRANT'S TELEPHONE NUMBER,
EXECUTIVE OFFICES) INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ______
Aggregate market value of Common Stock held by nonaffiliates of the Registrant
at June 23, 2001: $7.6 million. For purposes of this calculation, officers and
directors are considered affiliates.
Number of shares of Common Stock outstanding at June 20, 2001: 1,962,032
Document Part of Form 10-K into which incorporated
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Proxy Statement for 2001 Part III
Annual Meeting of Shareholders
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TABLE OF CONTENTS
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Item of Form 10-K Page
PART I.........................................................................2
Item 1. Business.........................................................2
Item 2. Properties.......................................................8
Item 3. Legal Proceedings................................................9
Item 4. Submission of Matters to a Vote of Security Holders.............10
PART II.......................................................................10
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.............................................10
Item 6. Selected Financial Data.........................................11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................11
Item 8. Financial Statements and Supplementary Data.....................16
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................16
PART III......................................................................16
Item 10. Directors and Executive Officers of the Registrant..............16
Item 11. Executive Compensation..........................................16
Item 12. Security Ownership of Certain Beneficial Owners
and Management..................................................17
Item 13. Certain Relationships and Related Transactions..................17
PART IV.......................................................................16
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 10-K........................................16
SIGNATURES....................................................................18
1
PART I
ITEM 1. BUSINESS
GENERAL
The Company, located in Portland, Oregon, is a franchisor and operator
of full-service, family oriented restaurants under the names "Elmer's Pancake &
Steak House", "ELMER'S. Breakfast. Lunch. Dinner", and "Mitzel's American
Kitchen" and operates delicatessen restaurants under the names "Ashley's Cafe"
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 now owns and operates 12 Elmer's restaurants, five
Mitzel's American Kitchen restaurants and franchises 19 Elmer's restaurants in
six western states. The Company reports on a fiscal year which ends on the
Monday nearest March 31st.
BUSINESS SEGMENT
The Company primarily operates in the business segment of restaurant
operations. Information as to revenue, operating profit, identifiable assets,
depreciation and amortization expense and capital expenditures for the Company's
business segment for fiscal 2001 is contained herein by reference to the
Company's consolidated financial statements.
Company-owned Elmer's restaurants are located in the Delta Park section
of Portland, Oregon; Beaverton, Hillsboro, Medford, Albany, Springfield,
Roseburg and Grants Pass, Oregon; Palm Springs, California; Boise, Idaho; and
Tacoma and Lynnwood, Washington. The Company acquired six Mitzel's restaurants
on December 13, 2000, located in Oak Harbor, Kent, Fife, Poulsbo and Everett,
Washington. The Company acquired five Ashley's restaurants on February 18, 1999
and opened a sixth in January, 2000. Two Ashley's restaurants are located in
Bend, Oregon; two are in Springfield Oregon; one is in Eugene, Oregon and the
newest is in Redmond, Oregon. The Company acquired four Richard's Deli and Pub
restaurants on March 31, 1999. Richard's restaurants are located in Tigard,
Aloha and two in Hillsboro, Oregon.
RECENT ACQUISITIONS AND DEVELOPMENTS
On April 12, 2001 the Company purchased the assets of the Sandpiper
restaurant located in Roseburg, Oregon and entered into a long-term occupancy
lease. The Company intends to convert the restaurant to an Elmer's restaurant by
the end of June 2001.
On December 13, 2000, the Company purchased the assets of six Mitzel's
American Kitchen restaurants in Washington for $975,000 and 130,000 shares of
Elmer's common stock. As part of the terms of the purchase agreement, the
Company immediately closed the competing Tacoma Mitzel's restaurant.
On August 1, 2000 the Company acquired the assets of the Hodgepodge
restaurant and Trackstirs Sports Bar located in Springfield, Oregon for $325,000
and entered into a long-term occupancy lease. The Company finished the remodel
of the restaurant property and re-opened it as an Elmer's restaurant in November
2000.
Effective March 31, 1999, the Company executed a stock exchange
agreement ("GVL Acquisition") with Grass Valley Ltd., Inc. ("GVL"), a closely
held Oregon corporation, in a transaction in which the Company acquired 100% of
the outstanding stock of GVL in consideration for the payment by the Company of
the sum of $110,000 in cash and the issuance of 209,620 restricted shares of the
Company's common stock to GVL's shareholders. The primary source of the cash
portion of the purchase price was working capital. GVL is now a wholly owned
subsidiary of the Company.
GVL owns and operates four restaurants in Hillsboro, Aloha, and Tigard,
Oregon operating under the moniker of Richard's Deli and Pub. The first
Richard's Deli and Pub was opened in August 1994 and all the restaurants are
located in leased retail space. The Company plans to continue operations at all
four locations in a substantially similar manner. The Company's management
believes that it has realized significant synergies between the Richard's Deli
and Pubs and Ashley's Deli operations while accruing significant savings from
the consolidation of back office functions.
On February 18, 1999, the Company merged with its majority shareholder
CBW, Inc. ('CBW'), a closely held Oregon corporation, in a transaction in which
the Company was the surviving corporation. CBW was the operator of five
restaurants in Eugene, Springfield, and Bend, Oregon. In consideration for the
issuance by the Company of 770,500 new shares of the Company's restricted stock
to the CBW shareholders and the assumption of approximately $4 million in debt
owed by CBW
2
arising from CBW's acquisition of the controlling block of the Company's
restricted common stock on August 25, 1998, the Company acquired all the stock
and assets of CBW including CBW's wholly owned subsidiary, CBW Food Company, LLC
(which by operation of merger is now the Company's wholly-owned subsidiary). The
assets included five Ashley's Delis operated by CBW and an option to purchase
four Richards' Delis operated by GVL.
Each CBW shareholder received 144.4507 shares of the Company's
restricted common stock for every CBW share owned. The shares of Company stock
previously acquired by CBW, a total of 705,000 shares, were concurrently
transferred to the Company and canceled. The Company's primary source of
financing for the acquisition consisted of $3.08 million from its principal
lender bank, Wells Fargo Bank, N.A. The proceeds were applied to pay down $1.75
million of the assumed debt and approximately $1.48 million in other outstanding
debt of the Company. The debt financing is secured by a grant of various
security interests in the Company's assets as well as the issuance of continuing
guaranties by two subsidiaries of the Company. The Company also used
approximately $1,000,000 in working capital to pay down debt assumed in the
transaction.
The CBW Merger and GVL Acquisition were accounted for under the
purchase method of accounting. The CBW Merger transaction was accounted for as a
reverse acquisition as the shareholders of CBW received the larger portion
(53.8%) of the voting interests in the combined enterprise. (for more details
see the Company's Consolidated Financial Statements incorporated herein).
Accordingly, CBW was considered the acquirer for accounting purposes and
therefore, the Company's assets and liabilities were recorded based upon their
fair market values. The CBW Merger and GVL Acquisition created a company with
over 20 restaurants, making it more competitive in the particular restaurant
segments represented and allowing the crossover of product promotions, menu
items, marketing strategies and restaurant images while generating likely
opportunities for the development of several brands targeting different consumer
segments. Management anticipates that the CBW Merger and GVL Acquisition will
also allow the Company to achieve administrative and operational efficiencies
which were previously not possible.
To the extent permitted by operating cash flow or external financing
sources, the Company intends to focus future growth primarily in its existing
markets through strategic acquisitions, new restaurant openings and other growth
opportunities. The Company will also continue to seek to expand through existing
and new franchisees. From time to time, the Company may refranchise, sell or
otherwise dispose of restaurants.
ELMER'S. BREAKFAST. LUNCH. DINNER.
The Company franchises or operates a total of 31 full-service,
family-oriented Elmer's restaurants. These restaurants have a warm, friendly
atmosphere and comfortable furnishings. Most of the restaurants are decorated in
a home style with fireplaces in the dining rooms. They are free standing
buildings, ranging in size from 4,600 to approximately 9,000 square feet with
seating capacities ranging from 120 to 220 people. 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. Thirteen of the restaurants have a lounge with
seating capacity ranging from 15 to 75 people. The normal hours of operation are
from 6 a.m. to 10 or 11 p.m. and to 12 midnight on weekends in some restaurants
with lounges.
Each restaurant offers full service, with a host or hostess to seat
guests and handle payments, wait staff to take and serve orders, and additional
personnel to clear and reset tables.
The menu offers an extensive selection of items for breakfast, lunch
and dinner. The Elmer's breakfast menu, which is available all day, contains a
wide variety of selections with particular emphasis on pancakes, waffles,
omelets, crepes, country platters and other popular breakfast items. Each
Elmer's restaurant makes all its batters and compotes from scratch and prepares
its fruit sauces with fresh fruits when in season. The lunch menu includes soups
made from scratch, salads, hamburgers and hot and cold sandwiches. Customers at
dinner may choose from steak, seafood, chicken, and a variety of home-style
items such as pot roast and turkey.
While most menu selections are standard to all Elmer's restaurants,
restaurants in different areas include on their menus selections that appeal to
local preferences. A special children's menu and a full senior menu is offered
in all restaurants.
MITZEL'S AMERICAN KITCHEN
The Company owns and operates five full-service, family-style
restaurants located in the Puget Sound region of Washington State. Home-style,
comfort food is served in a warm atmosphere with friendly service. Most of the
restaurants are decorated in a home style with fireplaces in the dining areas.
They are free standing buildings, ranging in size from 5,400 to 6,250
3
square feet with seating capacities from 166 to 203 people. 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. Two of the restaurants have a
lounge with a seating capacity of 20 to 30. The normal hours of operation are
6:00 a.m. to 10:00 or 11:00 p.m. and to midnight on weekends in restaurants with
lounges.
Each restaurant offers full service, with a host or hostess to seat
guests, wait staff to take and serve orders and handle payments, and additional
personnel to clear and reset tables.
The menu offers an extensive selection of items for breakfast, lunch
and dinner. The Mitzel's breakfast menu contains a wide variety of selections
from pancakes to schnitzels. The lunch/dinner menu includes soups, hamburgers,
sandwiches, steak, seafood, pot roast, chicken and a variety of home-style,
fresh rotisserie items such as prime rib, and turkey. A special children's menu
and a limited senior menu is offered in all restaurants.
ASHLEY'S AND RICHARD'S DELI AND PUB
The Company operates a total of six Ashley's restaurants and four
Richard's Delis and Pubs. They are substantially similar in design, size and
menu. Eight of the ten units are located in retail strip mall locations, one is
in a food court in a major indoor mall, and one is a free standing building.
They range in size from 1,000 to 2,200 square feet with seating capacities
ranging from 15 to 30 people. A portion of the dining room is also used for the
sale of Oregon lottery games. The normal hours of operation are from 7 a.m. to
10 p.m. and up to 2 a.m. for some restaurants on weekends.
Each restaurant offers deli-style hot and cold sandwiches, soups,
salads, and desserts and has a catering department. The restaurants are approved
retailers with the Oregon lottery and offer all lottery games. Meal selections
generally range in price from $2.95 to $6.95. The catering operation offers
small to medium size food service and event support for business meetings,
outdoor barbecues, and special events.
The above brands provide a vehicle for market penetration and unit
growth, leveraging off the concept of broad appeal, quick-turn meals and
emphasis on service. In a typical market, Ashley's restaurants and Richard's
Delis and Pubs experience competition from either other moderately-priced,
casual dining and walk-through restaurants or economy sandwich outlets. Ashley's
and Richard's differentiate themselves from economy deli competitors by their
full table and bar service, attentive wait staff, lottery games, entertaining
atmosphere, distinctive decor and consistently high-quality meals.
FRANCHISE OPERATIONS
In addition to the acquisition and development of additional Company
operated restaurants, the Company encourages the strategic development of
franchised restaurants in its existing markets as well as potentially in certain
additional states. The primary criteria considered by the Company in the
selection, review and approval of prospective franchisees are the availability
of adequate capital to open and operate the number of restaurants franchised and
prior experience in operating full-service restaurants. Under a franchise
agreement, a franchisor grants to a franchisee the right to operate a business
in a manner developed by the franchisor. The franchisee owns the franchised
operation independently from the franchisor and, in effect, buys the right to
use the franchisor's name, format, and operational procedures. Franchisees
benefit from a common identification, standardized products, and the business
reputation and services that a franchisor may provide, such as group
advertising, management services, product enhancements, and group buying
programs. The franchisor is able to capitalize on its business concept without,
in many cases, having to invest substantial capital to develop name recognition,
menu items, logos and the like.
EXISTING FRANCHISEES. The Company's existing franchise agreements
generally grant to franchisees the right to operate an Elmer's restaurant in one
specific location for 25 years, renewable generally for an additional 25-year
period. When they entered into franchising agreements, the existing franchisees
paid initial franchise fees of up to $25,000 plus additional fees of up to
$10,000 if the restaurant had a lounge serving alcoholic beverages. Franchisees
pay monthly franchise royalty fees ranging from two to four percent of the gross
revenues of their restaurants. All but one restaurant must contribute up to one
percent of gross revenues to a common advertising pool. From time to time,
franchised and Company-owned restaurants have agreed to increase advertising
pool contributions to one and one-half percent. The Company may terminate a
franchise agreement for several reasons including the franchisee's bankruptcy or
insolvency, default in the payment of indebtedness to the Company or suppliers,
failure to maintain standards set forth in the franchise agreement or operations
manual, continued material violation of any safety, health or sanitation law,
ordinance or governmental rule or regulation or cessation of business.
PROSPECTIVE FRANCHISEES. Prospective new franchisees will generally pay
an initial franchise fee of $35,000. Initial franchise fees are generally
payable in cash at the execution of the franchise agreement. Existing
franchisees opening new
4
franchised restaurants may pay a lower initial franchise fee than new
franchisees. For new franchisees, the monthly franchise royalty fee is expected
to be four percent of the gross revenues of the restaurant, subject to a minimum
monthly fee of $750. The standard franchising agreement calls for a monthly
advertising contribution equal to one percent of the gross revenues of the
restaurant. See "Services to Franchisees" below.
A prospective franchisee who assumes operation of a previously
franchised restaurant may be offered a reduced initial franchise fee, deferred
payment of the franchise fee, or other concessions. Pursuant to certain area
franchise agreements, the Company will receive reduced initial franchise fees
and monthly royalty fees from additional restaurants that may be opened in the
areas covered by those agreements. See "Area Franchise Agreements" below. In
connection with the acquisition of the Elmer's franchising operation in 1984,
the Company also granted Dale Elmer, a former director of the Company, and
members of the Elmer family the right to operate a total of three additional
restaurants at a franchise royalty fee of two percent. No restaurants are being
operated on this basis.
The Company estimates that construction costs for the standard
free-standing building will range from approximately $700,000 to $900,000, with
actual costs dependent upon local building requirements and construction
conditions, and further based on configuration and parking requirements.
The cost of the land may vary considerably depending upon the quality
and size of the site, surrounding population density and other factors. The cost
of kitchen equipment, furniture, and trade fixtures, is estimated by the Company
to range from approximately $250,000 to $400,000. Inventory and miscellaneous
items such as paper goods, food, janitorial supplies, and other small wares are
estimated initially to cost between approximately $68,000 and $108,000.
There is no typical elapsed time from the signing of a franchise
agreement until a restaurant is open for business, although it normally takes
120 days from the receipt of the building permits to construct a new restaurant
facility. Most restaurants have opened within 12 months of the date of the
signing of the franchise agreement. Franchisees bear all costs associated with
the development and construction of their restaurants. Although the Company has
established criteria to evaluate prospective franchisees, there can be no
assurance that franchisees will have the business abilities or access to
financial resources necessary to open the restaurants or that the franchisees
will successfully develop or operate restaurants in their franchise areas in a
manner consistent with the Company's concepts and standards.
AREA FRANCHISE AGREEMENTS. Under previous management, the Elmer's
franchising operation granted exclusive area franchise agreements, whereby
independent entities obtained the exclusive rights to develop Elmer's
restaurants within their respective areas. Areas covered by these agreements are
Clackamas County, Oregon and Vancouver, Washington. The agreement covering Ada
and Canyon Counties, Idaho expired in 1998 and was not renewed. The area
franchise agreements require the area franchisee to share with the Company the
initial fees and the franchise royalty fees for each new restaurant in the area.
The Company's share of the initial fees ranges from $2,500 to $12,500 per
restaurant. There are two restaurants covered by area franchise agreements.
Under the area franchise agreements, the Company reserves the right to approve
each new restaurant franchisee. The area franchise agreements grant the
franchisees the right to use the Company's name in the particular area and
preclude the Company from opening Company-owned or franchised restaurants in the
areas covered by the agreements. The Company does not intend to enter into
similar agreements in the future.
SERVICES TO FRANCHISEES. The Company makes available to its franchisees
various programs and materials. The Company provides several manuals to assist
franchisees in ongoing operations, including a comprehensive operations manual
describing kitchen operations, floor operations, personnel management, job
descriptions, and other matters. The Company has prepared a recipe book for
franchisees. All system restaurants use the same menu. Prices are adjusted
according to local conditions. The Company has developed and maintains a menu
cost-control program and a labor cost-control program at each of its
Company-owned restaurants and has developed and implemented a training manual
and programs for all positions within the restaurant.
The Company provides both formal and informal ongoing training for
franchisees. At least one two or three-day meeting is scheduled each year. At
the meetings, franchisees attend lectures by Company personnel and guest
speakers from the industry, as well as participate in group workshops discussing
such topics as cost control, promotion and food presentation.
The Company provides each franchisee with specifications for menu
items. The Company, however, sells no food items or like products to
franchisees, except for certain minor supplies such as guest checks and gift
certificates. The Company coordinates franchisees' purchases to obtain volume
discounts. Franchisees bear all cost involved in the operation of their
restaurants.
5
Periodic on-site inspections and audits are conducted to ensure
compliance with Company standards and to aid franchisees in improving their
sales and profitability.
COMPANY-OWNED RESTAURANTS
The Company owns and operates 12 Elmer's restaurants, which it acquired
or built from 1984 to 2001, five Ashley's restaurants acquired February 18,
1999, four Richard's Deli and Pub restaurants acquired March 31, 1999, one
additional Ashley's unit opened January 3, 2001, and five Mitzel's American
Kitchen restaurants purchased December 13, 2000. The Company has owned and
operated an Elmer's restaurant located in the Delta Park section of Portland,
Oregon since January 1984. In August 1986, the Company opened a restaurant in
Tacoma, Washington. In January 1987, the Company began operation of a restaurant
in Lynnwood, Washington and assumed operation of an Elmer's restaurant in Grants
Pass, Oregon. In fiscal 1988, the Company acquired from former franchisees
restaurants in Gresham, Albany, and Medford, Oregon; and Boise, Idaho. In fiscal
1989, the Company purchased the land and buildings for the Boise and Gresham
restaurants and also purchased, from a former franchisee, an additional
restaurant in Hillsboro, Oregon. In May 1989, the Company acquired a franchised
Elmer's restaurant in Palm Springs, California. In July 1991, the Company
acquired a franchised Elmer's restaurant in Beaverton, Oregon. In November 2000,
the Company sold and entered into a long-term franchise agreement and occupancy
lease for the Gresham Elmer's restaurant. Also in 2000 the Company purchased the
assets and remodeled the Springfield Elmer's restaurant. In April 2001 the
Company purchased and remodeled the Roseburg Elmer's restaurant. Of the 12
restaurants, nine operate on leased property and three on property owned by the
Company.
The Company owns and operates five Mitzel's American Kitchen
restaurants, which were acquired on December 13, 2000. The first Mitzel's
restaurant opened in Everett, Washington in August of 1984. In July of 1985, a
restaurant was opened in Poulsbo, Washington. In 1987, restaurants were opened
in Oak Harbor and Kent, Washington. In August of 1992, a restaurant was opened
in Fife, Washington. All the restaurants operate on leased property.
As earlier discussed, five Ashley's restaurants were acquired in a
merger with CBW, Inc. on February 18, 1999. One restaurant in Springfield,
Oregon was opened in 1994 and the other four were opened in 1995. The four
Richard's Delis and Pubs were acquired in a purchase of the outstanding stock of
Grass Valley Ltd., Inc. on March 31, 1999 (as reported on a Current Report on
Form 8-K filed April 15, 1999 and amended on June 14, 1999). All the restaurants
operate on leased property.
The Company and its franchisees coordinate the purchase of their food,
beverages and supplies from Company-approved and other suppliers. Management
monitors the quality of the food, beverages and supplies provided to the
restaurants. The Company believes that its continued efforts over time have
achieved cost savings, improved food quality and consistency and helped decrease
volatility of food and supply costs for the restaurants. All essential food and
beverage products are available or, upon short notice, could be made available
from alternate qualified suppliers. Therefore, management believes that the loss
of any one supplier would not have a material adverse effect on the Company.
EMPLOYEES
As of April 2, 2001, the Company employed 410 persons on a full-time
basis, of whom 20 were corporate office personnel and 390 were restaurant
personnel. At that date, the Company also employed 529 part-time restaurant and
2 part-time corporate personnel. Of 22 corporate employees, 8 are in upper
management positions and the remainder are professional and administrative
employees. Employees of franchised Elmer's restaurants are not included in these
figures. None of the Company's employees are covered by collective bargaining
agreements. The Company considers its employee relations to be good. Most
employees, other than management and corporate personnel, are paid on an hourly
basis. Many restaurant personnel also receive tips. The Company believes that it
provides working conditions and wages that compare favorably with those of its
competition.
Each Company-operated restaurant employs an average of approximately 45
hourly employees, many of whom work part time on various shifts. The management
staff of a typical restaurant operated by the Company consists of a general
manager, one kitchen manager, one assistant manager and two shift managers. The
Company has an incentive compensation program for restaurant managers that
provides the restaurant managers with a quarterly bonus based upon the
achievement of certain defined goals.
6
EXECUTIVE OFFICERS OF THE REGISTRANT
As of June 20, 2001, the executive officers and other key personnel of
the Company were as set forth below.
Name Age Position
---- --- --------
Bruce Davis 40 President
William Service 40 Chief Executive Officer
Jerry Scott 47 Vice President, Operations
Dennis Miller 52 Controller
EXECUTIVE OFFICERS
Bruce Davis has served as President and Chairman of Board of Directors
since August 1998. For more than five years prior to joining the Company, Mr.
Davis was President of three companies engaged in the restaurant business:
Jaspers Food Management, Inc. (1993-present), CBW, Inc. (1995-1999), and Oregon
Food Management, Inc. (1996-present).
William Service has served as Chief Executive Officer and Director
since August 1998. For more than five years prior to joining the Company, Mr.
Service was the Chief Executive Officer of three companies engaged in the
restaurant business: Jaspers Food Management, Inc. (1993-present), CBW, Inc.
(1995-1999), and Oregon Food Management, Inc. (1996-present).
KEY PERSONNEL
Jerry Scott has served as Vice President, Operations since August 1998.
For more than five years prior to joining the Company, Mr. Scott served as Vice
President of Operations for Jaspers Food Management, Inc. He served from
November 1994 to November 1995 as Regional Director of Operations of Macheezmo
Mouse Restaurants, Inc. and from June 1993 to September 1994 as Director of
Operations of Mission Investment Company.
Dennis Miller has served as Corporate Controller since December 2000
when the Company purchased the six Mitzel's Restaurants. Prior to that, and
since September 1994, Mr. Miller was Corporate Controller for Mercer Restaurant
Services, which owned and managed restaurants in the Puget Sound Area including
the Mitzel's Restaurant chain. Prior to joining the restaurant industry, he had
over 22 years in hotel finance positions, including 11 years with Westin Hotels.
TRADEMARKS AND SERVICE MARKS
The Company believes its trademarks and service marks have significant
value and are important to its business. The Company has registered the
trademarks and service marks "Elmer's Pancake & Steak House" and "Elmer's
Colonial Pancake & Steak House" and the Elmer's logo with the U.S. Patent and
Trademark Office. The service mark "Elmer's Breakfast. Lunch. Dinner." has also
been registered in certain states. It is the Company's policy to pursue
registration of its marks whenever possible and to actively protect its marks
against infringement.
The Company grants to each of its Elmer's restaurant franchisees a
nonexclusive right to use the trademarks and service marks in connection with
and at each franchise location during the term of the franchise agreement.
ADVERTISING AND MARKETING
Word-of-mouth advertising, new restaurant openings, and the on-premises
sale of promotional products have historically been the primary methods of
restaurant advertising. The Company employs an advertising consultant to assist
in projecting the Elmer's restaurant concept to the general public in the
Western states, primarily through magazines, newspapers, and radio and
television commercials. The Company maintains a common advertising pool with its
franchisees to advertise Elmer's restaurants. After production costs for the
advertising campaign have been paid out of the common pool, the remaining money
is used for advertising in the various local areas of the franchised
restaurants. The Company-owned Elmer's restaurants and all but one of the
franchised restaurants are required to participate by contributing one percent
of monthly gross revenues. At the present time, the Company relies principally
on word-of-mouth advertising and catering exposure for advertising of Ashley's
and Richard's.
7
Generally, ongoing consumer research is employed on a limited basis to
track attitudes, brand awareness and market share of not only the Company's
customers, but also of its major competitors' customers as well. This is vital
in creating a better understanding of the Company's short and long term
marketing strategies.
COMPETITION
The restaurant industry is highly competitive with respect to price,
concept, quality and speed of service, location, attractiveness of facilities,
customer recognition, convenience, food quality and variety and is often
affected by changes in the tastes and eating habits of the public, including
changes in local, regional or national economic conditions affecting consumer
spending habits, demographic trends and traffic patterns, increases in the
number, type and location of competing restaurants, local and national economic
conditions affecting spending habits, and by population and traffic patterns.
The Company competes for potential franchisees with franchisors of other
restaurants, Company-owned restaurants, chains and others. The Company-owned
Elmer's restaurants and the franchised Elmer's restaurants compete for customers
with restaurants from national and regional chains as well as local
establishments. Some of the Company's competitors are much larger than the
Company and have greater capital resources that can be devoted to advertising,
product development and restaurant development and greater abilities to
withstand adverse business conditions. Increased competition, discounting and
changes in marketing strategies by one or more of these competitors could have
an adverse effect on the Company's sales and earnings in the affected markets.
In general, there is active competition for management personnel, capital and
attractive commercial real estate sites suitable for restaurants.
The Company believes that the principal competitive factors in its
favor for attracting both restaurant franchisees and restaurant customers are
Elmer's extensive menu, quality of food, service, reasonable prices, and brand
awareness.
GOVERNMENT REGULATIONS
The restaurant industry generally, and each Company-operated and
franchised restaurant specifically, are subject to numerous federal, state and
local government regulations, including those relating to the preparation and
sale of food and those relating to building, zoning, health, accommodations for
disabled members of the public, sanitation, safety, fire, environmental and land
use requirements; and, in some cases, state and local licensing of the sale of
alcoholic beverages and the state licensing of gaming. The Company and its
franchisees are also subject to federal and state laws governing their
relationship with employees, including minimum wage requirements, accommodation
for disabilities, overtime, working and safety conditions and
citizenship/residency requirements. Federal and state environmental regulations
have not had a major effect on the Company's operations to date. The Company has
no material contracts with the United States government or any of its agencies.
The Company is subject to a number of state laws regulating franchise
operations and sales. For the most part, those laws impose registration and
disclosure requirements on the Company in the offer and sale of franchises but,
in certain cases, also apply substantive standards to the relationship between
the Company and the franchisees, including limitations on noncompetition
provisions and on provisions concerning the termination or nonrenewal of a
franchise. Some states require that certain franchise offering materials be
registered before franchises can be offered or sold in that state. The Company
is also subject to Federal Trade Commission regulations covering disclosure
requirements and sales of franchises.
The failure to obtain or retain food licenses or approvals to sell
franchises, or an increase in the minimum wage rate, employee benefit costs
(including costs associated with mandated health insurance coverage) or other
costs associated with employees could adversely affect the Company and its
franchisees. Some Company-owned and franchisee-owned restaurants offer lottery
products and/or alcoholic beverages. The failure to obtain or renew lottery or
liquor licenses could adversely affect those restaurants. Some restaurant
employees are paid at or slightly above the minimum wage. Mandated increases in
the minimum wage rate were implemented in 1999, 2000 and 2001and have the effect
of increasing labor costs.
ITEM 2. PROPERTIES
HEADQUARTERS
The Company's corporate offices are located in Portland, Oregon and
consist of an office facility of approximately 5,000 square feet. Lease payments
totaled approximately $35,000 for fiscal 2001. The lease expires November 30,
2001.
8
COMPANY-OWNED RESTAURANTS
COMPANY-OWNED PROPERTIES. The Company owns the real property upon which
the following four Company-owned restaurants are located. All of the properties
are subject to mortgages in favor of lending institutions.
Approximate Area
Location Site Restaurant
-------- ---- ----------
Tacoma, Washington 1.3 acres 6,660 sq. ft.
Lynnwood, Washington 1 acre 6,500 sq. ft.
Gresham, Oregon (leased to franchisee) 1 acre 5,670 sq. ft.
Boise, Idaho 1.3 acres 5,430 sq. ft.
LEASED PROPERTIES. The Company leases the property upon which the
following 25 Corporate-owned restaurants are located. Each lease contains
specific terms relating to calculation of lease payment, renewal, purchase
options, if any, and other matters.
Approximate Area
Elmer's Locations Restaurant Sq. ft. Expiration
----------------- ------------------ ----------
Grants Pass, Oregon 6,350 December, 2006
Hillsboro, Oregon 6,350 January, 2002
Medford, Oregon 6,300 May, 2008
Albany, Oregon 5,460 February, 2008
Roseburg, Oregon 8,800 February, 2018
Springfield, Oregon 9,000 June, 2011
Palm Springs, California 5,500 April, 2007
Portland, Oregon (Delta Park) 6,350 July, 2006
Beaverton, Oregon 5,322 August, 2006
Mitzel's Locations
------------------
Everett, Washington 6,200 December, 2005
Fife, Washington 5,900 September, 2004
Kent, Washington 5,100 April, 2005
Oak Harbor, Washington 5,200 April, 2005
Poulsbo, Washington 6,500 December, 2004
Ashley's Locations
------------------
Bend, Oregon (North) 1,000 December, 2005
Bend, Oregon (South) 1,400 August, 2003
Redmond, Oregon 1,200 June, 2003
Eugene, Oregon 1,700 September, 2003
Springfield, Oregon (Gateway) 921 May, 2004
Springfield, Oregon (Thurston) 1,200 April, 2002
Richard's Locations
-------------------
Aloha, Oregon 1,727 November, 2002
Hillsboro, Oregon (North) 1,092 August, 2004
Hillsboro, Oregon (South) 2,510 October, 2001
Tigard, Oregon 1,743 December, 2002
9
The Company believes that its facilities are generally in good
condition and that they are suitable for their current uses. The Company
nevertheless engages periodically in remodeling and other capital improvement
projects designed to expand and improve the efficiency of its facilities.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ SmallCap Market
under the symbol "ELMS."
The following table sets forth the high and low reported sales prices
of the Common Stock in the NASDAQ SmallCap Market for the fiscal year quarters
indicated
Fiscal Year Ended
April 2, 2001 March 31, 2000
-------------------------------------------------
High Low High Low
1st Quarter 5.90 4.52 7.79 4.81
2nd Quarter 6.44 5.11 7.14 5.09
3rd Quarter 5.67 4.38 6.71 4.77
4th Quarter 5.75 4.53 6.53 4.31
Although the Common Stock is traded on the NASDAQ SmallCap Market,
there is a relatively low trading volume.
The Company has not paid or declared cash dividends on its Common
Stock. In November 1999, the Company declared a five-percent stock dividend, and
in August 2000 the Company declared a ten-percent stock dividend. The Company
intends to retain any future earnings to finance growth and does not presently
intend to pay dividends or make distributions in cash other than the payment of
cash in lieu of functional shares in connection with stock splits, if any, to
the holders of Common Stock. Any future dividends will be determined by the
Board of Directors based on the Company's earnings, financial condition, capital
requirements, debt covenants or other relevant factors.
As of June 15, 2001, the Company had 191 shareholders of record.
UNREGISTERED SALES OF STOCK
Sales of unregistered Common Stock made by the Company in the last
three fiscal years are as follows:
CBW Inc. acquired 705,000 restricted shares of the Common Stock in the
Company from Anita Goldberg and Rudolph Mazurosky on August 25, 1998. The
consideration paid by CBW, Inc. for the Shares was $4,504,950. The shareholders
of CBW, Inc. that acquired the indirect beneficial ownership of the Company's
Common Stock as part of this transaction were William W. Service, Bruce N.
Davis, Thomas C. Connor, Corydon H. Jensen, Linda E. Bolton (as Trustee under a
Restated Trust Agreement dated 6/8/98), Ken Boettcher, Karen Brooks, Gregory
Wendt and Donald W. Woolley. The issuance was made pursuant to available
exemptions from the registration provisions of the Securities Act of 1933, as
amended (specifically, Section 4(2) of the Securities Act) and relevant Blue Sky
statutes. The shares are subject to transfer restrictions and may only be
transferred subject to compliance with applicable federal and state securities
laws.
Effective February 18, 1999, the Company merged with its majority
shareholder CBW Inc. ('CBW'), a closely held Oregon corporation, in a
transaction in which the Company was the surviving corporation. In consideration
for the issuance by the Company of 770,500 new shares of the Company's
restricted Common Stock to the CBW shareholders and the assumption of
approximately $4 million in debt owed by CBW arising from CBW's acquisition of
the controlling block of the Company's
10
restricted common stock on August 25, 1998, the Company acquired all the stock
and assets of CBW including CBW's wholly owned subsidiary, CBW Food Company, LLC
(which by operation of merger is now the Company's wholly-owned subsidiary).
Each CBW shareholder received 144.4507 shares of the Company's restricted Common
Stock for every CBW share owned. The shares of Company stock previously acquired
by CBW, a total of 705,000 shares, were concurrently transferred to the Company
and were canceled upon receipt thereof. The issuances were made pursuant to
available exemptions from the registration provisions of the Securities Act of
1933, as amended (specifically, Section 4(2) of the Securities Act) and relevant
Blue Sky statutes. The shares are subject to transfer restrictions and may only
be transferred subject to compliance with applicable federal and state
securities laws.
Effective March 31, 1999, the Company paid the sum of $110,000 in cash
and issued 209,620 shares of Common Stock to the shareholders of GVL, namely
Gary Weeks and Richard Buckley, as part of the GVL Acquisition (disclosed in
Item 1 under the sub-caption "Recent Developments and Acquisitions"). The
issuances were made pursuant to available exemptions from the registration
provisions of the Securities Act of 1933, as amended (specifically, Section 4(2)
of the Securities Act) and relevant Blue Sky statutes. The shares are subject to
transfer restrictions and may only be transferred subject to compliance with
applicable federal and state securities laws.
The Company issued 130,000 shares as part of the consideration paid for
the purchase of the six Mitzel's American Kitchen restaurants in December 2000.
The Company filed SEC Form 8-K in its fourth quarter disclosing the details of
the transaction.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data relating to the Company should be
read in conjunction with the Company's consolidated financial statements and the
related notes thereto, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," other financial information included
herein, and Elmer's Restaurants, Inc. consolidated financial statements. The
selected financial data set forth below for the Company as of April 2, 2001 and
March 31, 2000 and for each of the three years in the period ended April 2, 2001
are derived from the audited financial statements included elsewhere herein. The
selected financial data set forth below for the Company as of March 31, 1999,
1998 and for the years ended March 31, 1998 and 1997 are derived from the
consolidated financial statements not included elsewhere herein.
Elmer's Restaurants, Inc. and Subsidiaries
Selected Financial Data
for the fiscal years ended March 31, and
April 2, 2001 2000 1999 1998 1997
Revenues $25,852,336 $22,179,574 $11,952,728 $1,591,293 $875,199
Net income (loss) 956,006 939,549 290,512 205,270 (40,971)
Net income (loss) per share 0.51 0.51 0.30 0.23 (.05)
Total assets 16,374,147 13,847,208 13,046,684 259,675 263,676
Long-term notes payable, less current portion 5,798,769 5,124,130 5,703,539 50,000 245,754
Total liabilities 9,129,937 8,209,004 8,348,029 258,962 463,539
Total shareholder's equity (deficit) 7,244,210 5,638,204 4,698,655 713 (199,863)
On August 25, 1998, CBW, Inc. ("CBW") acquired a controlling interest
in the then outstanding stock of Elmer's. On February 18, 1999, CBW merged with
and into Elmer's. These transactions have been accounted for as a purchase of
Elmer's by CBW and, accordingly a new basis of accounting, based on fair values,
was established for the assets and liabilities of Elmer's. Subsequent to the
acquisition on August 25, 1998, the Company's financial statements reflect the
combined results of operations and financial position of CBW and Elmer's based
on the new basis of accounting for Elmer's and the historical cost basis of CBW.
The results of operations for the year ended March 31, 1999 also reflect a
minority interest in the earnings of the Company representing the separate 46.2%
separate public ownership in Elmer's from August 25, 1998 through February 17,
1999. The financial position at March 31, 1999 also reflects the acquisition of
GVL on that date. Prior to August 25, 1998, the financial statements of the
Company include only the results of operations, financial position and cash
flows of CBW, which began operations on June 16, 1995.
11
The following table presents summarized quarterly results.
FISCAL 2001 Quarter 1 Quarter 2 Quarter 3 Quarter 4
Total revenues 7,231,139 5,458,374 5,809,505 7,353,318
Operating income 605,355 513,710 363,927 386,064
Net Income 308,117 279,589 182,058 186,242
Net income per share $ 0.17 $ 0.15 $ 0.10 $ 0.09
========= ========= ========= =========
FISCAL 2000
Total revenues 7,018,838 5,110,491 5,109,326 4,940,919
Operating income 570,043 454,258 476,214 396,954
Net Income 257,059 228,236 249,733 204,520
Net income per share $ 0.14 $ 0.12 $ 0.14 $ 0.11
--------- --------- --------- ---------
NEW ACCOUNTING PRONOUNCEMENTS
The effects of new accounting pronouncements are discussed in Note 1 of
Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
"Selected Historical Financial Data" and the financial statements of the Company
and the accompanying notes thereto included elsewhere herein. Certain
information discussed below may constitute forward-looking statements within the
meaning of the federal securities laws. Although the Company believes that the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will be
achieved. Forward-looking information is subject to certain risks, trends and
uncertainties that could cause actual results to differ materially from
projected results. Among those risks, trends and uncertainties are the general
economic climate, costs of food and labor, consumer demand, interest rate
levels, restrictions imposed by the Company's debt covenants, management
control, availability of supplies, the availability of financing and other risks
associated with the acquisition, development and operation of new and existing
restaurants. This list of risks and uncertainties is not exhaustive.
OVERVIEW
On August 25, 1998, CBW, Inc. purchased 53.8% of Elmer's Restaurants,
Inc. then outstanding common stock from its then president and chairman, Ms.
Anita Goldberg, and her brother and director, Rudolph Mazurosky. On February 18,
1999, Elmer's Restaurants, Inc. merged with CBW, Inc.
In accordance with generally accepted accounting principles, these
transactions have been accounted for as a purchase of Elmer's Restaurants, Inc.
by CBW, Inc. and accordingly a new basis of accounting, based on fair values,
was established for the assets and liabilities of Elmer's Restaurants, Inc. The
consolidated financial statements include the accounts of CBW, Inc. for the
years ended March 31, 1998 and 1997 (rather than the previously reported results
of Elmer's) and include the accounts of CBW, Inc. for the year ended March 31,
1999 and of Elmer's Restaurants, Inc. for the period August 31, 1998 through
March 31, 1999 (with a minority interest in the income through February 17, 1999
representing the 46.2 % separate public ownership), as well as the assets and
liabilities of Grass Valley Ltd., Inc., which was acquired as of March 31, 1999.
Because of the significance of these transactions, the Company believes
that a discussion and analysis of the Company's results of operations in fiscal
year 2001 and 2000 to pro forma results of operations for 1999, which include
results of operations of Elmer's Restaurants, Inc. and Grass Valley Ltd., Inc.,
provides a more meaningful comparison than the discussion and analysis of prior
year actual results of operations which, prior to these transactions, only
includes the results of operations of CBW, Inc. and supplements the following
highlights of historical results.
HIGHLIGHTS OF HISTORICAL RESULTS
The Company reported record net income of approximately $956,000, or
$.51 basic earnings per share for the year ended April 2, 2001, on sales of
approximately $25,852,000. The Company reported net income of approximately
$939,500 or
12
$.51 per share for the year ended March 31, 2000. For the year ended March 31,
1999, the Company reported net income of approximately $290,500 or $.30 per
share.
During the year ended April 2, 2001, total assets increased
approximately $2.6 million to $16.4 million. This increase is due primarily to
the acquisition of the Mitzel's units and the new Springfield Elmer's location.
At April 2, 2001, total shareholders' equity increased approximately $1.6
million as a result of current year net income and 130,000 shares issued in
conjunction with the acquisition of Mitzel's.
COMPARISON OF FISCAL YEAR 2001 ACTUAL RESULTS TO HISTORICAL PRO FORMA
RESULTS OF OPERATIONS
As discussed above, the Company believes that discussion and analysis
of the Company's fiscal year 2001 and 2000 results of operations compared to
1999 on a pro forma basis, which include CBW, Inc. and Grass Valley Ltd., Inc.,
provides a more meaningful comparison than the discussion and analysis of
reported historical actual results of operations. The following discussion and
analysis presents the Company's results of operations for the year ended April
2, 2001 and March 31, 2000 with the results of operations for the year ended
March 31, 1999, as if the merger of CBW, Inc. and the acquisition of Grass
Valley Ltd., Inc., had occurred at the beginning of the periods after giving
effect to pro forma adjustments, including amortization of goodwill,
depreciation, interest expense, and related income tax effects. The pro forma
information is provided for illustrative purposes and is not necessarily
indicative of the combined results of operations that would have actually
occurred for such periods nor does it represent a forecast of results of
operations for any future periods.
Dollar amounts in thousands except per share data Years Ended
---------------------- ---------------------- ----------------------
(pro forma information is unaudited) April 2, 2001 March 31, 2000 March 31, 1999
------------- -------------- --------------
PRO FORMA
Percent of Percent of Percent of
Amount Revenues Amount Revenues Amount Revenues
------ -------- ------ -------- ------ --------
Revenue $25,852 100.0% $22,180 100.0% $21,232 100.0%
Restaurant costs and expenses 17,840 69.0 15,260 68.8.0 14,721 69.3
General and administrative expenses 6,143 23.8 5,023 22.6 4,861 22.9
Operating income 1,869 7.2 1,897 8.6 1,650 7.8
Non operating income (expense) (425) (1.6) (478) (2.2) (508) (2.4)
Net income 956 3.7 940 4.2 751 3.5
Earnings per share $.51 $.51 $.41
Weighted average shares outstanding 1,883,074 1,832,032 1,832,032
REVENUE For the year ended
------------------------------------------------------------------------
April 2, 2001 March 31, 2000 March 31, 1999
---------------------- ---------------------- ----------------------
PRO FORMA
Percent of Percent of Percent of
Amount Revenues Amount Revenues Amount Revenues
------- ---------- ------- ---------- ------- ----------
Restaurant operations:
Restaurant sales $21,720 84.0% 18,625 84%.0 $18,255 86.0%
Lottery 3,292 12.7 2,906 13.1 2,354 11.1
----- ---- ----- ---- ------- ------
25,012 96.7 21,531 97.1 20,609 97.1
Franchise operations 840 3.3 649 2.9 623 2.9
--- --- --- --- --- ------
Total pro forma revenue $25,852 100.0% $22,180 100.0% $21,232 100.0%
======= ====== ======= ====== ======= ======
REVENUES. Revenues for the year ended April 2, 2001 were 16.6% greater
than for the comparable period in 2000. Same restaurant sales increased 3.6% and
franchise and administrative services revenues increased 29.4% due to the sale
of two
13
franchise agreements and the administrative services agreement with the Yankee
Grills which commenced December, 2000. Lottery revenues, as a percentage of
total revenues, fell from 13.1% to 12.7%. Revenues for the year ended March 31,
2000 were 4.5% greater than the pro forma comparable period in 1999. This was
due to an increase in restaurant sales of 4.5%, franchise revenues increased
4.2% and lottery revenues increased 23.5%.
RESTAURANT COSTS AND EXPENSES. As a percent of total revenue, food,
beverage and supply costs were 27.5% in 2001 compared to 2000 and pro forma 1999
of 28.4% and 28.5% respectively. Labor was 31.4% of total revenue in 2001
compared to results in 2000 and pro forma 1999 of 31.9% and 31.2% respectively.
Occupancy, depreciation, amortization and restaurant opening/closing expenses
totaled 10.0% of revenue in 2001 compared to 2000 and pro forma results in 1999
of 8.5% and 9.0% respectively. The decrease in food, beverage and supply cost as
a percentage of revenue in 2001 over 2000 is principally a result of the
introduction of the new menu and "outsert" items, an increase in customer check
average, and in-restaurant training, promotions and development. The decrease in
labor as a percentage of revenue in 2001 over fiscal year 2000 is driven by
improved operating efficiencies, partly offset by an increase in minimum wages
rates in Washington. The Company's slight increase in labor as a percentage of
revenues in 2000 compared to pro forma 1999 was driven by an increase in the
Company's average wage rate resulting from significant increases in both Oregon
and Washington minimum wage rates. Washington's minimum wage rate increased
10.7% on January 1, 1999 from $5.15 to $5.70. Washington state minimum wage was
increased another 14% on January 1, 2000 (matching Oregon's $6.50 per hour
rate). Washington state minimum wage is now indexed to inflation and will be
adjusted annually. The increase in occupancy, depreciation, amortization and
restaurant opening/closing expenses as a percentage of revenues in 2001 over
2000 is primarily due to the costs of opening the Springfield Elmer's, closing
the Tacoma Mitzel's and incremental depreciation on the prior year's capital
expenditures.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were 23.9% of total revenue in 2001 compared to 2000 of 22.6% and pro
forma results of 22.9% in 1999. The increase in general and administrative costs
as a percentage of revenues reflects the impact of integration expenses related
to the Mitzel's restaurant acquisition and increased marketing expenditures for
those restaurants.
PRO FORMA NON OPERATING INCOME (EXPENSES). This primarily reflects net
interest expenses that were 1.6% of total revenues in 2001 compared to fiscal
year 2000 and pro forma results in 1999 of 2.2% and 2.4% respectively. The
reduction in net interest expense as a percentage of pro forma revenues is the
result of increased revenues and increased interest income.
LIQUIDITY AND CAPITAL RESOURCES
As of April 2, 2001, the Company had cash and equivalents of
approximately $1,141,000 representing a decrease of approximately $499,000. The
decrease resulted from cash provided by operations totaling approximately
$1,720,000, cash provided by financing activities of approximately $671,000 and
less cash used in investing activities of approximately $2.9 million. Cash
provided by financing is $1.3 million in new convertible notes less principal
payments on term debt. Cash used in investing activities was the result of
additions to property, buildings, equipment and intangibles. In addition to the
regular replacement of depreciating restaurant assets, cash used in investing
activities included the acquisition on the five Mitzel's units and the
acquisition and remodel of the Springfield Elmer's.
December 2000 the Company issued $1.3 million in convertible notes to
finance the Mitzel's acquisition. The seven year notes bear interest at 10%, and
are convertible to common stock after six months at $6.50 per share. The Company
may call the notes after 3 years at premiums of between one and five percent,
depending on the remaining term. Interest-only payments are made to the holder
and $13,690 per month is paid into a sinking fund. The notes are unsecured and
subordinate to the Company's senior secured debt held by Wells Fargo Bank.
The Company's primary liquidity needs arise from debt service on
indebtedness incurred in connection with the merger of CBW, Inc., operating
lease requirements and the funding of capital expenditures. As of April 2, 2001,
the Company had outstanding indebtedness for borrowed money of $1.6 million
under a term loan facility and $2.2 million in real estate loan facilities with
Wells Fargo Bank and $1.25 million under a term loan facility with Eagle's View
Management, assumed at the time of the merger with CBW, Inc. The Wells Fargo
loans have a weighted-average maturity of 9 years, bear interest at an average
of 8.25%, require monthly payments of principal and interest, are collateralized
by substantially all of the assets owned by Elmer's Restaurants, Inc. and impose
certain financial restrictions and covenants, the most restrictive of which,
require the Company to maintain a maximum of total liabilities, excluding
subordinated debt, to tangible net worth plus subordinated debt of 4.0 to 1.0.
In addition, effective September 30, 1999, and thereafter on a trailing four
quarter basis as of the end of each fiscal quarter, the Company will be required
to maintain 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.
The Company was in compliance with this covenant at April 2, 2001. The Company
has available a $250,000 line of credit with Wells Fargo Bank through September
1, 2001, which is secured by substantially all assets of the Company
14
excluding real estate. Interest on the unpaid balance accrues at a rate of prime
plus 1%. The prime rate at April 2, 2001 was 8.25%. There was no amount
outstanding at April 2, 2001.
The Eagle's View Management loan has a maturity of approximately three
years, an interest rate of 15%, requires monthly payments of interest only, and
is secured by a second position on substantially all the assets owned by Elmer's
Restaurants, Inc. and does not impose financial covenants upon the Company. The
Company plans to complete the early pay off of the $1.6 million Wells Fargo term
loan and the $1.25 million Eagles View Management loan in the first quarter of
fiscal year 2002. The Company anticipates financing the pay down with long term
senior secured debt.
The Company's primary source of liquidity during the year was the
operation of the restaurants, franchise fees earned from its franchisees,
internal cash and borrowings as discussed above.
In the future, the Company's liquidity and capital resources will
depend primarily on the operations of Elmer's Restaurants, Inc., CBW, Inc. and
Grass Valley Ltd., Inc. which, under the provisions of the Company's loan
agreements, would permit, under certain conditions, distributions and dividends
to the Company's shareholders and early reduction of the Eagle's View Management
indebtedness. Elmer's Restaurants, Inc., CBW, Inc. and Grass Valley Ltd., Inc.,
like most restaurant businesses, are 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.
INFLATION
Certain of the Company's operating costs are subject to inflationary
pressures, of which the most significant are food and labor costs. As of April
2, 2001, a significant percentage of the Company's employees were paid wages
equal to or based on the state minimum hourly wage rates. Economic growth that
would reduce unemployment or make more jobs available in higher paying
industries could directly affect the Company's labor costs. The Company believes
that inflation has not had a material impact on its results of operations for
fiscal 2001, fiscal 2000 or fiscal 1999. Substantial increases in costs could
have a significant impact on the Company and the industry. If operating expenses
increase, management believes it can recover increased costs by increasing
prices to the extent deemed advisable considering competition.
SEASONALITY
The seasonality of restaurant sales due to consumer spending habits can
be significantly affected by the timing of advertising, competitive market
conditions and weather-related events. While restaurant sales for certain
quarters can be stronger, or weaker, there is no predominant pattern.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
CERTAIN STATEMENTS IN THIS FORM 10-K UNDER "ITEM 1. BUSINESS," "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND ELSEWHERE IN THIS FORM 10-K CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WHICH WE BELIEVE ARE 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 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 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
15
BUSINESS STRATEGY OR DEVELOPMENT PLANS; 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; IMPACT OF YEAR 2001; CONTINUED NASDAQ LISTING; WEATHER
CONDITIONS; CONSTRUCTION SCHEDULES; AND OTHER FACTORS REFERENCED IN THIS FORM
10-K.
The Company holds no financial instruments of any kind for trading
purposes. Certain of the Company's outstanding financial instruments are subject
to market risks, including interest rate risk. Such financial instruments are
not currently subject to foreign currency risk or commodity price risk. The
Company's major market risk exposure is potential loss arising from changing
interest rates and the impact of such changes on its long-term debt. Of the
Company's long-term debt outstanding at April 2, 2001, $808,000 was accruing
interest at a variable rate of LIBOR plus 2.25%. A rise in prevailing interest
rates could have adverse effects on the Company's financial condition and
results of operations.
PRINCIPAL AMOUNT BY EXPECTED MATURITY
($ in thousands)
Fiscal Year 2002 2003 2004 2005 Total Fair Value
Variable rate debt 236.4 236.4 236.4 98.2 808.4 808.4
Average interest rate 7.25% 7.25% 7.25% 7.25%
2.25% above LIBOR
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this
Form 10-K. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On April 17, 2001, the Audit Committee of the Board of Directors
dismissed PricewaterhouseCoopers LLP as the Company's independent accountants
and appointed Moss Adams LLP for the fiscal year ended April 2, 2001. The
decision to change accountants was recommended by the registrant's audit
committee and approved by the Board of Directors.
PricewaterhouseCoopers LLP 's reports on the financial statements for
the years ended March 31, 2000 and 1999, contained no adverse opinion nor
disclaimer of opinion, nor were such reports qualified or modified as to
uncertainty, audit scope, or accounting principles. During the fiscal years
ended March 31, 2000 and 1999, and during the interim period between April 1,
2000, and April 17, 2001, there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction PricewaterhouseCoopers LLP,
would have caused it to make a reference to the subject matter of the
disagreements in connection with its reports.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company is included under
the caption "Election of Directors" in the Company's definitive proxy statement
(the "2001 Proxy Statement") for its 2001 Annual Meeting of Shareholders filed
or to be filed not later than 120 days after the end of the fiscal year covered
by this Report and is incorporated herein by reference. Information with respect
to executive officers of the Company is included under Item 4(a) of Part I of
this Report. Information with respect to compliance with Section 16(a) of the
Securities Exchange Act is included under "Section 16(a) Beneficial Ownership
Reporting Compliance" in the 2001 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is included under
the caption "Executive Compensation" in the 2001 Proxy Statement is incorporated
herein by reference.
16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial
owners and management is included under the caption "Voting Securities and
Principal Shareholders" and "Election of Directors" in the 2001 Proxy Statement
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related
transactions with management is included under the caption "Certain
Transactions" in the 2001 Proxy Statement and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
The Financial Statements listed in the accompanying index on page F-1
are filed as part of this Report.
(a)(1) Financial Statements and Schedules Page in
this Report
-----------
Reports of Independent Accountants.......................................F-1
Consolidated Balance Sheets at April 2, 2001 and March 31, 2000..........F-3
Consolidated Statements of Operations for the years ended
April 2, 2001, March 31, 2000 and 1999...................................F-4
Consolidated Statements of Changes in Shareholders' Equity for
the years ended April 2, 2001, March 31, 2000 and 1999...................F-5
Consolidated Statements of Cash Flows For the years ended April
2, 2001, March 31, 2000 and 1999.........................................F-6
Notes to Consolidated Financial Statements...............................F-7
No other schedules are included because the required information is
inapplicable or is presented in the financial statements or related notes
thereto.
17
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: WILLIAM W. SERVICE
-----------------------
William W. Service
Chief Executive Officer
Dated: June 29, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of Elmer's
Restaurants, Inc., in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Bruce N. Davis Chairman of the Board & President June 29, 2001
----------------------
Bruce N. Davis
/s/ William W. Service Chief Executive Officer & Director June 29, 2001
---------------------- (Principal Executive & Financial Officer)
William W. Service
/s/ Thomas C. Connor Director June 29, 2001
----------------------
Thomas C. Connor
/s/ Corydon H. Jensen Director June 29, 2001
----------------------
Corydon H. Jensen
/s/ Richard Williams Director June 29, 2001
----------------------
Richard Williams
/s/ Donald Woolley Director June 29, 2001
----------------------
Donald Woolley
18
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Elmer's Restaurants, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Elmer's Restaurants, Inc. and Subsidiaries (the Company)
at March 31, 2000, and the results of their operations and their cash flows for
the years ended March 31, 2000 and 1999 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Portland, Oregon
May 23, 2000
F-1
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Elmer's Restaurants, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Elmer's
Restaurants, Inc. and Subsidiaries (the Company) as of April 2, 2001, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Elmer's Restaurants,
Inc. and Subsidiaries as of April 2, 2001, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
MOSS ADAMS LLP
Portland, Oregon
May 25, 2001
F-2
ELMER'S RESTAURANTS, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 2, 2001 and March 31, 2000
April 2, 2001 March 31, 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,141,016 $ 1,640,210
Accounts receivable 337,266 199,466
Notes receivable - related parties, current portion 180,213 --
Inventories 368,059 339,654
Prepaid expenses and other 237,681 276,604
Income taxes receivable 61,625 --
------------ ------------
Total current assets 2,325,860 2,455,934
Notes receivable - related parties, net of current portion 203,045 --
Property, buildings and equipment, net 8,441,867 6,892,844
Intangible assets, net of accumulated amortization of
$362,244 and $194,325 5,280,714 4,390,471
Other assets 122,661 107,959
------------ ------------
Total assets $ 16,374,147 $ 13,847,208
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, current portion $ 569,327 $ 572,399
Accounts payable 1,389,195 772,174
Accrued expenses 209,821 448,803
Accrued payroll and related taxes 390,825 218,728
Accrued income taxes -- 279,770
------------ ------------
Total current liabilities 2,559,168 2,291,874
Notes payable, net of current portion 5,798,769 5,124,130
Deferred income taxes 772,000 793,000
------------ ------------
Total liabilities 9,129,937 8,209,004
------------ ------------
Commitments and contingencies (Note 6)
Shareholders' equity
Common stock, no par value; 10,000,000 shares authorized,
1,962,032 and 1,665,548 shares issued and outstanding at
April 2, 2001 and March 31, 2000 respectively 6,871,190 5,242,264
Retained earnings 373,020 395,940
------------ ------------
Total shareholders' equity 7,244,210 5,638,204
------------ ------------
Total liabilities and shareholders' equity $ 16,374,147 $ 13,847,208
============ ============
The accompanying notes are an integral part
of the consolidated financial statements.
F-3
ELMER'S RESTAURANTS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended April 2, 2001, March 31, 2000 and 1999
FOR THE YEARS ENDED
--------------------------------------------
APRIL 2, MARCH 31, MARCH 31,
2001 2000 1999
------------ ------------ ------------
REVENUES $ 25,852,336 $ 22,179,574 $ 11,952,728
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of restaurant sales:
Food and beverage 7,121,428 6,298,727 3,406,602
Labor and related costs 8,126,818 7,082,100 3,735,043
Occupancy costs 1,706,692 1,248,224 741,078
Depreciation and amortization 745,744 630,089 341,170
Restaurant opening/closing expenses 139,909 -- --
General and administrative expenses 6,142,689 5,022,965 2,683,534
------------ ------------ ------------
23,983,280 20,282,105 10,907,427
------------ ------------ ------------
INCOME FROM OPERATIONS 1,869,056 1,897,469 1,045,301
OTHER INCOME (EXPENSE):
Interest income 138,845 91,314 18,545
Interest expense (591,311) (570,334) (458,804)
Gain on disposition of assets 27,528 1,100 6,477
------------ ------------ ------------
Income before provision for income taxes 1,444,118 1,419,549 611,519
Income tax provision (488,112) (480,000) (185,000)
------------ ------------ ------------
Income before minority interest 956,006 939,549 426,519
Minority interest -- -- (136,007)
------------ ------------ ------------
NET INCOME $ 956,006 $ 939,549 $ 290,512
============ ============ ============
PER SHARE DATA:
Net income per share - Basic $ 0.51 $ 0.51 $ 0.30
============ ============ ============
Weighted average number of
common shares outstanding - Basic 1,883,074 1,832,032 968,563
============ ============ ============
Net income per share - Diluted $ 0.50 $ 0.50 $ 0.30
------------ ------------ ------------
Weighted average number of
common shares outstanding - Diluted 1,917,936 1,881,376 968,563
============ ============ ============
PRO FORMA INCOME TAX INFORMATION (Unaudited)
Income before provision for income taxes 611,519
Provision for income taxes (211,000)
Minority interest (136,007)
------------
Pro forma net income 264,512
============
Pro forma Basic earnings per share $ 0.27
------------
Pro forma Diluted earnings per share $ 0.27
------------
Shares used in per share calculation
Basic 968,563
Diluted 968,563
The accompanying notes are an integral part
of the consolidated financial statements.
F-4
ELMER'S RESTAURANTS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (DEFICIT)
For the years ended April 2, 2001, March 31, 2000 and 1999
Common Stock Retained earnings
Shares Amount (accumulated deficit)
---------- ---------- ----------
Balance March 31, 1998 770,500 $ 295,020 $ (294,307)
Capital contributions 600,000
Dividend distributions (44,070)
Issuance of common stock in conjunction with merger 606,109 2,803,000 --
Issuance of common stock in conjunction with acquisition
of Grass Valley Ltd., Inc. 209,620 1,048,500 --
Net income -- -- 290,512
---------- ---------- ----------
Balance, March 31, 1999 1,586,229 4,746,520 (47,865)
5% stock dividend (November 30, 1999) 79,319 495,744 (495,744)
Net income -- -- 939,549
---------- ---------- ----------
Balance, March 31, 2000 1,665,548 5,242,264 395,940
10% stock dividend (August 18, 2000) 166,484 978,926 (978,926)
Issuance of common stock in conjunction with acquisition
of Mitzel's American Kitchen restaurants 130,000 650,000 --
Net income -- -- 956,006
---------- ---------- ----------
Balance, April 2, 2001 1,962,032 $6,871,190 $ 373,020
========== ========== ==========
The accompanying notes are an integral part
of the consolidated financial statements.
F-5
ELMER'S RESTAURANTS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended April 2, 2001, March 31, 2000 and 1999
FOR THE YEARS ENDED
--------------------------------------
APRIL 2, MARCH 31, MARCH 31,
2001 2000 1999
---------- ---------- ----------
Cash flows from operating activities:
Net income $ 956,006 $ 939,549 $ 290,512
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 745,744 630,089 341,170
Deferred income taxes (21,000) 20,000 (7,000)
Gain on disposition of assets (27,528) (1,100) (6,477)
Minority Interest 136,007
Changes in assets and liabilities:
Current assets (127,282) 5,016 162,757
Other assets (14,702) 20,942 (41,559)
Accounts payable and accrued expenses 550,136 140,614 (51,156)
Income taxes (341,395) 387,002 (130,119)
---------- ---------- ----------
Net cash provided by operating activities 1,719,979 2,142,112 694,135
---------- ---------- ----------
Cash flows from investing activities:
Additions to property, buildings and equipment (1,597,233) (527,165) (217,515)
Additions to intangible assets (1,052,249)
Business acquisition, net of cash acquired (3,438,127)
Issuance of note receivable (275,000)
Principal collected on note receivables 33,742
Proceeds from sale of assets 1,100 20,000
---------- ---------- ----------
Net cash used in investing activities (2,890,740) (526,065) (3,635,642)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of notes payable 7,092,500
Capital contribution 600,000
Issuance of 10% convertible notes 1,300,000
Payments on notes payable (628,433) (579,409) (4,145,540)
Distributions (44,070)
---------- ---------- ----------
Net cash provided by (used in) financing activities 671,567 (579,409) 3,502,890
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (499,194) 1,036,638 561,383
Cash and cash equivalents, beginning of period 1,640,210 603,572 42,189
---------- ---------- ----------
Cash and cash equivalents, end of period $1,141,016 $1,640,210 $ 603,572
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 591,311 $ 582,887 422,023
========== ========== ==========
Income taxes $ 850,507 $ 73,000 467,619
========== ========== ==========
Supplemental disclosures of non-cash transactions:
Sale of equipment for note receivable $ 142,000
==========
Shares issued in conjunction with Mitzel's
restaurants acquisition 650,000
==========
Stock dividends declared $ 988,915 $ 495,744
========== ==========
The accompanying notes are an integral part
of the consolidated financial statements.
F-6
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Elmer's Restaurants, Inc. an Oregon corporation, and Subsidiaries (the Company),
owns and operates twelve Elmer's Restaurants, six Ashley's Deli restaurants,
five Mitzel's American Kitchen restaurants, four Richard's Deli and Pub
restaurants and sells franchises that give franchisees the right to operate
under the name Elmer's Breakfast. Lunch. Dinner. for a specific restaurant or
region. Franchises and Company owned units are located throughout the western
United States.
On December 13, 2000, the Company acquired six Mitzel's American Kitchen
restaurants for $975,000 in cash and 130,000 shares of common stock. This
transaction was accounted for by the purchase method of accounting.
On August 25, 1998, CBW, Inc. (CBW) acquired a controlling interest (705,000
shares representing 53.8% of the outstanding stock) of the then outstanding
common stock of Elmer's Restaurants, Inc. (Elmer's) for $4,500,000. On February
18, 1999, CBW merged with and into Elmer's. Pursuant to the terms of the merger,
Elmer's Restaurants, Inc. and Subsidiaries was the surviving corporation. The
merger was consummated by Elmer's issuance of 770,500 shares of Elmer's
restricted common stock to CBW shareholders in exchange for the 705,000 shares
previously acquired. In connection with the merger, Elmer's assumed
approximately $4 million in debt owed by CBW arising from CBW's acquisition of
the controlling block of stock on August 25, 1998. These transactions were
accounted for as a purchase of Elmer's by CBW, and accordingly a new basis of
accounting, based on fair values, was established for the assets and liabilities
of Elmer's. Elmer's entered into a new financing agreement whereby it borrowed
funds to refinance existing debt and debt of CBW totaling approximately
$1,750,000. Elmer's also used existing cash to reduce debt by approximately
$1,000,000. Each CBW shareholder received 144.4507 shares of Elmer's restricted
common stock for every CBW share owned.
On March 31, 1999, the Company acquired Grass Valley Ltd., Inc. (GVL), which is
the owner and operator of four delicatessen-style restaurants operating under
the name of Richard's Deli and Pub located in Oregon (see Note 9).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CBW for the years
ended April 2, 2001 and March 31, 2000 and 1999, Elmer's from August 31, 1998
(the results of operations of Elmer's from August 25, 1998 to August 31, 1998 is
not material to the results of operations of the Company), and Grass Valley
Ltd., Inc., Elmer's wholly-owned subsidiary, from March 31, 1999. All material
intercompany accounts and transactions have been eliminated. The minority
interest included in the 1999 consolidated financial statements represents the
46.2% separate public ownership in Elmer's from August 31, 1998 through February
17, 1999.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
accounting
F-7
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates and assumptions.
CHANGE IN REPORTING PERIODS
Effective April 1, 2000, The Company changed its quarterly reporting periods
from three month quarters ending on the last day of the third month, to a
"4-3-3-3" accounting cycle whereby each quarter ends on the last Monday of the
respective quarter. This change in reporting periods does not have a material
effect on comparability of the consolidated financial statements. Fiscal year
2001 ended April 2, 2001.
DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash
equivalents and accounts receivable approximated fair value as of April 2, 2001
and March 31, 2000 because of the relatively short maturity of these
instruments. The carrying value of notes receivable approximated fair value as
of April 2, 2001 and March 31, 2000 based upon interest rates and terms
available for similar investments. The carrying value of notes payable
approximated fair value as of April 2, 2001 and March 31, 2000 based upon
interest rates and terms available for the same or similar loans.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
short-term, highly-liquid investments, with a maturity of three months or less
to be cash equivalents.
The Company invests its excess cash in interest bearing deposits with major
banks and in U.S. Treasury securities. These investments mature within 90 days
and are therefore subject to minimal risk. Management routinely reviews these
investments in order to limit the amount of credit exposure to any one financial
institution.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash deposits. The Company places its cash
deposits with federally insured financial institutions. As of April 2, 2001, the
Company's deposits were in excess of the federal insurance limits.
INVENTORIES
Inventories of food, beverages and restaurant supplies are stated at the lower
of cost or market. Cost is determined using the first-in, first-out (FIFO)
method.
PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the related
assets. Lives used for calculating depreciation and amortization rates for the
principal asset classifications are as follows: buildings - 35 years;
automobiles, furniture, fixtures and equipment - 3 to 7 years; leasehold
improvements - life of lease or applicable shorter period. Maintenance and
repairs are expensed as incurred; renewals and improvements are capitalized.
Upon disposal of assets
F-8
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
subject to depreciation, the related costs and accumulated depreciation are
removed and resulting gains and losses are reflected in the consolidated
statements of operations.
INTANGIBLE ASSETS
The excess of cost over fair value of net tangible assets of acquired companies
(goodwill) and trademarks are amortized on a straight-line basis over 30 years.
RECOVERABILITY OF LONG-LIVED ASSETS
Management of the Company reviews the carrying value of capitalized tangible and
intangible assets on a regular basis to reach a judgment concerning possible
permanent impairment of value. These reviews consider, among other factors: (1)
the net realizable value of each major classification of assets, (2) the cash
flow associated with the assets, and (3) significant changes in the extent or
manner in which major assets are used. Management believes the carrying value of
assets is less than the estimated fair value.
ADVERTISING
Advertising and promotion costs are expensed as incurred. Advertising and
promotion expenses were $406,987, $274,675 and $131,752 for the years ending
April 2, 2001 and March 31, 2000 and 1999, respectively.
INTEREST RATE SWAP AGREEMENT
The Company entered into an interest rate swap agreement with a bank to reduce
the impact of changes in interest rates on a portion of its floating rate
long-term debt. The agreement effectively changes the Company's interest rate
exposure on the covered portion to a fixed percentage. The interest rate swap
agreement expires on March 1, 2002.
FRANCHISE OPERATIONS
Initial license fees from individual and area franchise sales are recognized as
revenue when substantially all of the terms and conditions of the franchise
agreement are met. Elmer's has sold area franchises to several restaurant
operators in various western states. The terms of the agreements entered into
with each franchisee protect the territory for the operator and provide standard
building blueprints, recipes, formulas and methods of food preparation. The term
of the franchise is generally25 years. Continuing franchise fees (based on a
percentage of sales) are recognized as revenue when earned.
INCOME TAXES
CBW was treated for federal income tax purposes as an S corporation under
Subchapter S of the Internal Revenue Code of 1986, as amended and comparable
state tax laws from May 22, 1997 through February 17, 1999. During that period,
CBW's earnings were taxed directly to CBW's shareholders, at their individual
federal and state income tax rates, rather than to the Company. Since February
17, 1999, the Company has been treated for income tax purposes as a corporation.
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred income tax assets to the amount expected to be realized.
F-9
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Income tax expense is the tax payable for the year and the change during the
year in net deferred income tax assets and liabilities.
NET INCOME PER SHARE
Basic earnings per share (EPS) is computed using the weighted-average number of
shares of common stock outstanding for the period. Diluted EPS is computed using
the weighted-average number of shares of common stock and dilutive common stock
equivalents outstanding during the period, if any. Common equivalent shares from
stock options, if any, are excluded from the computation when their effect is
antidilutive.
All references to share and per share information have been adjusted to give
effect to the 770,500 shares of restricted common stock issued by Elmer's in
connection with the merger of CBW on February 18, 1999 with and into Elmer's as
described above, the 5% stock dividend declared on November 30, 1999 and the 10%
stock dividend declared on August 18, 2000.
RECLASSIFICATION
A reclassification has been made to the consolidated financial statements for
the year ended March 31, 2000 to transfer the fair value of shares issued in the
November 30, 1999 5% stock dividend from retained earnings to common stock. The
effect of the reclassification was to decrease retained earnings and increase
common stock as of March 31, 2000 by $495,744.
This reclassification has no effect on previously reported net income or
earnings per share.
Certain other amounts in the 2000 and 1999 consolidated financial statements
have been reclassified to conform to the 2001 presentation. Net income and cash
flows were not affected by the reclassifications.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME,
which establishes requirements for disclosure of comprehensive income. The
objective of SFAS No. 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 significantly from
reported net income in the periods presented.
The Company has also adopted FASB issued SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. This statement changes the
way public companies report information about segments of their business in
their annual financial statements and requires selected segment information in
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 reports 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
F-10
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
accounting criteria are met. SFAS No. 133, as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000. The Company's
management has studied the implications of SFAS 133 and expects the adoption to
have no impact on the Company's financial condition or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) released Staff
Accounting bulletin (SAB) 101 REVENUE RECOGNITION IN FINANCIAL STATEMENTS. SAB
101 establishes guidelines in applying generally accepted accounting principles
to the recognition of revenue in financial statements based on the following
four criteria: persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the seller's price to the buyer is
fixed or determinable, and collectibility is reasonably assured. SAB 101, as
amended by SAB 101A, is effective no later than the first fiscal quarter of the
fiscal year beginning after December 15, 1999. The Company expects SAB 101 and
SAB 101A to have no material effect on the Company's revenue recognition
process.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
As more fully described in Note 4, CBW has been taxed for federal and state
income tax purposes as an S corporation for certain periods in the years ended
March 31, 1999. The unaudited pro forma information reflects provisions for
income taxes that would have been recorded had CBW been a taxed as a corporation
for all periods presented.
2. NOTES RECEIVABLE - RELATED PARTIES
Notes receivable consist of the following at April 2, 2001:
Notes receivable bearing interest at 10.5%, due on or before
January 1, 2002, secured by a stock pledge agreement for
15,000 shares of Elmer's Restaurants, Inc. common stock $76,199
Note receivable bearing interest at 8% due on or before
October 15, 2002, secured by franchise agreement and
restaurant furniture, fixtures and equipment 115,124
Note receivable bearing interest at 10% due on or before
March 15, 2003, secured by a stock pledge agreement for
50,000 shares of Elmer's Restaurants. Inc. common stock 191,935
-------
383,258
Less current portion 180,213
-------
Notes receivable net of current portion $203,045
========
F-11
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. PROPERTY, BUILDINGS AND EQUIPMENT
APRIL 2, 2001 MARCH 31, 2000
---------- ----------
Land $2,246,700 $2,246,700
Buildings 1,911,903 1,894,204
Furniture, fixtures and equipment 3,508,920 2,676,821
Leasehold improvements 2,117,301 894,471
Automobiles 23,409 16,932
---------- ----------
9,808,233 7,729,128
Less accumulated depreciation and amortization (1,366,366) (836,284)
---------- ----------
$8,441,867 $6,892,844
========== ==========
Depreciation expense charged to operations was $598,927, $484,204, $292,730 for
the years ending April 2, 2001 and March 31, 2000 and 1999 respectively.
4. INCOME TAXES
CBW was treated for federal income tax purposes as an S corporation under
Subchapter S of the Internal Revenue Code of 1986, as amended, since May 22,
1997 (and was a limited liability company from organization to that date) and
was treated as an S corporation for state income tax purposes under comparable
state tax laws. As a result, CBW's earnings through February 17, 1999 have been
taxed directly to CBW shareholders, at their individual federal and state income
tax rates, rather than to the Company.
The earnings of Elmer's from August 31, 1998 through February 17, 1999 are taxed
as a taxable corporation. Effective with the merger of CBW with and into Elmer's
(see Note 9), on February 18, 1999 (Termination date) CBW's S corporation status
terminated. Subsequent to the Termination date, the Company has been treated as
a corporation for federal and state tax purposes.
The provision for income taxes has been computed in accordance with SFAS No. 109
ACCOUNTING FOR INCOME TAXES, as if the Company had been a taxable corporation
for all periods presented (information with respect to the year ended March 31,
1999 is unaudited pro forma information):
F-12
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED
-----------------------------------
APRIL 2, MARCH 31, MARCH 31,
2001 2000 1999
--------- --------- ---------
Current:
Federal $ 419,112 $ 400,000 $ 160,000
State 90,000 60,000 34,000
--------- --------- ---------
509,112 460,000 194,000
Deferred income taxes (21,000) 20,000 17,000
--------- --------- ---------
$ 488,112 $ 480,000 $ 211,000
========= ========= =========
A reconciliation of the federal income tax rate to the Company's effective
income tax rate is as follows (information with respect to the year ended March
31, 1999 is unaudited pro forma information):
APRIL 2, MARCH 31, MARCH 31,
2001 2000 1999
------ ------ ------
(UNAUDITED
PRO FORMA)
Federal income tax at statutory rate 34.0% 34.0% 34.0%
State income taxes, net of
federal income tax benefit 3.6 3.9 3.5
Non deductible expenses 2.9 1.9 1.2
Federal income tax credits (6.7) (6.0) (4.3)
------ ------ ------
33.8% 33.8% 34.4%
====== ====== ======
The income tax provision of $185,000 for the year ended March 31, 1999 relates
to the results of operations of Elmer's from August 31, 1998 through February
17, 1999 and the results of operations of the Company from February 18, 1999
through March 31, 1999.
Deferred income taxes are the result of provisions in the tax laws that either
require or permit certain items of income or expense to be reported for income
tax purposes in different periods than they are reported for financial
reporting. As of April 2, 2001 and March 31, 2000, the deferred tax liability of
$772,000 and $793,000 respectively, primarily represents the difference between
the book basis of property, buildings equipment and intangibles and the related
tax basis of approximately $2,270,000 and $2,300,000, respectively.
F-13
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. NOTES PAYABLE
APRIL 2, MARCH 31,
2001 2000
---------- ----------
Note payable to financial institution, payable
in monthly principal installments of $34,900
plus interest at varying rates as follows:
On 50% of the outstanding balance -
interest fixed at 8.04%, based on
contractual interest rate swap agreement
On 50% of the outstanding balance -
variable interest rate of LIBOR plus 2.25%
adjusted monthly (7.25% at April 2, 2001)
Matures September 2004; secured by real estate
and all assets of the Company $1,615,150 $2,127,271
Note payable to financial institution, principal
and interest due monthly at 8.15%, matures March
2009; secured by real estate and all assets of
the Company 444,364 464,325
Note payable to financial institution, principal
and interest due monthly at 8.18%, matures
January 2011; secured by real estate and all
assets of the Company 1,194,538 1,238,241
Note payable to financial institution, principal
and interest due monthly at 8.25%, matures
February 2008; secured by real estate and all
assets of the Company 555,335 581,617
Note payable to financing company, interest
payable due monthly at 15%; subordinated,
principal balance due February 2004 1,250,000 1,253,402
Note payable to individual, principal and
interest due monthly at 10%; secured by stock
of a subsidiary 8,709 31,673
Convertible notes payable, private placement,
interest payable monthly at 10%; convertible to
common stock at $6.50 per share; principal due
December 2007 1,300,000
---------- ----------
Total long-term debt 6,368,096 5,696,529
Less current portion 569,327 572,399
---------- ----------
Net of current portion $5,798,769 $5,124,130
========== ==========
Certain notes payable contain restrictive covenants pertaining to financial
ratios and minimum cash flow coverage. 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 4.0 to 1.0,
and a ratio of cash generation (defined as net income before
F-14
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
The Company has available with a financial institution a $250,000 line of
credit, which matures September 1, 2001, and is secured by substantially all
assets of the Company excluding real estate. Interest on the unpaid balance
accrues at a rate of prime plus 1%. The prime rate at April 2, 2001 was 8.0%.
There were no balances outstanding on the line at April 2, 2001 and March 31,
2000.
Future maturities of notes payable for the following fiscal years are:
2002 $ 569,327
2003 570,655
2004 1,827,392
2005 309,754
2006 121,811
Thereafter 2,969,157
----------
$6,368,096
==========
All interest costs incurred during the years ended April 2, 2001 and March 31,
2000 and 1999 have been expensed during the respective periods.
6. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities under operating lease agreements. Minimum
fiscal year rental commitments for the year ending April 2, 2001 for property,
buildings and equipment with non-cancelable terms of more than one year are:
2002 $1,262,867
2003 1,236,321
2004 1,210,181
2005 1,157,486
2006 916,528
Thereafter 2,278,499
----------
$8,061,882
==========
The leases generally provide for additional rentals based upon a specified
percentage of sales and require the Company to pay certain other costs. Rental
expense on operating leases amounted to approximately $1,431,000, $884,000,
$848,000 for the years ending April 2, 2001 and March 31, 2000 and 1999,
respectively.
From time to time, the Company is involved in litigation relating to claims
arising in the normal course of its business. The Company maintains insurance
coverage against potential claims, in amounts that it believes to be adequate.
Management believes that it is not presently a party to any litigation, the
outcome of which could have a material adverse effect on the Company's business
or operations.
F-15
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. RELATED PARTY TRANSACTIONS
Jaspers Food Management, Inc. (JFMI), is an privately held restaurant management
company. Certain officers and directors hold a majority interest in JFMI.
Amounts outstanding with JFMI are as follows:
APRIL 2, MARCH 31,
2001 2000
-------- --------
Accounts receivable $ 26,364 $ 3,148
Accounts payable and other liabilities due to the affiliate are due on demand
and accrue interest at an annual rate of 10.5% based on the outstanding balance
over 28 days.
Transactions applicable to the affiliate were approximately as follows:
APRIL 2, MARCH 31, MARCH 31,
2001 2000 1999
-------- -------- --------
Interest expense - - $ 14,000
Labor and related expenses $930,000 $903,000 $452,000
Under the terms of a management services agreement, the affiliate provides
substantially all store labor, management, accounting, human resources, training
and other administrative services related to the operation of the six Ashley's
Deli and four Richard's Deli and Pub restaurants as disclosed in labor and
related expenses above.
Included in accounts receivable at April 2, 2001 is a note receivable from a
franchisee in the amount of $20,735.
F-16
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. RESTAURANT AND FRANCHISE OPERATIONS
Summary results of operations and other selected financial information from
restaurant operations and franchise operations are presented after elimination
of intercompany transactions:
APRIL 2, MARCH 31, MARCH 31,
2001 2000 1999
------------ ------------ ------------
Revenues:
Restaurant operations $ 25,011,807 $ 21,404,597 $ 11,591,646
Franchise operations 840,529 774,977 361,082
------------ ------------ ------------
Consolidated $ 25,852,336 $ 22,179,574 $ 11,952,728
============ ============ ============
Income from operations:
Restaurant operations $ 1,731,667 $ 1,620,632 $ 649,753
Franchise operations 137,389 276,837 395,548
------------ ------------ ------------
Consolidated $ 1,869,056 $ 1,897,469 $ 1,045,301
============ ============ ============
Capital and intangible expenditures:
Restaurant operations $ 3,206,615 $ 493,333 $ 191,748
Franchise operations 92,867 33,832 25,767
------------ ------------ ------------
Consolidated $ 3,299,482 $ 527,165 $ 217,515
============ ============ ============
Depreciation and amortization:
Restaurant operations $ 692,755 $ 561,440 $ 261,635
Franchise operations 52,989 68,649 79,535
------------ ------------ ------------
Consolidated $ 745,744 $ 630,089 $ 341,170
============ ============ ============
Assets:
Restaurant operations $ 15,246,621 $ 12,495,871 $ 11,571,468
Franchise operations 1,127,526 1,351,337 1,475,216
------------ ------------ ------------
Consolidated $ 16,374,147 $ 13,847,208 $ 13,046,684
============ ============ ============
The number of Company owned stores and operating franchises is as follows:
APRIL 2, MARCH 31, MARCH 31,
2001 2000 1999
-------- -------- --------
Company owned stores 26 21 20
Operating franchises 19 18 18
F-17
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. ACQUISITIONS AND MERGER
ACQUISITION OF SIX MITZEL'S AMERICAN KITCHEN RESTAURANTS.
Effective December 13, 2000 Elmer's Restaurants, Inc. (the "Company") executed
an asset purchase agreement with the owners of six Mitzel's American Kitchen
restaurants, acquiring substantially all the assets of those locations for
$975,000 in cash and issuance of 130,000 shares of the Company's restricted
common stock. These locations are wholly owned by and operated as a division of
the Company. The acquisition was recorded as a purchase and the excess of the
acquisition cost over fair value of the tangible assets acquired was allocated
to goodwill. The total cost of the acquisition was as follows:
Cash $ 975,000
Value of 130,000 shares of common stock
issued in conjunction with the transaction 650,000
Assumed liabilities, closing and relocation
expenses 122,245
Related legal and other transaction costs 65,009
----------
$1,812,254
==========
The acquisition cost of $1,812,254 was allocated to the fair market value of the
assets acquired ($1,024,900) and the remainder to goodwill ($787,354).
ACQUISITION OF SPRINGFIELD RESTAURANT
On August 1, 2000, the Company executed an asset purchase agreement with
Hospitality Two LLC, acquiring substantially all the assets of the Springfield,
Oregon restaurant and lounge for $325,000 in cash. The Company has converted the
restaurant into an Elmer's, which opened November, 2000. The acquisition cost
($345,630) was allocated to the fair market value of the assets acquired
($109,110) and the excess to goodwill ($236,520).
CBW ACQUISITION OF AND MERGER WITH ELMER'S
On August 25, 1998, CBW acquired a controlling interest (705,000 shares
representing 53.8% of the outstanding stock) in Elmer's for $4,500,000. The
total cost of the acquisition of $4,612,013, including $112,013 of related
acquisition costs, was provided by approximately $4,000,000 of debt financing
and the balance in CBW's own cash. The purchase method of accounting was used to
record this transaction and a new basis of accounting was established for the
assets and liabilities of Elmer's to the extent of the change in ownership based
on fair values as follows:
Current assets $ 1,190,536
Property, building and equipment 3,790,027
Intangible assets 2,171,048
Other assets 43,587
Liabilities assumed (2,163,185)
Deferred income taxes (420,000)
-----------
$ 4,612,013
===========
F-18
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
On February 18, 1999, CBW merged with and into Elmer's in a transaction in which
Elmer's was the surviving corporation. In consideration for the issuance by
Elmer's of 770,500 shares of Elmer's restricted common stock to CBW shareholders
and the assumption of approximately $4 million in debt owed by CBW arising from
CBW's acquisition of the controlling block of Elmer's common stock on August 25,
1998, Elmer's acquired all the stock and assets of CBW including CBW's
wholly-owned subsidiary, CBW Food Company, LLC.
Each CBW shareholder received 144.4507 shares of Elmer's restricted common stock
for every CBW share owned. The shares of Elmer's stock previously acquired by
CBW, a total of 705,000 shares, were concurrently transferred to Elmer's and
were canceled upon receipt thereof. In further consideration for the issuance
and to secure various indemnification obligations of CBW shareholders under the
merger agreement, Elmer's and the individual CBW shareholders executed an escrow
agreement for a period of one year from the date of closing of the merger
transaction.
Elmer's entered into a new financing agreement in connection with the merger
whereby it borrowed funds to refinance existing debt and debt of CBW totaling
approximately $1,750,000. Elmer's also used existing cash to reduce debt by
approximately $1,000,000. The merger transaction was accounted for as a purchase
of the remaining 46.2% separate public ownership of Elmer's by CBW. A new basis
of accounting was established for the assets and liabilities of Elmer's, based
on fair values, upon execution of the merger agreement. The total estimated fair
value of assets acquired in the merger transaction is comprised of the
following:
Estimated value of 606,109 shares of
outstanding common stock of Elmer's
(other than CBW ownership) at the
date of the merger $ 2,803,000
Assumed liabilities 2,123,804
Accrued expenses related to the transaction 20,000
Deferred income taxes 320,000
-----------
$ 5,266,804
===========
The purchase price has been allocated to the assets to be acquired and
obligations to be assumed, based on the estimate of the 46.2% proportionate fair
values of the assets and liabilities, as follows:
Current assets $ 839,988
Property , buildings and equipment 3,173,264
Intangible assets 1,220,701
Other assets 32,851
-----------
$ 5,266,804
===========
F-19
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
ACQUISITION OF GRASS VALLEY LTD., INC. (DBA RICHARD'S DELI AND PUB)
Effective March 31, 1999, Elmer's executed a stock exchange agreement with Grass
Valley Ltd., Inc. (GVL), a closely held Oregon corporation, in a transaction in
which Elmer's acquired 100% of the outstanding stock of GVL in consideration for
the payment by Elmer's of $110,000 in cash and the issuance of 209,620
restricted shares of Elmer's common stock to the GVL shareholders. GVL is now a
wholly-owned and operating subsidiary of the Company.
The total cost of the merger transaction is comprised of the following:
Cash $ 110,000
Estimated value of 209,620 shares of common stock of
Elmer's issued in connection with merger transaction 1,048,500
Assumed liabilities 181,161
Expenses related to the transaction 44,000
----------
$1,383,661
==========
The excess of the estimated fair value of the assets acquired ($1,383,661) over
the historical cost ($223,553) was allocated to goodwill ($1,160,108), as the
historical costs of all tangible assets was assumed to be equal to their fair
value.
SUMMARY
The following table represents the unaudited pro forma results of operations for
the year ended March 31, 1999 as if the acquisition of 53.8% of the outstanding
common stock of Elmer's, the merger of CBW with and into Elmer's and the
acquisition of GVL had occurred at the beginning of the respective periods.
These pro forma results have been prepared for comparative purposes only and are
not necessarily indicative of what would have occurred had the acquisitions been
made at the beginning of the respective periods, or of results which may occur
in the future.
YEAR ENDED
MARCH 31, 1999
--------------
Total revenue $ 21,231,597
Income from operations 1,649,526
Income before provision for income taxes 1,141,293
Net income 751,278
Basic earnings per share of common stock .45
Weighted-average number of shares outstanding 1,665,548
Number of Company owned stores 20
10. EMPLOYEE BENEFIT PLAN
The Company formed a 401(k) profit sharing plan on April 1, 2000 whereby
eligible employees may contribute up to 20% of their regular earnings. Employees
are eligible to
F-20
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
participate after one year of half-time employment with the Company and
attainment of 21 years of age. The plan provides that the Company can also make
matching and other contributions to the plan. The Company contributed $29,200 to
the plan for the year ended April 2, 2001.
11. STOCK OPTIONS
The Board of Directors adopted a stock option plan (Plan) which provides for the
award of incentive stock options to key employees and the award of nonqualified
stock options to employee and non-employee Directors. Under the terms of the
Plan, the option price is determined as the fair value of the Company's common
stock at the time the option is granted. Under the Plan, 369,600 shares of
common stock are authorized for issuance. The Board of Directors has approved an
increase in the number of shares available under the Plan of 150,400 shares, to
a total of 520,000 shares. This proposal will be submitted to the Company's
shareholders for approval at the Company's 2001 Annual Meeting. Some to the
options listed in the table below were granted in anticipation of shareholder
approval of the proposal. Options are exercisable upon vesting. Options
generally vest 20% annually and expire 10 - 15 years after the date of grant.
A summary of the Company's stock options as of April 2, 2001 and March 31, 2000
and 1999 and changes during the years ended is presented below:
WEIGHTED-
AVERAGE
OPTIONS EXERCISE
OUTSTANDING PRICE
------- -------
Balance, March 31, 1998 -
Options granted 187,688 $ 4.11
-------
Balance, March 31, 1999 187,688 4.11
Options granted 180,400 5.38
Options cancelled (17,325) 4.11
-------
Balance, March 31, 2000 350,763 4.77
Options granted 90,000 4.92
Options cancelled (20,900) 4.66
-------
Balance, April 2, 2001 419,863 $ 4.81
=======
The following table summarizes information about stock options outstanding as of
April 2, 2001:
F-21
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
OPTIONS EXERCISABLE
WEIGHTED- ------------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE - YEARS PRICE EXERCISABLE PRICE
----- ----------- ------------ ------- ----------- -----
$4.11 158,813 10.79 $4.11 84,315 $4.11
4.75 60,000 9.69 4.75 22,500 4.75
5.25 30,000 11.67 5.25 - 5.25
5.34 55,550 9.87 5.34 11,110 5.34
5.41 115,500 13.05 5.41 115,500 5.41
There were 100,137 shares of common stock reserved for the grant of stock
options under the Plan at April 2, 2001.
The FASB issued SFAS No. 123, Accounting for Stock-Based Compensation, which
defines a fair value based method of accounting for employee stock options and
similar equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost of those plans using
the method of accounting prescribed by APB 25. Entities electing to continue to
use the accounting treatment in APB 25 must make pro forma disclosures of net
income and, if presented, earnings per share, as if the fair value based method
of accounting defined in SFAS No. 123 had been adopted.
The Company complies with the disclosure-only provisions of SFAS No. 123 and
thus 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:
2001 2000 1999
-------- -------- --------
Net income - as reported $956,006 $939,549 $290,512
Net income - pro forma 798,951 652,404 290,512
Diluted earnings per share - as reported $.51 $.51 $.30
Diluted earnings per share - pro forma .43 .35 .30
The pro forma effect on net income for 2000 and 2001 is not representative of
the pro forma effect in future years because compensation expense related to
grants made in prior years is not considered. For purposes of the above pro
forma information, the fair value of each option grant was estimated at the date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
F-22
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
APRIL 2, MARCH 31, MARCH 31,
2001 2000 1999
-------- -------- --------
Risk-free interest rate 5.5% 6.0% 6.0%
Expected life 10 years 10 years 8.14 years
Expected volatility 26% 26% 59%
Expected dividend yield 0% 0% 0%
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts and additional awards are anticipated in future
years.
F-23