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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 1, 2002 OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO _________________
COMMISSION FILE NUMBER 0-14837
ELMER'S RESTAURANTS, INC.
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(Exact name of registrant as specified in its charter)
OREGON 93-0836824
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11802 S.E. Stark St.
Portland, Oregon 97216 (503) 252-1485
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(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 5, 2002: $8.9 million. For purposes of this calculation, officers and
directors are considered affiliates.
Number of shares of Common Stock outstanding at June 5, 2002: 2,058,034
Document Part of Form 10-K into which incorporated
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Proxy Statement for 2002 Part III
Annual Meeting of Shareholders
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TABLE OF CONTENTS
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Item of Form 10-K Page
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PART I....................................................................... 2
Item 1. Business....................................................... 2
Item 2. Properties..................................................... 9
Item 3. Legal Proceedings..............................................10
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..........................12
Item 8. Financial Statements and Supplementary Data ...................16
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..........................16
PART III.....................................................................17
Item 10. Directors and Executive Officers of the Registrant.............17
Item 11. Executive Compensation.........................................17
Item 12. Security Ownership of Certain Beneficial Owners and
Management...................................................17
Item 13. Certain Relationships and Related Transactions.................17
PART IV......................................................................17
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 10-K.....................................17
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.
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 ten Elmer's restaurants, five Mitzel's American Kitchen
restaurants and franchises 22 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 two business segments: restaurant
operations and restaurant franchisor. Information as to revenue, operating
profit, identifiable assets, depreciation and amortization expense and capital
expenditures for the Company's business segment for fiscal 2002, 2001 and 2000
is contained herein by reference to the Company's consolidated financial
statements.
The ten Company-owned Elmer's restaurants are located in: the Delta
Park section of Portland, Beaverton, Hillsboro, Albany and Springfield, Oregon;
Palm Springs, California; Boise, Idaho; and Vancouver, Tacoma and Lynnwood,
Washington. The Company operates five Mitzel's restaurants, 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 one 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 May 7, 2002 the Company sold three Elmer's restaurants located in
Grants Pass, Medford and Roseburg, Oregon to a buyer who signed 25-year
franchise agreements for the three restaurants and agreed to open two new units
under a development agreement. This transaction is further described in Note 15
to the financial statements.
On April 15, 2002 the Company acquired an Elmer's restaurant in
Vancouver Washington from franchisee and former board member, Paul Welch. The
Company paid total consideration of approximately $250,000 and entered into a
long-term occupancy lease with an unaffiliated landlord.
On April 12, 2001 the Company acquired the Sandpiper Restaurant in
Roseburg, Oregon for $164,000 in cash and assumed liabilities. The Company
entered into a long-term occupancy lease. The Company has since sold the
location and assigned the occupancy lease to the buyer in the May 7, 2002
transaction listed above.
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.
The Company intends to focus future growth primarily through new and
existing franchisees, with an emphasis on experienced single and multi-unit
operators and locations in the western states where the Company has an
established presence. The Company will pursue strategic acquisitions, new
restaurant openings and other growth opportunities where they support the
Company's strategic focus. From time to time, the Company may refranchise, sell
or otherwise dispose of restaurants.
2
ELMER'S. BREAKFAST. LUNCH. DINNER
The Company franchises or operates a total of 32 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. 22 of the restaurants have a lounge with
seating capacities ranging from 15 to 75 people. The normal hours of operation
are from 6 a.m. to 10 or 11 p.m. and to 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 batters and other key menu items 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. Guests at dinner may choose from steak, seafood, chicken, and a
variety of home-style items such as pot roast and turkey. 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 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 beer and wine service, attentive wait staff, lottery games,
entertaining atmosphere, distinctive decor and consistently high-quality meals.
3
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 other western states.
The primary criteria considered by the Company in the selection, review and
approval of prospective franchisees is the availability of adequate capital 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, pays a fee for 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 franchisee is able to capitalize on a business concept without, in
many cases, having to invest substantial capital to develop name recognition,
menu items, logos and the like. The franchisor is able to expand its business
without having to invest substantial capital in property, buildings and
equipment.
EXISTING FRANCHISEES. The Company's 22 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 based on 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 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
4
respective areas. All exclusive area franchise agreements have expired or
lapsed, except for Clackamas County, Oregon. 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 gift certificates. The
Company coordinates franchisees' purchases to obtain volume discounts.
Franchisees bear all cost involved in the operation of their restaurants.
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 10 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. The Company purchased an Elmer's
restaurant located in Vancouver, Washington in April 2002. Of the 10 Elmer's
restaurants, seven 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.
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. 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
5
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 1, 2002, the Company employed 248 persons on a full-time
basis, of whom 20 were corporate office personnel and 228 were restaurant
personnel. At that date, the Company also employed 547 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 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 for
quarterly bonuses based upon the achievement of certain defined goals.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of June 5, 2002, the executive officers and other key personnel of
the Company were as set forth below.
Name Age Position
--------------- --- --------
Bruce Davis 41 President
William Service 41 Chief Executive Officer
Jerry Scott 48 Vice President, Operations
Dennis Miller 53 Secretary
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,
and has more than 30 years experience in restaurant operations 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.
Dennis Miller has served as Secretary since April 2002 and 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.
6
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. The Company promotes the Mitzel's restaurants with a
frequent guest program and local store marketing initiatives. At the present
time, the Company relies principally on word-of-mouth advertising and catering
exposure for advertising of Ashley's and Richard's.
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.
7
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.
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 2002. The lease expires November 30,
2006.
COMPANY-OWNED RESTAURANTS
COMPANY-OWNED PROPERTIES. The Company owns the real property upon which
the following three 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.
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 (Sublet - May, 2002) 6,350 December, 2006
Hillsboro, Oregon 6,350 January, 2011
Medford, Oregon (Assigned - May, 2002) 6,300 May, 2008
Albany, Oregon 5,460 February, 2008
Roseburg, Oregon (Assigned - May, 2002) 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
Vancouver, Washington (Acquired April, 2002) 5,900 February, 2004
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 January, 2004
Springfield, Oregon (Thurston) 1,200 June, 2002
8
Richard's Locations
-------------------
Aloha, Oregon 1,727 November, 2002
Hillsboro, Oregon (North) 1,092 August, 2004
Hillsboro, Oregon (South) 2,510 June, 2002
Tigard, Oregon 1,743 December, 2002
The Company believes that its facilities are generally in good
condition and that they are suitable for their current uses. The Company engages
periodically in remodeling and other capital improvement projects designed to
expand and improve the efficiency of its facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company is periodically involved in litigation relating to claims
arising in the normal course of 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
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 1, 2002 April 2, 2001
------------------------------------------------
High Low High Low
1st Quarter 4.86 4.52 5.63 4.30
2nd Quarter 4.76 4.31 6.13 4.87
3rd Quarter 5.43 4.40 5.42 4.17
4th Quarter 5.20 4.33 5.48 4.32
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, in
August 2000 a ten-percent stock dividend and in March 2002 a five-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 May 28, 2002, the Company had 187 shareholders of record. The
Company estimates there are approximately 425 beneficial shareholders.
UNREGISTERED SALES OF STOCK
Sales of unregistered Common Stock made by the Company in the last
three fiscal years are as follows:
9
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.
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 1, 2002 and
April 2, 2001 and for each of the three years in the period ended April 1, 2002
are derived from the audited financial statements included elsewhere herein. The
selected financial data set forth below for the Company as of March 31, 2000,
1999 and 1998 are derived from the consolidated financial statements not
included elsewhere herein.
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
April 1, April 2, March 31, March 31, March 31,
For the fiscal years ended 2002 2001 2000 1999 1998
-------------------------- ----------- ----------- ----------- ----------- -----------
Revenues $33,775,648 $25,852,336 $22,179,574 $11,952,728 $ 1,591,293
Net income 1,065,856 956,006 939,549 290,512 205,270
Net income per share 0.52 0.48 0.49 0.29 0.22
Total assets 16,685,283 16,374,147 13,847,208 13,046,684 259,675
Long-term notes payable,
less current portion 5,366,050 5,798,769 5,124,130 5,703,539 50,000
Total liabilities 8,396,191 9,129,937 8,209,004 8,348,029 258,962
Total shareholder's equity 8,289,092 7,244,210 5,638,204 4,698,655 713
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 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 Grass
Valley Ltd. 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.
The following table presents summarized quarterly results.
Quarter 1 Quarter 2 Quarter 3 Quarter 4
----------- ----------- ----------- -----------
FISCAL 2002
Revenues $10,267,510 $ 8,193,871 $ 7,905,618 $ 7,408,649
Operating Income 628,475 503,955 479,760 422,191
Net Income 314,787 256,305 242,942 251,822
Net Income per share $ 0.15 $ 0.13 $ 0.12 $ 0.12
=========== =========== =========== ===========
FISCAL 2001
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 $ 0.16 $ 0.14 $ 0.09 $ 0.09
=========== =========== =========== ===========
10
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.
CRITICAL ACCOUNTING POLICIES
The Company's reported results are affected by the application of
certain accounting policies that require subjective or complex judgements. These
judgements involve estimates that are inherently uncertain and may have a
significant impact on our quarterly or annual results of operations and
financial condition. Changes in these estimates and judgements could have
significant effects on the Company's results of operations and financial
condition in future years. We believe the Company's most critical accounting
policies cover accounting for long-lived assets - specifically property,
buildings and equipment depreciation thereon and the valuation of intangible
assets. Additional critical accounting policies govern revenue recognition and
accounting for stock options.
Property, Buildings and Equipment
---------------------------------
When the Company purchases fixed assets, those assets are recorded at
cost. However, when the Company acquires an operating restaurant or business,
the Company must allocate the purchase price between the fair market value of
the tangible assets acquired and any excess to goodwill. The fair market value
of restaurant equipment fixtures and furnishings in an operating restaurant is
difficult to separate from the going concern value of the restaurant. Most of
the value of the equipment is due to the fact that it is in the restaurant and
working. The Company values in place equipment with reference to replacement
cost, age and condition, and utility in its intended use.
Depreciation
------------
Property, buildings and equipment are depreciated using the
straight-line method over their estimated useful lives. Leasehold improvements
are amortized on a straight-line method over their estimated useful lives or the
term of the related lease, whichever is shorter. Differences between the
realized lives and the estimated lives could result in changes to the Company's
results from operations in future years, as well as changes in the rate of
recurring capital expenditures.
Intangible Assets
-----------------
The Company reviews the carrying value of the Company's intangible
assets for impairment annually in accordance with FAS 142. These tests are
primarily based on the cashflow of the underlying business units and the value
of those cashflows in the marketplace. Changes in those cashflows or in the
"multiples" assigned by the marketplace could result in the impairment of those
assets and a subsequent writedown of goodwill.
Revenue Recognition
-------------------
The Company's revenue is primarily from cash and credit card
transactions. As such, restaurant revenue is generally recognized upon receipt
of cash or credit cards receipts. Franchise fees based upon a percent of the
franchisees gross sales are recognized as the franchisees' sales occur. Revenue
from the lottery, which includes traditional ticket based games and video poker
games is recorded on a commission basis, that is net of state regulated payouts.
Expenses are record using accrual accounting based upon when goods and services
are used.
Stock Options
-------------
The Company accounts for its stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. Based on
11
this methodology the company has not recorded any compensation costs related to
its stock options since all options have been issued at an exercise price equal
to or greater than the market value of the company's stock at the time of
issuance. Included in note 14 of the Company's financial statements is the pro
forma effect on the Company's net income and earnings per share if compensation
had been determined based on the estimated fair value of the options at the date
of grant consistent with the provisions of SFAS No. 123.
HIGHLIGHTS OF HISTORICAL RESULTS
The Company reported record net income of approximately $1,066,000, or
$.52 basic earnings per share for the year ended April 1, 2002, on sales of
approximately $33,776,000. The Company reported net income of approximately
$956,000, or $.48 per share for the year ended April 2, 2001. For the year ended
March 31, 2000, the Company reported net income of approximately $939,500 or
$.49 per share.
During the year ended April 1, 2002, total assets increased
approximately $311,000 to $16.7 million. Increases in cash and marketable
securities were largely offset by reductions in fixed assets due to the sale of
the real estate in Gresham, Oregon to the franchisee. During the year ended
April 1, 2002, total shareholders' equity increased approximately $1.1 million
to $8.3 million, primarily as a result of current year net income.
COMPARISON OF FISCAL YEAR 2002 RESULTS TO HISTORICAL RESULTS OF OPERATIONS
Dollar amounts in thousands except per share data
For the Year Ended
--------------------------------------------------------------------------
April 1, 2002 April 2, 2001 March 31, 2000
---------------------- ---------------------- ----------------------
Percent of Percent of Percent of
Amount Revenues Amount Revenues Amount Revenues
---------- -------- ---------- -------- ---------- --------
Revenue $ 33,776 100.0% $ 25,852 100.0% $ 22,180 100.0%
Restaurant costs and expenses 23,106 68.4 17,733 68.6 15,260 68.8
General and administrative expenses 8,635 25.6 6,251 24.2 5,023 22.6
Operating income 2,034 6.0 1,869 7.2 1,897 8.6
Non operating income (expense) (469) (1.4) (425) (1.6) (478) (2.2)
Net income 1,066 3.2 956 3.7 940 4.2
Earnings per share $ .52 $ .48 $ .49
Weighted average shares outstanding 2,058,955 1,977,227 1,923,633
REVENUE
For the Year Ended
--------------------------------------------------------------------------
April 1, 2002 April 2, 2001 March 31, 2000
---------------------- ---------------------- ----------------------
Percent of Percent of Percent of
Amount Revenues Amount Revenues Amount Revenues
---------- -------- ---------- -------- ---------- --------
Restaurant operations:
Restaurant sales $ 29,147 86.3% $ 21,720 84.0% $ 18,499 83.4%
Lottery 3,412 10.1 3,292 12.7 2,906 13.1
---------- -------- ---------- -------- ---------- --------
32,559 96.4 25,012 99.8 21,405 96.5
Franchise operations 1,217 3.6 840 3.2 775 3.5
---------- -------- ---------- -------- ---------- --------
Total revenue $ 33,776 100.0% $ 25,852 100.0% $ 22,180 100.0%
========== ======== ========== ======== ========== ========
12
REVENUES. Revenues for the year ended April 1, 2002 were 30.7% greater
than for the comparable period in 2001 reflecting the operations of the five
Mitzel's units for the full year as well as two additional Company-owned Elmer's
units. Same restaurant sales decreased 0.4% and franchise and administrative
services revenues increased 43.3% due to the sale of two 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
12.7% to 10.1%. Revenues for the year ended April 2, 2001 were 16.6% greater
than the comparable period in 2000, driven primarily by the December, 2000
acquisition of the five Mitzel's units.
RESTAURANT COSTS AND EXPENSES. As a percent of total revenue, food,
beverage and supply costs were 28.6% in 2002 compared to 2001 and 2000 of 27.5%
and 28.4% respectively. Labor was 31.2% of total revenue in 2002 compared to
results in 2001 and 2000 of 31.4% and 31.9% respectively. Occupancy,
depreciation, amortization and restaurant opening/closing expenses totaled 8.6%
of revenue in 2002 compared to 2001 and results in 2000 of 9.6% and 8.5%
respectively. In the first six months of the year, the Company saw a shift in
sales to lower margin items, resulting in an increase in food beverage and
supply costs as a percentage of revenues. This seems to have stabilized in the
second half of the year. The decrease in labor as a percentage of revenue in
2002 over fiscal year 2001 is driven by improved operating efficiencies, partly
offset by an increase in minimum wages rates in Washington and California.
Washington state minimum wage is now indexed to inflation and will be adjusted
annually. The decrease in occupancy, depreciation, amortization and restaurant
opening/closing expenses as a percentage of revenues in 2002 over 2001 is
primarily due to lower restaurant opening/closing expenses and the cessation of
amortization under FAS 142, which the Company adopted in the first quarter of
the fiscal year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were 25.6% of total revenue in fiscal 2002 compared 24.2% and 22.6% in
fiscal 2001 and 2000 respectively. 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 as well as an increase in resources devoted
to franchise operations.
NON OPERATING INCOME (EXPENSES). This primarily reflects net interest
expenses that were 1.4% of total revenues in 2002 compared to 1.6% and 2.2% in
fiscal 2001 and 2000 respectively. The reduction in net interest expense as a
percentage of revenues is primarily the result of increased revenues.
LIQUIDITY AND CAPITAL RESOURCES
As of April 1, 2002, the Company had cash and equivalents of
approximately $654,000 representing a decrease of approximately $487,000 during
the fiscal year. The decrease resulted from cash provided by operations totaling
approximately $1.69 million, less cash used in investing activities of
approximately $1.12 million and less cash used in financing activities of
approximately $1.06 million. Cash used in investing activities includes net
additions to available for sale securities of $1.17 million. In addition to the
regular replacement of depreciating restaurant assets, cash used in investing
activities included the acquisition and subsequent conversion to the Elmer's
concept of the Roseburg location. Cash used in financing activities includes
early retirement of the mortgage debt on the Gresham property of approximately
$435,000, as well as $303,000 contributed to a sinking fund for the Company's
convertible debt.
The Company's primary liquidity needs arise from debt service,
operating lease requirements and the funding of capital expenditures. As of
April 1, 2002, the Company had outstanding indebtedness of $2.7 million under
term loan facilities with GE Capital, $1.7 million in real estate loan
facilities with Wells Fargo Bank and $1.3 million in convertible notes issued in
a private placement.
The GE Capital loan was originated in June 2001 with proceeds used to
retire (without penalty) approximately $1.55 million in Wells Fargo term debt
and $1.25 million in a term loan facility with Eagles View Management. The GE
Capital loan fully amortizes over ten years, $1.70 million of the loan has a
fixed interest rate of 8.95%. Interest is variable at 385 basis points over 30
day commercial paper (currently approximately 5.6%) on the remaining $1.00
million portion of the note. The variable portion of the note can be fixed (385
basis points above five year treasuries) without penalty within the first two
years. The loan is collateralized by substantially all of the assets owned by
Elmer's Restaurants, Inc. (except for real estate assets).
The remaining Wells Fargo real estate debt has a weighted-average
maturity of 7.8 years, bears interest at an average of 8.2%, requires monthly
payments of principal and interest, and is collateralized by three real estate
assets.
The $1.3 million of convertible notes have a remaining maturity of
approximately six years, bear interest at 10%, require monthly interest-only
payments, payments into a Company-held sinking fund, and are subordinated to
other Company funded debt. The notes include a convertible feature that permits
the holder to convert the principal of the note into common
13
stock at any time at $6.19 per share. The Company can redeem the notes after
December 1, 2003 by paying a premium of 5% or less depending on the years
remaining to maturity.
Certain of the Company's debt agreements require compliance with debt
covenants. The most restrictive covenants require the Company to maintain a
maximum ratio of total liabilities, excluding subordinated debt, to tangible net
worth plus subordinated debt of 3.25 to 1.0, and a ratio of cash generation
(defined as net income before taxes, interest expense, depreciation and
amortization) to total interest expense plus the prior period current maturities
of long-term debt of at least 2.25 to 1.0. Management believes that the Company
is in compliance with such requirements.
Elmer's Restaurants, Inc., like most restaurant businesses, is able to
operate with nominal or deficit working capital because sales are for cash and
inventory turnover is rapid. Renovation and/or remodeling of existing
restaurants is either funded directly from available cash or, in some instances,
is financed through outside lenders. Construction or acquisition of new
restaurants is generally, although not always, financed by outside lenders.
The Company believes that it will continue to be able to obtain
adequate financing on acceptable terms for new restaurant construction and
acquisitions and that cash generated from operations will be adequate to meet
its financial needs and to pay operating expenses for the foreseeable future,
although no assurances can be given.
CONTRACTUAL OBLIGATIONS
The Company makes a range of contractual commitments in the ordinary
course of business and in conjunction with the acquisition and sale of
restaurants. The following table shows the Company's contractual obligations:
Commitment expiration period
Total amount 1 year 5 years
committed or less 1-3 years 4-5 years or more
-------------------------------------------------------------------------------------------
Term debt $ 4,343,383 $ 277,333 $ 629,734 $ 866,857 $ 2,569,459
Convertible debt 1,300,000 1,300,000
Operating Leases 6,577,654 1,202,994 2,310,424 1,501,209 1,563,027
Guarantees 2,607,900 243,000 537,250 586,950 1,240,700
-------------------------------------------------------------------------------------------
Totals $14,828,937 $ 1,723,327 $ 3,477,408 $ 2,955,016 $ 6,673,186
=========== =========== =========== =========== ===========
The covenants to the Company's term debt require the company to
maintain certain leverage and cash flow ratios (discusses in detail in the
footnotes to the financial statements.) The Company believes it is in compliance
with all debt covenants as of the fiscal year ended April 1, 2002, and the
Company expects it will continue to be in compliance. However, in the event the
company were out of compliance with the debt covenants, the terms of the loan
agreements generally provide for the acceleration of repayment.
The Company has issued promissory notes, convertible at the option of
the Holder, into common stock at $6.19 per share. The likelihood of conversion
increases with any increase in the market price of the Company's common stock
above $6.19.
The Company has signed long term occupancy leases for all but three of
its restaurant locations. These leases are recorded as operating leases, and
costs are expensed as they become due.
Under the terms of lease assignment agreements, the Company has
guaranteed certain franchisee occupancy leases five years. In one case the
guarantee could be extended for up to 16 years. In all cases these guarantees
are in turn, personally guaranteed by the franchisee. In the event the
franchisee defaulted on the occupancy lease, the Company could be required to
pay all rent and other amounts due under the terms of the lease for the
remainder of the guarantee term. In the event of default, the Company expects it
would exercise its right to reoccupy and continue to operate the restaurants as
Elmer's Breakfast. Lunch. Dinner(TM) These guarantees are further discussed in
Note 15 of the financial statements.
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
1, 2002, 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 2002, fiscal 2001 or fiscal 2000. Substantial increases in costs could
14
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" 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 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 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; 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 and
marketable securities. Of the Company's long-term debt outstanding at April 1,
2002, $951,000 was accruing interest at a variable rate of 3.85% over 30-day
commercial paper. The Companies marketable securities are largely invested in
mutual funds whose underlying assets are interest paying debt with a maturity of
less than five years. A rise in prevailing interest rates could have adverse
effects on the Company's financial condition and results of operations.
PRINCIPAL AMOUNT BY EXPECTED MATURITY
($ in thousands)
Fiscal Year 2003 2004 2005 2006 Thereafter Total Fair Value
--------------------- ------ ------ ------ ------ ------ ------ ------
Variable rate debt $73.3 $79.1 $85.0 $92.4 $620.9 $950.7 $950.7
Average interest rate 5.6% 5.6% 5.6% 5.6% 5.6%
(3.85% over 30-day
Commercial Paper)
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 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 Company's Audit Committee and
approved by the Board of Directors.
PricewaterhouseCoopers LLP 's reports on the financial statements for
the years ended April 2, 2001 and March 31, 2000 contained no adverse opinion
nor disclaimer of opinion, nor were such reports qualified or modified as to
15
uncertainty, audit scope, or accounting principles. During the fiscal years
ended April 2, 2001 and March 31, 2000, 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 "2002 Proxy Statement") for its 2002 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 2002 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is included under
the caption "Executive Compensation" in the 2002 Proxy Statement is incorporated
herein by reference.
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 2002 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 2002 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
-----------
Auditors' Reports.........................................................F-1
Consolidated Balance Sheets at April 1, 2002 and April 2, 2001............F-3
Consolidated Statements of Operations for the years ended
April 1, 2002, April 2, 2001 and March 31, 2000...........................F-4
Consolidated Statements of Changes in Shareholders' Equity for
the years ended April 1, 2002, April 2, 2001 and March 31, 2000...........F-5
Consolidated Statements of Cash Flows for the years ended
April 1, 2002, April 2, 2001 and March 31, 2000...........................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.
16
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 14, 2002
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 June 14, 2002
---------------------- & President
Bruce N. Davis
/s/ William W. Service Chief Executive Officer June 14, 2002
---------------------- & Director
William W. Service (Principal Executive &
Financial Officer)
/s/ Thomas C. Connor Director June 14, 2002
----------------------
Thomas C. Connor
/s/ Corydon H. Jensen Director June 14, 2002
----------------------
Corydon H. Jensen
/s/ Richard Williams Director June 14, 2002
----------------------
Richard Williams
/s/ Donald Woolley Director June 14, 2002
----------------------
Donald Woolley
17
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Elmer's Restaurants, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Elmer's
Restaurants, Inc. and Subsidiaries (the Company) as of April 1, 2002, and April
2, 2001, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for the years 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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 audits provide 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 1, 2002, and April 2, 2001, and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
Moss Adams LLP
Portland, Oregon
May 22, 2002
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Elmer's Restaurants, Inc.
In our opinion, the consolidated statements of income, of changes in
shareholders' equity (deficit) and of cash flows for the year ended March 31,
2000 (included in the Elmer's Restaurants, Inc. Form 10-K for the fiscal year
ended April 1, 2002) present fairly, in all material respects, the results of
operations and cash flows of Elmer's Restaurants, Inc. and Subsidiaries for the
year ended March 31, 2000, 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 audit. We conducted our audit
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 principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Portland, Oregon
May 23, 2000
F-2
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
April 1, April 2,
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 654,211 $ 1,141,016
Marketable securities 1,149,171 --
Accounts and franchise fees receivable 315,063 316,529
Notes receivable - related parties, current portion 372,712 200,950
Inventories 411,008 368,059
Prepaid expenses and other 133,424 147,783
Income taxes receivable 114,117 61,625
------------ ------------
Total current assets 3,149,706 2,235,962
Notes receivable - related parties, net of current portion 203,045 --
Property, buildings, and equipment, net 7,654,097 8,441,867
Goodwill 4,699,164 4,642,152
Intangible assets 602,709 602,709
Principal debt service account for convertible debt 305,019 --
Other assets 274,588 248,412
------------ ------------
Total assets $ 16,685,283 $ 16,374,147
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, current portion $ 277,333 $ 569,327
Accounts payable 1,483,823 1,389,195
Accrued expenses 174,120 209,821
Accrued payroll and related taxes 403,141 390,825
------------ ------------
Total current liabilities 2,338,417 2,559,168
Notes payable, net of current portion 5,366,050 5,798,769
Deferred income taxes 691,724 772,000
------------ ------------
Total liabilities 8,396,191 9,129,937
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY
Common stock, no par value, 10,000,000 shares authorized;
2,058,034 and 1,962,032 shares issued and oustanding
at April 1, 2002, and April 2, 2001, respectively 7,371,400 6,871,190
Retained earnings 929,266 373,020
Accumulated other comprehensive loss, net of taxes (11,574) --
------------ ------------
Total shareholders' equity 8,289,092 7,244,210
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 16,685,283 $ 16,374,147
============ ============
See accompanying notes. F-3
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
For The Years Ended
------------------------------------------------------
April 1, April 2, March 31,
2002 2001 2000
------------ ------------ ------------
REVENUES $ 33,775,648 $ 25,852,336 $ 22,179,574
------------ ------------ ------------
COSTS AND EXPENSES
Cost of restaurant sales:
Food and beverage 9,672,077 7,121,428 6,298,727
Labor and related 10,526,212 8,126,818 7,082,100
Occupancy costs 2,067,785 1,598,805 1,248,224
Depreciation and amortization 786,593 745,744 630,089
Restaurant opening/closing expenses 53,382 139,909 --
General and administrative expenses 8,635,218 6,250,576 5,022,965
------------ ------------ ------------
Total costs and expenses 31,741,267 23,983,280 20,282,105
------------ ------------ ------------
INCOME FROM OPERATIONS 2,034,381 1,869,056 1,897,469
OTHER INCOME (EXPENSE)
Interest income 109,444 138,845 91,314
Interest expense (572,210) (591,311) (570,334)
(Loss) gain on disposition of assets (5,759) 27,528 1,100
------------ ------------ ------------
Income before provision for income taxes 1,565,856 1,444,118 1,419,549
Income tax provision (500,000) (488,112) (480,000)
------------ ------------ ------------
NET INCOME $ 1,065,856 $ 956,006 $ 939,549
============ ============ ============
PER SHARE DATA:
Net income per share - basic $ 0.52 $ 0.48 $ 0.49
============ ============ ============
Weighted average number of common
shares outstanding - basic 2,058,955 1,977,227 1,923,633
============ ============ ============
Net income per share - diluted $ 0.51 $ 0.48 $ 0.48
============ ============ ============
Weighted average number of common
shares outstanding - diluted 2,074,073 2,013,832 1,975,444
============ ============ ============
See accompanying notes. F-4
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------------------
Retained Accumulated
Common Stock Earnings Other Total
---------------------------- (Accumulated Comprehensive Shareholders'
Shares Amount Deficit) Loss Equity
----------- ----------- ----------- ----------- -----------
BALANCE, March 31, 1999 1,586,229 $ 4,746,520 $ (47,865) $ -- $ 4,698,655
5% stock dividend
(November 30, 1999) 79,319 495,744 (495,744) -- --
Net income -- -- 939,549 -- 939,549
----------- ----------- ----------- ----------- -----------
BALANCE, March 31, 2000 1,665,548 5,242,264 395,940 -- 5,638,204
10% stock dividend
(August 18, 2000) 166,484 978,926 (978,926) -- --
Issuance of common stock in
conjunction with acquistion
of Mitzel's American Kitchen
restaurants (December 13, 2000) 130,000 650,000 -- -- 650,000
Net income -- -- 956,006 -- 956,006
----------- ----------- ----------- ----------- -----------
BALANCE, April 2, 2001 1,962,032 6,871,190 373,020 -- 7,244,210
Stock repurchase
(October 3, 2001) (2,000) (9,400) -- -- (9,400)
5% stock dividend
(March 7, 2002) 98,002 509,610 (509,610) -- --
Comprehensive income:
Net income -- -- 1,065,856 -- 1,065,856
Change in net unrealized loss
on securities available-for-
sale, net of taxes -- -- -- (11,574) (11,574)
-----------
Total comprehensive income -- -- -- -- 1,054,282
----------- ----------- ----------- ----------- -----------
BALANCE, April 1, 2002 2,058,034 $ 7,371,400 $ 929,266 $ (11,574) $ 8,289,092
=========== =========== =========== =========== ===========
See accompanying notes. F-5
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
For the Years Ended
---------------------------------------------
April 1, April 2, March 31,
2002 2001 2000
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,065,856 $ 956,006 $ 939,549
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 786,593 745,744 630,089
Deferred income taxes (73,000) (21,000) 20,000
Loss (gain) on disposition of assets 5,759 (27,528) (1,100)
Changes in assets and liabilities:
Accounts and franchise fees receivable, inventories,
and prepaids (68,806) (127,282) 5,016
Other assets (43,582) (14,702) 20,942
Accounts payable 94,628 25,141 --
Accrued expenses (23,385) 550,136 115,473
Income taxes (52,492) (341,395) 387,002
----------- ----------- -----------
Net cash from operating activities 1,691,571 1,719,979 2,142,112
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, buildings, and equipment (793,520) (1,142,010) (527,165)
Purchases of available-for-sale securities (1,476,353) -- --
Proceeds from the sale of available-for-sale securities 305,904 -- --
Business acquisition (128,000) (1,507,472) --
Issuance of notes receivable - related parties (75,508) (275,000) --
Principal collected on notes receivable - related parties 148,473 33,742 --
Proceeds from sale of assets 912,938 1,100 --
Repurchase of common stock (9,400) -- --
----------- ----------- -----------
Net cash from investing activities (1,115,466) (2,890,740) (526,065)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of 10% convertible notes 1,300,000 -- --
Payments on notes payable (760,319) (628,433) (579,409)
Contribution to principal debt service account (302,591) -- --
----------- ----------- -----------
Net cash from financing activities (1,062,910) 671,567 (579,409)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (486,805) (499,194) 1,036,638
CASH AND CASH EQUIVALENTS, beginning of year 1,141,016 1,640,210 603,572
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 654,211 $ 1,141,016 $ 1,640,210
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest $ 572,210 $ 591,311 $ 582,887
=========== =========== ===========
Income taxes $ 667,300 $ 850,507 $ 73,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH
TRANSACTIONS
Sale of property and equipment for notes receivable $ -- $ 142,000 $ --
=========== =========== ===========
Shares issued in conjunction with Mitzel's acquisition $ -- $ 650,000 $ --
=========== =========== ===========
Stock dividends declared $ 509,610 $ 988,915 $ 495,744
=========== =========== ===========
Change in unrealized loss on available-for-sale securities,
net of taxes $ 11,574 $ -- $ --
=========== =========== ===========
Note payable issued in conjunction with acquisition of
certain assets and goodwill of a company $ 35,606 $ -- $ --
=========== =========== ===========
Accrued interest classified as note receivable $ 10,182 $ -- $ --
=========== =========== ===========
Note receivable issued for franchise fee receivable $ 31,500 $ -- $ --
=========== =========== ===========
See accompanying notes. F-6
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION - As of April 1, 2002, Elmer's Restaurants, Inc., an Oregon
corporation, and Subsidiaries (the Company) owned and operated 12 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.
DinnerTM for a specific restaurant or region. Franchises and Company-owned
restaurants are located throughout the western United States.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Elmer's Restaurants, Inc. and its wholly-owned subsidiaries, CBW,
Inc., CBW Food Company LLC, Grass Valley Ltd., Inc., and Elmer's Pancake & Steak
House, Inc. All material intercompany accounts and transactions have been
eliminated.
USE OF ESTIMATES - The preparation of the consolidated financial statements, in
conformity with accounting 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 2002 ended April 1, 2002, and 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 1, 2002 and April 2, 2001,
because of the relatively short maturity of these instruments. The carrying
value of notes receivable approximated fair value as of April 1, 2002, and April
2, 2001, based upon interest rates and terms available for similar investments.
The carrying value of notes payable approximated fair value as of April 1, 2002,
and April 2, 2001, based upon interest rates and terms available for the same or
similar loans.
CASH AND CASH EQUIVALENTS - For purposes of the statements 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's cash equivalents consist of interest-bearing deposits with major
banks and money market accounts. Management routinely reviews these investments
in order to limit the amount of credit exposure to any one financial
institution.
INVESTMENTS - The Company classifies its marketable securities as
"available-for-sale." Securities classified as available-for-sale are carried in
the financial statements at fair value based on quoted market prices. Realized
gains and losses, determined using the first-in, first-out (FIFO) method, are
included in earnings; unrealized holding gains and losses are reported in other
comprehensive income.
CONCENTRATIONS OF CREDIT RISK - Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of cash
deposits, marketable securities, and accounts receivable. The Company places its
cash deposits with federally insured financial institutions. As of April 1,
2002, the Company's deposits were in excess of the federal insurance limits of
$100,000. The Company maintained investment accounts with combined balances of
$1,399,465. The funds in these
F-7
--------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
accounts were invested in mutual funds, corporate bonds, and equity securities.
Future changes in market prices may make such investments less valuable.
Accounts receivable balances consist primarily of franchise fees receivable,
which are deemed fully collectible by the Company.
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 subject to depreciation,
the related costs and accumulated depreciation are removed and resulting gains
and losses are reflected in the consolidated statements of income.
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 are less than the
estimated fair value.
ADVERTISING - Advertising and promotional costs are expensed as incurred.
Advertising and promotional expenses were $318,081, $406,987, and $274,675 for
the years ending April 1, 2002, April 2, 2001, and March 31, 2000, respectively.
Company-owned and franchise restaurants contribute 1% of gross sales to a common
advertising fund maintained by the Company.
DERIVATIVE FINANCIAL INSTRUMENTS - In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 also requires that changes in
the derivative instrument's fair value be recognized currently in results of
operations unless specific hedge accounting criteria are met. SFAS No. 133, as
amended by SFAS No. 137, is effective for fiscal years beginning after June 15,
2000. 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 changed the Company's interest rate
exposure on the covered portion to a fixed percentage. The interest rate swap
agreement expired on March 1, 2002.
REVENUE RECOGNITION - 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. The terms of the franchise
agreements are generally 25 years. Continuing franchise fees (based on a
percentage of sales) are recognized as revenue each month based on the
franchisees' monthly sales activity. Lottery revenues are recognized net of
prizes and the State of Oregon's share of proceeds. Net lottery revenues were
$3,412,000, $3,292,000, and $2,906,000 for the years ending April 1, 2002, April
2, 2001, and March 31, 2000, respectively.
F-8
--------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
INCOME TAXES - 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.
Income tax expense is the tax payable for the year, and the change during the
year, in net deferred income tax assets and liabilities.
STOCK OPTIONS - SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, defines a
fair value based method of accounting for employee stock options and similar
equity instruments, and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. It encourages,
but does not require, companies to record compensation costs for stock-based
employee compensation plans at fair value. The Company has chosen to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations.
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, 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 stock dividends.
RECLASSIFICATION - A reclassification has been made to the 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 2001 and 2000 consolidated financial statements
have been reclassified to conform to the 2002 presentation. Net income and cash
flows were not affected by the reclassifications.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - In June 2001, the FASB issued
SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. SFAS No. 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development,
and/or the normal operation of a long-lived asset, except for certain
obligations of lessees. As used in SFAS No. 143, a legal obligation is an
obligation that a party is required to settle as a result of an existing or
enacted law, statute, ordinance, or a written or oral contract, or by legal
construction for a contract under the doctrine of promissory estopel. This
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002, although earlier application is encouraged. The
Company does not expect that application of the provisions of this statement
will have a material impact on the Company's financial statements.
F-9
--------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
In October 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 establishes a single accounting
model, based on the framework established in SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, for
long-lived assets to be disposed of by sale, and resolves significant
implementation issues related to SFAS No. 121. SFAS No. 144 is effective for
financial statements issued for fiscal years beginning after December 2001,
although earlier application is encouraged. The Company does not expect that
application of the provisions of this statement will have a material impact on
the Company's financial statements.
NOTE 2 - MARKETABLE SECURITIES
Cost and fair value of available-for-sale marketable debt and equity securities
at April 1, 2002, are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Losses Value
---------- ---------- ---------- ----------
Mutual funds $1,251,344 $ 13,481 $ 36,011 $1,228,814
Corporate bonds 91,347 -- 2,477 88,870
Equity securities 75,624 7,297 1,140 81,781
---------- ---------- ---------- ----------
$1,418,315 $ 20,778 $ 39,628 $1,399,465
========== ========== ========== ==========
These investments are classified on the balance sheet as follows:
Marketable Money
Securities Market Total
---------- ---------- ----------
Marketable securities (current asset) $1,149,171 $ -- $1,149,171
Bond sinking fund (noncurrent asset) 250,294 54,725 305,019
---------- ---------- ----------
$1,399,465 $ 54,725 $1,454,190
========== ========== ==========
Net unrealized holding losses on available-for-sale securities in the amount of
$18,850 for the year-end April 1, 2002, have been included in accumulated other
comprehensive income, net of income taxes of $7,276. For the year ended April 1,
2002, realized losses on sales of available-for-sale securities were $6,857 and
are included in other income. There were no marketable securities held by the
Company at April 2, 2001.
F-10
--------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3 - NOTES RECEIVABLE - RELATED PARTIES
Notes receivable - related parties consist of the following:
April 1, April 2,
2002 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 $ 154,889 $ 76,199
Note receivable bearing interest at 8%, due on or
before October 15, 2002, secured by a franchise
agreement and restaurant furniture, fixtures, and
equipment 48,266 115,124
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 135,460 191,935
Notes receivable from franchisees, bearing interest
from 12% to 14%, due on or before October 2002 34,097 20,737
--------- ---------
Total notes receivable - related parties 372,712 403,995
Less current portion (372,712) (200,950)
--------- ---------
Notes receivable - related parties, net of current portion $ -- $ 203,045
========= =========
NOTE 4 - PROPERTY, BUILDINGS, AND EQUIPMENT
April 1, April 2,
2002 2001
----------- -----------
Land $ 1,686,700 $ 2,246,700
Buildings 1,551,378 1,911,903
Furniture, fixtures, and equipment 3,981,618 3,508,920
Leasehold improvements 2,505,232 2,117,301
Automobiles 55,814 23,409
----------- -----------
9,780,742 9,808,233
Less accumulated depreciation and amortization (2,126,645) (1,366,366)
----------- -----------
$ 7,654,097 $ 8,441,867
=========== ===========
Depreciation expense charged to operations was $786,593, $598,927, and $484,204
for the years ending April 1, 2002, April 2, 2001, and March 31, 2000,
respectively.
F-11
--------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4 - PROPERTY, BUILDINGS, AND EQUIPMENT - (continued)
In October 2001, the Company's Gresham, Oregon franchise exercised their option
to purchase the land and building leased from the Company. Proceeds from the
transaction and the carrying value of the assets were $912,938 and $918,697,
respectively. The Company recognized a $5,759 loss as a result of this
transaction.
NOTE 5 - INCOME TAXES
The provision for income taxes consisted of current and deferred income tax
expense as follows:
April 1, April 2, March 31,
2002 2001 2000
--------- --------- ---------
Current:
Federal $ 487,000 $ 419,112 $ 400,000
State 86,000 90,000 60,000
--------- --------- ---------
573,000 509,112 460,000
Deferred (73,000) (21,000) 20,000
--------- --------- ---------
Income tax provision $ 500,000 $ 488,112 $ 480,000
========= ========= =========
A reconciliation of the federal income tax rate to the Company's effective
income tax rate is as follows:
April 1, April 2, March 31,
2002 2001 2000
--------------------- --------------------- ---------------------
Federal income tax at $ 534,000 34.0% $ 491,112 34.0% $ 481,000 34.0%
statutory rate
State income taxes, net of
federal income tax benefit 56,000 3.6 52,000 3.6 56,000 3.9
Nondeductible expenses 71,000 4.6 42,000 2.9 28,000 1.9
Federal income tax credits (161,000) (10.2) (97,000) (6.7) (85,000) (6.0)
--------- ---- --------- ---- --------- ----
$ 500,000 32.0% $ 488,112 33.8% $ 480,000 33.8%
========= ==== ========= ==== ========= ====
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 1, 2002, and April 2, 2001, the deferred tax liability of
$691,724 and $772,000, respectively, primarily represents the difference between
the book basis of property, buildings, and equipment and intangibles and the
related tax basis of approximately $2,056,000 and $2,270,000, respectively.
F-12
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ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 6 - NOTES PAYABLE
Notes payable consist of the following:
April 1, April 2,
2002 2001
----------- -----------
Note payable to financing company, principal and
interest due monthly at 8.95%, matures July
2011, secured by all assets of the Company $ 1,715,338 $ --
Note payable to financing company, principal and
interest due monthly, interest at average weekly
yield of 30-day Commercial Paper, matures July
2011, secured by all assets of the Company 950,676 --
Note payable to financial institution, payable in
monthly principal installments of $34,900 plus
interest at varying rates, refinanced in June 2001 -- 1,615,150
Note payable to financial institution, principal and
interest due monthly at 8.15%, repaid during 2002 -- 444,364
Note payable to financial institution, principal and
interest due monthly at 8.18%, matures January
2011, secured by real estate 1,150,590 1,194,538
Note payable to financial institution, principal and
interest due monthly at 8.25%, matures February
2008, secured by real estate 526,779 555,335
Note payable to financing company, interest due
monthly at 15%, subordinated, refinanced during
2002 -- 1,250,000
Note payable to individual, principal and interest
due monthly at 10%, repaid July 2001 -- 8,709
Convertible notes payable, interest payable
monthly at 10%, principal due December 2007
(Note 7) 1,300,000 1,300,000
----------- -----------
Total notes payable 5,643,383 6,368,096
Less current portion (277,333) (569,327)
----------- -----------
Notes payable, net of current portion $ 5,366,050 $ 5,798,769
=========== ===========
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 3.25 to 1.0,
and a ratio of cash generation (defined as net income before taxes, interest
expense, depreciation, and amortization) to total interest expense plus the
prior period current maturities of long-term debt of at least 2.25 to 1.0.
F-13
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ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 6 - NOTES PAYABLE - (continued)
Future maturities of notes payable for the following fiscal years are:
Years ended April 1, 2003 $ 277,333
2004 301,614
2005 328,120
2006 380,194
2007 486,663
Thereafter 3,869,459
----------
$5,643,383
==========
All interest costs incurred during the years ended April 1, 2002, April 1, 2001,
and March 31, 2000, have been expensed during the respective periods.
NOTE 7 - CONVERTIBLE DEBT
The Company's outstanding convertible debt of $1,300,000 at April 1, 2002, and
April 2, 2001, is convertible into shares of the Company's common stock at a
price of $6.19 per share. The notes are subject to conversion, in whole but not
in part, at any time following May 1, 2001, into unregistered shares of the
Company's common stock, at the option of the holder. The notes also contain a
call feature whereby the Company may call the notes for call prices designated
at a percent of the stated conversion price as follows:
For the period: Call Price
----------
December 1, 2003 through November 30, 2004 105%
December 1, 2004 through November 30, 2005 103%
December 1, 2005 through November 30, 2005 101%
December 1, 2005 through the maturity date 100%
Under the terms of the convertible debt notes, the Company is required to make
monthly payments (through December 2007) of principal in the amount of $15,476
to a principal debt service account. The balance in the account was $305,019 at
April 1, 2002. There was no balance in the account at April 2, 2001.
F-14
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ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities under operating lease agreements. Minimum
fiscal year rental commitments for the year ending April 1, 2002, for property,
buildings, and equipment with noncancellable terms of more than one year are:
Years ended April 1, 2003 $1,202,994
2004 1,192,628
2005 1,117,796
2006 868,496
2007 632,713
Thereafter 1,563,027
----------
$6,577,654
==========
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 $1,819,032, $1,431,000,
and $884,000 for the years ending April 1, 2002, April 2, 2001, and March 31,
2000, 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.
NOTE 9 - RELATED-PARTY TRANSACTIONS
Jaspers Food Management, Inc. (JFMI), is a privately held restaurant management
company. Certain officers and directors hold a majority interest in JFMI.
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. 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 Delis and four Richard's Deli and Pub restaurants. Labor and related
expenses were $842,000, $930,000, and $903,000 as of April 1, 2002, April 2,
2001, and March 31, 2000, respectively. Amounts outstanding with JFMI are as
follows:
April 1, April 2,
2002 2001
------- -------
Accounts (payable) receivable $(7,231) $26,364
======= =======
F-15
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ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10 - RESTAURANT AND FRANCHISE OPERATIONS
The consolidated results of operations and other selected financial information,
from restaurant and franchise operations, are presented after elimination of
intercompany transactions:
April 1, April 2, March 31,
2002 2001 2000
----------- ----------- -----------
Revenues:
Restaurant operations $32,558,606 $25,011,807 $21,404,597
Franchise operations 1,217,042 840,529 774,977
----------- ----------- -----------
Consolidated $33,775,648 $25,852,336 $22,179,574
=========== =========== ===========
Income from operations:
Restaurant operations $ 1,812,031 $ 1,731,667 $ 1,620,632
Franchise operations 222,350 137,389 276,837
----------- ----------- -----------
Consolidated $ 2,034,381 $ 1,869,056 $ 1,897,469
=========== =========== ===========
Capital and intangible expenditures:
Restaurant operations $ 945,497 $ 3,206,615 $ 493,333
Franchise operations 29,035 92,867 33,832
----------- ----------- -----------
Consolidated $ 974,532 $ 3,299,482 $ 527,165
=========== =========== ===========
Depreciation and amortization:
Restaurant operations $ 739,293 $ 692,755 $ 561,440
Franchise operations 47,300 52,989 68,649
----------- ----------- -----------
Consolidated $ 786,593 $ 745,744 $ 630,089
=========== =========== ===========
Assets:
Restaurant operations $16,114,277 $15,246,621 $12,495,871
Franchise operations 571,006 1,127,526 1,351,337
----------- ----------- -----------
Consolidated $16,685,283 $16,374,147 $13,847,208
=========== =========== ===========
The number of Company-owned stores and operating franchises is as follows:
April 1, April 2, March 31,
2002 2001 2000
---- ---- ----
Company-owned stores 27 26 21
Operating franchises 20 19 18
F-16
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ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11 - RESTAURANT ACQUISITIONS
ACQUISITION OF ROSEBURG RESTAURANT - On April 12, 2001, the Company executed an
asset purchase agreement with Sandpiper Restaurants of Oregon, LLC, acquiring
substantially all the assets of the Roseburg, Oregon, restaurant for $128,000 in
cash and a promissory note payable to seller for $35,600. The acquisition cost
of $164,000 was allocated to the fair market value of the assets acquired
($124,000) and the excess to goodwill ($40,000). The Company converted the
restaurant to the Elmer's concept, and opened in June 2001. As further described
in Note 15, the Company sold and refranchised this location on May 7, 2002.
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 converted the restaurant to the Elmer's concept, and opened
November of 2000. The acquisition cost of $345,630 was allocated to the fair
market value of the assets acquired ($109,110) and the excess to goodwill
($236,520).
ACQUISITION OF MITZEL'S RESTAURANTS - Effective December 13, 2000, 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 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 transactions 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 excess to goodwill ($787,354).
NOTE 12 - GOODWILL AND INTANGIBLE ASSETS
In July 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS and SFAS No.
142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 requires business
combinations initiated after June 30, 2001, to be accounted for using the
purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. Recorded goodwill and intangibles have
been evaluated against this new criteria and no changes were considered
necessary to the previously recognized intangibles. SFAS No. 142 requires the
use of a nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain intangibles
(those deemed to have indefinite life) will be reviewed for impairment and
written down and charged to results of operations only in the periods in which
the recorded value of goodwill and certain intangibles are determined to be more
than their fair value.
F-17
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ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 12 - GOODWILL AND INTANGIBLE ASSETS - (continued)
The Company adopted SFAS No. 142 effective April 3, 2001. The changes in the
carrying amount of goodwill and intangible assets for the year ended April 1,
2002, are as follows:
Goodwill Intangibles
---------- ----------
Balance as of April 3, 2001 $4,642,152 $ 602,709
Acquired during the year 57,012 --
---------- ----------
Balance as of April 1, 2002 $4,699,164 $ 602,709
========== ==========
Components of goodwill are tested for impairment in the third quarter. The fair
value of the reporting units as estimated using multiples of earnings before
interest, taxes, depreciation, and amortization (EBITDA) resulted in no
impairment of goodwill.
The pro forma effect of adjusted net income, basic and diluted earnings per
share are as follows:
April 1, April 2, March 31,
2002 2001 2000
------------- ------------- -------------
Net income:
Reported net income $ 1,065,856 $ 956,006 $ 939,549
Add back: Goodwill amortization,
net of tax -- 97,715 83,259
Add back: Trademark amortization,
net of tax -- 13,300 13,297
------------- ------------- -------------
Adjusted net income $ 1,065,856 $ 1,067,021 $ 1,036,105
============= ============= =============
Basic earnings per share:
Reported net income $ 0.52 $ 0.48 $ 0.49
Add back: Goodwill amortization,
net of tax -- 0.05 0.04
Add back: Trademark amortization,
net of tax -- 0.01 0.01
------------- ------------- -------------
Adjusted net income $ 0.52 $ 0.54 $ 0.54
============= ============= =============
Diluted earnings per share
Reported net income $ 0.51 $ 0.48 $ 0.48
Add back: Goodwill amortization,
net of tax -- 0.05 0.04
Add back: Trademark amortization,
net of tax -- 0.01 0.01
------------- ------------- -------------
Adjusted net income $ 0.51 $ 0.54 $ 0.53
============= ============= =============
All net income and per share amounts have been adjusted to reflect the March 7,
2002, 5% stock dividend.
F-18
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ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 13 - 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 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 $44,385 and $29,200 to the plan for the years ended April 1, 2002,
and April 2, 2001, respectively.
NOTE 14 - STOCK OPTIONS
The Board of Directors adopted the 1999 Stock Option Plan (the Plan) in February
1999 which provides for the award of incentive stock options to key employees
and the award of nonqualified stock options to employee and nonemployee
directors. Under the terms of the Plan, the exercise price of the options are
determined as the fair market value based on trading values of the Company's
common stock at the time the option is granted. Under the Plan, 546,000 shares
of common stock are authorized for issuance. Options are exercisable upon
vesting. Options generally vest 20% annually and expire 10 to 15 years after the
date of grant.
A summary of the Company's stock options and changes during the years ended
April 1, 2002, April 2, 2001, and March 31, 2000, is presented below:
Weighted-
Average
Options Exercise
Outstanding Price
-------- --------
Balance, March 31, 1999 197,072 $ 3.91
Options granted 189,420 5.12
Options cancelled (18,191) 3.91
-------
Balance, March 31, 2000 368,301 4.54
Options granted 94,500 4.69
Options cancelled (21,945) 4.44
-------
Balance, April 2, 2001 440,856 4.58
Options granted 8,400 4.76
Options cancelled (37,869) 4.44
-------
Balance, April 1, 2002 411,387 $ 4.59
======== ========
F-19
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ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 14 - STOCK OPTIONS - (continued)
The following table summarizes information on stock options outstanding as of
April 1, 2002:
Weighted- -------------------------
Average Weighted- Weighted-
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life - Years Price Exercisable Price
------- ----------- ------------ ------- ----------- -------
$ 3.92 148,565 9.74 $ 3.92 89,139 $ 3.92
4.52 57,750 8.70 4.52 30,450 4.52
4.76 8,400 14.92 4.76 -- 4.76
5.00 25,725 10.52 5.00 5,145 5.00
5.09 49,671 8.81 5.09 23,334 5.09
5.15 121,276 12.05 5.15 121,276 5.15
There were 134,613 shares of common stock reserved for the grant of stock
options under the Plan at April 1, 2002.
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:
April 1, April 2, March 31,
2002 2001 2000
------------- ----------- -----------
Net income - as reported $ 1,065,856 $ 956,006 $ 939,549
Net income - pro forma $ 905,671 $ 798,951 $ 652,404
Diluted earnings per share - as
reported $ 0.51 $ 0.48 $ 0.48
Diluted earnings per share -
pro forma $ 0.44 $ 0.40 $ 0.33
F-20
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ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 14 - STOCK OPTIONS - (continued)
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:
April 1, April 2, March 31,
2002 2001 2000
-------- -------- --------
Risk-free interest rate 5.28% 5.5% 6.0%
Expected life 10 years 10 years 10 years
Expected volatility 20% 26% 26%
Expected dividend yield 0% 0% 0%
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. The granting of additional stock options in future
years is anticipated.
NOTE 15 - SUBSEQUENT EVENTS
Effective May 7, 2002, the Company executed asset purchase and franchise
agreements with Southern Oregon Elmer's LLC (the Buyer), refranchising three of
the Company's Elmer's restaurants located in Grants Pass, Medford, and Roseburg,
Oregon. The Company has sold substantially all the assets of those locations in
consideration for $1,385,500 in cash and promissory notes valued at $349,500.
The Buyer has signed 25-year franchise agreements for each location and will
operate the locations under the Elmer's Breakfast. Lunch. DinnerTM name.
The Buyer has also signed a development agreement to open two additional
restaurants within seven years. The Buyer expects to open the first restaurant
before December 2002.
As a result of this transaction, the Company will report a one-time gain of
approximately $475,000 (net of tax effect) in the Company's first quarter ending
July 22, 2002.
The Company has agreed to provide a limited amount of seller financing. The
Company accepted a $270,000 note bearing interest at 9% per year, payable in 84
equal monthly payments; an approximately $79,500 note bearing interest at 9%,
payable in 24 equal monthly payments; and an approximately $106,000 inventory
note bearing interest at 12% and due in 90 days.
The Company has assigned its rights and obligations under the occupancy leases
for the Medford and Roseburg locations. The Company remains a guarantor of the
Medford lease until April 2007. The Company's guarantee of the Roseburg lease
could extend until 2018 if the Buyer exercises its options in 2003, 2008, and
2013. The Company has subleased the Grants Pass location to the Buyer for five
years under substantially the same terms and conditions as the underlying lease.
Provided all parties are in good standing under the lease at the end of the
sublease, the Grants Pass landlord has agreed to lease directly to the Buyer
under substantially similar terms.
In an unrelated transaction, the Company has acquired an Elmer's restaurant
located in Vancouver, Washington, from a franchisee and former Board member, for
approximately $250,000 in cash and assumed liabilities. The Company has entered
into a long-term occupancy lease at the same location, and will continue to
operate the location as an Elmer's restaurant. The Company expects to spend
approximately $100,000 on renovating this location.
F-21
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