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SECURITIES AND EXCHANGE COMMISSION
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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 MARCH 31, 2003 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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [_] No [X]
Aggregate market value of Common Stock held by nonaffiliates of the Registrant
at May 15, 2003: $8.5 million. For purposes of this calculation, officers and
directors are considered affiliates.
Number of shares of Common Stock outstanding at May 15, 2003: 2,041,709.
Document Part of Form 10-K into which incorporated
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Proxy Statement for 2003 Annual Part III
Meeting of Shareholders
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TABLE OF CONTENTS
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Item of Form 10-K Page
PART I.........................................................................2
Item 1. Business......................................................2
Item 2. Properties....................................................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 7a. Quantitative and Qualitative Disclosures About Market Risk...17
Item 8. Financial Statements and Supplementary Data..................18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................18
PART III......................................................................18
Item 10. Directors and Executive Officers of the Registrant............18
Item 11. Executive Compensation........................................18
Item 12. Security Ownership of Certain Beneficial Owners and
Management...................................................18
Item 13. Certain Relationships and Related Transactions................18
Item 14. Controls and Procedures.......................................18
PART IV.......................................................................19
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 10-K.........................................19
SIGNATURES....................................................................20
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 o
Lunch o Dinner(R)" and "Mitzel's American Kitchen", and operates delicatessen
restaurants under the names "Ashley's Cafe", "Richard's Deli and Pub" and
"Cooper'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 20 Elmer's restaurants in
six western states. The Company reports on a fiscal year, which ends on the
Monday nearest March 31st.
The Company's corporate office is located at 11802 S.E. Stark Street,
Portland, Oregon, 97216; telephone (503) 252-1485, fax (503) 257-7448. The
Company's website address is www.elmers-restaurants.com.
BUSINESS SEGMENTS
The Company primarily operates in two business segments: restaurant
operations and franchising the Elmer's restaurant concept. Information as to
revenue, operating profit, identifiable assets, depreciation and amortization
expense and capital expenditures for the Company's business segments for fiscal
2003, 2002 and 2001 is discussed in further detail in Note 10 to the financial
statements.
The ten Company-owned Elmer's restaurants are located the following states:
five in Oregon; three in Washington; one each in Idaho and California. The
Company operates five Mitzel's restaurants all located in the Puget Sound area
in the state of Washington. The Company operates six Ashley's restaurants, four
Richard's Deli and Pub restaurants and three Cooper's Deli restaurants all of
which are located in Oregon.
RECENT ACQUISITIONS AND DEVELOPMENTS
On January 6, 2003 the Company entered into a Sales and Purchase Agreement
for a one acre site in Beaverton, Oregon. The Company has placed a $30,000
deposit on the property and the balance of the purchase price, $745,000, is due
and payable at closing which is expected to be in July, 2003. The Company is not
obligated to purchase the site unless it is able to obtain the necessary land
use and other governmental approvals prior to July 7, 2003, subject to possible
extensions. If the Company acquires the site, the Company plans to build a
prototype restaurant at this site. The land and building costs would be financed
by new term loans of approximately $1.6 million.
On July 1, 2002, the Company acquired three Cooper's Deli units located in
Salem, Oregon from Cooper's Inc. The Cooper's units are substantially similar to
the Company's existing deli operations. Purchase consideration included $100,000
cash, a $66,500 two-year promissory note, $11,500 in assumed liabilities and the
assumption of a $155,000 promissory note due to the Company. The acquisition
cost of $333,000 included $100,000 in tangible assets and $233,000 in goodwill.
On June 28, 2002 the Company repurchased half ($650,000) of its 10%
convertible notes, paying a 15% premium over face value. As permitted by the
early adoption provisions of SFAS No. 145 - Rescission of FASB Statements No. 4,
44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections, the
total premium of $97,500 was recorded as a loss on extinguishment. In addition
to reducing the Company's debt, this transaction eliminates the potential
obligation to issue up to 105,000 shares of common stock upon conversion and
reduces the Company's required balances in the debt service account by half.
On May 7, 2002 Elmer's Restaurants, Inc. (the "Company") executed asset
purchase and franchise agreements with Southern Oregon Elmer's LLC (the
"Buyer"), refranchising three Company owned Elmer's restaurants located in
Grants Pass, Medford and Roseburg, Oregon. The Company sold substantially all
the assets of those locations in consideration for $1,385,500 in cash and
promissory notes valued at $349,500. The Buyer has signed 25-year franchise
agreements for each location and will operate the locations under the Elmer's
Breakfast o Lunch o Dinner(R) name.
The Buyer also signed a development agreement to open an additional two
units within five years. The first unit, located in Klamath Falls, Oregon,
opened October 23, 2002.
2
The principals of Southern Oregon Elmer's LLC, Robert Brutke and David
Thomason, have substantial industry experience. They are both past-presidents of
the Oregon Restaurant Association. Mr. Thomason operates a 10-unit Carl's Jr.
franchise from Carl Karcher Enterprises and Mr. Brutke has operated a number of
independent concepts in the southern Oregon market, including Brutke's Wagon
Wheel in Roseburg, Oregon.
As a result of this transaction, the Company posted a one-time gain of
approximately $504,000 or 25 cents per share, (net of tax effect) in the quarter
ending July 22, 2002. For the fiscal year ended April 1, 2002, revenues from the
three restaurants were $5.07 million, contributing $332,000 in earnings before
taxes and interest expense. If these three restaurants had been franchised
during the year ended April 1, 2002, pro forma franchise fee income would have
been approximately $245,000.
The Company agreed to provide a limited amount of seller financing. The
Company 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. To assist with the development
of the Klamath Falls restaurant, the Company granted an extension of the
inventory note, which has now been paid in full.
In valuing the restaurants, the Company considered discounted historical
cash flows, future capital spending requirements, as well as the impact on the
Company's franchise program. The Company believes the consideration paid to be
fair, from a financial point of view, to the Company's shareholders. The
franchise agreements with the Buyer are comparable to other recent Company
franchise agreements.
The Company has assigned its rights and obligations under the occupancy
leases for the Medford and Roseburg locations. The Company remains a guarantor
of the Medford lease until April 2007. The Company's guarantee of the Roseburg
lease could extend until 2018 if the Buyer exercises its options in 2003, 2008
and 2013. The Company has subleased the Grants Pass location to the Buyer for
five years under substantially the same terms and conditions as the underlying
master lease. Provided all parties are in good standing under the lease at the
end of the sublease, the Grants Pass landlord has agreed to lease directly to
the Buyer under substantially similar terms.
The Buyer has indemnified the Company against all losses incurred as a
result of the Company's obligations as a Guarantor. This indemnification is
personally guaranteed by Mssrs. Brutke and Thomason and their spouses. However,
in the event of default by the Buyer of the terms of the occupancy leases, and
the failure of Mssrs. Brutke and Thomason to make good on their personal
guarantees, the Company could be required to pay all rent and other amounts due
under the terms of the lease for the remainder of the guarantee term. In the
event of default, the Company expects it would exercise its right to reoccupy
and continue to operate the restaurants as Elmer's Breakfast o Lunch o
Dinner(R).
The Buyer's obligations under the franchise agreements, promissory notes,
lease assignments and sublease are guaranteed by the Buyer and personally by
Mssrs. Brutke and Thomason and their spouses.
April 15, 2002 the Company acquired an Elmer's restaurant located in
Vancouver, Washington from franchisee and former board member, Paul Welch for
approximately $250,000 in cash and assumed liabilities. The Company has entered
into a long-term occupancy lease at the same location, and continues to operate
the location as an Elmer's restaurant. The purchase price was allocated to the
tangible assets of the restaurant. The Company has spent approximately $148,000
remodeling the facility.
The Company reached a termination agreement with the Twin Falls franchisee
in December 2002 and the Longview franchisee in January 2003. For the fiscal
year ended March 31, 2003, the Company recorded less than $9,000 in franchise
fee revenues from these locations. Subsequent to year-end, the Company has
entered into a Franchise Agreement for Coeur d'Alene, Idaho. The Coeur d'Alene
location is under construction and expected to open in August 2003.
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.
3
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.
ELMER'S BREAKFAST o LUNCH o DINNER
The Company franchises or operates a total of 30 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 10,000 square feet with seating capacities
ranging from 120 to 265 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. Twenty-three 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 Mitzel's
American Kitchen 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, RICHARD'S DELI AND PUB AND COOPER'S DELI
The Company operates a total of six Ashley's restaurants, four Richard's
Delis and Pubs and three Cooper's Delis. They are substantially similar in
design, size and menu. Ten of the thirteen units are located in retail strip
mall locations, one is in a food court in a major indoor mall, and two are
free-standing buildings. 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, Richard's Delis and Pubs and
Cooper's Delis experience competition from either other moderately-priced,
casual dining and walk-through restaurants or
4
economy sandwich outlets. Ashley's, Richard's and Cooper'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.
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,
customer service experience, prior experience in operating full-service
restaurants, and ability to directly operate the restaurant. 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 23 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 period of
5 to 25-years. When they entered into franchising agreements, the existing
franchisees paid initial franchise fees of up to $35,000 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 a suitable free-standing
building, exclusive of land, furniture, fixtures and equipment, will range from
approximately $700,000 to $900,000, with actual costs dependent upon local
building requirements and construction conditions, as well as 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.
The Company also has an active program to convert existing restaurants to
the Elmer's concept. Candidates for conversion must meet the Company's
requirements for location, construction and demographic profile. Conversions
must also be consistent with the Elmer's brand image after remodeling.
Conversion costs typically range between $300,000 and $500,000.
5
There is no typical elapsed time from the signing of a franchise agreement
until a restaurant is open for business, although it normally takes 120 days
from the receipt of the building permits to construct a new restaurant facility.
Most restaurants have opened within 12 months of the date of the signing of the
franchise agreement. Franchisees bear all costs associated with the development
and construction of their restaurants. Although the Company has established
criteria to evaluate prospective franchisees, there can be no assurance that
franchisees will have the business abilities or access to financial resources
necessary to open the restaurants or that the franchisees will successfully
develop or operate restaurants in their franchise areas in a manner consistent
with the Company's concepts and standards.
AREA FRANCHISE AGREEMENTS. Under previous management, the Elmer's
franchising operation granted exclusive area franchise agreements, whereby
independent entities obtained the exclusive rights to develop Elmer's
restaurants within their respective areas. 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 range 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 costs 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 2002, 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, five Mitzel's American Kitchen restaurants
purchased December 13, 2000 and three Cooper's Delis purchased July 1, 2002.
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.
In January 2003, the Company entered into a Sales and Purchase Agreement
for a one acre site in Beaverton, Oregon. If the Company is able to obtain the
necessary land use and other governmental approvals, the Company plans on
building a
6
prototype restaurant at this location. The Company intends to use the prototype
restaurant to market the Elmer's concept to prospective franchisees and as a
training restaurant for franchise owners and managers.
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. These restaurants initially opened in 1995 and 1996. 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. The three Cooper's Delis were
acquired under a purchase agreement on July 1, 2002. All the restaurants operate
on leased property.
The Company and its franchisees coordinate the purchase of their food,
beverages and supplies from Company-approved and other suppliers. Management
monitors the quality of the food, beverages and supplies provided to the
restaurants. The Company believes that its continued efforts over time have
achieved cost savings, improved food quality and consistency and helped decrease
volatility of food and supply costs for the restaurants. All essential food and
beverage products are available or, upon short notice, could be made available
from alternate qualified suppliers. Therefore, management believes that the loss
of any one supplier would not have a material adverse effect on the Company.
EMPLOYEES
As of March 31, 2003, the Company employed 232 persons on a full-time
basis, of whom 22 were corporate office personnel and 210 were restaurant
personnel. At that date, the Company also employed 469 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 excellent. 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, wages and benefits that exceed 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 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 10, 2003, the executive officer and other key personnel of the
Company were as set forth below.
Name Age Position
---- --- --------
Bruce Davis 42 President and Chief Executive Officer
Gerald Scott 49 Vice President
Dennis Miller 54 Secretary and Corporate Controller
EXECUTIVE OFFICER
Bruce Davis has served as President and Chairman of Board of Directors
since August 1998. Mr. Davis has served as the Chief Executive Officer since
November 1, 2002. 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 resigned as Chief Executive Officer of the registrant for
personal reasons. The Board granted the request effective November 1, 2002.
Bruce Davis, the Company's President and Chairman, has assumed the
responsibilities of the C.E.O. Mr. Service remains an active member of the Board
and continues to serve as a strategic advisor to the Company.
7
KEY PERSONNEL
Gerald Scott has served as Vice President 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.
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 Breakfast o Lunch o Dinner" and the
Elmer's logo with the U.S. Patent and Trademark Office. The Company also has
other trademarks and service marks registered with the U.S. Patent and Trademark
Office. 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
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, Richard's and Cooper'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.
8
GOVERNMENT REGULATIONS
The restaurant industry generally, and each Company-operated and franchised
restaurant specifically, are subject to numerous federal, state and local
government regulations, including those relating to the preparation and sale of
food and those relating to building, zoning, health, accommodations for disabled
members of the public, sanitation, safety, fire, environmental and land use
requirements; and, in some cases, state and local licensing of the sale of
alcoholic beverages and the state licensing of gaming. The Company and its
franchisees are also subject to federal and state laws governing their
relationship with employees, including minimum wage requirements, accommodation
for disabilities, overtime, working and safety conditions and
citizenship/residency requirements. Federal and state environmental regulations
have not had a major effect on the Company's operations to date. The Company has
no material contracts with the United States government or any of its agencies.
The Company is subject to a number of federal and 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 2003. 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
Elmer's Locations 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.
Beaverton, Oregon - pending transaction
with closing date of July 2003 1 acre 5,921 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
----------------- ------------------ ----------
Hillsboro, Oregon 6,350 January, 2011
Albany, Oregon 5,460 February, 2008
Springfield, Oregon 9,000 June, 2011
Palm Springs, California 5,500 April, 2007
Portland, Oregon (Delta Park) 6,350 July, 2006
Vancouver, Washington 5,900 February, 2004
Beaverton, Oregon 5,322 August, 2006
Mitzel's Locations
------------------
Everett, Washington 6,200 December, 2005
Fife, Washington 5,900 September, 2011
Kent, Washington 5,100 April, 2005
Oak Harbor, Washington 5,200 April, 2005
Poulsbo, Washington 6,500 December, 2004
9
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 March, 2007
Richard's Locations
-------------------
Aloha, Oregon 1,727 November, 2005
Hillsboro, Oregon (North) 1,092 August, 2004
Hillsboro, Oregon (South) 4,000 March, 2005
Tigard, Oregon 1,743 December, 2007
Cooper's Deli and Pub
---------------------
Salem, Oregon (Commercial) 1,070 August, 2003
Salem, Oregon (Keizer) 1,440 May, 2004
Salem, Oregon (Lancaster) 2,390 January, 2008
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. Of the 13 leases up for
renewal in the next two years, the Company holds options to renew 10 of them
including each of the Elmer's and Mitzel's locations coming due in the next two
years.
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 AN 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
March 31, 2003 April 1, 2002
---------------------- -------------------
High Low High Low
1st Quarter 7.51 4.74 4.86 4.52
2nd Quarter 6.04 4.90 4.76 4.31
3rd Quarter 5.42 4.97 5.43 4.40
4th Quarter 6.50 5.00 5.20 4.33
Although the Common Stock is traded on the NASDAQ SmallCap Market, there is
a relatively low trading volume.
10
The Company has not paid or declared cash dividends on its Common Stock. In
August 2000 the Company declared 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 15, 2003, the Company had 155 shareholders of record. The Company
estimates there are approximately 400 beneficial shareholders.
UNREGISTERED SALES OF STOCK
Sales of unregistered Common Stock made by the Company in the last three
fiscal years are as follows:
The Company issued 130,000 shares of Common Stock as part of the
consideration paid for the purchase of the six Mitzel's American Kitchen
restaurants in December 2000. This transaction was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933
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 March 31, 2003 and
April 1, 2002 and for each of the three years in the period ended March 31, 2003
are derived from the audited financial statements included elsewhere herein. The
selected financial data set forth below for the Company as of April 2, 2001,
March 31, 2000 and 1999 are derived from the consolidated financial statements
not included elsewhere herein.
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
March 31, April 1, April 2, March 31, March 31,
For the fiscal years ended 2003 2002 2001 2000 1999
Revenues $31,984,292 $33,775,648 $25,852,336 $22,179,574 $11,952,728
Net income 1,557,613 1,065,856 956,006 939,549 290,512
Net income per share 0.76 0.52 0.48 0.49 0.29
Total assets 17,389,303 16,685,283 16,374,147 13,847,208 13,046,684
Long-term notes payable, less current portion 4,439,170 5,366,050 5,798,769 5,124,130 5,703,539
Total liabilities 7,639,198 8,396,191 9,129,937 8,209,004 8,348,029
Total shareholder's equity 9,750,105 8,289,092 7,244,210 5,638,204 4,698,655
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 2003
Revenues $9,438,069 $7,385,565 $7,575,376 $7,585,282
Operating Income 1,303,913 512,923 484,444 456,290
Net Income 713,082 290,063 268,145 286,323
Net Income per share $ 0.35 $ 0.14 $ 0.13 $ 0.14
========== ========== ========== ==========
11
FISCAL 2002
Revenues $10,267,510 $8,193,871 $7,905,618 $7,408,649
Operating Income 628,475 499,908 478,043 429,053
Net Income 314,787 256,305 242,942 251,822
Net Income per share $ 0.15 $ 0.13 $ 0.12 $ 0.12
=========== ========== ========== ==========
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, changes in government regulation,
particularly in relation to lottery rules and compensation, 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 judgments. These
judgments involve estimates that are inherently uncertain and may have a
significant impact on our quarterly or annual results of operations and
financial condition. Changes in these estimates and judgments could have
significant effects on the Company's results of operations and financial
condition in future years. We believe the Company's most critical accounting
policies cover accounting for long-lived assets - specifically property,
buildings and equipment depreciation thereon and the valuation of intangible
assets. Additional critical accounting policies govern revenue recognition and
accounting for stock options.
Property, Buildings and Equipment
---------------------------------
When the Company purchases property, buildings and equipment, the assets are
recorded at cost. However, when the Company acquires an operating restaurant or
business, the Company must allocate the purchase price between the fair market
value of the tangible assets acquired and any excess to goodwill. The fair
market value of restaurant equipment fixtures and furnishings in an operating
restaurant is difficult to separate from the going concern value of the
restaurant. Most of the value of the equipment is due to the fact that it is
installed and working. The Company values in place equipment with reference to
replacement cost, age and condition, and utility in its intended use.
Intangible Assets
-----------------
The Company reviews and estimates the valuation of its intangible assets
annually based on its third quarter financial statements. If the fair values of
the intangibles were less than their recorded values, an impairment loss would
be recognized. The fair values of the reporting units are estimated using
multiples of earnings before interest, taxes, depreciation and amortization. The
market for these intangibles is limited and the realizable value will differ
from the fair values estimated by the Company.
Depreciation
------------
Property, buildings and equipment are depreciated using the straight-line method
over their estimated useful lives. Leasehold improvements are amortized on a
straight-line method over their estimated useful lives or the term of the
related lease, whichever is shorter. Differences between the realized lives and
the estimated lives could result in changes to the Company's results from
operations in future years, as well as changes in the rate of recurring capital
expenditures.
Revenue Recognition
-------------------
The Company's revenue is primarily from cash and credit card transactions. As
such, restaurant revenue is generally recognized upon receipt of cash or credit
card 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
12
poker games is recorded on a commission basis, that is net of state regulated
payouts. Expenses are recorded using accrual accounting based upon when goods
and services are used.
Stock Options
-------------
The Company accounts for its stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. Based on this
methodology the Company has not recorded any compensation costs related to its
stock options since all options have been issued at an exercise price equal to
or greater than the market value of the Company's stock at the time of issuance.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2003, the Financial Accounting Standards Board "FASB" issued SFAS No.
150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY. SFAS No. 150 establishes standards for classification
and measurement of certain financial instruments with characteristics of both
liabilities and equity. This statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period after June 15, 2003. The Company's
management does not expect that the application of the provisions of this
statement will have a material effect on the Company's consolidated financial
statements.
In April 2003, the FASB issued SFAS No. 149, AMENDMENT OF STATEMENT 133 ON
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement amends and
clarifies financial accounting and reporting for derivative instruments
including certain derivatives embedded in other contracts. This statement is
effective for contracts entered into or modified after June 30, 2003. The
Company's management does not expect that the application of the provisions of
this statement will have a material effect on the Company's consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT OF FASB STATEMENT NO.
123. This statement amends SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, to provide alternative methods of transition for a voluntary
change to the fair value-based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
Company's management intends to continue using the intrinsic value method for
stock-based employee compensation arrangements and, therefore, does not expect
that the application provisions of this statement will have a material impact on
the Company's consolidated financial statements. The Company has adopted the
disclosure provisions of SFAS No. 148.
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH
EXIT OR DISPOSAL ACTIVITIES. This statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, LIABILITY RECOGNITION FOR
CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY
(INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING). The statement is
effective for exit or disposal activities that are initiated after December 31,
2002. Management does not believe adoption of this statement will have a
material impact on the Company's consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, RESCISSION OF STATEMENTS NO. 4, 44,
AND 64, AMENDMENT OF STATEMENT NO. 13, AND TECHNICAL CORRECTIONS. This statement
rescinds SFAS No. 4, and an amendment of that statement, SFAS No. 64,
EXTINGUISHMENTS OF DEBT MADE TO SATISFY SINKING-FUND REQUIREMENTS. This
statement also rescinds SFAS No. 44, ACCOUNTING FOR INTANGIBLE ASSETS OF MOTOR
CARRIERS. This statement amends SFAS No. 13, ACCOUNTING FOR LEASES, to eliminate
an inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The Company's management does not expect that the application of the
provisions of this statement will have a material impact on the Company's
consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING OF THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 clarifies the accounting for the
impairment of long-lived assets and for long-lived assets to be disposed of,
including the disposal of business segments and major lines of business. SFAS
No. 144 is effective for the Company in the first quarter of 2003. The
application of the provisions of this statement did not have a material impact
on the Company's consolidated financial statements.
In July 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS. SFAS No. 143 addresses the accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset
13
retirement costs. SFAS No. 143 is effective for the Company in the first quarter
of 2003. The application of the provisions of this statement did not have a
material impact on the Company's consolidated financial statements.
In January 2003, FASB issued Interpretation No. 46 (FIN 46), CONSOLIDATION OF
VARIABLE INTEREST ENTITIES. This interpretation clarifies the application of
Accounting Research Bulletin No. 51, CONSOLIDATED FINANCIAL Statements, and
requires existing unconsolidated variable interest entities to be consolidated
by their primary beneficiaries if the entities do not effectively disperse risks
among parties involved. The Company's management does not expect that the
application of the provisions of this interpretation will have a material impact
on the Company's consolidated financial statements.
In November 2002, FASB issued Interpretation No. 45 (FIN 45), GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS. This interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing a
guarantee. The Company has complied with the disclosure requirements of FIN 45.
The initial recognition and initial measurement provisions are applied on a
prospective basis to guarantees issued or modified after December 31, 2002. The
Company's management does not expect that the application of the provisions of
this interpretation will have a material impact on the Company's consolidated
financial statements.
HIGHLIGHTS OF HISTORICAL RESULTS
The Company reported record net income of approximately $1,558,000, or $.76
basic earnings per share for the year ended March 31, 2003, on sales of
approximately $31,984,000. The Company reported net income of approximately
$1,066,000, or $.52 per share for the year ended April 1, 2002. For the year
ended April 2, 2001, the Company reported net income of approximately $956,000
or $.48 per share. The $492,000 increase in net income is largely attributable
to gain on sale of the three Southern Oregon restaurants of $504,000 net of tax,
partially offset by losses totaling $141,000 from debt repurchase, restaurant
relocation and losses on investments. These gains and losses accounted for
approximately 18 cents of the 24 cent increase in basic earnings per share.
During the year ended March 31, 2003, total assets increased approximately
$700,000 to $17.4 million. Increased cash was partly offset by reductions in
fixed assets due to the sale and refranchising of three Southern Oregon Elmer's
restaurants. During the year ended March 31, 2003, total shareholders' equity
increased approximately $1.5 million to $9.75 million, primarily as a result of
current year net income.
COMPARISON OF FISCAL YEAR 2003 RESULTS TO HISTORICAL RESULTS OF OPERATIONS
Dollar amounts in thousands except per share data
For the Year Ended
---------------------------------------------------------------------------
March 31, 2003 April 1, 2002 April 2, 2001
-------------- ------------- -------------
Percent of Percent of Percent of
Amount Revenues Amount Revenues Amount Revenues
------ -------- ------ -------- ------ --------
Revenue $31,984 100.0% $33,776 100.0% $25,852 100.0%
Restaurant costs and expenses 27,711 86.6 29,443 87.2 22,412 86.7
General and administrative expenses 2,268 7.1 2,298 6.8 1,572 6.1
(Gain) loss on sale of land, buildings, and equipment (752) (2.4) 6 0.0 (28) (0.1)
Operating income 2,758 8.6 2,028 6.0 1,896 7.3
Non operating income (expense) (440) (1.4) (462) (1.4) (452) (1.8)
Net income 1,558 4.9 1,066 3.2 956 3.7
Earnings per share $.76 $.52 $.48
Weighted average shares outstanding 2,047,061 2,058,955 1,977,227
14
REVENUE For the Year Ended
---------------------------------------------------------------------------
March 31, 2003 April 1, 2002 April 2, 2001
-------------- ------------- -------------
Percent of Percent of Percent of
Amount Revenues Amount Revenues Amount Revenues
Restaurant operations: ------ -------- ------ -------- ------ --------
Restaurant sales $27,051 84.6% $29,147 86.3% $21,720 84.0%
Lottery 3,682 11.5 3,412 10.1 3,292 12.7
------- ----- ------- ----- ------- -----
30,733 96.1 32,559 96.4 25,012 99.8
Franchise operations 1,251 3.9 1,217 3.6 840 3.2
------- ----- ------- ----- ------- -----
Total revenue $31,984 100.0% $33,776 100.0% $25,852 100.0%
======= ===== ======= ===== ======= =====
REVENUES. Restaurant sales are comprised of food and beverage sales at
Company owned restaurants. Lottery revenues are principally commissions received
from the sale of Oregon Lottery products under retailer contracts with the
Oregon State Lottery. The contract term is six years and expires July 2004.
Revenues for the year ended March 31, 2003 were 5.3%, lower than for the
comparable period in 2002, reflecting fewer operating restaurants for most of
the current year. Revenues from same store restaurant operations showed an
increase of 2.4% over the comparable period in 2002. Same store sales at the
core Elmer's brand increased 4.2% for the year ended March 31, 2003.
RESTAURANT COSTS AND EXPENSES. A comparison of restaurant costs and expenses as
a percent of revenue are as follows:
FOR THE YEAR ENDED
-------------------------------
MARCH 31, APRIL 1, APRIL 2,
2003 2002 2001
-------- ------- -------
Cost of restaurant sales:
Food and beverage 28.9 28.7 27.6
Labor and related costs 35.1 35.9 36.3
Restaurant operating costs 13.9 14.0 13.3
Occupancy costs 6.3 6.1 6.1
Depreciation and amortization 2.4 2.3 2.9
Restaurant opening and closing expenses 0.0 0.2 0.5
-------- ------- -------
Total Cost of Restaurant Sales 86.6 87.2 86.7
======== ======= =======
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative ("G&A")
expenses were 7.1% of total revenue in fiscal 2003 compared to 6.8% and 6.1% in
fiscal 2002 and 2001 respectively. Following the sale of the three Southern
Oregon restaurants, the Company has worked to reduce G&A expense in conjunction
with the reduction in the number of Company owned restaurants. The time required
to achieve these cost savings accounts for the increase in G&A expense as a
percentage of sales in the first half of the year.
NET (GAIN) LOSS ON DISPOSITION OF PROPERTY. As a result of sale of the
three Southern Oregon Elmer's restaurants the Company posted a pre-tax gain of
approximately $830,000. This gain was partially offset by losses realized on the
relocation of one of the Richard's Deli and Pub units of approximately $78,000
on a pre-tax basis.
NON-OPERATING INCOME/(EXPENSE). Non-operating expense was 1.4% of total
revenues for the year ended March 31, 2003 compared to 1.4% and 1.8% of total
revenues in the years ended April 1, 2002 and April 2, 2001 respectively. Net
interest expense has declined each year as a percentage of revenues. In the
current year the Company recorded losses on debt extinguishment and marketable
securities equal to 0.5% of total revenues.
LIQUIDITY AND CAPITAL RESOURCES. As of March 31, 2003, the Company had cash
and equivalents of approximately $2.2 million representing an increase from
April 1, 2002 of approximately $1.5 million. Cash provided by operations was
$1.7 million. Cash provided by investing activities was $826,000. Proceeds of
$1.3 million from the sale of the Southern Oregon units were offset by capital
expenditures of $717,000 and cash used to purchase the Vancouver Elmer's and the
Cooper's delis
15
of $314,000. Cash used in financing activities totaled $1.0 million, including
$747,500 spent for the repurchase of 10% convertible notes.
The Company repurchased 16,325 shares of its common stock during the year
ended March 31, 2003 for $88,261. These purchases were made in the NASDAQ market
through the Company's broker. The board of directors has authorized the Company
to repurchase shares valued, in aggregate, at less than $300,000 annually. This
authorization is ongoing and the Company may make additional purchases from time
to time.
The Company's primary liquidity needs arise from debt service, operating
lease requirements and the funding of capital expenditures. The Company's
primary source of liquidity during the year is the operation of its restaurants,
franchise fees earned from its franchisees, cash on hand, and borrowings. As of
March 31, 2003, the Company's primary indebtedness was $2.5 million under term
loan facilities with GE Capital, $1.6 million in real estate loan facilities
with Wells Fargo Bank and $650,000 in convertible notes issued in a private
placement.
The Board of Directors adopted the 1999 Stock Option Plan (the Plan) in
February 1999 which provides for the award of incentive stock option 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 and 15 years after
the date of grant. The Company complies with the disclosure-only provisions of
SFAS No. 123 and no compensation cost has been recognized for the Plan.
In March 2003, the Company granted stock options for 20,000 shares to
non-employee directors of the Company. The options vest over five years and have
a ten-year term. The exercise price of $5.02 was equal to the market value of
the Company's stock on the grant date.
In April 2002, the Company granted non-executive incentive stock options
for 34,000 shares to employees of the Company. The options vest over five years
and have a ten-year term. The exercise price of $5.00 was equal to the market
value of the Company's stock on the grant date.
In August 2002, the Company elected to fix the interest rate on the
$925,000 portion of the GE Capital loan that had a variable interest rate. The
new rate is 7.4% per annum. The GE loans carry a weighted average interest rate
of 8.4% and have a maturity of 8.2 years.
The remaining Wells Fargo real estate debt has a weighted-average maturity
of 6.4 years, bears interest at an average of 8.2%, requires monthly payments of
principal and interest, and is collateralized by three real estate assets. In
June 2003 the Company negotiated a repricing of the notes to a weighted average
interest rate of 6.1%.
The $650,000 in convertible notes have a remaining maturity of
approximately five years, bear interest at 10%, require monthly interest-only
payments, payments into a Company-held sinking fund, and are subordinated to the
other Company funded debt. The notes include a convertible feature that permits
the holder to convert the principal of the note into common stock at any time at
$6.19 per share. The Company may call the notes with a five percent premium
beginning December 2003.
Certain of the Company's debt agreements require compliance with debt
covenants. The most restrictive covenants require the Company to maintain a
maximum ratio of total liabilities, excluding subordinated debt, to tangible net
worth plus subordinated debt of 3.25 to 1.0, and a ratio of cash generation
(defined as net income before taxes, interest expense, depreciation and
amortization) to total interest expense plus the prior period current maturities
of long-term debt of at least 2.25 to 1.0. Management believes that the Company
is in compliance with such requirements.
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.
16
CONTRACTUAL OBLIGATIONS
The Company makes a range of contractual commitments in the ordinary course
of business and in conjunction with the acquisition and sale of restaurants. The
following table shows the Company's contractual obligations:
Commitment expiration period
Total amount
committed 1 year or less 1-3 years 4-5 years 5 years or more
---------------------------------------------------------------------------------------------
Term debt $4,121,980 $332,810 $698,833 $1,100,356 $1,989,981
Convertible debt 650,000 650,000
Operating leases 5,958,227 1,431,457 2,171,278 1,179,982 1,175,500
Guarantees 2,364,900 264,250 561,750 416,900 1,122,000
-------------------------------------------------------------------------------------------
Totals $13,095,107 $2,028,517 $3,431,861 $3,347,248 $4,287,481
=========== ========== ========== ========== ==========
The covenants to the Company's term debt require the Company to maintain
certain leverage and cash flow ratios, discussed 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 March 31, 2003, and the Company expects it
will continue to be in compliance. However, in the event the Company was 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 for four more years. In one case the
guarantee could be extended for up to 15 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 o Lunch o Dinner(R). These guarantees are further discussed in
Note 11 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 March
31, 2003, 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 2003, fiscal 2002 or fiscal 2001. Substantial increases in costs could
have a significant impact on the Company and the industry. If operating expenses
increase, management believes it can recover increased costs by increasing
prices to the extent deemed advisable considering competition.
SEASONALITY
The seasonality of restaurant sales due to consumer spending habits can be
significantly affected by the timing of advertising, competitive market
conditions and weather-related events. While restaurant sales for certain
quarters can be stronger, or weaker, there is no predominant pattern.
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 the Company to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions; the
impact of competitive products and pricing; success of operating initiatives;
development and operating costs; advertising and promotional efforts; adverse
publicity; acceptance of new product offerings; consumer trial and
17
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; changes in lottery commissions
or regulations; continued NASDAQ listing; weather conditions; construction
schedules; and other factors referenced in this Form 10-K.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests excess cash beyond its working capital requirements in
liquid marketable securities. These securities include corporate and government
bond mutual funds focusing on issues with medium and short term maturities. The
Company actively manages its portfolio to reduce interest rate risk. However, an
increase in interest rate levels will tend to reduce the value of the portfolio.
Certain of the Company's outstanding financial instruments are subject to
market risks, including interest rate risk. Such financial instruments are not
currently subject to foreign currency risk or commodity price risk. A rise in
prevailing interest rates could have adverse effects on the Company's financial
condition and results of operations. The fair value of financial instruments
approximates the book value at March 31, 2003.
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 15.
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
year March 31, 2000 contained no adverse opinion nor disclaimer of opinion, nor
were such reports qualified or modified as to uncertainty, audit scope, or
accounting principles. During the fiscal years ended 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
"2003 Proxy Statement") for its 2003 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 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 2003 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is included under the
caption "Executive Compensation" in the 2003 Proxy Statement and 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 "Security Ownership of Certain
Beneficial Owners and Management" in the 2003 Proxy Statement incorporated
herein by reference.
18
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Jaspers Food Management, Inc. ("JFMI") provides some of the Company's
administrative and accounting service needs for the operations of the Company's
Ashley's, Richard's and Cooper's restaurants. William Service and Bruce Davis
each own 36% of the outstanding common stock of JFMI and each serves on JFMI's
three-person Board of Directors. JFMI's third director is Cordy Jensen who owns
3.75% of the outstanding common stock of JFMI. Mr. Davis is an executive officer
of the Company, Mr. Service resigned as Chief Executive Officer of the Company
effective November 1, 2002. Messrs. Service, Davis and Jensen serve on the
Company's Board of Directors. For Fiscal 2003, Messrs. Service and Davis each
received annual compensation of $30,000 from JFMI.
ITEM 14. CONTROLS AND PROCEDURES
(A). EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and its Corporate Controller, after
evaluating the effectiveness of the Company's disclosure controls and procedures
(as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and
15d-14(c)) as of a date (the "Evaluation Date") within 90 days of the filing
date of this annual report, have concluded that as of the Evaluation Date, the
Company's disclosure controls and procedures were effective and designed to
ensure that material information relating to the Company and its consolidated
subsidiaries would be made known to them by others within those entities.
(B). CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect those controls subsequent to the
Evaluation Date
PART IV
ITEM 15. 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.
Financial Statements and Schedules Page in
this Report
-----------
Auditor's Reports........................................................F-1
Consolidated Balance Sheets at March 31, 2003 and April 1, 2002..........F-2
Consolidated Statements of Income for the years ended March 31,
2003, April 1, 2002 and April 2, 2001....................................F-3
Consolidated Statements of Changes in Shareholders' Equity for the
years ended March 31, 2003, April 1, 2002 and April 2, 2001..............F-4
Consolidated Statements of Cash Flows for the years ended
March 31, 2003, April 1, 2002 and April 2, 2001..........................F-5
Notes to Consolidated Financial Statements...............................F-6
No other schedules are included because the required information is
inapplicable or is presented in the financial statements or related notes
thereto.
19
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 March 31, 2003, and
April 1, 2002, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for the years ended March 31, 2003, April
1, 2002, and April 2, 2001. 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 March 31, 2003, and April 1, 2002, and the results
of their operations and their cash flows for the years ended March 31, 2003,
April 1, 2002, and April 2, 2001, in conformity with accounting principles
generally accepted in the United States of America.
/s/ MOSS ADAMS, LLP
Portland, Oregon
May 21, 2003
F-1
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
March 31, April 1,
2003 2002
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,200,263 $ 654,211
Marketable securities 760,441 1,149,171
Accounts and franchise fees receivable 260,848 315,063
Notes receivable - related parties, current portion 81,771 372,712
Inventories 430,737 411,008
Prepaid expenses and other 227,142 133,424
Income taxes receivable 121,617 114,117
------------ ------------
Total current assets 4,082,819 3,149,706
Notes receivable - related parties, net of current portion 212,026 --
Property, buildings, and equipment, net 7,075,969 7,654,097
Goodwill 4,897,743 4,699,164
Intangible assets 602,709 602,709
Principal debt service account for convertible debt 208,929 305,019
Other assets 309,108 274,588
------------ ------------
TOTAL ASSETS $ 17,389,303 $ 16,685,283
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, current portion $ 332,810 $ 277,333
Accounts payable 1,118,167 1,483,823
Accrued expenses 314,136 166,844
Accrued payroll and related taxes 486,915 403,141
------------ ------------
Total current liabilities 2,252,028 2,331,141
Notes payable, net of current portion 4,439,170 5,366,050
Deferred income taxes 948,000 699,000
------------ ------------
Total liabilities 7,639,198 8,396,191
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY
Common stock, no par value, 10,000,000 shares authorized;
2,041,709 and 2,058,034 shares issued and oustanding
at March 31, 2003 and April 1, 2002, respectively 7,283,139 7,371,400
Retained earnings 2,486,879 929,266
Accumulated other comprehensive loss, net of taxes (19,913) (11,574)
------------ ------------
Total shareholders' equity 9,750,105 8,289,092
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 17,389,303 $ 16,685,283
============ ============
See accompanying notes. F-2
--------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
For The Years Ended
------------------------------------------------------
March 31, April 1, April 2,
2003 2002 2001
------------ ------------ ------------
REVENUES $ 31,984,292 $ 33,775,648 $ 25,852,336
------------ ------------ ------------
COSTS AND EXPENSES
Cost of restaurant sales:
Food and beverage 9,239,966 9,681,511 7,123,380
Labor and related 11,219,026 12,131,703 9,383,408
Restaurant operating costs 4,457,256 4,722,310 3,440,809
Occupancy costs 2,030,596 2,067,785 1,578,267
Depreciation and amortization 754,107 786,593 745,744
Restaurant opening/closing expenses 9,718 53,382 139,909
General and administrative expenses 2,268,430 2,297,983 1,571,763
(Gain) loss on sale of land, buildings, and equipment (752,377) 5,759 (27,528)
------------ ------------ ------------
Total costs and expenses 29,226,722 31,747,026 23,955,752
------------ ------------ ------------
Income from operations 2,757,570 2,028,622 1,896,584
OTHER INCOME (EXPENSE)
Interest income 141,651 109,444 138,845
Interest expense (428,174) (572,210) (591,311)
Loss on extinguishment of debt (97,500) -- --
Loss on sale of marketable securities (55,934) -- --
------------ ------------ ------------
Income before provision for income taxes 2,317,613 1,565,856 1,444,118
Provision for income taxes (760,000) (500,000) (488,112)
------------ ------------ ------------
NET INCOME $ 1,557,613 $ 1,065,856 $ 956,006
============ ============ ============
PER SHARE DATA
Net income per share - basic $ 0.76 $ 0.52 $ 0.48
============ ============ ============
Weighted-average number of common
shares outstanding - basic 2,047,061 2,058,955 1,977,227
============ ============ ============
Net income per share - diluted $ 0.74 $ 0.51 $ 0.48
============ ============ ============
Weighted-average number of common
shares outstanding - diluted 2,117,909 2,074,073 2,013,832
============ ============ ============
F-3 See accompanying notes.
--------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
Accumulated
Common Stock Other Total
----------------------------- Retained Comprehensive Shareholders'
Shares Amount Earnings Loss Equity
----------- ----------- ----------- ----------- -----------
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
Stock repurchase
(July 31, 2002) (10,000) (56,010) -- -- (56,010)
Stock repurchase
(August 9, 2002) (6,325) (32,251) -- -- (32,251)
Comprehensive income:
Net income -- -- 1,557,613 -- 1,557,613
Change in net unrealized loss
on securities available-for-sale,
net of taxes -- -- -- (8,339) (8,339)
-----------
Total comprehensive income -- -- -- -- 1,549,274
----------- ----------- ----------- ----------- -----------
BALANCE, March 31, 2003 2,041,709 $ 7,283,139 $ 2,486,879 $ (19,913) $ 9,750,105
=========== =========== =========== =========== ===========
See accompanying notes. F-4
--------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
For the Years Ended
---------------------------------------------------
March 31, April 1, April 2,
2003 2002 2001
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,557,613 $ 1,065,856 $ 956,006
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 754,107 786,593 745,744
Deferred income taxes 249,000 (73,000) (21,000)
(Gain) loss on disposition of assets (752,377) 5,759 (27,528)
Loss on sale of marketable securities 55,934 -- --
Loss on extinguishment of debt 97,500 -- --
Changes in assets and liabilities:
Accounts and franchise fees receivable, inventories,
and prepaids (14,907) (68,806) (127,282)
Other assets (34,520) (43,582) (14,702)
Accounts payable (380,149) 94,628 --
Accrued expenses 231,066 (23,385) 550,136
Income taxes (7,500) (52,492) (341,395)
----------- ----------- -----------
Net cash from operating activities 1,755,767 1,691,571 1,719,979
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, buildings, and equipment (716,905) (793,520) (1,142,010)
Purchases of available-for-sale securities (410,752) (1,476,353) --
Proceeds from sale of available-for-sale securities 735,209 305,904 --
Business acquisition (314,263) (128,000) (1,507,472)
Issuance of notes receivable - related parties (129,487) (75,508) (275,000)
Principal collected on notes receivable - related parties 358,920 148,473 33,742
Proceeds from sale of assets 1,303,176 912,938 --
----------- ----------- -----------
Net cash from investing activities 825,898 (1,106,066) (2,890,740)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of 10% convertible notes -- -- 1,300,000
Repurchase of 10% convertible notes (747,500) -- --
Payments on notes payable (295,942) (760,319) (628,433)
Net change in principal debt service account 96,090 (302,591) --
Repurchase of common stock (88,261) (9,400) --
----------- ----------- -----------
Net cash from financing activities (1,035,613) (1,072,310) 671,567
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,546,052 (486,805) (499,194)
CASH AND CASH EQUIVALENTS, beginning of year 654,211 1,141,016 1,640,210
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 2,200,263 $ 654,211 $ 1,141,016
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest $ 428,174 $ 572,210 $ 591,311
=========== =========== ===========
Income taxes $ 527,852 $ 667,300 $ 850,507
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING TRANSACTIONS
Sale of property and equipment for notes receivable $ 455,631 $ -- $ 142,000
=========== =========== ===========
Shares issued in conjunction with Mitzel's acquisition $ -- $ -- $ 650,000
=========== =========== ===========
Stock dividends declared $ -- $ 509,610 $ 988,915
=========== =========== ===========
Change in unrealized loss on available-for-sale securities,
net of taxes $ 13,091 $ 11,574 $ --
=========== =========== ===========
Assumption of notes receivable as partial consideration
for purchase of property, equipment, and goodwill $ 175,625 $ -- $ --
=========== =========== ===========
Note payable issued in conjunction with acquisition of
certain assets and goodwill of a company $ 74,538 $ 35,606 $ --
=========== =========== ===========
Accrued interest classified as note receivable $ -- $ 10,182 $ --
=========== =========== ===========
Note receivable issued for franchise fee receivable $ -- $ 31,500 $ --
=========== =========== ===========
F-5 See accompanying notes.
--------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION - As of March 31, 2003, Elmer's Restaurants, Inc., an Oregon
corporation, and Subsidiaries (the Company) owned and operated ten Elmer's
Restaurants, six Ashley's Deli restaurants, five Mitzel's American Kitchen
restaurants, four Richard's Deli and Pub restaurants, three Cooper's Deli and
Pub restaurants; and sells franchises that give franchisees the right to operate
under the name Elmer's Breakfast Lunch Dinner for a specific restaurant or
region. Franchises and Company-owned 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
accordance with generally accepted accounting principles, requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, and disclosures 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. Estimates and assumptions used in the
consolidated financial statements include, but are not limited to, those used to
determine depreciation and amortization, the allowance for doubtful accounts,
the carrying amounts of financial instruments, notes receivable, notes payable,
and goodwill in evaluating intangible asset impairment. The amounts ultimately
realized from the affected assets will depend, among other factors, on general
business conditions and could differ materially in the near-term from the
carrying amounts reflected in the consolidated financial statements.
REPORTING PERIODS - The Company reports its quarterly consolidated financial
information using a "4-3-3-3" accounting cycle whereby each quarter ends on the
last Monday of the respective quarter. Fiscal year 2003 ended March 31, 2003,
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 March 31, 2003, and April 1, 2002,
because of the relatively short maturity of these instruments. The carrying
value of notes receivable approximated fair value as of March 31, 2003, and
April 1, 2002, based upon interest rates and terms available for similar
investments. The carrying value of notes payable approximated fair value as of
March 31, 2003, and April 1, 2002, based upon interest rates and terms available
for the same or similar loans.
CASH AND CASH EQUIVALENTS - For purposes of the consolidated 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 consolidated 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.
F-6
--------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
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 March 31,
2003, the Company's deposits were in excess of the federal insurance limits of
$100,000. However, the Company deposits funds with reputable banks. The Company
maintained investment accounts with combined balances of $933,540. The funds in
these accounts were invested in mutual funds 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 $341,456, $318,081, and $406,987 for
the years ending March 31, 2003, April 1, 2002, and April 1, 2001, respectively.
Company-owned and franchise restaurants contribute 1% of gross sales to a common
advertising fund maintained by the Company.
DERIVATIVE FINANCIAL INSTRUMENTS - The Statement of Financial Accounting
Standards (SFAS) No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, 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. 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
$3,682,000, $3,412,000, and $3,292,000 for the years ending March 31, 2003,
April 1, 2002, and April 2, 2001, respectively.
F-7
--------------------------------------------------------------------------------
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, the 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.
The Company complies with the disclosure-only provisions of SFAS No. 123 and 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:
March 31, April 1, April 2,
2003 2002 2001
------------ ------------ ------------
Net income - as reported $ 1,557,613 $ 1,065,856 $ 956,006
Net income - pro forma $ 1,449,920 $ 905,671 $ 798,951
Diluted earnings per share -
as reported $ 0.74 $ 0.51 $ 0.48
Diluted earnings per share -
pro forma $ 0.68 $ 0.44 $ 0.40
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:
March 31, April 1, April 2,
2003 2002 2001
------------ ------------ ------------
Risk-free interest rate 4.78% 5.28% 5.50%
Expected life 10 years 10 years 10 years
Expected volatility 25% 20% 26%
Expected dividend yield 1.25% 0% 0%
F-8
--------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
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.
NET INCOME PER SHARE - Basic earnings per share (EPS) are 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.
RECLASSIFICATIONS - Certain amounts in the 2002 and 2001 consolidated financial
statements have been reclassified to conform to the 2003 presentation. The
Company has included additional detail in the consolidated statements of income.
Restaurant operating costs are now broken out on a separate line. These costs
include such items as advertising, repairs and maintenance, and credit card
discounts. Historically, most of these items have been included under general
and administrative. All information presented herein has been reclassifed to
conform to the new format. The Company believes that this new format will
improve comparability between the Company and its peers. Net income and cash
flows were not affected by the reclassifications.
RECENTLY ISSUED ACCOUNTING STANDARDS - In December 2002, the Financial
Accounting Standards Board (FASB) issued SFAS No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT OF FASB
STATEMENT NO. 123. THIS STATEMENT AMENDS SFAS NO. 123, ACCOUNTING FOR STOCK-
BASED COMPENSATION, to provide alternative methods of transition for a voluntary
change to the fair value-based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
Company's management intends to continue using the intrinsic value method for
stock-based employee compensation arrangements and, therefore, does not expect
that the application of the provisions of this statement will have a material
impact on the Company's consolidated financial statements. The Company has
adopted the disclosure provisions of SFAS No. 148.
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH
EXIT OR DISPOSAL ACTIVITIES. This statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, LIABILITY RECOGNITION FOR
CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY
(INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING). The statement is
effective for exit or disposal activities that are initiated after December 31,
2002. Management does not believe adoption of this statement will have a
material impact on the Company's consolidated 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 April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB STATEMENTS NO.
4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS.
This statement rescinds SFAS No. 4, and an amendment of that statement, SFAS No.
64, EXTINGUISHMENTS OF DEBT MADE TO SATISFY SINKING- FUND REQUIREMENTS. This
statement also rescinds SFAS No. 44, ACCOUNTING FOR INTANGIBLE ASSETS OF MOTOR
CARRIERS. This statement amends SFAS No. 13, ACCOUNTING FOR LEASES, to eliminate
an inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The Company's management does not expect that the application of the
provisions of this statement will have a material impact on the Company's
consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING OF THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 clarifies the accounting for the
impairment of long-lived assets and for long-lived assets to be disposed of,
including the disposal of business segments and major lines of business. SFAS
No. 144 is effective for the Company in the first quarter of 2003. The
application of the provisions of this statement did not have a material impact
on the Company's consolidated financial statements.
In July 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS. SFAS No. 143 addresses the accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 is effective for the Company in the first
quarter of 2003. The application of the provisions of this statement did not
have a material impact on the Company's consolidated financial statements.
In January 2003, FASB issued Interpretation No. 46 (FIN 46), CONSOLIDATION OF
VARIABLE INTEREST ENTITIES. This interpretation clarifies the application of
Accounting Research Bulletin No. 51, CONSOLIDATED FINANCIAL STATEMENTS, and
requires existing unconsolidated variable interest entities to be consolidated
by their primary beneficiaries if the entities do not effectively disperse risks
among parties involved. The Company's management does not expect that the
application of the provisions of this interpretation will have a material impact
on the Company's consolidated financial statements.
In November 2002, FASB issued Interpretation No. 45 (FIN 45), GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS. This interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing a
guarantee. The Company has complied with the disclosure requirements of FIN 45.
The initial recognition and initial measurement provisions are applied on a
prospective basis to guarantees issued or modified after December 31, 2002. The
Company's management does not expect that the application of the provisions of
this interpretation will have a material impact on the Company's consolidated
financial statements.
F-10
--------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 - MARKETABLE SECURITIES
Cost and fair value of available-for-sale marketable debt and equity securities
at March 31, 2003, are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Losses Value
----------- ----------- ----------- -----------
Mutual funds $ 931,768 $ 12,532 $ (43,937) $ 900,363
Equity securities 33,713 2,458 (2,994) 33,177
----------- ----------- ----------- -----------
$ 965,481 $ 14,990 $ (46,931) $ 933,540
=========== =========== =========== ===========
These investments are classified on the balance sheet as follows:
Marketable Money
Securities Market Total
---------- ---------- ----------
Marketable securities (current asset) $ 760,441 $ -- $ 760,441
Bond sinking fund (noncurrent asset) 173,099 35,830 208,929
---------- ---------- ----------
$ 933,540 $ 35,830 $ 969,370
========== ========== ==========
Net unrealized holding losses on available-for-sale securities in the amount of
$31,941 for the year ended March 31, 2003, have been included in accumulated
other comprehensive income, net of income taxes of $12,028. For the year ended
March 31, 2003, realized losses on sales of available-for-sale securities were
$55,934 and are included in other income.
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
=========== =========== =========== ===========
F-11
--------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 - MARKETABLE SECURITIES - (continued)
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 ended April 1, 2002, have been included in accumulated
other comprehensive income, net of income taxes of $7,276.
There were no marketable securities held by the Company at April 2, 2001.
NOTE 3 - NOTES RECEIVABLE - RELATED PARTIES
Notes receivable - related parties consist of the following:
March 31, April 1,
2003 2002
------------ ------------
Notes receivable from franchisees, bearing
interest at 9%, secured by a franchise
agreement and restaurant furniture, fixtures,
and equipment $ 293,797 $ --
Notes receivable bearing interest at 10.5%,
secured by a stock pledge agreement for
15,000 shares of Elmer's Restaurants, Inc.
common stock -- 154,889
Note receivable bearing interest at 8%,
secured by a franchise agreement and
restaurant furniture, fixtures, and equipment -- 48,266
Note receivable bearing interest at 10%,
secured by a stock pledge agreement for
50,000 shares of Elmer's Restaurants, Inc.
common stock -- 135,460
F-12
--------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3 - NOTES RECEIVABLE - RELATED PARTIES - (continued)
March 31, April 1,
2003 2002
----------- -----------
Notes receivable from franchisees, bearing
interest from 12% to 14% $ -- $ 34,097
----------- -----------
Total notes receivable - related parties 293,797 372,712
Less current portion (81,771) (372,712)
----------- -----------
Notes receivable - related parties,
net of current portion $ 212,026 $ --
=========== ===========
NOTE 4 - PROPERTY, BUILDINGS, AND EQUIPMENT
Property, building, and equipment consist of the following:
March 31, April 1,
2003 2002
----------- -----------
Land $ 1,686,700 $ 1,686,700
Buildings 1,616,437 1,551,378
Furniture, fixtures, and equipment 3,502,669 3,981,618
Leasehold improvements 2,623,996 2,505,232
Automobiles 78,774 55,814
----------- -----------
Total property, buildings, and equipment 9,508,576 9,780,742
Less accumulated depreciation and amortization (2,432,607) (2,126,645)
----------- -----------
Property, building, and equipment, net $ 7,075,969 $ 7,654,097
=========== ===========
Depreciation expense charged to operations was $754,107, $786,593, and $598,927
for the years ending March 31, 2003, April 1, 2002, and April 2, 2001,
respectively.
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.
F-13
--------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 5 - INCOME TAXES
The provision for income taxes consists of current and deferred income tax
expense as follows:
March 31, April 1, April 2,
2003 2002 2001
--------- --------- ---------
Current:
Federal $ 435,000 $ 487,000 $ 419,112
State 76,000 86,000 90,000
--------- --------- ---------
511,000 573,000 509,112
Deferred 249,000 (73,000) (21,000)
--------- --------- ---------
Provision for income taxes $ 760,000 $ 500,000 $ 488,112
========= ========= =========
A reconciliation of the federal income tax rate to the Company's effective
income tax rate is as follows:
March 31, April 1, April 2,
2003 2002 2001
-------------------- -------------------- --------------------
Federal income tax at statutory
rate $ 788,000 34.0% $ 534,000 34.0% $ 491,112 34.0%
State income taxes, net of federal
income tax benefit 72,000 3.1 56,000 3.6 52,000 3.6
Nondeductible expenses 47,000 2.0 71,000 4.6 42,000 2.9
Dividend received deduction (3,000) (0.1) -- -- -- --
Federal income tax credits (144,000) (6.2) (161,000) (10.2) (97,000) (6.7)
--------- ---- --------- ---- --------- ----
$ 760,000 32.8% $ 500,000 32.0% $ 488,112 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 March 31, 2003, and April 1, 2002, the deferred tax liability
of $948,000 and $699,000, respectively, primarily represents the difference
between the book basis of property, buildings, and equipment and intangibles and
the related tax basis of approximately $2,798,000 and $2,056,000, respectively.
F-14
--------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 6 - NOTES PAYABLE
Notes payable consist of the following:
March 31, April 1,
2003 2002
------------ ------------
Note payable to a financing company, principal and
interest due monthly at 8.95%, matures July 2011,
secured by substantially all assets of the Company $ 1,590,934 $ 1,715,338
Note payable to a financing company, principal and
interest due monthly at 7.38%, matures July 2011,
secured by substantially all assets of the Company 877,414 950,676
Note payable to a financial institution, principal and
interest due monthly at 8.18%, matures January 2011,
secured by real estate, subsequent to year-end, the
Company refinanced the note for a term of seven
years at a rate of 6.17% 1,106,988 1,150,590
Note payable to a financial institution, principal and
interest due monthly at 8.25%, matures February
2008, secured by real estate, under the terms of the
note, the interest rate was converted to a fixed rate
of 5.64% subsequent to year-end 495,870 526,779
Convertible notes payable, interest payable monthly
at 10%, principal due December 2007 (Note 7) 650,000 1,300,000
Note payable to Coopers, Inc. for the purchase
of three restaurants, monthly principal payments
of $2,767, matures June 1, 2004 41,507 --
Capital lease payable, monthly payments of $360 9,267 --
------------ ------------
Total notes payable 4,771,980 5,643,383
Less current portion (332,810) (277,333)
------------ ------------
Notes payable, net of current portion $ 4,439,170 $ 5,366,050
============ ============
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-15
--------------------------------------------------------------------------------
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 March 31, 2004 $ 332,810
2005 340,024
2006 358,809
2007 387,703
2008 1,362,653
Thereafter 1,989,981
-----------
$ 4,771,980
===========
All interest costs incurred during the years ended March 31, 2003, April 1,
2002, and April 2, 2001, have been expensed during the respective periods.
NOTE 7 - CONVERTIBLE DEBT
The Company's outstanding convertible debt of $650,000 at March 31, 2003, and
$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 face value 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, 2006 101%
December 1, 2006, 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 $7,738 to
a principal debt service account. The balance in the account was $208,929 at
March 31, 2003. The balance in the account was $305,019 at April 1, 2002.
In the first quarter of 2003, the Company repurchased $650,000 of their
convertible debt. A $97,500 loss was recognized from this repurchase.
F-16
--------------------------------------------------------------------------------
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 March 31, 2003, for property,
buildings, and equipment with noncancellable terms of more than one year are:
Years ended March 31, 2004 $ 1,431,457
2005 1,225,611
2006 945,667
2007 697,291
2008 482,701
Thereafter 1,175,500
-----------
5,958,227
Less sublease rental income (44,328)
-----------
$ 5,913,899
===========
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 $1,804,000, $1,819,000,
and $1,431,000 for the years ending March 31, 2003, April 1, 2002, and April 2,
2001, 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 of the Company 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. No interest has been accrued or paid under the agreement.
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, four Richard's Deli and Pub, and three Cooper's Deli and Pub
restaurants. Labor and related expenses were $1,003,000, $842,000, and $930,000
as of March 31, 2003, April 1, 2002, and April 2, 2001, respectively. Amounts
outstanding with JFMI are as follows:
March 31, April 1,
2003 2002
-------- --------
Accounts payable $ 32,132 $ 7,231
======== ========
F-17
--------------------------------------------------------------------------------
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:
March 31, April 1, April 2,
2003 2002 2001
------------ ------------ ------------
Revenues:
Restaurant operations $ 30,732,800 $ 32,558,606 $ 25,011,807
Franchise operations 1,251,492 1,217,042 840,529
------------ ------------ ------------
Consolidated $ 31,984,292 $ 33,775,648 $ 25,852,336
============ ============ ============
Income from operations:
Restaurant operations $ 1,540,213 $ 1,812,031 $ 1,731,667
Gain (loss) on sale of land,
buildings, and equipment 752,377 (5,759) 27,528
Franchise operations 464,980 222,350 137,389
------------ ------------ ------------
Consolidated $ 2,757,570 $ 2,028,622 $ 1,896,584
============ ============ ============
Capital and intangible expenditures:
Restaurant operations $ 701,052 $ 945,497 $ 3,206,615
Franchise operations 15,565 29,035 92,867
------------ ------------ ------------
Consolidated $ 716,617 $ 974,532 $ 3,299,482
============ ============ ============
Depreciation and amortization:
Restaurant operations $ 754,107 $ 739,293 $ 692,755
Franchise operations -- 47,300 52,989
------------ ------------ ------------
Consolidated $ 754,107 $ 786,593 $ 745,744
============ ============ ============
Assets:
Restaurant operations $ 15,727,619 $ 16,114,277 $ 15,246,621
Franchise operations 1,661,684 571,006 1,127,526
------------ ------------ ------------
Consolidated $ 17,389,303 $ 16,685,283 $ 16,374,147
============ ============ ============
The number of Company-owned stores and operating franchises is as follows:
March 31, April 1, April 2,
2003 2002 2001
------------ ------------ ------------
Company-owned stores 28 27 26
Operating franchises 20 20 19
F-18
--------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11 - RESTAURANT ACQUISITIONS AND DISPOSITIONS
PURCHASE OF CORNELL OAKS PROPERTY - On January 6, 2003, the Company entered into
a Sales and Purchase Agreement for a one-acre site in Beaverton, Oregon. The
Company has placed a $30,000 deposit on the property and the balance of the
purchase price of $745,000 is due and payable at closing, which is expected to
be in July 2003. If the Company is able to obtain the necessary land use and
other governmental approvals prior to July 7, 2003, the Company plans on
building a prototype restaurant at this location.
PURCHASE OF COOPER'S DELI AND PUB - On July 1, 2002, the Company acquired three
Cooper's Deli units located in Salem, Oregon, from Cooper's Inc. The Cooper's
units are substantially similar to the Company's existing deli operations.
Purchase consideration included $100,000 cash, a $66,500 two-year promissory
note, $11,500 assumed liabilities, and the forgiveness of a $155,000 promissory
note due to the Company. The acquisition cost of $333,000 included $100,000 in
tangible assets and $233,000 in goodwill.
SALE OF SOUTHERN OREGON ELMER'S - 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 sold substantially all
the assets of those locations in consideration for $1,385,500 in cash and
promissory notes valued at $349,500. The Buyer has signed 25-year franchise
agreements for each location and will operate the locations under the Elmer's
Breakfast Lunch Dinner name.
The Buyer signed a development agreement to open an additional two units within
five years. The first unit located in Klamath Falls, Oregon, opened October 23,
2002. As a result of this transaction, the Company posted a one-time gain of
approximately $504,000 in the quarter ending July 22, 2002.
The Company agreed to provide a limited amount of seller financing. The Company
issued 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. To assist with the development of
the Klamath Falls restaurant, the Company granted an extension of the inventory
note, which has now been paid in full.
The Company has assigned its rights and obligations under the occupancy leases
for the Medford and Roseburg locations. The Company remains a guarantor of the
Medford lease until April 2007. The Company's guarantee of the Roseburg lease
could extend until 2018 if the Buyer exercises its options in 2003, 2008, and
2013. The Company has subleased the Grants Pass location to the Buyer for five
years under substantially the same terms and conditions as the underlying master
lease. Provided that all parties are in good standing under the lease at the end
of the sublease, the Grants Pass landlord has agreed to lease directly to the
Buyer under substantially similar terms.
The Buyer has indemnified the Company against all losses incurred as a result of
the Company's obligations as a Guarantor. This indemnification is personally
guaranteed by Mssrs. Brutke and Thomason and their spouses. However, in the
event of default by the Buyer of the terms of the occupancy leases, and the
failure of Mssrs. Brutke and Thomason to make good on their personal guarantees,
the Company could be required to pay all rent and other amounts due under the
terms of the lease for the remainder of the guarantee term. In the event of
default, the Company expects it would exercise its right to reoccupy and
continue to operate the restaurants as Elmer's Breakfast Lunch Dinner.
The Buyer's obligations under the franchise agreements, promissory notes, lease
assignments, and sublease are guaranteed by the Buyer and personally by Mssrs.
Brutke and Thomason and their spouses.
F-19
--------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11 - RESTAURANT ACQUISITIONS AND DISPOSITIONS - (continued)
ACQUISITION OF VANCOUVER RESTAURANT - On April 15, 2002, the Company acquired an
Elmer's restaurant located in Vancouver, Washington, from franchisee and former
Board member, Paul Welch, for approximately $250,000 in cash and assumed
liabilities. The Company has entered into a long-term occupancy lease at the
same location and continues to operate the location as an Elmer's restaurant.
The purchase price was allocated to the tangible assets of the restaurant. The
Company has spent approximately $148,000 remodeling this facility.
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
above, the Company sold and refranchised this location on May 7, 2002.
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 market 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).
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 in
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).
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-20
--------------------------------------------------------------------------------
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 years ended March 31,
2003, and 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
Acquired during the year 232,929 --
Sold during the year (34,350) --
----------- -----------
Balance as of March 31, 2003 $ 4,897,743 $ 602,709
=========== ===========
Components of goodwill are tested for impairment in the third quarter. The fair
market 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:
March 31, April 1, April 2,
2003 2002 2001
------------ ------------ ------------
Net income:
Reported net income $ 1,557,613 $ 1,065,856 $ 956,006
Add back: Goodwill
amortization, net of tax -- -- 97,715
Add back: Trademark
amortization, net of tax -- -- 13,300
------------ ------------ ------------
Adjusted net income $ 1,557,613 $ 1,065,856 $ 1,067,021
============ ============ ============
Basic earnings per share:
Reported net income $ 0.76 $ 0.52 $ 0.48
Add back: Goodwill
amortization, net of tax -- -- 0.05
Add back: Trademark
amortization, net of tax -- -- 0.01
------------ ------------ ------------
Adjusted net income $ 0.76 $ 0.52 $ 0.54
============ ============ ============
Diluted earnings per share
Reported net income $ 0.74 $ 0.51 $ 0.48
Add back: Goodwill
amortization, net of tax -- -- 0.05
Add back: Trademark
amortization, net of tax -- -- 0.01
------------ ------------ ------------
Adjusted net income $ 0.74 $ 0.51 $ 0.54
============ ============ ============
F-21
--------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 12 - GOODWILL AND INTANGIBLE ASSETS - (continued)
All net income and per share amounts have been adjusted to reflect the March 7,
2002, 5% stock dividend.
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 halftime 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 $44,617, $44,385, and $29,000 to the plan for the years ended March
31, 2003, April 1, 2002, and April 2, 2001, respectively.
NOTE 14 - STOCK OPTIONS
The Board of Directors adopted the 1999 Stock Option 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
March 31, 2003, April 1, 2002, and April 2, 2001, is presented below:
Weighted-
Average
Options Exercise
Outstanding Price
-------- --------
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 2, 2002 411,387 $ 4.59
Options granted 54,000 $ 5.01
Options cancelled (50,763) $ 4.53
--------
Balance, March 31, 2003 414,624 $ 4.65
========
F-22
--------------------------------------------------------------------------------
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
March 31, 2003:
Options Exercisable
Weighted- ----------------------------
Average Weighted- Weighted-
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life - Years Price Exercisable Price
$ 3.92 136,437 9.00 $ 3.92 116,426 $ 3.92
$ 4.52 34,125 7.70 $ 4.52 13,650 $ 4.52
$ 4.76 8,400 13.92 $ 4.76 1,680 $ 4.76
$ 5.00 52,225 9.29 $ 5.00 10,290 $ 5.00
$ 5.02 20,000 14.93 $ 5.02 -- $ 5.02
$ 5.09 42,161 -- $ 5.09 25,297 $ 5.09
$ 5.15 121,276 11.05 $ 5.15 121,276 $ 5.15
There were 131,376 shares of common stock reserved for the grant of stock
options under the Plan at March 31, 2003.
F-23
--------------------------------------------------------------------------------
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: BRUCE N. DAVIS
---------------------------------
Bruce N. Davis
Chief Executive Officer
Dated: June 23, 2003
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 and June 23, 2003
------------------------- Chief Executive Officer
Bruce N. Davis
/s/ Dennis R. Miller Secretary and Corporate June 23, 2003
------------------------- Controller
Dennis R. Miller
/s/ William W. Service Director June 23, 2003
-------------------------
William W. Service
/s/ Thomas C. Connor Director June 23, 2003
-------------------------
Thomas C. Connor
/s/ Corydon H. Jensen Director June 23, 2003
-------------------------
Corydon H. Jensen
/s/ Richard Williams Director June 23, 2003
-------------------------
Richard Williams
/s/ Donald Woolley Director June 23, 2003
-------------------------
Donald Woolley
/s/ Dennis M. Waldron Director June 23, 2003
-------------------------
Dennis M. Waldron
20
CERTIFICATION
I, Bruce N. Davis, certify that:
1. I have reviewed this Annual Report on Form 10-K of Elmer's Restaurants,
Inc.;
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Annual
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respect the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Annual Report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Annual Report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior to the
filing date of this Annual Report (the "Evaluation Date"); and
(c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the Audit Committee
of registrant's Board of Directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls.
6. The registrant's other certifying officer and I have indicated in this
Annual Report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Bruce N. Davis
-----------------------
Bruce N. Davis
Chief Executive Officer
June 23, 2003
21
CERTIFICATION
I, Dennis R. Miller, certify that:
1. I have reviewed this Annual Report on Form 10-K of Elmer's Restaurants,
Inc.;
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Annual
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respect the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Annual Report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Annual Report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior to the
filing date of this Annual Report (the "Evaluation Date"); and
(c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the Audit Committee
of registrant's Board of Directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls.
6. The registrant's other certifying officer and I have indicated in this
Annual Report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Dennis R. Miller
----------------------
Dennis R. Miller
Corporate Controller
June 23, 2003
22
EXHIBIT INDEX
Exhibit Sequential
No. Description Page No.
3 (i) * Restated Articles of Incorporation of the Company (Incorporated herein
by reference from Exhibit No. 3.1 to the Company's Annual Report on Form 10-K
for the year ended March 31, 1988.)
3 (ii) * By-Laws of the Company, as amended. (Incorporated herein by reference
from Exhibit 3.2 of the Company's Annual Report on Form 10-K for the year ended
March 31, 1990.)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
of Chief Executive Officer. 24
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
of Corporate Controller. 25
23