================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO _________________
COMMISSION FILE NUMBER 0-14837
ELMER'S RESTAURANTS, INC.
-------------------------
(Exact name of registrant as specified in its charter)
OREGON 93-0836824
------ ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
11802 S.E. Stark St.
Portland, Oregon 97216
---------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(503) 252-1485
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
-----------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of Common Stock held by nonaffiliates of the Registrant
at June 23, 2000: $7.6 million. For purposes of this calculation, officers and
directors are considered affiliates.
Number of shares of Common Stock outstanding at June 20, 2000: 1,665,553
Document Part of Form 10-K into which incorporated
-------- -----------------------------------------
Proxy Statement for 2000 Part III
Annual Meeting of Shareholders
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
Item of Form 10-K Page
PART I.........................................................................2
Item 1. Business.........................................................2
Item 2. Properties.......................................................8
Item 3. Legal Proceedings................................................9
Item 4. Submission of Matters to a Vote of Security Holders..............9
PART II........................................................................9
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.............................................9
Item 6. Selected Financial Data.........................................10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................11
Item 8. Financial Statements and Supplementary Data.....................15
Item 9. Changes in the Disagreements with Accountants on Accounting
and Financial Disclosure.......................................15
PART III......................................................................15
Item 10. Directors and Executive Officers of the Registrant..............15
Item 11. Executive Compensation..........................................15
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................................15
Item 13. Certain Relationships and Related Transactions..................15
PART IV.......................................................................16
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 10-K...................................................16
SIGNATURES....................................................................17
1
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
The Company, located in Portland, Oregon, is a franchisor and operator
of full-service, family oriented restaurants under the names "Elmer's Pancake &
Steak House" and "ELMER'S. Breakfast. Lunch. Dinner" and an operator of
delicatessen restaurants under the names "Ashley's Cafe" and "Richard's Deli and
Pub." The Company is an Oregon corporation and was incorporated in 1983. Walter
Elmer opened the first Elmer's restaurant in Portland, Oregon in 1960, and the
first franchised restaurant opened in 1966. The Company acquired the Elmer's
franchising operation in January 1984 from the Elmer family. The Company now
owns and operates 11 Elmer's restaurants and franchises 18 Elmer's restaurants
in six western states. The Company reports on a fiscal year commencing April 1
and ending March 31 of the following year.
BUSINESS SEGMENT
The Company primarily operates in the business segment of restaurant
operations. Information as to revenue, operating profit, identifiable assets,
depreciation and amortization expense and capital expenditures for the Company's
business segment for fiscal 2000 is contained herein by reference to the
Company's consolidated financial statements.
Company-owned Elmer's restaurants are located in the Delta Park section
of Portland, Oregon; Beaverton, Gresham, Hillsboro, Medford, Albany and Grants
Pass, Oregon; Palm Springs, California; Boise, Idaho; and Tacoma and Lynnwood,
Washington. The Company acquired five Ashley's restaurants on February 18, 1999
and added a sixth on January 3, 2000. Two Ashley's are located in Bend, two are
in Springfield, one is in Eugene, and the newest is in Redmond, Oregon. The
Company acquired four Richard's Deli and Pub restaurants on March 31, 1999.
Richard's are located in Tigard, Aloha and two in Hillsboro, Oregon.
RECENT ACQUISITIONS AND DEVELOPMENTS
On February 18, 1999, the Company merged with its majority shareholder
CBW, Inc. ('CBW'), a closely held Oregon corporation, in a transaction in which
the Company was the surviving corporation. CBW was the operator of five
restaurants in Eugene, Springfield, and Bend, Oregon. In consideration for the
issuance by the Company of 770,500 new shares of the Company's restricted stock
to the CBW shareholders and the assumption of approximately $4 million in debt
owed by CBW arising from CBW's acquisition of the controlling block of the
Company's restricted common stock on August 25, 1998, the Company acquired all
the stock and assets of CBW including CBW's wholly owned subsidiary, CBW Food
Company, LLC (which by operation of merger is now the Company's wholly-owned
subsidiary). The assets included five Ashley's delis operated by CBW and an
option to purchase four Richards' delis operated by Grass Valley Ltd., Inc.
Each CBW shareholder received 144.4507 shares of the Company's
restricted common stock for every CBW share owned. The shares of Company stock
previously acquired by CBW, a total of 705,000 shares, were concurrently
transferred to the Company and were canceled upon receipt thereof.. The
Company's primary source of financing for the acquisition consisted of $3.08
million from its principal lender bank, Wells Fargo Bank, N.A., the proceeds of
which were applied to pay down $1.75 million of the assumed debt and
approximately $1.48 million in other outstanding debt of the Company. The debt
financing is secured by a grant of various security interests in the Company's
assets as well as the issuance of continuing guaranties by two subsidiaries of
the Company. The Company also used approximately $1,000,000 to pay down debt
assumed in the transaction.
Effective March 31, 1999, the Company executed a stock exchange
agreement ("GVL Acquisition") with Grass Valley Ltd., Inc. ("GVL"), a closely
held Oregon corporation, in a transaction in which the Company acquired 100% of
the outstanding stock of GVL in consideration for the payment by the Company of
the sum of $110,000 in cash and the issuance of 209,620 restricted shares of the
Company's common stock to the GVL shareholders. GVL is now a wholly owned
subsidiary of the Company.
GVL is the owner and operator of four restaurants in Hillsboro, Aloha,
and Tigard, Oregon operating under the moniker of Richard's Deli and Pub. The
first Richard's Deli and Pub was opened in August 1994 and all the restaurants
are located in leased retail space. The Company plans to continue operations at
all four locations in a substantially similar manner. The Company's Management
believes that it has realized significant synergies between the Richard's Deli
and Pubs and Ashley's Deli operations while accruing significant savings from
the consolidation of back office functions.
2
<PAGE>
Each GVL shareholder received 1048.1 restricted shares of the Company's
common stock in exchange for each GVL share owned. The Company's primary source
of financing for the cash portion of the acquisition was from working capital.
The business combinations under the Merger and GVL Acquisition were
accounted for under the purchase method. The Merger transaction was accounted
for as a reverse acquisition as the shareholders of CBW received the larger
portion (53.8%) of the voting interests in the combined enterprise. (See the
Company's Consolidated Financial Statements incorporated herein for more
details). Accordingly, CBW was considered the acquirer for accounting purposes
and therefore, the Company's assets and liabilities were recorded based upon
their fair market value. Management of the Company believes the Merger and GVL
Acquisition created a company with over 20 restaurants systemwide, making it
more competitive in the particular restaurant segments represented and allowing
the crossover of product promotions, menu items, marketing strategies and
restaurant images while generating likely opportunities for the development of
several brands targeting different consumer segments. Management anticipates
that the Merger and GVL Acquisition will also allow the Company to achieve
administrative and operational efficiencies.
To the extent permitted by operating cash flow or external financing
sources, the Company intends to focus future growth primarily in its existing
markets of higher market penetration ("Core Markets") through strategic
acquisitions, new restaurant openings or through other growth opportunities. The
Company will also continue to seek to expand through existing and new
franchisees. From time to time, the Company may close or sell restaurants or
markets when determined by management and the Board of Directors to be in the
best interests of the Company.
ELMER'S. BREAKFAST. LUNCH. DINNER.
RESTAURANT FORMAT AND MENU. The Company franchises or operates a total
of 29 full-service, family-oriented restaurants, with a warm, friendly
atmosphere and comfortable furnishings. Most of the restaurants are decorated in
a home style with fireplaces in the dining rooms. They are free standing
buildings, ranging in size from 4,600 to approximately 8,000 square feet with
seating capacities ranging from 120 to 220. A portion of the dining room in most
restaurants may also be used for private group meetings by closing it off from
the public dining areas. Thirteen of the restaurants have a lounge with seating
capacity ranging from 15 to 75. The normal hours of operation are from 6 a.m. to
10 or 11 p.m. and to 12 midnight on weekends in some restaurants with lounges.
Each restaurant offers full service, with a host or hostess to seat
guests and handle payments, wait staff to take and serve orders, and additional
personnel to clear and reset tables.
The menu offers an extensive selection of items for breakfast, lunch
and dinner. The Elmer's breakfast menu, which is available all day, contains a
wide variety of selections with particular emphasis on pancakes, waffles,
omelets, crepes, country platters and other popular breakfast items. Each
Elmer's restaurant makes all its batters and compotes from scratch and prepares
its fruit sauces with fresh fruits when in season. The lunch menu includes soups
made from scratch, salads, french dips, hamburgers and sandwiches. Customers at
dinner may choose among steak, seafood, chicken, and a variety of homestyle
items such as pot roast and turkey.
While most menu selections are standard to all Elmer's restaurants,
restaurants in different areas include on their menus selections that appeal to
local preferences. A special children's menu and a full senior menu is offered
in all restaurants.
ASHLEY'S AND RICHARD'S DELI AND PUB
RESTAURANT FORMAT AND MENU. The Company operates a total of six
Ashley's restaurants and four Richard's Delis and Pubs. They are substantially
similar in design, size and menu. Eight of the ten units are located in retail
strip mall locations, one is in a food court in a major indoor mall, and one is
a free standing building. They range in size from 1,000 to 2,200 square feet
with seating capacities ranging from 15 to 30. A portion of the dining room is
also used for the sale of Oregon lottery games. The normal hours of operation
are from 7 a.m. to 10 p.m. and up to 2 a.m. for some restaurants on weekends.
Each restaurant offers deli-style hot and cold sandwiches, soups,
salads, and desserts and has a catering department. The restaurants are approved
retailers with the Oregon lottery and offer all lottery games. Meal selections
generally range in price from $2.95 to $6.95. The catering operation offers
small to medium size food service and event support for business meetings,
outdoor barbecues, and special events.
The above brands provide a vehicle for market penetration and unit
growth, leveraging off the concept of broad appeal, quick-turn meals and
emphasis on service. In a typical market, Ashley's restaurants and Richard's
Delis and Pubs
3
<PAGE>
experience competition from either other moderately-priced, casual dining and
walk-through restaurants or economy sandwich outlets. Ashley's and Richards'
differentiate themselves from economy deli competitors by their full table and
bar service, attentive wait staff, lottery games, entertaining atmosphere,
distinctive decor and consistently high-quality meals.
FRANCHISE OPERATIONS
In addition to the acquisition and development of additional Company
operated restaurants, the Company encourages the strategic development of
franchised restaurants in its existing markets as well as potentially in certain
additional states. The primary criteria considered by the Company in the
selection, review and approval of prospective franchisees are the availability
of adequate capital to open and operate the number of restaurants franchised and
prior experience in operating full-service restaurants. Under a franchise
agreement, a franchisor grants to a franchisee the right to operate a business
in a manner developed by the franchisor. The franchisee owns the franchised
operation independently from the franchisor and, in effect, buys the right to
use the franchisor's name, format, and operational procedures. Franchisees
benefit from a common identification, standardized products, and the business
reputation and services that a franchisor may provide, such as group
advertising, management services, product enhancements, and group buying
programs. The franchisor is able to capitalize on its business concept without,
in many cases, having to invest substantial capital for expanded operations.
EXISTING FRANCHISEES. The existing franchise agreements generally grant
to franchisees the right to operate an Elmer's restaurant in one specific
location for 25 years, renewable generally for an additional 25-year period.
When they entered into franchising agreements, the existing franchisees paid
initial franchise fees of up to $25,000 plus additional fees of up to $10,000 if
the restaurant had a lounge serving alcoholic beverages. Franchisees pay monthly
franchise royalty fees ranging from one to four percent of the gross revenues of
their restaurants. All but one restaurant must contribute up to one percent of
gross revenues to a common advertising pool. In several markets, franchised and
company-owned restaurants have agreed to increased 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, with a
minimum monthly fee of $500.00 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
unsuccessful franchised restaurant may be offered a reduced initial franchise
fee, deferred payment of the franchise fee, or other concessions. Pursuant to
certain area franchise agreements, the Company will receive reduced initial
franchise fees and monthly royalty fees from additional restaurants that may be
opened in the areas covered by those agreements. See "Area Franchise Agreements"
below. In connection with the acquisition of the Elmer's franchising operation
in 1984, the Company also granted Dale Elmer, a former director of the Company,
and members of the Elmer family the right to operate a total of three additional
restaurants at a franchise royalty fee of two percent; no restaurants are being
operated on this basis.
The Company estimates that construction costs for the standard
free-standing building range from approximately $700,000 to $900,000, with
actual costs dependent upon local building requirements and construction
conditions, and further based on configuration and parking requirements.
The cost of the land may vary considerably depending upon the quality
and size of the site, surrounding population density and other factors. The cost
of leasehold improvements and restaurant equipment, including kitchen equipment,
furniture, and trade fixtures, is estimated by the Company to range from
approximately $250,000 to $400,000. Inventory and miscellaneous items such as
paper goods, food, janitorial supplies, and other small wares are estimated
initially to cost between approximately $68,000 and $108,000.
There is no typical elapsed time from the signing of a franchise
agreement until a restaurant is open for business, although it normally takes
120 days from the receipt of the building permits to construct a new restaurant
facility. Most restaurants have opened within 12 months of the date of the
signing of the franchise agreement. Franchisees bear all costs associated with
the development and construction of their restaurants. Although the Company has
established criteria to evaluate prospective franchisees, there can be no
assurance that franchisees will have the business abilities or access to
financial
4
<PAGE>
resources necessary to open the restaurants or that the franchisees will
successfully develop or operate restaurants in their franchise areas in a manner
consistent with the Company's concepts and standards.
AREA FRANCHISE AGREEMENTS. Under previous management, the Elmer's
franchising operation granted exclusive area franchise agreements, whereby
independent entities obtained the exclusive rights to develop Elmer's
restaurants within their respective areas. Areas covered by these agreements are
Clackamas County, Oregon and Vancouver, Washington. The agreement covering Ada
and Canyon Counties, Idaho was not renewed. The area franchise agreements
require the area franchisee to share with the Company the initial fees and the
franchise royalty fees for each new restaurant in the area. The Company's share
of the initial fees ranges from $2,500 to $12,500 per restaurant. There are two
restaurants covered by area franchise agreements. Under the area franchise
agreements, the Company reserves the right to approve each new restaurant
franchisee. The area franchise agreements grant the franchisees the right to use
the Company's name in the particular area and preclude the Company from opening
Company-owned or franchised restaurants in the areas covered by the agreements.
The Company does not intend to enter into similar agreements in the future.
SERVICES TO FRANCHISEES. The Company makes available to its franchisees
various programs and materials. The Company provides several manuals to assist
franchisees in ongoing operations, including a comprehensive operations manual
describing kitchen operations, floor operations, personnel management, job
descriptions, and other matters. The Company has prepared a recipe book for
franchisees. All system restaurants use the same menu. Prices are adjusted
according to local conditions. The Company has developed and maintains a menu
cost-control program and a labor cost-control program at each of its
Company-owned restaurants and has developed and implemented a training manual
and programs for all positions within the restaurant.
The Company provides both formal and informal ongoing training. At
least one two-day meeting is scheduled each year. At the meetings, franchisees
attend lectures by Company personnel and guest speakers from the industry as
well as participate in group workshops discussing such topics as cost control,
promotion and food presentation.
The Company provides each franchisee with specifications for menu
items. The Company, however, sells no food items or like products to
franchisees, except for certain minor supplies such as guest checks and gift
certificates. The Company coordinates franchisees' purchases to obtain volume
discounts. Franchisees bear all cost involved in the operation of their
restaurants.
Periodic on-site inspections and audits are conducted to ensure
compliance with Company standards and to aid in franchisees in improving their
sales and profitability.
COMPANY-OWNED RESTAURANTS
The Company owns and operates 11 Elmer's restaurants, which it acquired
or built from 1984 to 1991, five Ashley's restaurants acquired February 18,
1999, four Richard's Deli and Pub restaurants acquired March 31, 1999, and one
additional Ashley's unit built in January 3, 2000. The Company has owned and
operated an Elmer's restaurant located in the Delta Park section of Portland,
Oregon since January 1984. In August 1986, the Company opened a restaurant in
Tacoma, Washington. In January 1987, the Company began operation of a restaurant
in Lynnwood, Washington and assumed operation of an Elmer's restaurant in Grants
Pass, Oregon that was in bank foreclosure. 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.
As earlier discussed, five Ashley's restaurants were acquired in a
merger with CBW, Inc. on February 18, 1999 (as reported on a Current Report on
Form 8-K filed March 5, 1999 and amended on June 14, 1999). One restaurant in
Springfield, Oregon was opened in 1994 and the other four were opened in 1995.
The Company does not own any of the real estate. The four Richard's Delis and
Pubs were acquired in a purchase of the outstanding stock of Grass Valley Ltd.,
Inc. on March 31, 1999 (as reported on a Current Report on Form 8-K filed April
15, 1999 and amended on June 14, 1999). The Company does not own any of the real
estate.
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
5
<PAGE>
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, 2000, the Company employed 326 persons on a full-time
basis, of whom 15 were corporate office personnel and 311 were hourly restaurant
personnel. At that date, the Company also employed 206 part-time restaurant
personnel. Of the 15 corporate employees, 7 are in upper management positions
and the remainder are professional and administrative or office employees.
Employees of franchised Elmer's restaurants are not included in these figures.
None of the Company's employees are covered by collective bargaining agreements.
The Company considers its employee relations to be good. Most employees, other
than management and corporate personnel, are paid on an hourly basis. The
Company believes that it provides working conditions and wages that compare
favorably with those of its competition.
Each Company-operated restaurant employs an average of approximately 45 hourly
employees, many of whom work part-time on various shifts. The management staff
of a typical restaurant operated by the Company consists of a general manager,
one kitchen manager, one assistant manager and two shift managers. The Company
has an incentive compensation program for store managers that provides the store
managers with a quarterly bonus based upon the achievement of certain defined
goals.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of June 10, 2000, the executive officers and other key personnel of
the Company were as set forth below.
Name Age Position
---- --- --------
Bruce Davis 39 President
William Service 39 Chief Executive Officer
Jerry Scott 46 Vice President, Operations
Juanita Nelson 64 Secretary and Controller
The executive officers of the Company are appointed annually for one
year and hold office until their successors are appointed.
EXECUTIVE OFFICERS
Bruce Davis has served as President and Chairman of Board of Directors
since August 1998. For more than five years prior to joining the Company, Mr.
Davis was President of three companies engaged in the restaurant business:
Jaspers Food Management, Inc. (1993-1999), CBW, Inc. (1995-1999), and Oregon
Food Management, Inc. (1996-present).
William Service has served as Chief Executive Officer and Director
since August 1998. For more than five years prior to joining the Company, Mr.
Service was the Chief Executive Officer of three companies engaged in the
restaurant business: Jaspers Food Management, Inc. (1993-present), CBW, Inc.
(1995-1999), and Oregon Food Management, Inc. (1996-present).
KEY PERSONNEL
Jerry Scott has served as Vice President, Operations since August 1998.
For more than five years prior to joining the Company, Mr. Scott served as Vice
President of Operations for Jaspers Food Management, Inc. He served from
November 1994 to November 1995 as Regional Director of Operations of Macheezmo
Mouse Restaurants, Inc. and from June 1993 to September 1994 as Director of
Operations of Mission Investment Company.
Juanita Nelson has served as Controller since March 1985 and as
Secretary since February 1998. For more than five years prior to joining the
Company, Mrs. Nelson was the Office Manager of the Red Lion Inns and Thunderbird
Motor Inns corporate office.
TRADEMARKS AND SERVICE MARKS
The Company believes its trademarks and service marks have significant
value and are important to its business. The Company has registered the
trademarks and service marks "Elmer's Pancake & Steak House" and "Elmer's
Colonial Pancake &
6
<PAGE>
Steak House" and the Elmer's logo with the U.S. Patent and Trademark Office. The
service mark "Elmer's Breakfast. Lunch. Dinner." has also been registered in
certain states. It is the Company's policy to pursue registration of its marks
whenever possible and to oppose any infringement of its marks.
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.
ADVERTISING AND MARKETING
Word-of-mouth advertising, new restaurant openings, and the on-premises
sale of promotional products have historically been the primary methods of
restaurant advertising. The Company employs an advertising consultant to assist
in projecting the Elmer's restaurant concept to the general public in the
Western states, primarily through magazines, newspapers, and radio and
television commercials. The Company maintains a common advertising pool with its
franchisees to advertise Elmer's restaurants. After production costs for the
advertising campaign have been paid out of the common pool, the remaining money
is used for advertising in the various local areas of the franchised
restaurants. The Company-owned Elmer's restaurants and all but one of the
franchised restaurants are required to participate by contributing one percent
of monthly gross revenues. At the present time, the Company relies principally
on word-of-mouth advertising and catering exposure for advertising of Ashley's
and Richard's.
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 and 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 restaurant franchisors,
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, having at
their disposal greater capital resources that can be devoted to advertising,
product development and new restaurants and greater abilities to withstand
adverse business trends. 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, and reasonable prices.
GOVERNMENT REGULATIONS
The restaurant industry generally, and each Company-operated and
franchised restaurant specifically, are subject to numerous federal, state and
local government regulations, including those relating to the preparation and
sale of food and those relating to building, zoning, health, accommodations for
disabled members of the public, sanitation, safety, fire, environmental and land
use requirements; and, in some cases, state and local licensing of the sale of
alcoholic beverages and the state licensing of gaming. The Company and its
franchisees are also subject to federal and state laws governing their
relationship with employees, including minimum wage requirements, accommodation
for disabilities, overtime, working and safety conditions and
citizenship/residency requirements. Federal and state environmental regulations
have not had a major effect on the Company's operations to date. The Company has
no material contracts with the United States government or any of its agencies.
The Company is subject to a number of state laws regulating franchise
operations and sales. For the most part, those laws impose registration and
disclosure requirements on the Company in the offer and sale of franchises but,
in certain cases, also apply substantive standards to the relationship between
the Company and the franchisees, including limitations on noncompetition
provisions and on provisions concerning the termination or nonrenewal of a
franchise. Some states require that certain 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.
7
<PAGE>
The failure to obtain or retain food licenses or approvals to sell
franchises, or an increase in the minimum wage rate, employee benefit costs
(including costs associated with mandated health insurance coverage) or other
costs associated with employees could adversely affect the Company and its
franchisees. A mandated increase in the minimum wage rate was implemented in
1999 and 2000.
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 2000. The lease expires November 30,
2000.
COMPANY-OWNED RESTAURANTS
COMPANY-OWNED PROPERTIES. The Company owns the real property upon which
the following four Company-owned restaurants are located. All of the properties
are subject to encumbrances in favor of lending institutions.
Approximate Area
Location Site Restaurant
-------- ---- ----------
Tacoma, Washington 1.3 acres 6,660 sq. ft.
Lynnwood, Washington 1 acre 6,500 sq. ft.
Gresham, Oregon 1 acre 5,670 sq. ft.
Boise, Idaho 1.3 acres 5,430 sq. ft.
LEASED PROPERTIES. The Company leases the property upon which the
following seven 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 Site Restaurant Expiration
----------------- ---- ---------- ----------
Grants Pass, Oregon 1 acre 6,350 sq. ft. December 31, 2001
Hillsboro, Oregon 1.2 acres 6,350 sq. ft. January 1, 2002
Medford, Oregon 1.25 acres 6,300 sq. ft. May 31, 2003
Albany, Oregon -- 5,460 sq. ft. February 28, 2003
Palm Springs, California 1.3 acres 5,500 sq. ft. April 30, 2007
Portland, Oregon (Delta Park) 1.2 acres 6,350 sq. ft. July 31, 2006
Beaverton, Oregon -- 5,322 sq. ft. August 31, 2006
Ashley's Locations Sq. Ft. Leased Through
------------------ ------- --------------
Bend, Oregon (North) 1,000 12/31/00
Bend, Oregon (South) 1,400 8/31/03
Redmond, Oregon 1,200 6/31/03
Eugene, Oregon 1,700 9/30/03
Springfield, Oregon (Gateway) 921 1/31/01
Springfield, Oregon (Thurston) 1,200 4/1/02
Richard's Locations Sq. Ft. Leased Through
------------------- ------- --------------
Aloha, Oregon 1,727 11/30/02
Hillsboro, Oregon (North) 1,092 8/31/01
Hillsboro, Oregon (South) 2,510 10/21/01
Tigard, Oregon 1,743 12/31/02
8
<PAGE>
The Company believes that its facilities are generally in good
condition and that they are suitable for their current uses. The Company
nevertheless engages periodically in construction and other capital improvement
projects designed to expand and improve the efficiency of its facilities.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ SmallCap System,
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
Years Ended March 31
------------------------------------------------------
2000 1999
------------------------------------------------------
High Low High Low
1st Quarter 6 5/8 51/4 $4 5/8 $2 3/4
2nd Quarter 81/2 53/4 5 7/8 3 5/8
3rd Quarter 7 3/8 5 1/2 5 1/4 3 15/16
4th Quarter 7 1/8 4 3/4 6 4 1/8
Although the Common Stock is traded on the NASDAQ SmallCap System,
there is a relatively low trading volume.
The Company has not paid or declared cash dividends on its Common
Stock. In December 1999 the company issued 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 of other relevant factors.
As of June 1, 2000, the Company had 191 shareholders of record.
UNREGISTERED SALES OF STOCK
Sales of unregistered Common Stock made by the Company in the last
three fiscal years are as follows:
CBW Inc. acquired 705,000 restricted shares of the Common Stock in the
Company from Anita Goldberg and Rudolph Mazurosky on August 25, 1998. The
consideration paid by CBW, Inc. for the Shares was $4,504,950. The shareholders
of CBW, Inc. that acquired the indirect beneficial ownership of the Company's
Common Stock as part of this transaction were William W. Service, Bruce N.
Davis, Thomas C. Connor, Corydon H. Jensen, Linda E. Bolton (as Trustee under a
Restated Trust Agreement dated 6/8/98), Ken Boettcher, Karen Brooks, Gregory
Wendt and Donald W. Woolley. The issuance was made pursuant to available
exemptions from the registration provisions of the Securities Act of 1933, as
amended (specifically, Section 4(2) of the Securities Act) and relevant Blue Sky
statutes. The shares are subject to transfer restrictions and may only be
transferred subject to compliance with applicable federal and state securities
laws.
Effective February 18, 1999, the Company merged with its majority
shareholder CBW Inc. ('CBW'), a closely held Oregon corporation, in a
transaction in which the Company was the surviving corporation. In consideration
for the issuance by the Company of 770,500 new shares of the Company's
restricted Common Stock to the CBW shareholders and the assumption of
approximately $4 million in debt owed by CBW arising from CBW's acquisition of
the controlling block of the Company's
9
<PAGE>
restricted common stock on August 25, 1998, the Company acquired all the stock
and assets of CBW including CBW's wholly owned subsidiary, CBW Food Company, LLC
(which by operation of merger is now the Company's wholly-owned subsidiary).
Each CBW shareholder received 144.4507 shares of the Company's restricted Common
Stock for every CBW share owned. The shares of Company stock previously acquired
by CBW, a total of 705,000 shares, were concurrently transferred to the Company
and were canceled upon receipt thereof. The issuances were made pursuant to
available exemptions from the registration provisions of the Securities Act of
1933, as amended (specifically, Section 4(2) of the Securities Act) and relevant
Blue Sky statutes. The shares are subject to transfer restrictions and may only
be transferred subject to compliance with applicable federal and state
securities laws.
Effective March 31, 1999, the Company paid the sum of $110,000 in cash
and issued 209,620 shares of Common Stock to the shareholders of GVL, namely
Gary Weeks and Richard Buckley, as part of the GVL Acquisition (disclosed in
Item 1 under the sub-caption "Recent Developments and Acquisitions"). The
issuances were made pursuant to available exemptions from the registration
provisions of the Securities Act of 1933, as amended (specifically, Section 4(2)
of the Securities Act) and relevant Blue Sky statutes. The shares are subject to
transfer restrictions and may only be transferred subject to compliance with
applicable federal and state securities laws.
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, 1999 and
2000 and for each of the three years in the period ended March 31, 2000 are
derived from the audited financial statements included elsewhere herein. The
selected financial data set forth below for the Company as of March 31, 1998,
1997 and 1996 and for the years ended March 31, 1997 and 1996 are derived from
the financial statements not included elsewhere herein.
<TABLE><CAPTION>
Elmer's Restaurants, Inc. and Subsidiaries
Selected Financial Data
for the year ended March 31, 2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
Revenues $22,179,574 $11,952,728 $1,591,293 $875,199 94,852
Net income (loss) 939,549 290,512 205,270 (40,971) (213,912)
Net income (loss) per share 0.56 0.33 0.25 (.05) (.27)
Total assets 13,847,208 13,046,684 259,675 263,676 267,277
Long-term notes payable, less current 5,124,130 5,703,539 50,000 245,754 275,385
portion
Total liabilities 8,209,004 8,348,029 258,962 463,539 426,169
Total shareholder's equity (deficit) 5,638,204 4,698,655 713 (199,863) 213,912
</TABLE>
On August 25, 1998, CBW, Inc. ("CBW") acquired a controlling interest
in the then outstanding stock of Elmer's. On February 18, 1999, CBW merged with
and into Elmer's. These transactions have been accounted for as a purchase of
Elmer's by CBW and, accordingly a new basis of accounting, based on fair values,
was established for the assets and liabilities of Elmer's. Subsequent to the
acquisition on August 25, 1998, the Company's financial statements reflect the
combined results of operations and financial position of CBW and Elmer's based
on the new basis of accounting for Elmer's and the historical cost basis of CBW.
The results of operations for the year ended March 31, 1999 also reflect a
minority interest in the earnings of the Company representing the separate 46.2%
separate public ownership in Elmer's from August 25, 1998 through February 17,
1999. The financial position at March 31, 1999 also reflects the acquisition of
GVL on that date. Prior to August 25, 1998, the financial statements of the
Company include only the results of operations, financial position and cash
flows of CBW, which began operations on June 16, 1995.
NEW ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements are discussed in Note 1 of Notes to
Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
"Selected Historical Financial Data" and the financial statements of the Company
and the accompanying notes thereto included elsewhere herein. Certain
information discussed
10
<PAGE>
below may constitute forward-looking statements within the meaning of the
federal securities laws. Although the Company believes that the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, it can give no assurance that its expectations will be achieved.
Forward-looking information is subject to certain risks, trends and
uncertainties that could cause actual results to differ materially from
projected results. Among those risks, trends and uncertainties are the general
economic climate, costs of food and labor, consumer demand, interest rate
levels, restrictions imposed by the Company's debt covenants, management
control, availability of supplies, the availability of financing and other risks
associated with the acquisition, development and operation of new and existing
restaurants. This list of risks of uncertainties is not exhaustive.
OVERVIEW
On August 25, 1998, CBW, Inc. purchased 53.8% of Elmer's Restaurants,
Inc. then outstanding common stock from its then president and chairman, Ms.
Anita Goldberg, and her brother and director, Rudolph Mazurosky. On February 18,
1999, Elmer's Restaurants, Inc. merged with CBW, Inc.
In accordance with generally accepted accounting principles, these
transactions have been accounted for as a purchase of Elmer's Restaurants, Inc.
by CBW, Inc. and accordingly a new basis of accounting, based on fair values,
was established for the assets and liabilities of Elmer's Restaurants, Inc. The
consolidated financial statements include the accounts of CBW, Inc. for the
years ended March 31, 1998 and 1997 (rather than the previously reported results
of Elmer's) and include the accounts of CBW, Inc. for the year ended March 31,
1999 and of Elmer's Restaurants, Inc. for the period August 31, 1998 through
March 31, 1999 (with a minority interest in the income through February 17, 1999
representing the 46.2 % separate public ownership), as well as the assets and
liabilities of Grass Valley Ltd., Inc., which was acquired as of March 31, 1999.
Because of the significance of these transactions, the Company believes
that a discussion and analysis of the Company's results of operations in fiscal
year 2000 to pro forma results of operations of prior years, which include
results of operations of Elmer's Restaurants, Inc. and Grass Valley Ltd., Inc.,
provides a more meaningful comparison than the discussion and analysis of prior
year actual results of operations which, prior to these transactions, only
includes the results of operations of CBW, Inc. and supplements the following
highlights of historical results.
HIGHLIGHTS OF HISTORICAL RESULTS
The Company reported record net income of approximately $939,500, or
$.56 basic earnings per share for the year ended March 31, 2000, on sales of
approximately $22,180,000. After taking into account the pro forma income tax
provision as if the Company had been a taxable company for the entire year in
1999, the Company reported net income, net of pro forma income tax provision, of
approximately $264,000 or $.30 per share for the year ended March 31, 1999.
During the fourth quarter of the Company's fiscal year ending March 31,
1999, Elmer's Restaurants, Inc. executed an option (which it acquired at the
time it merged with CBW, Inc.) to purchase Grass Valley Ltd., Inc. ("GVL"), the
operator of four restaurants in the Portland area under the name Richard's Deli
and Pub. This acquisition was completed on the last day of the Company's fiscal
year and is reflected in the Company's March 31, 1999 balance sheet. There are
no operating results from the GVL acquisition reflected in the Company's actual
results of operations for the year ended March 31, 1999.
During the year ended March 31, 2000, total assets increased
approximately $800,000 to $13.8 million. This increase is due primarily to the
increase in current assets as a result of current year earnings. At March 31,
2000, total shareholders' equity increased $939,549 entirely as a result of
current year net income.
COMPARISON OF FISCAL YEAR 2000 ACTUAL RESULTS TO HISTORICAL PRO FORMA RESULTS
OF OPERATIONS
As discussed above, the Company believes that discussion and analysis
of the Company's fiscal year 2000 results of operations compared to prior years
on a pro forma basis, which include CBW, Inc. and Grass Valley Ltd., Inc.,
provides a more meaningful comparison than the discussion and analysis of
reported historical actual results of operations. The following discussion and
analysis presents the Company's results of operations for the year ended March
31, 2000 with the results of operations for the years ended March 31, 1999 and
1998, as if the merger of CBW, Inc. and the acquisition of Grass Valley Ltd.,
Inc., had occurred at the beginning of the periods after giving effect to pro
forma adjustments, including amortization of goodwill, depreciation, interest
expense, and related income tax effects. The pro forma information is provided
for illustrative purposes and is not necessarily indicative of the combined
results of operations that would have actually occurred for such periods nor
does it represent a forecast of results of operations for any future periods.
11
<PAGE>
<TABLE><CAPTION>
Dollar amounts in thousands except per Year Ended
share data ------------------------------------------------------------------------------------------
(pro forma information is unaudited) March 31, 2000 March 31, 1999 March 31, 1998
-------------- -------------- --------------
PRO FORMA PRO FORMA
Percent of Percent of Percent of
Amount Revenues Amount Revenues Amount Revenues
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Revenue $22,180 100.0% $21,232 100.0% $19,763 100.0%
Restaurant costs and expenses 14,629 66.0 14,721 69.3 13,566 68.6
General and administrative expenses 5,653 25.4 4,861 22.9 4,678 23.7
Operating income 1,897 8.6 1,650 7.8 1,519 7.7
Non operating income (expense) (478) (2.2) (508) (2.4) (618) (3.1)
Net income 940 4.2 751 3.5 595 3.0
Earnings per share $0.56 $0.45 $0.36
Weighted average shares outstanding 1,665,548 1,665,548 1,665,548
</TABLE>
<TABLE><CAPTION>
REVENUE
-----------------------------------------------------------------------------------
For the year ended: March 31, 2000 March 31, 1999 March 31, 1998
-------------- -------------- --------------
PRO FORMA PRO FORMA
Percent of Percent of Percent of
Amount Revenues Amount Revenues Amount Revenues
Restaurant operations:
<S> <C> <C> <C> <C> <C> <C>
Restaurant sales 18,625 84.0 $18,255 86.0% $17,029 86.2%
Lottery 2,906 13.1 2,354 11.1 2,074 10.5
----- ---- -------- ------ ------- ------
21,531 97.1 20,609 97.1 19,103 96.7
Franchise operations 649 2.9 623 2.9 660 3.3
--- --- --- ----- ------ ------
Total pro forma revenue $22,180 100.0% $21,232 100.0% $19,763 100.0%
======= ====== ======= ====== ======= ======
</TABLE>
REVENUES. Revenues for the year ended March 31, 2000 were 4.5% greater
than the pro forma comparable period in 1999. Same store sales increased 4.5%
and franchise revenues increased of 4.2%. Lottery revenues as a percentage of
total revenues rose from 11.1% to 13.5%. Pro forma revenues for the year ended
March 31, 1999 were 7.4% greater than the comparable period in 1998 due to an
increase in restaurant sales of 7.2% and lottery revenues of 13.5%. The Company
anticipates further improvement in same store sales and franchise revenues as it
realizes the benefits of its new menu design implemented in winter of 1999 and
an ongoing "outsert" menu program implemented system-wide in the summer of 2000.
PRO FORMA RESTAURANT COSTS AND EXPENSES. As a percent of total revenue,
food, beverage and supply costs were 28.4% in 2000 compared to pro forma results
in 1999 and 1998 of 28.8% and 27.0% respectively. Labor was 31.9% of total
revenue in 2000 compared to pro forma results in 1999 and 1998 of 31.5% and
31.9% respectively. Occupancy and depreciation and amortization expenses totaled
8.5% of revenue in 2000 compared to pro forma results in 1999 and 1998 of 9.0%
and 9.7% respectively. The decrease in food, beverage and supply cost as a
percentage of revenue in 2000 over pro forma 1999 is principally a result of the
introduction of the new menu and "outsert" items, an increase in customer check
average, and in-store training, promotions and development. The slight increase
in labor as a percentage of revenue in 2000 over pro forma 1999 is driven by an
increase in the company's average wage rate resulting from significant increases
in both Oregon and Washington minimum wage. The Company's reduction in pro forma
labor as a percentage of pro forma revenues in 1999 compared to 1998 occurred
while Oregon's minimum wage rate increased 9.1% on January 1, 1998 (from $5.50
to $6.00 an hour) and another 8.3% increase on January 1, 1999 (from $6.00 to
$6.50 per hour). Washington's minimum wage rate increased 10.7% on January 1,
1999 from $5.15 to $5.70. Washington state minimum wage was increased another
14% on January 1, 2000 (matching Oregon's $6.50 per hour rate). The Company is
not aware of any further state minimum wage increases scheduled in states which
the Company operates restaurants. The reduction in occupancy and depreciation
12
<PAGE>
and amortization expenses as a percentage of revenues in 2000 over pro forma
1999 is primarily due to the increase in pro forma revenues.
PRO FORMA GENERAL AND ADMINISTRATIVE EXPENSES. General and
administrative expenses were 22.6% of total revenue in 2000 compared to pro
forma results in 1999 of 22.9% and 23.7% in 1998. The continued reduction of
general and administrative expenses as a percentage of revenues is the result of
increased management attention to overhead cost minimization
PRO FORMA NON OPERATING INCOME (EXPENSES). This primarily reflects net
interest expenses that were 2.2% of total revenues in 2000 compared to pro forma
results in 1999 and 1998 of 2.5% and 3.1% respectively. The reduction in net
interest expense as a percentage of pro forma revenues is the result of
scheduled amortization principal payments and the 4.5% increase in revenues.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company had cash and equivalents of
approximately $1,640,000 representing an increase of approximately $1,037,000.
The increase resulted from cash provided by operations totaling approximately
$2,102,000, less cash used in financing activities of approximately $579,000 and
less cash used in investing activities of approximately $526,000. Cash used in
financing activities was from scheduled payments on notes payable. Cash used in
investing activities was the results of additions to property, buildings and
equipment. In addition to the regular replacement of depreciating restaurant
assets, cash used in investing activities included the addition of a
deli-restaurant unit in central Oregon, the addition of a lounge in the Elmer's
Restaurant located in Albany, kitchen capacity improvements in several
restaurants, and new restaurant signage system-wide.
The Company's primary liquidity needs arise form debt service on
indebtedness incurred in connection with the merger of CBW, Inc., operating
lease requirements and the funding of capital expenditures. As of March 31,
2000, the Company had outstanding indebtedness for borrowed money of $2.1
million under a term loan facility and $2.3 million real estate loan facilities
with Wells Fargo Bank and $1.25 million under a term loan facility with Eagle's
View Management, assumed at the time of the merger with CBW, Inc. The Wells
Fargo loans have a weighted-average maturity of 9 years, bear interest at an
average of 8.25%, require monthly payments of principal and interest, are
collateralized by substantially all of the assets owned by Elmer's Restaurants,
Inc. and impose certain financial restrictions and covenants, the most
restrictive of which, require the Company to maintain a maximum of total
liabilities, excluding subordinated debt, to tangible net worth plus
subordinated debt of 5.5 to 1.0. The Company was in compliance with this
covenant at March 31, 2000. In addition, effective September 30, 1999, and
thereafter on a trailing four quarter basis as of the end of each fiscal
quarter, the Company will be required to maintain a ratio of cash generation
(defined as net income before taxes, interest expense, depreciation and
amortization) to total interest expense plus the prior period current maturities
of long-term debt of at least 2.25 to 1.0. The Company has available a $250,000
line of credit with Wells Fargo Bank through September 1, 2000, and is
collateralized by substantially all assets of the Company excluding real estate.
Interest on the unpaid balance accrues at a rate of prime plus 1%. The prime
rate at March 31, 2000 was 9.0%. There was no amount outstanding at March 31,
2000. The Eagle's View Management loan has a maturity of approximately five
years, an interest rate of 12%, requires monthly payments of interest only, and
is collateralized by a second position on substantially all the assets owned by
Elmer's Restaurants, Inc. and does not impose financial covenants upon the
Company.
The Company's primary source of liquidity during the year was the
operation of the restaurants, franchise fees earned from its franchisees,
internal cash and borrowings as discussed above.
In the future, the Company's liquidity and capital resources will
primarily depend on the operations of Elmer's Restaurants, Inc., CBW, Inc. and
Grass Valley Ltd., Inc. which, under the provisions of the Company's loan
agreements, would permit, under certain conditions, distributions and dividends
to the Company's shareholders and early reduction of the Eagle's View Management
indebtedness. Elmer's Restaurants, Inc., CBW, Inc. and Grass Valley Ltd., Inc.,
like most restaurant businesses, are able to operate with nominal or deficit
working capital because sales are for cash and inventory turnover is rapid.
Renovation and/or remodeling of existing restaurants is either funded directly
from available cash or, in some instances, is financed through outside lenders.
Construction or acquisition of new restaurants is generally, although not
always, financed by outside lenders. 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.
13
<PAGE>
EFFECTS OF YEAR 2000
The Company has completed its assessment of internal systems and has
concluded that its hardware and software are Year 2000 compliant. The Company
has concluded that it will not be necessary to replace its retail point of sale
hardware and that, based on information available at this time, the remaining
costs to implement the Year 2000 readiness program will not be material.
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, 2000, 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 1998, fiscal 1999 or fiscal 2000. Substantial increases in costs could
have a significant impact on the Company and the industry. If operating expenses
increase, management believes it can recover increased costs by increasing
prices to the extent deemed advisable considering competition.
SEASONALITY
The seasonality of restaurant sales due to consumer spending habits can
be significantly affected by the timing of advertising, competitive market
conditions and weather related events. While restaurant sales for certain
quarters can be stronger, or weaker, there is no predominant pattern.
ITEM 7(A) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
CERTAIN STATEMENTS IN THIS FORM 10-K UNDER "ITEM 1. BUSINESS," "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND ELSEWHERE IN THIS FORM 10-K CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WHICH WE BELIEVE ARE WITHIN THE MEANING OF THE SECURITIES ACT OF
1933, AS AMENDED AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES, AND
OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE, OR ACHIEVEMENTS
OF ELMER'S RESTAURANTS, INC. (INDIVIDUALLY AND COLLECTIVELY WITH ITS
SUBSIDIARIES, HEREIN THE "COMPANY") TO BE MATERIALLY DIFFERENT FROM ANY FUTURE
RESULTS, PERFORMANCE, OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING:
GENERAL ECONOMIC AND BUSINESS CONDITIONS; THE IMPACT OF COMPETITIVE PRODUCTS AND
PRICING; SUCCESS OF OPERATING INITIATIVES; DEVELOPMENT AND OPERATING COSTS;
ADVERTISING AND PROMOTIONAL EFFORTS; ADVERSE PUBLICITY; ACCEPTANCE OF NEW
PRODUCT OFFERINGS; CONSUMER TRIAL AND FREQUENCY; AVAILABILITY, LOCATIONS, AND
TERMS OF SITES FOR RESTAURANT DEVELOPMENT; CHANGES IN BUSINESS STRATEGY OR
DEVELOPMENT PLANS; QUALITY OF MANAGEMENT; AVAILABILITY, TERMS AND DEPLOYMENT OF
CAPITAL; THE RESULTS OF FINANCING EFFORTS; BUSINESS ABILITIES AND JUDGMENT OF
PERSONNEL; AVAILABILITY OF QUALIFIED PERSONNEL; FOOD, LABOR AND EMPLOYEE BENEFIT
COSTS; CHANGES IN, OR THE FAILURE TO COMPLY WITH, GOVERNMENT REGULATIONS; IMPACT
OF YEAR 2000; CONTINUED NASDAQ LISTING; WEATHER CONDITIONS; CONSTRUCTION
SCHEDULES; AND OTHER FACTORS REFERENCED IN THIS FORM 10-K.
The Company holds no financial instruments of any kind for trading
purposes. Certain of the Company's outstanding financial instruments are subject
to market risks, including interest rate risk. Such financial instruments are
not currently subject to foreign currency risk or commodity price risk. The
Company's major market risk exposure is potential loss arising from changing
interest rates and the impact of such changes on its long-term debt. Of the
Company's long-term debt outstanding at March 31, 2000, $1.1 million principal
amount was accruing interest at a variable rate of LIBOR plus 2.25%. A rise in
prevailing interest rates could have adverse effects on the Company's financial
condition and results of operations.
14
<PAGE>
<TABLE><CAPTION>
PRINCIPAL AMOUNT BY EXPECTED MATURITY
($ in thousands)
Fiscal Year 2001 2002 2003 2004 Thereafter Total Fair Value
<S> <C> <C> <C> <C> <C> <C> <C>
Variable rate debt 236.4 236.4 236.4 236.4 118.2 1,063.8 1,063.8
Average interest rate 8.5% 8.5% 8.5% 8.5% 8.5%
2.25% above LIBOR
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this
Form 10-K. See Item 14.
ITEM 9. CHANGES IN THE DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
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 "2000 Proxy Statement") for its 2000 Annual Meeting of Shareholders filed
or to be filed not later than 120 days after the end of the fiscal year covered
by this Report and is incorporated herein by reference. Information with respect
to executive officers of the Company is included under Item 4(a) of Part I of
this Report. Information with respect to compliance with Section 16(a) of the
Securities Exchange Act is included under "Section 16(a) Beneficial Ownership
Reporting Compliance" in the 1999 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is included under
the caption "Executive Compensation" in the 2000 Proxy Statement is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information with respect to security ownership of certain beneficial
owners and management is included under the caption "Voting Securities and
Principal Shareholders" and "Election of Directors" in the 2000 Proxy Statement
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related
transactions with management is included under the caption "Certain
Transactions" in the 2000 Proxy Statement and is incorporated herein by
reference.
15
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 10-K
The Financial Statements listed in the accompanying index on page F-1
are filed as part of this Report.
(a)(1) Financial Statements and Schedules Page in
this Report
-----------
Report of Independent Accountants.........................................F-1
Consolidated Balance Sheets at March 31, 2000 and 1999....................F-2
Consolidated Statements of Income For the years ended March 31, 2000,
1999 and 1998.............................................................F-3
Consolidated Statements of Changes in Shareholders' Equity for the
years ended March 31, 2000, 1999 and 1998.................................F-4
Consolidated Statements of Cash Flows For the years ended March 31,
2000, 1999 and 1998.......................................................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.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, Elmer's Restaurants, Inc. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Elmer's Restaurants, Inc.
By: WILLIAM W. SERVICE
----------------------------
William W. Service
Chief Executive Officer
Dated: June 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of Elmer's
Restaurants, Inc., in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Bruce N. Davis Chairman of the Board & President June 29, 2000
----------------------
Bruce N. Davis
/s/ William W. Service Chief Executive Officer & Director June 29, 2000
---------------------- (Principal Executive & Financial Officer)
William W. Service
/s/ Juanita Nelson Secretary & Controller June 29, 2000
---------------------- (Principal Accounting Officer)
Juanita Nelson
/s/ Thomas C. Connor Director June 29, 2000
----------------------
Thomas C. Connor
/s/ Paul Welch Director June 29, 2000
----------------------
Paul Welch
/s/ Corydon H. Jensen Director June 29, 2000
----------------------
Corydon H. Jensen
/s/ Richard Williams Director June 29, 2000
----------------------
Richard Williams
/s/ Donald Woolley Director June 29, 2000
----------------------
Donald Woolley
17
<PAGE>
ELMER'S RESTAURANTS, INC. AND
SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999 AND 2000 AND FOR THE YEARS
ENDED MARCH 31, 1998, 1999 AND 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Elmer's Restaurants, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Elmer's Restaurants, Inc. and Subsidiaries (the Company)
at March 31, 1999 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended March 31, 2000 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Portland, Oregon
May 23, 2000
F-1
<PAGE>
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND 2000
<TABLE><CAPTION>
March 31,
------------------------------
ASSETS 1999 2000
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 603,572 $ 1,640,210
Accounts receivable 280,979 199,466
Inventories 372,584 339,654
Prepaid expenses and other 167,177 276,604
Income taxes receivable 107,232 --
------------ ------------
Total current assets 1,531,544 2,455,934
Property, buildings and equipment, net 6,882,822 6,892,844
Intangible assets, net of accumulated amortization of $48,440
and $194,325 4,503,417 4,390,471
Other assets 128,901 107,959
------------ ------------
Total assets $ 13,046,684 $ 13,847,208
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, current portion $ 572,399 $ 572,399
Accounts payable 747,033 772,174
Accrued expenses 257,888 448,803
Accrued payroll and related taxes 294,170 218,728
Accrued income taxes -- 279,770
------------ ------------
Total current liabilities 1,871,490 2,291,874
Notes payable, net of current portion 5,703,539 5,124,130
Deferred income taxes 773,000 793,000
------------ ------------
Total liabilities 8,348,029 8,209,004
------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 500,000 shares authorized, none
issued
Common stock, no par value; 10,000,000 shares authorized, 1,586,229
shares and 1,665,548 shares outstanding March 31, 1999 and
2000, respectively 4,746,520 4,746,520
Retained earnings (deficit) (47,865) 891,684
------------ ------------
Total shareholders' equity 4,698,655 5,638,204
------------ ------------
Total liabilities and shareholders' equity $ 13,046,684 $ 13,847,208
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-2
<PAGE>
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000
<TABLE><CAPTION>
Years ended March 31,
------------------------------------------------
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 1,591,293 $ 11,952,728 $ 22,179,574
------------ ------------ ------------
Costs and expenses:
Food, beverage and supplies 564,115 3,406,602 6,298,727
Labor and related 420,427 3,735,043 7,082,100
Occupancy costs 138,058 741,078 1,248,224
Depreciation and amortization 56,263 341,170 630,089
General and administrative expenses 172,312 2,683,534 5,022,965
------------ ------------ ------------
1,351,175 10,907,427 20,282,105
------------ ------------ ------------
Income from operations 240,118 1,045,301 1,897,469
Other income (expense):
Interest income 48 18,545 91,314
Interest expense (34,896) (458,804) (570,334)
Gain on disposal of assets -- 6,477 1,100
------------ ------------ ------------
Income before provision for income taxes 205,270 611,519 1,419,549
Income tax provision -- (185,000) (480,000)
------------ ------------ ------------
Income before minority interest 205,270 426,519 939,549
Minority interest -- (136,007) --
------------ ------------ ------------
Net income $ 205,270 $ 290,512 $ 939,549
============ ============ ============
Basic earnings per share $ .25 $ .33 $ .56
============ ============ ============
Diluted earnings per share $ .25 $ .33 $ .55
============ ============ ============
Shares used in per share calculation
Basic 809,025 880,512 1,665,548
Diluted 809,025 880,512 1,702,499
</TABLE>
<TABLE><CAPTION>
(Unaudited Pro Forma
Information)
<S> <C> <C>
Income loss before provision for income taxes $ 205,270 $ 611,519
Provision for income taxes (72,000) (211,000)
Minority interest -- (136,007)
--------- ---------
Pro forma net income $ 133,270 $ 264,512
========= =========
Pro forma basic earnings per share $ .16 $ .30
========= =========
Pro forma diluted earnings per share $ .16 $ .30
========= =========
Shares used in per share calculation
Basic 809,025 880,512
Diluted 809,025 880,512
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
<PAGE>
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000
<TABLE><CAPTION>
Retained
Common stock earnings
------------------------- (accumulated
Shares Amount deficit)
---------- ---------- ----------
<S> <C> <C> <C>
Balance, March 31, 1997 770,500 $ 55,020 $ (254,883)
Debt to equity conversion -- 240,000 --
Dividend distributions -- -- (244,694)
Net income -- -- 205,270
---------- ---------- ----------
Balance, March 31, 1998 770,500 295,020 (294,307)
Capital contributions -- 600,000 --
Dividend distributions -- -- (44,070)
Issuance of common stock in conjunction with
merger (Note 8) 606,109 2,803,000 --
Issuance of common stock in conjunction with
acquisition of Grass Valley Ltd., Inc. (Note 8) 209,620 1,048,500 --
Net income -- -- 290,512
---------- ---------- ----------
Balance, March 31, 1999 1,586,229 4,746,520 (47,865)
Stock dividend 79,319 -- --
Net income -- -- 939,549
---------- ---------- ----------
Balance, March 31, 2000 1,665,548 $4,746,520 $ 891,684
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
<PAGE>
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000
<TABLE><CAPTION>
Years ended March 31,
---------------------------------------------
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 205,270 $ 290,512 $ 939,549
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 56,263 341,170 630,089
Deferred income taxes -- (7,000) (20,000)
(Gain) loss on disposition of assets -- (6,477) (1,100)
Minority interest in earnings of consolidated subsidiary -- 136,007 --
Changes in assets and liabilities:
Receivables (13,022) 122,076 81,513
Inventories (27,835) 29,279 32,930
Prepaid expenses 2,498 11,402 (109,427)
Other assets (1,525) (41,559) 20,942
Accounts payable and accrued expenses 23,606 (51,156) 140,614
Income taxes -- (130,119) 387,002
----------- ----------- -----------
Net cash provided by (used in) operating activities 245,255 694,135 2,102,112
----------- ----------- -----------
Cash flows from investing activities:
Additions to property, buildings and equipment (13,657) (217,515) (527,165)
Proceeds from sale of assets -- 20,000 1,100
Payment for business acquisition, net of cash acquired -- (3,438,127) --
----------- ----------- -----------
Net cash used in investing activities (13,657) (3,635,642) (526,065)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 7,271 7,092,500 --
Payments on notes payable (1,214) (4,145,540) (579,409)
Capital contributions 5,760 600,000 --
Dividend distributions (244,694) (44,070) --
----------- ----------- -----------
Net cash provided by (used in) financing activities (232,877) 3,502,890 (579,409)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (1,279) 561,383 1,036,638
Cash and cash equivalents, beginning of year 43,468 42,189 603,572
----------- ----------- -----------
Cash and cash equivalents, end of year $ 42,189 $ 603,572 $ 1,640,210
=========== =========== ===========
Supplemental disclosures of cash flow information:
Conversion of debt to equity $ 234,240 $ -- $ --
=========== =========== ===========
Cash paid for:
Interest $ 34,896 $ 422,023 $ 582,887
=========== =========== ===========
Taxes $ -- $ 467,619 $ 73,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
<PAGE>
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY AND BASIS OF PRESENTATION
Elmer's Restaurants, Inc. and Subsidiaries (the Company), an Oregon
corporation, owns and operates eleven Elmer's Restaurants, six Ashley's
Deli restaurants, four Richard's Deli and Pub restaurants and sells
franchises that give franchisees the right to operate under the name
Elmer's Breakfast. Lunch. Dinner. for a specific restaurant or region.
Franchises and Company owned stores are located throughout the western
United States.
On August 25, 1998, CBW, Inc. (CBW) acquired a controlling interest
(705,000 shares representing 53.8% of the outstanding stock) of the then
outstanding common stock of Elmer's Restaurants, Inc. (Elmer's) for
$4,500,000. On February 18, 1999, CBW merged with and into Elmer's.
Pursuant to the terms of the merger, Elmer's Restaurants, Inc. and
Subsidiaries was the surviving corporation. The merger was consummated by
Elmer's issuance of 770,500 shares of Elmer's restricted common stock to
CBW shareholders in exchange for the 705,000 shares previously acquired. In
connection with the merger, Elmer's assumed approximately $4 million in
debt owed by CBW arising from CBW's acquisition of the controlling block of
stock on August 25, 1998. These transactions were accounted for as a
purchase of Elmer's by CBW, and accordingly a new basis of accounting,
based on fair values, was established for the assets and liabilities of
Elmer's. As a result of these transactions, the financial statements for
the years ended March 31, 1997 and 1998 include the results of operations
of CBW rather than the previously reported results of Elmer's. Elmer's
entered into a new financing agreement whereby it borrowed funds to
refinance existing debt and debt of CBW totaling approximately $1,750,000.
Elmer's also used existing cash to reduce debt by approximately $1,000,000.
Each CBW shareholder received 144.4507 shares of Elmer's restricted common
stock for every CBW share owned.
On March 31, 1999, the Company acquired Grass Valley Ltd., Inc. (GVL),
which is the owner and operator of four delicatessen-style restaurants
operating under the name of Richard's Deli and Pub located in Oregon (see
Note 8).
The consolidated financial statements include the accounts of CBW for the
years ended March 31, 1998, 1999 and 2000, Elmer's from August 31, 1998
(the results of operations of Elmer's from August 25, 1998 to August 31,
1998 is not material to the results of operations of the Company), and
Grass Valley Ltd., Inc., Elmer's wholly-owned subsidiary, from March 31,
1999. All material intercompany accounts and transactions have been
eliminated. The minority interest included in the 1999 financial statements
represents the 46.2% separate public ownership in Elmer's from August 31,
1998 through February 17, 1999.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
F-6
<PAGE>
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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,
1999 and 2000 because of the relatively short maturity of these
instruments. The carrying value of notes payable approximated fair value as
of March 31, 1999 and 2000 based upon interest rates and terms available
for the same or similar loans.
CASH AND CASH EQUIVALENTS
The Company considers all short-term, highly-liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
The Company invests its excess cash in interest bearing deposits with major
banks and in U.S. Treasury securities. These investments mature within 90
days and are therefore subject to minimal risk. Management routinely
reviews these investments in order to limit the amount of credit exposure
to any one financial institution.
INVENTORIES
Inventories of food, beverages and restaurant supplies are stated at the
lower of first-in, first-out cost or market.
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 operations.
INTANGIBLE ASSETS
The cost over fair value of net tangible assets of acquired companies
(goodwill) and trademarks are amortized on a straight-line basis over 30
years.
RECOVERABILITY OF LONG-LIVED ASSETS
Management of the Company reviews the carrying value of capitalized
tangible and intangible assets on a regular basis to reach a judgement
concerning possible permanent impairment of value. These reviews consider,
among other factors: (1) the net realizable value of each major
classification of assets, (2) the cash flow associated with the assets, and
(3) significant changes in the extent or manner in which major assets are
used. Management believes the carrying value of assets is less than the
estimated fair value.
F-7
<PAGE>
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FRANCHISE OPERATIONS
Initial license fees from individual and area franchise sales are
recognized as revenue when substantially all of the terms and conditions of
the franchise agreement are met. Elmer's has sold area franchises to
several restaurant operators in various western states. The terms of the
agreements entered into with each franchisee protect the territory for the
operator and provide standard building blueprints, recipes, formulas and
methods of food preparation. The term of the franchise is 25 years.
Continuing franchise fees (based on a percentage of sales) are recognized
as income when earned.
INCOME TAXES
CBW was treated for federal income tax purposes as an S corporation under
Subchapter S of the Internal Revenue Code of 1986, as amended, from May 22,
1997 (and was a limited liability company from organization to that date)
and was treated as an S corporation for state income tax purposes under
comparable state tax laws. As a result, CBW's earnings through February 17,
1999 have been taxed directly to CBW's shareholders, at their individual
federal and state income tax rates, rather than to the Company. The
earnings of Elmer's from August 25,1998 through March 31, 1999, and the
earnings for the year ended March 31, 2000, are taxed as a taxable
corporation.
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred income tax assets to the
amount expected to be realized. Income tax expense is the tax payable for
the year and the change during the year in net deferred income tax assets
and liabilities.
NET INCOME (LOSS) PER SHARE
Basic earnings per share (EPS) is computed using the weighted-average
number of shares of common stock outstanding for the period. Diluted EPS is
computed using the weighted-average number of shares of common stock and
dilutive common stock equivalents outstanding during the period, if any.
Common equivalent shares from stock options, if any, are excluded from the
computation when their effect is antidilutive.
All references to share and per share information have been adjusted to
give effect to the 770,500 shares of restricted common stock issued by
Elmer's in connection with the merger of CBW on February 18, 1999 with and
into Elmer's as described above, and the 5% stock dividend declared at
November 30, 1999.
RECLASSIFICATION
Certain amounts in the 1999 financial statements have been reclassified to
conform to the 2000 presentation. Net income and cash flows were not
affected by the reclassifications.
F-8
<PAGE>
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 130, REPORTING COMPREHENSIVE
INCOME, which establishes requirements for disclosure of comprehensive
income. The objective of SFAS No. 130 is to report a measure of all changes
in equity that result from transactions and economic events other than
transactions with owners. Comprehensive income is the total of net income
and all other non-owner changes in equity. Comprehensive income did not
differ significantly from reported net income in the periods presented.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
The Company has also adopted FASB issued SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. This statement changes
the way public companies report information about segments of their
business in their annual financial statements and requires selected segment
information in quarterly reports issued to shareholders. It also requires
entity-wide disclosures about the products and services an entity provides,
the material countries in which it holds assets and reports revenues, and
its major customers.
In June 1998, the FASB SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the
balance sheet as either an asset or liability measure at its fair value.
SFAS No. 133 also requires that changes in the derivative instrument's fair
value be recognized currently in results of operations unless specific
hedge accounting criteria are met. SFAS No. 133, as amended by SFAS No.
137, is effective for fiscal years beginning after June 15, 2000. Elmer's
management has studied the implications of SFAS 133 and based on the
initial evaluation, expects the adoption to have no impact on the Company's
financial condition or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) released
Staff Accounting bulletin (SAB) 101 REVENUE RECOGNITION IN FINANCIAL
STATEMENTS. SAB 101 establishes guidelines in applying generally accepted
accounting principles to the recognition of revenue in financial statements
based on the following four criteria; persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the seller's
price to the buyer is fixed or determinable, and collectibility is
reasonably assured. SAB 101, as amended by SAB 101A, is effective no later
than the first fiscal quarter of the fiscal year beginning after December
15, 1999, except that registrants with fiscal years that begin between
December 16, 1999 and March 15, 2000, may report any resulting change in
accounting principle no later than their second fiscal quarter of the
fiscal year beginning after December 15, 1999. Elmer's management is in the
process of studying the implications of SAB 101 and has not yet determined
the impact to the financial statements.
F-9
<PAGE>
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNAUDITED PRO FORMA FINANCIAL INFORMATION
As more fully described in Note 3, CBW has been taxed for federal and state
income tax purposes as a limited liability company or as an S corporation
for certain periods in the three years ended March 31, 2000. The unaudited
pro forma information reflects provisions for income taxes that would have
been recorded had CBW been a taxable corporation for all periods presented.
2. PROPERTY, BUILDINGS AND EQUIPMENT
<TABLE><CAPTION>
March 31,
----------------------------
1999 2000
----------- -----------
<S> <C> <C>
Land $ 2,246,700 $ 2,246,700
Buildings 1,862,400 1,894,204
Furniture, fixtures and equipment 2,226,211 2,676,821
Leasehold improvements 813,796 894,471
Automobiles 12,632 16,932
----------- -----------
7,161,739 7,729,128
Less accumulated depreciation and amortization (278,917) (836,284)
----------- -----------
$ 6,882,822 $ 6,892,844
=========== ===========
</TABLE>
3. INCOME TAXES
CBW was treated for federal income tax purposes as an S corporation under
Subchapter S of the Internal Revenue Code of 1986, as amended, since May
22, 1997 (and was a limited liability company from organization to that
date) and was treated as an S corporation for state income tax purposes
under comparable state tax laws. As a result, CBW's earnings through
February 17, 1999 have been taxed directly to CBW shareholders, at their
individual federal and state income tax rates, rather than to the Company.
The earnings of Elmer's from August 31, 1998 through February 17, 1999 are
taxed as a taxable corporation. Effective with the merger of CBW with and
into Elmer's (see Note 8), on February 18, 1999 (Termination date) CBW's S
corporation status terminated. Subsequent to the Termination date, the
Company is subject to federal and state income taxes on its earnings.
F-10
<PAGE>
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. INCOME TAXES (CONTINUED)
The provision for income taxes has been computed in accordance with SFAS
No. 109 as if the Company had been a taxable corporation for all periods
presented (information with respect to the years ended March 31, 1998 and
1999 is unaudited pro forma information):
<TABLE><CAPTION>
Years ended March 31,
----------------------------------
1998 1999 2000
-------- -------- --------
(unaudited pro forma
information)
<S> <C> <C> <C>
Currently payable:
Federal $ -- $160,000 $400,000
State -- 34,000 60,000
-------- -------- --------
-- 194,000 460,000
Deferred income taxes 72,000 17,000 20,000
-------- -------- --------
$ 72,000 $211,000 $480,000
======== ======== ========
</TABLE>
A reconciliation of the federal income tax rate to the Company's effective
income tax rate is as follows (information with respect to the years ended
March 31, 1998 and 1999 is unaudited pro forma information):
<TABLE><CAPTION>
Years ended March 31,
--------------------------------
1998 1999 2000
------ ------ ------
(unaudited pro forma
information)
<S> <C> <C> <C>
Income tax at statutory rate 34.0% 34.0% 34.0%
Federal graduated rates (3.5) -- --
State income taxes, net of federal income tax benefit 4.4 3.5 3.9
Non deductible expenses 0.2 1.2 1.9
Federal income tax credits (4.3) (6.0)
------ ------ ------
35.1% 34.4% 33.8%
====== ====== ======
</TABLE>
The income tax provision of $185,000 for the year ended March 31, 1999
relates to the results of operations of Elmer's from August 31, 1998
through February 17, 1999 and the results of operations of the Company from
February 18, 1999 through March 31, 1999.
Deferred income taxes are the result of provisions in the tax laws that
either require or permit certain items of income or expense to be reported
for income tax purposes in different periods than they are reported for
financial reporting. As of March 31, 1999 and 2000, the deferred tax
liability of $773,000 and $793,000 primarily represents the difference
between the book basis of property, buildings and equipment and the related
tax basis of approximately $2,200,000 and $2,300,000, respectively.
F-11
<PAGE>
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. NOTES PAYABLE
<TABLE><CAPTION>
1999 2000
<S> <C> <C>
Note payable to financial institution, collateralized by substantially
all assets of the Company excluding real estate, due
September 2004, monthly principal installments of $2,600,000 $2,127,271
approximately $39,400 plus interest at 8.25%
Notes payable to financial institutions, collateralized by real
estate, due at various dates through February 2008, monthly
installments total approximately $22,500 including interest at
rates as follows:
Fixed rate of 8.15% 480,000 464,325
Fixed rate of 8.18% 1,275,006 1,238,241
Fixed rate of 8.25% 605,567 581,617
Note payable to financing company, collateralized by substantially
all assets of the Company, interest only payments due monthly
at 12%, principal balance due February 2004 1,262,500 1,253,402
Note payable to other, collateralized by stock of a subsidiary,
due August 2001, interest at 10% 52,865 31,673
---------- ----------
6,275,938 5,696,529
Less current portion 572,399 572,399
---------- ----------
Net of current portion $5,703,539 $5,124,130
========== ==========
</TABLE>
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 of total liabilities, excluding
subordinated debt, to tangible net worth plus subordinated debt of 5.5 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. The Company was in compliance with these covenants at March 31,
2000.
The Company has available a $250,000 line of credit with Wells Fargo Bank,
which matures September 1, 2000, and is collateralized by substantially all
assets of the Company excluding real estate. Interest on the unpaid balance
accrues at a rate of prime plus 1%. The prime rate at March 31, 2000 was
9.0%. There were no amounts drawn on the line at March 31, 2000.
Future maturities of notes payable for years ending March 31 are: 2001 -
$572,399; 2002 - $577,066; 2003 - $574,538; 2004 - $1,836,603; 2005 -
$300,200; and thereafter - $1,835,723.
All interest costs incurred during the years ended March 31, 1998, 1999 and
2000 have been expensed during the respective periods.
F-12
<PAGE>
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. LEASES
Minimum fiscal year rental commitments for the years ending March 31 under
operating leases for property, buildings and equipment with noncancelable
terms of more than one year are: 2001 - $697,845; 2002 - $631,380; 2003 -
$544,920; 2004 - $389,602; 2005 - $366,572; and thereafter - $508,596.
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 $135,000,
$848,000 and $883,751for the years ended March 31, 1998, 1999 and 2000,
respectively.
6. RELATED PARTY TRANSACTIONS
Amounts outstanding with Jaspers Food Management, Inc. (JFMI) are as
follows:
<TABLE><CAPTION>
March 31,
------------------------
1999 2000
----------- -----------
<S> <C> <C>
Accounts payable (receivable) and other liabilities $ (3,873) $ (3,148)
</TABLE>
Accounts payable and other liabilities due to the affiliate is due on
demand and accrue interest at an annual rate of 10.5% based on the
outstanding balance over 28 days.
Transactions applicable to the affiliate were approximately as follows:
<TABLE><CAPTION>
Years ended March 31,
----------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Interest expense $ 15,000 $ 14,000 $ --
Labor and related expenses 420,000 452,000 903,137
</TABLE>
Under the terms of a management services agreement, the affiliate provides
substantially all store labor, management, accounting, human resources,
training and other administrative services related to the operation of the
six Ashley's Deli and four Richard's Deli and Pub restaurants as disclosed
in labor and related expenses above.
Included in accounts receivable at March 31, 1999 is a note receivable from
a franchisee and director of the Company in the amount of $97,857. The note
was collected during the year ended March 31, 2000.
F-13
<PAGE>
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. RESTAURANT AND FRANCHISE OPERATIONS
Summary results of operations and other selected financial information from
restaurant operations and franchise operations are presented after
elimination of intercompany transactions:
<TABLE><CAPTION>
Years Ended March 31,
-------------------------------------------
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Restaurant operations $ 1,591,293 $11,591,646 $21,404,597
Franchise operations -- 361,082 774,977
----------- ----------- -----------
Consolidated $ 1,591,293 $11,952,728 $22,179,574
=========== =========== ===========
Income (loss) from operations:
Restaurant operations $ 240,118 $ 649,753 $ 1,620,632
Franchise operations -- 395,548 276,837
----------- ----------- -----------
Consolidated $ 240,118 $ 1,045,301 $ 1,897,469
=========== =========== ===========
Capital and intangible expenditures:
Restaurant operations $ 13,657 $ 191,748 $ 493,333
Franchise operations -- 25,767 33,832
----------- ----------- -----------
Consolidated $ 13,657 $ 217,515 $ 527,165
=========== =========== ===========
Depreciation and amortization:
Restaurant operations $ 56,263 $ 261,635 $ 561,440
Franchise operations -- 79,535 68,649
----------- ----------- -----------
Consolidated $ 56,263 $ 341,170 $ 630,089
=========== =========== ===========
Assets:
Restaurant operations $ 259,675 $11,571,468 $12,495,871
Franchise operations -- 1,475,216 1,351,337
----------- ----------- -----------
Consolidated $ 259,675 $13,046,684 $13,847,208
=========== =========== ===========
</TABLE>
The number of Company owned stores and operating franchises at March 31 is
as follows:
<TABLE><CAPTION>
1998 1999 2000
<S> <C> <C> <C>
Company owned stores 5 20 21
Operating franchises -- 18 18
</TABLE>
F-14
<PAGE>
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. ACQUISITIONS AND MERGER
CBW ACQUISITION OF ELMER'S
On August 25, 1998, CBW acquired a controlling interest (705,000 shares
representing 53.8% of the outstanding stock) in Elmer's for $4,500,000. The
total cost of the acquisition of $4,612,013, including $112,013 of related
acquisition costs, was provided by approximately $4,000,000 of debt
financing and the balance in CBW's own cash. The purchase method of
accounting was used to record this transaction and a new basis of
accounting was established for the assets and liabilities of Elmer's to the
extent of the change in ownership based on fair values as follows:
Current assets $1,190,536
Property, buildings and equipment 3,790,027
Intangible assets 2,171,048
Other assets 43,587
Liabilities assumed (2,163,185)
Deferred income taxes (420,000)
-----------
$4,612,013
===========
CBW MERGER WITH ELMER'S
On February 18, 1999, CBW merged with and into Elmer's, in a transaction in
which Elmer's was the surviving corporation. In consideration for the
issuance by Elmer's of 770,500 shares of Elmer's restricted common stock to
CBW shareholders and the assumption of approximately $4 million in debt
owed by CBW arising from CBW's acquisition of the controlling block of
Elmer's common stock on August 25, 1998, Elmer's acquired all the stock and
assets of CBW including CBW's wholly-owned subsidiary, CBW Food Company,
LLC.
Each CBW shareholder, received 144.4507 shares of Elmer's restricted common
stock for every CBW share owned. The shares of Elmer's stock previously
acquired by CBW, a total of 705,000 shares, were concurrently transferred
to Elmer's and were canceled upon receipt thereof. In further consideration
for the issuance and to secure various indemnification obligations of CBW
shareholders under the merger agreement, Elmer's and the individual CBW
shareholders executed an escrow agreement for a period of one year from the
date of closing of the merger transaction.
Elmer's entered into a new financing agreement in connection with the
merger whereby it borrowed funds to refinance existing debt and debt of CBW
totaling approximately $1,750,000. Elmer's also used existing cash to
reduce debt by approximately $1,000,000.
F-15
<PAGE>
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. ACQUISITIONS AND MERGER (CONTINUED)
The merger transaction was accounted for as a purchase of the remaining
46.2% separate public ownership of Elmer's by CBW. A new basis of
accounting was established for the assets and liabilities of Elmer's, based
on fair values, upon execution of the merger agreement. The total estimated
fair value of assets acquired in the merger transaction is comprised of the
following:
<TABLE><CAPTION>
<S> <C>
Estimated value of 606,109 shares of outstanding common stock of
Elmer's (other than CBW ownership) at the date of the merger $2,803,000
Assumed liabilities 2,123,804
Accrued expenses related to the transaction 20,000
Deferred income taxes 320,000
----------
$5,266,804
==========
</TABLE>
The purchase price has been allocated to the assets to be acquired and
obligations to be assumed, based on the estimate of the 46.2% proportionate
fair values of the assets and liabilities, as follows:
<TABLE><CAPTION>
<S> <C>
Current assets $ 839,988
Property, buildings and equipment 3,173,264
Intangible assets 1,220,701
Other assets 32,851
----------
$5,266,804
==========
</TABLE>
ACQUISITION OF GRASS VALLEY LTD., INC. (DBA RICHARD'S DELI AND PUB)
Effective March 31, 1999, Elmer's executed a stock exchange agreement with
Grass Valley Ltd., Inc. (GVL), a closely held Oregon corporation, in a
transaction in which Elmer's acquired 100% of the outstanding stock of GVL
in consideration for the payment by Elmer's of $110,000 in cash and the
issuance of 209,620 restricted shares of Elmer's common stock to the GVL
shareholders. GVL is now a wholly-owned and operating subsidiary of the
Company.
The total cost of the merger transaction is comprised of the following:
<TABLE><CAPTION>
<S> <C>
Cash $ 110,000
Estimated value of 209,620 shares of common stock of Elmer's
issued in connection with merger transaction 1,048,500
Assumed liabilities 181,161
Expenses related to the transaction 44,000
----------
$1,383,661
==========
</TABLE>
F-16
<PAGE>
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. ACQUISITIONS AND MERGER (CONTINUED)
ACQUISITION OF GRASS VALLEY LTD., INC. (DBA RICHARD'S DELI AND PUB)
(CONTINUED)
The excess of the estimated fair value of the assets acquired ($1,383,661)
over the historical cost ($223,553) was allocated to goodwill ($1,160,108),
as the historical costs of all tangible assets was assumed to be equal to
their fair value.
SUMMARY
The following table represents the unaudited pro forma results of
operations for the years ended March 31, 1998 and 1999 as if the
acquisition of 53.8% of the outstanding common stock of Elmer's, the merger
of CBW with and into Elmer's and the acquisition of GVL had occurred at the
beginning of the respective periods. These pro forma results have been
prepared for comparative purposes only and are not necessarily indicative
of what would have occurred had the acquisitions been made at the beginning
of the respective periods or of results, which may occur in the future.
<TABLE><CAPTION>
Year ended Year ended
March 31, March 31,
1998 1999
----------- -----------
<S> <C> <C>
Total revenue $19,763,000 $21,231,597
Income from operations $ 1,519,000 $ 1,649,526
Income before provision for income taxes $ 901,000 $ 1,141,293
Net income $ 595,000 $ 751,278
Basic earnings per share of common stock $ .36 $ .45
Weighted-average number of shares outstanding 1,665,548 1,665,548
Number of Company owned stores 20 20
</TABLE>
9. CONTINGENCIES
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, which it believes
to be adequate. Management believes that it is not presently a party to any
litigation, the outcome of which would have a material adverse effect on
the Company's business or operations.
F-17
<PAGE>
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. STOCK OPTIONS
The Board of Directors adopted a stock option plan (Plan), subject to
shareholder approval, which provides for the award of incentive stock
options to key employees and the award of nonqualified stock options to
employees and non-employee Directors. Under the terms of the Plan, the
option price is determined as the fair value of the Company's common stock
at the time the option is granted. Under the Plan, 320,000 shares of common
stock are authorized for issuance. Options are exercisable upon vesting.
Options generally vest 20% annually and expire 10 - 15 years after the date
of grant.
A summary status of the Company's stock option as of March 31, 1999 and
2000 and changes during the year ended on those dates is presented below:
<TABLE><CAPTION>
Weighted-
average
Options exercise
outstanding price
-------- -----
<S> <C> <C>
Balance, March 31, 1998 --
Options granted 169,500 $4.75
-------- -----
Balance, March 31, 1999 169,500 4.75
Options granted 159,000 6.11
Options cancelled (17,000) 4.75
-------- -----
Balance, March 31, 2000 311,500 $5.44
======== =====
</TABLE>
The following table summarizes information about stock options outstanding
as of March 31, 2000:
<TABLE><CAPTION>
Options exercisable
Weighted- ---------------------------------
average Weighted- Weighted-
remaining average average
Exercise Number contractual exercise Number exercise
price outstanding life price exercisable price
---------------- ----------------- ---------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$4.75 152,500 11.62 years $4.75 54,500 $4.75
$5.875 59,000 10.85 years $5.875 - $5.875
$6.25 100,000 15 years $6.25 100,000 $6.25
</TABLE>
There were 8,500 shares of common stock reserved for the grant of stock
options under the Plan at March 31, 2000.
The FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
which defines a fair value based method of accounting for employee stock
options and similar equity instruments and encourages all entities to adopt
that method of accounting for all of their employee stock compensation
plans. However, it also allows an entity to continue to measure
compensation cost of those plans using the method of accounting prescribed
by
F-18
<PAGE>
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. STOCK OPTIONS (CONTINUED)
APB 25. Entities electing to continue to use the accounting treatment in
APB 25 must make pro forma disclosures of net income and, if presented,
earnings per share, as if the fair value based method of accounting defined
in SFAS No. 123 had been adopted.
The Company complies with the disclosure-only provisions of SFAS No. 123
and thus no compensation cost has been recognized for the Plan. Had
compensation cost for the stock-based compensation plan been determined
based on the fair value of options at the date of grant consistent with the
provisions fo SFAS No. 123, the Company's pro forma net income and pro
forma earnings per share would have been as follows:
<TABLE><CAPTION>
1999 2000
<S> <C> <C>
Net income - as reported $ 290,512 $ 939,549
Net income - pro forma 290,512 394,763
Diluted earnings per share - as reported $ .35 $ .55
Diluted earnings per share - pro forma .35 .23
</TABLE>
The pro forma effect on net income for 1999 and 2000 is not representative
of the pro forma effect in future years because compensation expense
related to grants made in prior years is not considered. For purposes of
the above pro forma information, the fair value of each option grant was
estimated at the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions:
<TABLE><CAPTION>
1999 2000
<S> <C> <C>
Risk-free interest rate 6.0% 6.0%
Expected life 8.14 years 9.42 years
Expected volatility 59% 50%
Expected dividend yield 0% 0%
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts and additional awards are anticipated in
future years.
F-19
