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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-14837
ELMER'S RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
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Oregon 93-0836824
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11802 SE Stark
Portland, Oregon 97216 (503) 252-1485
(Address of principal (Zip Code) (Registrant's telephone
executive offices) 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
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _____
Aggregate market value of Common Stock held by nonaffiliates of the
Registrant at June 10, 1998: $1,837,268. For purposes of this calculation,
officers and directors are considered affiliates. _____
Number of shares of Common Stock outstanding at June 10, 1998: 1,311,109.
Documents Incorporated by Reference
Part of Form 10-K into
Document which incorporated
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Proxy Statement for 1998
Annual Meeting of Shareholders Part III
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TABLE OF CONTENTS
Item of Form 10-K Page
- ----------------- ----
PART I.........................................................................1
Item 1. Business........................................................1
Item 2. Properties......................................................5
Item 3. Legal Proceedings...............................................6
Item 4. Submission of Matters to a Vote of Security Holders.............6
Item 4(a). Executive Officers of the Registrant............................6
PART II........................................................................7
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters .........................................7
Item 6. Selected Financial Data.........................................7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................8
Item 8. Financial Statements and Supplementary Data....................10
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.........................10
PART III......................................................................11
Item 10. Directors and Executive Officers of the Registrant.............11
Item 11. Executive Compensation.........................................11
Item 12. Security Ownership of Certain Beneficial Owners and Management.11
Item 13. Certain Relationships and Related Transactions.................11
PART IV.......................................................................12
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.................................................12
SIGNATURES....................................................................15
PART I
Item 1. Business
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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 Colonial Pancake & Steak House." 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 restaurants and franchises 18 restaurants in six western states.
Company-owned 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.
Elmer's Pancake & Steak House
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 a 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, omelettes,
crepes, and other popular breakfast items. Each Elmer's restaurant makes all its
breakfast batters and compotes from scratch and prepares its fruit sauces with
fresh fruits when in season. The lunch menu includes soups made from scratch,
french dips, hamburgers, and sandwiches. Customers at dinner may choose among
steak, seafood, chicken, and, in most restaurants, filet mignon and prime rib.
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. Breakfast and lunch selections generally range in price from $1.85
to $7.25; dinner selections generally range in price from $5.50 to $13.50. A
special children's menu is offered in most restaurants.
1
Franchise Operations
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 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 one percent of gross
revenues to a common advertising pool if required to do so by the Company. The
non-contributing restaurant is not required to do so under its franchise
agreement.
Prospective Franchisees Prospective new franchisees will pay an initial
franchise fee of $35,000. Initial franchise fees are 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. A monthly advertising contribution equal to one percent of
the gross revenues of the restaurant will be assessed. It has been the practice
of the Company in recent years to permit existing franchisees to open new
franchises under the royalty rate that applied to the existing franchises owned
by that franchise. See "Services to Franchisees."
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." 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 $860,000 to $1,060,000, 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 $375,000 to $500,000. Inventory and miscellaneous items
2
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 signing the
franchise agreement. Franchisees bear all costs associated with the development
and construction of their restaurants.
The Company has added three franchises since August 1987. The last
currently operating franchise was added in November 1994.
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; Vancouver, Washington; and Ada and Canyon Counties,
Idaho. 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, and its share of the franchise royalty fees
ranges from one to two percent of gross revenues 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 and maintains a complete file of menus from all franchised
restaurants. The Company has also prepared a personnel handbook for its
Company-owned restaurants. 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 seminar is scheduled each year. At the seminars, 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
selected by the franchisee for inclusion on restaurant menus. The Company,
however, sells no food items or like products to the franchisees, except for
certain minor supplies such as guest checks, gift certificates, and children's
menus. The Company does not require franchisees to purchase products from
designated or approved sources, other than requiring that approved blend coffee
be served in each restaurant. The Company, however, coordinates franchisees'
purchases to obtain volume discounts. Franchisees bear all costs involved in the
operation of their restaurants.
3
Periodic on-site inspections and audits are conducted to ensure compliance
with Company standards and to aid franchisees in improving their sales and
profitability.
Company-Owned Restaurants
The Company owns and operates 11 Elmer's restaurants, which it acquired or
built from 1984 to 1991. The Company has owned and operated a 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.
Employees
As of March 31, 1998, the Company employed 204 persons on a full-time
basis, of whom 11 were corporate office personnel and 193 were restaurant
personnel. At that date, the Company also employed 266 part-time restaurant
personnel. Employees of franchised Elmer's restaurants are not included in these
figures. None of the Company's employees is covered by collective bargaining
agreements. The Company believes that its employee relations are satisfactory.
Trademarks and Service Marks
The Company has registered the trademarks and service marks "Elmer's
Pancake & Steak House" and "Elmer's Colonial Pancake & Steak House" and the
Elmer's logo with the U.S. Patent and Trademark Office. The service mark
"Elmer's Colonial Pancake & Steak House" has also been registered in certain
states.
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-premise 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. 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 restaurants
and 17 of the 18 franchised restaurants are required to participate by
contributing one percent of monthly gross revenues. The non-contributed
franchised restaurant is not required to do so under its franchising agreement.
4
Competition
The restaurant industry is highly competitive and is often affected by
changes in the tastes and eating habits of the public, by 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 to local establishments. Some
of the Company's competitors are much larger than the Company, having at their
disposal greater capital resources and greater abilities to withstand adverse
business trends. 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 Company is subject to various federal, state, and local laws affecting
its business. Its restaurants and those of its franchisees are subject to
various health, sanitation, and safety standards; federal and state labor laws;
zoning restrictions; and, in some cases state and local licensing of the sale of
alcoholic beverages and the state licensing of gaming. Federal and state
environmental regulations have not had a major effect on the Company's
operations to date.
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. The Company is also subject to Federal Trade
Commission regulations covering disclosure requirements and sales of franchises.
Item 2. Properties
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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
$33,636 for fiscal 1998. The lease expires November 30, 1998.
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 except for the Gresham,
Oregon property.
Approximate Area
---------------------------------
Location Site Restaurant
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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.
5
Leased Properties The Company leases the property upon which the following
seven Company-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
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Location 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
Item 3. Legal Proceedings
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Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
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Not applicable.
Item 4(a). Executive Officers of the Registrant
As of June 10, 1998, the executive officers and other key personnel of the
Company were as set forth below.
Name Age Position
- ---- --- --------
Anita Goldberg 69 President
Juanita Nelson 62 Secretary and Controller
The executive officers of the Company are appointed annually for one year
and hold office until their successors are appointed.
Anita Goldberg was appointed President and elected to the Board of
Directors in June 1996 and has served as Director of Franchising for the Company
since September 1984. Before joining the Company, Ms. Goldberg was a
self-employed life insurance salesperson.
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.
6
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.
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,
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1998 1997
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High Low High Low
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1st Quarter $ 2 1/2 $ 2 1/16 $ 3 1/4 $ 1 13/16
2nd Quarter 3 1/8 2 3 1/4 1 3/4
3rd Quarter 4 1/2 2 7/8 2 25/64 1 7/8
4th Quarter 6 3 7/8 2 3/8 2
Although the Common Stock is traded on the Nasdaq SmallCap System, there is
a relatively low trading volume and, at times, limited or sporadic quotations.
The Company has not paid cash dividends on its Common Stock. The Company
intends to retain any future earnings to finance growth and does not presently
intend to pay dividends to the holders of Common Stock.
As of May 20, 1998, the Company had 228 shareholders of record.
Item 6. Selected Financial Data
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Elmer's Restaurants, Inc. and Subsidiaries
Selected Financial Data
for the year ended March 31
1998 1997 1996 1995 1994
Revenues $16,596,397 $16,112,355 $15,712,033 $15,223,087 $14,276,483
Net income 529,779 452,215 350,622 377,771 159,922
Net income per share 0.38 0.31 0.23 0.21 0.08
Total assets 8,180,610 8,108,965 8,028,521 8,137,008 8,285,506
Long-term notes payable,
less current portion 3,061,284 3,338,255 3,687,808 3,573,613 3,822,338
Total liabilities 4,673,273 4,899,555 5,099,689 5,180,012 5,507,048
Total shareholders' equity 3,507,337 3,209,410 2,928,832 2,956,996 2,778,458
7
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------------------------------------------------------------------------
Results of Operations
Revenues
Revenues increased $484,042 (3.0%) for the fiscal year ended March 31, 1998
("1998"), compared to the fiscal year ended March 31, 1997 ("1997"), due
primarily to increased restaurant sales and video poker revenues of the
Company's restaurants. Revenues increased $400,322 (2.5%) for 1997 compared to
the fiscal year ended March 31, 1996 ("1996"), due primarily to the increased
revenues of the Company-owned restaurants. Revenues from restaurant sales and
franchise operations were $16,417,225, $16,070,948 and $15,712,033 for 1998,
1997 and 1996, respectively. The Company began offering video poker to its
patrons in certain restaurants during 1997. The net revenues from video poker
were $179,172 in 1998 and $41,407 in 1997. There were eleven Company-owned
restaurants at March 31, 1998.
Revenues from franchise operations increased $5,437 for 1998 due primarily
to increased franchise fees resulting from increased revenues by franchisees.
Revenues from franchise operations decreased $25,967 for 1997 due primarily to
decreased supply sales to franchisees. Franchise operation's revenues totaled
$660,074, $654,637 and $680,604 for 1998, 1997 and 1996, respectively, after
elimination of intercompany transactions (see Note 8 of the Notes to
Consolidated Financial Statements).
Operating Costs and Expenses
Cost of restaurant sales, for food and beverage costs, decreased $6,364
(.2%) from $4,270,067 for 1997 to $4,263,703 for 1998 and labor and related
costs increased $238,221 (4.5%) to $5,490,690 for 1998 compared to $5,252,469
for 1997, each due primarily to minimum wage increases passed by the federal and
various state governments. Cost of restaurant sales, for food and beverage
costs, increased $78,906 (1.9%) for 1997 compared to 1996, and labor and related
costs increased $150,055 (2.9%) for 1997 compared to 1996, each primarily as a
result of increased restaurant sales. Cost of restaurant sales, as a percentage
of restaurant sales, amounted to 61.9% for 1998 and 61.8% for 1997 and 1996,
respectively.
Depreciation and amortization totaled $679,455 for 1998, a decrease of
$19,558 from 1997, and $699,013 for 1997, a decrease of $20,698 from 1996. Each
year's decrease was due primarily to certain assets becoming fully depreciated.
General and administrative expenses increased $183,753 in 1998 over 1997
and $11,863 in 1997 over 1996, due primarily to the increased cost of management
of the Company-owned restaurants, including increased executive compensation.
General and administrative expenses as a percentage of revenues were 24.7% for
1998, 24.3% for 1997 and 24.9% for 1996.
Occupancy costs as a percentage of revenues were 6.0% for 1998, 6.2% for
1997 and 5.9% for 1996. Occupancy costs include leases based on a percentage of
the revenues of certain leased restaurants.
8
Income from Operations
Income from operations for 1998 totaled $1,056,764, an increase of $82,215
(8.4%) from 1997, and income from operations for 1997 totaled $974,549, an
increase of $121,707 (14.3%) from 1996. The increased income from operations was
due to increased video poker revenues.
Other Income and Expenses
Interest income for 1998 increased $5,278 over 1997 to $66,225, primarily
due to higher average cash balances available for investment. Interest income
for 1997 and 1996 totaled $60,947 and $60,780, respectively.
Interest expense decreased $27,253 to $324,578 for 1998 from 1997, and
decreased $35,202 to $351,831 for 1997 from 1996, primarily as a result of the
reduction of the principal balance of outstanding debt.
Income Taxes
The tax rate on income for 1998 was 33.7% compared to 33.9% for 1997 and
1996.
Liquidity and Capital Resources
The Company's working capital at March 31, 1998 totaled $842,859, an
increase of $55,285 from working capital of $787,574 at March 31, 1997. The
increase in working capital resulted primarily through net cash provided by
operations and the refinancing of mortgages payable with long-term debt.
Principal sources of funds for the Company's operation in recent years have
included cash flow from operations and long-term and short-term debt financing.
Funds obtained from debt financing amounted to $630,000, $230,000 and $2,670,000
in 1998, 1997 and 1996, respectively. The long-term debt incurred in 1998 was
for the refinancing of two mortgages which matured, the debt incurred in 1997
was due primarily to the acquisition of equipment, refurbishing of existing
restaurants and repurchase of Company stock, and the long-term debt incurred in
1996 was primarily for the refinancing of two mortgages and the refinancing of
certain short-term and long-term notes payable into two long-term notes payable.
Certain of the Company's loan agreements contain restrictive covenants
pertaining to financial ratios and minimum cash flow coverage. The most
restrictive of these covenants requires the Company to maintain a ratio of cash
generation (defined as income before income taxes, interest, depreciation and
amortization) to current maturities of long-term debt of at least 1.5 to 1.0 and
a maximum of total liabilities to tangible net worth of 3.25 to 1.0.
Funds provided by operating activities totaled approximately $1,361,600,
$1,149,000 and $1,130,000 in 1998, 1997 and 1996, respectively.
9
As of March 31, 1998, the Company had approximately $1,875,000 in cash and
cash equivalents. The Company believes that cash and cash equivalents on hand at
March 31, 1998, together with funds from operations, will be sufficient to fund
its operations for the ensuing year.
Capital expenditures of approximately $550,000, $398,500 and $450,000 for
1998, 1997 and 1996, respectively, were primarily for the acquisition of
equipment for and improvements to the Company's existing restaurants.
The Company anticipates that capital expenditures for the acquisition of
equipment and for improvements to the Company's existing restaurants for the
fiscal year ending March 31, 1999 will be approximately the same as in 1998.
The Company has reviewed its computer systems in order to evaluate
necessary modifications for the year 2000. The Company does not anticipate that
it will incur material expenditures to complete any such modifications and does
not anticipate any significant disruptions to its operations.
New Accounting Pronouncements
New accounting pronouncements are discussed in Note 1 of Notes to
Consolidated Financial Statements.
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
The information required by this item is included on pages F-1 to F-15 of
this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- -----------------------------------------------------------------------
Not applicable.
10
PART III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
Information with respect to directors of the Company is included under
"Election of Directors" in the Company's definitive proxy statement for its 1998
Annual Meeting of Shareholders (the "1998 Proxy Statement") 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 1998 Proxy Statement.
Item 11. Executive Compensation
- -------------------------------
Information with respect to executive compensation is included under
"Compensation" in the 1998 Proxy Statement.
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 "Voting Securities and Principal Shareholders"
and "Election of Directors" in the 1998 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
Information with respect to certain relationships and related transactions
with management is included under "Certain Transactions" in the 1998 Proxy
Statement.
11
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(a)(1) Financial Statements and Schedules Page in
---------------------------------- this Report
-----------
Report of Independent Accountants.........................................F-1
Consolidated Balance Sheets at
March 31, 1998 and 1997.................................................F-2
Consolidated Statements of Income
for the years ended March 31, 1998, 1997
and 1996................................................................F-3
Consolidated Statements of Changes in Shareholders'
Equity for the years ended March 31, 1998,
1997 and 1996...........................................................F-4
Consolidated Statements of Cash Flows
for the years ended March 31, 1998,
1997 and 1996...........................................................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.
(a)(2) Exhibits
--------
3.1 Restated Articles of Incorporation of the Company. Incorporated
by reference to Exhibit 3.1 of the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1988 (the "1988
Form 10-K").
3.2 Bylaws of the Company, as amended. Incorporated by reference to
Exhibit 3.2 of the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1990.
10.1 Area Franchisee - Unit Franchisee Agreement dated July 10, 1978
by and between Elmer's Colonial Pancake & Steak House, Inc. and
Paul H. and Jacqueline M. Welch, Dale M. and Sandra Lee Elmer.
Incorporated by reference to Exhibit 10.30 of the Company's
Registration Statement on Form S-18, Registration No. 2-98298-S
(the "Form S-18 Registration").
12
10.2 Lease Agreement dated June 18, 1987 by and between Dale M. Elmer
and Sandra Lee Elmer and Elmer's Pancake & Steak House, Inc., and
addenda thereto. Incorporated by reference to Exhibit 10.5 of the
Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1989 (the "1989 Form 10-K") and Exhibit 10.3 of the
December 31, 1991 Form 10-Q.
10.3 Franchise Agreement between the Company and Paul H. Welch and
Jacqueline M. Welch dated March 23, 1993. Incorporated by
reference to Exhibit 10.9 of the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1993 (the "1993 Form
10-K").
10.4 Franchise Development Option Agreement between the Company and
Paul H. Welch and Jacqueline M. Welch dated May 3, 1993.
Incorporated by reference to Exhibit 10.10 of the 1993 Form 10-K.
10.5 Commercial Loan Note, dated May 18, 1995, issued by the Company
to The Bank of California, N.A. and addendum thereto.
Incorporated by reference to Exhibit 10.9 of the Form 10-K for
the fiscal year ended March 31, 1995.
10.6 Loan Agreement, dated December 21, 1995, between the Company and
Wells Fargo Bank, N.A., successor-by-merger to First Interstate
Bank of Oregon, N.A. and the First Amendment thereto, dated as of
March 18, 1997, Promissory Note dated December 21, 1995 issued by
the Company to Wells Fargo Bank, N.A., successor-by-merger to
First Interstate Bank of Oregon, N.A. in connection with the Loan
Agreement, and Deeds of Trust given by the Company to Ticor Title
Insurance Company, Trustee, for benefit of Wells Fargo Bank,
N.A., successor-by-merger to First Interstate Bank of Oregon,
N.A. in connection with the Loan Agreement. Incorporated by
reference to Exhibit 10.6 of the Form 10-K for the fiscal year
ended March 31, 1997.
10.7 Credit Agreement, dated as of March 18, 1997, between the Company
and Wells Fargo Bank, N.A. and Promissory Note dated March 18,
1997, issued by the Company to Wells Fargo Bank, N.A. in
connection with the Credit Agreement and Promissory Note dated
May 17, 1995, issued by the Company to Wells Fargo Bank, N.A.,
successor-by-merger to First Interstate Bank of Oregon, N.A.,
which is governed by the Credit Agreement.
10.8 Promissory Notes, dated March 31, 1997, issued by Paul H. Welch
and Jacqueline M. Welch to the Company.
10.9 Stock Purchase Agreement, dated as of February 13, 1997, between
the Company and Dale Elmer.
10.10 Letter Agreement dated March 23, 1998, between the Company and
Wells Fargo Bank, N.A., Promissory Note dated March 30, 1998,
issued by the Company to Wells Fargo Bank, N.A., and Deed of
Trust and Assignment of Rents and Leases dated as of March 23,
1998, given by the Company to Wells Fargo Bank (Arizona), N. A.,
Trustee, for the benefit of Wells Fargo Bank. N.A.
13
22.1 List of Subsidiaries.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K No reports on Form 8-K were filed by the Company
during the last quarter of the fiscal year ended March 31, 1998.
14
Report of Independent Accountants
To the Board of Directors and Shareholders
Elmer's Restaurants, Inc.
We have audited the accompanying consolidated balance sheets of Elmer's
Restaurants, Inc. and Subsidiaries as of March 31, 1998 and 1997, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the three years in the period ended March 31, 1998. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Elmer's
Restaurants, Inc. and Subsidiaries as of March 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended March 31, 1998 in conformity with generally
accepted accounting principles.
Portland, Oregon
May 15, 1998
F-1
Elmer's Restaurants, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 1998 and 1997
ASSETS 1998 1997
Current assets:
Cash and cash equivalents (Note 6) $ 1,875,136 $ 1,678,876
Accounts receivable, less allowance for doubtful accounts of
$5,000 in 1998 and 1997 140,717 159,904
Notes receivable, current portion (Note 2) 81,033 69,880
Inventories 216,537 203,115
Prepaid expenses 101,425 126,099
------------- -------------
Total current assets 2,414,848 2,237,874
Property, buildings and equipment, net (Notes 3 and 6) 4,696,507 4,738,012
Intangible assets, net (Notes 4 and 6) 973,643 1,062,419
Note receivable, long-term portion 16,709
Other assets 78,903 70,660
------------- -------------
Total assets $ 8,180,610 $ 8,108,965
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable - current portion (Note 6) $ 405,266 $ 495,581
Accounts payable 612,107 631,639
Accrued payroll and related taxes 311,782 192,867
Accrued expenses 47,447 33,754
Accrued income taxes (Note 5) 195,387 96,459
------------- -------------
Total current liabilities 1,571,989 1,450,300
Notes payable - long-term portion (Note 6) 3,061,284 3,338,255
Deferred income taxes (Note 5) 40,000 111,000
------------- -------------
Total liabilities 4,673,273 4,899,555
------------- -------------
Commitments and contingencies (Notes 7 and 9)
Shareholders' equity:
Preferred stock, no par value; 500,000 shares authorized;
none issued
Common stock, no par value; 10,000,000 shares authorized;
1,311,109 shares and 1,404,686 shares issued and
outstanding in 1998 and 1997, respectively 1,417,034 1,518,098
Retained earnings 2,090,303 1,691,312
------------- -------------
Total shareholders' equity 3,507,337 3,209,410
------------- -------------
Total liabilities and shareholders' equity $ 8,180,610 $ 8,108,965
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
Elmer's Restaurants, Inc. and Subsidiaries
Consolidated Statements of Income
for the years ended March 31, 1998, 1997 and 1996
1998 1997 1996
Revenues:
Restaurant sales $ 15,757,151 $ 15,416,311 $ 15,031,429
Franchise operations 660,074 654,637 680,604
Lottery 179,172 41,407
-------------- -------------- --------------
16,596,397 16,112,355 15,712,033
-------------- -------------- --------------
Costs and expenses:
Cost of restaurant sales:
Food and beverage 4,263,703 4,270,067 4,191,161
Labor and related 5,490,690 5,252,469 5,102,414
Occupancy costs 998,782 993,007 934,518
Depreciation and amortization 679,455 699,013 719,711
General and administrative expenses 4,107,003 3,923,250 3,911,387
-------------- -------------- --------------
15,539,633 15,137,806 14,859,191
-------------- -------------- --------------
Income from operations 1,056,764 974,549 852,842
Other income (expense):
Interest income 66,225 60,947 60,780
Interest expense (Note 6) (324,578) (351,831) (387,033)
Gain on disposition of assets 368 550 3,533
-------------- -------------- --------------
Food and beverage 4,263,703 4,270,067 4,191,161
Labor and related 5,490,690 5,252,469 5,102,414
Occupancy costs 998,782 993,007 934,518
Depreciation and amortization 679,455 699,013 719,711
General and administrative expenses 4,107,003 3,923,250 3,911,387
-------------- -------------- --------------
15,539,633 15,137,806 14,859,191
-------------- -------------- --------------
Income from operations 1,056,764 974,549 852,842
Other income (expense):
Interest income 66,225 60,947 60,780
Income before provision for income taxes 798,779 684,215 530,122
Provision for income taxes (Note 5) (269,000) (232,000) (179,500)
-------------- -------------- --------------
Net income $ 529,779 $ 452,215 $ 350,622
============== ============== ==============
Net income per share $ 0 $ 0 $ 0
============== ============== ==============
Weighted average number of shares outstanding 1,385,676 1,477,812 1,538,253
============== ============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
Elmer's Restaurants, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
for the years ended March 31, 1998, 1997 and 1996
Common Stock
------------------------------- Retained
Shares Amount Earnings
------------- ------------- -------------
Balance, March 31, 1995 1,727,445 $ 1,866,676 $ 1,090,320
Repurchase and retirement of common stock (228,182) (246,436) (132,350)
Net income 350,622
------------- ------------- -------------
Balance, March 31, 1996 1,499,263 1,620,240 1,308,592
Repurchase and retirement of common stock (94,577) (102,142) (69,495)
Net income 452,215
------------- ------------- -------------
Balance, March 31, 1997 1,404,686 1,518,098 1,691,312
Repurchase and retirement of common stock (93,577) (101,064) (130,788)
Net income 529,779
------------- ------------- -------------
Balance, March 31, 1998 1,311,109 $ 1,417,034 $ 2,090,303
============= ============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
Elmer's Restaurants, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended March 31, 1998, 1997 and 1996
1998 1997 1996
Cash flows from operating activities:
Net income $ 529,779 $ 452,215 $ 350,622
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 590,679 601,899 609,912
Amortization 88,776 97,114 109,799
Deferred income taxes (71,000) 6,000 21,500
Gain on disposition of assets (368) (550) (3,533)
Changes in assets and liabilities:
Receivables (8,675) (113,927) (7,456)
Inventories (13,422) (11,087) 20,009
Prepaid expenses 24,674 23,474 (35,887)
Other assets 9,162 33,081 (2,330)
Accounts payable and accrued expenses 113,076 (35,790) 88,081
Accrued income taxes 98,928 96,459 (20,575)
-------------- -------------- --------------
Net cash provided by operating activities 1,361,609 1,148,888 1,130,142
-------------- -------------- --------------
Amortization 88,776 97,114 109,799
Deferred income taxes (71,000) 6,000 21,500
Gain on disposition of assets (368) (550) (3,533)
Changes in assets and liabilities:
Receivables (8,675) (113,927) (7,456)
Inventories (13,422) (11,087) 20,009
Prepaid expenses 24,674 23,474 (35,887)
-------------- -------------- --------------
Cash flows from investing activities:
Additions to property, buildings and equipment (550,006) (398,501) (450,047)
Proceeds from sale of assets 1,200 550 3,937
-------------- -------------- --------------
Net cash used in investing activities (548,806) (397,951) (446,110)
-------------- -------------- --------------
Cash flows from financing activities:
Net change in other non-current assets (17,405) (4,450) (34,355)
Proceeds from notes payable 630,000 230,000 2,670,000
Payments on notes payable (997,286) (496,803) (2,839,329)
Repurchase of common stock (231,852) (171,637) (378,786)
-------------- -------------- --------------
Net cash used in financing activities (616,543) (442,890) (582,470)
-------------- -------------- --------------
Net increase in cash and cash equivalents 196,260 308,047 101,562
Cash and cash equivalents, beginning of year 1,678,876 1,370,829 1,269,267
-------------- -------------- --------------
Cash and cash equivalents, end of year $ 1,875,136 $ 1,678,876 $ 1,370,829
============== ============== ==============
Supplemental disclosures of cash flow information:
Cash paid for:
Amortization 88,776 97,114 109,799
Deferred income taxes (71,000) 6,000 21,500
Gain on disposition of assets (368) (550) (3,533)
Changes in assets and liabilities:
Receivables (8,675) (113,927) (7,456)
Inventories (13,422) (11,087) 20,009
Prepaid expenses 24,674 23,474 (35,887)
Interest $ 325,206 $ 351,203 $ 387,033
============== ============== ==============
Income taxes $ 247,711 $ 119,350 $ 188,766
============== ============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
Elmer's Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. The Company and Summary of Significant Accounting Policies:
The Company
Elmer's Restaurants, Inc. (the Company), an Oregon corporation, owns and
operates eleven Elmer's Pancake & Steak House restaurants and sells
franchises that give franchisees the right to operate under the name
Elmer's Pancake & Steak House for a specific restaurant or region.
Franchises and Company owned stores are located throughout the western
United States.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany accounts and transactions
have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
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,
1998 and 1997 because of the relatively short maturity of these
instruments. The carrying value of notes payable approximated fair value as
of March 31, 1998 and 1997, 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 generally 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.
F-6
Elmer's Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
1. The Company and Summary of Significant Accounting Policies, Continued:
Property, Buildings and Equipment
Property, buildings and equipment are stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of
the related assets. Lives used for calculating depreciation and
amortization rates for the principal asset classifications are as follows:
buildings - 35 years; automobiles, furniture, fixtures and equipment - 3 to
7 years; leasehold improvements - life of lease or applicable shorter
period. Maintenance and repairs are expensed as incurred; renewals and
improvements are capitalized. Upon disposal of assets subject to
depreciation, the related costs and accumulated depreciation are removed
and resulting gains and losses are reflected in the consolidated statements
of income.
Intangible Assets
The cost over fair value of net tangible assets of acquired companies
(goodwill) is amortized on a straight-line basis over periods not exceeding
25 years. Other intangible assets are stated at cost and amortized using
the straight-line method over the shorter of the actual life or the period
estimated to be benefited of 3 to 40 years.
Management of the Company reviews the carrying value of capitalized
tangible and intangible assets on a regular basis to reach a judgment
concerning possible permanent impairment of value. These reviews consider,
among other factors: (1) the net realizable value of each major
classification of assets, (2) the cash flow associated with the assets, and
(3) significant changes in the extent or manner in which major assets are
used. Management believes the carrying value of assets is less than the
estimated fair value.
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. The Company 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.
Lottery
The Company offers video poker to its patrons in certain restaurants. The
net revenue earned from video poker is recorded in the Company's financial
statements as Lottery revenue when received.
F-7
Elmer's Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
1. The Company and Summary of Significant Accounting Policies, Continued:
Income Taxes
Deferred income taxes are recorded for the tax consequences in future years
of differences between the tax bases of assets and liabilities and their
financial reporting amounts based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to
affect taxable income. Income tax expense is the tax payable for the year
and the change during the year in deferred tax assets and liabilities.
Net Income Per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 128, Earnings Per
Share, effective for fiscal periods ending after December 15, 1997. This
Statement simplifies the standards for computing earnings per share (EPS)
previously found in APB Opinion No. 15, Earnings Per Share, and makes them
comparable with international EPS standards. This statement requires
restatement of all prior period data presented. The primary differences
between the provisions of SFAS No. 128 and previous authoritative
pronouncements are exclusion of common stock equivalents in the
determination of basic EPS and the market price at which common stock
equivalents are calculated in the determination of diluted EPS. Basic 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. The adoption of this statement
did not have any impact on previously reported EPS.
Impact of Recently Issued Accounting Standards
In June 1997, FASB issued SFAS No. 130, Comprehensive Income. SFAS No. 130
becomes effective in 1998 and requires reclassification of previously
issued financial statements for comparative purposes. SFAS No. 130 requires
that changes in the amounts of certain items, including foreign currency
translation adjustments and gains and losses on certain securities be shown
in a statement of comprehensive income. Management does not expect the
adoption to have a material effect on the consolidated financial
statements.
Also in June 1997, the FASB issued SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. This statement will change 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. The statement is effective for fiscal years beginning
after December 15, 1997 and may modify the disclosure of certain segment
information for the Company.
F-8
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, Continued
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
About Pensions and Other Postretirement Benefits. This statement revises
employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans.
The statement suggests combined formats for presentation of pension and
other postretirement benefit disclosures. The statement also permits
reduced disclosures for nonpublic entities. This statement is effective for
fiscal years beginning after December 15, 1997. Management does not expect
the adoption to have any effect on the consolidated financial statements.
2. Notes Receivable:
Notes receivable from a franchisee and officer/director
of the Company, due on demand, interest at 7%, without
collateral $ 69,880
Note receivable from a franchisee, monthly payments of
$1,120, including interest at 10%, without collateral 27,862
------------
97,742
Current portion 81,033
------------
Long-term portion $ 16,709
------------
3. Property, Buildings and Equipment:
1998 1997
Land $ 1,258,439 $ 1,258,439
Buildings 2,448,527 2,425,055
Furniture, fixtures and equipment 6,886,948 6,455,031
Automobiles 81,580 81,580
Leasehold improvements 1,332,385 1,247,473
-------------- --------------
12,007,879 11,467,578
Less accumulated depreciation (7,311,372) (6,729,566)
-------------- --------------
$ 4,696,507 $ 4,738,012
-------------- --------------
F-9
Elmer's Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
4. Intangible Assets:
Intangible assets, net of accumulated amortization of $1,245,504 and
$1,156,728 at March 31, 1998 and 1997, respectively, are comprised of:
1998 1997
Trademark and franchise registrations and agreements $ 630,151 $ 680,298
Cost over fair value of net tangible assets acquired 312,515 347,506
Other 30,977 34,615
-------------- -------------
$ 973,643 $ 1,062,419
-------------- -------------
5. Income Taxes:
The Company's provision for income taxes is comprised of the following:
1998 1997 1996
Currently payable:
Federal $ 297,000 $ 172,000 $ 120,000
State 43,000 54,000 38,000
------------ ------------ ------------
340,000 226,000 158,000
Deferred income taxes (71,000) 6,000 21,500
------------ ------------ ------------
$ 269,000 $ 232,000 $ 179,500
------------ ------------ ------------
F-10
Elmer's Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
5. Income Taxes, Continued:
Deferred income tax assets and liabilities are recorded for both the
expected future tax impact of differences between the financial statement
and income tax basis of assets and liabilities, and for the expected future
tax benefit to be derived from tax loss and tax credit carryforwards. A
valuation allowance is established, when necessary, to reflect the
likelihood of realization of deferred income tax assets. No valuation
allowance was deemed necessary as a result of management's evaluation of
the likelihood that all of the deferred income tax assets will be realized.
The Company has recorded a net deferred tax liability of $40,000 and
$111,000 at March 31, 1998 and 1997, respectively, which is comprised of
the following:
1998 1997
Excess of financial statement fixed assets over tax basis $ (81,000) $ (144,000)
Expenses not currently deductible for tax 41,000
Federal alternative minimum tax credit carryforwards 33,000
------------ -------------
$ (40,000) $ (111,000)
------------ -------------
Income taxes are provided at a rate different from the
expected federal tax rate on income before provision
for income taxes as follows:
1998 1997 1996
Expected tax $ 272,000 $ 233,000 $ 180,000
Amortization not deductible for income taxes 12,000 12,000 12,000
State taxes, net of federal tax benefits 28,000 35,000 25,000
Tax credits utilized (50,000) (48,000) (42,500)
Other 7,000 5,000
------------ ------------ ------------
$ 269,000 $ 232,000 $ 179,500
------------ ------------ ------------
F-11
Elmer's Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
6. Notes Payable:
1998 1997
Notes payable to financial institutions, collateralized by
all assets excluding real estate, due at various dates
through June 2000, monthly principal installments total
approximately $34,000 plus interest at rates as follows:
Prime rate plus 0.5% - 0.75% (prime was 8.50% at
March 31, 1998) $ 1,457,995 $ 1,892,935
Notes payable to financial institutions,
collateralized by real estate, due at various dates
through February 2008, monthly installments total
$16,204 including interest at rates as follows:
513,332
Average 2 year U.S. Treasury note rate plus
1.75% and 2%
Fixed rate of 8.18% 1,306,533 1,338,206
Fixed rate of 8.25% 630,000
Note payable to others, collateralized by stock of
a subsidiary, due August 2001, interest at 10%
72,022 89,363
------------- -------------
3,466,550 3,833,836
Less current portion (405,266) (495,581)
------------- -------------
Long-term portion $ 3,061,284 $ 3,338,255
------------- -------------
F-12
Elmer's Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
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 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 1.3 to 1.0 and a maximum of total liabilities to
tangible net worth of 3.25 to 1.0. The Company was in compliance with these
covenants at March 31, 1998. Future maturities of notes payable for years
ending March 31 are as follows:
1999 $ 405,266
2000 402,694
2001 902,803
2002 81,516
2003 79,430
Thereafter 1,594,881
-----------
$ 3,466,590
-----------
All interest costs incurred during the years ended March 31, 1998, 1997 and
1996 have been expensed during the respective periods.
7. Leases:
Minimum fiscal year rental commitments for the years ending March 31 under
operating leases with noncancelable terms of more than one year, are as
follows:
1999 $ 492,518
2000 481,307
2001 458,882
2002 450,882
2003 413,435
Thereafter 1,173,040
-----------
$ 3,470,064
-----------
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 $674,552 (including $182,034
of additional rentals) for the year ended March 31, 1998, $661,419
(including $168,803 of additional rentals) for the year ended March 31,
1997, and $642,166 (including $149,648 of additional rentals) for the year
ended March 31, 1996.
Total lease payments for the lease of the corporate offices from a
stockholder of the Company were $33,636 for the years ended March 31, 1998,
1997 and 1996.
F-13
Elmer's Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
8. Restaurant and Franchise Operations:
Summary results of operations and other selected financial information from
restaurant operations and franchise operations are presented after
elimination of intercompany transactions:
Years Ended March 31,
---------------------------------------------------
1998 1997 1996
Revenues:
Restaurant operations $ 15,936,323 $ 15,457,718 $ 15,031,429
Franchise operations 1,393,275 1,358,776 1,360,729
Intercompany eliminations (733,201) (704,139) (680,125)
------------- ------------- -------------
Consolidated $ 16,596,397 $ 16,112,355 $ 15,712,033
============= ============= =============
Income from operations :
Restaurant operations $ 612,723 $ 586,968 $ 424,480
Franchise operation s 444,041 387,581 428,362
------------- ------------- -------------
Consolidated $ 1,056,764 $ 974,549 $ 852,842
------------- ------------- -------------
Capital and intangible expenditures:
Restaurant operations $ 521,913 $ 360,961 $ 361,545
Franchise operations 28,093 37,540 88,502
------------- ------------- -------------
Consolidated $ 550,006 $ 398,501 $ 450,047
------------- ------------- -------------
Depreciation and amortization:
Restaurant operations $ 587,248 $ 606,533 $ 642,031
Franchise operations 28,093 37,540 88,502
------------- ------------- -------------
Franchise operations 92,207 92,480 77,680
------------- ------------- -------------
Consolidated $ 679,455 $ 699,013 $ 719,711
============= ============= =============
F-14
Elmer's Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
8. Restaurant and Franchise Operations, Continued:
1998 1997
Assets:
Restaurant operations $ 7,307,145 $ 7,117,727
Franchise operations 873,465 991,238
------------- -------------
Consolidated $ 8,180,610 $ 8,108,965
============= =============
The number of Company owned stores and operating franchises at March 31 is
as follows:
1998 1997 1996
Company owned stores 11 11 11
Operating franchises 18 18 18
9. Commitments and Contingencies:
The Company entered into employment agreements with its late Chief
Executive Officer and the founders of the original Elmer's Pancake & Steak
House. The agreements provide the following minimum compensation
commitments: Chief Executive Officer - $120,000 per year expiring May 1999;
Founders - $15,000 per year for life. In accordance with the terms of the
agreement with the late Chief Executive Officer, the Company will continue
to provide this minimum compensation to the successor Chief Executive
Officer for a period of two years after his death. This agreement will
expire on May 26, 1998.
The Company has authorized incentive compensation for the Chief Executive
Officer equal to 10% of the Company's annual earnings (before income taxes
and the incentive payment) in excess of $200,000 for each fiscal year.
Incentive compensation expense for the years ended March 31, 1998 and 1996
was $66,531 and $36,680, respectively. This agreement was not in effect
during the year ended March 31, 1997.
F-15
Elmer's Restaurants, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, Continued
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-16
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ELMER'S RESTAURANTS, INC.
Date: June 12, 1998 By ANITA GOLDBERG
--------------------------------------
Anita Goldberg, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on June 12, 1998.
Signature Title
--------- -----
(1) Principal Executive and
Financial Officer
ANITA GOLDBERG President and Director
- ----------------------------------
Anita Goldberg
(2) Principal Accounting
Officer
JUANITA NELSON Controller
- ----------------------------------
Juanita Nelson
(3) Directors
ANITA GOLDBERG Director
- ----------------------------------
Anita Goldberg
PAUL WELCH Director
- ----------------------------------
Paul Welch
ZADOC (ZED) MERRILL Director
- ----------------------------------
Zadoc (Zed) Merrill
RUDOLPH MAZUROSKY Director
- ----------------------------------
Rudolph (Rudy) Mazurosky
15
EXHIBIT INDEX
Exhibit Sequential
No. Description Page Nos.
- ------- ----------- ----------
3.1 Restated Articles of Incorporation of the Company. Incorporated by
reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1988 (the "1988 Form 10- K").
3.2 Bylaws of the Company, as amended. Incorporated by reference to
Exhibit 3.2 of the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1990.
10.1 Area Franchisee - Unit Franchisee Agreement dated July 10, 1978 by
and between Elmer's Colonial Pancake & Steak House, Inc. and Paul H.
and Jacqueline M. Welch, Dale M. and Sandra Lee Elmer. Incorporated
by reference to Exhibit 10.30 of the Company's Registration
Statement on Form S-18, Registration No. 2-98298-S (the "Form S-18
Registration").
10.2 Lease Agreement dated June 18, 1987 by and between Dale M. Elmer and
Sandra Lee Elmer and Elmer's Pancake & Steak House, Inc., and
addenda thereto. Incorporated by reference to Exhibit 10.5 of the
Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1989 (the "1989 Form 10-K") and Exhibit 10.3 of the December 31,
1991 Form 10-Q.
10.3 Franchise Agreement between the Company and Paul H. Welch and
Jacqueline M. Welch dated March 23, 1993. Incorporated by reference
to Exhibit 10.9 of the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1993 (the "1993 Form 10- K").
10.4 Franchise Development Option Agreement between the Company and Paul
H. Welch and Jacqueline M. Welch dated May 3, 1993. Incorporated by
reference to Exhibit 10.10 of the 1993 Form 10-K.
10.5 Commercial Loan Note, dated May 18, 1995, issued by the Company to
The Bank of California, N.A. and addendum thereto. Incorporated by
reference to Exhibit 10.9 of the Form 10-K for the fiscal year ended
March 31, 1995.
EXHIBIT INDEX
Exhibit Sequential
No. Description Page Nos.
- ------- ----------- ----------
10.6 Loan Agreement, dated December 21, 1995, between the Company and
Wells Fargo Bank, N.A., successor-by-merger to First Interstate Bank
of Oregon, N.A. and the First Amendment thereto, dated as of March
18, 1997, Promissory Note dated December 21, 1995 issued by the
Company to Wells Fargo Bank, N.A., successor-by-merger to First
Interstate Bank of Oregon, N.A. in connection with the Loan
Agreement, and Deeds of Trust given by the Company to Ticor Title
Insurance Company, Trustee, for benefit of Wells Fargo Bank, N.A.,
successor-by-merger to First Interstate Bank of Oregon, N.A. in
connection with the Loan Agreement. Incorporated by reference to
Exhibit 10.6 of the Form 10-K for the fiscal year ended March 31,
1997.
10.7 Credit Agreement, dated as of March 18, 1997, between the Company
and Wells Fargo Bank, N.A. and Promissory Note dated March 18, 1997,
issued by the Company to Wells Fargo Bank, N.A. in connection with
the Credit Agreement and Promissory Note dated May 17, 1995, issued
by the Company to Wells Fargo Bank, N.A., successor-by-merger to
First Interstate Bank of Oregon, N.A., which is governed by the
Credit Agreement.
10.8 Promissory Notes, dated March 31, 1997, issued by Paul H. Welch and
Jacqueline M. Welch to the Company.
10.9 Stock Purchase Agreement, dated as of February 13, 1997, between the
Company and Dale Elmer.
10.10 Letter Agreement dated March 23, 1998, between the Company and Wells
Fargo Bank, N.A., Promissory Note dated March 30, 1998, issued by
the Company to Wells Fargo Bank, N.A., and Deed of Trust and
Assignment of Rents and Leases dated as of March 23, 1998, given by
the Company to Wells Fargo Bank (Arizona), N. A., Trustee, for the
benefit of Wells Fargo Bank. N.A.
22.1 List of Subsidiaries.
27.1 Financial Data Schedule.