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 29, 2004
[ ] 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 (503) 252-1485
(ADDRESS OF PRINCIPAL (ZIP CODE) (REGISTRANT'S TELEPHONE NUMBER,
EXECUTIVE OFFICES) INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
-----------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
Aggregate market value of Common Stock held by nonaffiliates of the Registrant
at May 14, 2004: $8.2 million. For purposes of this calculation, officers and
directors are considered affiliates.
Number of shares of Common Stock outstanding at May 14, 2004: 1,816,335.
Document Part of Form 10-K into which incorporated
- -------- -----------------------------------------
Proxy Statement for 2004 Annual
Meeting of Shareholders Part III
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TABLE OF CONTENTS
Item of Form 10-K Page
PART I............................................................................................................2
Item 1. Business.........................................................................................2
Item 2. Properties.......................................................................................9
Item 3. Legal Proceedings...............................................................................10
Item 4. Submission of Matters to a Vote of Security Holders.............................................10
PART II..........................................................................................................11
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.......................11
Item 6. Selected Financial Data.........................................................................11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................................12
Item 7A Quantitative and Qualitative Disclosures About Market Risk........................................18
Item 8. Financial Statements and Supplementary Data.....................................................18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................................................18
Item 9A Controls and Procedures...........................................................................18
PART III.........................................................................................................18
Item 10. Directors and Executive Officers of the Registrant...............................................18
Item 11. Executive Compensation...........................................................................18
Item 12. Security Ownership of Certain Beneficial Owners and Management...................................19
Item 13. Certain Relationships and Related Transactions...................................................19
Item 14. Principal Accountant Fees and Services...........................................................19
PART IV..........................................................................................................19
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 10-K................................19
SIGNATURES.......................................................................................................20
1
PART I
ITEM 1. BUSINESS
GENERAL
The Company, located in Portland, Oregon, is a franchisor and operator
of full-service, family oriented restaurants under the names "Elmer's Breakfast
o Lunch o Dinner(R)" and "Mitzel's American Kitchen", and operates delicatessen
restaurants under the names "Ashley's Cafe", "Richard's Deli and Pub" and
"Cooper's Deli and Pub." The Company is an Oregon corporation and was
incorporated in 1983. Walter Elmer opened the first Elmer's restaurant in
Portland, Oregon in 1960, and the first franchised restaurant opened in 1966.
The Company acquired the Elmer's franchising operation in January 1984 from the
Elmer family. The Company now owns and operates 11 Elmer's restaurants, five
Mitzel's American Kitchen restaurants, 13 Delis and franchises 21 Elmer's
restaurants in five western states. The Company reports on a fiscal year, which
ends on the Monday nearest March 31st.
The Company's corporate office is located at 11802 S.E. Stark Street,
Portland, Oregon, 97216; telephone (503) 252-1485, fax (503) 257-7448. The
Company's website address is www.elmers-restaurants.com.
BUSINESS SEGMENTS
The Company primarily operates in two business segments: restaurant
operations and franchising the Elmer's restaurant concept. Information as to
revenue, operating profit, identifiable assets, depreciation and amortization
expense and capital expenditures for the Company's business segments for fiscal
2004, 2003 and 2002 is discussed in further detail in Note 10 to the financial
statements.
The 11 Company-owned Elmer's restaurants are located in the following
states: six in Oregon; three in Washington; one each in Idaho and California.
The Company operates five Mitzel's restaurants all located in the Puget Sound
area in the state of Washington. The Company operates six Ashley's restaurants,
four Richard's Deli and Pub restaurants and three Cooper's Deli restaurants all
of which are located in Oregon.
RECENT ACQUISITIONS AND DEVELOPMENTS
March 15, 2004, Elmer's newest franchised restaurant opened in
Corvallis, Oregon. The 4,500 square foot restaurant in Corvallis occupies a
converted Lyons restaurant site.
January 14, 2004, the Company completed a self-tender under which it
acquired 204,255 shares of Common Stock, representing approximately 10% of the
then outstanding shares, at a purchase price of $6.43 per share. A total of
568,564 shares had been tendered. The cost of the self-tender, including the
purchase price, fees and expenses, totaled approximately $1,330,000.
December 29, 2003, the Company's new prototype restaurant located in
Beaverton, Oregon opened. The 5,921 square foot restaurant is located on a
one-acre site purchased by the Company in July 2003. The Company secured
financing of approximately $1.6 million and as of March 29, 2004 had drawn
$1,563,500.
December 1, 2003, the Company repurchased the balance ($650,000) of its
10% convertible notes, paying a 5% premium over face value. In accordance with
the Statement of Financial Accounting Standards (SFAS) No. 145 - Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and
Technical Corrections, the total premium of $32,500 was recorded as a loss on
extinguishments of debt.
November 2003, the Company repurchased 25,000 shares of stock for
$151,700 in a privately negotiated transaction.
June 28, 2002, the Company repurchased half ($650,000) of its 10%
convertible notes, paying a 15% premium over face value. As permitted by the
early adoption provisions of SFAS No. 145, the total premium of $97,500 was
recorded as a loss on extinguishments of debt.
In addition to reducing the Company's debt, these transactions
eliminate the potential obligation to issue up to 210,000 shares of common stock
upon conversion of the notes. All convertible debt has now been repurchased.
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July 21, 2003, the Company opened a 5,000 square foot franchised
restaurant in Coeur d'Alene, Idaho. This location occupies a converted Village
Inn site.
July 1, 2002, the Company acquired three Cooper's Deli units located in
Salem, Oregon from Cooper's Inc. The Cooper's units are substantially similar to
the Company's existing deli operations. Purchase consideration included $100,000
cash, a $66,500, two-year promissory note, $11,500 in assumed liabilities and
the cancellation of a $155,000 promissory note due to the Company. The
acquisition cost of $333,000 included $100,000 in tangible assets and $233,000
in goodwill.
May 28, 2002, the Company relocated one of two Hillsboro, Oregon
Richard's Deli units to a nearby retail mall. The prior landlord's bankruptcy,
combined with the superiority of the new space, made the decision to move
compelling. The Company terminated its occupancy lease and recorded a $77,000
loss on the surrender of leasehold improvements. The Company entered into a
five-year lease for approximately 4,000 sq. ft. at the new location. This is
larger than the operating requirement; therefore the Company has subleased 1,900
sq. ft. of the new space to a non-competing use.
The quarter ended July 22, 2002 results include a gain on sale of
building and equipment related to the sale of three company owned restaurants.
Effective May 7, 2002 Elmer's Restaurants, Inc. (the "Company") executed asset
purchase and franchise agreements with Southern Oregon Elmer's LLC (the
"Buyer"), refranchising three of the Company's Elmer's restaurants located in
Grants Pass, Medford and Roseburg, Oregon. The Company sold substantially all
the assets of those locations in consideration for $1,385,500 in cash and
promissory notes valued at $349,500. The Buyer signed 25-year franchise
agreements for each location and operates the locations under the Elmer's
Breakfast o Lunch o Dinner(TM) name.
The Buyer signed a development agreement to open an additional two
units within five years. The first unit in Klamath Falls, Oregon opened October
23, 2002.
The principals of Southern Oregon Elmer's LLC, Robert Brutke and David
Thomason, have substantial industry experience. They are both past-presidents of
the Oregon Restaurant Association. Mr. Thomason operates a 10-unit Carl's Jr.
franchise from Carl Karcher Enterprises and Mr. Brutke has operated a number of
independent concepts in the southern Oregon market, including Brutke's Wagon
Wheel in Roseburg, Oregon.
As a result of this transaction, the Company posted an after tax gain
of approximately $504,000 or $.25 per share in the quarter ending July 22, 2002.
For the year ended April 1, 2002, revenues from the three restaurants were $5.07
million, contributing $332,000 in earnings before taxes and interest expense.
The Company agreed to provide a limited amount of seller financing. As
of March 29, 2004, the Company holds notes receivable totaling $215,624, of that
amount, approximately $35,000 is due within the next year.
In valuing the restaurants, the Company considered discounted
historical cash flows, future capital spending requirements, as well as the
impact on the Company's franchise program. The Company believes the
consideration paid to be fair, from a financial point of view, to the Company's
shareholders. The franchise agreements with the Buyer are comparable to other
recent Company franchise agreements.
The Company has assigned its rights and obligations under the occupancy
leases for the Medford and Roseburg locations. The Company remains a guarantor
of the Medford lease until April 2007. The Company's guarantee of the Roseburg
lease could extend as long as 2018 if the Buyer exercises its options in 2008
and 2013. The Company has subleased the Grants Pass location to the Buyer for
five years under substantially the same terms and conditions as the underlying
master lease. Provided all parties are in good standing under the lease at the
end of the sublease, the Grants Pass landlord has agreed to lease directly to
the Buyer under substantially similar terms.
The Buyer has indemnified the Company against all losses incurred as a
result of the Company's obligations as a Guarantor. The Buyer's obligations
under the franchise agreements, promissory notes, lease assignments and sublease
are guaranteed by the Buyer and personally by Mssrs. Brutke and Thomason.
However, in the event of default by the Buyer of the terms of the occupancy
leases, and the failure of Mssrs. Brutke and Thomason to make good on their
personal guarantees, the Company could be required to pay all rent and other
amounts due under the terms of the lease for the remainder of the guarantee
term. In the event of default, the Company expects it would exercise its right
to reoccupy and continue to operate the restaurants as Elmer's Breakfast o Lunch
o Dinner(TM).
April 15, 2002, the Company acquired an Elmer's restaurant located in
Vancouver, Washington from a franchisee and former board member, Paul Welch for
approximately $250,000 in cash and assumed liabilities. The Company has entered
into a long-term occupancy lease at the same location, and continues to operate
the location as an Elmer's restaurant. The purchase
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price was allocated to the tangible assets of the restaurant. The Company has
spent approximately $148,000 remodeling the facility.
The Company reached a termination agreement with the Billings
franchisee in December 2003. For the fiscal year ended March 29, 2004, the
Company recorded less than $7,100 in franchise fee revenues from this location.
The Company intends to focus future growth primarily through new and
existing franchisees, with an emphasis on experienced single and multi-unit
operators and locations in the western states where the Company has an
established presence. The Company will pursue strategic acquisitions, new
restaurant openings and other growth opportunities where they support the
Company's strategic focus. From time to time, the Company may refranchise, sell
or otherwise dispose of restaurants. The Company has three franchise restaurants
under development in Oceanside, California; Eugene, Oregon and Walla Walla,
Washington. The Eugene restaurant is expected to open in the second quarter of
fiscal year 2005.
SUBSEQUENT EVENTS
March 30, 2004, the Company refranchised the Company's Elmer's
restaurant in Palm Springs, California. The buyer executed a 25-year franchise
agreement and assumed the Company's operating lease obligations. The Company
remains a guarantor of the lease until April, 2007 and on a rolling twelve-month
basis thereafter until 2020. The purchase price of $450,000 was paid in cash and
will result in a pretax gain of approximately $150,000.
March 31, 2004, the Oregon Lottery Commission approved a new six-year
retailer contract effective June 27, 2004. The new contract lowers retailer
commissions by approximately 10%. If the new commission structure had been
applied to sales for the year ended March 29, 2004, it would have reduced
revenues from commissions by approximately $435,000. The Lottery has installed
additional terminals in most Company locations and the Company expects year over
year sales increases to significantly reduce, but not eliminate, the impact of
the new lower rates. As a result of timing features of the new contract, most of
the adverse impact will be felt in the Company's second quarter ending the
second Monday in October.
ELMER'S BREAKFAST o LUNCH o DINNER
The Company franchises or operates a total of 32 full-service,
family-oriented Elmer's restaurants. These restaurants have a warm, friendly
atmosphere and comfortable furnishings. Most of the restaurants are decorated in
a home style with fireplaces. They are free standing buildings, ranging in size
from 4,600 to approximately 10,000 square feet with seating capacities ranging
from 120 to 265 people. A portion of the dining room in most restaurants may
also be used for private group meetings by closing it off from the public dining
areas. Six of the restaurants have a lounge with seating capacities ranging from
15 to 75 people. The normal hours of operation are from 6 a.m. to 10 or 11 p.m.
and to midnight on weekends in some restaurants with lounges.
Each restaurant offers full service, with a host or hostess to seat
guests and handle payments, wait staff to take and serve orders, and additional
personnel to clear and reset tables.
The menu offers an extensive selection of items for breakfast, lunch
and dinner. The Elmer's breakfast menu, which is available all day, contains a
wide variety of selections with particular emphasis on pancakes, waffles,
omelets, crepes, country platters and other popular breakfast items. Each
Elmer's restaurant makes batters and other key menu items from scratch and
prepares its fruit sauces with fresh fruits when in season. The lunch menu
includes soups, salads, hamburgers and hot and cold sandwiches. Guests at dinner
may choose from steak, seafood, chicken, and a variety of home-style items such
as pot roast and turkey. A special children's menu and a full senior menu is
offered in all restaurants.
MITZEL'S AMERICAN KITCHEN
The Company owns and operates five full-service, family-style Mitzel's
American Kitchen restaurants located in the Puget Sound region of Washington
state. Home-style comfort food is served in a warm atmosphere with friendly
service. Most of the restaurants are decorated in a home-style with fireplaces
in the dining areas. They are free standing buildings, ranging in size from
5,400 to 6,250 square feet with seating capacities from 166 to 203 people. A
portion of the dining room in most restaurants may also be used for private
group meetings by closing it off from the public dining areas. Two of the
restaurants have a lounge with a seating capacity of 20 to 30. The normal hours
of operation are 6:00 a.m. to 10:00 or 11:00 p.m. and to midnight on weekends in
restaurants with lounges.
Each restaurant offers full service, with a host or hostess to seat
guests, wait staff to take and serve orders and handle payments, and additional
personnel to clear and reset tables.
4
The menu offers an extensive selection of items for breakfast, lunch
and dinner. The Mitzel's breakfast menu contains a wide variety of selections
from pancakes to schnitzels. The lunch/dinner menu includes soups, hamburgers,
sandwiches, steak, seafood, pot roast, chicken and a variety of home-style,
fresh rotisserie items such as prime rib and turkey. A special children's menu
and a limited senior menu is offered in all restaurants.
ASHLEY'S, RICHARD'S DELI AND PUB AND COOPER'S DELI
The Company operates a total of six Ashley's restaurants, four
Richard's Delis and Pubs and three Cooper's Delis. They are substantially
similar in design, size and menu. Ten of the thirteen units are located in
retail strip mall locations, one is in a food court in a major indoor mall, and
two are freestanding buildings. They range in size from 1,000 to 2,200 square
feet with seating capacities ranging from 15 to 30 people. A portion of the
dining room is also used for the sale of Oregon lottery games. The normal hours
of operation are from 8 a.m. to 10 p.m. and up to 2 a.m. for some restaurants on
weekends.
Each restaurant offers deli-style hot and cold sandwiches, soups,
salads, and desserts and has a catering department. The restaurants are approved
retailers with the Oregon lottery and offer all lottery games. Meal selections
generally range in price from $2.95 to $6.95. The catering operation offers
small to medium size food service and event support for business meetings,
outdoor barbecues and special events.
The above brands provide a vehicle for market penetration and unit
growth, leveraging off the concept of broad appeal, quick-turn meals and
emphasis on service. In a typical market, Ashley's restaurants, Richard's Delis
and Pubs and Cooper's Delis experience competition from other moderately-priced,
casual dining and walk-through restaurants and/or economy sandwich outlets.
Ashley's, Richard's and Cooper's differentiate themselves from economy deli
competitors by their full table and beer and wine service, attentive wait staff,
lottery games, entertaining atmosphere, distinctive decor and value-priced
meals.
FRANCHISE OPERATIONS
In addition to the acquisition and development of additional Company
operated restaurants, the Company encourages the strategic development of
franchised restaurants in its existing markets as well as other western states.
The primary criteria considered by the Company in the selection, review and
approval of prospective franchisees is the availability of adequate capital,
customer service experience, prior experience in operating full-service
restaurants, and ability to operate the restaurant. Under a franchise agreement,
a franchisor grants to a franchisee the right to operate a business in a manner
developed by the franchisor. The franchisee owns the franchised operation
independently from the franchisor and, in effect, pays a fee for the right to
use the franchisor's name, format, and operational procedures. Franchisees
benefit from a common identification, standardized products, and the business
reputation and services that a franchisor may provide, such as group
advertising, management services, product enhancements, and group buying
programs. The franchisee is able to capitalize on a business concept without, in
many cases, having to invest substantial capital to develop name recognition,
menu items, logos and the like. The franchisor is able to expand its business
without having to invest substantial capital in property, buildings and
equipment.
EXISTING FRANCHISEES. The Company's 23 existing franchise agreements
generally grant to franchisees the right to operate an Elmer's restaurant in one
specific location for 25 years, renewable generally for an additional period of
5 to 25-years. Existing franchisees paid initial franchise fees of up to $35,000
plus additional fees of up to $10,000 if the restaurant had a lounge serving
alcoholic beverages on entering into the agreement. Franchisees pay monthly
franchise royalty fees based on the gross revenues of their restaurants. All but
four restaurants must contribute up to one percent of gross revenues to a common
advertising pool. From time to time, franchised and Company-owned restaurants
have agreed to increase advertising pool contributions to one and one-half
percent. The Company may terminate a franchise agreement for several reasons
including the franchisee's bankruptcy or insolvency, default in the payment of
indebtedness to the Company or suppliers, failure to maintain standards set
forth in the franchise agreement or operations manual, continued material
violation of any safety, health or sanitation law, ordinance or governmental
rule or regulation or cessation of business.
PROSPECTIVE FRANCHISEES. Prospective new franchisees will generally pay
an initial franchise fee of $40,000. Initial franchise fees are generally
payable in cash at the execution of the franchise agreement. Existing
franchisees opening new franchised restaurants may pay a lower initial franchise
fee than new franchisees. For new franchisees, the monthly franchise royalty fee
is expected to be four percent of the gross revenues of the restaurant, subject
to a minimum monthly fee of $1,500. 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 that assumes operation of a previously
franchised restaurant may be offered a reduced initial franchise fee, deferred
payment of the franchise fee, or other concessions. Pursuant to certain area
franchise agreements, the
5
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.
The Company estimates that construction costs for a suitable
freestanding building, exclusive of land, furniture, fixtures and equipment,
will range from approximately $520,000 to $700,000, with actual costs dependent
upon local building requirements and construction conditions, as well as
configuration and parking requirements.
The cost of the land may vary considerably depending upon the location
and size of the site, surrounding population density and other factors. The cost
of kitchen equipment, furniture and trade fixtures is estimated by the Company
to range from approximately $325,000 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 $35,000 and $60,000.
The Company also has an active program to convert existing restaurants
to the Elmer's concept. Candidates for conversion must meet the Company's
requirements for location, construction and market area. Conversions must also
be consistent with the Elmer's brand image after remodeling. Conversion costs
typically range between $300,000 and $500,000. Usually, the Company is retained
to design and supervise conversion, for which the Company receives a management
fee of $25,000.
There is no typical elapsed time from the signing of a franchise
agreement until a restaurant is open for business, although it normally takes
120 days from the receipt of the building permits to construct a new restaurant
facility. Most restaurants have opened within 12 months of the date of the
signing of the franchise agreement. Franchisees bear all costs associated with
the development and construction of their restaurants. Although the Company has
established criteria to evaluate prospective franchisees, there can be no
assurance that franchisees will have the business abilities or access to
financial resources necessary to open the restaurants or that the franchisees
will successfully develop or operate restaurants in their franchise areas in a
manner consistent with the Company's concepts and standards.
AREA FRANCHISE AGREEMENTS. Under previous management, the Elmer's
franchising operation granted exclusive area franchise agreements, whereby
independent entities obtained the exclusive rights to develop Elmer's
restaurants within their respective areas. All exclusive area franchise
agreements have expired or lapsed, except for Clackamas County, Oregon. The area
franchise agreements require the area franchisee to share with the Company the
initial fees and the franchise royalty fees for each new restaurant in the area.
The Company's share of the initial fees range from $2,500 to $12,500 per
restaurant. There are two restaurants covered by this area franchise agreement.
Under the area franchise agreement, the Company reserves the right to approve
each new restaurant franchisee. The area franchise agreement grants 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.
AREA DEVELOPMENT AGREEMENTS. The Company may offer Area Development
Agreements, which grant, for a fee, the right to be the exclusive franchisee for
a designated area. These include a commitment for a certain number of
restaurants to be opened within a set time. Under the Area Development
Agreements, the franchisee must own and operate all restaurants directly and may
not sub-franchise.
SERVICES TO FRANCHISEES. The Company makes available to its franchisees
various programs and materials. The Company provides several manuals to assist
franchisees in ongoing operations, including a comprehensive operations manual
describing kitchen operations, floor operations, personnel management, job
descriptions, and other matters. The Company has prepared a recipe book for
franchisees. All system restaurants use the same menu. Prices are adjusted
according to local conditions. The Company has developed and maintains a menu
cost-control program and a labor cost-control program at each of its
Company-owned restaurants and has developed and implemented a training manual
and programs for all positions within the restaurant.
The Company provides both formal and informal ongoing training for
franchisees. At least one two or three-day meeting is scheduled each year. At
the meetings, franchisees attend lectures by Company personnel and guest
speakers from the industry, as well as participate in discussions on such topics
as cost control, promotion and food presentation.
The Company provides each franchisee with specifications for menu
items. The Company, however, sells no food items or like products to
franchisees, except for certain minor supplies such as gift certificates. The
Company coordinates franchisees' purchases to obtain volume discounts.
Franchisees bear all costs involved in the operation of their restaurants.
Periodic on-site inspections and audits are conducted to ensure
compliance with Company standards and to aid franchisees in improving their
sales and profitability.
6
COMPANY-OWNED RESTAURANTS
The Company owns and operates 11 Elmer's restaurants, which it acquired
or built from 1984 to 2003, five Ashley's restaurants acquired February 18,
1999, four Richard's Deli and Pub restaurants acquired March 31, 1999, one
additional Ashley's unit opened January 3, 2001, five Mitzel's American Kitchen
restaurants purchased December 13, 2000 and three Cooper's Delis purchased July
1, 2002.
The Company has owned and operated an Elmer's restaurant located in the
Delta Park section of Portland, Oregon since January 1984. In August 1986, the
Company opened a restaurant in Tacoma, Washington. In January 1987, the Company
began operation of a restaurant in Lynnwood, Washington and assumed operation of
an Elmer's restaurant in Grants Pass, Oregon. In fiscal 1988, the Company
acquired from former franchisees restaurants in Gresham, Albany, and Medford,
Oregon; and Boise, Idaho. In fiscal 1989, the Company purchased the land and
buildings for the Boise and Gresham restaurants and also purchased, from a
former franchisee, an additional restaurant in Hillsboro, Oregon. In May 1989,
the Company acquired a franchised Elmer's restaurant in Palm Springs,
California. In July 1991, the Company acquired a franchised Elmer's restaurant
in Beaverton, Oregon. In November 2000, the Company sold and entered into a
long-term franchise agreement and occupancy lease for the Gresham Elmer's
restaurant. Also in 2000 the Company purchased the assets and remodeled the
Springfield Elmer's restaurant. In April 2001 the Company purchased and
remodeled the Roseburg Elmer's restaurant. The Company purchased an Elmer's
restaurant located in Vancouver, Washington in April 2002. In fiscal 2003, the
Company purchased the land and constructed a restaurant located in Beaverton,
Oregon. Of the 11 Company-owned Elmer's restaurants, seven operate on leased
property and four on property owned by the Company.
In July 2003, the Company purchased a one-acre site in Beaverton,
Oregon. The Company built a prototype restaurant at this location. The Company
intends to use the prototype restaurant to market the Elmer's concept to
prospective franchisees and as a training restaurant for franchise owners and
managers.
The Company owns and operates five Mitzel's American Kitchen
restaurants, which were acquired on December 13, 2000. The first Mitzel's
restaurant opened in Everett, Washington in August of 1984. In July of 1985, a
restaurant was opened in Poulsbo, Washington. In 1987, restaurants were opened
in Oak Harbor and Kent, Washington. In August of 1992, a restaurant was opened
in Fife, Washington. All the restaurants operate on leased property.
Five Ashley's restaurants were acquired in a merger with CBW, Inc. on
February 18, 1999. These restaurants initially opened in 1995 and 1996. The four
Richard's Delis and Pubs were acquired in a purchase of the outstanding stock of
Grass Valley Ltd., Inc. on March 31, 1999. The three Cooper's Delis were
acquired under a purchase agreement on July 1, 2002. All the restaurants operate
on leased property.
The Company and its franchisees coordinate the purchase of their food,
beverages and supplies from Company-approved and other suppliers. Management
monitors the quality of the food, beverages and supplies provided to the
restaurants. The Company believes that its continued efforts over time have
achieved cost savings, improved food quality and consistency and helped decrease
volatility of food and supply costs for the restaurants. All essential food and
beverage products are available or, upon short notice, could be made available
from alternate qualified suppliers. Therefore, management believes that the loss
of any one supplier would not have a material adverse effect on the Company.
EMPLOYEES
As of March 29, 2004, the Company employed 290 persons on a full-time
basis, of whom 25 were corporate office personnel and 265 were restaurant
personnel. At that date, the Company also employed 433 part-time restaurant and
1 part-time corporate personnel. Of 25 corporate employees, 9 are in upper
management positions and the remainder are professional and administrative
employees. Employees of franchised Elmer's restaurants are not included in these
figures. None of the Company's employees are covered by collective bargaining
agreements. The Company considers its employee relations to be excellent. Most
employees, other than management and corporate personnel, are paid on an hourly
basis. Many restaurant personnel also receive tips. The Company believes that it
provides working conditions, wages and benefits that exceed those of its
competition.
Each Company-operated restaurant employs an average of 45 hourly
employees, many of whom work part time on various shifts. The management staff
of a typical restaurant consists of a general manager, one kitchen manager, one
assistant manager and two shift managers. The Company has an incentive
compensation program for restaurant managers that provides for quarterly bonuses
based upon the achievement of certain defined goals.
7
EXECUTIVE OFFICERS OF THE REGISTRANT
As of June 10, 2004, the executive officer and other key personnel of
the Company were as set forth below.
Name Age Position
- ---- --- --------
Bruce Davis 43 President and Chief Executive Officer
Gerald Scott 50 Vice President
Dennis Miller 55 Secretary and Corporate Controller
EXECUTIVE OFFICER
Bruce Davis has served as President and Chairman of Board of Directors
since August 1998. Mr. Davis has served as the Chief Executive Officer since
November 1, 2002. For more than five years prior to joining the Company, Mr.
Davis was President of three companies engaged in the restaurant business:
Jaspers Food Management, Inc. (1993-present), CBW, Inc. (1995-1999), and Oregon
Food Management, Inc. (1996-present).
KEY PERSONNEL
Gerald Scott has served as Vice President since August 1998, and has
more than 30 years experience in restaurant operations. For more than five years
prior to joining the Company, Mr. Scott served as Vice President of Operations
for Jaspers Food Management, Inc. He served from November 1994 to November 1995
as Regional Director of Operations of Macheezmo Mouse Restaurants, Inc.
Dennis Miller has served as Secretary since April 2002 and Corporate
Controller since December 2000 when the Company purchased the Mitzel's
Restaurants. Prior to that, and since September 1994, Mr. Miller was Corporate
Controller for Mercer Restaurant Services, which owned and managed restaurants
in the Puget Sound Area including the Mitzel's Restaurant chain. Prior to
joining the restaurant industry, he had over 22 years in hotel finance
positions, including 11 years with Westin Hotels.
TRADEMARKS AND SERVICE MARKS
The Company believes its trademarks and service marks have significant
value and are important to its business. The Company has registered the
trademarks and service marks "Elmer's Breakfast o Lunch o Dinner" and the
Elmer's logo with the U.S. Patent and Trademark Office. The Company also has
other trademarks and service marks registered with the U.S. Patent and Trademark
Office. It is the Company's policy to pursue registration of its marks whenever
possible and to actively protect its marks against infringement.
The Company grants to each of its Elmer's restaurant franchisees a
nonexclusive right to use the trademarks and service marks in connection with
and at each franchise location during the term of the franchise agreement.
ADVERTISING AND MARKETING
Word-of-mouth advertising, new restaurant openings, and the on-premises
sale of promotional products have historically been the primary methods of
restaurant advertising. The Company recently hired a Marketing Director 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 four of the
franchised restaurants are required to participate by contributing one percent
of monthly gross revenues. The Company promotes the Mitzel's restaurants with
local and regional store marketing initiatives. At the present time, the Company
relies principally on word-of-mouth advertising and catering exposure for
advertising of Ashley's, Richard's and Cooper's.
Generally, ongoing consumer research is employed on a limited basis to
track attitudes, brand awareness and market share of not only the Company's
customers, but also of its major competitors' customers as well. This is vital
in creating a better understanding of the Company's short and long-term
marketing strategies.
8
COMPETITION
The restaurant industry is highly competitive with respect to price,
concept, quality and speed of service, location, attractiveness of facilities,
customer recognition, convenience, food quality and variety, and is often
affected by changes in the tastes and eating habits of the public, including
changes in local, regional or national economic conditions affecting consumer
spending habits, demographic trends and traffic patterns, increases in the
number, type and location of competing restaurants, local and national economic
conditions affecting spending habits, and by population and traffic patterns.
The Company competes for potential franchisees with franchisors of other
restaurants, Company-owned restaurants, chains and others. The Company-owned
Elmer's restaurants and the franchised Elmer's restaurants compete for customers
with restaurants from national and regional chains as well as local
establishments. Some of the Company's competitors are much larger than the
Company and have greater capital resources that can be devoted to advertising,
product development and restaurant development and greater abilities to
withstand adverse business conditions. Increased competition, discounting and
changes in marketing strategies by one or more of these competitors could have
an adverse effect on the Company's sales and earnings in the affected markets.
In general, there is active competition for management personnel, capital and
attractive commercial real estate sites suitable for restaurants.
The Company believes that the principal competitive factors in its
favor for attracting both restaurant franchisees and restaurant customers are
Elmer's extensive menu, quality of food, service, reasonable prices, and brand
awareness.
GOVERNMENT REGULATIONS
The restaurant industry generally, and each Company-operated and
franchised restaurant specifically, are subject to numerous federal, state and
local government regulations, including those relating to the preparation and
sale of food and those relating to building, zoning, health, accommodations for
disabled members of the public, sanitation, safety, fire, environmental and land
use requirements; and, in some cases, state and local licensing of the sale of
alcoholic beverages and the state licensing of gaming. The Company and its
franchisees are also subject to federal and state laws governing their
relationship with employees, including minimum wage requirements, accommodation
for disabilities, overtime, working and safety conditions and
citizenship/residency requirements. Federal and state environmental regulations
have not had a major effect on the Company's operations to date. The Company has
no material contracts with the United States government or any of its agencies.
The Company is subject to a number of federal and state laws regulating
franchise operations and sales. For the most part, those laws impose
registration and disclosure requirements on the Company in the offer and sale of
franchises but, in certain cases, also apply substantive standards to the
relationship between the Company and the franchisees, including limitations on
noncompetition provisions and on provisions concerning the termination or
nonrenewal of a franchise. Some states require that certain franchise offering
materials be registered before franchises can be offered or sold in that state.
The Company is also subject to Federal Trade Commission regulations covering
disclosure requirements and sales of franchises.
ITEM 2. PROPERTIES
HEADQUARTERS
The Company's corporate offices are located in Portland, Oregon and
consist of an office facility of approximately 5,000 square feet. Lease payments
totaled approximately $34,000 for fiscal 2004. The lease expires November 30,
2006.
COMPANY-OWNED RESTAURANTS
COMPANY-OWNED PROPERTIES. The Company owns the real property upon which
the following four Company-owned restaurants are located. All of the properties
are subject to mortgages in favor of lending institutions.
Approximate Area
Elmer's Locations Site Restaurant
- ----------------- ---- ----------
Tacoma, Washington 1.3 acres 6,660 sq. ft.
Lynnwood, Washington 1 acre 6,500 sq. ft.
Boise, Idaho 1.3 acres 5,430 sq. ft.
Beaverton, Oregon 1 acre 5,921 sq. ft.
9
LEASED PROPERTIES. The Company leases the property upon which the
following 25 Corporate-owned restaurants are located. Each lease contains
specific terms relating to calculation of lease payment, renewal, purchase
options, if any, and other matters.
Approximate Area
Elmer's Locations Restaurant Sq. ft. Expiration
----------------- ------------------ ----------
Hillsboro, Oregon 6,350 January, 2011
Albany, Oregon 5,460 February, 2008
Springfield, Oregon 9,000 June, 2011
Palm Springs, California 5,500 April, 2007
Portland, Oregon (Delta Park) 6,350 July, 2006
Vancouver, Washington 5,900 February, 2009
Beaverton, Oregon 5,322 August, 2006
Mitzel's Locations
------------------
Everett, Washington 6,200 December, 2004
Fife, Washington 5,900 September, 2011
Kent, Washington 5,100 April, 2005
Oak Harbor, Washington 5,200 April, 2005
Poulsbo, Washington 6,500 July, 2005
Ashley's Locations
------------------
Bend, Oregon (North) 1,000 December, 2005
Bend, Oregon (South) 1,400 August, 2006
Redmond, Oregon 1,200 June, 2006
Eugene, Oregon 1,700 September, 2005
Springfield, Oregon (Gateway) 921 January, 2005
Springfield, Oregon (Thurston) 1,200 March, 2007
Richard's Locations
-------------------
Aloha, Oregon 1,727 November, 2005
Hillsboro, Oregon (North) 1,092 August, 2004
Hillsboro, Oregon (South) 4,000 March, 2005
Tigard, Oregon 1,743 December, 2007
Cooper's Deli and Pub
---------------------
Salem, Oregon (Commercial) 1,070 August, 2008
Salem, Oregon (Keizer) 1,440 May, 2009
Salem, Oregon (Lancaster) 2,390 January, 2008
The Company believes that its facilities are generally in good
condition and that they are suitable for their current uses. The Company engages
periodically in remodeling and other capital improvement projects designed to
expand and improve the efficiency of its facilities. Of the ten leases up for
renewal in the next two years, the Company holds options to renew eight of them
including each of the Elmer's and Mitzel's locations coming due in the next two
years.
ITEM 3. LEGAL PROCEEDINGS
The Company is periodically involved in litigation relating to claims
arising in the normal course of business. The Company maintains insurance
coverage against potential claims in amounts that it believes to be adequate.
Management believes that it is not presently a party to any litigation, the
outcome of which could have a material adverse effect on the Company's business
or operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the NASDAQ SmallCap Market
under the symbol "ELMS."
The following table sets forth the high and low reported sales prices
of the Common Stock in the NASDAQ Small Cap Market for the fiscal year quarters
indicated:
Fiscal Year Ended
March 29, 2004 March 31, 2003
----------------------------- -------------------------
High Low High Low
1st Quarter 8.00 4.83 7.51 4.74
2nd Quarter 6.49 5.91 6.04 4.90
3rd Quarter 6.75 6.00 5.42 4.97
4th Quarter 7.50 6.40 6.50 5.00
Although the Common Stock is traded on the NASDAQ Small Cap Market,
there is a relatively low trading volume.
On October 22, 2003, the Board of Directors directed the Company to
prepare a tender offer for 204,200 shares of the Company's common stock. The
Company commenced the tender offer on December 10, 2003 to purchase 204,200
shares of its common stock at a purchase price of $6.43 per share.
Based on the final count by the depository for the tender offer (OTR,
Inc.) on January 14, 2004, 568,564 shares of common stock were properly tendered
and not withdrawn. The Company accepted for purchase 204,255 shares,
representing approximately 10% of outstanding shares, at a purchase price of
$6.43 per share in accordance with the terms of the offer. The Company purchased
36% of the shares tendered. The aggregate price of the shares purchased by the
Company through the tender offer was $1,313,088. Fees and expenses associated
with the tender offer were $16,453 and were expensed in the Company's 4th
Quarter. All shares repurchased by the Company were retired.
The Company has not paid or declared cash dividends on its Common
Stock. In March 2002 the Company declared a five-percent stock dividend. The
Company intends to retain any future earnings to finance growth and does not
presently intend to pay cash dividends. Any future dividend will be determined
by the Board of Directors based on the Company's earnings, financial condition,
capital requirements, debt covenants or other relevant factors will determine
any future dividends.
As of May 14, 2004, the Company had 150 shareholders of record. The
Company estimates there are approximately 450 beneficial shareholders.
UNREGISTERED SALES OF STOCK
No sales of unregistered Common Stock were made by the Company in the
last three fiscal years.
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 29, 2004,
March 31, 2003 and April 1, 2002 and for each of the three years in the period
ended March 29, 2004 are derived from the audited financial statements included
elsewhere herein. The selected financial data set forth below for the Company as
of April 2, 2001 and March 31, 2000 are derived from the consolidated financial
statements not included elsewhere herein.
11
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
March 29, March 31, April 1, April 2, March 31,
For the fiscal years ended 2004 2003 2002 2001 2000
Revenues $33,491,570 $31,984,292 $33,775,648 $25,852,336 $22,179,574
Net income 1,277,384 1,557,613 1,065,856 956,006 939,549
Net income per share 0.64 0.76 0.52 0.48 0.49
Total assets 19,045,329 17,389,303 16,685,283 16,374,147 13,847,208
Long-term notes payable, less
current portion 4,916,157 4,439,170 5,366,050 5,798,769 5,124,130
Total liabilities 9,421,134 7,639,198 8,396,191 9,129,937 8,209,004
Total shareholder's equity 9,624,195 9,750,105 8,289,092 7,244,210 5,638,204
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 following table presents summarized quarterly results for Fiscal
2004 and 2003.
Quarter 1 Quarter 2 Quarter 3 Quarter 4
FISCAL 2004
Revenues $10,059,012 $7,835,882 $7,705,568 $7,891,108
Operating Income 618,893 579,128 486,991 493,500
Net Income 363,105 330,528 289,151 294,600
Net Income per share $ 0.18 $ 0.16 $ 0.14 $ 0.16
FISCAL 2003
Revenues $ 9,438,069 $7,385,565 $7,575,376 $7,585,282
Operating Income 1,303,913 512,923 484,444 456,290
Net Income 713,082 290,063 268,145 286,323
Net Income per share $ 0.35 $ 0.14 $ 0.13 $ 0.14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
"Selected Historical Financial Data" and the financial statements of the Company
and the accompanying notes thereto included elsewhere herein. Certain
information discussed below may constitute forward-looking statements within the
meaning of the federal securities laws. Although the Company believes that the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will be
achieved. Forward-looking information is subject to certain risks, trends and
uncertainties that could cause actual results to differ materially from
projected results. Among those risks, trends and uncertainties are the general
economic climate, costs of food and labor, consumer demand, interest rate
levels, restrictions imposed by the Company's debt covenants, management
control, availability of supplies, changes in government regulation,
particularly in relation to lottery rules and compensation, the availability of
financing and other risks associated with the acquisition, development and
operation of new and existing restaurants. This list of risks and uncertainties
is not exhaustive.
CRITICAL ACCOUNTING POLICIES
The Company's reported results are affected by the application of certain
accounting policies that require subjective or complex judgments. These
judgments involve estimates that are inherently uncertain and may have a
significant impact on the Company's quarterly or annual results of operations
and financial condition. Changes in these estimates and judgments could have
significant effects on the Company's results of operations and financial
condition in future years. Management believes the Company's most critical
accounting policies cover accounting for long-lived assets - specifically
property, buildings and equipment
12
depreciation thereon and the valuation of intangible assets. Additional critical
accounting policies govern revenue recognition and accounting for stock options.
Property, Buildings and Equipment
- ---------------------------------
When the Company purchases property, buildings and equipment, the assets are
recorded at cost. However, when the Company acquires an operating restaurant or
business, the Company must allocate the purchase price between the fair market
value of the tangible assets acquired and any excess to goodwill. The fair
market value of restaurant equipment fixtures and furnishings in an operating
restaurant is difficult to separate from the going concern value of the
restaurant. Most of the value of the equipment is due to the fact that it is in
the restaurant and working. The Company values in place equipment with reference
to replacement cost, age and condition, and utility in its intended use.
Intangible Assets
- -----------------
The Company reviews the valuation of its intangible assets and goodwill annually
based on its third quarter financial statements. If the fair values of the
intangibles and goodwill were less than their recorded values, an impairment
loss would be recognized. The fair values of the reporting units are estimated
using multiples of earnings before interest, taxes, depreciation and
amortization. The market for these intangibles and goodwill is limited and the
realizable value will differ from the fair values estimated by using a multiple
of earnings.
Depreciation
- ------------
Property, buildings and equipment are depreciated using the straight-line method
over their estimated useful lives. The useful lives of the individual assets are
estimated by the Company's management based upon their experience in the
restaurant industry. Generally buildings are depreciated over 35 years and
equipment is depreciated over a range of 3 to 10 years. Leasehold improvements
are amortized on a straight-line method over their estimated useful lives or the
term of the related lease, whichever is shorter. Periodically the Company
reviews the net book value of its depreciable assets to determine if there is
any possible impairment of value. If it were to be determined that any asset had
been permanently impaired the asset would be written down to its realizable
value. To date, the Company has not determined any depreciable assets to be
impaired. Differences between the realized lives and the estimated lives could
result in changes to the Company's results from operations in future years, as
well as changes in the rate of recurring capital expenditures.
Revenue Recognition
- -------------------
The Company's revenue is primarily from cash and credit card transactions. As
such, restaurant revenue is generally recognized upon receipt of cash or credit
cards receipts. Franchise fees based upon a percent of the franchisees gross
sales are recognized as the franchisees' sales occur. Revenue from the lottery,
which includes traditional ticket based games and video poker games is recorded
on a commission basis, that is net of state regulated payouts. Expenses are
recorded using accrual accounting based upon when goods and services are used.
Stock Options
- -------------
The Company accounts for its stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. Based on this
methodology the Company has not recorded any compensation costs related to its
stock options since all options have been issued at an exercise price equal to
or greater than the market value of the Company's stock at the time of issuance.
In Note 1 of the Notes to Consolidated Financial Statements, we provide pro
forma disclosures of net income and earnings per share as if the method
prescribed by SFAS No. 123, Accounting for Stock-Based Compensation, had been
applied in measuring compensation expense. A change to recognize compensation
expense for all options granted using a fair value approach in regularly
reported financial results would have a significant impact on our results of
operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS No. 150 establishes standards for classification
and measurement of certain financial instruments with characteristics of both
liabilities and equity. This statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period after June 15, 2003. The adoption of SFAS
No. 150 did not have a material effect on the Company's consolidated financial
statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial accounting and reporting for derivative instruments
including certain
13
derivatives embedded in other contracts. This statement is effective for
contracts entered into or modified after June 30, 2003. The adoption of SFAS No.
149 did not have a material effect on the Company's consolidated financial
statements.
In January 2003, FASB issued Interpretation No. 46 (FIN 46), Consolidation of
Variable Interest Entities, which was subsequently revised through
Interpretation No. 46R (FIN No. 46R). This interpretation and its revision
clarify the application of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, and require existing unconsolidated variable interest
entities to be consolidated by their primary beneficiaries if the entities do
not effectively disperse risks among parties involved. The Company's management
does not expect that the application of the provisions of this interpretation
will have a material impact on the Company's consolidated financial statements.
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 148, Accounting for Stock-Based Compensation--Transition and Disclosure--an
Amendment of FASB Statement No. 123. This statement amends FASB Statement No.
123, Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of statement No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. Management intends to continue using the intrinsic value method for
stock-based employee compensation arrangements and, therefore, does not expect
that the application provisions of this statement will have a material impact on
the Company's consolidated financial statements. Additional required disclosures
have been included in Note 1 of the financial statements.
In November 2002, FASB issued Interpretation No. 45 (FIN 45), Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This interpretation elaborates on the
disclosures to be made by a guarantor about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing a guarantee. The Company has complied with
the disclosure requirements of FIN 45. The initial recognition and initial
measurement provisions shall be applied on a prospective basis to guarantees
issued or modified after December 31, 2002. Management does not expect that the
application of the provisions of this interpretation will have a material impact
on the Company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This statement addresses financial accounting and
reporting for costs associated with exit or disposal activities. The Company has
adopted this statement and there was no material impact on the consolidated
financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
Among other things, this statement rescinds FASB Statement No. 4, Reporting
Gains and Losses from Extinguishment of Debt, and an amendment of that
statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. The Company adopted the provisions of SFAS No. 145
under its early application provisions in the first quarter of 2003. The Company
recorded a loss on extinguishment of debt totaling $97,500 in the prior year and
$32,500 in the current year and current quarter that is included in "Other
income (expense)" on the consolidated financial statements.
HIGHLIGHTS OF HISTORICAL RESULTS
The Company reported record net income of approximately $1,277,000, or
$.64 basic earnings per share for the year ended March 29, 2004, on sales of
approximately $33,492,000. This compares to reported net income of approximately
$1,558,000, or $.76 per share for the year ended March 31, 2003. For the year
ended April 1, 2002, the Company reported net income of approximately $1,066,000
or $.52 per share. The $281,000 decrease in net income 2004 over 2003 is largely
attributable to gain in fiscal 2003 on sale of the three Southern Oregon
restaurants of $504,000 net of tax, partially offset by losses totaling $141,000
from debt repurchase, restaurant relocation and losses on investments.
During the year ended March 29, 2004, total assets increased
approximately $1,656,000 to $19 million. During the year ended March 29, 2004,
total shareholders' equity decreased approximately $126,000 to $9.6 million,
primarily as a result of the purchase of 10% of the Company's outstanding shares
of stock offset by the Company's current year net income.
14
COMPARISON OF FISCAL YEAR 2004 RESULTS TO HISTORICAL RESULTS OF OPERATIONS
Dollar amounts in thousands except per share data
For the Year Ended
------------------------------ ---------------------------- ---------------------------
March 29, 2004 March 31, 2003 April 1, 2002
------------------------------ ---------------------------- ---------------------------
Percent of Percent of Percent of
Amount Revenues Amount Revenues Amount Revenues
------------------------------ ---------------------------- ---------------------------
Revenue $ 33,492 100.0 % $ 31,984 100.0 % $ 33,776 100.0 %
Restaurant costs and expenses 28,848 86.1 % 27,711 86.6 % 29,443 87.2 %
General and administrative expenses 2,461 7.4 % 2,268 7.1 % 2,298 6.8 %
(Gain) loss on sale of land, buildings, and
equipment 4 - (752) (2.4)% 6 -
Operating income 2,178 6.5 % 2,758 8.6 % 2,028 6.0 %
Non operating income (expense) (276) (.8)% (440) (1.4)% (462) (1.4)%
Net income 1,277 3.8 % 1,558 4.9 % 1,066 3.2 %
Earnings per share $ .64 $ .76 $ .52
Weighted average shares outstanding 1,990,047 2,047,061 2,058,955
REVENUE
For the Year Ended
--------------------------- -------------------------- ---------------------------
March 29, 2004 March 31, 2003 April 1, 2002
--------------------------- -------------------------- ---------------------------
Percent of Percent of Percent of
Amount Revenues Amount Revenues Amount Revenues
--------------------------- -------------------------- ---------------------------
Restaurant operations:
Restaurant sales $ 28,100 83.9% $ 27,051 84.6% $ 29,147 86.3%
Lottery 4,188 12.5% 3,682 11.5% 3,412 10.1%
--------- --------- --------- --------- --------- ---------
32,288 96.4% 30,733 96.1% 32,559 96.4%
Franchise operations 1,204 3.6% 1,251 3.9% 1,217 3.6%
--------- --------- --------- --------- --------- ---------
Total revenue $ 33,492 100.0% $ 31,984 100.0% $ 33,776 100.0%
========= ========= ========= ========= ========= =========
REVENUES. Restaurant sales are comprised of food and beverage sales at
Company owned restaurants. Lottery revenues are principally commissions received
from the sale of Oregon Lottery products under retailer contracts with the
Oregon State Lottery. March 31, 2004, the Oregon Lottery Commission approved a
new six-year retailer contract effective June 27, 2004. The new contract lowers
retailer commissions by approximately 10%. If the new commission structure had
been applied to sales for the year ended March 29, 2004, it would have reduced
revenues from commissions by approximately $435,000. The Lottery has installed
additional terminals in most Company locations and the Company expects year over
year sales increases to significantly reduce, but not eliminate, the impact of
the new lower rates. As a result of timing features of the new contract, most of
the adverse impact will be felt in the Company's second quarter ending the
second Monday in October.
Revenues for the year ended March 29, 2004 were 4.7% higher than for
the comparable period in 2003. Revenues from same store restaurant operations
showed an increase of 2.5% over the comparable period in 2003. Same store sales
at the core Elmer's brand increased 1.3% for the year ended March 29, 2004.
RESTAURANT COSTS AND EXPENSES. A comparison of restaurant costs and expenses as
a percent of revenue is as follows:
FOR THE YEAR ENDED
-------------- -- ------------- --- --------------
MARCH 29, MARCH 31, APRIL 1,
2004 2003 2002
-------------- ------------- --------------
Cost of restaurant sales:
Food and beverage 29.6% 28.9% 28.7%
Labor and related costs 33.5% 35.1% 35.9%
Restaurant operating costs 13.9% 13.9% 14.0%
Occupancy costs 6.2% 6.3% 6.1%
Depreciation and amortization 2.5% 2.4% 2.3%
Restaurant opening and closing expenses .4% 0.0% 0.2%
-------------- ------------- --------------
Total Cost of Restaurant Sales 86.1% 86.6% 87.2%
============== ============= ==============
15
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative ("G&A")
expenses were 7.4% of total revenue in fiscal 2004 compared to 7.1% and 6.8% in
fiscal 2003 and 2002 respectively. Following the sale of the three Southern
Oregon restaurants, the Company has worked to reduce G&A expense in conjunction
with the reduction in the number of Company owned restaurants. The time required
to achieve these cost savings accounts for the increase in G&A expense as a
percentage of sales in the first half of the year.
NON-OPERATING INCOME/(EXPENSE). Non-operating expense was .8% of total
revenues for the year ended March 29, 2004 compared to 1.4% and 1.4% of total
revenues in the years ended March 31, 2003 and April 1, 2002 respectively. Net
interest expense has declined each year as a percentage of revenues. In the
current year the Company recorded a loss on debt extinguishment and gains on
sales of marketable securities equal to .1% of total revenues. Whereas, for the
year ended March 31, 2003 the Company had losses on debt extinguishment and
marketable securities of .5% of total revenue.
LIQUIDITY AND CAPITAL RESOURCES. As of March 29, 2004, the Company had
cash and equivalents of approximately $1.6 million representing a decrease from
March 31, 2003 of approximately $.6 million. Cash provided by operations was
$3.0 million. The Company used $2.7 million of cash in investing activities.
Purchase of land and construction of the Cornell Oaks restaurant, which opened
in December 2003, totaled $2.4 million. Capital expenditures at the remaining
Company restaurants totaled $694,000. Cash used in financing activities
consisted of stock repurchases of $1,465,000, repurchase of convertible debt of
$682,500, repayment of notes payable of $353,000 and offset by the issuance of
long term debt of $1,563,000.
The Company repurchased 204,255 shares of its Common Stock, 10% of the
total, in a self-tender offer on January 14, 2004 for $1,313,085. In addition
the Company repurchased 25,000 shares of stock for $151,700 in a privately
negotiated transaction which was completed in November 2003.
The Company's primary liquidity needs arise from debt service,
operating lease requirements and the funding of capital expenditures. The
Company's primary source of liquidity during the year is the operation of its
restaurants, franchise fees earned from its franchisees, cash on hand, and
borrowings. As of March 29, 2004, the Company's primary indebtedness was $3.8
million under term loan facilities with GE Capital, $1.5 million in real estate
loan facilities with Wells Fargo Bank.
The Board of Directors adopted the 1999 Stock Option Plan (the Plan) in
February 1999, which provides for the award of incentive stock option to key
employees and the award of nonqualified stock options to employee and
nonemployee directors. Under the terms of the Plan, the exercise price of the
options are determined as the fair market value based on trading values of the
Company's common stock at the time the option is granted. Under the Plan 546,000
shares of common stock are authorized for issuance. Options are exercisable upon
vesting. Options generally vest 20% annually and expire 10 and 15 years after
the date of grant. The Company complies with the disclosure-only provisions of
SFAS No. 123 and no compensation cost has been recognized for the Plan.
In March 2004, the Company granted stock options for 12,000 shares to
non-employee directors of the Company. The options vest over five years and have
a ten-year term. The exercise price of $6.77 was equal to the market value of
the Company's stock on the grant date.
In May 2003, the Company granted non-executive incentive stock options
for 45,000 shares to employees of the Company. The options vest over five years
and have a ten-year term. The exercise price of $5.48 was equal to the market
value of the Company's stock on the grant date.
In August 2002, the Company elected to fix the interest rate on the
$925,000 portion of the GE Capital loan that had a variable interest rate. The
new rate is 7.4% per annum. The GE loans carry a weighted average interest rate
of 8.4% and have a maturity of 7.3 years.
The remaining Wells Fargo real estate debt has a weighted-average
maturity of 5.4 years, bears interest at an average of 5.8%, requires monthly
payments of principal and interest, and is collateralized by three real estate
assets. In June 2003 the Company negotiated a variable rate note, which in
combination with an interest rate swap agreement, results in an average fixed
interest rate of 6.17%.
Certain of the Company's debt agreements require compliance with debt
covenants. The most restrictive covenants require the Company to maintain a
maximum ratio of total liabilities, excluding subordinated debt, to tangible net
worth plus subordinated debt of 3.5 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 2.0 to 1.0. Management believes that the Company
is in compliance with such requirements.
16
Elmer's Restaurants, Inc., like most restaurant businesses, is able to
operate with nominal or deficit working capital because sales are for cash and
inventory turnover is rapid. Renovation and/or remodeling of existing
restaurants are either funded directly from available cash or, in some
instances, is financed through outside lenders. Construction or acquisition of
new restaurants is generally, although not always, financed by outside lenders.
The Company believes that it will continue to be able to obtain
adequate financing on acceptable terms for new restaurant construction and
acquisitions and that cash generated from operations will be adequate to meet
its financial needs and to pay operating expenses for the foreseeable future,
although no assurances can be given.
CONTRACTUAL OBLIGATIONS
The Company makes a range of contractual commitments in the ordinary
course of business and in conjunction with the acquisition and sale of
restaurants. The following table shows the Company's contractual obligations:
Commitment expiration period
Total amount committed 1 year or less 1-3 years 4-5 years 5 years or more
- ---------------------------------------------------------------------------------------------------------------------------
Term debt $ 5,332,435 $ 416,278 $ 965,755 $1,356,542 $2,593,860
Operating leases 5,397,174 1,422,915 2,030,727 1,114,032 829,500
Guarantees 969,300 273,000 586,950 109,350 -
- ---------------------------------------------------------------------------------------------------------------------------
Totals $ 11,698,909 $ 2,112,193 $ 3,583,432 $2,579,924 $3,423,360
============ =========== =========== ========== ==========
The covenants to the Company's term debt require the Company to
maintain certain leverage and cash flow ratios, discussed in detail in the notes
to the financial statements. The Company believes it is in compliance with all
debt covenants as of the fiscal year ended March 29, 2004 and the Company
expects it will continue to be in compliance. However, in the event the Company
was out of compliance with the debt covenants, the terms of the loan agreements
generally provide for the acceleration of repayment.
The Company has signed long-term occupancy leases for all but three of
its restaurant locations. These leases are recorded as operating leases, and
costs are expensed as they become due.
Under the terms of lease assignment agreements, the Company has
guaranteed certain franchisee occupancy leases for three more years. In one case
the Company's guarantee would be extended in the event the franchisee exercises
their options to extend the lease. If all options are exercised, the guarantee
would be extended until 2018. In all cases these guarantees are in turn,
personally guaranteed by the franchisee. In the event the franchisee defaulted
on the occupancy lease, the Company could be required to pay all rent and other
amounts due under the terms of the lease for the remainder of the guarantee
term. In the event of default, the Company expects it would exercise its right
to reoccupy and continue to operate the restaurants as Elmer's Breakfast o Lunch
o Dinner(R). These guarantees are further discussed in Note 11 of the financial
statements.
INFLATION
Certain of the Company's operating costs are subject to inflationary
pressures, of which the most significant are food and labor costs. As of March
29, 2004, 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 2004, fiscal 2003 or fiscal 2002. Substantial increases in costs could
have a significant impact on the Company and the industry. If operating expenses
increase, management believes it can recover increased costs by increasing
prices to the extent deemed advisable considering competition.
SEASONALITY
The seasonality of restaurant sales due to consumer spending habits can
be significantly affected by the timing of advertising, competitive market
conditions and weather-related events. While restaurant sales for certain
quarters can be stronger, or weaker, there is no predominant pattern.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
Certain statements in this Form 10-K under "Item 1. Business," "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this Form 10-K constitute "forward-looking
statements" within
17
the meaning of the Securities Act of 1933, as amended and the Securities
Exchange Act of 1934, as amended. Such forward-looking statements involve known
and unknown risks, uncertainties, and other factors, which may cause the actual
results, performance, or achievements of the Company to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions; the impact of competitive
products and pricing; success of operating initiatives; development and
operating costs; advertising and promotional efforts; adverse publicity;
acceptance of new product offerings; consumer trial and frequency; availability,
locations, and terms of sites for restaurant development; changes in business
strategy or development plans; quality of management; availability, terms and
deployment of capital; the results of financing efforts; business abilities and
judgment of personnel; availability of qualified personnel; food, labor and
employee benefit costs; changes in, or the failure to comply with, government
regulations; changes in lottery commissions or regulations; continued NASDAQ
listing; weather conditions; construction schedules; and other factors
referenced in this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests excess cash beyond its working capital requirements
in liquid marketable securities. These securities include corporate and
government bond mutual funds focusing on issues with medium and short term
maturities. The Company actively manages its portfolio to reduce interest rate
risk. However, an increase in interest rate levels will tend to reduce the value
of the portfolio.
Certain of the Company's outstanding financial instruments are subject
to market risks, including interest rate risk. Such financial instruments are
not currently subject to foreign currency risk or commodity price risk. A rise
in prevailing interest rates could have adverse effects on the Company's
financial condition and results of operations. The fair value of financial
instruments approximates the book value at March 29, 2004.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this
Form 10-K. See Item 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and its Corporate Controller,
after evaluating the effectiveness of the Company's disclosure controls and
procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c)
and 15d-14(c)) as of March 29, 2004 (the"Evaluation Date"), have concluded that
as of the Evaluation Date, the Company's disclosure controls and procedures were
effective and designed to ensure that material information relating to the
Company and its consolidated subsidiaries would be made known to them by others
within those entities.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect those controls subsequent to
the Evaluation Date.
PART 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 "2004 Proxy Statement") for its 2004 Annual Meeting of Shareholders filed
or to be filed not later than 120 days after the end of the fiscal year covered
by this Report and is incorporated herein by reference. Information with respect
to executive officers of the Company is included under Part I of this Report.
Information with respect to compliance with Section 16(a) of the Securities
Exchange Act is included under "Section 16(a) Beneficial Ownership Reporting
Compliance" in the 2004 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is included under
the caption "Executive Compensation" in the 2004 Proxy Statement and is
incorporated herein by reference.
18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial
owners and management is included under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the 2004 Proxy Statement
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Jaspers Food Management, Inc. ("JFMI") provides some of the Company's
administrative and accounting service needs for the operations of the Company's
Ashley's, Richard's and Cooper's restaurants. William Service and Bruce Davis
each own 36% of the outstanding common stock of JFMI and each serves on JFMI's
three-person Board of Directors. JFMI's third director is Cordy Jensen who owns
3.75% of the outstanding common stock of JFMI. Mr. Davis is an executive officer
of the Company, Mr. Service resigned as Chief Executive Officer of the Company
effective November 1, 2002. Messrs. Service, Davis and Jensen serve on the
Company's Board of Directors. For Fiscal 2004, Mr. Davis was entitled to annual
salaried compensation of $30,000 from JFMI.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required is set forth under the caption "Audit Committee"
in the Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
The Financial Statements listed in the accompanying index on page F-1
are filed as part of this Report.
Financial Statements and Schedules Page in
this Report
Independent Auditor's Reports...............................................................................F-1
Consolidated Balance Sheets at March 29, 2004 and March 31, 2003............................................F-2
Consolidated Statements of Income for the years ended March 29, 2004, March 31, 2003
and April 1, 2002...........................................................................................F-3
Consolidated Statements of Changes in Shareholders' Equity for the years ended March 29, 2004,
March 31, 2003 and April 1, 2002............................................................................F-4
Consolidated Statements of Cash Flows for the years ended March 29, 2004, March 31, 2003
and April 1, 2002...........................................................................................F-5
Notes to Consolidated Financial Statements..................................................................F-6
No other schedules are included because the required information is
inapplicable or is presented in the financial statements or related notes
thereto.
19
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Elmer's Restaurants, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Elmer's
Restaurants, Inc. and Subsidiaries (the Company), as of March 29, 2004 and March
31, 2003 and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for the years ended March 29, 2004, March
31, 2003 and April 1, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Elmer's Restaurants,
Inc. and Subsidiaries, as of March 29, 2004 and March 31, 2003, and the results
of their operations and their cash flows for the years ended March 29, 2004,
March 31, 2003 and April 1, 2002, in conformity with U.S. generally accepted
accounting principles.
Portland, Oregon
May 24, 2004
F-1
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
MARCH 29, MARCH 31,
2004 2003
-------------- --------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,601,378 $ 2,200,263
Marketable securities 930,196 760,441
Accounts and franchise fees receivable 261,669 260,848
Notes receivable - franchisees, current portion 41,036 81,771
Inventories 372,707 430,737
Prepaid expenses and other 476,159 227,142
Income taxes receivable 159,877 121,617
-------------- --------------
Total current assets 3,843,022 4,082,819
Notes receivable - franchisees, net of current portion 191,244 212,026
Property, buildings, and equipment, net 9,325,050 7,075,969
Goodwill 4,897,743 4,897,743
Intangible assets 602,709 602,709
Principal debt service account for convertible debt - 208,929
Other assets 185,561 309,108
-------------- --------------
TOTAL ASSETS $ 19,045,329 $ 17,389,303
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, current portion $ 416,278 $ 332,810
Accounts payable 1,496,905 1,118,167
Accrued expenses 500,536 314,136
Accrued payroll and related taxes 662,253 486,915
-------------- --------------
Total current liabilities 3,075,972 2,252,028
Notes payable, net of current portion 4,916,157 4,439,170
Deferred income taxes 1,396,000 948,000
Obligation under interest rate swap 33,005 -
-------------- --------------
Total liabilities 9,421,134 7,639,198
-------------- --------------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
SHAREHOLDERS' EQUITY
Common stock, no par value, 10,000,000 shares authorized;
1,816,335 and 2,041,709 shares issued and outstanding
at March 29, 2004 and March 31, 2003, respectively 6,216,136 7,283,139
Retained earnings 3,391,413 2,486,879
Accumulated other comprehensive gain (loss), net of taxes 16,646 (19,913)
-------------- --------------
Total shareholders' equity 9,624,195 9,750,105
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 19,045,329 $ 17,389,303
============== ==============
See accompanying notes. F-2
- --------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED
----------------------------------------------------------
MARCH 29, MARCH 31, APRIL 1,
2004 2003 2002
----------------- ----------------- -----------------
REVENUES $ 33,491,570 $ 31,984,292 $ 33,775,648
----------------- ----------------- -----------------
COSTS AND EXPENSES
Cost of restaurant sales:
Food and beverage 9,915,919 9,239,966 9,681,511
Labor and related 11,239,527 11,219,026 12,131,703
Restaurant operating costs 4,655,033 4,457,256 4,722,310
Occupancy costs 2,073,648 2,030,596 2,067,785
Depreciation and amortization 836,728 754,107 786,593
Restaurant opening/closing expenses 127,408 9,718 53,382
General and administrative expenses 2,460,724 2,268,430 2,297,983
(Gain) loss on sale of land, buildings, and
equipment 4,071 (752,377) 5,759
----------------- ----------------- -----------------
Total costs and expenses 31,313,058 29,226,722 31,747,026
----------------- ----------------- -----------------
Income from operations 2,178,512 2,757,570 2,028,622
OTHER INCOME (EXPENSE)
Interest income 78,861 141,651 109,444
Interest expense (388,283) (428,174) (572,210)
Loss on extinguishment of debt (32,500) (97,500) -
Gain (loss) on sale of marketable securities 65,794 (55,934) -
----------------- ----------------- -----------------
Income before provision for income taxes 1,902,384 2,317,613 1,565,856
Provision for income taxes (625,000) (760,000) (500,000)
----------------- ----------------- -----------------
NET INCOME $ 1,277,384 $ 1,557,613 $ 1,065,856
================= ================= =================
PER SHARE DATA
Net income per share - basic $ 0.64 $ 0.76 $ 0.52
================= ================= =================
Net income per share - diluted $ 0.62 $ 0.74 $ 0.51
================= ================= =================
Weighted-average number of common
shares outstanding - basic 1,990,047 2,047,061 2,058,955
Net effect of dilutive stock options 78,387 70,848 15,118
----------------- ----------------- -----------------
Weighted-average number of common
shares outstanding - diluted 2,068,434 2,117,909 2,074,073
================= ================= =================
F-3 See accompanying notes.
- --------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
ACCUMULATED
COMMON STOCK OTHER TOTAL
----------------------------- RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT EARNINGS INCOME (LOSS) EQUITY
------------ ------------- ------------ --------------- --------------
BALANCE, APRIL 2, 2001 1,962,032 $6,871,190 $ 373,020 $ - $ 7,244,210
Stock repurchase (2,000) (9,400) - - (9,400)
5% stock dividend 98,002 509,610 (509,610) - -
Comprehensive income:
Net income - - 1,065,856 - 1,065,856
Change in net unrealized loss
on securities available-for-
Sale, net of taxes - - - (11,574) (11,574)
--------------
Total comprehensive income - - - - 1,054,282
------------ ----------- ------------ --------------- --------------
BALANCE, APRIL 1, 2002 2,058,034 7,371,400 929,266 (11,574) 8,289,092
Stock repurchase (16,325) (88,261) - - (88,261)
Comprehensive income:
Net income - - 1,557,613 - 1,557,613
Change in net unrealized loss
on securities available-for-
sale, net of taxes - - - (8,339) (8,339)
--------------
Total comprehensive income - - - - 1,549,274
------------ ----------- ------------ --------------- --------------
BALANCE, MARCH 31, 2003 2,041,709 7,283,139 2,486,879 (19,913) 9,750,105
Stock repurchase (239,348) (1,156,922) (372,850) - (1,529,772)
Stock option exercise 13,974 89,919 - - 89,919
Comprehensive income:
Net income - - 1,277,384 - 1,277,384
Change in net unrealized gain
on securities available-for-
sale, net of taxes - - - 96,759 96,759
Reclassification adjustment for
realized gains on available-
for-sale securities, net of taxes - - - (40,398) (40,398)
Change in fair market value of
interest rate swap agreement,
net of taxes - - - (19,802) (19,802)
--------------
Total comprehensive income - - - - 1,313,943
------------ ----------- ------------ --------------- --------------
BALANCE, MARCH 29, 2004 1,816,335 $6,216,136 $3,391,413 $ 16,646 $ 9,624,195
============ =========== ============ =============== ==============
See accompanying notes. F-4
- --------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED
--------------------------------------------------
MARCH 29, MARCH 31, APRIL 1,
2004 2003 2002
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,277,384 $ 1,557,613 $ 1,065,856
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 836,728 754,107 786,593
Deferred income taxes 426,260 249,000 (73,000)
(Gain) loss on disposition of assets 4,071 (752,377) 5,759
(Gain) loss on sale of marketable securities (65,794) 55,934 -
Loss on extinguishment of debt 32,500 97,500 -
Exercise of non-statutory stock options 24,935 - -
Changes in assets and liabilities:
Accounts and franchise fees receivable and inventories (65,791) (91,517) (85,466)
Prepaids (249,017) 76,610 16,660
Other assets 123,547 (34,520) (43,582)
Accounts payable 378,738 (380,149) 94,628
Accrued expenses 361,738 231,066 (23,385)
Income taxes (38,260) (7,500) (52,492)
-------------- -------------- --------------
Net cash from operating activities 3,047,039 1,755,767 1,691,571
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, buildings, and equipment (3,094,780) (716,905) (793,520)
Purchases of available-for-sale securities (980,434) (410,752) (1,476,353)
Proceeds from sale of available-for-sale securities 1,140,876 735,209 305,904
Business acquisition - (314,263) (128,000)
Issuance of notes receivable - franchisees - (129,487) (75,508)
Principal collected on notes receivable - franchisees 184,517 358,920 148,473
Proceeds from sale of property, building and equipment 4,900 1,303,176 912,938
-------------- -------------- --------------
Net cash from investing activities (2,744,921) 825,898 (1,106,066)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of 10% convertible notes (682,500) (747,500) -
Release of (contribution to) principal debt service account 35,830 96,090 (302,591)
Issuance of term debt 1,563,507 - -
Payments on notes payable (353,052) (295,942) (760,319)
Repurchase of common stock (1,464,788) (88,261) (9,400)
-------------- -------------- --------------
Net cash from financing activities (901,003) (1,035,613) (1,072,310)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (598,885) 1,546,052 (486,805)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,200,263 654,211 1,141,016
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,601,378 $ 2,200,263 $ 654,211
============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest $ 397,514 $ 428,174 $ 572,210
============== ============== ==============
Income taxes $ 216,000 $ 527,852 $ 667,300
============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING TRANSACTIONS
Sale of property and equipment for notes receivable $ - $ 455,631 $ -
============== ============== ==============
Stock dividends declared $ - $ - $ 509,610
============== ============== ==============
Change in unrealized (gain) loss on available-for-sale securities,
net of taxes $ (56,361) $ 8,339 $ 11,574
============== ============== ==============
Assumption of notes receivable as partial consideration
for purchase of property, equipment, and goodwill $ - $ 175,625 $ -
============== ============== ==============
Note payable issued in conjunction with acquisition of
certain assets and goodwill of a company $ - $ 74,538 $ 35,606
============== ============== ==============
Accrued interest classified as note receivable $ - $ - $ 10,182
============== ============== ==============
Note receivable issued for franchise fee receivable $ 123,000 $ - $ 31,500
============== ============== ==============
F-5 See accompanying notes.
- --------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION - As of March 29, 2004, Elmer's Restaurants, Inc., an Oregon
corporation, and Subsidiaries (the Company) owned and operated eleven Elmer's
Restaurants, six Ashley's Deli restaurants, five Mitzel's American Kitchen
restaurants, four Richard's Deli and Pub restaurants, three Cooper's Deli and
Pub restaurants; and sold franchises that give franchisees the right to operate
under the name Elmer's Breakfast o Lunch o Dinner (TM) for a specific
restaurant. Franchises and Company-owned restaurants are located throughout the
northwestern United States and California.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Elmer's Restaurants, Inc. and its wholly-owned subsidiaries, CBW
Food Company LLC, Grass Valley Ltd., Inc., and Elmer's Pancake & Steak House,
Inc. All material intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES - The preparation of the consolidated financial statements, in
accordance with generally accepted accounting principles, requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements, and the reported amounts of revenues and
expenses during the reporting period. Estimates and assumptions used in the
consolidated financial statements include, but are not limited to, those used to
determine depreciation and amortization, the allowance for doubtful accounts,
the carrying amounts of financial instruments, notes receivable, notes payable,
and goodwill in evaluating intangible asset impairment. The amounts ultimately
realized from the affected assets will depend, among other factors, on general
business conditions and could differ materially in the near-term from the
carrying amounts reflected in the consolidated financial statements.
REPORTING PERIODS - The Company reports its quarterly consolidated financial
information using a "4-3-3-3" accounting cycle whereby each quarter ends on the
last Monday of the respective quarter. Fiscal year 2004 ended March 29, 2004,
fiscal year 2003 ended March 31, 2003, and fiscal year 2002 ended April 1, 2002.
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 29, 2004 and March 31, 2003,
because of the relatively short maturity of these instruments. The carrying
value of notes receivable approximated fair value as of March 29, 2004 and March
31, 2003, based upon interest rates and terms available for similar investments.
The carrying value of notes payable approximated fair value as of March 29, 2004
and March 31, 2003, based upon interest rates and terms available for the same
or similar loans.
CASH AND CASH EQUIVALENTS - For purposes of the consolidated statements of cash
flows, the Company considers all short-term, highly-liquid investments, with a
maturity of three months or less, to be cash equivalents.
The Company's cash equivalents consist of interest-bearing deposits with major
banks and money market accounts. Management routinely reviews these investments
in order to limit the amount of credit exposure to any one financial
institution.
INVESTMENTS - The Company classifies its marketable securities as
"available-for-sale." Securities classified as available-for-sale are carried in
the consolidated financial statements at fair value based on quoted market
prices. Realized gains and losses, determined using the first-in, first-out
(FIFO) method, are included in earnings; unrealized holding gains and losses are
reported in other comprehensive income.
F-6
- --------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
CONCENTRATIONS OF CREDIT RISK - Financial instruments, which potentially subject
the Company to concentrations of credit risk, consist principally of cash
deposits, marketable securities, and accounts receivable. The Company places its
cash deposits with federally insured financial institutions. As of March 29,
2004, the Company's deposits were in excess of the federal insurance limits of
$100,000. However, the Company deposits funds with reputable banks. The Company
maintained investment accounts with combined balances of $1,174,000. The funds
in these accounts were invested in mutual funds and equity securities. Future
changes in market prices may make such investments less valuable. Accounts
receivable balances consist primarily of franchise fees receivable, which are
deemed fully collectible by the Company.
ACCOUNTS RECEIVABLE - Accounts receivable consist primarily of amounts due from
franchisees and are recorded as services are rendered, and are charged off
against the allowance for doubtful accounts when they are determined by
management to be uncollectible. The allowance for doubtful accounts is estimated
based on the Company's historical losses, review of specific problem accounts,
existing economic conditions, and the financial stability of its franchisees.
Generally, the Company considers accounts receivable past due after 30 days.
INVENTORIES - Inventories of food, beverages, and restaurant supplies are stated
at the lower of cost or market. Cost is determined using the first-in, first-out
(FIFO) method.
PROPERTY, BUILDINGS, AND EQUIPMENT - Property, buildings, and equipment are
stated at cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets. Lives used for calculating
depreciation and amortization rates for the principal asset classifications are
as follows: buildings - 35 years; automobiles, furniture, fixtures, and
equipment - 3 to 10 years; leasehold improvements - life of lease or applicable
shorter period. Maintenance and repairs are expensed as incurred; renewals and
improvements are capitalized. Upon disposal of assets, subject to depreciation,
the related costs and accumulated depreciation are removed and resulting gains
and losses are reflected in the consolidated statements of income.
RECOVERABILITY OF LONG-LIVED ASSETS - Management of the Company reviews the
carrying value of capitalized tangible and intangible assets on a regular basis
to reach a judgment concerning possible permanent impairment of value. These
reviews consider, among other factors: (1) the net realizable value of each
major classification of assets; (2) the cash flow associated with the assets;
and (3) significant changes in the extent or manner in which major assets are
used. Management believes the carrying value of assets are less than the
estimated fair value.
ADVERTISING - Advertising and promotional costs are expensed as incurred.
Advertising and promotional expenses were $349,342, $341,456, and $318,081 for
the years ending March 29, 2004, March 31, 2003 and April 1, 2002, respectively.
Company-owned and most franchise restaurants contribute 1% of gross sales to a
common advertising fund maintained by the Company. Four franchise restaurants
are grandfathered from this requirement.
DERIVATIVE FINANCIAL INSTRUMENTS - The Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities, establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 also requires that changes in
the derivative instrument's fair value be recognized currently in results of
operations unless specific hedge accounting criteria are met. The Company
entered into an interest rate swap agreement with a bank to reduce the impact of
changes in interest rates on a portion of its floating rate long-term debt. The
agreement effectively changed the Company's floating interest rate exposure on
the covered portion to a fixed percentage of 6.17%.
F-7
- --------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
The swap is inversely correlated to the related hedged long-term debt and is
therefore considered an effective cash flow hedge of the underlying long-term
debt. The level of effectiveness of the hedge is measured by changes in the fair
value of the hedged long-term debt resulting from fluctuations in interest
rates. As a matter of policy, the Company does not enter into derivative
transactions for trading or speculative purposes.
The interest rate swap agreement qualifies as a cash flow hedge under SFAS No.
133. SFAS No. 133 requires that the fair value of derivative instruments to be
recorded and changes in the fair value of the derivative instruments to be
recognized in other comprehensive income. As of March 29, 2004 the fair market
value of this agreement results in a liability of $33,005 and recognition of
$19,802 in other comprehensive loss (net of tax effect of $13,203).
REVENUE RECOGNITION - Initial license fees from sales of franchise agreements
are recognized when the restaurant opens. The terms of the franchise agreements
are generally 25 years. Continuing franchise fees, based on a percentage of
sales, are recognized as revenue each month based on the franchisees' monthly
sales activity. Lottery revenues are recognized net of prizes and the State of
Oregon's share of proceeds. Net lottery revenues were $4,188,000, $3,682,000 and
$3,412,000 for the years ending March 29, 2004, March 31, 2003 and April 1,
2002, respectively.
INCOME TAXES - Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end, based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred income tax assets to the amount expected to be
realized.
Income tax expense is the tax payable for the year and the change during the
year in net deferred income tax assets and liabilities.
STOCK OPTIONS - SFAS No. 123, Accounting for Stock-Based Compensation, defines a
fair value-based method of accounting for employee stock options and similar
equity instruments, and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. It encourages,
but does not require, the companies to record compensation costs for stock-based
employee compensation plans at fair value. The Company has chosen to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations.
The Company complies with the disclosure-only provisions of SFAS No. 123 and no
compensation cost has been recognized for the plan. Had compensation cost for
the stock-based compensation plan been
F-8
- --------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
determined, based on the fair value of options at the date of grant consistent
with the provisions of SFAS No. 123, the Company's pro forma net income and pro
forma earnings per share would have been as follows:
March 29, March 31, April 1,
2004 2003 2002
-------------- -------------- --------------
Net income - as reported $ 1,277,384 $ 1,557,613 $ 1,065,856
Net income - pro forma $ 1,201,831 $ 1,449,920 $ 905,671
Diluted earnings per share -
as reported $ 0.62 $ 0.74 $ 0.51
Diluted earnings per share -
pro forma $ 0.58 $ 0.68 $ 0.44
For purposes of the above pro forma information, the fair value of each option
grant was estimated at the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions:
March 29, March 31, April 1,
2004 2003 2002
-------------- ------------- ------------
Risk-free interest rate 4.43% 4.78% 5.28%
Expected life 10 years 10 years 10 years
Expected volatility 25% 25% 20%
Expected dividend yield 1.25% 1.25% 0%
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. The granting of additional stock options in future
years is anticipated.
NET INCOME PER SHARE - Basic earnings per share (EPS) are computed using the
weighted-average number of shares of common stock outstanding for the period.
Diluted EPS is computed using the weighted-average number of shares of common
stock and dilutive common stock equivalents outstanding during the period, if
any. Common equivalent shares, if any, are excluded from the computation when
their effect is antidilutive.
All references to share and per share information have been adjusted to give
effect to stock dividends.
RECLASSIFICATIONS - Certain amounts in the 2002 and 2001 consolidated financial
statements have been reclassified to conform to the 2003 presentation. The
Company has included additional detail in the consolidated statements of income.
Restaurant operating costs are now broken out on a separate line. These costs
include such items as advertising, repairs and maintenance, and credit card
discounts. Historically, most of these items have been included under general
and administrative. All information presented herein has been reclassifed to
conform to the new format. The Company believes that this new format will
improve comparability between the Company and its peers. Net income and cash
flows were not affected by the reclassifications.
F-9
- --------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
RECENTLY ISSUED ACCOUNTING STANDARDS - In June 2003, the Financial Accounting
Standards Board (FASB) issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This statement
establishes standards regarding classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. It
requires financial instruments within the scope of this statement to be
classified as liabilities (or as assets in some circumstances). Many of these
financial statements were previously classified as equity. This statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. For financial instruments created before the
issuance date of this statement and still existing at the beginning of the
interim period of adoption, transition is achieved by reporting the cumulative
effective of a change in an accounting principle by initially measuring the
financial instruments at fair value. The adoption of SFAS No. 150 did not have a
material impact on the Company's consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149 Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. The adoption of SFAS No. 149 did not have a material impact
on the Company's consolidated financial statements.
In January 2003, FASB issued Interpretation No. 46 (FIN 46), Consolidation of
Variable Interest Entities. This interpretation clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements, and
requires existing unconsolidated variable interest entities to be consolidated
by their primary beneficiaries if the entities do not effectively disperse risks
among parties involved. This interpretation explains how to identify variable
interest entitles and how an enterprise assesses its interests in a variable
interest entity to decide whether to consolidate that entity. In December 2003,
FASB issued FIN 46R, which made revisions and delayed implementation of certain
provisions of FIN 46. As a public entity that is not a "Small Business Issues,"
the Company is now required to apply FIN 46R to all unconsolidated variable
interest entitles no later than March 31, 2004, with the exception of
unconsolidated special-purpose entitled, which had an implementation deadline of
December 31, 2003. The Company's management does not expect that the application
of the provisions of this interpretation will have a material impact on the
Company's consolidated financial statements.
NOTE 2 - MARKETABLE SECURITIES
Cost and fair value of available-for-sale marketable debt and equity securities
at March 29, 2004, are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Losses Value
--------------- --------------- ---------------- ----------------
Mutual funds $ 571,945 $ 45,624 $ (2,965) $ 614,604
Equity securities 298,889 18,476 (1,773) 315,592
--------------- --------------- ---------------- ----------------
$ 870,834 $ 64,100 $ (4,738) $ 930,196
=============== =============== ================ ================
F-10
- --------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - MARKETABLE SECURITIES - (continued)
At March 29, 2004, there were no individual securities that have been in a
continuous unrealized loss position for greater than twelve months.
Net unrealized holding gains on available-for-sale securities in the amount of
$59,362 for the year ended March 29, 2004, have been included in accumulated
other comprehensive income, net of income taxes of $22,915. For the year ended
March 29, 2004, net realized gains on sales of available-for-sale securities
were $65,794 and are included in other income.
Cost and fair value of available-for-sale marketable debt and equity securities
at March 31, 2003, are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Losses Value
---------------- --------------- --------------- ----------------
Mutual funds $ 931,768 $ 12,532 $ (43,937) $ 900,363
Equity securities 33,713 2,458 (2,994) 33,177
---------------- --------------- --------------- ----------------
$ 965,481 $ 14,990 $ (46,931) $ 933,540
================ =============== =============== ================
These investments are classified on the balance sheet as follows:
Marketable Money
Securities Market Total
--------------- --------------- ---------------
Marketable securities (current asset) $ 760,441 $ - $ 760,441
Bond sinking fund (noncurrent asset) 173,099 35,830 208,929
--------------- --------------- ---------------
$ 933,540 $ 35,830 $ 969,370
=============== =============== ===============
Net unrealized holding losses on available-for-sale securities in the amount of
$31,941 for the year ended March 31, 2003, have been included in accumulated
other comprehensive income, net of income taxes of $12,028. For the year ended
March 31, 2003, realized losses on sales of available-for-sale securities were
$55,934 and are included in other income.
Cost and fair value of available-for-sale marketable debt and equity securities
at April 1, 2002, are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Losses Value
---------------- --------------- --------------- ----------------
Mutual funds $ 1,251,344 $ 13,481 $ (36,011) $ 1,228,814
Corporate bonds 91,347 - (2,477) 88,870
Equity securities 75,624 7,297 (1,140) 81,781
---------------- --------------- --------------- ----------------
$ 1,418,315 $ 20,778 $ (39,628) $ 1,399,465
================ =============== =============== ================
F-11
- --------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - MARKETABLE SECURITIES - (continued)
Net unrealized holding losses on available-for-sale securities in the amount of
$18,850 for the year ended April 1, 2002, have been included in accumulated
other comprehensive income, net of income taxes of $7,276.
NOTE 3 - NOTES RECEIVABLE - FRANCHISEES
Notes receivable - franchisees consist of the following:
March 29, March 31,
2004 2003
-------------- ---------------
Notes receivable from franchisees, bearing
interest at 9%, secured by a franchise
agreement and restaurant furniture, fixtures
and equipment $ 232,280 $ 293,797
-------------- ---------------
Total notes receivable - franchisees 232,280 293,797
Less current portion (41,036) (81,771)
-------------- ---------------
Notes receivable - franchisees,
net of current portion $ 191,244 $ 212,026
============== ===============
NOTE 4 - PROPERTY, BUILDINGS AND EQUIPMENT
Property, building and equipment consist of the following:
March 29, March 31,
2004 2003
---------------- -----------------
Land $ 2,470,530 $ 1,686,700
Buildings 2,824,474 1,616,437
Furniture, fixtures and equipment 4,311,343 3,502,669
Leasehold improvements 2,881,797 2,623,996
Automobiles 99,216 78,774
---------------- -----------------
Total property, buildings and equipment 12,587,360 9,508,576
Less accumulated depreciation and amortization (3,262,310) (2,432,607)
---------------- -----------------
Property, building and equipment, net $ 9,325,050 $ 7,075,969
================ =================
Depreciation expense charged to operations was $836,728, $754,107 and $786,593,
for the years ending March 29, 2004, March 31, 2003 and April 1, 2002,
respectively.
F-12
- --------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - INCOME TAXES
The provision for income taxes consists of current and deferred income tax
expense as follows:
March 29, March 31, April 1,
2004 2003 2002
--------------- --------------- ----------------
Current:
Federal $ 138,000 $ 435,000 $ 487,000
State 39,000 76,000 86,000
--------------- --------------- ----------------
177,000 511,000 573,000
Deferred 448,000 249,000 (73,000)
--------------- --------------- ----------------
Provision for income taxes $ 625,000 $ 760,000 $ 500,000
=============== =============== ================
A reconciliation of the federal income tax rate to the Company's effective
income tax rate is as follows:
March 29, March 31, April 1,
2004 2003 2002
---------------------- ---------------------- -----------------------
Federal income tax at statutory
rate $647,000 34.0 % $ 788,000 34.0 % $534,000 34.0 %
State income taxes, net of federal
income tax benefit 53,000 2.8 % 72,000 3.1 % 56,000 3.6 %
Nondeductible expenses 34,000 1.8 % 47,000 2.0 % 71,000 4.6 %
Dividend received deduction (4,000) (0.2)% (3,000) (0.1)% - -
Federal income tax credits (105,000) (5.5)% (144,000) (6.2)% (161,000) (10.2)%
---------- -------- ----------- -------- ---------- ---------
$625,000 32.9 % $ 760,000 32.8 % $500,000 32.0 %
========== ======== =========== ======== ========== =========
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 29, 2004 and March 31, 2003, the deferred tax liability
of $1,396,000 and $948,000, respectively, primarily represents the difference
between the book basis of property, buildings, and equipment and intangibles and
the related tax basis of approximately $4,094,000 and $2,798,000, respectively.
F-13
- --------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - NOTES PAYABLE
Notes payable consist of the following:
March 29, March 31,
2004 2003
----------------- ------------------
Note payable to a financing company, principal and
interest due monthly at 8.95%, matures July 2011,
secured by substantially all assets of the Company $ 1,455,274 $ 1,590,934
Note payable to a financing company, principal and
interest due monthly at 7.38%, matures July 2011,
secured by substantially all assets of the Company 799,955 877,414
Note payable to a financing company, principal and
interest due monthly at 5.09%, matures May 2019,
secured by land and building at Cornell Oaks restaurant 1,226,007 -
Note payable to a financing company, principal and
interest due monthly at 5.12% (variable), matures May
2011, secured by equipment at Cornell Oaks restaurant 337,500 -
Note payable to a financial institution, principal and
interest due monthly at LIBOR plus 2.25% matures
January 2011, secured by real estate, hedged with swap 1,050,771 1,106,988
agreement that effectively fixes the interest rate at 6.17%
(Note 7)
Note payable to a financial institution, principal and
interest due monthly at 5.64%, matures February
2008, secured by real estate 457,396 495,870
Convertible notes payable, interest payable monthly
at 10% - 650,000
Note payable to Coopers, Inc. for the purchase
of three restaurants, monthly principal payments
of $2,767, matures June 1, 2004 5,532 41,507
Capital lease payable, monthly payments of $360 - 9,267
----------------- ------------------
Total notes payable 5,332,435 4,771,980
Less current portion (416,278) (332,810)
----------------- ------------------
Notes payable, net of current portion $ 4,916,157 $ 4,439,170
================= ==================
Certain notes payable contain restrictive covenants pertaining to financial
ratios and minimum cash flow coverage. The most restrictive covenants require
the Company to maintain a maximum ratio of total liabilities, excluding
subordinated debt, to tangible net worth plus subordinated debt of 3.5 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 2.0 to 1.0.
F-14
- --------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - NOTES PAYABLE - (continued)
Future maturities of notes payable for the following fiscal years are:
Years ended March 31, 2005 $ 416,278
2006 464,797
2007 500,958
2008 826,940
2009 529,602
Thereafter 2,593,860
------------------
$ 5,332,435
==================
All interest costs incurred during the years ended March 31, 2003 and April 1,
2002, have been expensed during the respective periods. For the year ended March
29, 2004 all interest cost, except for $9,231, which was capitalized as part of
the Cornell Oaks Elmer's restaurant, have been expensed.
NOTE 7 - INTEREST RATE SWAP AGREEMENT
The Company has entered into an interest rate swap agreement with a financial
institution to hedge its cash flow requirements on one of the Company's notes
payable. The notional amount of the agreement is $1,050,771 as of March 29,
2004. The agreement expires May 24, 2010.
Under the terms of the swap agreement the Company has committed to paying or
receiving interest on the spread between 30-day LIBOR and a fixed rate of 3.92%.
If a 30-day LIBOR exceeds 3.92%, the Company receives interest income from the
bank equal to the spread. If 30-day LIBOR is less than 3.93%, the Company makes
interest payments to the bank equal to the spread. The 30-day LIBOR rate is
fixed on a monthly basis by the bank.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities under operating lease agreements. Minimum
fiscal year rental commitments for the year ending March 29, 2004, for property,
buildings and equipment with noncancellable terms of more than one year are:
Years ended March 31, 2005 $ 1,422,915
2006 1,146,580
2007 884,147
2008 636,117
2009 477,915
Thereafter 829,500
-----------------
5,397,174
Less sublease rental income (22,164)
-----------------
$ 5,375,010
=================
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
F-15
- --------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS AND CONTINGENCIES - (continued)
$1,679,447, $1,804,000 and $1,819,000 the years ending March 29, 2004, March 31,
2003 and April 1, 2002, respectively.
Under the terms of lease assignment agreements, the Company has guaranteed
certain franchisee occupancy leases for three more years. In one case the
Company's guarantee would be extended in the event the franchisee exercises
their options to extend the lease. If all options are exercised, the guarantee
would be extended until 2018. In all cases these guarantees are in turn,
personally guaranteed by the franchisee. In the event the franchisee defaulted
on the occupancy lease, the Company could be required to pay all rent and other
amounts due under the terms of the lease for the remainder of the guarantee
term. In the event of default, the Company expects it would exercise its right
to reoccupy and continue to operate the restaurants as Elmer's Breakfast o Lunch
o Dinner(R). As of March 29, 2004, the Company's maximum potential liability for
these guarantees was $969,300.
From time to time, the Company is involved in litigation relating to claims
arising in the normal course of its business. The Company maintains insurance
coverage against potential claims in amounts that it believes to be adequate.
Management believes that it is not presently a party to any litigation, the
outcome of which could have a material adverse effect on the Company's business
or operations.
NOTE 9 - RELATED-PARTY TRANSACTIONS
Jaspers Food Management, Inc. (JFMI), is a privately-held restaurant management
company. Certain officers and directors of the Company hold a majority interest
in JFMI. Accounts payable and other liabilities due to the affiliate are due on
demand and accrue interest at an annual rate of 10.5% based on the outstanding
balance over 28 days. No interest has been accrued or paid under the agreement.
Under the terms of a management services agreement, the affiliate provides
substantially all store labor, management, accounting, human resources,
training, and other administrative services related to the operation of the six
Ashley's Delis, four Richard's Deli and Pub, and three Cooper's Deli and Pub
restaurants. Labor and related expenses were $1,138,231, $1,003,000 and $842,000
as of March 29, 2004, March 31, 2003 and April 1, 2002, respectively. Amounts
outstanding with JFMI are as follows:
March 29, March 31,
2004 2003
-------------- ---------------
Accounts payable $ 39,759 $ 32,132
============== ===============
F-16
- --------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - RESTAURANT AND FRANCHISE OPERATIONS
The consolidated results of operations and other selected financial information,
from restaurant and franchise operations, are presented after elimination of
intercompany transactions:
March 29, March 31, April 1,
2004 2003 2002
--------------- --------------- ----------------
Revenues:
Restaurant operations $ 32,287,513 $ 30,732,800 $ 32,558,606
Franchise operations 1,204,057 1,251,492 1,217,042
--------------- --------------- ----------------
Consolidated $ 33,491,570 $ 31,984,292 $ 33,775,648
=============== =============== ================
Income from operations:
Restaurant operations $ 1,771,749 $ 1,540,213 $ 1,812,031
Gain (loss) on sale of land,
buildings, and equipment (4,071) 752,377 (5,759)
Franchise operations 410,835 464,980 222,350
--------------- --------------- ----------------
Consolidated $ 2,178,512 $ 2,757,570 $ 2,028,622
=============== =============== ================
Capital and intangible expenditures:
Restaurant operations $ 3,094,780 $ 701,052 $ 945,497
Franchise operations - 15,565 29,035
--------------- --------------- ----------------
Consolidated $ 3,094,780 $ 716,617 $ 974,532
=============== =============== ================
Depreciation and amortization:
Restaurant operations $ 836,728 $ 754,107 $ 739,293
Franchise operations - - 47,300
--------------- --------------- ----------------
Consolidated $ 836,728 $ 754,107 $ 786,593
=============== =============== ================
Assets:
Restaurant operations $ 17,846,576 $ 15,727,619 $ 16,114,277
Franchise operations 1,198,753 1,661,684 571,006
--------------- --------------- ----------------
Consolidated $ 19,045,329 $ 17,389,303 $ 16,685,283
=============== =============== ================
The number of Company-owned stores and operating franchises is as follows:
March 29, March 31, April 1,
2004 2003 2002
--------------- --------------- ----------------
Company-owned stores 29 28 27
Operating franchises 21 20 20
F-17
- --------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - SIGNIFICANT TRANSACTIONS
SELF-TENDER OFFER - On January 14, 2004, the Company completed a self-tender
under which it acquired 204,255 shares of Common Stock, representing
approximately 10% of the then outstanding shares, at a purchase price of $6.43
per share. A total of 568,564 shares had been tendered. The cost of the
self-tender, including the purchase price of $1,313,088 and fees and expenses of
$16,453, totaled $1,329,541. All shares repurchased by the Company were retired.
In addition the Company repurchased 25,000 shares of stock for $151,700 in a
privately negotiated transaction which was completed during November 2003.
PURCHASE OF CORNELL OAKS RESTAURANT - On July 29, 2003, the Company purchased a
one-acre site in Beaverton, Oregon for $775,000. Construction has been completed
and the Elmer's restaurant opened December 29, 2003. The Company has secured
financing of approximately $1.6 million and as of March 29, 2004, had drawn
$1,563,500.
REPURCHASE OF CONVERTIBLE DEBT - December 1, 2003, the Company repurchased the
balance ($650,000) of its 10% convertible notes, paying a 5% premium over face
value. The total premium as December 1, 2003 of $32,500 was recorded as a loss
on extinguishments of debt.
June 28, 2002 the Company repurchased half ($650,000) of its 10% convertible
notes, paying a 15% premium over face value. As permitted by the early adoption
provisions of SFAS No. 145 - Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13 and Technical Corrections, the total premium
of $97,500 was recorded as a loss on extinguishments of debt.
In addition to reducing the Company's debt, these transactions eliminates the
potential obligation to issue up to 210,000 shares of common stock upon
conversion. All convertible debt has now been repurchased.
FRANCHISE OPENINGS - On March 15, 2004 Elmer's newest franchised restaurant
opened in Corvallis, Oregon. The 4,500 square foot restaurant in Corvallis
occupies a converted Lyons site.
On July 21, 2003 a franchised Elmer's opened a 5,000 square foot restaurant in
Coeur d'Alene, Idaho. This location occupies a converted Village Inn site.
PURCHASE OF COOPER'S DELI AND PUB - On July 1, 2002, the Company acquired three
Cooper's Deli units located in Salem, Oregon from Cooper's Inc. The Cooper's
units are substantially similar to the Company's existing deli operations.
Purchase consideration included $100,000 cash, a $66,500, two-year promissory
note, $11,500 in assumed liabilities and the assumption of a $155,000 promissory
note due to the Company. The acquisition cost of $333,000 included $100,000 in
tangible assets and $233,000 in goodwill.
RELOCATION OF RICHARD'S DELI & PUB - On May 28, 2002, the Company relocated one
of two Hillsboro, Oregon units to a nearby retail mall. The prior landlord's
bankruptcy, combined with the superiority of the new space, made the decision to
move compelling. The Company terminated its occupancy lease and recorded a
$77,000 loss on the surrender of leasehold improvements. The Company entered
into a five-year lease for approximately 4,000 sq. ft. at the new location. This
is larger than the operating requirement; therefore the Company has subleased
1,900 sq. ft. of the new space to a non-competing use.
SALE OF SOUTHERN OREGON ELMER'S - Effective May 7, 2002, the Company executed
asset purchase and franchise agreements with Southern Oregon Elmer's LLC (the
Buyer), refranchising three of the Company's Elmer's restaurants located in
Grants Pass, Medford and Roseburg, Oregon. The Company
F-18
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ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - SIGNIFICANT TRANSACTIONS - (continued)
sold substantially all the assets of those locations in consideration for
$1,385,500 in cash and promissory notes valued at $349,500. The Buyer has signed
25-year franchise agreements for each location and will operate the locations
under the Elmer's Breakfast o Lunch o Dinner (TM) name.
The Buyer signed a development agreement to open an additional two units within
five years. The first unit located in Klamath Falls, Oregon, opened October 23,
2002. As a result of this transaction, the Company posted a one-time gain of
approximately $504,000 in the quarter ending July 22, 2002.
The Company agreed to provide a limited amount of seller financing. The Company
issued a $270,000 note bearing interest at 9% per year payable in 84 equal
monthly payments; an approximately $79,500 note bearing interest at 9% payable
in 24 equal monthly payments; and an approximately $106,000 inventory note
bearing interest at 12% and due in 90 days. To assist with the development of
the Klamath Falls restaurant, the Company granted an extension of the inventory
note, which has now been paid in full.
The Company has assigned its rights and obligations under the occupancy leases
for the Medford and Roseburg locations. The Company remains a guarantor of the
Medford lease until April 2007. The Company's guarantee of the Roseburg lease
could extend until 2018 if the Buyer exercises its options in 2008 and 2013. The
Company has subleased the Grants Pass location to the Buyer until April 2007
under substantially the same terms and conditions as the underlying master
lease. Provided that all parties are in good standing under the lease at the end
of the sublease, the Grants Pass landlord has agreed to lease directly to the
Buyer under substantially similar terms.
The Buyer has indemnified the Company against all losses incurred as a result of
the Company's obligations as a Guarantor. This indemnification is personally
guaranteed by the franchisees and their spouses. However, in the event of
default by the Buyer of the terms of the occupancy leases, and the failure of
the franchisees to make good on their personal guarantees, the Company could be
required to pay all rent and other amounts due under the terms of the lease for
the remainder of the guarantee term. In the event of default, the Company
expects it would exercise its right to reoccupy and continue to operate the
restaurants as Elmer's Breakfast o Lunch o Dinner (TM).
The Buyer's obligations under the franchise agreements, promissory notes, lease
assignments, and sublease are guaranteed by the Buyer and personally by the
franchisees and their spouses.
ACQUISITION OF VANCOUVER RESTAURANT - On April 15, 2002, the Company acquired an
Elmer's restaurant located in Vancouver, Washington, from franchisee and former
Board member, Paul Welch, for approximately $250,000 in cash and assumed
liabilities. The Company has entered into a long-term occupancy lease at the
same location and continues to operate the location as an Elmer's restaurant.
The purchase price was allocated to the tangible assets of the restaurant. The
Company has spent approximately $148,000 remodeling this facility.
FRANCHISE DEVELOPMENT - A Franchise Agreement was signed in July 2003 for a
restaurant to be located in either Riverside County or San Diego County,
California. This franchisee is in the lease acquisition phase and it is
anticipated that the restaurant will be opened during fiscal 2005.
A Franchise Agreement was signed in June 2003 for a restaurant to be located in
Eugene, Oregon. The franchisee has entered into a lease for a conversion of a
former Izzy's restaurant and it is anticipated that the restaurant will be
opened late August 2004.
F-19
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ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - GOODWILL AND INTANGIBLE ASSETS
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 requires business
combinations initiated after June 30, 2001, to be accounted for using the
purchase method of accounting and broadens the criteria for recording intangible
assets separate from goodwill. Recorded goodwill and intangibles have been
evaluated against this new criteria and no changes were considered necessary to
the previously recognized intangibles. SFAS No. 142 requires the use of a
nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain intangibles
(those deemed to have indefinite life) will be reviewed for impairment and
written down and charged to results of operations only in the periods in which
the recorded value of goodwill and certain intangibles are determined to be more
than their fair value.
The Company adopted SFAS No. 142 effective April 3, 2001. The changes in the
carrying amount of goodwill and intangible assets for the years ended March 29,
2004 and March 31, 2003, are as follows:
Goodwill Intangibles
---------------- -----------------
Balance as of April 1, 2002 $ 4,699,164 $ 602,709
Acquired during the year 232,929 -
Sold during the year (34,350) -
---------------- -----------------
Balance as of March 31, 2003 4,897,743 602,709
Acquired during the year - -
Sold during the year - -
---------------- -----------------
Balance as of March 29, 2004 $ 4,897,743 $ 602,709
================ =================
Components of goodwill are tested for impairment in the third quarter. The fair
market value of the reporting units as estimated using multiples of earnings
before interest, taxes, depreciation, and amortization (EBITDA) resulted in no
impairment of goodwill.
Intangibles consist of trademark and franchise registrations and franchise
agreements and development costs. These indefinite lived assets are tested for
impairment in the third quarter. The fair value of the intangibles as estimated
using multiples of EBITDA resulted in no impairment.
NOTE 13 - EMPLOYEE BENEFIT PLAN
The Company formed a 401(k) profit sharing plan on April 1, 2000, whereby
eligible employees may contribute up to 20% of their regular earnings. Employees
are eligible to participate after one year of half-time employment with the
Company and attainment of 21 years of age. The plan provides that the Company
can also make matching and other contributions to the plan. The Company
contributed $39,583, $44,617 and $44,385, to the plan for the years ended March
29, 2004, March 31, 2003 and April 1, 2002, respectively.
F-20
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ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14 - STOCK OPTIONS
The Board of Directors adopted the 1999 Stock Option Plan in February 1999 which
provides for the award of incentive stock options to key employees and the award
of nonqualified stock options to employee and nonemployee directors. Under the
terms of the plan, the exercise price of the options are determined as the fair
market value based on trading values of the Company's common stock at the time
the option is granted. Under the plan, 546,000 shares of common stock are
authorized for issuance. Options are exercisable upon vesting. Options generally
vest 20% annually and expire 10 to 15 years after the date of grant.
A summary of the Company's stock options and changes during the years ended
March 29, 2004, March 31, 2003, April 1, 2002, and April 2, 2001, is presented
below:
Weighted-
Weighted- Average Number Weighted-
Average Fair Value Of Average
Options Exercise Of Option Options Exercise
Outstanding Price Grant Exercisable Price
------------- ------------ ------------ ------------- -------------
Balance, April 2, 2001 440,856 $ 4.58 93,528 $ 4.70
Options granted 8,400 $ 4.76 $ 1.78
Options cancelled (37,869) $ 4.44
Balance, April 1, 2002 411,387 $ 4.59 174,213 $ 4.47
Options granted 54,000 $ 5.01 $ 1.47
Options cancelled (50,763) $ 4.53
Balance, March 31, 2003 414,624 $ 4.65 281,342 $ 4.63
Options granted 57,000 $ 5.75 $ 1.20
Options exercised (13,974) $ 4.65
Options cancelled (5,513) $ 4.87
Balance, March 29, 2004 452,137 $ 4.80 324,133 $ 4.60
The following table summarizes information on stock options outstanding as of
March 29, 2004:
Options Exercisable
Weighted- ------------------------------
Average Weighted- Weighted-
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life - Years Price Exercisable Price
-------------- --------------- ----------------- --------------- ------------------------------
$ 3.92 130,374 8.14 $ 3.92 130,374 $ 3.92
$ 4.52 34,125 6.70 $ 4.52 20,475 $ 4.52
$ 4.76 8,400 12.92 $ 4.76 3,360 $ 4.76
$ 5.00 45,000 8.44 $ 5.00 15,540 $ 5.00
$ 5.02 20,000 13.93 $ 5.02 4,000 $ 5.02
$ 5.09 36,962 7.14 $ 5.09 29,108 $ 5.09
$ 5.15 121,276 10.06 $ 5.15 121,276 $ 5.15
$ 5.48 44,000 9.16 $ 5.48 - $ 5.48
$ 6.77 12,000 14.99 $ 6.77 - $ 6.77
F-21
- --------------------------------------------------------------------------------
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14 - STOCK OPTIONS - (continued)
There were 79,889 shares of common stock reserved for the grant of stock options
under the Plan at March 29, 2004.
NOTE 15 - SUBSEQUENT EVENTS
March 30, 2004, the Company refranchised the Company's Elmer's restaurant in
Palm Springs, California. The buyer executed a 25-year franchise agreement and
assumed the Company's operating lease obligations. The Company remains a
guarantor of the lease until April, 2007 and on a rolling twelve month basis
thereafter until 2020. The Company's maximum potential liability under this
guarantee is $315,000. The purchase price of $450,000 was paid in cash and will
result in a pretax gain of approximately $150,000.
March 31, 2004, the Oregon Lottery Commission approved a new six-year retailer
contract effective June 27, 2004. The new contract lowers retailer commissions
by approximately 10%. If the new commission structure had been applied to sales
for the year ended March 29, 2004, it would have reduced commissions by
approximately $435,000. The Lottery has installed additional terminals in most
Company locations and the Company expects year over year sales increases to
significantly reduce, but not eliminate, the impact of the new lower rates. As a
result of timing features of the new contract, most of the adverse impact will
be felt in the Company's second quarter ending the second Monday in October.
Subsequent to year-end, the Company entered into a Franchise Agreement for a
Walla Walla, Washington location.
F-22
- --------------------------------------------------------------------------------
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: /s/ BRUCE N. DAVIS
--------------------------------------
Bruce N. Davis
Chief Executive Officer and President
Dated: June 23, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of Elmer's
Restaurants, Inc., in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ BRUCE N. DAVIS Chairman of the Board and Chief Executive June 23, 2004
- ------------------
Bruce N. Davis Officer and President
/s/ DENNIS R. MILLER Secretary and Corporate Controller June 23, 2004
- --------------------
Dennis R. Miller
/s/ THOMAS C. CONNOR Director June 23, 2004
- --------------------
Thomas C. Connor
/s/ CORYDON H. JENSEN Director June 23, 2004
- ---------------------
Corydon H. Jensen
/s/ WILLIAM W. SERVICE Director June 23, 2004
- ----------------------
William W. Service
/s/ DENNIS M. WALDRON Director June 23, 2004
- ---------------------
Dennis M. Waldron
/s/ RICHARD WILLIAMS Director June 23, 2004
- --------------------
Richard Williams
/s/ DONALD WOOLLEY Director June 23, 2004
- ------------------
Donald Woolley
20
EXHIBIT INDEX
Exhibit Sequential
No. Description Page No.
3(i)* Restated Articles of Incorporation of the Company
(Incorporated herein by reference from Exhibit No. 3.1 to the
Company's Annual Report on Form 10-K for the year ended March
31, 1988.)
3(ii)* By-Laws of the Company, as amended. (Incorporated herein by
reference from Exhibit 3.2 of the Company's Annual Report on
Form 10-K for the year ended March 31, 1990.)
23.1 Consent of Moss Adams LLP. 22
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of
Chief Executive Officer and President. 23
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of
Secretary and Corporate Controller. 24
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
Chief Executive Officer and President. 25
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
Secretary and Corporate Controller. 26
21