ITEM 1. BUSINESS
GENERAL
The Company, located in Portland, Oregon, is a franchisor and operator of full-service, family oriented restaurants under the names "Elmer's Pancake & Steak House" and "ELMER'S. Breakfast. Lunch. Dinner" and an operator of delicatessen restaurants under the names "Ashley's Cafe" and "Richard's Deli and Pub." The Company is an Oregon corporation and was incorporated in 1983. Walter Elmer opened the first Elmer's restaurant in Portland, Oregon in 1960, and the first franchised restaurant opened in 1966. The Company acquired the Elmer's franchising operation in January 1984 from the Elmer family. The Company now owns and operates 11 Elmer's restaurants and franchises 18 Elmer's restaurants in six western states. The Company reports on a fiscal year commencing April 1 and ending March 31 of the following year.
BUSINESS SEGMENT
The Company primarily operates in the business segment of restaurant operations. Information as to revenue, operating profit, identifiable assets, depreciation and amortization expense and capital expenditures for the Company's business segment for fiscal 2000 is contained herein by reference to the Company's consolidated financial statements.
Company-owned Elmer's restaurants are located in the Delta Park section of Portland, Oregon; Beaverton, Gresham, Hillsboro, Medford, Albany and Grants Pass, Oregon; Palm Springs, California; Boise, Idaho; and Tacoma and Lynnwood, Washington. The Company acquired five Ashley's restaurants on February 18, 1999 and added a sixth on January 3, 2000. Two Ashley's are located in Bend, two are in Springfield, one is in Eugene, and the newest is in Redmond, Oregon. The Company acquired four Richard's Deli and Pub restaurants on March 31, 1999. Richard's are located in Tigard, Aloha and two in Hillsboro, Oregon.
RECENT ACQUISITIONS AND DEVELOPMENTS
On February 18, 1999, the Company merged with its majority shareholder CBW, Inc. ('CBW'), a closely held Oregon corporation, in a transaction in which the Company was the surviving corporation. CBW was the operator of five restaurants in Eugene, Springfield, and Bend, Oregon. In consideration for the issuance by the Company of 770,500 new shares of the Company's restricted stock to the CBW shareholders and the assumption of approximately $4 million in debt owed by CBW arising from CBW's acquisition of the controlling block of the Company's restricted common stock on August 25, 1998, the Company acquired all the stock and assets of CBW including CBW's wholly owned subsidiary, CBW Food Company, LLC (which by operation of merger is now the Company's wholly-owned subsidiary). The assets included five Ashley's delis operated by CBW and an option to purchase four Richards' delis operated by Grass Valley Ltd., Inc.
Each CBW shareholder received 144.4507 shares of the Company's restricted common stock for every CBW share owned. The shares of Company stock previously acquired by CBW, a total of 705,000 shares, were concurrently transferred to the Company and were canceled upon receipt thereof.. The Company's primary source of financing for the acquisition consisted of $3.08 million from its principal lender bank, Wells Fargo Bank, N.A., the proceeds of which were applied to pay down $1.75 million of the assumed debt and approximately $1.48 million in other outstanding debt of the Company. The debt financing is secured by a grant of various security interests in the Company's assets as well as the issuance of continuing guaranties by two subsidiaries of the Company. The Company also used approximately $1,000,000 to pay down debt assumed in the transaction.
Effective March 31, 1999, the Company executed a stock exchange agreement ("GVL Acquisition") with Grass Valley Ltd., Inc. ("GVL"), a closely held Oregon corporation, in a transaction in which the Company acquired 100% of the outstanding stock of GVL in consideration for the payment by the Company of the sum of $110,000 in cash and the issuance of 209,620 restricted shares of the Company's common stock to the GVL shareholders. GVL is now a wholly owned subsidiary of the Company.
GVL is the owner and operator of four restaurants in Hillsboro, Aloha, and Tigard, Oregon operating under the moniker of Richard's Deli and Pub. The first Richard's Deli and Pub was opened in August 1994 and all the restaurants are located in leased retail space. The Company plans to continue operations at all four locations in a substantially similar manner. The Company's Management believes that it has realized significant synergies between the Richard's Deli and Pubs and Ashley's Deli operations while accruing significant savings from the consolidation of back office functions.
Each GVL shareholder received 1048.1 restricted shares of the Company's common stock in exchange for each GVL share owned. The Company's primary source of financing for the cash portion of the acquisition was from working capital.
The business combinations under the Merger and GVL Acquisition were accounted for under the purchase method. The Merger transaction was accounted for as a reverse acquisition as the shareholders of CBW received the larger portion (53.8%) of the voting interests in the combined enterprise. (See the Company's Consolidated Financial Statements incorporated herein for more details). Accordingly, CBW was considered the acquirer for accounting purposes and therefore, the Company's assets and liabilities were recorded based upon their fair market value. Management of the Company believes the Merger and GVL Acquisition created a company with over 20 restaurants systemwide, making it more competitive in the particular restaurant segments represented and allowing the crossover of product promotions, menu items, marketing strategies and restaurant images while generating likely opportunities for the development of several brands targeting different consumer segments. Management anticipates that the Merger and GVL Acquisition will also allow the Company to achieve administrative and operational efficiencies.
To the extent permitted by operating cash flow or external financing sources, the Company intends to focus future growth primarily in its existing markets of higher market penetration ("Core Markets") through strategic acquisitions, new restaurant openings or through other growth opportunities. The Company will also continue to seek to expand through existing and new franchisees. From time to time, the Company may close or sell restaurants or markets when determined by management and the Board of Directors to be in the best interests of the Company.
ELMER'S. BREAKFAST. LUNCH. DINNER.
RESTAURANT FORMAT AND MENU. The Company franchises or operates a total of 29 full-service, family-oriented restaurants, with a warm, friendly atmosphere and comfortable furnishings. Most of the restaurants are decorated in a home style with fireplaces in the dining rooms. They are free standing buildings, ranging in size from 4,600 to approximately 8,000 square feet with seating capacities ranging from 120 to 220. A portion of the dining room in most restaurants may also be used for private group meetings by closing it off from the public dining areas. Thirteen of the restaurants have a lounge with seating capacity ranging from 15 to 75. The normal hours of operation are from 6 a.m. to 10 or 11 p.m. and to 12 midnight on weekends in some restaurants with lounges.
Each restaurant offers full service, with a host or hostess to seat guests and handle payments, wait staff to take and serve orders, and additional personnel to clear and reset tables.
The menu offers an extensive selection of items for breakfast, lunch and dinner. The Elmer's breakfast menu, which is available all day, contains a wide variety of selections with particular emphasis on pancakes, waffles, omelets, crepes, country platters and other popular breakfast items. Each Elmer's restaurant makes all its batters and compotes from scratch and prepares its fruit sauces with fresh fruits when in season. The lunch menu includes soups made from scratch, salads, french dips, hamburgers and sandwiches. Customers at dinner may choose among steak, seafood, chicken, and a variety of homestyle items such as pot roast and turkey.
While most menu selections are standard to all Elmer's restaurants, restaurants in different areas include on their menus selections that appeal to local preferences. A special children's menu and a full senior menu is offered in all restaurants.
ASHLEY'S AND RICHARD'S DELI AND PUB
RESTAURANT FORMAT AND MENU. The Company operates a total of six Ashley's restaurants and four Richard's Delis and Pubs. They are substantially similar in design, size and menu. Eight of the ten units are located in retail strip mall locations, one is in a food court in a major indoor mall, and one is a free standing building. They range in size from 1,000 to 2,200 square feet with seating capacities ranging from 15 to 30. A portion of the dining room is also used for the sale of Oregon lottery games. The normal hours of operation are from 7 a.m. to 10 p.m. and up to 2 a.m. for some restaurants on weekends.
Each restaurant offers deli-style hot and cold sandwiches, soups, salads, and desserts and has a catering department. The restaurants are approved retailers with the Oregon lottery and offer all lottery games. Meal selections generally range in price from $2.95 to $6.95. The catering operation offers small to medium size food service and event support for business meetings, outdoor barbecues, and special events.
The above brands provide a vehicle for market penetration and unit growth, leveraging off the concept of broad appeal, quick-turn meals and emphasis on service. In a typical market, Ashley's restaurants and Richard's Delis and Pubs
experience competition from either other moderately-priced, casual dining and walk-through restaurants or economy sandwich outlets. Ashley's and Richards' differentiate themselves from economy deli competitors by their full table and bar service, attentive wait staff, lottery games, entertaining atmosphere, distinctive decor and consistently high-quality meals.
FRANCHISE OPERATIONS
In addition to the acquisition and development of additional Company operated restaurants, the Company encourages the strategic development of franchised restaurants in its existing markets as well as potentially in certain additional states. The primary criteria considered by the Company in the selection, review and approval of prospective franchisees are the availability of adequate capital to open and operate the number of restaurants franchised and prior experience in operating full-service restaurants. Under a franchise agreement, a franchisor grants to a franchisee the right to operate a business in a manner developed by the franchisor. The franchisee owns the franchised operation independently from the franchisor and, in effect, buys the right to use the franchisor's name, format, and operational procedures. Franchisees benefit from a common identification, standardized products, and the business reputation and services that a franchisor may provide, such as group advertising, management services, product enhancements, and group buying programs. The franchisor is able to capitalize on its business concept without, in many cases, having to invest substantial capital for expanded operations.
EXISTING FRANCHISEES. The existing franchise agreements generally grant to franchisees the right to operate an Elmer's restaurant in one specific location for 25 years, renewable generally for an additional 25-year period. When they entered into franchising agreements, the existing franchisees paid initial franchise fees of up to $25,000 plus additional fees of up to $10,000 if the restaurant had a lounge serving alcoholic beverages. Franchisees pay monthly franchise royalty fees ranging from one to four percent of the gross revenues of their restaurants. All but one restaurant must contribute up to one percent of gross revenues to a common advertising pool. In several markets, franchised and company-owned restaurants have agreed to increased advertising pool contributions to one and one-half percent. The Company may terminate a franchise agreement for several reasons including the franchisee's bankruptcy or insolvency, default in the payment of indebtedness to the Company or suppliers, failure to maintain standards set forth in the franchise agreement or operations manual, continued material violation of any safety, health or sanitation law, ordinance or governmental rule or regulation or cessation of business.
PROSPECTIVE FRANCHISEES. Prospective new franchisees will generally pay an initial franchise fee of $35,000. Initial franchise fees are generally payable in cash at the execution of the franchise agreement. Existing franchisees opening new franchised restaurants may pay a lower initial franchise fee than new franchisees. For new franchisees, the monthly franchise royalty fee is expected to be four percent of the gross revenues of the restaurant, with a minimum monthly fee of $500.00 The standard franchising agreement calls for a monthly advertising contribution equal to one percent of the gross revenues of the restaurant. See "Services to Franchisees" below.
A prospective franchisee who assumes operation of a previously unsuccessful franchised restaurant may be offered a reduced initial franchise fee, deferred payment of the franchise fee, or other concessions. Pursuant to certain area franchise agreements, the Company will receive reduced initial franchise fees and monthly royalty fees from additional restaurants that may be opened in the areas covered by those agreements. See "Area Franchise Agreements" below. In connection with the acquisition of the Elmer's franchising operation in 1984, the Company also granted Dale Elmer, a former director of the Company, and members of the Elmer family the right to operate a total of three additional restaurants at a franchise royalty fee of two percent; no restaurants are being operated on this basis.
The Company estimates that construction costs for the standard free-standing building range from approximately $700,000 to $900,000, with actual costs dependent upon local building requirements and construction conditions, and further based on configuration and parking requirements.
The cost of the land may vary considerably depending upon the quality and size of the site, surrounding population density and other factors. The cost of leasehold improvements and restaurant equipment, including kitchen equipment, furniture, and trade fixtures, is estimated by the Company to range from approximately $250,000 to $400,000. Inventory and miscellaneous items such as paper goods, food, janitorial supplies, and other small wares are estimated initially to cost between approximately $68,000 and $108,000.
There is no typical elapsed time from the signing of a franchise agreement until a restaurant is open for business, although it normally takes 120 days from the receipt of the building permits to construct a new restaurant facility. Most restaurants have opened within 12 months of the date of the signing of the franchise agreement. Franchisees bear all costs associated with the development and construction of their restaurants. Although the Company has established criteria to evaluate prospective franchisees, there can be no assurance that franchisees will have the business abilities or access to financial
resources necessary to open the restaurants or that the franchisees will successfully develop or operate restaurants in their franchise areas in a manner consistent with the Company's concepts and standards.
AREA FRANCHISE AGREEMENTS. Under previous management, the Elmer's franchising operation granted exclusive area franchise agreements, whereby independent entities obtained the exclusive rights to develop Elmer's restaurants within their respective areas. Areas covered by these agreements are Clackamas County, Oregon and Vancouver, Washington. The agreement covering Ada and Canyon Counties, Idaho was not renewed. The area franchise agreements require the area franchisee to share with the Company the initial fees and the franchise royalty fees for each new restaurant in the area. The Company's share of the initial fees ranges from $2,500 to $12,500 per restaurant. There are two restaurants covered by area franchise agreements. Under the area franchise agreements, the Company reserves the right to approve each new restaurant franchisee. The area franchise agreements grant the franchisees the right to use the Company's name in the particular area and preclude the Company from opening Company-owned or franchised restaurants in the areas covered by the agreements. The Company does not intend to enter into similar agreements in the future.
SERVICES TO FRANCHISEES. The Company makes available to its franchisees various programs and materials. The Company provides several manuals to assist franchisees in ongoing operations, including a comprehensive operations manual describing kitchen operations, floor operations, personnel management, job descriptions, and other matters. The Company has prepared a recipe book for franchisees. All system restaurants use the same menu. Prices are adjusted according to local conditions. The Company has developed and maintains a menu cost-control program and a labor cost-control program at each of its Company-owned restaurants and has developed and implemented a training manual and programs for all positions within the restaurant.
The Company provides both formal and informal ongoing training. At least one two-day meeting is scheduled each year. At the meetings, franchisees attend lectures by Company personnel and guest speakers from the industry as well as participate in group workshops discussing such topics as cost control, promotion and food presentation.
The Company provides each franchisee with specifications for menu items. The Company, however, sells no food items or like products to franchisees, except for certain minor supplies such as guest checks and gift certificates. The Company coordinates franchisees' purchases to obtain volume discounts. Franchisees bear all cost involved in the operation of their restaurants.
Periodic on-site inspections and audits are conducted to ensure compliance with Company standards and to aid in franchisees in improving their sales and profitability.
COMPANY-OWNED RESTAURANTS
The Company owns and operates 11 Elmer's restaurants, which it acquired or built from 1984 to 1991, five Ashley's restaurants acquired February 18, 1999, four Richard's Deli and Pub restaurants acquired March 31, 1999, and one additional Ashley's unit built in January 3, 2000. The Company has owned and operated an Elmer's restaurant located in the Delta Park section of Portland, Oregon since January 1984. In August 1986, the Company opened a restaurant in Tacoma, Washington. In January 1987, the Company began operation of a restaurant in Lynnwood, Washington and assumed operation of an Elmer's restaurant in Grants Pass, Oregon that was in bank foreclosure. In fiscal 1988, the Company acquired from former franchisees restaurants in Gresham, Albany, and Medford, Oregon; and Boise, Idaho. In fiscal 1989, the Company purchased the land and buildings for the Boise and Gresham restaurants and also purchased, from a former franchisee, an additional restaurant in Hillsboro, Oregon. In May 1989, the Company acquired a franchised Elmer's restaurant in Palm Springs, California. In July 1991, the Company acquired a franchised Elmer's restaurant in Beaverton, Oregon.
As earlier discussed, five Ashley's restaurants were acquired in a merger with CBW, Inc. on February 18, 1999 (as reported on a Current Report on Form 8-K filed March 5, 1999 and amended on June 14, 1999). One restaurant in Springfield, Oregon was opened in 1994 and the other four were opened in 1995. The Company does not own any of the real estate. The four Richard's Delis and Pubs were acquired in a purchase of the outstanding stock of Grass Valley Ltd., Inc. on March 31, 1999 (as reported on a Current Report on Form 8-K filed April 15, 1999 and amended on June 14, 1999). The Company does not own any of the real estate.
The Company and its franchisees coordinate the purchase of their food, beverages and supplies from Company-approved and other suppliers. Management monitors the quality of the food, beverages and supplies provided to the restaurants. The Company believes that its continued efforts over time have achieved cost savings, improved food quality and consistency and helped decrease volatility of food and supply costs for the restaurants. All essential food and beverage products are
available or, upon short notice, could be made available from alternate qualified suppliers. Therefore, management believes that the loss of any one supplier would not have a material adverse effect on the Company.
EMPLOYEES
As of March 31, 2000, the Company employed 326 persons on a full-time basis, of whom 15 were corporate office personnel and 311 were hourly restaurant personnel. At that date, the Company also employed 206 part-time restaurant personnel. Of the 15 corporate employees, 7 are in upper management positions and the remainder are professional and administrative or office employees. Employees of franchised Elmer's restaurants are not included in these figures. None of the Company's employees are covered by collective bargaining agreements. The Company considers its employee relations to be good. Most employees, other than management and corporate personnel, are paid on an hourly basis. The Company believes that it provides working conditions and wages that compare favorably with those of its competition.
Each Company-operated restaurant employs an average of approximately 45 hourly employees, many of whom work part-time on various shifts. The management staff of a typical restaurant operated by the Company consists of a general manager, one kitchen manager, one assistant manager and two shift managers. The Company has an incentive compensation program for store managers that provides the store managers with a quarterly bonus based upon the achievement of certain defined goals.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of June 10, 2000, the executive officers and other key personnel of the Company were as set forth below.
Name Age Position - ---- --- -------- Bruce Davis 39 President William Service 39 Chief Executive Officer Jerry Scott 46 Vice President, Operations Juanita Nelson 64 Secretary and Controller
The executive officers of the Company are appointed annually for one year and hold office until their successors are appointed.
EXECUTIVE OFFICERS
Bruce Davis has served as President and Chairman of Board of Directors since August 1998. For more than five years prior to joining the Company, Mr. Davis was President of three companies engaged in the restaurant business: Jaspers Food Management, Inc. (1993-1999), CBW, Inc. (1995-1999), and Oregon Food Management, Inc. (1996-present).
William Service has served as Chief Executive Officer and Director since August 1998. For more than five years prior to joining the Company, Mr. Service was the Chief Executive Officer of three companies engaged in the restaurant business: Jaspers Food Management, Inc. (1993-present), CBW, Inc. (1995-1999), and Oregon Food Management, Inc. (1996-present).
KEY PERSONNEL
Jerry Scott has served as Vice President, Operations since August 1998. For more than five years prior to joining the Company, Mr. Scott served as Vice President of Operations for Jaspers Food Management, Inc. He served from November 1994 to November 1995 as Regional Director of Operations of Macheezmo Mouse Restaurants, Inc. and from June 1993 to September 1994 as Director of Operations of Mission Investment Company.
Juanita Nelson has served as Controller since March 1985 and as Secretary since February 1998. For more than five years prior to joining the Company, Mrs. Nelson was the Office Manager of the Red Lion Inns and Thunderbird Motor Inns corporate office.
TRADEMARKS AND SERVICE MARKS
The Company believes its trademarks and service marks have significant value and are important to its business. The Company has registered the trademarks and service marks "Elmer's Pancake & Steak House" and "Elmer's Colonial Pancake &
Steak House" and the Elmer's logo with the U.S. Patent and Trademark Office. The service mark "Elmer's Breakfast. Lunch. Dinner." has also been registered in certain states. It is the Company's policy to pursue registration of its marks whenever possible and to oppose any infringement of its marks.
The Company grants to each of its Elmer's restaurant franchisees a nonexclusive right to use the trademarks and service marks in connection with and at each franchise location.
ADVERTISING AND MARKETING
Word-of-mouth advertising, new restaurant openings, and the on-premises sale of promotional products have historically been the primary methods of restaurant advertising. The Company employs an advertising consultant to assist in projecting the Elmer's restaurant concept to the general public in the Western states, primarily through magazines, newspapers, and radio and television commercials. The Company maintains a common advertising pool with its franchisees to advertise Elmer's restaurants. After production costs for the advertising campaign have been paid out of the common pool, the remaining money is used for advertising in the various local areas of the franchised restaurants. The Company-owned Elmer's restaurants and all but one of the franchised restaurants are required to participate by contributing one percent of monthly gross revenues. At the present time, the Company relies principally on word-of-mouth advertising and catering exposure for advertising of Ashley's and Richard's.
Generally, ongoing consumer research is employed on a limited basis to track attitudes, brand awareness and market share of not only the Company's customers, but also of its major competitors' customers as well. This is vital in creating a better understanding of the Company's short and long term marketing strategies.
COMPETITION
The restaurant industry is highly competitive with respect to price, concept, quality and speed of service, location, attractiveness of facilities, customer recognition, convenience and food quality and variety and is often affected by changes in the tastes and eating habits of the public, including changes in local, regional or national economic conditions affecting consumer spending habits, demographic trends and traffic patterns, increases in the number, type and location of competing restaurants, local and national economic conditions affecting spending habits, and by population and traffic patterns. The Company competes for potential franchisees with restaurant franchisors, company-owned restaurants, chains and others. The Company-owned Elmer's restaurants and the franchised Elmer's restaurants compete for customers with restaurants from national and regional chains as well as local establishments. Some of the Company's competitors are much larger than the Company, having at their disposal greater capital resources that can be devoted to advertising, product development and new restaurants and greater abilities to withstand adverse business trends. Increased competition, discounting and changes in marketing strategies by one or more of these competitors could have an adverse effect on the Company's sales and earnings in the affected markets. In general, there is active competition for management personnel, capital and attractive commercial real estate sites suitable for restaurants.
The Company believes that the principal competitive factors in its favor for attracting both restaurant franchisees and restaurant customers are Elmer's extensive menu, quality of food, service, and reasonable prices.
GOVERNMENT REGULATIONS
The restaurant industry generally, and each Company-operated and franchised restaurant specifically, are subject to numerous federal, state and local government regulations, including those relating to the preparation and sale of food and those relating to building, zoning, health, accommodations for disabled members of the public, sanitation, safety, fire, environmental and land use requirements; and, in some cases, state and local licensing of the sale of alcoholic beverages and the state licensing of gaming. The Company and its franchisees are also subject to federal and state laws governing their relationship with employees, including minimum wage requirements, accommodation for disabilities, overtime, working and safety conditions and citizenship/residency requirements. Federal and state environmental regulations have not had a major effect on the Company's operations to date. The Company has no material contracts with the United States government or any of its agencies.
The Company is subject to a number of state laws regulating franchise operations and sales. For the most part, those laws impose registration and disclosure requirements on the Company in the offer and sale of franchises but, in certain cases, also apply substantive standards to the relationship between the Company and the franchisees, including limitations on noncompetition provisions and on provisions concerning the termination or nonrenewal of a franchise. Some states require that certain materials be registered before franchises can be offered or sold in that state. The Company is also subject to Federal Trade Commission regulations covering disclosure requirements and sales of franchises.
The failure to obtain or retain food licenses or approvals to sell franchises, or an increase in the minimum wage rate, employee benefit costs (including costs associated with mandated health insurance coverage) or other costs associated with employees could adversely affect the Company and its franchisees. A mandated increase in the minimum wage rate was implemented in 1999 and 2000.
ITEM 2.
ITEM 2. PROPERTIES
HEADQUARTERS
The Company's corporate offices are located in Portland, Oregon and consist of an office facility of approximately 5,000 square feet. Lease payments totaled approximately $35,000 for fiscal 2000. The lease expires November 30, 2000.
COMPANY-OWNED RESTAURANTS
COMPANY-OWNED PROPERTIES. The Company owns the real property upon which the following four Company-owned restaurants are located. All of the properties are subject to encumbrances in favor of lending institutions.
Approximate Area Location Site Restaurant - -------- ---- ---------- Tacoma, Washington 1.3 acres 6,660 sq. ft. Lynnwood, Washington 1 acre 6,500 sq. ft. Gresham, Oregon 1 acre 5,670 sq. ft. Boise, Idaho 1.3 acres 5,430 sq. ft.
LEASED PROPERTIES. The Company leases the property upon which the following seven Corporate-owned restaurants are located. Each lease contains specific terms relating to calculation of lease payment, renewal, purchase options, if any, and other matters.
Approximate Area Elmer's Locations Site Restaurant Expiration - ----------------- ---- ---------- ---------- Grants Pass, Oregon 1 acre 6,350 sq. ft. December 31, 2001 Hillsboro, Oregon 1.2 acres 6,350 sq. ft. January 1, 2002 Medford, Oregon 1.25 acres 6,300 sq. ft. May 31, 2003 Albany, Oregon -- 5,460 sq. ft. February 28, 2003 Palm Springs, California 1.3 acres 5,500 sq. ft. April 30, 2007 Portland, Oregon (Delta Park) 1.2 acres 6,350 sq. ft. July 31, 2006 Beaverton, Oregon -- 5,322 sq. ft. August 31, 2006
Ashley's Locations Sq. Ft. Leased Through - ------------------ ------- -------------- Bend, Oregon (North) 1,000 12/31/00 Bend, Oregon (South) 1,400 8/31/03 Redmond, Oregon 1,200 6/31/03 Eugene, Oregon 1,700 9/30/03 Springfield, Oregon (Gateway) 921 1/31/01 Springfield, Oregon (Thurston) 1,200 4/1/02
Richard's Locations Sq. Ft. Leased Through - ------------------- ------- -------------- Aloha, Oregon 1,727 11/30/02 Hillsboro, Oregon (North) 1,092 8/31/01 Hillsboro, Oregon (South) 2,510 10/21/01 Tigard, Oregon 1,743 12/31/02
The Company believes that its facilities are generally in good condition and that they are suitable for their current uses. The Company nevertheless engages periodically in construction and other capital improvement projects designed to expand and improve the efficiency of its facilities.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ SmallCap System, under the symbol "ELMS."
The following table sets forth the high and low reported sales prices of the Common Stock in the NASDAQ SmallCap Market for the fiscal year quarters indicated
Years Ended March 31 ------------------------------------------------------ 2000 1999 ------------------------------------------------------ High Low High Low 1st Quarter 6 5/8 51/4 $4 5/8 $2 3/4 2nd Quarter 81/2 53/4 5 7/8 3 5/8 3rd Quarter 7 3/8 5 1/2 5 1/4 3 15/16 4th Quarter 7 1/8 4 3/4 6 4 1/8
Although the Common Stock is traded on the NASDAQ SmallCap System, there is a relatively low trading volume.
The Company has not paid or declared cash dividends on its Common Stock. In December 1999 the company issued a five-percent stock dividend. The Company intends to retain any future earnings to finance growth and does not presently intend to pay dividends or make distributions in cash other than the payment of cash in lieu of functional shares in connection with stock splits, if any, to the holders of Common Stock. Any future dividends will be determined by the Board of Directors based on the Company's earnings, financial condition, capital requirements, debt covenants of other relevant factors.
As of June 1, 2000, the Company had 191 shareholders of record.
UNREGISTERED SALES OF STOCK
Sales of unregistered Common Stock made by the Company in the last three fiscal years are as follows:
CBW Inc. acquired 705,000 restricted shares of the Common Stock in the Company from Anita Goldberg and Rudolph Mazurosky on August 25, 1998. The consideration paid by CBW, Inc. for the Shares was $4,504,950. The shareholders of CBW, Inc. that acquired the indirect beneficial ownership of the Company's Common Stock as part of this transaction were William W. Service, Bruce N. Davis, Thomas C. Connor, Corydon H. Jensen, Linda E. Bolton (as Trustee under a Restated Trust Agreement dated 6/8/98), Ken Boettcher, Karen Brooks, Gregory Wendt and Donald W. Woolley. The issuance was made pursuant to available exemptions from the registration provisions of the Securities Act of 1933, as amended (specifically, Section 4(2) of the Securities Act) and relevant Blue Sky statutes. The shares are subject to transfer restrictions and may only be transferred subject to compliance with applicable federal and state securities laws.
Effective February 18, 1999, the Company merged with its majority shareholder CBW Inc. ('CBW'), a closely held Oregon corporation, in a transaction in which the Company was the surviving corporation. In consideration for the issuance by the Company of 770,500 new shares of the Company's restricted Common Stock to the CBW shareholders and the assumption of approximately $4 million in debt owed by CBW arising from CBW's acquisition of the controlling block of the Company's
restricted common stock on August 25, 1998, the Company acquired all the stock and assets of CBW including CBW's wholly owned subsidiary, CBW Food Company, LLC (which by operation of merger is now the Company's wholly-owned subsidiary). Each CBW shareholder received 144.4507 shares of the Company's restricted Common Stock for every CBW share owned. The shares of Company stock previously acquired by CBW, a total of 705,000 shares, were concurrently transferred to the Company and were canceled upon receipt thereof. The issuances were made pursuant to available exemptions from the registration provisions of the Securities Act of 1933, as amended (specifically, Section 4(2) of the Securities Act) and relevant Blue Sky statutes. The shares are subject to transfer restrictions and may only be transferred subject to compliance with applicable federal and state securities laws.
Effective March 31, 1999, the Company paid the sum of $110,000 in cash and issued 209,620 shares of Common Stock to the shareholders of GVL, namely Gary Weeks and Richard Buckley, as part of the GVL Acquisition (disclosed in Item 1 under the sub-caption "Recent Developments and Acquisitions"). The issuances were made pursuant to available exemptions from the registration provisions of the Securities Act of 1933, as amended (specifically, Section 4(2) of the Securities Act) and relevant Blue Sky statutes. The shares are subject to transfer restrictions and may only be transferred subject to compliance with applicable federal and state securities laws.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data relating to the Company should be read in conjunction with the Company's consolidated financial statements and the related notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations," other financial information included herein, and Elmer's Restaurants, Inc. consolidated financial statements. The selected financial data set forth below for the Company as of March 31, 1999 and 2000 and for each of the three years in the period ended March 31, 2000 are derived from the audited financial statements included elsewhere herein. The selected financial data set forth below for the Company as of March 31, 1998, 1997 and 1996 and for the years ended March 31, 1997 and 1996 are derived from the financial statements not included elsewhere herein.
On August 25, 1998, CBW, Inc. ("CBW") acquired a controlling interest in the then outstanding stock of Elmer's. On February 18, 1999, CBW merged with and into Elmer's. These transactions have been accounted for as a purchase of Elmer's by CBW and, accordingly a new basis of accounting, based on fair values, was established for the assets and liabilities of Elmer's. Subsequent to the acquisition on August 25, 1998, the Company's financial statements reflect the combined results of operations and financial position of CBW and Elmer's based on the new basis of accounting for Elmer's and the historical cost basis of CBW. The results of operations for the year ended March 31, 1999 also reflect a minority interest in the earnings of the Company representing the separate 46.2% separate public ownership in Elmer's from August 25, 1998 through February 17, 1999. The financial position at March 31, 1999 also reflects the acquisition of GVL on that date. Prior to August 25, 1998, the financial statements of the Company include only the results of operations, financial position and cash flows of CBW, which began operations on June 16, 1995.
NEW ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements are discussed in Note 1 of Notes to Consolidated Financial Statements.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected Historical Financial Data" and the financial statements of the Company and the accompanying notes thereto included elsewhere herein. Certain information discussed
below may constitute forward-looking statements within the meaning of the federal securities laws. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. Forward-looking information is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from projected results. Among those risks, trends and uncertainties are the general economic climate, costs of food and labor, consumer demand, interest rate levels, restrictions imposed by the Company's debt covenants, management control, availability of supplies, the availability of financing and other risks associated with the acquisition, development and operation of new and existing restaurants. This list of risks of uncertainties is not exhaustive.
OVERVIEW
On August 25, 1998, CBW, Inc. purchased 53.8% of Elmer's Restaurants, Inc. then outstanding common stock from its then president and chairman, Ms. Anita Goldberg, and her brother and director, Rudolph Mazurosky. On February 18, 1999, Elmer's Restaurants, Inc. merged with CBW, Inc.
In accordance with generally accepted accounting principles, these transactions have been accounted for as a purchase of Elmer's Restaurants, Inc. by CBW, Inc. and accordingly a new basis of accounting, based on fair values, was established for the assets and liabilities of Elmer's Restaurants, Inc. The consolidated financial statements include the accounts of CBW, Inc. for the years ended March 31, 1998 and 1997 (rather than the previously reported results of Elmer's) and include the accounts of CBW, Inc. for the year ended March 31, 1999 and of Elmer's Restaurants, Inc. for the period August 31, 1998 through March 31, 1999 (with a minority interest in the income through February 17, 1999 representing the 46.2 % separate public ownership), as well as the assets and liabilities of Grass Valley Ltd., Inc., which was acquired as of March 31, 1999.
Because of the significance of these transactions, the Company believes that a discussion and analysis of the Company's results of operations in fiscal year 2000 to pro forma results of operations of prior years, which include results of operations of Elmer's Restaurants, Inc. and Grass Valley Ltd., Inc., provides a more meaningful comparison than the discussion and analysis of prior year actual results of operations which, prior to these transactions, only includes the results of operations of CBW, Inc. and supplements the following highlights of historical results.
HIGHLIGHTS OF HISTORICAL RESULTS
The Company reported record net income of approximately $939,500, or $.56 basic earnings per share for the year ended March 31, 2000, on sales of approximately $22,180,000. After taking into account the pro forma income tax provision as if the Company had been a taxable company for the entire year in 1999, the Company reported net income, net of pro forma income tax provision, of approximately $264,000 or $.30 per share for the year ended March 31, 1999.
During the fourth quarter of the Company's fiscal year ending March 31, 1999, Elmer's Restaurants, Inc. executed an option (which it acquired at the time it merged with CBW, Inc.) to purchase Grass Valley Ltd., Inc. ("GVL"), the operator of four restaurants in the Portland area under the name Richard's Deli and Pub. This acquisition was completed on the last day of the Company's fiscal year and is reflected in the Company's March 31, 1999 balance sheet. There are no operating results from the GVL acquisition reflected in the Company's actual results of operations for the year ended March 31, 1999.
During the year ended March 31, 2000, total assets increased approximately $800,000 to $13.8 million. This increase is due primarily to the increase in current assets as a result of current year earnings. At March 31, 2000, total shareholders' equity increased $939,549 entirely as a result of current year net income.
COMPARISON OF FISCAL YEAR 2000 ACTUAL RESULTS TO HISTORICAL PRO FORMA RESULTS OF OPERATIONS
As discussed above, the Company believes that discussion and analysis of the Company's fiscal year 2000 results of operations compared to prior years on a pro forma basis, which include CBW, Inc. and Grass Valley Ltd., Inc., provides a more meaningful comparison than the discussion and analysis of reported historical actual results of operations. The following discussion and analysis presents the Company's results of operations for the year ended March 31, 2000 with the results of operations for the years ended March 31, 1999 and 1998, as if the merger of CBW, Inc. and the acquisition of Grass Valley Ltd., Inc., had occurred at the beginning of the periods after giving effect to pro forma adjustments, including amortization of goodwill, depreciation, interest expense, and related income tax effects. The pro forma information is provided for illustrative purposes and is not necessarily indicative of the combined results of operations that would have actually occurred for such periods nor does it represent a forecast of results of operations for any future periods.
REVENUES. Revenues for the year ended March 31, 2000 were 4.5% greater than the pro forma comparable period in 1999. Same store sales increased 4.5% and franchise revenues increased of 4.2%. Lottery revenues as a percentage of total revenues rose from 11.1% to 13.5%. Pro forma revenues for the year ended March 31, 1999 were 7.4% greater than the comparable period in 1998 due to an increase in restaurant sales of 7.2% and lottery revenues of 13.5%. The Company anticipates further improvement in same store sales and franchise revenues as it realizes the benefits of its new menu design implemented in winter of 1999 and an ongoing "outsert" menu program implemented system-wide in the summer of 2000.
PRO FORMA RESTAURANT COSTS AND EXPENSES. As a percent of total revenue, food, beverage and supply costs were 28.4% in 2000 compared to pro forma results in 1999 and 1998 of 28.8% and 27.0% respectively. Labor was 31.9% of total revenue in 2000 compared to pro forma results in 1999 and 1998 of 31.5% and 31.9% respectively. Occupancy and depreciation and amortization expenses totaled 8.5% of revenue in 2000 compared to pro forma results in 1999 and 1998 of 9.0% and 9.7% respectively. The decrease in food, beverage and supply cost as a percentage of revenue in 2000 over pro forma 1999 is principally a result of the introduction of the new menu and "outsert" items, an increase in customer check average, and in-store training, promotions and development. The slight increase in labor as a percentage of revenue in 2000 over pro forma 1999 is driven by an increase in the company's average wage rate resulting from significant increases in both Oregon and Washington minimum wage. The Company's reduction in pro forma labor as a percentage of pro forma revenues in 1999 compared to 1998 occurred while Oregon's minimum wage rate increased 9.1% on January 1, 1998 (from $5.50 to $6.00 an hour) and another 8.3% increase on January 1, 1999 (from $6.00 to $6.50 per hour). Washington's minimum wage rate increased 10.7% on January 1, 1999 from $5.15 to $5.70. Washington state minimum wage was increased another 14% on January 1, 2000 (matching Oregon's $6.50 per hour rate). The Company is not aware of any further state minimum wage increases scheduled in states which the Company operates restaurants. The reduction in occupancy and depreciation
and amortization expenses as a percentage of revenues in 2000 over pro forma 1999 is primarily due to the increase in pro forma revenues.
PRO FORMA GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were 22.6% of total revenue in 2000 compared to pro forma results in 1999 of 22.9% and 23.7% in 1998. The continued reduction of general and administrative expenses as a percentage of revenues is the result of increased management attention to overhead cost minimization
PRO FORMA NON OPERATING INCOME (EXPENSES). This primarily reflects net interest expenses that were 2.2% of total revenues in 2000 compared to pro forma results in 1999 and 1998 of 2.5% and 3.1% respectively. The reduction in net interest expense as a percentage of pro forma revenues is the result of scheduled amortization principal payments and the 4.5% increase in revenues.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company had cash and equivalents of approximately $1,640,000 representing an increase of approximately $1,037,000. The increase resulted from cash provided by operations totaling approximately $2,102,000, less cash used in financing activities of approximately $579,000 and less cash used in investing activities of approximately $526,000. Cash used in financing activities was from scheduled payments on notes payable. Cash used in investing activities was the results of additions to property, buildings and equipment. In addition to the regular replacement of depreciating restaurant assets, cash used in investing activities included the addition of a deli-restaurant unit in central Oregon, the addition of a lounge in the Elmer's Restaurant located in Albany, kitchen capacity improvements in several restaurants, and new restaurant signage system-wide.
The Company's primary liquidity needs arise form debt service on indebtedness incurred in connection with the merger of CBW, Inc., operating lease requirements and the funding of capital expenditures. As of March 31, 2000, the Company had outstanding indebtedness for borrowed money of $2.1 million under a term loan facility and $2.3 million real estate loan facilities with Wells Fargo Bank and $1.25 million under a term loan facility with Eagle's View Management, assumed at the time of the merger with CBW, Inc. The Wells Fargo loans have a weighted-average maturity of 9 years, bear interest at an average of 8.25%, require monthly payments of principal and interest, are collateralized by substantially all of the assets owned by Elmer's Restaurants, Inc. and impose certain financial restrictions and covenants, the most restrictive of which, require the Company to maintain a maximum of total liabilities, excluding subordinated debt, to tangible net worth plus subordinated debt of 5.5 to 1.0. The Company was in compliance with this covenant at March 31, 2000. In addition, effective September 30, 1999, and thereafter on a trailing four quarter basis as of the end of each fiscal quarter, the Company will be required to maintain a ratio of cash generation (defined as net income before taxes, interest expense, depreciation and amortization) to total interest expense plus the prior period current maturities of long-term debt of at least 2.25 to 1.0. The Company has available a $250,000 line of credit with Wells Fargo Bank through September 1, 2000, and is collateralized by substantially all assets of the Company excluding real estate. Interest on the unpaid balance accrues at a rate of prime plus 1%. The prime rate at March 31, 2000 was 9.0%. There was no amount outstanding at March 31, 2000. The Eagle's View Management loan has a maturity of approximately five years, an interest rate of 12%, requires monthly payments of interest only, and is collateralized by a second position on substantially all the assets owned by Elmer's Restaurants, Inc. and does not impose financial covenants upon the Company.
The Company's primary source of liquidity during the year was the operation of the restaurants, franchise fees earned from its franchisees, internal cash and borrowings as discussed above.
In the future, the Company's liquidity and capital resources will primarily depend on the operations of Elmer's Restaurants, Inc., CBW, Inc. and Grass Valley Ltd., Inc. which, under the provisions of the Company's loan agreements, would permit, under certain conditions, distributions and dividends to the Company's shareholders and early reduction of the Eagle's View Management indebtedness. Elmer's Restaurants, Inc., CBW, Inc. and Grass Valley Ltd., Inc., like most restaurant businesses, are able to operate with nominal or deficit working capital because sales are for cash and inventory turnover is rapid. Renovation and/or remodeling of existing restaurants is either funded directly from available cash or, in some instances, is financed through outside lenders. Construction or acquisition of new restaurants is generally, although not always, financed by outside lenders. Construction or acquisition of new restaurants is generally, although not always, financed by outside lenders.
The Company believes that it will continue to be able to obtain adequate financing on acceptable terms for new restaurant construction and acquisitions and that cash generated from operations will be adequate to meet its financial needs and to pay operating expenses for the foreseeable future, although no assurances can be given.
EFFECTS OF YEAR 2000
The Company has completed its assessment of internal systems and has concluded that its hardware and software are Year 2000 compliant. The Company has concluded that it will not be necessary to replace its retail point of sale hardware and that, based on information available at this time, the remaining costs to implement the Year 2000 readiness program will not be material.
INFLATION
Certain of the Company's operating costs are subject to inflationary pressures, of which the most significant are food and labor costs. As of March 31, 2000, a significant percentage of the Company's employees were paid wages equal to or based on the state minimum hourly wage rates. Economic growth that would reduce unemployment or make more jobs available in higher paying industries could directly affect the Company's labor costs. The Company believes that inflation has not had a material impact on its results of operations for fiscal 1998, fiscal 1999 or fiscal 2000. Substantial increases in costs could have a significant impact on the Company and the industry. If operating expenses increase, management believes it can recover increased costs by increasing prices to the extent deemed advisable considering competition.
SEASONALITY
The seasonality of restaurant sales due to consumer spending habits can be significantly affected by the timing of advertising, competitive market conditions and weather related events. While restaurant sales for certain quarters can be stronger, or weaker, there is no predominant pattern.
ITEM 7(A) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
CERTAIN STATEMENTS IN THIS FORM 10-K UNDER "ITEM 1. BUSINESS," "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS FORM 10-K CONSTITUTE "FORWARD-LOOKING STATEMENTS" WHICH WE BELIEVE ARE WITHIN THE MEANING OF THE SECURITIES ACT OF 1933, AS AMENDED AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES, AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE, OR ACHIEVEMENTS OF ELMER'S RESTAURANTS, INC. (INDIVIDUALLY AND COLLECTIVELY WITH ITS SUBSIDIARIES, HEREIN THE "COMPANY") TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE, OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING: GENERAL ECONOMIC AND BUSINESS CONDITIONS; THE IMPACT OF COMPETITIVE PRODUCTS AND PRICING; SUCCESS OF OPERATING INITIATIVES; DEVELOPMENT AND OPERATING COSTS; ADVERTISING AND PROMOTIONAL EFFORTS; ADVERSE PUBLICITY; ACCEPTANCE OF NEW PRODUCT OFFERINGS; CONSUMER TRIAL AND FREQUENCY; AVAILABILITY, LOCATIONS, AND TERMS OF SITES FOR RESTAURANT DEVELOPMENT; CHANGES IN BUSINESS STRATEGY OR DEVELOPMENT PLANS; QUALITY OF MANAGEMENT; AVAILABILITY, TERMS AND DEPLOYMENT OF CAPITAL; THE RESULTS OF FINANCING EFFORTS; BUSINESS ABILITIES AND JUDGMENT OF PERSONNEL; AVAILABILITY OF QUALIFIED PERSONNEL; FOOD, LABOR AND EMPLOYEE BENEFIT COSTS; CHANGES IN, OR THE FAILURE TO COMPLY WITH, GOVERNMENT REGULATIONS; IMPACT OF YEAR 2000; CONTINUED NASDAQ LISTING; WEATHER CONDITIONS; CONSTRUCTION SCHEDULES; AND OTHER FACTORS REFERENCED IN THIS FORM 10-K.
The Company holds no financial instruments of any kind for trading purposes. Certain of the Company's outstanding financial instruments are subject to market risks, including interest rate risk. Such financial instruments are not currently subject to foreign currency risk or commodity price risk. The Company's major market risk exposure is potential loss arising from changing interest rates and the impact of such changes on its long-term debt. Of the Company's long-term debt outstanding at March 31, 2000, $1.1 million principal amount was accruing interest at a variable rate of LIBOR plus 2.25%. A rise in prevailing interest rates could have adverse effects on the Company's financial condition and results of operations.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this Form 10-K. See Item 14.
ITEM 9.
ITEM 9. CHANGES IN THE DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company is included under the caption "Election of Directors" in the Company's definitive proxy statement (the "2000 Proxy Statement") for its 2000 Annual Meeting of Shareholders filed or to be filed not later than 120 days after the end of the fiscal year covered by this Report and is incorporated herein by reference. Information with respect to executive officers of the Company is included under Item 4(a) of Part I of this Report. Information with respect to compliance with Section 16(a) of the Securities Exchange Act is included under "Section 16(a) Beneficial Ownership Reporting Compliance" in the 1999 Proxy Statement.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is included under the caption "Executive Compensation" in the 2000 Proxy Statement is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners and management is included under the caption "Voting Securities and Principal Shareholders" and "Election of Directors" in the 2000 Proxy Statement incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions with management is included under the caption "Certain Transactions" in the 2000 Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
The Financial Statements listed in the accompanying index on page are filed as part of this Report.
(a)(1) Financial Statements and Schedules Page in this Report -----------
Report of Independent Accountants.........................................F-1
Consolidated Balance Sheets at March 31, 2000 and 1999....................F-2
Consolidated Statements of Income For the years ended March 31, 2000, 1999 and 1998.............................................................F-3
Consolidated Statements of Changes in Shareholders' Equity for the years ended March 31, 2000, 1999 and 1998.................................F-4
Consolidated Statements of Cash Flows For the years ended March 31, 2000, 1999 and 1998.......................................................F-5
Notes to Consolidated Financial Statements................................F-6
No other schedules are included because the required information is inapplicable or is presented in the financial statements or related notes thereto.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Elmer's Restaurants, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Elmer's Restaurants, Inc.
By: WILLIAM W. SERVICE ---------------------------- William W. Service Chief Executive Officer Dated: June 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of Elmer's Restaurants, Inc., in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ Bruce N. Davis Chairman of the Board & President June 29, 2000 - ---------------------- Bruce N. Davis
/s/ William W. Service Chief Executive Officer & Director June 29, 2000 - ---------------------- (Principal Executive & Financial Officer) William W. Service
/s/ Juanita Nelson Secretary & Controller June 29, 2000 - ---------------------- (Principal Accounting Officer) Juanita Nelson
/s/ Thomas C. Connor Director June 29, 2000 - ---------------------- Thomas C. Connor
/s/ Paul Welch Director June 29, 2000 - ---------------------- Paul Welch
/s/ Corydon H. Jensen Director June 29, 2000 - ---------------------- Corydon H. Jensen
/s/ Richard Williams Director June 29, 2000 - ---------------------- Richard Williams
/s/ Donald Woolley Director June 29, 2000 - ---------------------- Donald Woolley
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 AND 2000 AND FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders Elmer's Restaurants, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in shareholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Elmer's Restaurants, Inc. and Subsidiaries (the Company) at March 31, 1999 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2000 in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Portland, Oregon May 23, 2000
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 1999 AND 2000
The accompanying notes are an integral part of the consolidated financial statements.
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000
The accompanying notes are an integral part of the consolidated financial statements.
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000
The accompanying notes are an integral part of the consolidated financial statements.
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000
The accompanying notes are an integral part of the consolidated financial statements.
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY AND BASIS OF PRESENTATION Elmer's Restaurants, Inc. and Subsidiaries (the Company), an Oregon corporation, owns and operates eleven Elmer's Restaurants, six Ashley's Deli restaurants, four Richard's Deli and Pub restaurants and sells franchises that give franchisees the right to operate under the name Elmer's Breakfast. Lunch. Dinner. for a specific restaurant or region. Franchises and Company owned stores are located throughout the western United States.
On August 25, 1998, CBW, Inc. (CBW) acquired a controlling interest (705,000 shares representing 53.8% of the outstanding stock) of the then outstanding common stock of Elmer's Restaurants, Inc. (Elmer's) for $4,500,000. On February 18, 1999, CBW merged with and into Elmer's. Pursuant to the terms of the merger, Elmer's Restaurants, Inc. and Subsidiaries was the surviving corporation. The merger was consummated by Elmer's issuance of 770,500 shares of Elmer's restricted common stock to CBW shareholders in exchange for the 705,000 shares previously acquired. In connection with the merger, Elmer's assumed approximately $4 million in debt owed by CBW arising from CBW's acquisition of the controlling block of stock on August 25, 1998. These transactions were accounted for as a purchase of Elmer's by CBW, and accordingly a new basis of accounting, based on fair values, was established for the assets and liabilities of Elmer's. As a result of these transactions, the financial statements for the years ended March 31, 1997 and 1998 include the results of operations of CBW rather than the previously reported results of Elmer's. Elmer's entered into a new financing agreement whereby it borrowed funds to refinance existing debt and debt of CBW totaling approximately $1,750,000. Elmer's also used existing cash to reduce debt by approximately $1,000,000. Each CBW shareholder received 144.4507 shares of Elmer's restricted common stock for every CBW share owned.
On March 31, 1999, the Company acquired Grass Valley Ltd., Inc. (GVL), which is the owner and operator of four delicatessen-style restaurants operating under the name of Richard's Deli and Pub located in Oregon (see Note 8).
The consolidated financial statements include the accounts of CBW for the years ended March 31, 1998, 1999 and 2000, Elmer's from August 31, 1998 (the results of operations of Elmer's from August 25, 1998 to August 31, 1998 is not material to the results of operations of the Company), and Grass Valley Ltd., Inc., Elmer's wholly-owned subsidiary, from March 31, 1999. All material intercompany accounts and transactions have been eliminated. The minority interest included in the 1999 financial statements represents the 46.2% separate public ownership in Elmer's from August 31, 1998 through February 17, 1999.
USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of financial instruments including cash and cash equivalents and accounts receivable approximated fair value as of March 31, 1999 and 2000 because of the relatively short maturity of these instruments. The carrying value of notes payable approximated fair value as of March 31, 1999 and 2000 based upon interest rates and terms available for the same or similar loans.
CASH AND CASH EQUIVALENTS The Company considers all short-term, highly-liquid investments with a maturity of three months or less when purchased to be cash equivalents.
The Company invests its excess cash in interest bearing deposits with major banks and in U.S. Treasury securities. These investments mature within 90 days and are therefore subject to minimal risk. Management routinely reviews these investments in order to limit the amount of credit exposure to any one financial institution.
INVENTORIES Inventories of food, beverages and restaurant supplies are stated at the lower of first-in, first-out cost or market.
PROPERTY, BUILDINGS AND EQUIPMENT Property, buildings and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Lives used for calculating depreciation and amortization rates for the principal asset classifications are as follows: buildings - 35 years; automobiles, furniture, fixtures and equipment - 3 to 7 years; leasehold improvements - life of lease or applicable shorter period. Maintenance and repairs are expensed as incurred; renewals and improvements are capitalized. Upon disposal of assets subject to depreciation, the related costs and accumulated depreciation are removed and resulting gains and losses are reflected in the consolidated statements of operations.
INTANGIBLE ASSETS The cost over fair value of net tangible assets of acquired companies (goodwill) and trademarks are amortized on a straight-line basis over 30 years.
RECOVERABILITY OF LONG-LIVED ASSETS Management of the Company reviews the carrying value of capitalized tangible and intangible assets on a regular basis to reach a judgement concerning possible permanent impairment of value. These reviews consider, among other factors: (1) the net realizable value of each major classification of assets, (2) the cash flow associated with the assets, and (3) significant changes in the extent or manner in which major assets are used. Management believes the carrying value of assets is less than the estimated fair value.
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FRANCHISE OPERATIONS Initial license fees from individual and area franchise sales are recognized as revenue when substantially all of the terms and conditions of the franchise agreement are met. Elmer's has sold area franchises to several restaurant operators in various western states. The terms of the agreements entered into with each franchisee protect the territory for the operator and provide standard building blueprints, recipes, formulas and methods of food preparation. The term of the franchise is 25 years. Continuing franchise fees (based on a percentage of sales) are recognized as income when earned.
INCOME TAXES CBW was treated for federal income tax purposes as an S corporation under Subchapter S of the Internal Revenue Code of 1986, as amended, from May 22, 1997 (and was a limited liability company from organization to that date) and was treated as an S corporation for state income tax purposes under comparable state tax laws. As a result, CBW's earnings through February 17, 1999 have been taxed directly to CBW's shareholders, at their individual federal and state income tax rates, rather than to the Company. The earnings of Elmer's from August 25,1998 through March 31, 1999, and the earnings for the year ended March 31, 2000, are taxed as a taxable corporation.
Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized. Income tax expense is the tax payable for the year and the change during the year in net deferred income tax assets and liabilities.
NET INCOME (LOSS) PER SHARE Basic earnings per share (EPS) is computed using the weighted-average number of shares of common stock outstanding for the period. Diluted EPS is computed using the weighted-average number of shares of common stock and dilutive common stock equivalents outstanding during the period, if any. Common equivalent shares from stock options, if any, are excluded from the computation when their effect is antidilutive.
All references to share and per share information have been adjusted to give effect to the 770,500 shares of restricted common stock issued by Elmer's in connection with the merger of CBW on February 18, 1999 with and into Elmer's as described above, and the 5% stock dividend declared at November 30, 1999.
RECLASSIFICATION Certain amounts in the 1999 financial statements have been reclassified to conform to the 2000 presentation. Net income and cash flows were not affected by the reclassifications.
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS The Company adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME, which establishes requirements for disclosure of comprehensive income. The objective of SFAS No. 130 is to report a measure of all changes in equity that result from transactions and economic events other than transactions with owners. Comprehensive income is the total of net income and all other non-owner changes in equity. Comprehensive income did not differ significantly from reported net income in the periods presented.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED) The Company has also adopted FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. This statement changes the way public companies report information about segments of their business in their annual financial statements and requires selected segment information in quarterly reports issued to shareholders. It also requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues, and its major customers.
In June 1998, the FASB SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measure at its fair value. SFAS No. 133 also requires that changes in the derivative instrument's fair value be recognized currently in results of operations unless specific hedge accounting criteria are met. SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. Elmer's management has studied the implications of SFAS 133 and based on the initial evaluation, expects the adoption to have no impact on the Company's financial condition or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) released Staff Accounting bulletin (SAB) 101 REVENUE RECOGNITION IN FINANCIAL STATEMENTS. SAB 101 establishes guidelines in applying generally accepted accounting principles to the recognition of revenue in financial statements based on the following four criteria; persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller's price to the buyer is fixed or determinable, and collectibility is reasonably assured. SAB 101, as amended by SAB 101A, is effective no later than the first fiscal quarter of the fiscal year beginning after December 15, 1999, except that registrants with fiscal years that begin between December 16, 1999 and March 15, 2000, may report any resulting change in accounting principle no later than their second fiscal quarter of the fiscal year beginning after December 15, 1999. Elmer's management is in the process of studying the implications of SAB 101 and has not yet determined the impact to the financial statements.
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNAUDITED PRO FORMA FINANCIAL INFORMATION As more fully described in Note 3, CBW has been taxed for federal and state income tax purposes as a limited liability company or as an S corporation for certain periods in the three years ended March 31, 2000. The unaudited pro forma information reflects provisions for income taxes that would have been recorded had CBW been a taxable corporation for all periods presented.
2. PROPERTY, BUILDINGS AND EQUIPMENT
3. INCOME TAXES
CBW was treated for federal income tax purposes as an S corporation under Subchapter S of the Internal Revenue Code of 1986, as amended, since May 22, 1997 (and was a limited liability company from organization to that date) and was treated as an S corporation for state income tax purposes under comparable state tax laws. As a result, CBW's earnings through February 17, 1999 have been taxed directly to CBW shareholders, at their individual federal and state income tax rates, rather than to the Company.
The earnings of Elmer's from August 31, 1998 through February 17, 1999 are taxed as a taxable corporation. Effective with the merger of CBW with and into Elmer's (see Note 8), on February 18, 1999 (Termination date) CBW's S corporation status terminated. Subsequent to the Termination date, the Company is subject to federal and state income taxes on its earnings.
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. INCOME TAXES (CONTINUED)
The provision for income taxes has been computed in accordance with SFAS No. 109 as if the Company had been a taxable corporation for all periods presented (information with respect to the years ended March 31, 1998 and 1999 is unaudited pro forma information):
A reconciliation of the federal income tax rate to the Company's effective income tax rate is as follows (information with respect to the years ended March 31, 1998 and 1999 is unaudited pro forma information):
The income tax provision of $185,000 for the year ended March 31, 1999 relates to the results of operations of Elmer's from August 31, 1998 through February 17, 1999 and the results of operations of the Company from February 18, 1999 through March 31, 1999.
Deferred income taxes are the result of provisions in the tax laws that either require or permit certain items of income or expense to be reported for income tax purposes in different periods than they are reported for financial reporting. As of March 31, 1999 and 2000, the deferred tax liability of $773,000 and $793,000 primarily represents the difference between the book basis of property, buildings and equipment and the related tax basis of approximately $2,200,000 and $2,300,000, respectively.
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. NOTES PAYABLE
Certain notes payable contain restrictive covenants pertaining to financial ratios and minimum cash flow coverage. The most restrictive covenants require the Company to maintain a maximum of total liabilities, excluding subordinated debt, to tangible net worth plus subordinated debt of 5.5 to 1.0, and a ratio of cash generation (defined as net income before taxes, interest expense, depreciation and amortization) to total interest expense plus the prior period current maturities of long-term debt of at least 2.25 to 1.0. The Company was in compliance with these covenants at March 31, 2000.
The Company has available a $250,000 line of credit with Wells Fargo Bank, which matures September 1, 2000, and is collateralized by substantially all assets of the Company excluding real estate. Interest on the unpaid balance accrues at a rate of prime plus 1%. The prime rate at March 31, 2000 was 9.0%. There were no amounts drawn on the line at March 31, 2000.
Future maturities of notes payable for years ending March 31 are: 2001 - $572,399; 2002 - $577,066; 2003 - $574,538; 2004 - $1,836,603; 2005 - $300,200; and thereafter - $1,835,723.
All interest costs incurred during the years ended March 31, 1998, 1999 and 2000 have been expensed during the respective periods.
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. LEASES
Minimum fiscal year rental commitments for the years ending March 31 under operating leases for property, buildings and equipment with noncancelable terms of more than one year are: 2001 - $697,845; 2002 - $631,380; 2003 - $544,920; 2004 - $389,602; 2005 - $366,572; and thereafter - $508,596.
The leases generally provide for additional rentals based upon a specified percentage of sales and require the Company to pay certain other costs. Rental expense on operating leases amounted to approximately $135,000, $848,000 and $883,751for the years ended March 31, 1998, 1999 and 2000, respectively.
6. RELATED PARTY TRANSACTIONS
Amounts outstanding with Jaspers Food Management, Inc. (JFMI) are as follows:
Accounts payable and other liabilities due to the affiliate is due on demand and accrue interest at an annual rate of 10.5% based on the outstanding balance over 28 days.
Transactions applicable to the affiliate were approximately as follows:
Under the terms of a management services agreement, the affiliate provides substantially all store labor, management, accounting, human resources, training and other administrative services related to the operation of the six Ashley's Deli and four Richard's Deli and Pub restaurants as disclosed in labor and related expenses above.
Included in accounts receivable at March 31, 1999 is a note receivable from a franchisee and director of the Company in the amount of $97,857. The note was collected during the year ended March 31, 2000.
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. RESTAURANT AND FRANCHISE OPERATIONS
Summary results of operations and other selected financial information from restaurant operations and franchise operations are presented after elimination of intercompany transactions:
The number of Company owned stores and operating franchises at March 31 is as follows:
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. ACQUISITIONS AND MERGER
CBW ACQUISITION OF ELMER'S On August 25, 1998, CBW acquired a controlling interest (705,000 shares representing 53.8% of the outstanding stock) in Elmer's for $4,500,000. The total cost of the acquisition of $4,612,013, including $112,013 of related acquisition costs, was provided by approximately $4,000,000 of debt financing and the balance in CBW's own cash. The purchase method of accounting was used to record this transaction and a new basis of accounting was established for the assets and liabilities of Elmer's to the extent of the change in ownership based on fair values as follows:
Current assets $1,190,536 Property, buildings and equipment 3,790,027 Intangible assets 2,171,048 Other assets 43,587 Liabilities assumed (2,163,185) Deferred income taxes (420,000) ----------- $4,612,013 ===========
CBW MERGER WITH ELMER'S On February 18, 1999, CBW merged with and into Elmer's, in a transaction in which Elmer's was the surviving corporation. In consideration for the issuance by Elmer's of 770,500 shares of Elmer's restricted common stock to CBW shareholders and the assumption of approximately $4 million in debt owed by CBW arising from CBW's acquisition of the controlling block of Elmer's common stock on August 25, 1998, Elmer's acquired all the stock and assets of CBW including CBW's wholly-owned subsidiary, CBW Food Company, LLC.
Each CBW shareholder, received 144.4507 shares of Elmer's restricted common stock for every CBW share owned. The shares of Elmer's stock previously acquired by CBW, a total of 705,000 shares, were concurrently transferred to Elmer's and were canceled upon receipt thereof. In further consideration for the issuance and to secure various indemnification obligations of CBW shareholders under the merger agreement, Elmer's and the individual CBW shareholders executed an escrow agreement for a period of one year from the date of closing of the merger transaction.
Elmer's entered into a new financing agreement in connection with the merger whereby it borrowed funds to refinance existing debt and debt of CBW totaling approximately $1,750,000. Elmer's also used existing cash to reduce debt by approximately $1,000,000.
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. ACQUISITIONS AND MERGER (CONTINUED)
The merger transaction was accounted for as a purchase of the remaining 46.2% separate public ownership of Elmer's by CBW. A new basis of accounting was established for the assets and liabilities of Elmer's, based on fair values, upon execution of the merger agreement. The total estimated fair value of assets acquired in the merger transaction is comprised of the following:
The purchase price has been allocated to the assets to be acquired and obligations to be assumed, based on the estimate of the 46.2% proportionate fair values of the assets and liabilities, as follows:
ACQUISITION OF GRASS VALLEY LTD., INC. (DBA RICHARD'S DELI AND PUB) Effective March 31, 1999, Elmer's executed a stock exchange agreement with Grass Valley Ltd., Inc. (GVL), a closely held Oregon corporation, in a transaction in which Elmer's acquired 100% of the outstanding stock of GVL in consideration for the payment by Elmer's of $110,000 in cash and the issuance of 209,620 restricted shares of Elmer's common stock to the GVL shareholders. GVL is now a wholly-owned and operating subsidiary of the Company.
The total cost of the merger transaction is comprised of the following:
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. ACQUISITIONS AND MERGER (CONTINUED)
ACQUISITION OF GRASS VALLEY LTD., INC. (DBA RICHARD'S DELI AND PUB) (CONTINUED) The excess of the estimated fair value of the assets acquired ($1,383,661) over the historical cost ($223,553) was allocated to goodwill ($1,160,108), as the historical costs of all tangible assets was assumed to be equal to their fair value.
SUMMARY The following table represents the unaudited pro forma results of operations for the years ended March 31, 1998 and 1999 as if the acquisition of 53.8% of the outstanding common stock of Elmer's, the merger of CBW with and into Elmer's and the acquisition of GVL had occurred at the beginning of the respective periods. These pro forma results have been prepared for comparative purposes only and are not necessarily indicative of what would have occurred had the acquisitions been made at the beginning of the respective periods or of results, which may occur in the future.
9. CONTINGENCIES
From time to time, the Company is involved in litigation relating to claims arising in the normal course of its business. The Company maintains insurance coverage against potential claims in amounts, which it believes to be adequate. Management believes that it is not presently a party to any litigation, the outcome of which would have a material adverse effect on the Company's business or operations.
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. STOCK OPTIONS
The Board of Directors adopted a stock option plan (Plan), subject to shareholder approval, which provides for the award of incentive stock options to key employees and the award of nonqualified stock options to employees and non-employee Directors. Under the terms of the Plan, the option price is determined as the fair value of the Company's common stock at the time the option is granted. Under the Plan, 320,000 shares of common stock are authorized for issuance. Options are exercisable upon vesting. Options generally vest 20% annually and expire 10 - 15 years after the date of grant.
A summary status of the Company's stock option as of March 31, 1999 and 2000 and changes during the year ended on those dates is presented below:
The following table summarizes information about stock options outstanding as of March 31, 2000:
There were 8,500 shares of common stock reserved for the grant of stock options under the Plan at March 31, 2000.
The FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which defines a fair value based method of accounting for employee stock options and similar equity instruments and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost of those plans using the method of accounting prescribed by
ELMER'S RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. STOCK OPTIONS (CONTINUED)
APB 25. Entities electing to continue to use the accounting treatment in APB 25 must make pro forma disclosures of net income and, if presented, earnings per share, as if the fair value based method of accounting defined in SFAS No. 123 had been adopted.
The Company complies with the disclosure-only provisions of SFAS No. 123 and thus no compensation cost has been recognized for the Plan. Had compensation cost for the stock-based compensation plan been determined based on the fair value of options at the date of grant consistent with the provisions fo SFAS No. 123, the Company's pro forma net income and pro forma earnings per share would have been as follows:
The pro forma effect on net income for 1999 and 2000 is not representative of the pro forma effect in future years because compensation expense related to grants made in prior years is not considered. For purposes of the above pro forma information, the fair value of each option grant was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts and additional awards are anticipated in future years.