Elmer's executed the asset purchase agreement on Dec. 14, acquiring substantially all the assets of six Puget Sound locations in consideration for $975,000 in cash and issuance of 130,000 shares of the Company's restricted common stock, currently valued at $4.87 a share. Elmer's financed is acquisition by issuing $1.15 million in convertible debt. The seven-year notes bear interest at 10%, and are convertible to common stock after six months at $6.50 per share. Elmer's may call the notes after three years at premiums of between 1% and 5%, depending on the remaining term. Interest-only payments are made to the holder and $13,690 per month is paid into a sinking fund. The notes are unsecured and subordinate to the Company's senior secured debt held by Wells Fargo Bank.

The restaurants were purchased from four related parties, Mitzel's American Kitchens I, Inc. a Washington corporation; Mitzel's American Kitchens II, Inc. a Washington corporation; MC Poulsbo - Joint Venture, a Washington partnership; and MC Oak Harbor- Joint Venture, a Washington partnership. In connection with the acquisition, Elmer's agreed to loan $200,000 to Mitzel's American Kitchen I Inc. and Mitzel's American Kitchen II Inc. The loan bears interest at 10% per annum, principal and interest payments made monthly on a five year amortization schedule with the balance due in full March 14, 2003. The note is secured by Elmer's stock valued at $4.00 per share.

Additionally, Elmer's has signed a two-year Administrative Services Agreement with Mitzel's American Kitchen I Inc. and Mitzel's American Kitchen II Inc., Hospitality Services Renton LLC and Mitzel's Farmhouse Inn LLC. Elmer's will provide certain accounting and management functions for five restaurants still owned by the sellers for a fixed fee of $28,000 per month. Elmer's says it assumes no financial responsibility for those restaurants, and expects the fee to equal or exceed the costs of providing the required services.

Mitzel's American Kitchen's is a 15-year-old family-style restaurant chain with guest demographics and check averages similar to Elmer's. The six Mitzel's restaurants being acquired are located in free standing, leased locations averaging 6,000 sf. The six purchased locations all are in Western Washington, in the cities of Everett, Kent, Fife, Oak Harbor, Poulsbo and Tacoma. The restaurants will operate as a division of Elmer's, and founder John Mitzel has signed a two-year employment agreement to continue to direct the Mitzel's operations. Mitzel also will continue to serve as president of Mercer Restaurant Services, which operates five other restaurants that are not included in this asset purchase.

A seventh Mitzel's Restaurant location in Mt. Vernon, Washington is being sold to another restaurant chain and will no longer operate under the Mitzel's name. As well, on Dec. 18, Elmer's elected to close its Tacoma Mitzel's, which is located adjacent to the Tacoma Elmer's, which was a direct competitor. A lease termination agreement was entered into at closing with Mitzel's American Kitchen II Inc. and the Tacoma landlord.

Elmer's owns and operates 11 Elmer's restaurants and franchises 19 Elmer's restaurants in Washington, Oregon, California, Alaska, Idaho, and Montana. The Company also owns and operates ten delicatessen-style restaurants in Oregon. In describing the proposed transaction, Elmer's president Bruce Davis said, "This acquisition will increase our annual revenue base by nearly 40% and is expected to enhance shareholder value."