<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
For Quarter Ended August 4, 1996 Commission file number 0-11514
------------------- ---------------
Max & Erma's Restaurants, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware No. 31-1041397
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4849 Evanswood Drive, Columbus, Ohio 43229
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 431-5800
--------------------------
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to the filing
requirements for at least the past 90 days.
YES X NO
------ -------
As of the close of the period covered by this report, the registrant had
outstanding 4,141,865 common shares.
1
<PAGE> 2
PART I - FINANCIAL INFORMATION / ITEM 1 - FINANCIAL STATEMENTS
MAX & ERMA'S RESTAURANTS, INC. - BALANCE SHEETS (UNAUDITED)
ASSETS
------
<TABLE>
<CAPTION>
August 4, October 29,
Current Assets: 1996 1995
----------- -----------
<S> <C> <C>
Cash $ 831,942 $ 1,102,060
Receivables 254,212 965,673
Inventories 665,677 539,025
Supplies 173,429 148,322
Prepaid Expenses 731,026 530,658
----------- -----------
Total Current Assets 2,656,286 3,285,738
Property - At Cost: 65,644,571 57,563,647
Less Accumulated Depreciation and Amortization 16,879,885 15,061,971
----------- -----------
Property - Net 48,764,686 42,501,676
Other Assets:
Goodwill - Net 297,394 336,077
Other Assets - Net 2,718,648 2,487,017
----------- -----------
Total Other Assets 3,016,042 2,823,094
----------- -----------
Total $54,437,014 $48,610,508
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current Maturities of Long-Term Obligations $ 906,533 $ 727,719
Accounts Payable 2,428,454 3,534,336
Accrued Liabilities 3,314,231 2,569,718
----------- -----------
Total Current Liabilities 6,649,218 6,831,773
Long-Term Obligations - Less Current Maturities 30,358,413 26,036,831
Minority Interests in Affiliated Partnerships 74,563 141,935
Stockholders' Equity:
Preferred Stock - $.10 Par Value;
Authorized 500,000 Shares - none outstanding
Common Stock - $.10 Par Value;
Authorized 10,000,000 Shares,
Issued and Outstanding 4,141,865 Shares
At 8/4/96 and 4,117,885 Shares at 10/29/95 414,187 411,789
Additional Capital 11,428,161 11,296,383
Retained Earnings 5,512,472 3,891,797
----------- -----------
Total Stockholders' Equity 17,354,820 15,599,969
----------- -----------
Total $54,437,014 $48,610,508
=========== ===========
<FN>
See notes to financial statements
</TABLE>
2
<PAGE> 3
MAX & ERMA'S RESTAURANTS, INC.
STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Twelve Weeks Ended Forty Weeks Ended
------------------ -----------------
August 4, August 6, August 4, August 6,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES: $19,415,445 $15,180,790 $60,757,194 $48,841,623
COSTS AND EXPENSES:
Costs of Goods Sold 5,161,837 3,864,388 16,122,115 12,676,782
Payroll and Benefits 5,929,055 4,601,477 18,655,344 14,654,709
Other Operating Expenses 5,728,432 4,549,696 18,069,046 14,477,724
Administrative Expenses 1,143,687 1,082,730 3,918,260 3,608,464
----------- ----------- ----------- -----------
Total Operating Expenses 17,963,011 14,098,291 56,764,765 45,417,679
----------- ----------- ----------- -----------
OPERATING INCOME 1,452,434 1,082,499 3,992,429 3,423,944
Interest Expense 516,618 287,763 1,569,365 915,069
Minority Interest in Income
of Affiliated Partnerships 10,255 17,692 67,389 125,788
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 925,561 777,044 2,355,675 2,383,087
INCOME TAXES 300,000 235,000 735,000 739,000
----------- ----------- ----------- -----------
NET INCOME $ 625,561 $ 542,044 $ 1,620,675 $ 1,644,087
=========== =========== =========== ===========
NET INCOME
PER COMMON SHARE $ 0.15 $ 0.13 $ 0.38 $ 0.39
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 4,279,862 4,265,279 4,256,911 4,266,265
=========== =========== =========== ===========
<FN>
See notes to financial statements
</TABLE>
3
<PAGE> 4
MAX & ERMA'S RESTAURANTS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Forty Weeks Ended
-----------------
August 4, August 6,
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,620,675 $ 1,644,087
Depreciation and amortization 4,309,548 3,125,128
Minority interest in income of Affiliated Partnerships 67,389 125,789
Changes in other assets and liabilities 659,254 (393,728)
------------ ------------
Net cash provided by operating activities 6,656,866 4,501,276
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (9,702,849) (10,534,311)
Construction cost reimbursement 275,000
Decrease (increase) in other assets (220,825) (175,384)
Proceeds from sale of assets 215,400 4,424
------------ ------------
Net cash used by investing activities (9,708,274) (10,430,271)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations (27,557,409) (12,179,406)
Proceeds from long-term obligations 30,435,970 18,337,565
Proceeds from sale of common stock 37,490 53,921
Cash paid for Purchase of Common stock (480,049)
Distributions to minority interests in Affiliated Partnership (134,761) (154,012)
Cash paid in lieu of fractional shares upon stock dividend (2,228)
------------ ------------
Net cash provided by financing activities 2,781,290 5,575,791
------------ ------------
NET DECREASE IN CASH & EQUIVALENTS (270,118) (353,204)
CASH & EQUIVALENTS BEGINNING OF THE PERIOD 1,102,060 993,349
------------ ------------
CASH & EQUIVALENTS AT END OF PERIOD $ 831,942 $ 640,145
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 1,463,356 $ 794,638
Income taxes $ 676,431 $ 812,700
Non-cash activities:
Property additions financed by capital leases $ 1,442,865 $ 1,107,256
Property additions financed by accounts payable $ 837,078 $ 1,313,981
Tax benefit of stock exercised & sold within one year $ 13,399 $ 72,640
<FN>
See notes to financial statements
</TABLE>
4
<PAGE> 5
MAX & ERMA'S RESTAURANTS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Presentation
------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and include
all of the information and disclosures required by generally accepted
accounting principles for interim reporting, which are less than those
required for annual reporting. In the opinion of management, all
adjustments, consisting of only normal recurring accruals, considered
necessary for a fair presentation have been included.
The Company's year consists of one sixteen-week and three twelve-week
quarters.
2. Stock Dividend
--------------
Earnings per share and weighted average common and common equivalent
shares outstanding have been adjusted for the effect of a 10% stock
dividend payable April 21, 1995, to stockholders of record March 31,
1995.
3. Mortgage Loan
-------------
During the second quarter of 1996 the Company completed a $6.0 million
fifteen-year mortgage loan secured by four restaurant properties at a
fixed interest rate of 8.3%. The entire proceeds were used to reduce a
portion of the outstanding balance under the Company's revolving credit
line.
5
<PAGE> 6
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
REVENUES
- --------
Revenues for the third quarter of 1996 rose $4,235,000 or 28% from the
third quarter of 1995. The increase was a result of i) the opening of three
restaurants during the fourth quarter of 1995, ii) the opening of five
restaurants during the first three quarters of 1996, and iii) higher average
weekly sales at the eight restaurants opened since the third quarter of 1995. At
August 4, 1996 the Company operated 38 restaurants as compared to 30 at August
6, 1995. During the third quarter of 1996, the eight newest restaurants
generated average weekly sales of approximately $52,500 versus $40,000 per week
for the 30 older restaurants. The increase in revenues from new restaurants was
offset by a 1.8% or $236,000 decline in same-store sales from $12,784,000 for
the third quarter of 1995 to $12,548,000 for the third quarter of 1996 at
restaurants opened at least 18 months.
Year-to-date revenues increased $11,916,000 or 24% from 1995 to 1996.
The increase was a result of the openings referred to above plus four
restaurants opened during the first half of 1995. Revenue from new restaurants
was offset by a 2.6% or $1,108,000 decline in same-store sales from $41,896,000
for the first three quarters of 1995 to $40,788,000 for the comparable 1996
period at restaurants opened at least 18 months.
Management believes that approximately $300,000 of the year-to-date
decline in same-store sales was a result of record snowfall and harsh winter
weather during the first quarter of 1996. Exclusive of sales lost due to
weather, same-store sales year-to-date fell approximately 1.9%. The non-weather
related decline in same-store sales is primarily due to the intense level of
competition currently existing in the casual dining segment of the restaurant
industry and to some extent the opening of new Company-owned restaurants in
areas adjacent to its older restaurants.
To improve same-store sales the Company introduced a complete beverage
merchandising program and introduced a new menu which offers a selection of
higher value entrees. The entrees are designed to offer more trade-up options
for dinner customers and thereby increase the dinner check average. Results of
both programs have been positive. During the third quarter of 1996, total
beverage sales grew 28.2% over the third quarter of 1995 as compared to a 27.8%
increase in total food sales for the same periods. As a result, beverage sales
as a percentage of total sales, has increased slightly. The new menu was
introduced chain-wide just before the start of the third quarter of 1996. During
the quarter the average dinner check increased to $9.62. For 1995 the average
per person dinner check was $9.27. While both these programs have thus far been
successful, they have not offset declines in customer counts caused by the
intense level of competition and over-building currently existing in the casual
dining segment of the industry.
6
<PAGE> 7
COSTS AND EXPENSES
- ------------------
Cost of goods sold, as a percentage of revenues, increased from 25.5%
for the third quarter of 1995 to 26.6% for the third quarter of 1996.
Year-to-date cost of goods sold, as a percentage of revenues, increased from
26.0% in 1995 to 26.5% in 1996. Because of the intense level of competition
currently existing, the Company has raised prices less than 1% from last year.
This, along with the introduction of higher cost percentage entrees and higher
pork and dairy prices, has resulted in the increase in cost of goods sold.
Payroll and benefits, as a percentage of revenues, increased from 30.3%
for the third quarter of 1995 to 30.5% for the third quarter of 1996.
Year-to-date payroll and benefits increased from 30.0% in 1995 to 30.7% in 1996.
The increases for the quarter and year-to-date periods were a result of i) a
greater number of new restaurant openings where labor is generally more
inefficient for a period of time, and ii) labor inefficiencies caused by
same-store sales declines, particularly during the weather-impacted first
quarter of 1996.
Other operating expenses, as a percentage of revenues, declined from
30.0% for the third quarter of 1995 to 29.5% for the third quarter of 1996 as a
result of lower rental expense. Year-to-date other operating expenses were
relatively constant at approximately 29.7%. For the year-to-date periods lower
rental expense was offset by higher amortization of pre-opening expense and
weather-related maintenance costs.
ADMINISTRATIVE EXPENSES
- -----------------------
Administrative expenses increased 6% and 9%, respectively, from the
third quarter of 1995 to the third quarter of 1996 and for the year-to-date
periods of 1995 to 1996. The increases were primarily a result of additional
personnel and raises for corporate personnel. Administrative expenses, as a
percentage of revenue, declined from 7.1% for the third quarter of 1995 to 5.9%
for the third quarter of 1996. For the year-to-date period administrative
expenses declined from 7.4% of revenues in 1995 to 6.4% of revenues in 1996.
Management expects administrative expenses, as a percentage of revenues, to
remain at about the third quarter 1996 level for the remainder of 1996 and 1997.
INTEREST EXPENSE
- ----------------
Interest expense increased 80% from the third quarter of 1995 to the
third quarter of 1996, and 72% from the year-to-date periods of 1995 to 1996.
The increase reflects an increase of approximately $9.6 million in the balance
of long-term obligations since August 6, 1995 due to the construction of new
restaurants, which was somewhat offset by a decline in interest rates. The
interest rate on the Company's revolving credit line declined from 9.5% at
August 6, 1995 to 8.5% at August 4, 1996. Interest rates on all other long-term
obligations are fixed. The Company capitalized approximately $321,000 of
construction period interest during the first 40 weeks of 1996 as compared to
$184,000 capitalized during the comparable 1995 period.
7
<PAGE> 8
INCOME TAXES
- ------------
The Company's effective tax rate remained relatively constant at 31%
for both 1995 and 1996 year-to-date periods.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's working capital ratio declined from .5 to 1 at October
29, 1995 to .4 to 1 at August 4, 1996. Historically, the Company has been able
to operate with a working capital deficiency because i) restaurant operations
are primarily conducted on a cash basis, ii) high turnover (about once every 10
days) permits a limited investment in inventory, and iii) trade payables for
food purchases usually become due after receipt of cash from the related sales.
During the first 40 weeks of 1996, the Company expended approximately
$9,703,000 for property additions, $27,557,000 to reduce long-term obligations,
and distributed $135,000 to minority interests in the affiliated partnerships.
Funds for such expenditures were provided primarily by $30,436,000 from proceeds
of long-term obligations, $6,657,000 from operations and $215,000 from the sale
of assets, and a decrease in cash of $270,000. The Company routinely draws down
and repays balances under its revolving credit agreement, the gross amounts of
which are included in the above numbers.
At August 4, 1996 restaurants were under construction in Lexington,
Kentucky, Robinson Township, Pennsylvania, a suburb of Pittsburgh and Canton,
Michigan, a suburb of Detroit. In addition, a ground lease and purchase contract
have been executed for the Company's first two sites in Atlanta, Georgia. The
Company expects to open the restaurant in Lexington, Kentucky during the fourth
quarter of 1996. The restaurants in Robinson Township and Canton will open
during the first quarter of 1997. The Atlanta restaurants are expected to open
during the second quarter of 1997. In addition, the Company is negotiating for a
location in Greenville, South Carolina.
Funding for new restaurants will be provided by cash flow from
operations, equipment leasing and the Company's revolving credit line. At August
4, 1996 the Company had approximately $5.2 million available under its $15.0
million revolving credit line and approximately $2.0 million available under
equipment lease commitments.
8
<PAGE> 9
INVESTMENT CONSIDERATIONS
- -------------------------
The Company desires to take advantage of the new "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). The Reform Act only became law in late December 1995 and, except for the
Conference Reports, no official interpretations of the Reform Act's provisions
have been published. Many of the following important factors have been discussed
in the Company's prior filings with the Securities and Exchange Commission.
In addition to the other information in this Report, readers should
carefully consider that the following important factors, among others, in some
cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual consolidated results of operations
for the Fiscal Year ended October 27, 1996 and beyond, to differ materially from
those expressed in any forward-looking statements made by, or on behalf of the
Company.
1. Dependence on Management - The Company's senior management has over 80
years experience with the Company. The loss of one or more key executives
could have an adverse effect on the Company.
2. Competition - The casual dining segment of the restaurant industry is
highly competitive. Many of the Company's competitors are larger national
chains with greater financial resources.
3. Restaurant Industry - The restaurant industry is affected by changing
trends, economic conditions, traffic patterns and weather. Increases in
food, labor and benefits costs along with the availability of employees and
suitable restaurant sites could affect future operating results.
4. Legal - The Company is exposed to various tort and other claims, most
notably liability claims resulting from the sale of alcoholic beverages.
While the Company currently maintains insurance for such claims, there is
no assurance of its adequacy or future availability. An uninsured or excess
claim could have a material adverse affect on the Company.
5. Government Regulation - The restaurant industry is subject to extensive
government regulations relating to the sale of food and alcoholic
beverages, and sanitation, fire and building codes. Suspension or inability
to renew any of the related licenses and permits could adversely affect the
Company's operations. Further more, government actions affecting minimum
wage rates, payroll tax rates and mandated benefits could affect operating
results.
9
<PAGE> 10
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
The exhibits listed in the accompanying index to exhibits on page 11
are filed as part of this report.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAX & ERMA'S RESTAURANTS, INC.
------------------------------
Registrant
Todd B. Barnum
------------------------------
Todd. B. Barnum
Chairman of the Board
(Chief Executive Officer)
William C. Niegsch, Jr.
------------------------------
William C. Niegsch, Jr.
Executive Vice President &
Chief Financial Officer
September 10, 1996
- ------------------------------
Date
10
<PAGE> 11
MAX & ERMA'S RESTAURANTS INC.
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Exhibit Page No.
- ----------- ------- --------
<S> <C>
2 Not applicable
3 Not applicable
4 Not applicable
11 Not applicable
15 Not applicable
18 Not applicable
19 Not applicable
22 Not applicable
23 Not applicable
24 Not applicable
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-29-1995
<PERIOD-START> OCT-30-1995
<PERIOD-END> AUG-4-1996
<EXCHANGE-RATE> 1
<CASH> 831,942
<SECURITIES> 0
<RECEIVABLES> 141,712
<ALLOWANCES> 0
<INVENTORY> 665,677
<CURRENT-ASSETS> 2,543,786
<PP&E> 65,644,571
<DEPRECIATION> 16,879,885
<TOTAL-ASSETS> 54,437,014
<CURRENT-LIABILITIES> 6,649,218
<BONDS> 30,358,413
<COMMON> 414,187
0
0
<OTHER-SE> 16,940,633
<TOTAL-LIABILITY-AND-EQUITY> 54,437,014
<SALES> 0
<TOTAL-REVENUES> 60,757,194
<CGS> 16,122,115
<TOTAL-COSTS> 36,724,389
<OTHER-EXPENSES> 3,918,260
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,569,365
<INCOME-PRETAX> 2,355,676
<INCOME-TAX> 735,000
<INCOME-CONTINUING> 1,620,676
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,620,676
<EPS-PRIMARY> .38
<EPS-DILUTED> .38
</TABLE>
