<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
For Quarter Ended February 18, 1996 Commission file number 0-11514
------------------------ ---------------
Max & Erma's Restaurants, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware No. 31-1041397
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(State of 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 4,120,109 common shares.
<PAGE> 2
PART I - FINANCIAL INFORMATION / ITEM 1 - FINANCIAL STATEMENTS
MAX & ERMA'S RESTAURANTS, INC. - BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
------
February 18, October 29,
1996 1995
----------- -----------
<S> <C> <C>
Current Assets:
Cash $ 1,286,387 $ 1,102,060
Receivables 449,075 965,673
Inventories 589,405 539,025
Supplies 174,372 148,322
Prepaid Expenses 755,678 530,658
----------- -----------
Total Current Assets 3,254,917 3,285,738
Property - At Cost: 60,593,510 57,563,647
Less Accumulated Depreciation and Amortization 16,149,601 15,061,971
----------- -----------
Property - Net 44,443,909 42,501,676
Other Assets:
Goodwill - Net 320,604 336,077
Other Assets - Net 2,674,244 2,487,017
----------- -----------
Total Other Assets 2,994,848 2,823,094
----------- -----------
Total $50,693,674 $48,610,508
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current Maturities of Long-Term Obligations $ 725,971 $ 727,719
Accounts Payable 2,954,907 3,634,336
Accrued Liabilities 2,896,321 569,718
----------- -----------
Total Current Liabilities 6,577,199 6,831,773
Long-Term Obligations - Less Current Maturitie 27,934,641 26,036,831
Minority Interests in Affiliated Partnerships 136,115 141,935
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 4,120,109 Shares
At 2/18/96 and 4,117,885 Shares at 10/29/95 412,011 411,789
Additional Capital 11,326,519 11,296,383
Retained Earnings 4,307,189 3,891,797
----------- -----------
Total Stockholders' Equity 16,045,719 15,599,969
----------- -----------
Total $50,693,674 $48,610,508
=========== ===========
</TABLE>
(See notes to financial statements)
2
<PAGE> 3
MAX & ERMA'S RESTAURANTS, INC.
STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Sixteen Weeks Ended
-------------------
February 18, February 19,
1996 1995
----------- -----------
<S> <C> <C>
REVENUES: $23,078,501 $19,329,094
COSTS AND EXPENSES:
Costs of Goods Sold 6,108,949 5,083,046
Payroll and Benefits 7,184,730 5,782,971
Other Operating Expenses 7,018,954 5,737,028
Administrative Expenses 1,572,935 1,419,327
Interest Expense 578,858 356,110
Minority Interest in Income
of Affiliated Partnerships 32,683 65,019
----------- -----------
Total Costs and Expenses 22,497,109 18,443,501
----------- -----------
INCOME BEFORE TAXES 581,392 885,593
INCOME TAXES 166,000 276,000
----------- -----------
NET INCOME $ 415,392 $ 609,593
=========== ===========
NET INCOME PER COMMON SHARE $ 0.10 $ 0.14
=========== ===========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING $ 4,245,325 $ 4,277,589
=========== ===========
</TABLE>
(See notes to financial statements)
3
<PAGE> 4
MAX & ERMA'S RESTAURANTS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Sixteen Weeks Ended
-------------------
February 18, February 19,
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 415,392 $ 609,593
Depreciation and amortization 1,564,354 1,232,319
Minority interest in income of Affiliated Partners 32,683 65,020
Changes in other assets and liabilities 757,186 (123,282)
----------- -----------
Net cash provided (used) by operating activities 2,769,615 1,783,650
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (4,548,650) (3,218,471)
Construction cost reimbursement (275,000)
Decrease (increase) in other assets (34,857) 243,028
Proceeds from sale of assets 214,400
----------- -----------
Net cash used by investing activities (4,369,107) (3,250,443)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations (7,248,926) (4,032,287)
Proceeds from long-term obligations 9,071,248 5,429,289
Repurchase of common stock (455,674)
Proceeds from sale of common stock 5,625
Distributions to minority interests in Affiliated Partners (38,503) (57,755)
----------- -----------
Net cash provided (used) by financing activities 1,783,819 889,198
----------- -----------
NET INCREASE (DECREASE) IN
CASH AND EQUIVALENTS 184,327 (577,595)
CASH AND EQUIVALENTS
BEGINNING OF THE PERIOD 1,102,060 993,349
----------- -----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 1,286,387 $ 415,754
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 435,131 $ 490,501
Income taxes $ 123,752 $ 223,861
Non-cash activities:
Property additions financed by capital leases $ $ 634,043
Property additions financed by accounts payable $ 1,099,095 $ 251,291
</TABLE>
(See notes to financial statements)
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.
5
<PAGE> 6
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS REVENUE
-------------------------------------------
REVENUES
- --------
Revenues for the first quarter of 1996 rose $3,749,000 or 19% from the
first quarter of 1995. The increase was a result of I) the opening of seven
restaurants during 1995, and ii) the opening of two restaurants during the
first quarter of 1996. At February 18, 1996 the Company operated 35
restaurants as compared to 29 at February 19, 1995. The increase in revenues
from new restaurants was offset by a 3.8% or $630,000 decline in same-store
sales from $16,638,000 to $16,008,000 at restaurants opened for at least 18
months.
Management believes that approximately $300,000 of the decline in
same-store sales was a result of record snowfall and harsh winter weather
during the first quarter of 1996. Exclusive of sales loss due to weather,
same-store sales declined approximately 2% or $330,000. Management believes
this decline is primarily due to the intense level of competition currently
existing in the casual dining segment of the restaurant industry. New
competition was particularly intense around two of the Company's highest sales
volume locations, each of which have had approximately 8 to 10 new competitors
open nearby over the last 18 months. While annual sales volumes remain close
to $3.0 million at both locations, same-store sales, exclusive of the weather
effect, declined an average of 12% at each location and represented
approximately $250,000 of the $330,000 non-weather related decline in
same-store sales.
To improve same-store sales the Company is developing higher value
entrees, which will be introduced over the next five quarters, in an effort to
increase the dinner check average. The Company also introduced its first drink
menu during the first quarter of 1996. The goal of the menu is to increase
check average by stabilizing, or possibly increasing alcoholic beverage sales.
Management also believes sales will rebound at the two locations referred to
above. It is not unusual for sales to drop 10% or more subsequent to the
opening of several new competitors. The Company believes its level of service
and food quality have historically allowed it to rebuild sales after new
competitors undergo a period of trial, and as a result, on an annual basis
same-store sales have remained positive for four consecutive years despite the
intense competition of recent years.
Management is confident that overall revenue growth will exceed its
20% goal for 1996 due to the success of recent restaurant openings. Despite
the weather, two restaurants that opened at the end of last quarter plus the
two that opened during the first quarter of 1996 reported average weekly sales
of over $60,000 during the quarter compared to approximately $40,000 per week
for the other 31 restaurants. While sales at new restaurants do decline after
initial "honeymoon" periods, it appears that new openings are continuing the
trend of generating higher sales than older units.
6
<PAGE> 7
COSTS AND EXPENSES
- ------------------
Cost of goods sold, as a percentage of revenues, increased from 26.3%
for the first quarter of 1996 to 26.5% for the first quarter of 1996. The
slight increase from 1995 to 1996 was a result of increased pork, dairy and
shrimp prices and certain costs associated with the introduction of the new
beverage menu referred to above.
Payroll and benefits, as a percentage of revenues, increased from
29.9% for the first quarter of 1995 to 31.1% for the first quarter of 1996.
The increase was primarily a result of weather-related inefficiencies and
higher than normal payroll at the two restaurants opened just before the start
of the quarter and the two that opened during the quarter. Higher payroll is
typical at new restaurants and should decline to normal levels during the
quarter subsequent to opening.
Other operating expenses, as a percentage of revenues, increased from
29.7% for the first quarter of 1995 to 30.4% for the first quarter of 1996.
The increase was a result of i) increased amortization of pre-opening costs,
1.2% of revenue in 1996 versus .9% in 1995, ii) higher repairs and maintenance
in 1996 due, in part, to snow and ice removal and, iii) an inability to reduce
fixed costs in response to the decline in sales experienced during the quarter.
ADMINISTRATIVE EXPENSES
- -----------------------
Administrative expenses increased 11% from the first quarter of 1995
to the first quarter of 1996. The increase was a result of additional
personnel to support the Company's accelerated growth rate, the implementation
of a computerized management information system and raises for corporate
personnel. Administrative expenses, as a percentage of revenue, declined from
7.4% of revenues for the first of 1995 to 6.8% for the first quarter of 1996.
Management expects the decline, as a percentage of revenues, to continue as
revenue growth exceeds the growth in administrative expenses.
INTEREST EXPENSE
- ----------------
Interest expense increased 63% from the first quarter of 1995 to the
first quarter of 1996. The increase reflects an 82% increase or approximately
$12.5 million increase in the average balance of long-term obligations since
February 19, 1995 due to the construction of new restaurants. This increase
was offset by a slight decline in interest rates. The interest rate on the
Company's revolving credit line declined from 9.0% at February 19, 1995 to 8.5%
at February 18, 1996. Interest rates on all other long-term obligations are
fixed. The Company capitalized approximately $154,000 of construction period
interest in the first quarter of 1996 as compared to $42,000 in the first
quarter of 1995.
7
<PAGE> 8
INCOME TAXES
- ------------
The Company's effective tax rate declined from 31% for the first
quarter of 1995 to 28.6% for the first quarter of 1996. The decrease was a
result of the tax credit for FICA taxes paid on declared tips becoming a larger
percentage of pre-tax income. If annualized pre-tax income increases during
the remainder of the year, the Company's effective tax rate could increase to
approximately last year's effective rate.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's working capital ratio was .5 to 1 at both October 29,
1995 and February 18, 1996. Historically, the Company has been able to operate
with a working capital deficiency because 1)restaurant operations are primarily
conducted on a cash basis, 2) high turnover (about once every 10 days) permits
a limited investment in inventory, and 3) trade payables for food purchases
usually become due after receipt of cash from the related sales.
During the first quarter of 1996, the Company expended approximately
$4,549,000 for property additions, $7,249,000 to reduce long-term obligations,
distributed $38,000 to minority interests in the affiliated partnerships, and
increased cash $184,000. Funds for such expenditures were provided primarily
by $9,071,000 from proceeds of long-term obligations, $2,770,000 from
operations and $214,000 from the sale of assets. 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 February 18, 1996 four restaurants were under construction: two in
Chicago, Illinois plus Cleveland, Ohio and Lexington, Kentucky. In addition,
contracts for the purchase of ground had been entered into for sites in Canton,
Michigan, a suburb of Detroit and Robinson Township, Pennsylvania, a suburb of
Pittsburgh. The Company expects to begin construction late in the second
quarter of 1996 with openings planned for late 1996 or first quarter 1997. In
addition, the Company is negotiating for two locations in Atlanta, Georgia.
Funding for new restaurants will be provided by cash flow from
operations, equipment leasing and the Company's revolving credit line. At
February 18, 1996, the Company had approximately $1.4 million available under
its $15.0 million revolving credit line and approximately $2.3 million
available under equipment lease commitments. Early in 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.
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 interpratations 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 effect
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.
PART II
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
The exhibits listed in the accompanying index to exhibits on page 10
are filed as part of this report.
(b) Reports on Form 8-K
None
9
<PAGE> 10
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
March 20, 1996
-----------------------
Date
10
<PAGE> 11
MAX & ERMA'S RESTAURANTS INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page No.
- ----------- ------- --------
<S> <C> <C>
2 Not applicable
3 Not applicable
4 Not applicable
10(a) Third Amendment to Revolving Credit 12
Agreement between Max & Erma's Restaurants, Inc.,
and The Provident Bank dated February 17, 1996
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>
11
<PAGE> 1
EXHIBIT 10(a)
THIRD AMENDMENT TO
REVOLVING CREDIT AGREEMENT
This Third Amendment to the Revolving Credit Agreement, dated as of February
17, 1996 is made by and between The Provider Bank (the "Bank"), an Ohio banking
corporation, doing business at One East Fourth Street, Cincinnati, Ohio 45202,
and Max & Erma's Restaurants, Inc. (the "Borrower"), a Delaware corporation,
doing business at 4849 Evanswood Drive, Columbus, Ohio, 43229.
W I T N E S S E T H
WHEREAS, the parties hereto have previously entered into that certain Revolving
Credit Agreement dated as of October 25, 1993, which was first amended on
January 17, 1994, and amended the second time on August 25, 1995, (hereinafter
the "RCA"), whereby the Bank made certain loans to Borrower;
WHEREAS, the parties wish to further amend the RCA to provide for changes in
covenants and certain other provisions;
NOW, THEREFORE, in consideration of the premises and the mutual promises
contained herein, the parties hereto agree as follows:
1. The ratio referred to in the last line of Section 6.2 (c) shall be amended
to read "1.25 to 1.
2. Within the Definitions contained in Section 9, the definition of "Fixed
Charges" shall be deleted in its entirety and the following inserted in its
place:
"FIXED CHARGES" shall mean, for any period, the sum of (a) one fifth of
the Indebtedness owing the Bank plus (b) the amount of all Indebtedness
(exclusive of Indebtedness owing the Bank) which is or should be classified as
a Current Liability plus (c) rental expense incurred during such period with
respect to non-capitalized leases, all of which shall be determined in
accordance with generally accepted accounting principals consistently applied.
3. Item (d) within the Definition of "Income Available for Fixed Charges"
contained in Section 9, will be modified to read, "$25,000 times the number of
restaurant locations which the Company operates at the date of calculation".
IN WITNESS WHEREOF, the parties have executed this Second Amendment to the
Revolving Credit Agreement as of the date first set forth above.
MAX & ERMA'S RESTAURANTS, INC. THE PROVIDENT BANK
By: /s/ William C. Niegsch, Jr By: /s/ Michael G. Giulioli
--------------------------- ------------------------
William C. Niegsch, Jr Michael G. Giulioli
Executive Vice President Regional Vice President
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-29-1995
<PERIOD-START> OCT-30-1995
<PERIOD-END> FEB-18-1996
<EXCHANGE-RATE> 1
<CASH> 1,286,387
<SECURITIES> 0
<RECEIVABLES> 449,075
<ALLOWANCES> 0
<INVENTORY> 589,405
<CURRENT-ASSETS> 3,254,917
<PP&E> 60,593,510
<DEPRECIATION> 16,149,601
<TOTAL-ASSETS> 50,693,674
<CURRENT-LIABILITIES> 6,577,199
<BONDS> 27,934,641
<COMMON> 412,011
0
0
<OTHER-SE> 15,633,708
<TOTAL-LIABILITY-AND-EQUITY> 50,693,674
<SALES> 0
<TOTAL-REVENUES> 23,078,501
<CGS> 6,108,949
<TOTAL-COSTS> 20,312,633
<OTHER-EXPENSES> 1,605,618
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 578,858
<INCOME-PRETAX> 581,392
<INCOME-TAX> 166,000
<INCOME-CONTINUING> 415,392
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 415,392
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
