<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
For Quarter Ended May 12, 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 4,127,569 common shares.
<PAGE> 2
PART I - FINANCIAL INFORMATION / ITEM 1 - FINANCIAL STATEMENTS
MAX & ERMA'S RESTAURANTS, INC. - BALANCE SHEETS (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
May 12, October 29,
Current Assets: 1996 1995
----------- -----------
<S> <C> <C>
Cash $ 879,844 $ 1,102,060
Receivables 384,379 965,673
Inventories 628,498 539,025
Supplies 195,542 148,322
Prepaid Expenses 829,562 530,658
----------- -----------
Total Current Assets 2,917,825 3,285,738
Property - At Cost: 64,075,831 57,563,647
Less Accumulated Depreciation and Amortization 17,078,909 15,061,971
----------- -----------
Property - Net 46,996,922 42,501,676
Other Assets:
Goodwill - Net 308,999 336,077
Other Assets - Net 2,743,537 2,487,017
----------- -----------
Total Other Assets 3,052,536 2,823,094
----------- -----------
Total $52,967,283 $48,610,508
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Maturities of Long-Term Obligations $ 1,001,482 $ 727,719
Accounts Payable 2,331,481 3,534,336
Accrued Liabilities 3,067,801 2,569,718
----------- -----------
Total Current Liabilities 6,400,764 6,831,773
Long-Term Obligations - Less Current Maturities 29,807,624 26,036,831
Minority Interests in Affiliated Partnerships 102,811 141,935
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 4,127,569 Shares
At 5/12/96 and 4,117,885 Shares at 10/29/95 412,757 411,789
Additional Capital 11,356,415 11,296,383
Retained Earnings 4,886,912 3,891,797
----------- -----------
Total Stockholders' Equity 16,656,084 15,599,969
----------- -----------
Total $52,967,283 $48,610,508
=========== ===========
</TABLE>
See notes to financial statements 2
<PAGE> 3
MAX & ERMA'S RESTAURANTS, INC.
STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-eight Weeks Ended
------------------ ------------------------
May 12, May 14, May 12, May 14,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES: $18,263,248 $14,331,739 $41,341,749 $33,660,833
COSTS AND EXPENSES:
Costs of Goods Sold 4,851,329 3,729,348 10,960,278 8,812,394
Payroll and Benefits 5,541,559 4,270,260 12,726,289 10,053,231
Other Operating Expenses 5,321,655 4,191,000 12,340,613 9,928,028
Administrative Expenses 1,201,638 1,106,408 2,774,573 2,525,735
----------- ----------- ----------- -----------
Total Operating Expenses 16,916,181 13,297,016 38,801,753 31,319,388
----------- ----------- ----------- -----------
Operating Income 1,347,067 1,034,723 2,539,996 2,341,445
Interest Expense 473,889 271,196 1,052,747 627,306
Minority Interest in Income
of Affiliated Partnerships 24,451 43,077 57,134 108,096
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 848,727 720,450 1,430,115 1,606,043
INCOME TAXES 269,000 228,000 435,000 504,000
----------- ----------- ----------- -----------
NET INCOME $ 579,727 $ 492,450 $ 995,115 $ 1,102,043
=========== =========== =========== ===========
NET INCOME
PER COMMON SHARE $ 0.14 $ 0.12 $ 0.23 $ 0.26
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 4,249,410 4,252,153 4,247,076 4,266,687
=========== =========== =========== ===========
</TABLE>
See notes to financial statements 3
<PAGE> 4
MAX & ERMA'S RESTAURANTS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Twenty-Eight Weeks Ended
------------------------
May 12, May 14,
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 995,115 $ 1,102,043
Depreciation and amortization 2,965,775 2,150,541
Minority interest in income of Affiliated Partnerships 57,134 108,096
Changes in other assets and liabilities 100,555 (166,679)
------------ ------------
Net cash provided by operating activities 4,118,579 3,194,001
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (7,827,034) (5,729,939)
Construction cost reimbursement 275,000
Decrease (increase) in other assets (102,494) (278,044)
Proceeds from sale of assets 214,400 3,424
------------ ------------
Net cash used by investing activities (7,715,128) (5,729,559)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations (20,261,132) (7,960,740)
Proceeds from long-term obligations 23,713,606 10,845,899
Proceeds from sale of common stock 18,117 14,644
Cash paid for Purchase of Common stock (480,049)
Distributions to minority interests in Affiliated Partnership (96,258) (115,508)
Cash paid in lieu of fractional shares upon stock dividend (2,228)
------------ ------------
Net cash provided by financing activities 3,374,333 2,302,018
------------ ------------
NET DECREASE IN CASH & EQUIVALENTS (222,216) (233,540)
CASH & EQUIVALENTS BEGINNING OF THE PERIOD 1,102,060 993,349
------------ ------------
CASH & EQUIVALENTS AT END OF PERIOD $ 879,844 $ 759,809
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 954,658 $ 539,105
Income taxes $ 313,908 $ 439,843
Non-cash activities:
Property additions financed by capital leases $ 463,465 $ 634,043
Property additions financed by accounts payable $ 891,443 $ 930,497
Tax benefit of stock exercised & sold within one year $ 13,399 $ 72,640
Stock issued as a dividend $ 2,992,145
</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.
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 second quarter of 1996 rose $3,932,000 or 27% from the
second quarter of 1995. The increase was a result of i) the opening of four
restaurants during the second half of 1995, ii) the opening of two restaurants
during each of the first and second quarters of 1996, and iii) higher average
sales at the eight restaurants opened since the second quarter of 1995 as
compared to the 29 older restaurants. At May 12, 1996 the Company operated 37
restaurants as compared to 29 at May 14, 1995. The increase in revenues from new
restaurants was offset by a 1.7% or $215,000 decline in same-store sales from
$12,421,000 for the second quarter of 1995 to $12,206,000 for the second quarter
of 1996 at restaurants opened for at least 18 months.
Year-to-date revenues increased $7,681,000 or 23% from 1995 to 1996.
The increase was a result of the openings referred to above plus three
restaurants opened during the first quarter of 1995. Additional revenue from new
restaurants was offset by a 2.9% or $845,000 decline in same-store sales from
$29,058,000 for the first half of 1995 to $28,213,000 for the first half of 1996
at restaurants opened for at least 18 months.
Management believes that approximately $300,000 of the decline in
year-to-date 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 during the first quarter of 1996. The Company also
introduced a new menu late in the second quarter of 1996 with the goal of
increasing the dinner check average. The new menu offers a selection of higher
value entrees designed to offer more trade-up options for the dinner customer.
Initial results of both programs are positive. During the second quarter, total
beverage sales rose 28.1% over the second quarter of last year while total food
sales grew 27.3% and beverage sales, as a percentage of total sales, increased
slightly. Since the new food menu was introduced chain-wide at the end of the
quarter, only test results are available. During an eight week test of the menu
at one location the average dinner check rose approximately $.50 or 6% over the
previous eight week period. Management is encouraged by the test results,
however, there is no assurance that the same results will be achieved chain-wide
when the menu is rolled out at the start of the third quarter.
Despite the competitive environment management is confident that
overall revenue growth will exceed its 20% goal for 1996 due to the success of
recent openings. During the second quarter of 1996 the eight restaurants opened
during the last four quarters achieved average weekly sales of $51,000, 28%
higher than the $40,000 per week reported by 29 restaurants in operation at the
end of the second quarter of 1995. Management is optimistic that the menu and
beverage programs discussed above will also contribute to revenue growth during
the second half of 1996.
6
<PAGE> 7
COSTS AND EXPENSES
Cost of goods sold, as a percentage of revenues, increased from 26.0%
for the second quarter of 1995 to 26.6% for the second quarter of 1996.
Year-to-date cost of goods sold, as a percentage of revenues, increased from
26.2% in 1995 to 26.5% in 1996. The Company's goal is to keep cost of goods sold
in a range between 26.0% and 26.5%. A menu price increase of approximately
two-thirds of a percent at the end of the second quarter should reduce cost of
goods sold, as a percentage of revenues, during the third quarter of 1996.
However, because of the intense level of competition currently existing,
management will attempt to raise prices as little as possible and therefore
expects cost of goods sold to remain at the higher end of the targeted range.
Payroll and benefits, as a percentage of revenues, increased from 29.8%
for the second quarter of 1995 to 30.3% for the second quarter of 1996.
Year-to-date payroll and benefits increased from 29.9% for 1995 to 30.8% for
1996. The increase 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 first quarter of 1996.
Other operating expenses, as a percentage of revenues, remained
relatively constant from the second quarter of 1995 to the second quarter of
1996 at approximately 29.2%, as higher amortization of pre-opening expense was
offset by lower rental expense. Year-to-date other operating expenses, as a
percentage of revenues, increased from 29.5% for 1995 to 29.9% for 1996. The
increase was primarily a result of weather related maintenance costs and sales
declines, without an ability to reduce fixed costs, experienced during the first
quarter of 1996.
ADMINISTRATIVE EXPENSES
Administrative expenses increased 9% and 10%, respectively, from the
second quarter of 1995 to the second quarter of 1996 and for the year-to-date
periods of 1995 to 1996. The increases were 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 7.7% for the
second quarter of 1995 to 6.6% for the second quarter of 1996 and for the
year-to-date declined from 7.5% in 1995 to 6.7% for 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 75% from the second quarter of 1995 to the
second quarter of 1996. Year-to-date interest expense increased 68% from 1995 to
1996. The increase reflects an increase of approximately $12.6 million in the
balance of long-term obligations since May 14, 1995 due to the construction of
new restaurants. The increase in interest expense due to higher borrowings was
somewhat offset by a decline in interest rates. The interest rate on the
Company's revolving credit line declined from 9.75% at May 14, 1995 to 8.5% at
May 12, 1996. Interest rates on all other long-term obligations are fixed. The
Company capitalized approximately $246,000 of construction period interest
during the first 28 weeks of 1996 as compared to $99,000 capitalized during the
comparable 1995 period.
7
<PAGE> 8
INCOME TAXES
The Company's effective tax rate remained constant at approximately 31%
for the 28 weeks of 1995 and 1996. If annualized pre-tax income continues to
increase during the remainder of the year, the Company's effective tax rate
could increase slightly.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital ratio was .5 to 1 at both October 29,
1995 and May 12, 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 28 weeks of 1996, the Company expended approximately
$7,827,000 for property additions, $20,261,000 to reduce long-term obligations,
and distributed $96,000 to minority interests in the affiliated partnerships.
Funds for such expenditures were provided primarily by $23,714,000 from proceeds
of long-term obligations, $4,119,000 from operations and $214,000 from the sale
of assets, and a decrease in cash of $222,000. 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 May 12, 1996 restaurants were under construction in Gurnee,
Illinois, a suburb of Chicago, Lexington, Kentucky, and Robinson Township,
Pennsylvania, a suburb of Pittsburgh. In addition, a contract for the purchase
of ground had been entered into for a site in Canton, Michigan, a suburb of
Detroit, and a ground lease had been executed for the Company's first site in
Atlanta, Georgia. The Company expects to open the restaurants in Gurnee,
Illinois and Lexington, Kentucky in the second half of 1996. In addition, the
Company is negotiating for an additional location in Atlanta, Georgia and 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 May
12, 1996 the Company had approximately $5.5 million available under its $15.0
million revolving credit line and approximately $1.9 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.
PART II
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on March 15, 1996
for the purpose of electing three Class I directors for three-year terms
expiring in 1999, to ratify and approve the Company's 1996 Stock Option Plan,
and ratifying Deloitte & Touche LLP as the Company's independent auditors for
the 1996 fiscal year.
Each nominee to the Company's Board of Directors was elected by the
following vote:
<TABLE>
<CAPTION>
Votes For Votes Withheld
--------- --------------
<S> <C> <C>
Mark F. Emerson 3,424,064 12,587
Donald W. Kelley 3,423,903 12,748
Michael D. Murphy 3,397,762 38,889
</TABLE>
9
<PAGE> 10
The Company's 1996 Stock Option Plan was ratified and approved by a
vote of 2,531,512 shares for, 202,895 against, and 16,441 shares abstained.
Additionally, Deloitte & Touche LLP was ratified as the Company's
independent auditors for the 1996 fiscal year by a vote of 3,419,055 shares for,
6,726 shares against, and 10,870 shares abstained.
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
June 11, 1996
- ----------------------------
Date
10
<PAGE> 11
MAX & ERMA'S RESTAURANTS INC.
EXHIBIT INDEX
Exhibit No. Exhibit Page No.
- ----------- ------- --------
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
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-29-1995
<PERIOD-START> OCT-30-1995
<PERIOD-END> MAY-12-1996
<EXCHANGE-RATE> 1
<CASH> 879,844
<SECURITIES> 0
<RECEIVABLES> 384,379
<ALLOWANCES> 0
<INVENTORY> 628,498
<CURRENT-ASSETS> 2,917,825
<PP&E> 64,075,831
<DEPRECIATION> 17,078,909
<TOTAL-ASSETS> 52,967,283
<CURRENT-LIABILITIES> 6,400,764
<BONDS> 29,807,624
0
0
<COMMON> 412,757
<OTHER-SE> 16,243,327
<TOTAL-LIABILITY-AND-EQUITY> 52,967,084
<SALES> 0
<TOTAL-REVENUES> 41,341,749
<CGS> 10,960,278
<TOTAL-COSTS> 36,027,180
<OTHER-EXPENSES> 2,831,707
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,052,747
<INCOME-PRETAX> 1,430,115
<INCOME-TAX> 435,000
<INCOME-CONTINUING> 995,115
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 995,115
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
