<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended October 27, 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
--------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $.10 Par Value
-----------------------------
(title of class)
8% Convertible Subordinated Debentures Due 2004
-----------------------------------------------
(title of class)
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
--- ---
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value has been computed by reference to the
closing bid price of such stock, as of December 31, 1996.
<TABLE>
<S> <C>
Total shares outstanding 4,169,337
Number of shares owned beneficially 1,786,615
and/or of record by directors
and officers (1)
Number of shares held by persons 2,603,161
other than directors or
officers
Closing bid price $6.75
Market value of shares held by $17,571,337
persons other than directors
or officers
<FN>
(1) For purposes of this computation all officers and directors are included,
although not all are necessarily "affiliates." Includes options to purchase
220,439 shares of common stock, all of which are presently exercisable.
</TABLE>
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
4,169,337 Common Shares
were outstanding at December 31, 1996
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Shareholders for the Fiscal Year Ended October 27, 1996
(in pertinent part, as indicated).....Parts II and IV.
2. Proxy Statement for 1997 Annual Meeting of Shareholders (in pertinent
parts, as indicated).....Part III.
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PART I
Item 1. BUSINESS
- ----------------
Max & Erma's Restaurants, Inc. (the "Company"), directly and through
affiliated partnerships, owns and operates a chain of forty-one Max & Erma's
restaurants at December 31, 1996. The Company is a Delaware corporation
organized in 1982, as the successor to a restaurant business founded in 1971.
The Company has registered the phrase "Max & Erma's - Neighborhood Gathering
Place" and its associated logo as a service mark with the United States Patent
and Trademark Office.
The Company's executive offices are located at 4849 Evanswood Drive,
Columbus, Ohio 43229, and its telephone number is (614) 431-5800.
Description of Business
- -----------------------
Max & Erma's restaurants provide generous servings of consistently high
quality food at moderate prices in the casual setting of a neighborhood
gathering place. The menu includes Max & Erma's signature gourmet hamburgers,
specialty sandwiches, salads, appetizers, pasta dishes, chicken, seafood,
steaks, other entrees prepared in a variety of cuisines, desserts and a full
complement of alcoholic and non-alcoholic beverages. Management believes that
the decor and theme of Max & Erma's restaurants allow the introduction of a
broad range of menu items, thus permitting rapid adjustment to changing customer
preferences.
Max & Erma's restaurants are open for both lunch and dinner seven days a
week. Hours of operation are generally 11:00 a.m. to midnight. During fiscal
1996, the average check was approximately $7.83 at lunch and $9.58 at dinner,
although during the second half of the year the dinner check average was $9.68
as a result of the Company's efforts to increase the dinner check average
through the introduction of higher priced entrees. The lunch and dinner meal
periods accounted for approximately 35.9% and 64.1% of net sales, respectively.
Alcoholic beverages constituted approximately 13.6% of net sales in fiscal 1996.
The Company's strategy is to compete in the casual dining segment of
the restaurant industry by offering a variety of high quality food in a casual,
comfortable and fun atmosphere and with a uniquely personable service style. The
philosophy of the Company is to focus on the details of the customer experience
that instill customer loyalty and promote repeat business.
Management believes that Max & Erma's reputation is built every day
with every customer served and that a key to customer loyalty is the server.
Waiters and waitresses are trained based on the "Fifty-two Moments of Truth," a
program based on the Company's consumer research which measures the events that
impact the customer's dining experience. Food is delivered to the table by the
server instead of a food runner, and servers are required to recheck the table
two minutes after delivering the meal. Moreover, the wait staff is empowered to
address customer problems without the assistance of restaurant management.
Max & Erma's restaurants have always been known for gourmet hamburgers
and specialty sandwiches; however, one part of the Company's focus on the
customer is an evolving menu that changes to meet consumer tastes. The Company
believes its menu should be fun as
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well as innovative and reviews, and revises as necessary, the menu twice each
year, and in addition offers an annual summer menu. In fiscal 1992, nightly
dinner specials, such as fajitas, southwestern style steak and jumbo fried
shrimp, were introduced to increase weekday dinner volume and to provide variety
for frequent customers. Weekday lunch specials were added in fiscal 1993, and
separate lunch and dinner menus were introduced during 1994. "Five Great Ways to
be Good," a selection of healthy, low fat menu items, was introduced at the
start of 1995. During 1996 the Company expanded its entree offerings in an
effort to increase its per person dinner check average. By periodically
modifying its menu through the introduction of a broad range of appealing new
menu items the Company has achieved a more diversified sales mix.
The Company makes extensive use of consumer focus groups to conduct
marketing research. Management incorporates the findings of this market research
in its advertising, menu development, employee training, and building design and
decor. According to customers, the major point of difference between the Company
and its competitors is that Max & Erma's restaurants are perceived as being more
of a "fun place," an image the Company tries to foster in its advertising. The
Company spends approximately 3.25% of net sales annually on advertising and uses
television, radio, direct mail, billboards, special events and localized store
marketing designed to increase customer awareness and repeat business.
The Company owns thirty-nine of the Max & Erma's restaurants currently
in operation. Two are owned by separate affiliated partnerships. In addition to
the specified percentage interest in the profits and losses of the affiliated
partnerships, the Company is paid an annual fee equal to 6% or 7% of gross
revenues for managing the two Max & Erma's restaurants owned by the
partnerships. Each management contract provides for monthly payments to the
Company for an initial term of two years and renewal terms aggregating 20
additional years upon the mutual agreement of the parties.
Competition
- -----------
The restaurant business, particularly in the casual dining segment, is
highly competitive in terms of quality and value of products served, type and
variety of menu offered, quality and efficiency of service, ambiance and
attractiveness of facilities and site location. Max & Erma's restaurants compete
with food service operations of various types within their respective locations,
including national and regional chains as well as locally-owned and operated
restaurants. Many of the Company's competitors are substantially larger and have
greater financial resources than the Company.
Employees
- ---------
At November 30, 1996, the Company had 3,611 employees, of which 1,054
were full-time restaurant employees, 2,357 were part-time restaurant employees,
53 were corporate staff personnel and 147 were restaurant managerial personnel.
None of the Company's employees are represented by a labor union or a collective
bargaining unit. The Company considers relations with its employees to be good.
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Restaurant Operations
- ---------------------
The Company strives to maintain quality and uniformity in its
restaurants through careful training and supervision of personnel. All
restaurants are operated in accordance with uniform Company specifications,
which are set forth in detailed operating manuals relating to food and beverage
preparation, maintenance of premises and employee conduct. The Company utilizes
an independent shopping service to monitor implementation of Company operating
standards. The Company and the shopping service have developed testing standards
for the major aspects of restaurant operation, including physical appearance,
cleanliness, wait staff and food quality. The shopping service has "mystery
shoppers" visit each restaurant four times each quarter to evaluate and grade
the restaurant. A report is prepared by the shopping service for each visit and
is reviewed by the Company's Chief Operating Officer and the respective regional
and general managers. A portion of the bonus for each regional and general
manager is based on the scores received on the shopping service reports. The
Company also makes available at each table postage-paid comment cards addressed
to the Company's President. The President responds to any negative comments on a
weekly basis.
Restaurant operations are administered by a management staff headed by
the Chief Operating Officer. A Regional Vice President of Operations reports to
the Chief Operating Officer. Nine regional managers, each of whom supervises the
operations of four to five restaurants, report to either the Chief Operating
Officer or the Regional Vice President of Operations. Each restaurant has a
general manager, who is responsible for training and supervising 60 to 125
employees, and two or three assistant managers. Regional managers are
responsible for hiring their general and assistant managers. General managers,
with the assistance of the regional manager, are responsible for hiring
restaurant employees. The Company seeks to hire experienced restaurant personnel
who must complete a 14 week training program conducted by the Company before
becoming an assistant manager. The Company has historically promoted from within
to fill its regional and general manager positions.
Both regional and general managers receive a base salary plus a bonus
based upon performance against budget and average independent shopping service
scores. General managers prepare quarterly budgets for their stores and regional
managers prepare quarterly budgets for their regions. Bonuses are based on
specific goals derived from these quarterly budgets. Managers may elect to
receive some or all of their bonuses in the Company's common stock at a one-half
discount from fair market value. In addition, all regional managers and general
managers are eligible to receive stock options on a periodic basis. Management
believes that its bonus system and the ability to purchase common stock promote
loyalty and highly motivate managers to meet Company goals.
Management believes that the combination of the authority delegated to
its regional and general managers, particularly with respect to hiring
employees, together with its goal-specific bonus plans, results in a positive
work environment and has contributed to relatively low management turnover.
Purchasing and Inventory Controls
- ---------------------------------
Meat and most other food and restaurant supply items are purchased
through one major distributor in order to obtain favorable prices and to ensure
consistent quality and delivery. For
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major items, the Company typically negotiates prices directly with producers.
For other items, the Company provides the distributor with specifications and
receives monthly prices for such items, generally based upon a "cost plus"
formula. Restaurant managers purchase these items directly from the distributor,
and each restaurant is billed directly for its purchases. Although most of the
Company's food and supplies are presently furnished by one distributor, the
Company believes alternate food suppliers are available and has not experienced
a shortage of food or supplies. A daily inventory is taken for high cost items,
such as steaks, ground meat, seafood and liquor. A physical inventory of all
items is made at the end of each four week accounting period.
Future Expansion
- ----------------
In addition to two restaurants opened during the first quarter of 1997,
the Company intends to open four additional Max & Erma's restaurants during the
remainder of fiscal 1997 and an additional five to six restaurants during fiscal
1998. All but four of the existing Max & Erma's restaurants are located in
suburban areas. Of the existing restaurants, 25 are free-standing and 16 are
in-line shopping center/mall locations. The following table sets forth the
location of each existing Max & Erma's restaurant and the locations of two (all
free-standing) of the four restaurants scheduled to open during the remainder of
1997:
<TABLE>
<CAPTION>
Existing Under Development
-------- -----------------
<S> <C> <C>
GEORGIA
Atlanta.......... - 2
ILLINOIS
Chicago.......... 6 -
INDIANA
Indianapolis..... 3 -
KENTUCKY
Lexington........ 2 -
MICHIGAN
Ann Arbor........ 1 -
Detroit............. 6 -
Grand Rapids..... 1 -
NORTH CAROLINA
Charlotte........ 1 -
OHIO
Akron............ 1 -
Cincinnati....... 1 -
Cleveland........ 3 -
Columbus......... 8 -
Dayton........... 3 -
PENNSYLVANIA
Pittsburgh....... 5 -
- -
TOTAL.... 41 2
</TABLE>
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The Company's preference is to acquire the land and build new
free-standing restaurants. However, in order to acquire suitable sites, the
Company will utilize ground leases, or lease and convert existing premises.
Management believes that the clustering of three or more restaurants in markets
of sufficient size increases customer awareness, enhances the effectiveness of
advertising and improves management efficiency.
Government Regulation
- ---------------------
The Company is subject to Federal, state and local laws affecting the
operation of its restaurants, including zoning, health, sanitation and safety
regulations and alcoholic beverage licensing requirements. Each restaurant is
operated in accordance with standardized procedures designed to assure
compliance with all applicable codes and regulations. The suspension of a food
service or liquor license could cause an interruption of operations at affected
restaurants.
Business Risks
- --------------
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
case 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 Fiscal 1997 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 70
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 cost 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.
Item 2. PROPERTIES
- -------------------
All but thirteen of the Company's restaurants are occupied under leases
expiring from 1997 to 2025, with renewal options for five to 20 additional
years. The affiliated partnership which owns one of the restaurants in Columbus,
Ohio also owns the premises on which it is located. Restaurant leases are
generally collateralized by liens on leasehold improvements, equipment,
furniture and fixtures. The Company leases its executive offices (15,000 square
feet) and general warehouse and storage facilities (17,000 square feet) in
Columbus, Ohio under an operating lease expiring in October 2000.
The last 21 restaurants opened are based on a new design which the
Company has used as its prototype. The prototype gives Max & Erma's restaurants
a distinct identity and emphasizes an unpretentious neighborhood ambiance. The
prototype design downplays the use of brass, Tiffany lamps and other design
features common to the Company's older restaurants and to many other casual
dining restaurants. Max & Erma's restaurants established prior to the
introduction of the prototype vary in design and appearance, but average 6,000
square feet and seat an average of 160 customers. The freestanding prototype is
approximately 6,700 square feet and seats 200 patrons for dining in addition to
the bar area. A 30 to 40 seat seasonal patio area is optional. The prototype
design is readily adaptable to a variety of sites including shopping center and
mall locations.
The Company believes that its focus on selecting high profile
restaurant sites is critical to its success. The Company's present site
selection strategy is to locate its restaurants in prime, high visibility, high
traffic suburban locations. Management believes that selection of high profile
sites along with the implementation of its prototype restaurant will result in
improved unit economics.
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Item 3. LEGAL PROCEEDINGS
- -------------------------
The Company is a defendant in various legal proceedings regarded as
normal to its business, and in the opinion of management, the ultimate outcome
of such proceedings will not materially affect the Company's financial position
or the results of its operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
- ----------------------------------------------------------
STOCKHOLDER MATTERS
-------------------
The information contained under the captions "SELECTED QUARTERLY
FINANCIAL DATA" and "SHAREHOLDER INFORMATION" is incorporated herein by
reference to the inside back cover of the Company's Annual Report to
Shareholders for the fiscal year ended October 27, 1996.
Item 6. SELECTED FINANCIAL DATA
- --------------------------------
Information required under this Item is incorporated herein by reference to
the Company's Annual Report to Shareholders for the fiscal year ended October
27, 1996, page 10.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Information required under this Item is incorporated herein by
reference to the Company's Annual Report to Shareholders for the fiscal year
ended October 27, 1996, pages 11 through 13.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The balance sheets as of October 27, 1996 and October 29, 1995 and the
related statements of income, stockholders' equity and cash flows for each of
the three years in the period ended October 27, 1996, and the related notes to
the financial statements together with the independent auditors' report thereon
and the Selected Quarterly Financial Data are incorporated by reference to the
Company's Annual Report to Shareholders for the fiscal year ended October 27,
1996, pages 14 through 24 and the inside back cover.
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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
- ------------------------------------------------------
ON ACCOUNTING AND FINANCIAL DISCLOSURES
---------------------------------------
None.
PART III
Items 10, 11, 12 and 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE
- -----------------------------------------------------------------
REGISTRANT: EXECUTIVE COMPENSATION: SECURITY OWNERSHIP OF
-----------------------------------------------------------
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT: AND CERTAIN
------------------------------------------------------
RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------
Information required under these Items is incorporated herein by
reference to the Company's Proxy Statement for 1997 Annual Meeting of
Stockholders, pursuant to Regulation 14A.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
- ---------------------------------------------------------------------
8-K.
----
(a)(1) and (2) and (d): Financial Statements
The financial statements listed in the accompanying index to
financial statements on page 11 are filed as part of this
report.
(a)(3) and (c): Exhibits
The exhibits listed in the accompanying index to exhibits on
pages 12 through 15 are filed as part of this report.
(b): Reports on Form 8-K
Form 8-K was filed on September 26, 1996.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: January 13, 1997 Max & Erma's Restaurants, Inc.
By: */s/ Todd B. Barnum
-----------------------------------
Todd B. Barnum
Chairman of the Board,
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
*/s/ Todd B. Barnum Chairman of the Board, Chief Executive
- ------------------------------------------- Officer and President, Director (Principal
Todd B. Barnum Executive Officer)
*/s/ Mark F. Emerson Chief Operating Officer, Director
- -------------------------------------------
Mark F. Emerson
*/s/ William C. Niegsch, Jr. Executive Vice President and Chief
- -------------------------------------------- Financial Officer, Director,
William C. Niegsch, Jr. (Principal Financial Officer)
*/s/ William E. Arthur Director
- -------------------------------------------
William E. Arthur
*/s/ Donald W. Kelley Director
- -------------------------------------------
Donald W. Kelley
*/s/ Robert A. Rothman Director
- -------------------------------------------
Robert A. Rothman
*/s/ Roger D. Blackwell Director
- -------------------------------------------
Roger D. Blackwell
*/s/ Michael D. Murphy Director
- -------------------------------------------
Michael D. Murphy
*/s/ Thomas R. Green Director
- -------------------------------------------
Thomas R. Green
*By /s/ William C. Niegsch, Jr.
---------------------------------------
William C. Niegsch, Jr.
Attorney-in-Fact
</TABLE>
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MAX & ERMA'S RESTAURANTS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
ITEMS 8, 14(a)(1)
<TABLE>
<CAPTION>
REFERENCE PAGE
--------------
ANNUAL REPORT
TO
SHAREHOLDERS
------------
<S> <C>
The following items are required to
be included in Items 8 and 14(a)(1)
and are incorporated by reference
from the attached Annual Report to
Shareholders of Max & Erma's
Restaurants, Inc. for the fiscal
year ended October 27, 1996:
- -Balance Sheets as of
October 27, 1996 and October 29, 1995 14 - 15
- -For the years ended October 27, 1996,
October 29, 1995 and October 30, 1994
-Statements of Income 16
-Statements of Stockholders' Equity 17
-Statements of Cash Flows 18
- -Notes to Financial Statements 19 - 23
- -Independent Auditors' Report 24
- -No financial statement schedules
are required to be filed because
the conditions requiring their
filing do not exist or because the
information is given in the
financial statements or notes
thereto.
</TABLE>
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REPORT ON FORM 10-K
MAX & ERMA'S RESTAURANTS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description Page No.
------- ----------- --------
No.
---
<S> <C> <C>
2 Plan and Agreement of Reorganization, as amended October Reference is made to Exhibit 2 of
15, 1991. Report on Form 10-K filed January
24, 1992.
3(a) Restated Certificate of Incorporation, as amended April 4, Reference is made to Exhibit 4(c) of
1985. Report on Form 10-Q filed June 26,
1985.
3(b) Restated By-Laws, as amended April 4, 1985. Reference is made to Exhibit 4(d) of
Report on Form 10-Q filed June 26,
1985.
3(c) Certificate of Amendment of Certificate of Incorporation Reference is made to Exhibit 3(c) of
September 22, 1986. Report on Form 10-K filed January
23, 1987.
3(d) Certificate of Amendment of Certificate of Incorporation May Reference is made to Exhibit 3(d) of
30, 1990. Report on Form 10-K filed January
25, 1991.
4(a) Form of Common Stock Certificate. Reference is made to Exhibit 4(a) of
Registration Statement on Form S-1
(Registration No. 2-85585).
4(b) Form of Indenture dated as of August 18, 1994, between Max Reference is made to Exhibit 4(a) of
& Erma's Restaurants, Inc. and The Huntington National Bank, Registration Statement on Form S-2
as Trustee. (Registration No. 33-80090).
4(c) Form of Debenture. Reference is made to Exhibit 4(b) of
Registration Statement on Form S-2
(Registration No. 33-80090).
10(a) Max & Erma's, Ltd. Agreement of Limited Partnership, dated Reference is made to Exhibit 10(b) of
May 17, 1972. Registration Statement on Form S-1
(Registration No. 2-85585).
10(b) First Amendment to Agreement of Limited Partnership of Max Reference is made to Exhibit 10(b) of
& Erma's, Ltd., dated September 9, 1974. Registration Statement on Form S-1
(Registration No. 2-85585).
10(c) Max & Erma's Convention Center Ltd. Agreement of Limited Reference is made to Exhibit 10(k) of
Partnership, dated July 27, 1981. Registration Statement on Form S-1
(Registration No. 2-85585).
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
Exhibit Description Page No.
------- ----------- --------
No.
---
<S> <C> <C>
10(d) Letter Agreement between Nine Limited Leasing, Max & Reference is made to Exhibit 10(bb)
Erma's, Inc., and Max & Erma's Indianapolis, Ltd., dated April of Registration Statement on Form S-
24, 1977. 1 (Registration No. 2-85585).
10(e) Letter Agreement between Nine Limited Leasing, Max & Reference is made to Exhibit 10(dd)
Erma's, Inc., and Max & Erma's East, Ltd., dated May 27, 1977. of Registration Statement on Form S-
1 (Registration No. 2-85585).
10(f) Letter Agreement between Nine Limited Leasing, Max & Reference is made to Exhibit 10(ee)
Erma's, Inc., and Max & Erma's Dayton, Ltd., dated October 1, of Registration Statement on Form S-
1977. 1 (Registration No. 2-85585).
10(g) Letter Agreement between Nine Limited Leasing, Max & Reference is made to Exhibit 10(ff) of
Erma's, Inc., and Max & Erma's Lexington, Ltd., dated Registration Statement on Form S-1
September 27, 1978. (Registration No. 2-85585).
10(h) Letter Agreement between Nine Limited Leasing, Max & Reference is made to Exhibit 10(gg)
Erma's, Inc., and Max & Erma's North, Ltd., dated December of Registration Statement on Form S-
28, 1981. 1 (Registration No. 2-85585).
10(i)* Employment Agreement with Todd Barnum, dated December Reference is made to Exhibit 10(b) of
12, 1984. Report on Form 10-K filed January
25, 1985.
10(j)* Employment Agreement with Mark F. Emerson, dated Reference is made to Exhibit 10(c) of
December 12, 1984. Report on Form 10-K filed January
25, 1985.
10(k)* Employment Agreement with William C. Niegsch, Jr., dated Reference is made to Exhibit 10(d) of
December 12, 1984. Report on Form 10-K filed January
25, 1985.
10(l)* Third Amended and Restated 1984 Incentive Stock Option Reference is made to Exhibit 10(n) of
Plan. Report on Form 10-K filed January
25, 1993.
10(m)* Third Amended and Restated 1984 Non-Statutory Stock Option Reference is made to Exhibit 10(o) of
Plan. Report on Form 10-K filed January
25, 1993.
10(n)* Board of Directors' resolution dated October 19, 1992 relating Reference is made to Exhibit 10(p) of
to amendment to Third Amended and Restated 1984 Non- Report on Form 10-K filed January
Statutory Stock Option Plan. 25, 1993.
10(o)* 1992 Stock Option Plan. Reference is made to Exhibit 10(q) of
Report on Form 10-K filed January
25, 1993.
10(p)* 1996 Stock Option Plan. Reference is made to Exhibit 10(p) of
Report on Form 10-K filed January
1996.
10(q)* Indemnification Agreement (form) between Max & Erma's Reference is made to Exhibit 10(y) of
Restaurants, Inc. and each of its directors dated as of June 18,Report on Form 10-K filed January
1986. 23, 1987.
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
Exhibit Description Page No.
------- ----------- --------
No.
---
<S> <C> <C>
10(s)* Promissory Note from Karen Brennan, dated February 12, Reference is made to Exhibit 10(ee)
1988. of Report on Form 10-K filed January
27, 1989.
10(t)* Stock Pledge and Option Agreement with Karen Brennan, Reference is made to Exhibit 10(ff) of
dated February 12, 1988. Report on Form 10-K filed January
27, 1989.
10(u) Lease between Max & Erma's Dublin, Inc. and Mango Reference is made to Exhibit 10(ee)
Investments, dated February 9, 1989. of Report on Form 10-K filed January
26, 1990.
10(v)* Employment Agreement with Karen Brennan, dated June 20, Reference is made to Exhibit 10(ff) of
1989. Report on Form 10-K filed January
26, 1990.
10(w)* Board of Directors' Resolution adopted October 29, 1993 Reference is made to Exhibit 10(w)
relating to officers' bonuses. of Report on Form 10-K filed January
27, 1994.
10(x)* Board of Directors' Resolution adopted October 4, 1994 Reference is made to Exhibit 10(x) of
relating to officers' bonuses. Report on Form 10-K filed January
23, 1995.
10(y)* Board of Directors' Resolution adopted October 23, 1995 Reference is made to Exhibit 10(y) of
relating to officers' bonuses. Report on Form 10-K filed January
16, 1995.
10(z)* Written description of split dollar life insurance program for Reference is made to footnote 3 to the
officers. Summary Compensation Table
presented in the Company's Proxy
Statement for the 1996 Annual
Meeting of Shareholders, which is
incorporated by Reference herein.
10(aa)* Board of Directors' Resolution adopted November 2, 1987 Reference is made to Exhibit 10(dd)
relating to split dollar life insurance program for officers. of Report on Form 10-K filed January
25, 1993.
10(bb)* Board of Directors' Resolution adopted October 19, 1992 Reference is made to Exhibit 10(ee)
relating to split dollar life insurance program for officers. of Report on Form 10-K filed January
25, 1993.
10(cc) Revolving Credit Agreement dated October 25, 1993 between Reference is made to Exhibit 10(aa)
Max & Erma's Restaurants, Inc. and The Provident Bank. of Report on Form 10-K filed January
27, 1994.
10(dd) Letter Agreement dated July 20, 1994 between Max & Erma's Reference is made to Exhibit 10(ab)
Restaurants, Inc. and The Provident Bank. of Registration Statement on Form S-
2 (Registration No. 33-80090).
10(ee) Second Amendment to Revolving Credit Agreement dated Reference is made to Exhibit 10(ee)
August 25, 1995 between Max & Erma's Restaurants, Inc. and of Report on Form 10-K filed January
The Provident Bank. 16, 1996.
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
Exhibit Description Page No.
------- ----------- --------
No.
---
<S> <C> <C>
10(ff) Mortgage Commitment Letter dated November 7, 1995 Reference is made to Exhibit 10(ff)
between Max & Erma's Restaurants, Inc. and MetLife Capital of Report on Form 10-K filed January
Financial Corporation. 16, 1996.
10(gg)* Board of Directors' Resolution adopted October 8, 1996
relating to officers' bonuses.
13 Portions of the Annual Report to Stockholders for the
Fiscal Year ended October 27, 1996, incorporated herein
by reference (except for those pages which are
specifically incorporated by reference, the Company's Annual
Report to Stockholders is not to be deemed as filed as part of this
report.)
23 Consents of Experts and Counsel.
24 Power of Attorney.
27 Financial Data Schedule
</TABLE>
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Report on Form 10-K pursuant to Item 14(c) of the Report
on Form 10-K.
15
<PAGE> 1
EXHIBIT 10(gg)
RESOLVED, that a cash bonus pool be established for the Company's four senior
officers for Fiscal 1997 calculated in the aggregate as follows:
1% of pre-tax earnings up to $1,238,000;
5% of pre-tax earnings between $1,238,001 and $2,477,000;
10% of pre-tax earnings between $2,477,001 and $3,715,000;
25% of pre-tax earnings over $3,715,00.
FURTHER RESOLVED, that the cash bonus pool be allocated and paid 40% to Mr.
Barnum and 20% to each of Mr. Emerson, Mr. Niegsch, and 10% to Ms. Brannigan,
and 10% unallocated.
FURTHER RESOLVED, that the cash bonus pool be paid quarterly based on estimates
and adjusted for the annual amount at the fiscal year-end;
FURTHER RESOLVED, that the Company's officers attempt through estimates of
annual earnings to spread the quarterly bonus evenly throughout the four
quarters; and
FURTHER RESOLVED, that the cash bonus pool be capped at a total of $648,750,
which is 125% of the aggregate base salaries of the four executives eligible
for such bonus.
FURTHER RESOLVED, that in addition to the executive officer bonus program
described above, at the end of each of the second and fourth quarters of fiscal
1997, for each one point the Company's average price to earnings ratio for the
prior two quarters exceeds 14, Mr. Niegsch, the Company's Executive Vice
President, Chief Financial Officer, Treasurer and Secretary, will be paid a cash
bonus of $10,000, with fractional increases pro rated; provided, however, if the
Company's net income for fiscal 1997 is less than 90% of net income for fiscal
1996, the cash bonus hereunder shall not exceed $20,000 for fiscal year 1997.
FURTHER RESOLVED, that at the end of the second and fourth quarters of fiscal
1997, for each 100 basis points by which the Company's controllable profit
(defined as profit before interest, depreciation and rent) exceeds 25.75% of
revenues, Mr. Emerson, the Company's Chief Operating Officer, will receive a
cash bonus of $20,000, with fractional increases pro rated; provided, however,
that if the Company's net income for fiscal 1997 is less than 90% of net income
for fiscal 1996, the cash bonus shall not exceed $20,000 for fiscal 1997.
FURTHER RESOLVED, that Mr. Heywood, the Company's Regional Vice President of
Operations, will be paid a bonus equal to the cash bonuses paid for fiscal 1997
to the regional managers assigned to report to Mr. Heywood.
FURTHER RESOLVED, that Mr. Fournier, the Company's Vice President of
Development, will be paid a cash bonus for each new restaurant opened in fiscal
1997, in an amount equal to $25,000 divided by the number of planned new
restaurants for fiscal 1997, which bonus may be taken under the Company's
Manager Stock Bonus Plan in cash or in the Company's common stock valued at
one-half of fair market value.
<PAGE> 1
Exhibit 13
SELECTED FIANANCIAL DATA
- ------------------------
<TABLE>
<CAPTION>
October October October October October October
(IN THOUSANDS, EXCEPT PER SHARE DATA) 27, 1996 29, 1995 30, 1994 31, 1993 25, 1992 27, 1991
==================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Revenues $ 79,858 $ 64,198 $ 56,127 $ 43,515 $ 38,763 $ 36,402
Operating Income 5,312 4,427 3,740 2,581 2,225 1,377
Interest Expense 2,060 1,208 851 350 335 419
Income Before Income Taxes 3,176 3,061 2,817 2,084 1,698 771
Net Income 2,161 2,139 2,001 1,371 1,083 429
Depreciation and Amoritization 5,515 4,201 3,599 2,405 2,112 1,878
EBITDA* 10,750 8,470 7,268 4,839 4,144 3,069
Capital Expenditures 13,898 16,191 7,700 6,765 2,445 2,095
PER SHARE DATA
Net Income $ .51 $ .50 $ .47 $ .34 $ .28 $ .11
Revenues 18.73 15.04 13.26 10.94 9.86 8.98
Assets 13.72 11.43 7.65 6.19 4.09 3.66
Stockholders' Equity 4.20 3.65 3.24 2.51 2.13 2.03
Market Price at Year End 6.63 7.63 7.73 7.62 4.09 2.73
Weighted Average Shares Outstanding 4,264 4,268 4,232 3,979 3,932 4,054
FINANCIAL POSITION
Cash $ 927 $ 1,102 $ 993 $ 442 $ 299 $ 503
Working Capital Deficit (5,067) (3,316) (2,526) (2,748) (1,254) (2,320)
Property-Net 52,715 42,502 27,530 21,505 13,531 12,134
Total Assets 58,484 48,800 32,383 24,630 16,065 14,820
Long-Term Obligations
(Less Current Maturities) 32,349 26,037 13,639 10,129 5,023 2,925
Stockholders' Equity 17,908 15,600 13,712 10,000 8,367 8,241
OTHER DATA AND RATIOS
Average Restaurant Sales $ 2,209 $ 2,172 $ 2,191 $ 2,070 $ 2,035 $ 2,014
Restaurants in Operation at Year End 39 33 27 24 20 19
Restaurant Profit Margin 13.0% 14.4% 14.1% 14.1% 13.7% 11.7%
Operating Profit Margin 6.7% 6.9% 6.7% 5.9% 5.7% 3.8%
Long-Term Debt-to-Equity Ratio 1.8 1.7 1.0 1.0 .6 .4
Price Earnings Ratio (High/Low) 16.2/10.8 16.8/12.0 20.8/14.5 22.1/11.8 16.3/9.7 35.0/18.3
Return on Beginning Assets 4.4% 6.6% 8.1% 8.5% 7.3% 2.8%
Return on Beginning Equity 13.9% 15.6% 20.0% 16.4% 13.1% 5.5%
<FN>
* EBITDA, Earnings Before Interest, Taxes, Depreciation
and Amortization, is operating income plus depreciation
and amortization, less minority interests in income of
affiliated partnerships. EBITDA is not intended to
represent cash flow from operations as defined by
generally accepted accounting principles.
</TABLE>
MAX & ERMA'S RESTAURANTS, INC.
10
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
REVENUE
- -------
Revenues for 1996 increased $15,660,000 or 24% from 1995. The increase was a
result of opening seven restaurants during 1995 and six restaurants during 1996
and significantly higher average sales at the six restaurants opened during
1996. Revenues from the additional restaurants were partially offset by a
decline of 2.0% or $1,116,000 in sales at restaurants opened eighteen months or
more from $54,341,000 in 1995 to $53,225,000 in 1996.
Revenues for 1995 increased $8,071,000 or 14% from 1994. The increase was a
result of opening three restaurants during 1994 and seven restaurants during
1995 and an increase of 1.5% or $641,000 in sales at restaurants opened eighteen
months or more from $43,781,000 in 1994 to $44,422,000 in 1995.
The same-store sales decline in 1996 was caused by the increased level of
competition in the casual dining segment of the restaurant industry and, to a
much lesser extent, record snowfall experienced during the first quarter of
1996. Of the $1.1 million decline in same-store sales, approximately $300,000
was a result of harsh winter weather. The remaining decline was more than
accounted for by same-store sales declines totaling over $900,000 at three of
the Company's higher sales volume restaurants. In two of the cases as many as
ten or more competitors have opened over the last 18 to 24 months. In the third
case the decline was caused by the opening of another Max & Erma's restaurant in
a nearby area. Management believes the sales and profit contribution of the
newer restaurant has more than compensated for the decline at the older
restaurant and justified the additional investment. Despite the internal and
external competition the three restaurants discussed still generated average
sales of almost $2.6 million in 1996.
The remaining Max & Erma's restaurants, as a group, generally experienced
flat to slightly positive same-store sales. Management credits this to i) the
introduction of higher priced entrees which has increased the average dinner
check by approximately 5%, ii) a complete beverage merchandising program which
has resulted in positive same-store beverage sales by the fourth quarter of 1996
and a slight shift in the food to beverage sales mix in favor of higher gross
margin beverage sales, and iii) a moderate but consistent policy of raising
prices approximately 1% annually. In a less competitive restaurant environment
same-store sales gains at a majority of the Company's restaurants have generally
offset the effect of competitor openings. Management believes these programs
along with a continued focus on quality and customer service should re-establish
positive same-store sales.
At the same time management is extremely pleased with the result of 1996's
new restaurants and the prospects for restaurants scheduled to open in 1997. The
six restaurants opened during 1996 generated average weekly sales of $52,415,
approximately 27% higher than average weekly sales of $41,388 at restaurants
opened prior to 1996. Management credits this increase to a continued
improvement in site selection and the Company's new free-standing prototype
restaurant. The six restaurants planned to open in 1997 will all be the
free-standing prototype.
RESTAURANT OPERATING PROFIT
- ---------------------------
The following table sets forth the Company's restaurant operating profit as a
percent of revenue:
<TABLE>
<CAPTION>
Oct. 27, Oct. 29, Oct. 30,
1996 1995 1994
================================================================================
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of Goods Sold (26.7) (26.0) (25.9)
Payroll & Benefits (30.6) (30.3) (30.5)
Other Operating Expenses (29.7) (29.3) (29.5)
----- ----- -----
Restaurant Operating Profit 13.0% 14.4% 14.1%
===== ===== =====
</TABLE>
MAX & ERMA'S RESTAURANTS, INC.
11
<PAGE> 3
Cost of goods sold, as a percentage of revenues, increased from 26.0% in
1995 to 26.7% in 1996. The increase is a result of higher pork and dairy prices
throughout much of 1996 and, during the second half of 1996, the introduction of
higher cost percentage entrees. Because of the intense level of competition the
Company raised prices less than 1% during 1996. However, the Company will raise
menu prices approximately 1% at the start of 1997 in an effort to reduce cost of
goods sold, as a percentage of revenues. Cost of goods sold, as a percentage of
revenues, rose only slightly from 1994 to 1995 due primarily to higher produce
prices during the second quarter of 1995.
Payroll and benefits, as a percentage of revenues, remained relatively
constant over the periods reported. A slight decline from 30.5% in 1994 to 30.3%
in 1995 was primarily a result of lower benefit costs due to the implementation
of a self-funded health insurance plan and lower workers' compensation insurance
costs. A slight increase from 30.3% in 1995 to 30.6% in 1996 was a result of
higher wage rates due to the competitiveness in the labor market. Higher average
revenues at the Company's newer restaurants and the less labor intensive nature
of the new entrees introduced during 1996 somewhat mitigate the effect of higher
wage rates.
Other operating expenses, as a percentage of revenues, declined slightly
from 29.5% in 1994 to 29.3% in 1995 and then increased slightly to 29.7% in
1996. The decrease and increase were almost entirely related to amortization of
pre-opening expenses which varied from $669,000 or 1.2% of revenues in 1994 to
$551,000 or .9% of revenues in 1995 and then increased to $1,073,000 or 1.3% of
revenues in 1996. Other operating expenses were also negatively impacted during
1996 by higher weather-related maintenance costs.
Inflation has had no significant impact on operating costs during the years
reported.
ADMINISTRATIVE EXPENSES
- -----------------------
Administrative expenses increased approximately 15% from 1994 to 1995 and
approximately 5% from 1995 to 1996. The increases were a result of salary
increases and additional corporate staff needed to support the Company's growth.
As a percentage of revenues, administrative expenses remained relatively
constant in 1994 and 1995 at 7.5%. In 1996 administrative expenses, as a
percentage of revenues, declined to 6.3%. The decline was a result of the
accelerated revenue growth rate in 1996, a continuing effort to control
corporate overhead, and the fact that certain administrative costs were in place
in anticipation of 1996's growth.
The average increase in administrative expenses from 1994 to 1996 was 10%
annually, which was approximately one-half of the revenue growth rate.
Management expects this trend to continue into 1997, which should further reduce
administrative expenses as a percentage of revenues.
INTEREST EXPENSE
- ----------------
Interest expense increased from $1,208,000 in 1995 to $2,060,000 in 1996 due to
an increase in the average balance of long-term obligations during the year from
$18.7 million dollars in 1995 to $30.3 million in 1996. A slight reduction in
interest rates during 1996 partially offset the effect of the increased
borrowings. During the year the Company obtained a $6.0 million, 8.32% fixed
rate mortgage and the interest rate on its revolving credit agreement, which was
above 9.0% for most of 1995, declined to 8.5% for most of 1996. The Company does
not expect interest expense in 1997 to increase at the same rate, as it plans to
fund a greater portion of its capital expenditures from cash flow from
operations. The Company capitalized $406,000 of construction period interest
during 1996.
Interest expense increased from $851,000 in 1994 to $1,208,000 in 1995 due
to an increase in the average balance in long-term obligations during the year
from $12.5 million in 1994 to $18.7 million dollars in 1995. Although the
interest rate on the Company's revolving credit agreement rose from 8.25% in
1994 to 9.75% during the first half of 1995, the impact on interest expense was
minimal because outstanding borrowings under the agreement
MAX & ERMA'S RESTAURANT, INC.
12
<PAGE> 4
were low. During the second half of 1995 rates declined and the Company's lender
reduced the interest rate by 1/2% in conjunction with an increase in the dollar
amount available under the credit agreement. During 1995 the Company capitalized
$337,000 of construction period interest as compared to $71,000 in 1994.
INCOME TAXES
- ------------
The Company's effective tax rate increased from 29% in 1994 to 30% in 1995 and
to 32% in 1996. The increases were a result of the expiration of the targeted
jobs tax credit during 1995.
Effective October 1, 1996, Congress enacted the work opportunity tax
credit, which is substantially similar to the targeted jobs tax credit. Assuming
that a similar number of new hires qualify for the work opportunity tax credit,
the Company estimates that its effective tax rate for 1997 could decline to
approximately 30%.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's working capital ratio declined from .5 to 1 at October 29, 1995 to
.4 to 1 at October 27, 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 1996, the Company expended approximately $13,898,000 for property
additions, $33,735,000 to reduce long-term obligations, and $155,000 to
repurchase 23,000 shares of its common stock. Funds for such expenditures were
provided primarily by $38,929,000 from proceeds of long-term obligations,
$8,712,000 from operations, $183,000 from the sale of common stock and a
decrease in cash of $175,000. The Company routinely draws down and repays its
revolving credit agreement, the gross amounts of which are included in the above
numbers.
At October 27, 1996, the Company was committed to the opening of six
restaurants during 1997, four of which were under construction and scheduled to
open during the first and second quarters of 1997. An additional 1997 location
has been secured under a ground lease. The Company is also in the final stages
of negotiations for two additional locations, one of which would open in 1997.
The Company anticipates opening six restaurants in 1998. However, no sites for
1998 are currently under contract.
The Company expects to expend approximately $7.0 million in 1997 on the
completion of the six restaurants planned for the year. Although no sites are
currently under contract, the Company would anticipate spending an additional
two to three million dollars during 1997 on restaurants scheduled to open during
1998. Funding will be provided by cash from operations, bank borrowings and
equipment leasing. At October 27, 1996 the Company had available $2.75 million
dollars under its revolving credit agreement and $1.8 million under equipment
lease commitments. Management believes these funding sources, plus cash from
operations, should be adequate to meet its capital needs through 1997.
Except for the historical information, the matters discussed in this report
are forward-looking statements which involve risks and uncertainties, including
but not limited to: business conditions in the restaurant industry and the
general economy; competitive factors; regulatory requirements; pricing
pressures; and management decisions to pursue new restaurant sites which involve
additional costs, risks and capital expenditures.
MAX & ERMA'S RESTAURANT, INC.
13
<PAGE> 5
BALANCE SHEETS
- --------------
<TABLE>
<CAPTION>
October 27, October 29,
ASSETS 1996 1995
===================================================================================================================
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents .............................................................. $ 927,261 $ 1,102,060
Receivables:
Trade and other ................................................................ 197,622 164,142
Equipment desposits ............................................................ 330,076 801,531
------------ ------------
TOTAL RECEIVABLES ............................................................ 527,698 965,673
Inventories ....................................................................... 641,196 539,025
Supplies .......................................................................... 167,264 148,322
Prepaid expenses:
Insurance ...................................................................... 205,822 193,508
Other .......................................................................... 99,778 82,150
Preopening Costs (less accumulated amortization, 1996-$546,374; 1995-$472,572) .... 546,319 673,871
------------ ------------
TOTAL CURRENT ASSETS ......................................................... 3,115,338 3,704,609
PROPERTY-AT COST
Land and buildings ................................................................ 31,178,365 19,886,562
Leasehold improvements ............................................................ 20,347,332 19,710,573
Equipment and fixtures ............................................................ 14,905,282 13,811,360
Construction in progress .......................................................... 3,654,485 4,155,152
------------ ------------
Total .......................................................................... 70,085,464 57,563,647
Less accumulated depreciation and amortization .................................... 17,370,256 15,061,971
PROPERTY-NET ................................................................. 52,715,208 42,501,676
OTHER ASSETS
Goodwill (less accumulated amortization, 1996-$653,743; 1995-$603,455) ............ 285,789 336,077
Deferred Costs (less accumulated amortization, 1996-$218,227; 1995-$156,143) ...... 876,262 912,632
Deferred income taxes ............................................................. 620,000 600,000
Miscellaneous ..................................................................... 871,644 744,514
------------ ------------
TOTAL OTHER ASSETS ........................................................... 2,653,695 2,593,223
------------ ------------
TOTAL ............................................................................. $ 58,484,241 $ 48,799,508
============ ============
<FN>
See notes to financial statements.
</TABLE>
MAX & ERMA'S RESTAURANT, INC.
14
<PAGE> 6
<TABLE>
<CAPTION>
October 27, October 29,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
===============================================================================================================================
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term obligations ......................................... $ 1,407,604 $ 727,719
Accounts payable .................................................................... 1,638,990 1,265,154
Construction payables ............................................................... 1,774,350 2,269,182
Accrued liabilities:
Payroll and related taxes ........................................................ 1,305,276 1,216,812
Taxes, other than income taxes ................................................... 912,939 686,453
Income taxes ..................................................................... 208,773
Other ............................................................................ 787,168 666,453
----------- -----------
Total accrued liabilities ...................................................... 3,214,156 2,569,718
----------- -----------
Deferred income taxes ............................................................... 147,000 189,000
----------- -----------
TOTAL CURRENT LIABILITIES ...................................................... 8,182,100 7,020,773
LONG-TERM OBLIGATIONS-
Less current maturities .......................................................... 32,349,305 26,036,831
MINORITY INTERESTS IN AFFILIATED PARTNERSHIPS ....................................... 45,288 141,935
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock- $.10 par value; authorized 500,000 shares, none outstanding
Common stock- $.10 par value; authorized 10,000,000shares; issued and
outstanding:
1996-4,226,497; 1995-4,117,885 shares .......................................... 422,650 411,789
Additional capital ............................................................... 11,432,112 11,296,383
Retained earnings ................................................................ 6,052,786 3,891,797
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ..................................................... 17,907,548 15,599,969
----------- -----------
TOTAL ............................................................................... $58,484,241 $48,799,508
=========== ===========
<FN>
See notes to financial statements.
</TABLE>
MAX & ERMA'S RESTAURANT, INC.
15
<PAGE> 7
STATEMENTS OF INCOME
- --------------------
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------------------
October 27, October 29, October 30,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES ......................... $ 79,857,589 $ 64,198,284 $ 56,127,102
OPERATING EXPENSES:
Cost of goods sold ............... 21,338,590 16,723,445 14,533,731
Payroll and benefits ............. 24,396,710 19,435,463 17,105,875
Other operating expenses ......... 23,741,859 18,808,272 16,555,987
Administrative expenses .......... 5,068,093 4,804,486 4,191,901
------------ ------------ ------------
TOTAL OPERATING EXPENSES ...... 74,545,252 59,771,666 52,387,494
------------ ------------ ------------
OPERATING INCOME ................. 5,312,337 4,426,618 3,739,608
------------ ------------ ------------
INTEREST EXPENSE ................. 2,059,732 1,207,695 851,011
MINORITY INTERESTS IN INCOME OF
AFFILIATED PARTNERSHIPS ....... 76,616 157,712 71,495
------------ ------------ ------------
INCOME BEFORE INCOME TAXES ....... 3,175,989 3,061,211 2,817,102
------------ ------------ ------------
INCOME TAXES:
State and local .................. 223,000 184,000 189,000
Federal:
Current ....................... 854,000 791,000 827,000
Deferred (credit) ............. (62,000) (53,000) (200,000)
TOTAL INCOME TAXES .......... 1,015,000 922,000 816,000
------------ ------------ ------------
NET INCOME ....................... $ 2,160,989 $ 2,139,211 $ 2,001,102
============ ============ ============
NET INCOME PER COMMON SHARE ...... $ 0.51 $ 0.50 $ 0.47
============ ============ ============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING . 4,264,032 4,268,274 4,232,162
============ ============ ============
<FN>
See notes to financial statements.
</TABLE>
MAX & ERMA'S RESTAURANTS, INC.
16
<PAGE> 8
STATEMENT OF STOCKHOLDERS' EQUITY
- ---------------------------------
<TABLE>
<CAPTION>
Common Stock
---------------------- Additional Retained
Shares Amount Capital Earnings Total
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1993 3,498,802 $ 349,880 $ 6,973,771 $ 2,675,857 $ 9,999,508
Issuance of stock through
option and bonus plans,
including $8,922 related
tax benefit 113,832 11,383 510,555 521,938
Issuance of stock for acquisition
of buildings 155,555 15,556 1,173,444 1,189,000
Net income 2,001,102 2,001,102
--------- ------------- ------------ ------------- ------------
BALANCE, OCTOBER 30, 1994 3,768,189 376,819 8,657,770 4,676,959 13,711,548
Issuance of stock through
option and bonus plans,
including $72,640 related
tax benefit 39,091 3,909 227,579 231,488
Stock issued in connection with
10% stock dividend 371,066 37,107 2,885,038 (2,922,145)
Cash paid in lieu of fractional
shares in connection with
10% stock dividend (2,228) (2,228)
Shares repurchased (60,461) (6,046) (474,004) (480,050)
Net income 2,139,211 2,139,211
--------- ------------- ------------ ------------- ------------
BALANCE, OCTOBER 29, 1995 4,117,885 $ 411,789 $ 11,296,383 $ 3,891,797 $ 15,599,969
Issuance of stock through
option and bonus plans,
including $13,399 related
tax benefit 131,612 13,161 288,175 301,336
Shares repurchased (23,000) (2,300) (152,446) (154,746)
Net income 2,160,989 2,160,989
--------- ------------- ------------ ------------- ------------
BALANCE, OCTOBER 27,1996 4,226,497 $ 422,650 $ 11,432,112 $ 6,052,786 $ 17,907,548
========= ============= ============ ============= ============
<FN>
See notes to financial statements.
</TABLE>
MAX & ERMA'S RESTAURANTS, INC.
17
<PAGE> 9
STATEMENTS OF CASH FLOWS
- ------------------------
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------------------
October 27, October 29, October 30,
1996 1995 1994
===========================================================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................... $ 2,160,989 $ 2,139,211 $ 2,001,102
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................. 5,514,683 4,201,100 3,598,735
Deferred income taxes (credit) ............................ (62,000) (53,000) (200,000)
Minority interests in income of Affiliated Partnerships ... 76,616 157,712 71,495
Loss on property disposals ................................ 99,230 46,540 62,724
Issuance of common stock as compensation
through manager bonus plan .............................. 105,331 68,987 129,658
Changes in assets and liabilities:
Accounts receivable, inventories, supplies
and prepaid expenses .................................... 286,920 (749,171) (173,282)
Capitalized preopening costs .............................. (945,601) (916,639) (496,324)
Other assets .............................................. 22,022 (31,354) 68,954
Accounts payable, accrued and other liabilities ........... 1,453,886 1,167,756 1,396,810
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............... 8,712,076 6,031,142 6,459,872
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions ........................................... (13,897,963) (16,191,324) (7,699,720)
Reimbursable construction costs incurred ..................... (275,000)
Construction costs reimbursed ................................ 275,000 200,000
Additions to other assets .................................... (157,658) (126,337) (366,176)
Proceeds from the sale of property ........................... 215,400 4,424 5,650
------------ ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES ..................... (13,840,221) (16,313,237) (7,860,246)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations ............... (33,734,623) (15,612,803) (21,657,239)
Proceeds from long-term obligations .......................... 38,929,346 26,588,540 24,337,475
Debt issue costs ............................................. (95,972) (977,272)
Proceeds from exercise of stock options ...................... 182,604 89,861 383,358
Distributions to minority interests in Affiliated Partnerships (173,263) (192,514) (134,762)
Cash paid for purchase of common stock ....................... (154,746) (480,050)
Cash paid in lieu of fractional shares ....................... (2,228)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ................. 4,953,346 10,390,806 1,951,560
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS .............. (174,799) 108,711 551,186
CASH AND EQUIVALENTS AT BEGINNING OF YEAR .................... 1,102,060 993,349 442,163
------------ ------------ ------------
CASH AND EQUIVALENTS AT END OF YEAR .......................... $ 927,261 $ 1,102,060 $ 993,349
============ ============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest-net of $405,748, $337,046, and $70,646
capitalized in 1996, 1995 and 1994 ........................ $ 2,020,919 $ 1,152,455 $ 663,940
Income taxes .............................................. 823,827 1,014,025 984,838
Noncash activities:
Property additions financed by capital leases ............. 1,375,425 1,107,255 538,037
Property additions financed by issuance of stock .......... 1,189,000
Property additions financed by construction payables ...... 1,774,350 2,269,182 1,073,462
<FN>
See notes to financial statements.
</TABLE>
MAX & ERMA'S RESTAURANTS, INC.
18
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
FOR THE YEARS ENDED OCTOBER 27, 1996,
OCTOBER 29, 1995 AND OCTOBER 30, 1994
1. ACCOUNTING POLICIES
- ----------------------
DESCRIPTION OF BUSINESS - Max & Erma's Restaurants, Inc. (the "Company")
owns and operates restaurants under the trade name "Max & Erma's - Neighborhood
Gathering Place." At October 27, 1996, there are 39 Max & Erma's restaurants in
operation (33 at October 29, 1995) (principally located in the Midwestern United
States) and 4 under construction in Georgia, Michigan and Pennsylvania. The
Company owns all of the restaurants, except for two that are owned by separate
limited partnerships ("Affiliated Partnerships") in which the Company is the
controlling general partner. A restaurant owned by a franchisee was closed in
fiscal 1995.
CONSOLIDATION - The financial statements include the accounts of the
Company and the Affiliated Partnerships. All significant intercompany
transactions and balances, including management fees, interest, receivables and
payables, have been eliminated.
CASH EQUIVALENTS - The Company considers all checking accounts, cash funds
and highly liquid debt instruments with a maturity of less than three months at
the date of purchase to be cash equivalents. All cash is principally on deposit
with two banks.
INVENTORIES - Inventories are valued at the lower of cost, using the
first-in, first-out (FIFO) method, or market, and consist of food and beverages.
PREOPENING COSTS - Restaurant preopening costs which consist of hiring,
training and certain other incremental direct costs of opening restaurants are
accumulated and amortized from the opening date of the restaurant over a one
year period.
DEPRECIATION AND AMORTIZATION OF PROPERTY - Depreciation and amortization
of property are computed generally using the straight-line method based on the
estimated useful lives of the assets or the terms of the leases as follows:
<TABLE>
<CAPTION>
YEARS
- ------------------------------------------------------------------
<S> <C>
Buildings ............................................. 15 to 30
Leashold improvments .................................. 10 to 15
Lease rights .......................................... 6 to 23
Equipment and Fixtures ................................ 3 to 15
</TABLE>
INTANGIBLES - Goodwill is amortized over 16 1/2 to 20 years which are the
terms of the related restaurant leases, including renewal options. Annually, or
more frequently if events or circumstances change, a determination is made by
management to ascertain whether goodwill has been impaired based on the sum of
expected future undiscounted cash flows from operating activities. If the
estimated net cash flows are less than the carrying amount of goodwill, the
Company will recognize an impairment loss in an amount necessary to write down
goodwill to a fair value as determined from expected future undiscounted cash
flows. Based upon its most recent analysis, the Company believes that goodwill
at October 27, 1996 is realizable and the amortization period is appropriate.
Deferred costs include debt issue costs that relate to the August 1994
issuance of Subordinated Convertible Debentures and loan costs that relate to a
$6 million mortgage loan obtained in March 1996. The costs are being amortized
over the life of the debentures and mortgage loan, respectively.
ADVERTISING - The Company expenses the costs of advertising (including
production costs) the first time the advertising takes place. Advertising
expense was $2,538,000, $1,979,000, and $1,834,000 for fiscal 1996, 1995 and
1994, respectively.
INCOME TAXES - The Company is subject to federal, state, and local income
taxes. Income taxes are provided for all taxable items included in the
statements of income in accordance with Statement of Financial Accounting
Standards No. 109.
NET INCOME PER COMMON SHARE - Net income per common share is based on the
weighted average number of shares of common stock and common stock equivalents
(stock options) outstanding during the year after giving retroactive effect to a
10% stock dividend in April 1995. The assumed conversion of the convertible
debentures had an insignificant impact on net income per common share.
FISCAL YEAR-END - The Company and its Affiliated Partnerships each have a
52-53 week accounting period which ends on the last Sunday in October. Fiscal
1996, 1995 and 1994 each contained 52 weeks.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from these amounts.
RECLASSIFICATIONS - Certain amounts in the 1995 and 1994 financial
statements have been reclassified to conform with the 1996 presentation.
MAX & ERMA'S RESTAURANTS, INC.
19
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
2. OWNERSHIP OF RESTAURANTS BY AFFILIATED PARTNERSHIPS
- ------------------------------------------------------
Two of the restaurants are owned by Affiliated Partnerships in which the Company
is the general partner. As a general partner, the Company is liable for all of
the debts and liabilities of the Affiliated Partnerships. During fiscal 1996,
1995 and 1994 the Company's share of the profits and losses of these two
Affiliated Partnerships was 56% and 40%, respectively.
In addition to its share of the profits and losses of the Affiliated
Partnerships, the Company receives a fee (percentage of gross revenues, as
defined) for managing the restaurants owned by the Affiliated Partnerships.
3. LONG-TERM OBLIGATIONS
- ------------------------
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
October 27, October 29,
1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C>
Debt:
Revolving credit agreement,prime plus 1/4%
(total of 8.50% at October 27, 1996) ..... $12,256,518 $11,558,175
8% convertible subordinated debentures ... 10,384,000 10,384,000
8.32% mortgage loan ...................... 5,897,113
----------- -----------
Total debt ............................ 28,537,631 21,942,175
Capital leases (Note 4) .................. 3,110,664 3,135,972
Accrued rent (Note 4) .................... 2,108,614 1,686,403
----------- -----------
Total long-term obligations ........... 33,756,909 26,764,550
Less current maturites ................... 1,407,604 727,719
----------- -----------
Total long-term obligations-
Less current maturites ................ $32,349,305 $26,036,831
=========== ===========
</TABLE>
At October 27, 1996, the Company's revolving credit agreement with a bank
permits it to borrow up to $15,000,000 until January 1, 1998 at which time the
available borrowing commitment decreases by $750,000 every three months. The
outstanding balance of the revolving line of credit bears interest at a rate (as
defined) ranging from prime plus 1/4% to prime plus 3/4% adjusted quarterly
based upon the Company's debt ratio. All of the Company's assets except four
restaurants described below collateralize the credit agreement, which also
contains covenants that restrict the payment of dividends and incurrence of
additional debt and require the maintenance of certain financial ratios. At
October 27, 1996, approximately $1,000,000 is available for payment of dividends
under the terms of the bank agreement.
In August 1994, the Company issued $10,384,000 of convertible subordinated
debentures which bear interest at 8% and are due in 2004. The debentures are
unsecured and convertible at any time before maturity, unless previously
redeemed, into shares of common stock of the Company at a conversion price of
$9.86 per share, subject to adjustment. The holders of the debentures may tender
to the Company for redemption at par (plus accrued interest) up to a maximum of
$519,200 per year beginning September 1, 1997 and each succeeding year. The
Company may redeem the debentures at any time subject to certain restrictions
and is obligated to purchase the deben tures at the holders' option upon the
occurrence of certain changes in control of the Company.
In March 1996 the Company obtained a $6 million mortgage loan which bears
interest at 8.32% and is payable in monthly installments of $58,453 (principal
and interest) to 2011. The loan is collateralized by four restaurants.
Future maturities of long-term debt obligations at October 27, 1996 are as
follows (see Note 4 for maturities of other long-term obligations):
<TABLE>
<CAPTION>
YEAR ENDING IN OCTOBER
- ----------------------------------------------------------
<C> <C>
1997 ........................................ $ 738,223
1998 ........................................ 1,013,675
1999 ........................................ 3,777,728
2000 ........................................ 3,800,077
2001 ........................................ 3,824,358
Thereafter .................................. 15,383,570
-----------
Total .................................... $28,537,631
===========
</TABLE>
4. LEASES
- ---------
The Company leases certain land and buildings used in the restaurant
operations under various long-term capital and operating lease agreements. The
initial lease terms range from three to thirty years and expire between 1997 and
2025. The leases include renewal options for five to twenty additional years.
Several leases provide for rent either solely or in addition to specified
minimum amounts based on percentages of the restaurant's annual gross revenue,
as defined. The Company is also obligated to pay certain real estate taxes,
insurance, common area charges and various other expenses related to the
properties. The leases are collateralized by subordinated liens on the leasehold
improvements, equipment and fixtures. Four of the leases contain purchase
options at fair market value and one of the leases is with an entity in which an
officer and a director of the Company have a significant interest.
The Company leases vehicles and equipment used in the restaurant operations
under both capital and operating lease agreements. Lease terms range from three
to five years and expire through 2001. The Company is required to pay certain
MAX & ERMA'S RESTAURANT, INC.
20
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
taxes, insurance and other expenses related to the leased property. The Company
also leases other equipment for periods of one year or less.
The following is a summary of property under capital leases included in the
accompanying balance sheets:
<TABLE>
<CAPTION>
October 27, October 29,
1996 1995
- ------------------------------------------------------------------------
<S> <C> <C>
Asset Description
Buildings ...................... $1,045,000 $1,045,000
Equipment and fixtures ......... 3,109,419 3,452,224
---------- ----------
TOTAL ....................... 4,154,419 4,497,224
Less accumulated amortization 1,371,633 1,663,030
---------- ----------
NET ......................... $2,782,786 $2,834,194
========== ==========
</TABLE>
Future minimum lease payments under the capital leases and the present
value of such payments at October 27, 1996 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR:
- ---------------------------------------------------------
<S> <C>
1996 ....................................... $ 867,992
1997 ....................................... 838,205
1998 ....................................... 720,830
1999 ....................................... 465,271
2000 ....................................... 105,476
Thereafter ................................. 637,500
-----------
Total minimum lease payments ........... 3,635,274
Less amount representing interest .......... 524,610
-----------
Present value of minimum lease payments .... 3,110,664
Less current maturities .................... 669,381
-----------
Total obligations under capital leases-
less current maturities ................ $ 2,441,283
===========
</TABLE>
At October 27, 1996, the future minimum rental commitments under
noncancellable operating leases with an initial term in excess of one year are
as follows:
<TABLE>
<CAPTION>
RELATED UNRELATED
PARTIES PARTIES TOTAL
- ------------------------------------------------------------------
<S> <C> <C> <C>
FISCAL YEAR:
1996 ................... $ 146,178 $ 3,157,697 $ 3,303,875
1997 ................... 146,178 3,020,827 3,167,005
1998 ................... 146,178 3,006,916 3,153,094
1999 ................... 146,178 2,956,987 3,103,165
2000 ................... 146,178 2,311,452 2,457,630
Thereafter ............. 1,193,795 15,996,172 17,189,967
------------ ----------- -----------
Total ............... $ 1,924,685 $30,450,051 $32,374,736
============ =========== ===========
</TABLE>
The above future minimum rental amounts include the land portion of certain
capital leases but exclude renewal options and additional rent based on sales or
increases in the United States Consumer Price Index (USCPI). For operating
leases which require increasing rental payments over the term of the lease, the
Company records rent expense on a straight-line basis. The related accrued rent
will generally reverse over the next fifteen years.
At October 27, 1996, the Company has unused equipment lease commitments
totaling $1,775,000 expiring in fiscal 2001.
Rent expense, including common area charges but excluding taxes, insurance
and other expenses related to the properties, consists of the following:
<TABLE>
<CAPTION>
Years ended
--------------------------------------------------
October 27, October 29, October 30,
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Minimum rent on operating leases:
Related parties .............. $ 151,403 $ 157,215 $ 209,829
Unrelated parties ............ 3,870,177 3,400,264 2,859,879
Contingent rent based on:
Percentage of gross revenue
unrelated parties- ..... 246,365 329,295 351,040
Increases in the USCPI
related parties- ....... 26,430
---------- ---------- ----------
Total ........................ $4,267,945 $3,886,774 $3,447,178
========== ========== ==========
</TABLE>
The Company also has agreements with a partnership in which an outside
director of the Company is a partner that grants rights to the partnership to
install and operate coin-operated amusement equipment in certain restaurants.
Under the agreements, the Company has received games revenue averaging
approximately $134,000 per year over the last three years.
On March 14, 1994, the Company purchased land and building leased since
1975 from a director of the Company. The purchase price of approximately
$887,000 was paid with $250,000 cash and 83,333 unregistered shares of the
Company's common stock. On the same date, the Company also purchased land and
building leased since 1975 from a partnership in which a director and the
Chairman and Chief Executive Officer of the Company are general partners. The
purchase price of approximately $902,000 was paid with $350,000 cash and 72,222
unregistered shares of the Company's common stock.
At October 27, 1996 and October 29, 1995 the Company had made lease
deposits principally with two equipment lessors which are returned to the
Company upon installation of the equipment and execution of the leases.
MAX & ERMA'S RESTAURNATS, INC.
21
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
5. INCOME TAXES
- ---------------
The Company's effective tax rate varies from the statutory Federal income tax
rate as a result of the following factors:
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision at statutory rate $ 1,080,000 $ 1,041,000 $ 957,000
State income taxes -
net of Federal benefit . 147,000 121,000 124,000
Targeted jobs tax credit .. (84,000) (158,000)
FICA tax credit ........... (234,000) (210,000) (142,000)
Other - net ............... 22,000 54,000 35,000
----------- ----------- -----------
TOTAL .................. $ 1,015,000 $ 922,000 $ 816,000
=========== =========== ===========
Effective Income Tax Rate . 32.0% 30.1% 29.0%
=========== =========== ===========
</TABLE>
The tax effects of significant items comprising the Company's net deferred
tax asset at October 27, 1996 and October 29, 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS (LIABILITIES)
Rent expense .................... $ 718,000 $ 579,000
Targeted jobs tax credits ....... 107,000 119,000
FICA tax credits ................ 453,000 233,000
Alternative minimum tax credit .. 51,000 51,000
Other ........................... 186,000 102,000
----------- -----------
TOTAL DEFERRED TAX ASSETS .... 1,515,000 1,084,000
----------- -----------
Accelerated deprecitation ....... (736,000) (319,000)
Preopening costs ................ (208,000) (255,000)
Prepaid insurance ............... (70,000) (63,000)
Other ........................... (28,000) (36,000)
TOTAL DEFERRED TAX LIABILITIES (1,042,000) (673,000)
----------- -----------
NET DEFERRED TAX ASSETS ...... $ 473,000 $ 411,000
=========== ===========
</TABLE>
The Company's Targeted Jobs tax credit and FICA tax credit carryforwards
expire in varying periods to 2010 and the alternative minimum tax credit
carryforward has no expiration date.
6. STOCK OPTION AND BONUS PLANS
- -------------------------------
In effect at October 27, 1996 are the 1992 and 1996 Stock Option Plans
(collectively the "Plans"). The options granted under the Plans may be either
incentive stock options or non-statutory stock options. The terms of the Plans
are at the sole discretion of a committee of three non-employee members of the
Company's Board of Directors. The Plans provide that the Company may grant
options (generally at fair market value at the date of grant) for not more than
412,500 and 400,000 shares of common stock, respectively, to certain key
employees, officers and directors. Options granted under the Plans are
exercisable according to the terms of each option. At October 27, 1996, 136,150
shares under option were exercisable and 525 shares were reserved for future
grants under the 1992 Stock Option Plan. No shares under option were exercisable
and 333,000 shares were reserved for future grants under the 1996 Stock Option
Plan at October 27, 1996.
The Company also has a 1984 Incentive Stock Option Plan and a 1984
Non-Statutory Stock Option Plan, (collectively, the "1984 Option Plans"). The
1984 Option Plans provide that the Company may grant options (generally at fair
market value at date of grant) for not more than 1,283,335 shares of common
stock to certain employees and directors. Under the terms of the 1984 Option
Plans, options are exercisable over a period up to ten years from the grant date
as determined by the Company; however, options under the 1984 Incentive Plan are
not exercisable until at least one year after the grant date. Shares of common
stock purchased under the 1984 Option Plans vest at the rate of 20% per year of
service, including years of service prior to date of award. The Company may
repurchase, at the optionee's purchase price, non-vested shares if an optionee
terminates employment or directorship. At October 27, 1996, 108,575 shares under
option were exercisable. In conjunction with the adoption of the 1992 Plan no
further grants will be made under the 1984 Plans.
The Company provides for the payment of bonuses in cash and/or common stock
pursuant to The Manager Stock Bonus Plan ("Bonus Plan") and the 1996 Employee
Incentive Stock Purchase and Manager Bonus Plan (the "1996 Bonus Plan"). Under
the terms of the Bonus Plan, no shares of common stock remain available to be
issued. During fiscal 1996, 1995 and 1994, 8,962, 8,467 and 15,637 shares were
issued under this Plan. Under the terms of the 1996 Bonus Plan, up to 93,598
shares of common stock remain available to be issued at one-half of the fair
market value of the shares at the date of the award. During fiscal 1996, 6,402
shares were issued under this plan.
The following summarizes the stock option transactions from October 31,
1993 through October 27, 1996 adjusted to reflect the 10% stock dividend in
April 1995:
MAX & ERMA'S RESTAURANTS, INC.
22
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
<TABLE>
<CAPTION>
NUMBER EXERCISE AGGREGATE
OF PRICE PER EXERCISE
OPTIONS SHARE PRICE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, October 31, 1993 551,986 $2.36-10.00 $ 2,523,379
Granted .............. 81,950 7.27- 8.75 644,438
Exercised ............ (109,579) 2.36- 5.64 (383,351)
Cancelled ............ (13,063) 2.82- 7.27 (50,680)
-------- -----------
Balance, October 30, 1994 511,294 2.36-10.00 2,733,786
Granted .............. 140,700 6.82-11.00 1,260,375
Exercised ............ (33,244) 2.36- 5.79 (89,861)
Cancelled ............ (14,300) 4.09- 7.84 (120,563)
-------- -----------
Balance, October 29, 1995 604,450 2.36-11.00 3,783,737
Granted .............. 149,500 6.13- 7.88 987,563
Exercised ............ (154,425) 2.82- 4.09 (440,458)
Cancelled ............ (11,975) 7.27- 8.18 (93,650)
-------- -----------
Balance, October 27, 1996 587,550 2.36-11.00 $ 4,237,192
======== ===========
</TABLE>
The 1996, 1992 and 1984 Option Plans permit optionees to tender shares to
the Company in lieu of cash for the exercise of stock options. During fiscal
1996, 91,146 options with an aggregate exercise price of $257,854 were exercised
by the tendering of 38,177 shares with an equivalent market value. No such
options were exercised in fiscal 1995 and 1994.
7. EMPLOYEE BENEFIT PLANS
- -------------------------
Effective January 1, 1994, the Company adopted the Max & Erma's 401(k)
Savings Plan and Trust which allows employees who have attained age 21 and have
completed one year of service to defer receipt of a portion of their
compensation and contribute such amounts to various investment funds. The
Company matches a percentage of the employees' contributions.
The Company also provides certain retiree health care benefits to qualified
officers.
Total expense for these plans for 1996, 1995 and 1994 was approximately
$125,000, $138,000 and $83,000 respectively.
8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
- ------------------------------------------------
The carrying amounts of cash and equivalents at October 27, 1996 and October 29,
1995, approximate their fair value due to the short-term maturities of these
items.
The estimated fair value of the Company's long-term debt was approximately
$27,928,000 as compared to the carrying amounts of $28,537,631 at October 27,
1996. The fair value of the Company's long-term obligations is estimated based
on the quoted market prices for the same or similar issues of the subordinated
debentures and the current interest rates offered for debt of the same remaining
maturities.
9.RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
- -------------------------------------------
In 1995, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The statement,
which is effective for fiscal years beginning after December 15, 1995, requires
that an entity evaluate long-lived assets and certain other identifiable
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable.
Impairment loss meeting the recognition criteria is to be measured as the amount
by which the carrying amount for financial reporting purposes exceeds the fair
value of the asset. The Company plans to adopt this statement in fiscal 1997 and
does not expect adoption of the statement to have a material effect on the
Company's financial position or results of operations.
Also in 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which requires adoption no later than fiscal years beginning
after December 15, 1995. The new standard defines a fair value method of
accounting for stock options and similar equity instruments. Under the fair
value method, compensation cost is measured at the grant date based on the fair
value of the award and is recognized over the service period, which is usually
the vesting period. Pursuant to the new standard, companies are encouraged, but
not required, to adopt the fair value method of accounting for employee
stock-based transactions. Companies are also permitted to continue to account
for such transactions under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," but are required to disclose in a
note to the financial statements pro forma net income and earnings per share as
if the Company had applied the new method of accounting. The Company will not
adopt the new standard but will present the required pro forma footnote
disclosures commencing in fiscal 1997.
MAX & ERMA'S RESTAURANTS, INC.
23
<PAGE> 15
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Directors of Max & Erma's Restaurants, Inc.:
We have audited the accompanying balance sheets of Max & Erma's
Restaurants, Inc. as of October 27, 1996 and October 29, 1995, and the related
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended October 27, 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Max & Erma's Restaurants, Inc. at October
27, 1996 and October 29, 1995, and the results of its operations and its cash
flows for each of the three years in the period ended October 27, 1996 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- --------------------------
December 9, 1996
Columbus, Ohio
MAX & ERMA'S OFFICERS AND DIRECTORS
WILLIAM E. ARTHUR, Director, Partner, Porter, Wright, Morris & Arthur - TODD B.
BARNUM, Chairman of the Board, Chief Executive Officer, President and Director o
ROGER D. BLACKWELL, Director, Professor of Marketing, The Ohio State University
BONNIE J. BRANNIGAN, Vice President of Marketing and Planning - MARK F. EMERSON,
Chief Operating Officer and Director - LARRY B. FOURNIER, Vice President of
Development THOMAS R. GREEN, Director, Executive Vice President, Central
Benefits Mutual Insurance Company GREG L. HEYWOOD, Regional Vice President of
Operations DONALD W. KELLEY, Director, Owner, Donald W. Kelley & Associates o
MICHAEL D. MURPHY, Director, Private Investor WILLIAM C. NIEGSCH, JR., Executive
Vice President, Chief Financial Officer, Treasurer, Secretary and Director
ROBERT A. ROTHMAN, Director, Managing Partner, Amusement Investment Company
24
<PAGE> 16
SELECTED QUARTERLY FINANCIAL DATA
- ---------------------------------
<TABLE>
<CAPTION>
STOCK PRICE
(THOUSANDS, EXCEPT PER TOTAL INCOME BEFORE NET EARNINGS --------------------
SHARE DATA) REVENUES INCOME TAXES INCOME PER SHARE HIGH LOW
- -------------------------------------------------------------------------------------------------------------------
1996
<S> <C> <C> <C> <C> <C> <C>
First Quarter ............. $ 23,079 $ 581 $ 415 $ 0.10 $ 7.63 $ 5.50
Second Quarter ............ 18,263 849 580 0.14 7.88 5.75
Third Quarter ............. 19,415 926 626 0.15 8.25 5.88
Fourth Quarter ............ 19,101 820 540 0.13 6.88 5.88
--------- --------- --------- --------- -------- ---------
YEAR ................... $ 79,858 $ 3,176 $ 2,161 $ 0.51 $ 8.25 $ 5.50
========= ========= ========= ========= ======== =========
1995
First Quarter ............. $ 19,329 $ 886 $ 610 $ 0.14 $ 7.95 $ 6.02
Second Quarter ............ 14,332 720 492 0.12 8.38 7.16
Third Quarter ............. 15,181 777 542 0.13 8.25 7.63
Fourth Quarter ............ 15,356 678 495 0.12 8.38 7.38
--------- --------- --------- --------- -------- ---------
YEAR ................... $ 64,198 $ 3,061 $ 2,139 $ 0.50 $ 8.38 $ 6.02
========= ========= ========= ========= ======== =========
</TABLE>
The Company's common stock trades on the NASDAQ National Market under the symbol
MAXE. At November 30, 1996 there were 865 stockholders of record of the
Company's common stock. The closing price for the Company's common stock at
October 27, 1996 was $6.63. The high and low prices for the Company's common
stock have been adjusted for a 10% stock dividend paid April 21, 1995.
SHAREHOLDER INFORMATION
- -----------------------
QUARTERLY CALENDAR:
Max & Erma's operates on a fiscal year ending on the last Sunday in October.
Quarterly results are announced within 30 days after the end of each quarter and
audited results are announced within 60 days after year end.
Fiscal 1997 Quarter-End Dates
-------------------------------------
1st quarter February 16, 1997
2nd quarter May 11, 1997
3rd quarter August 3, 1997
4th quarter October 26, 1997
DIVIDENDS:
The Company paid no cash dividends in fiscal 1994, 1995 or 1996. The Company
presently intends to retain its earnings to finance the growth and development
of its business and does not anticipate paying any cash dividends in the
foreseeable future.
GENERAL COUNSEL:
Porter, Wright, Morris & Arthur
Columbus, Ohio
AUDITORS:
Deloitte & Touche LLP
Columbus, Ohio
STOCK TRANSFER AGENT AND REGISTRAR:
The Huntington Trust Company
Stock Transfer Department
Huntington Center - HC1026
Columbus, Ohio 43287
614-480-3760
Stockholders are advised to notify the Transfer Agent of changes in address or
problems regarding missing or incorrect dividends or stock certificates.
ANNUAL SHAREHOLDERS MEETING:
April 10, 1997, 2:30 p.m.
Hyatt Regency Columbus
at Greater Columbus Convention Center
350 North High Street
Columbus, Ohio
10-K REPORT:
Stockholders may obtain, without cost, a copy of
Form 10-K for the Company's fiscal year ended
October 27, 1996, by writing to:
William C. Niegsch, Jr.
Max & Erma's Restaurants, Inc.
P.O. Box 297830
4849 Evanswood Drive
Columbus, Ohio 43229
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-23950, 33-70284, 333-03081 and 333-03083 of Max & Erma's Restaurants, Inc. on
Form S-8 of our report dated December 9, 1996, incorporated by reference in this
Annual Report on Form 10-K of Max & Erma's Restaurants, Inc. for the year ended
October 27, 1996.
DELOITTE & TOUCHE LLP
Columbus, Ohio
January 13, 1997
<PAGE> 1
(EXHIBIT 24)
POWER OF ATTORNEY
-----------------
Each director and/or officer of Max & Erma's Restaurants, Inc. (the
"Corporation") whose signature appears below hereby appoints William C. Niegsch,
Jr., Mark F. Emerson and Todd B. Barnum as his or her attorneys or any of them
individually as his or her attorney, to sign, in his or her name and behalf and
in any and all capacities stated below, and to cause to be filed with the
Securities and Exchange Commission (the "Commission"), the Corporation's Annual
Report on Form 10-K (the "Form 10-K") for the fiscal year ended October 27,
1996, and likewise to sign and file with the Commission any and all amendments,
including post-effective amendments, to the Form 10-K, and the Corporation
hereby also appoints such persons as its attorneys-in-fact and each of them as
its attorney-in-fact with like authority to sign and file the Form 10-K and any
amendments thereto granting to each such attorney-in-fact full power of
substitution and revocation, and hereby ratifying all that any such
attorney-in-fact or his substitute may do by virtue hereof.
IN WITNESS WHEREOF, we have hereunto set our hands this 7th day of
January, 1997.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ Todd B. Barnum Chairman, President, Chief Executive Officer and
- ---------------------------------------- Director
Todd B. Barnum
/s/ Mark F. Emerson Chief Operating Officer and Director
- ----------------------------------------
Mark F. Emerson
/s/ William C. Niegsch, Jr. Executive Vice President, Chief Financial Officer,
- ---------------------------------------- Treasurer, Secretary and Director
William C. Niegsch, Jr.
/s/ William E. Arthur Director
- ----------------------------------------
William E. Arthur
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ Robert A. Rothman Director
- ----------------------------------------
Robert A. Rothman
/s/ Roger D. Blackwell Director
- ----------------------------------------
Roger D. Blackwell
/s/ Donald W. Kelley Director
- ----------------------------------------
Donald W. Kelley
/s/ Michael D. Murphy Director
- ----------------------------------------
Michael D. Murphy
/s/ Thomas R. Green Director
- ----------------------------------------
Thomas R. Green
</TABLE>
-2-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-27-1996
<PERIOD-START> OCT-30-1995
<PERIOD-END> OCT-27-1996
<EXCHANGE-RATE> 1
<CASH> 927,261
<SECURITIES> 0
<RECEIVABLES> 527,698
<ALLOWANCES> 0
<INVENTORY> 641,196
<CURRENT-ASSETS> 3,115,338
<PP&E> 70,085,464
<DEPRECIATION> 17,370,256
<TOTAL-ASSETS> 58,484,241
<CURRENT-LIABILITIES> 8,182,100
<BONDS> 32,349,305
<COMMON> 422,650
0
0
<OTHER-SE> 17,484,898
<TOTAL-LIABILITY-AND-EQUITY> 58,484,241
<SALES> 0
<TOTAL-REVENUES> 79,857,589
<CGS> 21,338,590
<TOTAL-COSTS> 69,477,159
<OTHER-EXPENSES> 5,068,093
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,059,732
<INCOME-PRETAX> 3,175,989
<INCOME-TAX> 1,015,000
<INCOME-CONTINUING> 2,160,989
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,160,989
<EPS-PRIMARY> .51
<EPS-DILUTED> .51
</TABLE>
