<PAGE> 1
FORM 10-Q/A No.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
For Quarter Ended August 3, 1997 Commission file number 0-11514
---------------- ---------
Max & Erma's Restaurants, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware No. 31-1041397
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4849 Evanswood Drive, Columbus, Ohio 43229
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 431-5800
----------------
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to the filing
requirements for at least the past 90 days.
YES X NO
--- ---
As of the close of the period covered by this report, the registrant had
outstanding 4,161,137 common shares.
1
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PART I - FINANCIAL INFORMATION / ITEM 1 - FINANCIAL STATEMENTS
MAX & ERMA'S RESTAURANTS, INC. - BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
------
August 3, October 27,
1997 1996
----------- -----------
<S> <C> <C>
Current Assets:
Cash $ 1,191,441 $ 927,261
Inventories 758,755 641,196
Other Current Assets 1,454,270 1,546,881
----------- -----------
Total Current Assets 3,404,466 3,115,338
Property - At Cost: 77,455,724 70,085,464
Less Accumulated Depreciation and Amortization 20,245,942 17,370,256
----------- -----------
Property - Net 57,209,782 52,715,208
Other Assets 2,706,646 2,653,695
----------- -----------
Total $63,320,894 $58,484,241
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current Maturities of Long-Term Obligations $ 1,455,060 $ 1,407,604
Accounts Payable 4,019,464 3,413,340
Accrued Liabilities 3,758,166 3,361,156
----------- -----------
Total Current Liabilities 9,232,690 8,182,100
Long-Term Obligations - Less Current Maturities 34,887,908 32,349,305
Minority Interests in Affiliated Partnerships 42,545 45,288
Stockholders' Equity:
Preferred Stock - $.10 Par Value;
Authorized 500,000 Shares - none outstanding
Common Stock - $.10 Par Value;
Authorized 10,000,000 Shares,
Issued and Outstanding 4,161,137 Shares
at 8/3/97 and 4,226,497 Shares at 10/27/96 416,114 422,650
Additional Capital 10,956,178 11,432,112
Retained Earnings 7,785,459 6,052,786
----------- -----------
Total Stockholders' Equity 19,157,751 17,907,548
----------- -----------
Total $63,320,894 $58,484,241
=========== ===========
</TABLE>
(See notes to financial statements)
2
<PAGE> 3
MAX & ERMA'S RESTAURANTS, INC.
STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Twelve Weeks Ended Forty Weeks Ended
------------------ -----------------
August 3, August 4, August 3, August 4,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES: $22,252,057 $19,415,445 $69,860,993 $60,757,194
COSTS AND EXPENSES:
Costs of Goods Sold 6,091,006 5,161,837 18,899,945 16,122,115
Payroll and Benefits 6,902,708 5,929,055 21,670,092 18,655,344
Other Operating Expenses 6,428,451 5,728,432 20,338,614 18,069,046
Administrative Expenses 1,273,814 1,143,687 4,291,329 3,918,260
----------- ----------- ----------- -----------
Total Operating Expenses 20,695,979 17,963,011 65,199,980 56,764,765
----------- ----------- ----------- -----------
Operating Income 1,556,078 1,452,434 4,661,013 3,992,429
Interest Expense 663,165 516,618 2,104,077 1,569,365
Minority Interest in Income (Loss)
of Affiliated Partnerships (5,415) 10,255 74,263 67,389
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 898,328 925,561 2,482,673 2,355,675
INCOME TAXES 270,000 300,000 750,000 735,000
----------- ----------- ----------- -----------
NET INCOME $ 628,328 $ 625,561 $ 1,732,673 $ 1,620,675
=========== =========== =========== ===========
NET INCOME
PER COMMON SHARE $ 0.15 $ 0.15 $ 0.41 $ 0.38
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 4,196,069 4,279,862 4,201,332 4,256,911
=========== =========== =========== ===========
</TABLE>
(See notes to financial statements)
3
<PAGE> 4
MAX & ERMA'S RESTAURANTS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Forty Weeks Ended
-----------------
August 3, August 4,
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,732,673 $ 1,620,675
Depreciation and amortization 4,459,154 4,309,548
Minority interest in income of Affiliated Partnerships 74,263 67,389
Changes in other assets and liabilities 408,884 659,254
------------ ------------
Net cash provided by operating activities 6,674,974 6,656,866
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (7,246,810) (9,702,849)
Decrease (increase) in other assets (974) (220,825)
Proceeds from sale of assets 1,250 215,400
------------ ------------
Net cash used by investing activities (7,246,534) (9,708,274)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations (38,922,413) (27,557,409)
Proceeds from long-term obligations 40,426,313 30,435,970
Proceeds from sale of common stock 73,770 37,490
Cash paid for purchase of common stock (664,924)
Distributions to minority interests in Affiliated Partnerships (77,006) (134,761)
------------ ------------
Net cash provided by financing activities 835,740 2,781,290
------------ ------------
NET INCREASE (DECREASE) IN CASH & EQUIVALENTS 264,180 (270,118)
CASH & EQUIVALENTS BEGINNING OF PERIOD 927,261 1,102,060
------------ ------------
CASH & EQUIVALENTS AT END OF PERIOD $ 1,191,441 $ 831,942
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 1,956,263 $ 1,463,356
Income taxes $ 800,151 $ 676,431
Non-cash activities:
Property additions financed by capital leases $ 920,862 $ 1,442,865
Property additions financed by accounts payable $ 2,253,218 $ 837,078
Tax benefit of stock exercised & sold within one year $ 44,249 $ 13,399
</TABLE>
(See notes to financial statements)
4
<PAGE> 5
MAX & ERMA'S RESTAURANTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Presentation
------------
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and include
all of the information and disclosures required by generally accepted
accounting principles for interim reporting, which are less than those
required for annual reporting. In the opinion of management, all
adjustments, consisting of only normal recurring accruals considered
necessary for a fair presentation, have been included.
The Company's year consists of one sixteen-week and three twelve-week
quarters.
2. Basic and Diluted Earnings Per Share
------------------------------------
Financial Accounting Standard No. 128 (FAS 128) "Earnings Per Share",
becomes effective for periods ending after December 15, 1997, which for
the Company will be the first quarter of fiscal 1998. FAS 128 requires
the calculation of earnings per share (EPS) under two methods, basic
and diluted. Basic EPS is calculated as income available to common
shareholders divided by the weighted-average common shares outstanding.
Diluted EPS is calculated giving effect to all dilutive potential
common shares, such as options and various convertible securities. Once
adopted, FAS 128 requires restatement of EPS for all periods presented.
The following pro forma information presents the third quarter and nine
months of 1997 and 1996 EPS calculated in accordance with FAS 128.
<TABLE>
<CAPTION>
Twelve Weeks Ended Forty Weeks Ended
Aug. 3, 1997 Aug. 4, 1996 Aug. 3, 1997 Aug. 4, 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income available to common shareholders $ 628,328 $ 625,561 $1,732,673 $1,620,675
========== ========== ========== ==========
Number of shares for computation of basic EPS 4,160,157 4,279,862 4,163,689 4,169,478
========== ========== ========== ==========
Pro forma basic EPS $ .15 $ .15 $ .42 $ .39
========== ========== ========== ==========
Income for computation of diluted EPS $ 628,328 $ 625,561 $1,732,673 $1,620,675
========== ========== ========== ==========
Number of shares for computation of
diluted EPS 4,196,069 4,279,862 4,201,332 4,256,911
========== ========== ========== ==========
Pro forma diluted EPS $ .15 $ .15 $ .41 $ .38
========== ========== ========== ==========
</TABLE>
5
<PAGE> 6
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
REVENUES
- --------
Revenues for the third quarter of 1997 rose $2,837,000 or 15% from the
third quarter of 1996. The increase was a result of i) the opening of one
restaurant during each of the third and fourth quarters of 1996, ii) the opening
of four restaurants during the first half of 1997, iii) an increase of
approximately $48,000 or 0.3% in same-store sales at restaurants opened for at
least 18 months, and iv) higher sales at restaurants not included in same-store
sales.
Year-to-date revenues increased $9,104,000 or 15% from 1996 to 1997.
The increase was a result of i) a total of six restaurants opened during 1996,
ii) the opening of four restaurants during 1997, iii) an increase in same-store
sales of approximately $276,000 or 0.6% from 1996 to 1997, and iv) higher
average sales at restaurants not included in the year-to-date same-store sales
calculation.
Results for the third quarter of 1997 represent the third consecutive
quarter of positive same-store sales. Management believes its programs to build
dinner check average and stabilize beverage sales along with approximately a
1-1/2% price increase have all contributed to the same-store sales gains. Higher
priced entrees introduced in 1996 and 1997 have resulted in an increase in
dinner check average from $9.27 in 1995 to $9.58 in 1996 and to $9.95 in 1997. A
complete beverage merchandising program introduced in 1996 has stabilized the
food to beverage sales mix, with beverage sales representing approximately 18%
of total sales in both 1996 and 1997.
The performance of newer restaurants contributed significantly to total
revenue growth during both the quarter and year-to-date periods. During the
third quarter of 1997 the 10 restaurants opened less than 18 months reported
average weekly sales of $47,739, a 14% increase over the average weekly sales of
restaurants included in same-store sales. Year-to-date the 14 restaurants not
included in same-store sales generated average sales approximately 13% higher
than the same-store sales group. During the third quarter of 1997 the four
restaurants opened during the year reported average weekly sales of $52,295,
which compares favorably with chain-wide average sales of $43,095 per week.
Management believes better site selection, capacity and appeal of the Company's
new prototype building, and the menu changes discussed above are all factors
contributing to the performance of newer restaurants.
During the third quarter of 1997 the Company entered into license
agreements with two different companies to operate a Max & Erma's restaurant in
the Columbus, Ohio airport and two Max & Erma's restaurants in the Cleveland,
Ohio airport. The agreements require an initial license fee plus a monthly
royalty payment based on sales at each licensed location. The Company expects
all three locations to open during the first half of 1998. The initial license
fees should offset the Company's out-of-pocket costs in meeting its pre-opening
obligations under the agreements. The Company expects to receive approximately
$200,000 in annual royalty payments under the license agreements.
6
<PAGE> 7
COSTS AND EXPENSES
- ------------------
Cost of goods sold, as a percentage of revenues, increased from 26.6%
for the third quarter of 1996 to 27.3% for the third quarter of 1997.
Year-to-date cost of goods sold, as a percentage of revenues, increased from
26.5% for 1996 to 27.1% for 1997. The increases were a result of higher beef and
ground beef prices. The price per pound of ground beef has risen 20% from the
third quarter of 1996 to the third quarter of 1997. Additionally, the
introduction of higher priced entrees, introduced to build check averages, has
increased cost of sales. Higher priced menu items generally sell at a higher
cost of sales but produce more gross margin dollars.
Payroll and benefits, as a percentage of revenues, increased from 30.5%
for the third quarter of 1996 to 31.0% for the third quarter of 1997.
Year-to-date payroll and benefits, as a percentage of revenues, increased from
30.7% in 1996 to 31.0% in 1997. The increases are a result of higher hourly pay
rates brought on by a shortage of restaurant workers.
In response to the increases in cost of goods sold and payroll and
benefits, the Company raised menu prices approximately 2% at the start of the
fourth quarter of 1997. In addition, every menu item is being reviewed for
product specification changes which could lower cost of goods sold and for labor
savings opportunities. Menu items with excessive labor may be removed from the
Company's menu.
Other operating expenses, as a percentage of revenues, declined from
29.5% for the third quarter of 1996 to 28.9% for the third quarter of 1997.
Year-to-date other operating expenses, as a percentage of revenues, declined
from 29.7% for 1996 to 29.1% for 1997. The decreases were primarily a result of
reduced rental expense and depreciation expense due to the Company's increased
ownership of real estate.
ADMINISTRATIVE EXPENSES
- -----------------------
Administrative expenses, as a percentage of revenue, declined from 5.9%
for the third quarters of 1996 to 5.7% for the third quarter of 1997. For the
year-to-date period administrative expenses declined from 6.5% in 1996 to 6.1%
in 1997. The declines were a result of revenue increases in excess of the growth
of administrative expenses. In dollar terms, administrative expenses increased
11% and 10% for the quarter and year-to-date periods, respectively. The increase
was a result of two additional regional managers to support the increased number
of restaurants, an additional MIS staff person and raises for corporate
employees.
7
<PAGE> 8
INTEREST EXPENSE
- ----------------
Interest expense increased 28% from the third quarter of 1996 to the
third quarter of 1997. Year-to-date interest expense increased 34% from 1996 to
1997. The increase was a result of a 15% or $4.5 million increase in long-term
obligations from the end of the third quarter of 1996 to the end of the third
quarter of 1997, a slight increase in interest rates on the Company's revolving
credit line from 8.5% at August 4, 1996 to 9.0% at August 3, 1997 and a
reduction in the capitalization of construction period interest. The Company
capitalized $158,000 of construction period interest during the first 40 weeks
of 1997 as compared to $321,000 during the comparable 1996 period. During the
third quarter of 1997 the Company's long-term obligations remained essentially
unchanged as capital expenditures were funded by cash flow from operations.
INCOME TAXES
- ------------
The Company's effective tax rate declined slightly from 31.2% for 1996
to 30.2% for 1997 due to the introduction of the Work Opportunity Tax Credit
program.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's working capital ratio remained steady at .4 to 1 at both
October 27, 1996 and August 3, 1997. Historically, the Company has been able to
operate with a working capital deficiency because 1) restaurant operations are
primarily conducted on a cash basis, 2) high turnover (about once every 10 days)
permits a limited investment in inventory, and 3) trade payables for food
purchases usually become due after receipt of cash from the related sales.
During the first 40 weeks of 1997, the Company expended approximately
$7,247,000 for property additions, $38,922,000 to reduce long-term obligations
and $665,000 to repurchase approximately 100,000 shares of common stock;
distributed $77,000 to minority interests in the affiliated partnerships, and
increased cash $264,000. Funds for such expenditures were provided primarily by
$40,426,000 from proceeds of long-term obligations, and $6,675,000 from
operations. The Company routinely draws down and repays balances under its
revolving credit agreement, the gross amounts of which are included in the above
numbers.
At August 3, 1997, a restaurant was under construction in Greenville,
South Carolina, which will open during the fourth quarter of 1997. In addition,
restaurants were under construction in the cities of Columbus and Hilliard,
Ohio, a suburb of Columbus and Maumee, Ohio, a suburb of Toledo. The Company is
also negotiating for an additional location in Chicago, Illinois. The Company
expects to open a total of five restaurants during 1998.
Funding for new restaurants will be provided primarily by cash flow
from operations and equipment leasing and, to the extent necessary, the
Company's revolving $18.0 million credit line. At August 3, 1997, the Company
had approximately $3.0 million available under its credit
8
<PAGE> 9
line and approximately $800,000 under equipment lease commitments. The Company
expects to increase its equipment lease commitments to $1.5 million for use in
fiscal 1998.
INVESTMENT CONSIDERATIONS
- -------------------------
The Company desires to take advantage of the "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 amended Report, readers
should carefully consider that the following important factors, among others, in
some cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual consolidated results of operations
for the Fiscal Year ended October 26, 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 60
years experience with the Company. The loss of one or more key executives
could have an adverse effect on the Company.
2. Competition - The casual dining segment of the restaurant industry is
highly competitive. Many of the Company's competitors are larger national
chains with greater financial resources.
3. Restaurant Industry - The restaurant industry is affected by changing
trends, economic conditions, traffic patterns and weather. Increases in
food, labor and benefits costs along with the availability of employees and
suitable restaurant sites could affect future operating results.
4. Legal - The Company is exposed to various tort and other claims, most
notably liability claims resulting from the sale of alcoholic beverages.
While the Company currently maintains insurance for such claims, there is
no assurance of its adequacy or future availability. An uninsured or excess
claim could have a material adverse affect on the Company.
5. Government Regulation - The restaurant industry is subject to extensive
government regulations relating to the sale of food and alcoholic
beverages, and sanitation, fire and building codes. Suspension or inability
to renew any of the related licenses and permits could adversely affect the
Company's operations. Further more, government actions affecting minimum
wage rates, payroll tax rates and mandated benefits could affect operating
results.
9
<PAGE> 10
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
The exhibits listed in the accompanying index to exhibits on page 11
are filed as part of this report.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAX & ERMA'S RESTAURANTS, INC.
------------------------------
Registrant
/s/ Todd. B. Barnum
----------------------------------------
Todd. B. Barnum
Chairman of the Board
(Chief Executive Officer)
/s/ William C. Niegsch, Jr.
----------------------------------------
William C. Niegsch, Jr.
Executive Vice President &
Chief Financial Officer
September 9, 1997
- ----------------------
Date
10
<PAGE> 11
MAX & ERMA'S RESTAURANTS INC.
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
2 Not applicable
3 Not applicable
4 Not applicable
11 Not applicable
15 Not applicable
18 Not applicable
19 Not applicable
22 Not applicable
23 Not applicable
24 Not applicable
27 Financial Data Schedule
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-27-1996
<PERIOD-START> OCT-28-1996
<PERIOD-END> AUG-03-1997
<EXCHANGE-RATE> 1
<CASH> 1,191,441
<SECURITIES> 0
<RECEIVABLES> 6
<ALLOWANCES> 0
<INVENTORY> 758,755
<CURRENT-ASSETS> 3,404,466
<PP&E> 77,455,724
<DEPRECIATION> 20,245,942
<TOTAL-ASSETS> 63,320,894
<CURRENT-LIABILITIES> 9,232,690
<BONDS> 34,887,908
0
0
<COMMON> 416,114
<OTHER-SE> 18,741,637
<TOTAL-LIABILITY-AND-EQUITY> 63,320,894
<SALES> 0
<TOTAL-REVENUES> 69,860,993
<CGS> 18,899,945
<TOTAL-COSTS> 60,908,651
<OTHER-EXPENSES> 4,291,329
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,104,077
<INCOME-PRETAX> 2,482,673
<INCOME-TAX> 750,000
<INCOME-CONTINUING> 1,732,673
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,732,673
<EPS-PRIMARY> .41
<EPS-DILUTED> .41
</TABLE>
