<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
For Quarter Ended February 16, 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 4,130,081 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
------
February 16, October 27,
Current Assets: 1997 1996
------------ ------------
<S> <C> <C>
Cash $ 1,313,884 $ 927,261
Inventories 733,613 641,196
Other Current Assets 1,525,879 1,546,881
----------- -----------
Total Current Assets 3,573,376 3,115,338
Property - At Cost: 71,973,541 70,085,464
Less Accumulated Depreciation and Amortization 18,575,398 17,370,256
----------- -----------
Property - Net 53,398,143 52,715,208
Other Assets 2,564,840 2,653,695
----------- -----------
Total $59,536,359 $58,484,241
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current Maturities of Long-Term Obligations $ 1,408,295 $ 1,407,604
Accounts Payable 2,173,036 3,413,340
Accrued Liabilities 4,018,567 3,361,156
----------- -----------
Total Current Liabilities 7,599,898 8,182,100
Long-Term Obligations - Less Current Maturities 34,053,804 32,349,305
Minority Interests in Affiliated Partnerships 82,477 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 4,130,081 Shares
At 2/16/97 and 4,226,497 Shares at 10/27/96 413,008 422,650
Additional Capital 10,843,306 11,432,112
Retained Earnings 6,543,866 6,052,786
----------- -----------
Total Stockholders' Equity 17,800,180 17,907,548
----------- -----------
Total $59,536,359 $58,484,241
=========== ===========
</TABLE>
(See notes to financial statements)
2
<PAGE> 3
MAX & ERMA'S RESTAURANTS, INC.
STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Sixteen Weeks Ended
-------------------
February 16, February 18,
1997 1996
----------- -----------
<S> <C> <C>
REVENUES: $26,509,864 $23,078,501
COSTS AND EXPENSES:
Costs of Goods Sold 7,146,987 6,108,949
Payroll and Benefits 8,225,718 7,184,730
Other Operating Expenses 7,841,491 7,018,954
Administrative Expenses 1,740,983 1,572,935
----------- -----------
Total Operating Expense 24,955,179 21,885,568
----------- -----------
Operating Income 1,554,685 1,192,933
Interest Expense 796,164 578,858
Minority Interest in Income
of Affiliated Partnerships 56,441 32,683
----------- -----------
INCOME BEFORE TAXES 702,080 581,392
INCOME TAXES 211,000 166,000
----------- -----------
NET INCOME $ 491,080 $ 415,392
=========== ===========
NET INCOME PER COMMON SHARE $ 0.12 $ 0.10
=========== ===========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 4,225,005 4,245,325
=========== ===========
</TABLE>
(See notes to financial statements)
3
<PAGE> 4
MAX & ERMA'S RESTAURANTS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Sixteen Weeks Ended
-------------------
February 16, February 18,
1997 1996
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 491,080 $ 415,392
Depreciation and amortization 1,779,066 1,564,354
Minority interest in income of Affiliated Partnerships 56,441 32,683
Changes in other assets and liabilities 610,581 757,186
------------ -----------
Net cash provided (used) by operating activities 2,937,168 2,769,615
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (3,554,816) (4,548,650)
Decrease (increase) in other assets 49,936 (34,857)
Proceeds from sale of assets 750 214,400
------------ -----------
Net cash used by investing activities (3,504,130) (4,369,107)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations (8,560,651) (7,248,926)
Proceeds from long-term obligations 10,198,412 9,071,248
Repurchase of common stock (664,924)
Distributions to minority interests in Affiliated Partnership (19,252) (38,503)
------------ -----------
Net cash provided (used) by financing activities 953,585 1,783,819
------------ -----------
NET INCREASE (DECREASE) IN
CASH AND EQUIVALENTS 386,623 184,327
CASH AND EQUIVALENTS
BEGINNING OF THE PERIOD 927,261 1,102,060
------------ -----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 1,313,884 $ 1,286,387
============ ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 658,118 $ 435,131
Income taxes $ 115,327 $ 123,752
Non-cash activities:
Property additions financed by accounts payable $ 347,371 $ 1,099,095
(See notes to financial statements)
</TABLE>
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.
5
<PAGE> 6
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
REVENUES
- --------
Revenues for the first quarter of 1997 rose $3,431,000 or 15% from the
first quarter of 1996. The increase was a result of i) the opening of six
restaurants during 1996, ii) the opening of two restaurants during the first
quarter of 1997, and iii) an increase of approximately .1% or $15,000 in
same-store sales from $18,173,000 in 1996 to $18,188,000 in 1997 at restaurants
opened for at least 18 months.
Although modest, management is encouraged by the increase in same-store
sales during the first quarter of 1997. A significantly milder winter, along
with the Company's programs to build check average and stabilize beverage sales,
have all contributed to the first same-store sales gain in five quarters.
Furthermore, the two restaurants opened in 1997 are achieving average sales in
excess of $64,000 per week since opening. With the expected opening of three
additional restaurants during fiscal 1997, the Company expects revenue growth of
approximately 15% for the remainder of 1997.
COSTS AND EXPENSES
- ------------------
Cost of goods sold, as a percentage of revenues, increased from 26.5%
for the first quarter of 1996 to 27.0% for the first quarter of 1997. The
increase was, in part, a result of slightly higher ground beef and steak prices
but primarily a result of the introduction of higher priced entrees subsequent
to the first quarter of 1996. Higher priced entrees, introduced to build check
average, generally sell at a higher cost of sales but produce more gross margin
dollars. The overall acceptance of these new menu items has been high and thus
put upward pressure on cost of goods sold as they have become a larger
percentage of the sales mix. Management believes the acceptance has contributed
to the recent improvement in same-store sales.
Payroll and benefits, as a percentage of revenues, remained relatively
constant during the first quarter of both 1996 and 1997 at 31.1% and 31.0%,
respectively. Management believes the demand for restaurant employees brought on
by the industry over-building of recent years will make it difficult to
significantly reduce payroll and benefits, as a percentage of revenues in the
near term.
Other operating expenses, as a percentage of revenues, declined from
30.4% for the first quarter of 1996 to 29.6% for the first quarter of 1997. The
decrease was primarily a result of lower rental expense due to the Company's
increased ownership of real estate.
6
<PAGE> 7
ADMINISTRATIVE EXPENSES
- -----------------------
Administrative expenses, as a percentage of revenue, declined from 6.8%
for the first quarter of 1996 to 6.6% for the first quarter of 1997. Management
expects the decline, as a percentage of revenues, will continue as revenue
growth exceeds the growth in administrative expenses. In dollars, administrative
expenses increased 11% from the first quarter of 1996 to the first quarter of
1997. 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.
INTEREST EXPENSE
- ----------------
Interest expense increased 38% from the first quarter of 1996 to the
first quarter of 1997. The increase was a result of a 22% or $6.1 million
increase in long-term obligations from the first quarter of 1996 to the first
quarter of 1997 and a reduction in the capitalization of construction period
interest from approximately $154,000 during the first quarter of 1996 to $73,000
during the first quarter of 1997. The Company expects the increase in interest
to decline as it expects to fund a greater portion of its capital expenditures
from internally generated funds during the remainder of 1997.
INCOME TAXES
- ------------
The Company's effective tax rate declined from 32% for all of 1996 to
30% for the first quarter of 1997 due to the enactment of the work opportunity
tax credit.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's working capital ratio increased from .4 to 1 at October
27, 1996 to .5 to 1 at February 16, 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 quarter of 1997, the Company expended approximately
$3,555,000 for property additions, $8,561,000 to reduce long-term obligations,
$665,000 to repurchase approximately 100,000 shares of common stock, distributed
$19,000 to minority interests in the affiliated partnerships, and increased cash
$387,000. Funds for such expenditures were provided primarily by $10,198,000
from proceeds of long-term obligations, and $2,937,000 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.
7
<PAGE> 8
At February 16, 1997 three restaurants were under construction: two in
Atlanta, Georgia plus one in Greenville, South Carolina. In addition, a contract
for the purchase of ground has been entered into for a site in Maumee, a suburb
of Toledo, Ohio. The Company is also negotiating for additional sites in
Columbus, Ohio, Charlotte, North Carolina and Chicago, Illinois. The Company
expects to open both Atlanta locations during the second quarter of 1997 and the
Greenville location during the third quarter. The restaurant in Maumee and the
sites under negotiation are expected to open in 1998.
Funding for new restaurants will be provided by cash flow from
operations, equipment leasing and the Company's revolving credit line. At
February 16, 1997, the Company had approximately $800,000 available under its
$15.0 million revolving credit line and approximately $1.4 million available
under equipment lease commitments. Early in the second quarter of 1997 the
Company received a commitment to increase the limit under its revolving credit
line to $18.0 million.
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 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 almost 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.
8
<PAGE> 9
4. Legal - The Company is exposed to various tort and other claims, most
notably liability claims resulting from the sale of alcoholic beverages.
While the Company currently maintains insurance for such claims, there is
no assurance of its adequacy or future availability. An uninsured or excess
claim could have a material adverse affect on the Company.
5. Government Regulation - The restaurant industry is subject to extensive
government regulations relating to the sale of food and alcoholic
beverages, and sanitation, fire and building codes. Suspension or inability
to renew any of the related licenses and permits could adversely affect the
Company's operations. Further more, government actions affecting minimum
wage rates, payroll tax rates and mandated benefits could affect operating
results.
PART II
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
The exhibits listed in the accompanying index to exhibits on page 10
are filed as part of this report.
(b) Reports on Form 8-K
None
9
<PAGE> 10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAX & ERMA'S RESTAURANTS, INC.
------------------------------
Registrant
Todd B. Barnum
------------------------------
Todd. B. Barnum
Chairman of the Board
(Chief Executive Officer)
William C. Niegsch, Jr.
------------------------------
William C. Niegsch, Jr.
Executive Vice President &
Chief Financial Officer
March 17, 1997
----------------------------
Date
10
<PAGE> 11
MAX & ERMA'S RESTAURANTS INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page No.
- ----------- ------- --------
<S> <C>
2 Not applicable
3 Not applicable
4 Not applicable
11 Not applicable
15 Not applicable
18 Not applicable
19 Not applicable
22 Not applicable
23 Not applicable
24 Not applicable
27 Financial Data Schedule
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-27-1996
<PERIOD-START> OCT-28-1996
<PERIOD-END> FEB-16-1997
<EXCHANGE-RATE> 1
<CASH> 1,313,884
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 733,613
<CURRENT-ASSETS> 3,573,376
<PP&E> 71,973,541
<DEPRECIATION> 18,575,398
<TOTAL-ASSETS> 59,536,359
<CURRENT-LIABILITIES> 7,599,898
<BONDS> 34,053,804
<COMMON> 413,008
0
0
<OTHER-SE> 17,387,172
<TOTAL-LIABILITY-AND-EQUITY> 59,536,359
<SALES> 0
<TOTAL-REVENUES> 26,509,864
<CGS> 7,146,987
<TOTAL-COSTS> 23,214,196
<OTHER-EXPENSES> 1,740,983
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 796,164
<INCOME-PRETAX> 702,080
<INCOME-TAX> 211,000
<INCOME-CONTINUING> 491,080
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 491,080
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
