<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 15, 1998 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 4,250,663 common shares.
1
<PAGE> 2
PART I - FINANCIAL INFORMATION / ITEM 1 - FINANCIAL STATEMENTS
MAX & ERMA'S RESTAURANTS, INC. - CONDENSED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
------
February 15, October 26,
Current Assets: 1998 1997
---- ----
<S> <C> <C>
Cash $ 2,167,745 $ 1,149,482
Inventories 805,415 738,124
Other Current Assets 1,552,750 1,449,833
------------ ------------
Total Current Assets 4,525,910 3,337,439
Property - At Cost: 65,203,543 79,222,149
Less Accumulated Depreciation and Amortization 21,500,523 21,138,547
------------ ------------
Property - Net 43,703,020 58,083,602
Other Assets 2,706,768 2,534,918
------------ ------------
Total $ 50,935,698 $ 63,955,959
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current Maturities of Long-Term Obligations $ 1,439,601 $ 1,460,128
Accounts Payable 2,729,048 2,874,559
Accrued Liabilities 4,255,990 3,272,603
------------ ------------
Total Current Liabilities 8,424,639 7,607,290
Long-Term Obligations - Less Current Maturities 21,729,466 36,358,966
Minority Interests in Affiliated Partnerships 19,211 20,225
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 4,250,663 Shares
At 2/15/98 and 4,231,113 Shares at 10/26/97 425,066 423,111
Additional Capital 11,394,804 11,268,830
Retained Earnings 8,942,512 8,277,537
------------ ------------
Total Stockholders' Equity 20,762,382 19,969,478
------------ ------------
Total $ 50,935,698 $ 63,955,959
============ ============
</TABLE>
(See notes to financial statements)
2
<PAGE> 3
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Sixteen Weeks Ended
-------------------
February 15, February 16,
1998 1997
----------- -----------
<S> <C> <C>
REVENUES: $29,544,785 $26,509,864
COSTS AND EXPENSES:
Costs of Goods Sold 7,900,969 7,146,987
Payroll and Benefits 9,138,309 8,225,718
Other Operating Expenses 8,790,774 7,841,491
Administrative Expenses 1,959,951 1,740,983
----------- -----------
Total Operating Expenses 27,790,003 24,955,179
----------- -----------
Operating Income 1,754,782 1,554,685
Interest Expense 762,318 796,164
Minority Interest in Income
of Affiliated Partnerships 37,489 56,441
----------- -----------
INCOME BEFORE INCOME TAXES 954,975 702,080
INCOME TAXES 290,000 211,000
----------- -----------
NET INCOME $ 664,975 $ 491,080
=========== ===========
BASIC NET INCOME PER COMMON SHARE $ 0.16 $ 0.12
=========== ===========
DILUTED NET INCOME PER COMMON SHARE $ 0.16 $ 0.12
=========== ===========
BASIC SHARES OUTSTANDING 4,250,491 4,178,806
=========== ===========
DILUTED SHARES OUTSTANDING 4,252,802 4,225,005
=========== ===========
</TABLE>
(See notes to financial statements)
3
<PAGE> 4
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Sixteen Weeks Ended
-------------------
February 15, February 16,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 664,975 $ 491,080
Depreciation and amortization 1,791,139 1,779,066
Minority interest in income of Affiliated Partnerships 37,489 56,441
Changes in other assets and liabilities 1,134,537 610,581
------------ ------------
Net cash provided by operating activities 3,628,140 2,937,168
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (3,292,075) (3,554,816)
Proceeds from sale of assets 16,998,868
Decrease (increase) in other assets (100,440) 50,686
------------ ------------
Net cash provided (used) by investing activities 13,606,353 (3,504,130)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations (25,333,048) (8,560,651)
Proceeds from long-term obligations 9,087,825 10,198,412
Proceeds from sale of stock 67,496
Purchase of common stock (664,924)
Distributions to minority interests in Affiliated Partnership (38,503) (19,252)
------------ ------------
Net cash provided (used) by financing activities (16,216,230) 953,585
------------ ------------
NET INCREASE IN
CASH AND EQUIVALENTS 1,018,263 386,623
CASH AND EQUIVALENTS
BEGINNING OF THE PERIOD 1,149,482 927,261
------------ ------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 2,167,745 $ 1,313,884
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 771,543 $ 658,118
Income taxes $ 114,333 $ 115,327
Non-cash activities:
Property additions financed by accounts payable $ 534,800 $ 347,371
Deferred gain from sales of assets $ 1,544,273 $
</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
------------------------------------
The Company adopted Financial Accounting Standard No. 128 (FAS 128)
"Earnings Per Share" in the first quarter of fiscal 1998 which
required retroactive adoption. 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
based on the weighted average shares outstanding and stock options
outstanding. The effect of the convertible securities is
anti-dilutive.
3. Property Sale-Leaseback
-----------------------
On December 31, 1997 the Company entered into a sale-leaseback
transaction with regard to the land, buildings, fixtures and
improvements at eight restaurant sites. As a result of the sale, the
Company received approximately $17,000,000 in net proceeds, which were
used to substantially pay off borrowings under the Company's revolving
line of credit. The Company leases back the restaurant sites under
operating leases over a twenty year period at a base annual rent of
approximately $1,583,000 (plus taxes and insurance). The transaction
resulted in a deferred gain of approximately $1,550,000 which will be
accreted to income over the twenty year lease term.
5
<PAGE> 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
REVENUES
- --------
Revenues for the first quarter of 1998 rose $3,035,000 or 11% from the
first quarter of 1997. The increase was a result of i) the opening of five
restaurants during 1997, ii) the opening of three restaurants during the first
quarter of 1998, and iii) an increase of approximately .75% or $175,000 in
same-store sales for restaurants opened for at least 18 months.
Revenues for the first quarter of 1998 include approximately $54,000 of
franchise fees and royalty payments. The Company anticipates the opening of two
additional franchised locations in the second and third quarters of 1998.
Accordingly, revenues from franchising should increase during each quarter of
1998.
Management believes the increase in same-store sales is a result of an
approximately 1-1/2 to 2 percent menu price increase. The price increase offsets
a slight decline in customer counts, while guest check averages remained almost
unchanged between the periods. Mild winter weather during the first quarter of
1998 contributed to customer counts remaining close to last year's levels,
despite the continued intense level of competition in the casual dining segment
of the restaurant industry.
In addition to continued growth in franchise revenues, the Company
anticipates the opening of two additional Max & Erma's during the fourth quarter
of 1998 and the opening of one Ironwood Cafe in each of the second, third and
fourth quarters. The Company is testing Ironwood Cafe as a second growth
concept. Generally the restaurant will occupy approximately 4,000 square feet of
leased space, open for dinner only and primarily serve pasta and gourmet pizzas
prepared in a wood burning oven. Management expects each Ironwood Cafe will
generate annual sales of approximately $1.25 million.
COSTS AND EXPENSES
- ------------------
Cost of goods sold, as a percentage of revenues, decreased from 27.0%
for the first quarter of 1997 to 26.7% for the first quarter of 1998. The
decrease was a result of menu price increases and menu changes made at the start
of 1998. In an effort to lower cost of goods sold, as a percentage of revenues,
several higher cost menu items were removed from the menu. Additionally, several
slower selling menu items were eliminated in an effort to cut waste and thus
reduce costs of goods sold.
Payroll and benefits, as a percentage of revenues, declined slightly
from 31.0% for the first quarter of 1997 to 30.9% for the first quarter of 1998.
The decline was primarily a result of removing several more labor intensive menu
items from the menu at the start of 1998 and
6
<PAGE> 7
offset the continued upward pressure on wage rates brought on by the lack of
restaurant workers, over-building of restaurants and increases in the minimum
wage, which tend to push up all wage rates.
Other operating expenses, as a percentage of revenues, increased from
29.6% for the first quarter of 1997 to 29.8% for the first quarter of 1998. The
increase was a result of a sale-leaseback transaction involving eight
restaurants which was completed during the middle of the first quarter of 1998.
As a result of the transaction, rent expense increased approximately $188,000
for the eight restaurants and depreciation decreased approximately $49,000 for
the quarter. This resulted in a net increase in operating expenses of $139,000
or 0.5% of revenues, which was more than offset by interest savings of
approximately $197,000 or 0.7% of revenues for the quarter. Excluding the effect
of the sale-leaseback transaction, other operating expenses, as a percentage of
revenues, declined by .3% primarily due to reduced marketing expenditures.
ADMINISTRATIVE EXPENSES
- -----------------------
Administrative expenses, as a percentage of revenue, remained constant
at 6.6% for the first quarter of 1997 and 1998. In dollar terms, administrative
expenses increased 13% from the first quarter of 1997 to the first quarter of
1998. A portion of the increase was a result of overhead costs associated with
Ironwood Cafe. The remaining increase was a result of raises for corporate
employees and additional employees needed to support the increased number of
restaurants, franchising, and a planned accelerated growth rate. Management
anticipates that administrative expenses, as a percentage of revenues, may
remain at or slightly above last year through the remainder of 1998 and then
begin to decline again.
INTEREST EXPENSE
- ----------------
Interest expense decreased 4% from the first quarter of 1997 to the
first quarter of 1998 as a result of the sale-leaseback transaction previously
discussed. The Company received net proceeds of approximately $17.0 million from
the transaction. The net proceeds were used to reduce borrowings under the
Company's revolving credit line, resulting in an expected annual interest saving
of $1,530,000. Had the transaction not occurred interest expense would have
increased approximately 20% from the first quarter of 1997. The Company expects
a greater decline in interest expense during each of the remaining quarters of
1998 as the interest savings will be in place for the entire period.
Additionally, the Company expects to fund a greater portion of its capital needs
from cash flow and real estate leasing. The Company capitalized $73,000 and
$71,000 in construction period interest during the first quarter of 1997 and
1998, respectively.
7
<PAGE> 8
INCOME TAXES
- ------------
The Company's effective tax rate remained relatively constant at 30.4%
for the first quarter of 1998 as compared to 30.0% for the first quarter of
1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's working capital ratio increased from .4 to 1 at October
26, 1997 to .5 to 1 at February 15, 1998. 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 1998, the Company expended approximately
$3,292,000 for property additions, $25,333,000 to reduce long-term obligations
and increased cash $1,018,000. Funds for such expenditures were provided
primarily by $16,999,000 of net proceeds from the sale-leaseback of assets,
$9,088,000 from proceeds of long-term obligations, and $3,628,000 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 February 15, 1998, the Company was under contract to purchase a site
for a Max & Erma's restaurant in Chicago, Illinois. It expects to complete the
purchase and commence construction during the second quarter of 1998 with an
expected opening during the fourth quarter. The Company also plans on opening
one additional Max & Erma's restaurant during the fourth quarter and eight Max &
Erma's restaurants during 1999. Sites are either under negotiation or
consideration in Lexington, Kentucky; Columbus, Ohio; Erie and Pittsburgh,
Pennsylvania; Atlanta, Georgia; Detroit, Michigan and Indianapolis, Indiana.
At February 15, 1998 the Company also had under construction one
Ironwood Cafe in Columbus, Ohio. It was also negotiating leases for two
additional Ironwood Cafes in Cleveland and Columbus, Ohio, both of which are
expected to open during 1998. Depending upon initial results, the Company
anticipates opening three to five Ironwood Cafes during 1999.
Funding for new restaurants will be provided by cash flow from
operations, real estate and equipment leasing and the Company's revolving credit
line. At February 15, 1998, the Company had a commitment for an additional $10.0
million of sale-leaseback financing, had approximately $11.0 available under its
$12.0 million revolving credit line and approximately $1.4 million available
under equipment lease commitments.
8
<PAGE> 9
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- --------------------------------------------------------------------------------
This Form 10-Q contains forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended, and Section
27A of the Securities Act of 1933, as amended. These forward-looking statements
include statements in Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations, regarding anticipated future revenues, the
opening of additional restaurants, changes in administrative expenses, future
interest expense, and future sources of capital. The words "anticipate,"
"believe," "expect," "estimate," and "project" and similar words and expressions
identify forward-looking statements which speak only as of the date hereof.
Investors are cautioned that such statements involve risks and uncertainties
that could cause actual results to differ materially from historical or
anticipated results due to many factors, including, but not limited to, the
Company's ability to open or franchise new restaurants as planned, changes in
competition in markets where the Company operates restaurants, the level of
market acceptance of the Company's new restaurant concept (Ironwood Cafe), the
Company's ability to control administrative expenses, changes in interest rates,
changes in cash flows from operations, the availability of real estate leases,
and other risks, uncertainties and factors described in the Company's most
recent Annual Report on Form 10-K and other filings from time to time with the
Securities and Exchange Commission. The Company undertakes no obligation to
publicly update or revise any forward-looking statements.
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 19, 1998
- -------------------------------
Date
10
<PAGE> 11
MAX & ERMA'S RESTAURANTS INC.
EXHIBIT INDEX
Exhibit No. Exhibit Page No.
- ----------- ------- --------
2 Not applicable
3 Not applicable
4 Not applicable
11 Not applicable
15 Not applicable
18 Not applicable
19 Not applicable
22 Not applicable
23 Not applicable
24 Not applicable
27 Financial Data Schedule
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-26-1997
<PERIOD-START> OCT-27-1997
<PERIOD-END> FEB-15-1998
<CASH> 2,167,745
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 805,415
<CURRENT-ASSETS> 4,525,910
<PP&E> 65,203,543
<DEPRECIATION> 21,500,523
<TOTAL-ASSETS> 50,935,698
<CURRENT-LIABILITIES> 8,424,639
<BONDS> 21,729,466
0
0
<COMMON> 425,066
<OTHER-SE> 20,337,316
<TOTAL-LIABILITY-AND-EQUITY> 50,935,698
<SALES> 0
<TOTAL-REVENUES> 29,544,785
<CGS> 7,900,969
<TOTAL-COSTS> 25,830,052
<OTHER-EXPENSES> 1,959,951
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 762,318
<INCOME-PRETAX> 954,975
<INCOME-TAX> 290,000
<INCOME-CONTINUING> 664,975
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 664,975
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
