<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
For Quarter Ended May 10, 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 4,256,308 common shares.
1
<PAGE> 2
PART I - FINANCIAL INFORMATION / ITEM 1 - FINANCIAL STATEMENTS
MAX & ERMA'S RESTAURANTS, INC. - CONDENSED BALANCE SHEETS (UNAUDITED)
ASSETS
------
May 10, October 26,
Current Assets: 1998 1997
----------- -----------
Cash $ 1,675,298 $ 1,149,482
Inventories 851,882 738,124
Other Current Assets 1,662,359 1,449,833
----------- -----------
Total Current Assets 4,189,539 3,337,439
Property - At Cost: 67,571,019 79,222,149
Less Accumulated Depreciation and Amortization 22,387,564 21,138,547
----------- -----------
Property - Net 45,183,455 58,083,602
Other Assets 2,847,500 2,534,918
----------- -----------
Total $52,220,494 $63,955,959
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current Maturities of Long-Term Obligations $ 1,407,360 $ 1,460,128
Accounts Payable 2,168,509 2,874,559
Accrued Liabilities 4,091,164 3,272,603
----------- -----------
Total Current Liabilities 7,667,033 7,607,290
Long-Term Obligations - Less Current Maturities 22,956,181 36,358,966
Minority Interests in Affiliated Partnerships 4,842 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 4,256,308 Shares
At 5/10/98 and 4,231,113 Shares at 10/26/97 425,631 423,111
Additional Capital 11,463,985 11,268,830
Retained Earnings 9,702,822 8,277,537
----------- -----------
Total Stockholders' Equity 21,592,438 19,969,478
----------- -----------
Total $52,220,494 $63,955,959
=========== ===========
(See notes to financial statements)
2
<PAGE> 3
<TABLE>
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>
Twelve Weeks Ended Twenty-eight Weeks Ended
------------------ ------------------------
May 10, May 11, May 10, May 11,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES: $23,628,234 $21,099,072 $53,173,019 $47,608,936
COSTS AND EXPENSES:
Costs of Goods Sold 6,222,992 5,661,952 14,123,961 12,808,939
Payroll and Benefits 7,286,132 6,541,666 16,424,441 14,767,384
Other Operating Expenses 7,010,180 6,068,672 15,800,954 13,910,163
Administrative Expenses 1,611,972 1,276,536 3,571,923 3,017,515
----------- ----------- ----------- -----------
Total Operating Expenses 22,131,276 19,548,826 49,921,279 44,504,001
----------- ----------- ----------- -----------
Operating Income 1,496,958 1,550,246 3,251,740 3,104,935
Interest Expense 384,766 644,748 1,147,084 1,440,912
Minority Interest in Income
of Affiliated Partnerships 4,882 23,237 42,371 79,678
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,107,310 882,261 2,062,285 1,584,345
INCOME TAXES 347,000 269,000 637,000 480,000
----------- ----------- ----------- -----------
NET INCOME $ 760,310 $ 613,261 $ 1,425,285 $ 1,104,345
=========== =========== =========== ===========
BASIC NET INCOME
PER COMMON SHARE $ 0.18 $ 0.15 $ 0.34 $ 0.27
=========== =========== =========== ===========
DILUTED NET INCOME
PER COMMON SHARE $ 0.18 $ 0.15 $ 0.33 $ 0.26
=========== =========== =========== ===========
BASIC SHARES OUTSTANDING 4,255,535 4,147,064 4,252,653 4,165,202
=========== =========== =========== ===========
DILUTED SHARES OUTSTANDING 4,262,433 4,175,031 4,256,659 4,203,588
=========== =========== =========== ===========
</TABLE>
(See notes to financial statements)
3
<PAGE> 4
<TABLE>
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
Twenty-Eight Weeks Ended
------------------------
May 10, May 11,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,425,285 $ 1,104,345
Depreciation and amortization 3,152,951 3,115,538
Minority interest in income of Affiliated Partnerships 42,371 79,680
Changes in other assets and liabilities 221,668 595,809
------------ ------------
Net cash provided by operating activities 4,842,275 4,895,372
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (6,185,229) (5,726,314)
Decrease (increase) in other assets (66,917) 25,345
Proceeds from sale of assets 16,991,024 1,250
------------ ------------
Net cash provided (used) by investing activities 10,738,878 (5,699,719)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations (33,102,063) (30,634,483)
Proceeds from long-term obligations 18,031,368 32,829,165
Proceeds from sale of common stock 73,113 61,869
Purchase of common stock (664,924)
Distributions to minority interests in Affiliated Partnership (57,755) (57,755)
------------ ------------
Net cash provided (used) by financing activities (15,055,337) 1,533,872
------------ ------------
NET INCREASE IN CASH & EQUIVALENTS 525,816 729,525
CASH & EQUIVALENTS BEGINNING OF PERIOD 1,149,482 927,261
------------ ------------
CASH & EQUIVALENTS AT END OF PERIOD $ 1,675,298 $ 1,656,786
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 1,126,890 $ 1,290,022
Income taxes $ 852,977 $ 498,631
Non-cash activities:
Property additions financed by capital leases $ 227,263
Property additions financed by accounts payable $ 257,134 $ 193,015
Deferred gain from sale of assets $ 1,554,022
</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 fiscal 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 second quarter of 1998 rose $2,529,000 or 12% from the
second quarter of 1997. The increase was a result of i) the opening of one Max &
Erma's restaurant during the fourth quarter of 1997, ii) the opening of three
Max & Erma's restaurants during the first quarter of 1998 and, iii) the opening
of the first Ironwood Cafe during the second quarter of 1998.
Menu prices were increased approximately 1 to 1-1/2 percent from the
second quarter of 1997 to the second quarter of 1998. This increase was offset
by a 0.9% decline in customer counts, resulting in a 0.4% decline in same-store
sales for restaurants opened at least 18 months from the second quarter of 1997
to the second quarter of 1998. The slight decline in same-store sales may be the
result of a planned strategy to reduce the frequency and dollar amount of
couponing and discounting. Management believes it can replace the vast majority
of "coupon related sales" with more profitable non-discounted sales.
Revenues for the second quarter of 1998 include approximately $58,000
of franchise fees and royalty payments. One franchised location opened in the
Cleveland, Ohio airport during the second quarter of 1998. The Company expects
to grant a franchise for the state of West Virginia during the third quarter of
1998. The agreement will be executed upon completion of a real estate lease by
the proposed franchisee. To further expand franchising, the Company has promoted
a regional manager to Director of Franchising for the purpose of marketing
franchises and overseeing the development and opening of franchised Max &
Erma's.
Year-to-date revenues increased $5,564,000 or 12% from 1997 to 1998.
The increase was a result of i) the opening of five Max & Erma's restaurants
during 1997, ii) the opening of three Max & Erma's and one Ironwood Cafe during
1998, iii) the receipt of franchise fees and royalty payments in 1998 totaling
$112,000 and, iv) a 0.3% increase in same-store sales.
In addition to growth in Company-owned and franchised Max & Erma's, the
Company expects to open five to six additional Ironwood Cafe's through fiscal
1999. At that time the Company will evaluate Ironwood Cafe's continued expansion
potential. The first Ironwood Cafe opened April 20, 1998. Management is
satisfied with the initial sales results and customer reaction to the
restaurant's food, service and ambiance.
6
<PAGE> 7
COSTS AND EXPENSES
- ------------------
Cost of goods sold, as a percentage of revenues, decreased from 26.8%
for the second quarter of 1997 to 26.4% for the second quarter of 1998.
Year-to-date cost of goods sold, as a percentage of revenues, decreased from
26.9% for 1997 to 26.6% in 1998. The declines were a result of menu price
increases and menu changes made at the start of 1998. The changes were made in
an effort to delete higher cost and higher waste menu items. The decreases
occurred despite sharply higher produce prices during the first half of 1998.
Increased produce prices resulted in a 0.6% increase in cost of goods sold, as a
percentage of revenues, for the quarter and year-to-date periods. In dollar
terms this represents increases of $140,000 and $320,000 for the quarter and
year-to-date periods, respectively. Management expects further declines in cost
of goods sold, as a percentage of revenues, because by early in the third
quarter produce prices (primarily romaine lettuce) had fallen approximately 70%
to almost normal levels.
Payroll and benefits, as a percentage of revenues, declined from 31.0%
for the second quarter of 1997 to 30.8% for the second quarter of 1998.
Year-to-date payroll and benefits, as a percentage of revenues, decreased from
31.0% for 1997 to 30.9% for 1998. The declines were a result of removing more
labor intensive menu items from the menu at the start of 1998 and a reduction in
labor costs associated with discounted meals. These factors were offset by the
continued upward pressure on wage rates brought on by the shortage of restaurant
workers, over-building of restaurants and increases in the minimum wage.
Other operating expenses, as a percentage of revenues, increased from
28.8% for the second quarter of 1997 to 29.7% for the second quarter of 1998.
The increase was primarily a result of the sale-leaseback transaction which
occurred during the first quarter of 1998, which increased rent $346,000 and
reduced depreciation $88,000 during the quarter. This resulted in a net increase
in other operating expenses of $258,000 or 1.1% of revenues. This increase was
somewhat offset by lower but more cost-effective marketing expenditures.
Year-to-date other operating expenses increased from 29.2% for 1997 to 29.7% for
1998 for reasons similar to the quarterly increase. All other operating expenses
remained essentially even with last year for both the quarter and year-to-date
periods.
ADMINISTRATIVE EXPENSES
- -----------------------
Administrative expenses, as a percentage of revenue, increased from
6.1% for the second quarter of 1997 to 6.8% for the second quarter of 1998. For
the year-to-date period administrative expenses increased from 6.3% of revenues
in 1997 to 6.7% of revenues in 1998. In dollar terms, the increases were 26% and
18% for the quarter and year-to-date periods, respectively. The increases were,
in part, a result of overhead related to the Ironwood Cafe concept. Most of the
remaining increases were 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. During 1998 the Company added
two additional real estate representatives, a director of franchising, a
corporate recruiter, an assistant food and beverage director, a staff accountant
and an additional point of sales support person.
7
<PAGE> 8
Management believes the addition of these personnel is necessary to achieve its
growth plans in 1999 and beyond and to properly support the Company's existing
restaurants. Management anticipates that administrative expenses, as a
percentage of revenues, may remain slightly above last year through the
remainder of 1998 and then begin to decline again.
INTEREST EXPENSE
- ----------------
Interest expense decreased 40% from the second quarter of 1997 to the
second quarter of 1998. Year-to-date interest expense decreased 20% from 1997 to
1998. The decreases were 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 annual interest savings of
$1,530,000. The Company expects a similar decline in interest expense during
each of the remaining quarters of 1998. The Company capitalized $98,000 of
construction period interest during the first 28 weeks of 1998 as compared to
$120,000 during the comparable 1997 period.
INCOME TAXES
- ------------
The Company's effective tax rate rose slightly from 30.3% for the 28
weeks of 1997 to 30.9% for the comparable 1998 period. The increase was due to
the fact that certain tax credits available to the Company are unrelated to
pre-tax income and as pre-tax income rises the credits have a lesser effect on
the Company's effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's working capital ratio increased from .4 to 1 at October
26, 1997 to .5 to 1 at May 10, 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 28 weeks of 1998, the Company expended approximately
$6,185,000 for property additions, $33,102,000 to reduce long-term obligations
and increased cash $526,000. Funds for such expenditures were provided primarily
by $16,991,000 of net proceeds from the sale-leaseback of assets, $18,031,000
from proceeds of long-term obligations, and $4,842,000 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 May 10, 1998, the Company had two Max & Erma's restaurants under
construction in Chicago, Illinois and Lexington, Kentucky. It expects to open
both restaurants during the fourth quarter of 1998. The Company expects to open
eight Max & Erma's restaurants in 1999. The Company is in the final stages of
negotiations on two sites in Pittsburgh and one site in each of
8
<PAGE> 9
Columbus, Ohio; Detroit, Michigan; Cleveland, Ohio and Erie, Pennsylvania. The
Company expects to open all of the above locations in fiscal 1999.
During the second quarter of 1998 the Company opened its first Ironwood
Cafe at a cost of $680,000. Management believes future Ironwood Cafe's can be
built for $600,000 or less. At May 10, 1998, the Company was negotiating for
additional Ironwood Cafe sites in Columbus, Cleveland and Toledo, Ohio; Detroit,
Michigan and Pittsburgh, Pennsylvania. Depending upon the completion of leases,
one additional Ironwood Cafe is expected to open during the fourth quarter of
1998. The remaining locations are expected to open during fiscal 1999.
The Company anticipates that funding for new restaurants will be
provided primarily by cash flow from operations and real estate and equipment
leasing and the Company's revolving credit line. At May 10, 1998, the Company
had a commitment for an additional $10.0 million of sale-leaseback financing,
had approximately $10.0 available under its $12.0 million revolving credit line
and approximately $1.3 million available under equipment lease commitments.
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,
franchising, the opening of additional restaurants, changes in cost of goods
sold and administrative expenses, future interest expense, new restaurant sites
and future sources of capital. The words "plan," "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.
9
<PAGE> 10
PART II
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Company held its Annual Meeting of Stockholders on April 9, 1998
for the purpose of electing three Class III directors for three-year terms
expiring in 2001 and ratifying Deloitte & Touche LLP as the Company's
independent auditors for the 1998 fiscal year.
Each nominee to the Company's Board of Directors was elected by the
following vote:
Votes For Votes Withheld
--------- --------------
William E. Arthur 3,387,055 9,504
Todd B. Barnum 3,387,146 9,413
Thomas R. Green 3,387,385 9,174
Additionally, Deloitte & Touche LLP was ratified as the Company's
independent auditors for the 1998 fiscal year by a vote of 3,370,538 shares for,
21,178 against, and 4,843 shares abstained.
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
The exhibits listed in the accompanying index to exhibits on page 12
are filed as part of this report.
(b) Reports on Form 8-K
None
10
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAX & ERMA'S RESTAURANTS, INC.
------------------------------
Registrant
Todd B. Barnum
-----------------------------------
Todd. B. Barnum
Chairman of the Board
(Chief Executive Officer)
William C. Niegsch, Jr.
-----------------------------------
William C. Niegsch, Jr.
Executive Vice President &
Chief Financial Officer
June 12, 1998
- ---------------------
Date
11
<PAGE> 12
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
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-26-1997
<PERIOD-START> OCT-27-1998
<PERIOD-END> MAY-10-1998
<EXCHANGE-RATE> 1
<CASH> 1,675,298
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 851,882
<CURRENT-ASSETS> 4,189,539
<PP&E> 67,571,019
<DEPRECIATION> 22,387,564
<TOTAL-ASSETS> 52,220,494
<CURRENT-LIABILITIES> 7,667,033
<BONDS> 22,956,181
0
0
<COMMON> 425,631
<OTHER-SE> 21,166,807
<TOTAL-LIABILITY-AND-EQUITY> 52,220,494
<SALES> 0
<TOTAL-REVENUES> 53,173,019
<CGS> 14,123,961
<TOTAL-COSTS> 46,349,356
<OTHER-EXPENSES> 3,571,923
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,147,084
<INCOME-PRETAX> 2,062,285
<INCOME-TAX> 637,000
<INCOME-CONTINUING> 1,425,285
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,425,285
<EPS-PRIMARY> .34
<EPS-DILUTED> .33
</TABLE>
