<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 14, 1999 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 3,625,010 common shares.
<PAGE> 2
<TABLE>
PART I - FINANCIAL INFORMATION / ITEM 1 - FINANCIAL STATEMENTS
MAX & ERMA'S RESTAURANTS, INC. - CONDENSED BALANCE SHEETS (UNAUDITED)
<CAPTION>
ASSETS
------
February 14, October 25,
Current Assets: 1999 1998
------------ -----------
<S> <C> <C>
Cash $ 2,068,073 $ 2,151,323
Inventories 876,317 855,202
Other Current Assets 1,722,522 1,662,760
----------- -----------
Total Current Assets 4,666,912 4,669,285
Property - At Cost: 62,649,265 60,656,746
Less Accumulated Depreciation and Amortization 23,213,581 22,559,784
----------- -----------
Property - Net 39,435,684 38,096,962
Other Assets 3,447,028 3,191,709
----------- -----------
Total $47,549,624 $45,957,956
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current Maturities of Long-Term Obligations $ 794,431 $ 772,634
Accounts Payable 2,620,321 2,838,526
Accrued Liabilities 3,641,137 3,689,637
----------- -----------
Total Current Liabilities 7,055,889 7,300,797
Long-Term Obligations - Less Current Maturities 22,990,658 20,009,596
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 3,625,010 Shares
At 2/14/99 and 3,772,388 Shares at 10/25/98 362,501 377,239
Additional Capital 6,583,344 7,655,299
Retained Earnings 10,557,232 10,615,025
----------- -----------
Total Stockholders' Equity 17,503,077 18,647,563
----------- -----------
Total $47,549,624 $45,957,956
=========== ===========
</TABLE>
(See notes to financial statements)
2
<PAGE> 3
<TABLE>
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>
Sixteen Weeks Ended
-------------------
February 14, February 15,
1999 1998
------------ ------------
<S> <C> <C>
REVENUES: $31,149,489 $29,544,785
COSTS AND EXPENSES:
Costs of Goods Sold 8,162,873 7,900,969
Payroll and Benefits 9,912,083 9,138,309
Other Operating Expenses 9,781,512 8,790,774
Administrative Expenses 2,357,683 1,959,951
----------- -----------
Total Operating Expenses 30,214,151 27,790,003
----------- -----------
Operating Income 935,338 1,754,782
Interest Expense 430,707 762,318
Minority Interest in Income
of Affiliated Partnerships 18,424 37,489
----------- -----------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 486,207 954,975
INCOME TAXES 144,000 290,000
----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 342,207 664,975
EXTRAORDINARY LOSS (net of income tax
benefit of $186,000) 400,000
-----------
NET INCOME (LOSS) $ (57,793) $ 664,975
=========== ===========
INCOME PER SHARE BEFORE EXTRAORDINARY ITEM:
BASIC $ 0.09 $ 0.16
=========== ===========
DILUTED $ 0.09 $ 0.16
=========== ===========
EXTRAORDINARY LOSS PER SHARE:
BASIC $ (0.11)
===========
DILUTED: $ (0.11)
===========
NET INCOME (LOSS) PER SHARE:
BASIC $ (0.02) $ 0.16
=========== ===========
DILUTED $ (0.02) $ 0.16
=========== ===========
SHARES OUTSTANDING:
BASIC 3,701,995 4,250,491
=========== ===========
DILUTED 3,765,377 4,252,802
=========== ===========
</TABLE>
(See notes to financial statements)
3
<PAGE> 4
<TABLE>
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
Sixteen Weeks Ended
-------------------
February 14, February 15,
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (57,793) $ 664,975
Depreciation and amortization 1,637,803 1,791,139
Extraordinary loss 400,000
Minority interest in income of Affiliated Partnerships 18,424 37,489
Changes in other assets and liabilities (436,028) 1,134,537
------------ ------------
Net cash provided by operating activities 1,562,406 3,628,140
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (3,237,706) (3,292,075)
Proceeds from sale of assets 1,215 16,998,868
Decrease in other assets (230,418) (100,440)
------------ ------------
Net cash provided (used) by investing activities (3,466,909) 13,606,353
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations (16,052,154) (25,333,048)
Proceeds from long-term obligations 19,065,748 9,087,825
Proceeds from sale of stock 24,150 67,496
Purchase of common stock (1,172,240)
Debt issue costs (25,000)
Distributions to minority interests in Affiliated
Partnership (19,251) (38,503)
------------ ------------
Net cash provided (used) by financing activities 1,821,253 (16,216,230)
------------ ------------
NET INCREASE (DECREASE)IN
CASH AND EQUIVALENTS (83,250) 1,018,263
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD 2,151,323 1,149,482
------------ ------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 2,068,073 $ 2,167,745
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 604,121 $ 771,543
Income taxes $ 131,502 $ 114,333
Non-cash activities:
Property additions financed by accounts payable $ 444,151 $ 534,800
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, its subsidiary and Affiliated Partnership each have a 52-53
week fiscal year which ends on the last Sunday in October. Fiscal 1999
consists of 53 weeks and includes one sixteen-week, two twelve-week and one
thirteen-week quarters.
2. Extraordinary Item
------------------
In August 1994, the Company issued $10,384,000 of unsecured convertible
subordinated debentures which bore interest at 8% and were due in 2004. In
November 1998 the Company redeemed the $8,842,000 outstanding debentures
by utilizing borrowings under its bank credit agreement. The Company
recognized an extraordinary charge against income of $400,000, net of tax
($0.11 per diluted share) related to the write-off of unamortized debt
issuance costs.
5
<PAGE> 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
REVENUES
- --------
Revenues for the first quarter of 1999 rose $1,605,000 or 5% from the first
quarter of 1998. The increase was a result of i) the opening of five Max &
Erma's restaurants during 1998, and ii) the opening of one Ironwood Cafe during
1998 and one during the first quarter of 1999. The increase in revenues from the
opening of new restaurants was partially offset by the closing of two Max &
Erma's restaurants, one during the fourth quarter of 1998 and one during the
first quarter of 1999, and a decline of approximately $320,000 or 1.2% in
same-store sales for restaurants opened at least 18 months.
Exclusive of the two week period from January 2, 1999 through January 15,
1999, same-store sales increased approximately $330,000 or 1.4% from the first
quarter of 1998 to the first quarter of 1999. During the first two weeks of
January, same-store sales declined approximately $650,000 or 20% due to
extremely harsh winter weather impacting the entire Midwest and to a lesser
extent the Company's southeastern locations. Same-store sales declines at
individual restaurants during this period ranged from 4% down to over 60% down.
During the two week period over half of the 41 restaurants included in the
same-store sales group reported sales declines of 20% or more, with no
restaurant in the chain reporting positive sales comparisons. Management
believes the total revenue loss at all restaurants during this period was in
excess of $800,000.
Management expects modest revenue growth during the second quarter of 1999
as it anticipates no restaurant openings during the quarter. Beginning in the
third quarter of 1999 the Company expects to open two to three Max & Erma's
restaurants per quarter through the end of fiscal 2000. The Company is currently
under contract to purchase or lease ten Max & Erma's locations and is
negotiating for an additional five sites.
The Company expects to open an additional Ironwood Cafe during the third
quarter of 1999. Management will continue to monitor and evaluate the Ironwood
Cafe concept through the end of 1999. At that time the Company will determine
its future development potential. Management is encouraged by initial sales at
the second Ironwood Cafe, which have averaged over $17,000 per week since
opening, approximately 75% higher than the first location.
The Company also anticipates additional revenue growth from franchising.
During the first quarter of 1999 the Company signed its first multi-unit
franchise agreement. The agreement requires the franchisee to open four Max &
Erma's restaurants in Richmond and Charlottesville, Virginia over a five year
period. The agreement calls for a $40,000 franchise fee for each restaurant
opened plus a royalty payment equal to 4% of sales. The first restaurant must be
open by August 2000.
6
<PAGE> 7
COSTS AND EXPENSES
- ------------------
Cost of goods sold, as a percentage of revenues, declined from 26.7% for
the first quarter of 1998 to 26.2% for the first quarter of 1999. The decline
was due to higher produce and dairy prices during 1998 and menu price increases
of 1-1/2 to 2 percent, while other inventory costs remained relatively stable.
Payroll and benefits, as a percentage of revenues, increased from 30.9% for
the first quarter of 1998 to 31.8% for the first quarter of 1999. The increase
was a result of the continued upward pressure on wage rates brought on by the
extremely low unemployment levels and continued high demand for restaurant
workers. The loss of revenue related to harsh weather in early January 1999 also
put upward pressure on payroll and benefits, as a percentage of revenues. For
that two week period most of the Company's restaurants operated at a minimum
fixed level of payroll with little ability to reduce payroll further in response
to sales declines.
Other operating expenses, as a percentage of revenues, increased from 29.8%
for the first quarter of 1998 to 31.4% for the first quarter of 1999. The
increase was a result of the two sale-leaseback transactions completed during
1998 which increased rent $514,000 and reduced depreciation $126,000 during the
quarter for a net increase to other operating expenses of $388,000 or 1.2%, as a
percentage of revenues. The remaining increase in other operating expenses, as a
percentage of revenues, was due to the weather, as fixed expenses cannot be
reduced during periods of temporary sales declines.
ADMINISTRATIVE EXPENSES
- -----------------------
Administrative expenses increased 20% from the first quarter of 1998 to the
first quarter of 1999. The increase was a result of raises for corporate
personnel, expansion of the Company's corporate headquarters and administrative
expenses associated with Ironwood Cafe and the franchising program for Max &
Erma's. The increase was generally in line with Management's expectations.
Administrative expenses, as a percentage of revenue, increased from 6.6% for the
first quarter of 1998 to 7.6% for the first quarter of 1999. The increase was a
result of increased overhead in anticipation of an accelerated growth rate,
which should begin during the second half of 1999. The closing of two
restaurants and the revenue loss due to weather also put upward pressure on
administrative expenses, as a percentage of revenues. Management expects that
administrative expenses, as a percentage of revenues, will begin to decline in
the second half of 1999.
INTEREST EXPENSE
- ----------------
Interest expense decreased 43% from the first quarter of 1998 to the first
quarter of 1999. The decrease was a result of the two sale-leaseback
transactions previously referred to, which resulted in interest savings of
approximately $686,000 over what would have been incurred had the sale-leaseback
not occurred and reduced interest rates. The interest rate on the first $9.0
million of
7
<PAGE> 8
borrowings under the Company's revolving credit line is 7.38%, with excess
borrowings at prime + 1/4% as compared to an effective rate of approximately 9%
under the Company's convertible debentures. The initial $9.0 million of the
Company's revolving credit line was used to redeem the convertible debentures
during the first quarter of 1999. The Company incurred approximately $125,000 in
interest expense resulting from the repurchase of approximately 650,000 shares
of its common stock through the end of the first quarter of 1999. The Company
capitalized $71,000 and $38,000 in construction period interest during the first
quarter of 1998 and 1999, respectively.
INCOME TAXES AND EXTRAORDINARY LOSS
- -----------------------------------
The Company's effective tax rate declined slightly from 30.4% for the first
quarter of 1998 to 29.6% for the first quarter of 1999. During the first quarter
of 1999 the Company redeemed $8,842,000 of convertible debentures. As a result,
the Company recognized an extraordinary charge of $400,000 ($.11 per share) net
of approximately $186,000 of income tax savings related to the write-off of
unamortized debt issuance costs.
YEAR 2000
- ---------
The Company has reviewed its computer systems and software with respect to
the Year 2000 issue. The Company has identified three critical areas of
information technology: register systems, network and accounting software and
payroll processing. Register systems currently being installed are Year 2000
compliant. Older register systems function and accumulate data without regard to
date and therefore Year 2000 is not an issue. The Company's main accounting
software is supplied by an outside vendor and has been represented to be Year
2000 compliant in the course of normal system upgrades. Certain database and
spreadsheet software are being upgraded during fiscal 1999 at an expected cost
not to exceed $50,000 which will be expensed as incurred. During 1998 the
Company expended approximately $25,000 for computer equipment used exclusively
to process payroll. The related software was provided by the Company's outside
payroll service and has been represented to be Year 2000 compliant.
The Company believes that little, if any, of its non-information technology
equipment and systems are date dependent.
The Company presently has one major outside food products supplier to its
restaurants. It has inquired of that supplier as to its Year 2000 compliance
efforts and been assured that all operational areas are Year 2000 compliant.
Failure of that supplier to deliver food products to the Company's restaurants
could lead to a cessation of operations. While the Company has no contingency
plan regarding replacement of that vendor, it believes it could be replaced and
operations resumed within a 30 day period.
Because the Company's Year 2000 compliance is, like most businesses,
dependent in many ways upon the Year 2000 compliance of key third party vendors,
including gas and electric utility service providers, food suppliers, payroll
processors, credit card processors, and others,
8
<PAGE> 9
there can be no assurance that the compliance of the Company's information
technology and non-information technology equipment with Year 2000 will prevent
a material adverse impact on the Company's results of operations, financial
condition and cash flows. The Company believes that the most reasonably likely
worst case scenario resulting from noncompliance with Year 2000 by the Company
or its key third party suppliers would be the temporary shutdown of some or all
of its restaurants due the unavailability of gas and electricity service or food
products to some or all of its restaurants. The shutdown of some or all of the
Company's restaurants for any substantial period of time would cause the Company
to lose revenues from sales, but the Company would not be able to reduce all
costs of operations associated with such shutdown restaurants, such as rent and
other fixed costs, interest, and certain employee and administrative costs.
Accordingly, if a substantial number of the Company's restaurants were shutdown
for any substantial period of time, such shutdowns could have a material adverse
effect on the Company's results of operations, financial condition and cash
flows.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's working capital ratio increased from .6 to 1 at October 25,
1998 to .7 to 1 at February 14, 1999. 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 1999, the Company expended approximately
$3,238,000 for property additions, and $16,052,000 to reduce long-term
obligations and $1,172,000 to repurchase approximately 157,000 shares of its
common stock. Funds for such expenditures were provided primarily by $19,066,000
from proceeds of long-term obligations, and $1,562,000 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 14, 1999, the Company was committed to the opening of six Max &
Erma's restaurants during the third and fourth quarters of 1999 and at least
eight Max & Erma's restaurants during fiscal 2000. At February 14, 1999 ten
sites were under contract to purchase or lease, two of which were under
construction. Five additional sites had been approved and were in some stage of
negotiations.
At February 14, 1999 the Company had one Ironwood Cafe under construction
in Cincinnati, Ohio, which it expects to open during the third quarter of 1999.
The Company will monitor and evaluate the Ironwood Cafe concept through the
remainder of 1999 at which time it will determine its future development
potential.
Funding for new restaurants will be provided by cash flow from operations,
the sale-leaseback of real estate, equipment leasing and the Company's revolving
credit line. At February 14, 1999, the Company had $7.9 million available under
its $20.0 million revolving credit line and approximately $2.3 million available
under equipment lease commitments. Although the Company
9
<PAGE> 10
had no commitments for sale-leaseback financing of real estate at February 14,
1999, it believes it will be able to obtain such commitments during 1999 under
terms similar to the two transactions completed during 1998.
On March 11, 1999 the Company's Board of Directors increased the number of
shares authorized for repurchase from 750,000 shares to 1,250,000 shares.
Funding for the share repurchase program will be provided by cash flow from
operations and the Company's revolving credit line.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- --------------------------------------------------------------------------------
This Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") 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. 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. Forward-looking statements in this MD&A include statements
regarding anticipated revenue growth from the opening of new restaurants
(paragraphs 3 and 4), revenue growth from franchising and the opening of
franchised Max & Erma's restaurants (paragraph 5), anticipated declines in
administrative expenses (paragraph 9), Year 2000 preparedness and contingency
plans (paragraphs 12, 13, 14 and 15), the opening of additional Max & Erma's and
Ironwood Cafe restaurants (paragraphs 18 and 19), future sources of capital and
the availability and terms of sale-leaseback financing (paragraph 20).
Investors are cautioned that forward-looking 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 for purchase or lease, 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
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
March 18, 1999
--------------------
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> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> OCT-26-1998
<PERIOD-END> FEB-14-1999
<EXCHANGE-RATE> 1
<CASH> 2,068,073
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 876,317
<CURRENT-ASSETS> 4,666,912
<PP&E> 62,649,265
<DEPRECIATION> 23,213,581
<TOTAL-ASSETS> 47,549,624
<CURRENT-LIABILITIES> 7,055,889
<BONDS> 22,990,658
0
0
<COMMON> 362,501
<OTHER-SE> 17,140,576
<TOTAL-LIABILITY-AND-EQUITY> 47,549,624
<SALES> 0
<TOTAL-REVENUES> 31,149,489
<CGS> 8,162,873
<TOTAL-COSTS> 27,856,468
<OTHER-EXPENSES> 2,357,683
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 430,707
<INCOME-PRETAX> 486,207
<INCOME-TAX> 144,000
<INCOME-CONTINUING> 342,207
<DISCONTINUED> 0
<EXTRAORDINARY> 400,000
<CHANGES> 0
<NET-INCOME> (57,793)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
