<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
For Quarter Ended August 1, 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 2,790,451 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
------
August 1, October 25,
Current Assets: 1999 1998
----------- -----------
<S> <C> <C>
Cash $ 1,052,254 $ 2,151,323
Inventories 832,688 855,202
Other Current Assets 2,078,597 1,662,760
----------- -----------
Total Current Assets 3,963,539 4,669,285
Property - At Cost: 69,466,416 60,656,746
Less Accumulated Depreciation and Amortization 24,917,064 22,559,784
----------- -----------
Property - Net 44,549,352 38,096,962
Other Assets 3,834,425 3,191,709
----------- -----------
Total $52,347,316 $45,957,956
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Bank Note Payable $ 3,500,000
Current Maturities of Long-Term Obligations 770,608 $ 772,634
Accounts Payable 3,400,250 2,838,526
Accrued Liabilities 3,914,402 3,689,637
----------- -----------
Total Current Liabilities 11,585,260 7,300,797
Long-Term Obligations - Less Current Maturities 29,279,132 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 2,790,451 Shares
At 8/1/99 and 3,772,388 Shares at 10/25/98 279,045 377,239
Additional Capital 160,776 7,655,299
Retained Earnings 11,043,103 10,615,025
----------- -----------
Total Stockholders' Equity 11,482,924 18,647,563
----------- -----------
Total $52,347,316 $45,957,956
=========== ===========
</TABLE>
(See notes to financial statements) 2
<PAGE> 3
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Twelve Weeks Ended Forty Weeks Ended
---------------------------- ---------------------------
August 1, August 2, August 1, August 2,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES: $ 25,021,143 $ 23,692,064 $ 80,197,927 $ 76,865,083
COSTS AND EXPENSES:
Costs of Goods Sold 6,394,550 6,211,248 20,716,819 20,335,209
Payroll and Benefits 8,008,679 7,451,070 25,501,915 23,875,514
Other Operating Expenses 7,278,722 6,883,162 24,040,758 22,285,512
Pre-Opening Expenses 194,863 151,725 281,864 550,322
Loss on Disposition of Assets 700,000
Administrative Expenses 1,983,753 1,555,846 6,297,388 5,127,770
------------ ------------ ------------ ------------
Total Operating Expenses 23,860,567 22,253,051 77,538,744 72,174,327
------------ ------------ ------------ ------------
Operating Income 1,160,576 1,439,013 2,659,183 4,690,756
Interest Expense 363,857 361,732 1,122,864 1,508,816
Minority Interest in Income
of Affiliated Partnerships (Loss) 24,967 (4,634) 69,241 37,737
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES,
EXTRAORDINARY ITEM & CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 771,752 1,081,915 1,467,078 3,144,203
INCOME TAXES 203,000 323,000 400,000 960,000
------------ ------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM &
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 568,752 758,915 1,067,078 2,184,203
EXTRAORDINARY LOSS (net of income tax
benefit of $186,000) (400,000)
CUMULATIVE EFFECT ON PRIOR YEARS OF CHANGE
IN ACCOUNTING PRINCIPLE FOR PRE-OPENING
EXPENSES (net of income tax benefit of $101,000) (239,000)
------------ ------------ ------------ ------------
NET INCOME $ 568,752 $ 758,915 $ 428,078 $ 2,184,203
============ ============ ============ ============
BASIC EARNINGS (LOSS) PER SHARE:
Income Before Extraordinary Item and
Cumulative Effect of Change in Accounting Principle $ 0.18 $ 0.18 $ 0.31 $ 0.51
Extraordinary Loss (0.12)
Cumulative Effect on Prior Years of Change in
Accounting Principle (0.07)
------------ ------------ ------------ ------------
Net Income $ 0.18 $ 0.18 $ 0.12 $ 0.51
============ ============ ============ ============
</TABLE>
(See notes to financial statements) 3
<PAGE> 4
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
Twelve Weeks Ended Forty Weeks Ended
--------------------- ---------------------------
August 1, August 2, August 1, August 2,
1999 1998 1999 1998
--------- --------- ----------- -------------
<S> <C> <C> <C> <C>
DILUTED EARNINGS (LOSS) PER SHARE:
Income Before Extraordinary Item and Cumulative Effect
of Change in Accounting Principle $ 0.18 $ 0.18 $ 0.30 $ 0.51
Extraordinary Loss (0.11)
Cumulative Effect of Change in Accounting Principle (0.07)
--------- ----------- -------------
Net Income $ 0.18 $ 0.18 $ 0.12 $ 0.51
========= ========= =========== =============
SHARES OUTSTANDING:
Basic 3,097,557 4,264,932 3,466,790 4,256,337
========= ========= =========== =============
Diluted 3,156,027 4,304,176 3,522,183 4,270,914
========= ========= =========== =============
PROFORMA AMOUNTS ASSUMING
RETROACTIVE APPLICATION OF
CHANGE IN ACCOUNTING PRINCIPLE:
Income Before Extraordinary item $ 568,752 $ 825,329 $ 1,067,078 $ 2,247,802
========= ========= =========== =============
Basic Earnings Per Share $ 0.18 $ 0.19 $ 0.31 $ 0.53
========= ========= =========== =============
Diluted Earnings Per Share $ 0.18 $ 0.19 $ 0.30 $ 0.53
========= ========= =========== =============
Net Income $ 568,752 $ 825,329 $ 667,078 $ 2,247,802
========= ========= =========== =============
Basic Earnings Per Share $ 0.18 $ 0.19 $ 0.19 $ 0.53
========= ========= =========== =============
Diluted Earnings Per Share $ 0.18 $ 0.19 $ 0.19 $ 0.53
========= ========= =========== =============
</TABLE>
(See notes to financial statements) 4
<PAGE> 5
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Forty Weeks Ended
----------------------------
August 1, August 2,
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 428,078 $ 2,184,203
Depreciation and amortization 3,695,819 4,506,394
Loss on Disposition of Assets 700,000
Extraordinary loss 400,000
Cumulative Effect of Change in Accounting Principle 239,000
Minority interest in income of Affiliated Partnerships 69,241 37,737
Changes in other assets and liabilities (1,116,941) (190,166)
------------ ------------
Net cash provided by operating activities 4,415,197 6,538,168
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (10,131,069) (7,831,301)
Proceeds from sale of assets 15,201 16,994,532
Decrease in other assets (232,949) (56,865)
------------ ------------
Net cash provided (used) by investing activities (10,348,817) 9,106,366
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations (34,117,367) (42,582,318)
Proceeds from long-term obligations 43,343,443 26,806,500
Proceeds from bank note payable 3,500,000
Proceeds from sale of stock 24,150 89,976
Purchase of common stock (7,732,921)
Debt issue costs (125,000)
Distributions to minority interests in Affiliated Partnership (57,754) (96,258)
------------ ------------
Net cash provided (used) by financing activities 4,834,551 (15,782,100)
------------ ------------
NET DECREASE IN
CASH AND EQUIVALENTS (1,099,069) (137,566)
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD 2,151,323 1,149,482
------------ ------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 1,052,254 $ 1,011,916
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 1,160,574 $ 1,490,654
Income taxes $ 754,246 $ 1,244,869
Non-cash activities:
Property additions financed by accounts payable $ 1,401,694 $ 412,674
Deferred gain from sales of assets $ 1,508,709
</TABLE>
(See notes to financial statements) 5
<PAGE> 6
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.
3. CHANGE IN ACCOUNTING PRINCIPLE
On October 26, 1998, the first day of fiscal 1999, the Company adopted
AICPA Statement of Position 98-5, "Reporting the Costs of Start-Up
Activities", which requires that pre-opening expenses be expensed as
incurred rather than capitalized. The cumulative effect on prior years
of change in accounting principle for pre-opening expenses resulted in
a charge of $239,000, net of tax, or $0.07 per diluted share.
4. BANK NOTE PAYABLE
Included in current liabilities at August 1, 1999 is a $3.5 million
bank note dated June 30, 1999 which is due September 30, 1999. On
August 17, 1999 the Company obtained a commitment, subject to certain
conditions, to increase its revolving credit line to $40,000,000. Upon
completion of a new revolving credit agreement, the Company will repay
the note. The Company expects to complete the new credit agreement
prior to the due date of the note.
6
<PAGE> 7
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
REVENUES
- --------
Revenues for the third quarter of 1999 increased $1,329,000 or 5.6%
from the third quarter of 1998. The increase was a result of i) the opening of
two Max & Erma's restaurants during the fourth quarter of 1998, ii) the opening
of one Max & Erma's restaurant during the third quarter of 1999, iii) the
opening of one Ironwood Cafe during each of the second and third quarters of
1999, and iv) a 1% increase in same-store sales during the third quarter of 1999
for restaurants opened at least 18 months.
The increase in revenues from new restaurants and same-store sales
increases 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.
Additionally, the original Ironwood Cafe, which opened during the second quarter
of 1998, was closed late in the second quarter of 1999 due to poor sales.
Year-to-date revenues increased $3,333,000 or 4.3% from 1998 to 1999.
The increase was a result of i) the opening of five Max & Erma's restaurants and
one Ironwood Cafe during 1998, and ii) the opening of one Max & Erma's
restaurant and two Ironwood Cafes during 1999. As discussed above, the increase
in revenues from new restaurants was partially offset by restaurant closings and
a year-to-date decline of $54,000 or 0.1% in same-store sales.
The slight decline in year-to-date same-store sales was a result of
extremely harsh winter weather during the first two weeks of January. From
January 2, 1999 through January 15, 1999 same-store sales declined $650,000 or
20%. Exclusive of that two week period, year-to-date same-store sales increased
$596,000 or 0.9%. Year-to-date customer counts declined approximately 4% while
the average guest check rose 5%, primarily as a result of menu price increases.
The Company plans to open three Max & Erma's restaurants during the
fourth quarter of 1999 and eight during fiscal 2000. The Company also expects
increased franchise fees and royalties in future periods. The Company's first
multi-unit franchise agreement requires the opening of the first of four Max &
Erma's restaurants in Richmond and Charlottesville, Virginia by August 2000.
The Company closed the original Ironwood Cafe during the second quarter
of 1999 resulting in a $700,000 pre-tax loss on disposition of assets. The
second Ironwood Cafe opened during the second quarter of 1999 in Mentor, Ohio.
The third Ironwood Cafe opened during the third quarter of 1999 in West Chester,
Ohio, a suburb of Cincinnati. Both locations are achieving sales at or above the
minimum sales target. The Company will monitor and evaluate the results of the
two remaining Ironwood Cafes before it determines its expansion potential.
7
<PAGE> 8
COSTS AND EXPENSES
- ------------------
Cost of goods sold, as a percentage of revenues, decreased from 26.2%
for the third quarter of 1998 to 25.5% for the third quarter of 1999.
Year-to-date cost of goods sold, as a percentage of revenues, declined from
26.5% for 1998 to 25.8% for 1999. The declines for both the quarter and
year-to-date periods were a result of menu price increases of approximately 2%
to 3% and sharply higher produce and dairy prices during the first half of 1998
which have since declined, while most other inventory costs have remained
stable.
Payroll and benefits, as a percentage of revenues, increased from 31.4%
for the third quarter of 1998 to 32.0% for the third quarter of 1999.
Year-to-date payroll and benefits, as a percentage of revenues, increased from
31.0% to 31.8%. The increase was a result of higher wage rates brought on by
extremely low unemployment levels and continued high demand for restaurant
workers.
Other operating expenses, as a percentage of revenues, remained
constant at 29.1% for both the third quarter of 1998 and the third quarter of
1999. Year-to-date other operating expenses, as a percentage of revenues,
increased from 29.0% for 1998 to 30.0% for 1999. The increase for the
year-to-date period is primarily a result of increased rental expense, net of
reduced depreciation, associated with the two sale-leaseback transactions
completed during 1998. During the third quarter of 1999, fixed expenses, as a
percentage of revenues, declined due to increased sales. As a result of this and
reduced marketing expenditures, other operating expenses, as a percentage of
revenues, remained even with the third quarter of 1998 despite the higher rental
expense.
Pre-opening expenses, as a percentage of revenues, increased from 0.6%
for the third quarter of 1998 to 0.8% for the third quarter of 1999.
Year-to-date pre-opening expenses decreased from 0.7% for 1998 to 0.4% for 1999.
The variation in this expense category is a result of the Company's adoption of
AICPA Statement of Position 98-5, "Reporting the Costs of Start-Up Activities",
which requires that pre-opening expenses be expensed as incurred rather than
capitalized. Prior to adoption of the new standard on October 26, 1998, the
first day of fiscal 1999, the Company amortized pre-opening expenses over a
12-month period. The increase from the third quarter of 1998 to the third
quarter of 1999 was due to the pre-opening expense of two restaurant openings
during the third quarter of 1999, exceeding the amortization expense during the
third quarter of 1998. Year-to-date the decrease from 1998 to 1999 was a result
of the amortization during 1998 exceeding the incurred expenses of three 1999
restaurant openings. The cumulative effect on prior years of the accounting
change resulted in a first quarter 1999 charge of $239,000, net of tax, or $0.7
per diluted share. Management believes that pre-opening expenses will increase
during the fourth quarter of 1999 and during fiscal 2000 as the Company
accelerates the rate of opening new restaurants.
8
<PAGE> 9
LOSS ON DISPOSITION OF ASSETS
- -----------------------------
During the second quarter of 1999 the Company recorded a $700,000 loss
on disposition of assets related to the closing of the original Ironwood Cafe in
Columbus, Ohio. The restaurant never achieved a profitable sales level.
Management believes the lack of sales was a site-related problem and remains
optimistic on the success of the concept based upon sales at the second and
third locations in Mentor and West Chester, Ohio.
ADMINISTRATIVE EXPENSES
- -----------------------
Administrative expenses increased 27% from the third quarter of 1998 to
the third quarter of 1999 and 23% for the year-to-date period from 1998 to 1999.
The increases were 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 revenues, increased from 6.6% for the third quarter of 1998 to
7.9% for the third quarter of 1999. Year-to-date administrative expenses, as a
percentage of revenues, increased from 6.7% for 1998 to 7.9% for 1999. The
increase was a result of increased overhead in anticipation of an accelerated
growth rate, which should begin during the fourth quarter of 1999. The closing
of restaurants and the revenue loss due to weather during the first quarter of
1999 also had the effect of increasing administrative expenses as a percentage
of revenues. Management expects that administrative expenses as a percentage of
revenues will begin to decline in the fourth quarter of 1999.
INTEREST EXPENSE
- ----------------
Interest expense was unchanged from the third quarter of 1998 to the
third quarter of 1999. Year-to-date interest expense decreased 26% from 1998 to
1999. The decrease was a result of the two sale-leaseback transactions
previously referred to, which resulted in interest savings of approximately
$515,000 and $1,705,000 for the quarter and year-to-date periods, respectively,
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
borrowings under the Company's revolving credit line is 7.38%, with excess
borrowings at prime + 1/4% (total of 8.75% at August 1, 1999) 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 additional interest expense resulting from the repurchase of
approximately 1,499,000 shares of its common stock from the fourth quarter of
1998 through the end of the third quarter of 1999. The Company capitalized
$212,000 and $143,000 in construction period interest during the first 40 weeks
of 1999 and 1998, respectively.
INCOME TAXES
- ------------
The Company's effective tax rate declined from 30.5% for the 40 weeks
of 1998 to 27.3% for the comparable 1999 period. The decrease was due to the
fact that certain tax credits available
9
<PAGE> 10
to the Company are unrelated to pre-tax income and have a proportionately
greater effect on the effective tax rate at lower levels of pre-tax income.
EXTRAORDINARY LOSS AND CUMULATIVE EFFECT ON
- -------------------------------------------
PRIOR YEARS OF CHANGE IN ACCOUNTING PRINCIPLE
- ---------------------------------------------
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 ($0.11 per diluted share) net of approximately $186,000 of
income tax savings related to the write-off of unamortized debt issuance costs.
On October 28, 1998, the first day of fiscal 1999, the Company adopted
AICPA Statement of Position 98-5, "Reporting the Costs of Start-Up Activities".
The cumulative effect on prior years' financial statements resulted in a charge
of $239,000 ($0.07 per diluted share) net of approximately $101,000 of tax
savings related to the write-off of unamortized pre-opening expenses.
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 is being 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,
10
<PAGE> 11
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 decreased from .6 to 1 at October
25, 1998 to .3 to 1 at August 1, 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 40 weeks of 1999, the Company expended approximately
$10,131,000 for property additions, $34,117,000 to reduce long-term obligations
and $7,733,000 to repurchase approximately 999,000 shares of its common stock.
Funds for such expenditures were provided primarily by $43,343,000 from proceeds
of long-term obligations, $3,500,000 from proceeds of a short-term bank note,
$4,415,000 from operations, and $1,099,000 from cash on hand. 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 1, 1999 the Company was committed to the opening of three Max
& Erma's restaurants during the fourth quarter of 1999 and at least eight Max &
Erma's restaurants during fiscal 2000. At August 1, 1999 twelve sites were under
contract to purchase or lease, three of which were under construction. Five
additional sites had been approved and were in some stage of negotiations.
Funding for new restaurants is expected to be provided by cash flow
from operations, the sale-leaseback of real estate, equipment leasing and the
Company's revolving credit line. At August 1, 1999, the Company had $1.3 million
available under its $20.0 million revolving credit line and approximately $2.0
million available under equipment lease commitments. As discussed below, the
Company expects to increase its revolving credit line to $40.0 million during
the fourth quarter of 1999. Although the Company has no commitments for
sale-leaseback financing of real estate at August 1, 1999, it believes it will
be able to obtain such commitments under terms similar to the two transactions
completed during 1998.
11
<PAGE> 12
On June 24, 1999 the Company's Board of Directors increased the number
of shares authorized for repurchase from 1,250,000 shares to 1,750,000 shares.
On June 30, 1999 the Company repurchased approximately 430,000 shares from two
institutional investors at a price of $8.125 per share. Funding for that
purchase was provided by a 9% bank note due September 30, 1999. Subject to
certain conditions and completion of documentation, the Company has received a
commitment from its bank to increase its revolving credit line to $40,000,000.
The Company believes a new credit agreement will be executed prior to September
30, 1999, at which time the note will be repaid or that the note will be
extended until completion of the new credit agreement. At August 1, 1999
approximately 250,000 shares remain available for repurchase under the
authorization. Additional funding for the share repurchase program is expected
to be provided by cash flow from operations and the Company's expanded 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 revenue growth from the opening of new Company-owned and franchised
restaurants (paragraph 5), anticipated increases in pre-opening expenses during
the fourth quarter of 1999 and fiscal 2000 (paragraph 10), optimism on the
success of Ironwood Cafe (paragraph 11), anticipated declines in administrative
expenses (paragraph 12), Year 2000 preparedness and contingency plans
(paragraphs 17, 18, 19 and 20), the opening of additional Max & Erma's
restaurants (paragraph 23), future sources of capital and the availability and
terms of sale-leaseback financing (paragraph 24), and the repurchase of shares
and completion of a new revolving credit agreement (paragraph 25).
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.
12
<PAGE> 13
PART II
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
---------------------------------
(a) Exhibits
The exhibits listed in the accompanying index to exhibits on page 15
are filed as part of this report.
(b) Reports on Form 8-K
None
13
<PAGE> 14
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
SEPTEMBER 2, 1999
------------------------
Date
14
<PAGE> 15
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
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> OCT-26-1998
<PERIOD-END> AUG-1-1999
<EXCHANGE-RATE> 1
<CASH> 1,052,254
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 832,688
<CURRENT-ASSETS> 3,963,539
<PP&E> 69,466,416
<DEPRECIATION> 24,917,064
<TOTAL-ASSETS> 52,347,352
<CURRENT-LIABILITIES> 11,585,260
<BONDS> 29,279,132
0
0
<COMMON> 279,045
<OTHER-SE> 11,203,879
<TOTAL-LIABILITY-AND-EQUITY> 52,347,352
<SALES> 0
<TOTAL-REVENUES> 80,197,927
<CGS> 20,716,819
<TOTAL-COSTS> 70,541,356
<OTHER-EXPENSES> 6,297,388
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,122,864
<INCOME-PRETAX> 1,467,078
<INCOME-TAX> 400,000
<INCOME-CONTINUING> 1,067,078
<DISCONTINUED> 0
<EXTRAORDINARY> 400,000
<CHANGES> 239,000
<NET-INCOME> 428,078
<EPS-BASIC> .12
<EPS-DILUTED> .12
</TABLE>
