<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 14, 2000 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 2,496,924 common shares.
1
<PAGE> 2
PART I - FINANCIAL INFORMATION / ITEM 1 - FINANCIAL STATEMENTS
MAX & ERMA'S RESTAURANTS, INC. - CONDENSED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
May 14, October 31,
ASSETS 2000 1999
------ ----------- -----------
<S> <C> <C>
Current Assets:
Cash $ 1,890,203 $ 1,318,944
Inventories 931,666 929,364
Other Current Assets 2,355,849 1,584,886
----------- -----------
Total Current Assets 5,177,718 3,833,194
Property - At Cost: 69,299,797 73,328,050
Less Accumulated Depreciation and Amortization 24,464,050 26,486,963
----------- -----------
Property - Net 44,835,747 46,841,087
Other Assets 4,452,459 4,222,425
----------- -----------
Total $54,465,924 $54,896,706
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Current Maturities of Long-Term Obligations $ 180,327 $ 736,475
Accounts Payable 3,928,163 5,402,415
Accrued Payroll and Related Taxes 2,158,462 1,163,867
Accrued Liabilities 2,763,459 2,801,834
----------- -----------
Total Current Liabilities 9,030,411 10,104,591
Long-Term Obligations - Less Current Maturities 35,605,785 33,913,675
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 2,496,924 Shares
At 5/14/00 and 2,746,737 Shares at 10/31/99 249,692 274,674
Retained Earnings 9,580,036 10,603,766
----------- -----------
Total Stockholders' Equity 9,829,728 10,878,440
----------- -----------
Total $54,465,924 $54,896,706
=========== ===========
</TABLE>
(See notes to financial statements)
2
<PAGE> 3
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-eight Weeks Ended
------------------- ------------------------
May 14, May 9, May 14, May 9,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES: $28,450,793 $24,027,295 $64,609,514 $55,176,784
COSTS AND EXPENSES:
Costs of Goods Sold 7,157,303 6,159,396 16,166,228 14,322,269
Payroll and Benefits 9,185,113 7,581,153 20,837,589 17,493,236
Other Operating Expenses 8,569,993 7,161,655 19,649,375 16,762,036
Pre-Opening Expenses 140,527 52,929 318,614 87,001
Loss on Disposition of Assets 700,000 700,000
Administrative Expenses 2,210,221 1,955,952 4,927,854 4,313,635
----------- ----------- ----------- -----------
Total Operating Expenses 27,263,157 23,611,085 61,899,660 53,678,177
----------- ----------- ----------- -----------
Operating Income 1,187,636 416,210 2,709,854 1,498,607
Interest Expense 482,640 328,300 1,177,885 759,007
Minority Interest in Income
of Affiliated Partnerships 30,229 25,850 68,733 44,274
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES,
EXTRAORDINARY ITEM & CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 674,767 62,060 1,463,236 695,326
INCOME TAXES 200,000 10,000 438,000 197,000
----------- ----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM &
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 474,767 52,060 1,025,236 498,326
EXTRAORDINARY LOSS (net of income tax
benefit of $30,000 and $186,000, respectively) (45,000) (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 (LOSS) $ 474,767 $ 52,060 $ 980,236 $ (140,674)
=========== =========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE:
Income Before Extraordinary Item and
Cumulative Effect of Change in Accounting Principle $ 0.19 $ 0.01 $ 0.40 $ 0.14
Extraordinary Loss (0.02) (0.11)
Cumulative Effect on Prior Years of Change in
Accounting Principle (0.07)
----------- ----------- ----------- -----------
Net Income (Loss) $ 0.19 $ 0.01 $ 0.38 $ (0.04)
=========== =========== =========== ===========
</TABLE>
(See notes to financial statements)
3
<PAGE> 4
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(continued)
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-eight Weeks Ended
------------------ ------------------------
May 14, May 9, May 14, May 9,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DILUTED EARNINGS (LOSS) PER SHARE:
Income Before Extraordinary Item and Cumulative Effect
of Change In Accounting Principle $ 0.18 $ 0.01 $ 0.39 $ 0.14
Extraordinary Loss (0.02) (0.11)
Cumulative Effect of Change in Accounting Principle (0.07)
---------- ---------- ---------- ----------
Net Income (Loss) $ 0.18 $ 0.01 $ 0.37 $ (0.04)
========== ========== ========== ==========
SHARES OUTSTANDING:
Basic 2,518,391 3,552,416 2,592,394 3,625,033
========== ========== ========== ==========
Diluted 2,645,097 3,564,079 2,674,132 3,679,106
========== ========== ========== ==========
</TABLE>
(See notes to financial statements)
4
<PAGE> 5
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Twenty-Eight Weeks Ended
------------------------
May 14, 2000 May 9, 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 980,230 $ (140,674)
Depreciation and amortization 2,783,144 2,568,392
Loss on Disposition of Assets 105,415 700,000
Extraordinary loss 45,000 400,000
Cumulative Effect of Change in Accounting Principle 239,000
Minority interest in income of Affiliated Partnerships 68,733 44,274
Changes in other assets and liabilities (555,863) (378,755)
------------ ------------
Net cash provided by operating activities 3,426,659 3,432,237
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (13,324,200) (6,708,954)
Proceeds from sale of assets 12,889,123
Decrease in other assets (246,001) (192,341)
------------ ------------
Net cash (used) by investing activities (681,078) (6,901,295)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations (33,450,350) (23,366,483)
Proceeds from long-term obligations 33,610,754 29,732,939
Proceeds from sale of stock 89,376 24,150
Purchase of common stock (2,251,620) (3,592,525)
Debt issue costs (95,476) (25,000)
Distributions to minority interests in Affiliated Partnerships (77,006) (38,503)
------------ ------------
Net cash provided by financing activities 2,174,322 2,734,578
------------ ------------
NET INCREASE (DECREASE) IN
CASH AND EQUIVALENTS 571,259 (734,480)
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD 1,318,944 2,151,323
------------ ------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 1,890,203 $ 1,416,843
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 1,216,879 $ 805,141
Income taxes $ 1,076,270 $ 295,155
Non-cash activities:
Property additions financed by accounts payable $ 956,869 $ 1,073,621
Deferred gain from sales of assets $ 978,343
</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 consisted of 53 weeks and included one sixteen-week, two
twelve-week and one thirteen-week quarters.
2. Extraordinary Item
------------------
In March 1996, the Company obtained a fifteen-year $6 million mortgage
loan which bore interest at 8.32% and was secured by four restaurant
properties. In January 2000, the Company repaid the approximately $5.2
million outstanding balance out of the proceeds of the sale-leaseback
of the four properties. The Company recognized an extraordinary charge
against income of $45,000, net of tax ($0.02 per diluted share),
related to the write-off of unamortized loan fees in the first quarter
of 2000.
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 in the first quarter of 1999.
3. Property Sale-Leaseback
-----------------------
In the first quarter of 2000 the Company entered into two separate
sale-leaseback transactions with regard to the land, buildings,
fixtures and improvements at two and four restaurant sites,
respectively. In the first transaction the Company received
approximately $4.75 million in net proceeds which were used to pay down
borrowings under the Company's revolving credit line. In the second
transaction the Company received approximately $8.1 million in net
proceeds which were used to pay off a $5.2 million mortgage loan
related to the properties and pay down borrowings under the Company's
revolving credit. The transaction resulted in a deferred gain of
approximately $978,000, which will be accreted to income over the
twenty-year lease term.
6
<PAGE> 7
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
REVENUES
--------
Revenues for the second quarter of 2000 rose $4,424,000 or 18% from the
second quarter of 1999. The increase was a result of i) the opening of four Max
& Erma's restaurants during the second half of 1999, ii) the opening of three
Max & Erma's restaurants during the first half of 2000 and iii) an increase of
$956,000 or 4.2% in same-store sales for restaurants opened at least 18 months.
Year-to-date revenues increased $9,433,000 or 17% from 1999 to 2000.
The increase was a result of the opening of Max & Erma's restaurants discussed
above and a year-to-date increase of $2,104,000 or 4.0% in same-store sales.
The same-store sales increases for the quarter and year-to-date periods
are a result of i) more favorable weather during the first quarter of 2000, ii)
price increases of approximately 2.0 to 2.5 percent over last year and iii)
increased customer counts. The increase in customer counts of approximately 1.0%
can, in part, be attributed to a shift in the Company's advertising expenditures
away from mass media and discounting and toward local store, relationship-based
marketing, which is more aligned with the Company's operational approach.
Same-store sales have been positive for four consecutive quarters.
During the first quarter of 2000 the Company closed the remaining two
Ironwood Cafe restaurants. Sales at Ironwood Cafe for both the quarter and
year-to-date periods of 1999 and 2000 were essentially even and represented less
than 1% of total revenues for the periods.
The Company expects to open four to five additional Max & Erma's
restaurants during the remainder of 2000 and eight restaurants during 2001.
Three restaurants were under construction at the end of the second quarter.
Seven additional sites were either owned, leased or under contract to purchase
at the end of the quarter. Additionally, the Company was negotiating for the
lease or purchase of four sites as of the end of the quarter.
One franchised restaurant opened during the first quarter of 2000 on
the Ohio Turnpike in northwestern Ohio. During the second quarter of 2000 the
Company signed a franchise agreement for four restaurants in the St. Louis,
Missouri market, the first of which should open during the first quarter of
2001.
COSTS AND EXPENSES
------------------
Cost of goods sold, as a percentage of revenues, declined from 25.6%
for the second quarter of 1999 to 25.2% for the second quarter of 2000.
Year-to-date cost of goods sold, as a percentage of revenues, decreased from
26.0% for 1999 to 25.0% for 2000. The declines for both the quarter and
year-to-date periods were a result of menu price increases of 2.0 to 2.5 percent
plus lower produce, dairy and chicken prices, which offset higher beef prices.
Other inventory costs remained relatively stable.
7
<PAGE> 8
Payroll and benefits, as a percentage of revenues, increased from 31.6%
for the second quarter of 1999 to 32.3% for the second quarter of 2000.
Year-to-date payroll and benefits, as a percentage of revenues, increased from
31.7% for 1999 to 32.2% for 2000. The increases were a result of opening three
new Max & Erma's restaurants during 2000 as compared to none during the first
half of 1999. Payroll and benefits is typically high for a period of time
subsequent to opening a new restaurant. Exclusive of new restaurants, payroll
and benefits, as a percentage of revenues, was 31.9% for the first half of 2000.
Despite the fact that payroll and benefits, as a percentage of revenues,
declines as a new restaurant matures, management does not expect any significant
improvement to these costs during the remainder of 2000 due to five restaurant
openings planned for the second half of 2000 and continued high wage rates
resulting from high demand for restaurant workers and low unemployment levels.
Other operating expenses, as a percentage of revenues, increased from
29.8% for the second quarter of 1999 to 30.1% for the second quarter of 2000.
Year-to-date other operating expenses, as a percentage of revenues, remained
steady at 30.4% for both 1999 and 2000. Generally, a decline in advertising
expense resulting from reduced coupon discounting was offset by higher occupancy
costs associated with the sale-leaseback transactions completed during the first
quarter of 2000 and costs associated with the introduction of new uniforms and a
new menu.
Pre-opening expenses, as a percentage of revenues, increased from 0.2%
in 1999 to 0.5% in 2000 for both the second quarter and year-to-date periods.
The increase was a result of the increase in the number of restaurant openings
planned for fiscal 2000. Pre-opening expenses are generally incurred for up to
six months prior to the opening of a restaurant. At the start of fiscal 1999 the
Company adopted AICPA Statement of Position 98-5, "Reporting the Costs of
Start-Up Activity", which requires that pre-opening expenses be expensed as
incurred rather than capitalized.
ADMINISTRATIVE EXPENSES
-----------------------
Administrative expenses, as a percentage of revenues, declined from
8.1% for the second quarter of 1999 to 7.8% for the second quarter of 2000.
Year-to-date administrative expenses, as a percentage of revenues, decreased
from 7.8% for 1999 to 7.6% for 2000. The declines were due to the fact that
revenue growth exceeded the growth of administrative expenses. Management
expects this trend will continue gradually through 2000 and into 2001. In dollar
terms, administrative expenses increased 13% and 14% for the quarter and
year-to-date periods, respectively. The increases were due to raises for
corporate personnel and additional personnel to support the accelerated growth
in Company-owned restaurants and franchising.
INTEREST EXPENSE
----------------
Interest expense increased 47% from the second quarter of 1999 to the
second quarter of 2000. Year-to-date interest expense increased 55% from 1999 to
2000. The increases were due to increased borrowings under the Company's
revolving credit line to repurchase common stock and
8
<PAGE> 9
fund development of additional restaurants and due to an increase in interest
rates. At May 14, 2000, the interest under the Company's revolving credit line
was 9.5% as compared to 8% at May 9, 1999. The Company capitalized $272,000
construction period interest during the first half of 2000 as compared to
$103,000 during the first half of 1999.
During the first quarter of 2000 the Company completed two
sale-leaseback transactions. The net proceeds of $12.85 million were used to pay
off a $5.2 million mortgage loan, which bore interest at 8.32% and reduce the
outstanding balance under the Company's revolving credit line by approximately
$7.65 million. The reduction in interest expense as a result of the
sale-leaseback transactions should be approximately $1.1 million annually.
However, additional borrowings to repurchase common stock and fund new
restaurants will offset some portion of the anticipated interest reduction.
INCOME TAXES AND EXTRAORDINARY LOSS
-----------------------------------
The Company's effective tax rate increased slightly from 28.3% to 29.9%
for the first 28 weeks of 2000 and 1999, respectively, due to the fact that on a
percentage basis, certain tax credits have a lesser impact on higher levels of
pre-tax income. During 2000 the Company repaid a $5.2 million mortgage. As a
result, the Company recognized an extraordinary charge of $45,000 ($0.02 per
diluted share) net of approximately $30,000 of income tax savings related to the
write-off of unamortized loan fees. During 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.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's working capital ratio increased from .4 to 1 at October
31, 1999 to .6 to 1 at May 14, 2000. 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 2000, the Company expended approximately
$13,324,000 for property additions, $33,450,000 to reduce long-term obligations
and $2,252,000 to repurchase approximately 281,000 shares of its common stock
and increased cash by $571,000. Funds for such expenditures were provided
primarily by $33,611,000 from proceeds of long-term obligations, $12,889,000
from the sale of restaurant real estate and $3,427,000 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 14, 2000, the Company was committed to the opening of four to
five Max & Erma's restaurants during the remainder of 2000 and eight Max &
Erma's restaurants during fiscal
9
<PAGE> 10
2001. At May 14, 2000 ten sites were either owned or under contract to purchase
or lease, three of which were under construction. Four 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 May 14, 2000, the Company had approximately
$11.5 million available under its $40.0 million revolving credit line, and
approximately $28.6 million available under a sale-leaseback commitment for 13
properties and approximately $2.3 million available under equipment lease
commitments.
On December 14, 1999 the Company's Board of Directors authorized the
repurchase of up to 500,000 shares of the Company's common stock, 300,000 of
which are still available for repurchase. Funding for the share repurchase
program is expected to 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 the opening of new restaurants (paragraph 5 and 17), the opening of
franchised restaurants (paragraph 6), expectations regarding payroll and
benefits (paragraph 8), anticipated declines in administrative expenses
(paragraph 11), the realization of interest savings (paragraph 13), and future
sources of capital (paragraph 18 and 19).
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 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.
10
<PAGE> 11
PART II
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on April 12, 2000
for the purpose of electing three Class II directors for three-year terms
expiring in 2003 and ratifying Deloitte & Touche LLP as the Company's
independent auditors for the 2000 fiscal year.
Each nominee to the Company's Board of Directors was elected by the
following vote:
<TABLE>
<CAPTION>
Votes For Votes Withheld
--------- --------------
<S> <C> <C>
Roger D. Blackwell 2,363,381 25,920
William C. Niegsch, Jr 2,386,391 2,910
Robert A. Rothman 2,385,456 3,845
</TABLE>
Additionally, Deloitte & Touche LLP was ratified as the Company's
independent auditors for the 2000 fiscal year by a vote of 2,385,392 shares for,
1,194 against, and 2,715 shares abstained.
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed in the accompanying index to exhibits on page 13
are filed as part of this report.
(b) Reports on Form 8-K
None
11
<PAGE> 12
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 21, 2000
---------------------
Date
12
<PAGE> 13
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
13
