<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 20, 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 2,552,784 common shares.
<PAGE> 2
PART I - FINANCIAL INFORMATION / ITEM 1 - FINANCIAL STATEMENTS
MAX & ERMA'S RESTAURANTS, INC. - CONDENSED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
February 20, October 31,
ASSETS 2000 1999
------ ------------ -----------
Current Assets:
<S> <C> <C>
Cash $ 1,721,919 $ 1,318,944
Inventories 847,391 929,364
Other Current Assets 2,089,458 1,584,886
----------- -----------
Total Current Assets 4,658,768 3,833,194
Property - At Cost: 63,967,225 73,328,050
Less Accumulated Depreciation and Amortization 23,642,968 26,486,963
----------- -----------
Property - Net 40,324,257 46,841,087
Other Assets 4,183,602 4,222,425
----------- -----------
Total $49,166,627 $54,896,706
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current Maturities of Long-Term Obligations $ 182,443 $ 736,475
Accounts Payable 4,310,219 5,402,415
Accrued Payroll and Related Taxes 1,973,658 1,163,867
Accrued Liabilities 3,019,057 2,801,834
----------- -----------
Total Current Liabilities 9,485,377 10,104,591
Long-Term Obligations - Less Current Maturities 29,836,387 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 2,552,784 Shares
At 2/20/00 and 2,746,737 Shares at 10/31/99 255,278 274,674
Retained Earnings 9,589,585 10,603,766
----------- -----------
Total Stockholders' Equity 9,844,863 10,878,440
----------- -----------
Total $49,166,627 $54,896,706
=========== ===========
(See notes to financial statements)
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
Sixteen Weeks Ended
-------------------
February 20, February 14,
2000 1999
------------ ------------
<S> <C> <C>
REVENUES: $ 36,158,721 $ 31,149,489
COSTS AND EXPENSES:
Costs of Goods Sold 9,008,925 8,162,873
Payroll and Benefits 11,652,476 9,912,083
Other Operating Expenses 11,079,382 9,600,381
Pre-Opening Expenses 178,087 34,072
Administrative Expenses 2,717,633 2,357,683
------------ ------------
Total Operating Expenses 34,636,503 30,067,092
------------ ------------
Operating Income 1,522,218 1,082,397
Interest Expense 695,245 430,707
Minority Interest in Income of Affiliated Partnerships 38,504 18,424
------------ ------------
INCOME BEFORE INCOME TAXES,
EXTRAORDINARY ITEM & CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 788,469 633,266
INCOME TAXES 238,000 187,000
------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM &
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 550,469 446,266
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) $ 505,469 $ (192,734)
============ ============
BASIC EARNINGS (LOSS) PER SHARE:
Income Before Extraordinary Item and
Cumulative Effect of Change in
Accounting Principle $ 0.21 $ 0.12
Extraordinary Loss (0.02) (0.11)
Cumulative Effect on Prior Years of Change in
Accounting Principle (0.06)
------------ ------------
Net Income (Loss) $ 0.19 $ (0.05)
============ ============
</TABLE>
(See notes to financial statements)
3
<PAGE> 4
<TABLE>
<CAPTION>
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(continued)
Sixteen Weeks Ended
-------------------
February 20, February 14,
2000 1999
------------- -------------
<S> <C> <C>
DILUTED EARNINGS (LOSS) PER SHARE:
Income Before Extraordinary Item and Cumulative Effect
of Change In Accounting Principle $ 0.21 $ 0.12
Extraordinary Loss (0.02) (0.11)
Cumulative Effect of Change in Accounting Principle (0.06)
------------- -------------
Net Income (Loss) $ 0.19 $ (0.05)
============= =============
SHARES OUTSTANDING:
Basic 2,647,897 3,701,995
============= =============
Diluted 2,695,909 3,765,377
============= =============
</TABLE>
(See notes to financial statements)
4
<PAGE> 5
<TABLE>
<CAPTION>
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Sixteen Weeks Ended
-------------------
February 20, February 14,
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 505,459 $ (192,734)
Depreciation and amortization 1,603,148 1,456,672
Extraordinary loss 45,000 400,000
Cumulative Effect of Change in Accounting Principle 239,000
Minority interest in income of Affiliated Partnerships 38,503 18,424
Changes in other assets and liabilities 513,430 (358,956)
------------ ------------
Net cash provided by operating activities 2,705,540 1,562,406
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (7,672,153) (3,237,706)
Proceeds from sale of assets 12,868,671 1,215
Decrease in other assets (131,404) (230,418)
------------ ------------
Net cash provided (used) by investing activities 5,065,114 (3,466,909)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations (25,079,983) (16,052,154)
Proceeds from long-term obligations 19,467,522 19,065,748
Proceeds from sale of stock 27,098 24,150
Purchase of common stock (1,648,337) (1,172,240)
Debt issue costs (95,476) (25,000)
Distributions to minority interests in Affiliated Partnership (38,503) (19,251)
------------ ------------
Net cash provided (used) by financing activities (7,367,679) 1,821,253
------------ ------------
NET INCREASE (DECREASE) IN
CASH AND EQUIVALENTS 402,975 (83,250)
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD 1,318,944 2,151,323
------------ ------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 1,721,919 $ 2,068,073
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 575,470 $ 604,121
Income taxes $ 571,661 $ 131,502
Non-cash activities:
Property additions financed by accounts payable $ 1,332,402 $ 444,151
Deferred gain from sales of assets $ 978,344
</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 first quarter of 2000 rose $5,009,000 or 16% from the
first quarter of 1999. The increase was a result of i) the opening of four Max &
Erma's restaurants during 1999, ii) the opening of two Max & Erma's restaurants
during the first quarter of 2000 and iii) an increase of $1,055,000 or 3.6% in
same-store sales for restaurants opened at least 18 months.
The same-store sales increase was a result of i) more favorable weather
during the first quarter of 2000, ii) price increases of approximately 1.5% over
last year and iii) a generally improving sales trend. During the first quarter
of 1999 same-store sales declined $320,000 or 1.2% due to extremely harsh winter
weather. A portion of the current quarter's increase was a result of more normal
weather and represented a recapture of last year's sales decline. However, price
increases and increased customer counts contributed almost equally to the
remaining $735,000 increase in same-store sales. The increase in customer counts
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. Same-store sales have now been positive the last three quarters.
During the quarter the Company closed the remaining two Ironwood Cafe
restaurants. Sales at Ironwood Cafe in the first quarter of 1999 and 2000 were
essentially even and represented less than 1% of total revenues for both
quarters. The reserve for loss on closing taken during the fourth quarter of
1999 was sufficient to cover all costs associated with the closing of the
restaurants. The Company expects no further costs or operating losses associated
with Ironwood Cafe.
The Company expects to open six additional Max & Erma's during the
remainder of 2000. Three restaurants were under construction at the end of the
quarter and are scheduled to open during fiscal 2000. Seven additional sites
were either leased or owned at the end of the quarter, three of which will also
open during 2000. The remaining four are scheduled to open in early 2001.
One franchised restaurant opened during the first quarter of 2000 on
the Ohio Turnpike in northwestern Ohio. A total of three franchised locations
are now open. Several additional franchise agreements are currently being
negotiated.
COSTS AND EXPENSES
- ------------------
Cost of goods sold, as a percentage of revenues, declined from 26.2%
for the first quarter of 1999 to 24.9% for the first quarter of 2000. The
decline was a result of menu price increases of approximately 1.5% coupled with
declining inventory costs for meat, produce, dairy and chicken. Other inventory
costs remained relatively stable.
Payroll and benefits, as a percentage of revenues, increased from 31.8%
for the first quarter of 1999 to 32.2% for the first quarter of 2000. The
increase was primarily a result of the opening of two Max & Erma's during the
first quarter of 2000. Payroll and benefits is typically high for a period of
time
7
<PAGE> 8
subsequent to the opening of a new restaurant. There were no Max & Erma's
restaurants opened during the first quarter of 1999. Exclusive of the two new
restaurants, payroll and benefits, as a percentage of revenues, was 31.9% for
the first quarter of 2000. Management does not expect any significant
improvement to these costs during the remainder of 2000, as unemployment remains
extremely low and the demand for restaurant workers remains high, both of which
put upward pressure on wage rates.
Other operating expenses, as a percentage of revenues, decreased
slightly from 30.8% for the first quarter of 1999 to 30.6% for the first quarter
of 2000. The decline was primarily a result of reduced advertising expense
associated with coupon discounting. This reduction in advertising also offset
slightly higher occupancy costs associated with the sale-leaseback transactions
completed during the first quarter of 2000.
Pre-opening expenses, as a percentage of revenues, increased from 0.1%
for the first quarter of 1999 to 0.5% for the first quarter of 2000. 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
7.6% for the first quarter of 1999 to 7.5% for the first quarter of 2000.
Administrative expenses increased 15% in dollars from the first quarter of 1999
to the first quarter of 2000 due to raises for corporate personnel and
additional personnel to support the accelerated growth in Company-owned
restaurants and franchising. Management expects that administrative expenses, as
a percentage of revenues, will continue to decline gradually throughout 2000.
INTEREST EXPENSE
- ----------------
Interest expense increased 61% from the first quarter of 1999 to the
first quarter of 2000 due to increased borrowings under the Company's revolving
credit line to repurchase common stock and fund development of additional
restaurants and due to an increase in interest rates. At February 14, 1999 the
interest rate under the Company's revolving credit line was 8.0% as compared to
9.0% at February 20, 2000. The Company capitalized $110,000 of construction
period interest during the first quarter of 2000 as compared to $38,000 during
the first quarter 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.
8
<PAGE> 9
INCOME TAXES AND EXTRAORDINARY LOSS
- -----------------------------------
The Company's effective tax rate remained relatively stable at 30.2%
and 29.6% for the first quarters of 2000 and 1999, respectively. During the
first quarter of 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 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.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's working capital ratio increased from .4 to 1 at October
31, 1999 to .5 to 1 at February 20, 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 quarter of 2000, the Company expended approximately
$7,672,000 for property additions, and $25,080,000 to reduce long-term
obligations and $1,648,000 to repurchase approximately 210,000 shares of its
common stock. Funds for such expenditures were provided primarily by $19,468,000
from proceeds of long-term obligations, $12,869,000 from the sale of restaurant
real estate and $2,706,000 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 20, 2000, the Company was committed to the opening of six
Max & Erma's restaurants during the remainder of 2000 and eight Max & Erma's
restaurants during fiscal 2001. At February 20, 2000 ten sites were under
contract to purchase or lease, three of which were under construction. Three
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 February 20, 2000, the Company had
approximately $17.3 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 $3.0 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. Funding for
the share repurchase program is expected to be provided by cash flow from
operations and the Company's revolving credit line.
9
<PAGE> 10
YEAR 2000
- ---------
During 1999, the Company successfully upgraded its computer system and
software to be Year 2000 compliant. During 1998 and 1999 the Company expended
approximately $145,000 in upgrades to computer hardware and software at both the
corporate office and restaurant level to become Year 2000 compliant. The Company
experienced no material problems with its systems or third party vendors related
to the Year 2000.
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 further losses associated with Ironwood Cafe (paragraph 3), the
opening of new restaurants (paragraph 4 and 16), expectations regarding payroll
and benefits (paragraph 7), anticipated declines in administrative expenses
(paragraph 10), the realization of interest savings (paragraph 12) and future
sources of capital (paragraph 17).
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 availability of restaurant workers, 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 - OTHER INFORMATION*
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
/s/Todd B. Barnum
-----------------------------------
Todd. B. Barnum
Chairman of the Board
(Chief Executive Officer)
/s/William C. Niegsch, Jr.
------------------------------------
William C. Niegsch, Jr.
Executive Vice President &
Chief Financial Officer
March 17, 2000
- ---------------------
Date
11
<PAGE> 12
<TABLE>
<CAPTION>
MAX & ERMA'S RESTAURANTS INC.
EXHIBIT INDEX
Exhibit No. Exhibit Page No.
- ----------- ------- --------
<S> <C>
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
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-29-2000
<PERIOD-START> NOV-01-1999
<PERIOD-END> FEB-20-2000
<CASH> 1,721,919
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 847,391
<CURRENT-ASSETS> 4,658,768
<PP&E> 63,967,225
<DEPRECIATION> 23,642,968
<TOTAL-ASSETS> 49,166,627
<CURRENT-LIABILITIES> 9,485,377
<BONDS> 29,836,387
0
0
<COMMON> 255,278
<OTHER-SE> 9,589,585
<TOTAL-LIABILITY-AND-EQUITY> 49,166,627
<SALES> 0
<TOTAL-REVENUES> 36,158,721
<CGS> 9,008,925
<TOTAL-COSTS> 33,114,285
<OTHER-EXPENSES> 2,717,633
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 695,245
<INCOME-PRETAX> 788,469
<INCOME-TAX> 238,000
<INCOME-CONTINUING> 550,469
<DISCONTINUED> 0
<EXTRAORDINARY> 45,000
<CHANGES> 0
<NET-INCOME> 505,469
<EPS-BASIC> .19
<EPS-DILUTED> .19
</TABLE>
