<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 6, 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
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(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 2,473,760 common shares.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
August 6, October 31,
ASSETS 2000 1999
------ ----------- -----------
<S> <C> <C>
Current Assets:
Cash $ 2,125,323 $ 1,318,944
Inventories 990,816 929,364
Other Current Assets 2,491,257 1,584,886
----------- -----------
Total Current Assets 5,607,396 3,833,194
Property - At Cost: 74,253,729 73,328,050
Less Accumulated Depreciation and Amortization 25,458,985 26,486,963
----------- -----------
Property - Net 48,794,744 46,841,087
Other Assets 4,534,199 4,222,425
----------- -----------
Total $58,936,339 $54,896,706
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Current Maturities of Long-Term Obligations $ 186,883 $ 736,475
Accounts Payable 4,962,041 5,402,415
Accrued Payroll and Related Taxes 2,209,458 1,163,867
Accrued Liabilities 2,660,456 2,801,834
----------- -----------
Total Current Liabilities 10,018,838 10,104,591
Long-Term Obligations - Less Current Maturities 38,812,938 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 2,473,760 Shares
At 8/6/00 and 2,746,737 Shares at 10/31/99 247,376 274,674
Retained Earnings 9,857,187 10,603,766
----------- -----------
Total Stockholders' Equity 10,104,563 10,878,440
----------- -----------
Total $58,936,339 $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 Forty Weeks Ended
------------------- -----------------
August 6, August 1, August 6, August 1,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES: $29,805,442 $25,021,143 $94,414,956 $80,197,927
COSTS AND EXPENSES:
Costs of Goods Sold 7,463,462 6,394,550 23,629,690 20,716,819
Payroll and Benefits 9,725,618 8,008,679 30,563,207 25,501,915
Other Operating Expenses 8,892,083 7,278,722 28,541,458 24,040,758
Pre-Opening Expenses 188,594 194,863 507,208 281,864
Loss on Disposition of Assets 700,000
Administrative Expenses 2,241,454 1,983,753 7,169,308 6,297,388
----------- ----------- ----------- -----------
Total Operating Expenses 28,511,211 23,860,567 90,410,871 77,538,744
----------- ----------- ----------- -----------
Operating Income 1,294,231 1,160,576 4,004,085 2,659,183
Interest Expense 532,482 363,857 1,710,367 1,122,864
Minority Interest in Income
of Affiliated Partnerships 24,007 24,967 92,740 69,241
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES,
EXTRAORDINARY ITEM & CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 737,742 771,752 2,200,978 1,467,078
INCOME TAXES 217,000 203,000 655,000 400,000
----------- ----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM &
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 520,742 568,752 1,545,978 1,067,078
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 $ 520,742 $ 568,752 $ 1,500,978 $ 428,078
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE:
Income Before Extraordinary Item and
Cumulative Effect of Change in Accounting Principle $ 0.21 $ 0.18 $ 0.61 $ 0.31
Extraordinary Loss (0.02) (0.12)
Cumulative Effect on Prior Years of Change in
Accounting Principle (0.07)
----------- ----------- ----------- -----------
Net Income $ 0.21 $ 0.18 $ 0.59 $ 0.12
=========== =========== =========== ===========
</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 Forty Weeks Ended
------------------ -----------------
August 6, August 1, August 6, August 1,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DILUTED EARNINGS PER SHARE:
Income Before Extraordinary Item and Cumulative Effect
of Change In Accounting Principle $ 0.20 $ 0.18 $ 0.59 $ 0.30
Extraordinary Loss (0.02) (0.11)
Cumulative Effect of Change in Accounting Principle (0.07)
---------- ---------- ---------- ----------
Net Income $ 0.20 $ 0.18 $ 0.57 $ 0.12
========== ========== ========== ==========
SHARES OUTSTANDING:
Basic 2,481,128 3,097,557 2,559,014 3,466,790
========== ========== ========== ==========
Diluted 2,611,228 3,156,027 2,655,261 3,522,183
========== ========== ========== ==========
</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 6, 2000 August 1, 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,500,978 $ 428,078
Depreciation and amortization 4,314,561 3,695,819
Loss on Disposition of Assets 138,277 700,000
Extraordinary loss 45,000 400,000
Cumulative Effect of Change in Accounting Principle 239,000
Minority interest in income of Affiliated Partnerships 92,740 69,241
Changes in other assets and liabilities (1,126,644) (1,116,941)
------------ ------------
Net cash provided by operating activities 4,964,912 4,415,197
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (17,362,471) (10,131,069)
Proceeds from sale of assets 12,893,993 15,201
Decrease in other assets (359,715) (232,949)
------------ ------------
Net cash (used) by investing activities (4,828,193) (10,348,817)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations (42,514,282) (34,117,367)
Proceeds from long-term obligations 45,873,463 43,343,443
Proceeds from bank note payable 3,500,000
Proceeds from sale of stock 127,818 24,150
Purchase of common stock (2,625,605) (7,732,921)
Debt issue costs (95,476) (125,000)
Distributions to minority interests in Affiliated Partnerships (96,258) (57,754)
------------ ------------
Net cash provided by financing activities 669,660 4,834,551
------------ ------------
NET INCREASE (DECREASE) IN
CASH AND EQUIVALENTS 806,379 (1,099,069)
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD 1,318,944 2,151,323
------------ ------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 2,125,323 $ 1,052,254
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 1,793,287 $ 1,160,574
Income taxes $ 1,140,305 $ 754,246
Non-cash activities:
Property additions financed by accounts payable $ 2,080,438 $ 1,401,694
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 accounting
principles generally accepted in the United States of America 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 third quarter of 2000 rose $4,784,000 or 19% from the
third 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 five Max &
Erma's restaurants during the first three quarters of 2000, and iii) an increase
of $904,000 or 3.7% in same-store sales for restaurants opened at least 18
months.
Year-to-date revenues increased $14,217,000 or 18% from 1999 to 2000.
The increase was a result of the restaurant openings discussed above and a
year-to-date increase of $3,120,000 or 4.2% in same-store sales.
The same-store sales increases for the quarter and year-to-date periods
are a result of an approximately 5% increase in the guest check average. This
increase was offset by a very slight decline in same-store customer counts, due
to reduced couponing and discounting. The increase in check average was a result
of menu price increases of approximately 2.0 to 2.5 percent over last year and a
higher guest check average at newer restaurants. In addition to the higher guest
check average, the nine restaurants opened since the start of 1999 are
generating average weekly sales of $50,700 as compared to $43,200 per week for
the 47 restaurants opened prior to 1999.
The Company expects to open two additional Max & Erma's restaurants
during the fourth quarter of 2000 and eight restaurants during 2001. Five
restaurants were under construction at the end of the third quarter. Two
additional sites were owned and awaiting building permits, and one site was
under contract to purchase at the end of the third quarter. Additionally, the
Company was negotiating for the lease or purchase of four sites.
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 fourth quarter of
2000.
During the first quarter of 2000 the Company closed the remaining two
Ironwood Cafe restaurants. Ironwood Cafe had no material impact on revenues
during any of the periods reported.
COSTS AND EXPENSES
------------------
Cost of goods sold, as a percentage of revenues, decreased from 25.5%
for the third quarter of 1999 to 25.0% for the third quarter of 2000.
Year-to-date cost of goods sold, as a percentage of revenues, decreased from
25.8% for 1999 to 25.0% for 2000. The declines for both the quarter and
year-to-date periods were primarily the result of menu price increases of 2.0
7
<PAGE> 8
to 2.5 percent. Lower produce, dairy and poultry prices generally offset higher
beef and pork prices. Other inventory costs have remained relatively stable.
Payroll and benefits, as a percentage of revenues, increased from 32.0%
for the third quarter of 1999 to 32.6% for the third quarter of 2000.
Year-to-date payroll and benefits, as a percentage of revenues, increased from
31.8% for 1999 to 32.4%. The increase is a result of the opening of five Max &
Erma's restaurants through the third quarter of 2000 as compared to only one
opening during the first three quarters of 1999. Payroll and benefits are
typically high for a period of time subsequent to the opening of a restaurant
and then decline as the restaurant's staff gains experience. The accelerated
rate of new restaurant openings plus the continued high wage rates resulting
from high demand for restaurant workers and low unemployment levels will
continue to put upward pressure on payroll and benefits expense.
Other operating expenses, as a percentage of revenues, increased from
29.1% for the third quarter of 1999 to 29.9% for the third quarter of 2000.
Year-to-date other operating expenses, as a percentage of revenues, increased
from 30.0% for 1999 to 30.2% for 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 higher cleaning, uniform and menu costs.
Pre-opening expenses, as a percentage of revenues, decreased from 0.8%
for the third quarter of 1999 to 0.6% for the third quarter of 2000.
Year-to-date pre-opening expenses, as a percentage of revenues, increased from
0.4% in 1999 to 0.5% in 2000 due to the opening of more restaurants during 2000.
The decline for the third quarter occurred because of the timing of restaurant
openings in 2000. At the start of fiscal 1999 the Company adopted AICPA
Statement of Position 98-5, "Reporting the Cost 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
7.9% for both the third quarter and year-to-date periods of 1999 to 7.5% for the
third quarter of 2000 and 7.6% for year-to-date 2000. The declines were due to
the fact that revenue growth exceeded the growth of administrative expenses.
Management expects that this trend will continue through 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 46% from the third quarter of 1999 to the
third quarter of 2000. Year-to-date interest expense increased 52% 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 August 6, 2000, the interest rate under the Company's revolving credit
line was 9.75% as compared to 8.75% at August 1, 1999. The Company capitalized
$466,000 and $212,000 in construction period interest during the first 40 weeks
of 2000 and 1999, respectively.
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.
During the fourth quarter of 2000 the Company expects to complete a
sale-leaseback transaction involving three recently opened restaurants. The
Company expects to receive net proceeds of approximately $7.0 million, which
will be used to reduce borrowings under the Company's revolving credit line. The
reduction in interest expense as a result of the sale-leaseback transaction
should be approximately $665,000 annually.
INCOME TAXES AND EXTRAORDINARY LOSS
-----------------------------------
The Company's effective tax rate increased from 27.3% to 29.8% for the
first 40 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 August 6, 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 40 weeks of 2000, the Company expended approximately
$17,362,000 for property additions, $42,514,000 to reduce long-term obligations
and $2,626,000 to repurchase approximately 320,000 shares of its common stock
and increased cash by $806,000. Funds for such expenditures were provided
primarily by $45,873,000 from proceeds of long-term obligations,
9
<PAGE> 10
$12,894,000 from the sale of restaurant real estate and $4,965,000 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 August 6, 2000, the Company was committed to the opening of two Max
& Erma's restaurants during the remainder of 2000 and eight Max & Erma's
restaurants during fiscal 2001. At August 6, 2000, eight sites were either owned
or under contract to purchase or lease, five 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 August 6, 2000, the Company had
approximately $8.2 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 $1.5 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, 268,000 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 4 and 18), the opening of
franchised restaurants (paragraph 5), expectations regarding payroll and
benefits (paragraph 8), anticipated declines in administrative expenses
(paragraph 11), the realization of interest savings (paragraph 13 and 14),
expected completion and proceeds of a sale-leaseback transaction and future
sources of capital (paragraph 19 and 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 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
10
<PAGE> 11
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 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
September 11, 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
