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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended August 3, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-1154
MAX & ERMA'S RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 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 check mark 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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
As of August 3, 2003 there were 2,481,133 shares of common stock outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
August 3,
2003 October 27,
ASSETS Unaudited 2002
------ ------------ ------------
Current Assets:
Cash and Equivalents $ 1,746,982 $ 3,406,702
Inventories 1,181,091 1,096,228
Other Current Assets 2,061,760 1,146,941
------------ ------------
Total Current Assets 4,989,833 5,649,871
Property - At Cost: 85,181,762 80,116,750
Less Accumulated Depreciation and Amortization 35,286,553 32,423,502
------------ ------------
Property - Net 49,895,209 47,693,248
Other Assets 8,755,007 8,628,311
------------ ------------
Total $ 63,640,049 $ 61,971,430
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current Maturities of Long-Term Obligations $ 2,627,267 $ 2,548,008
Accounts Payable 4,529,218 4,596,833
Accrued Payroll and Related Taxes 2,657,661 2,877,095
Accrued Liabilities 2,882,312 3,729,604
------------ ------------
Total Current Liabilities 12,696,458 13,751,540
Long-Term Obligations - Less Current Maturities 36,876,605 36,862,008
Stockholders' Equity:
Preferred Stock - $.10 Par Value;
Authorized 500,000 Shares - none outstanding
Common Stock - $.10 Par Value;
Authorized 5,000,000 Shares
Issued and Outstanding 2,481,133 Shares
at 8/3/03 and 2,346,798 Shares at 10/27/02 248,113 234,680
Additional Capital 340,023
Other Comprehensive Income (606,909) (794,290)
Retained Earnings 14,085,759 11,917,492
------------ ------------
Total Stockholders' Equity 14,066,986 11,357,882
------------ ------------
Total $ 63,640,049 $ 61,971,430
============ ============
(See notes to interim unaudited condensed consolidated financial statements)
1
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Twelve Weeks Ended Forty Weeks Ended
----------------------------- -----------------------------
August 3, August 4, August 3, August 4,
2003 2002 2003 2002
------------ ------------ ------------ ------------
REVENUES: $ 39,589,993 $ 35,712,493 $127,599,012 $115,992,136
COSTS AND EXPENSES:
Costs of Goods Sold 9,833,941 8,672,221 31,413,934 28,576,383
Payroll and Benefits 12,994,300 11,395,408 41,758,349 37,274,130
Other Operating Expenses 12,240,073 10,796,877 39,727,347 35,087,016
Pre-Opening Expenses 275,496 217,055 642,994 472,983
Loss on Disposition of Assets 158,239 158,239
Administrative Expenses 3,009,247 2,926,622 9,871,428 9,341,889
------------ ------------ ------------ ------------
Total Operating Expenses 38,511,296 34,008,183 123,572,291 110,752,401
------------ ------------ ------------ ------------
Operating Income 1,078,697 1,704,310 4,026,721 5,239,735
Interest Expense 373,606 474,924 1,259,704 1,644,782
Minority Interest in Income
of Affiliated Partnerships 19,251 -- 38,502 38,503
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 685,840 1,229,386 2,728,515 3,556,450
INCOME TAXES 66,000 348,000 551,000 993,000
------------ ------------ ------------ ------------
NET INCOME $ 619,840 $ 881,386 $ 2,177,515 $ 2,563,450
============ ============ ============ ============
NET INCOME PER SHARE:
Basic $ 0.25 $ 0.38 $ 0.89 $ 1.10
============ ============ ============ ============
Diluted $ 0.24 $ 0.34 $ 0.82 $ 0.99
============ ============ ============ ============
SHARES OUTSTANDING:
Basic 2,474,839 2,319,028 2,437,502 2,336,895
============ ============ ============ ============
Diluted 2,628,741 2,582,193 2,652,408 2,597,210
============ ============ ============ ============
(See notes to interim unaudited condensed consolidated financial statements)
2
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Forty Weeks Ended
------------------------------
August 3, August 4,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,177,515 $ 2,563,450
Depreciation and amortization 4,692,102 4,263,757
Minority Interest in Income of Affiliated Partnerships 38,502 38,503
Changes in other assets and liabilities (2,072,880) (620,456)
------------ ------------
Net cash provided by operating activities 4,835,239 6,245,254
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (14,356,756) (12,967,044)
Proceeds from sale of assets 7,754,957 2,210,648
Decrease (Increase) in other assets 174,932 (113,124)
------------ ------------
Net cash used by investing activities (6,426,867) (10,869,520)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations (46,445,517) (42,018,003)
Proceeds from long-term obligations 46,196,152 47,954,882
Proceeds from sale of stock 232,155 187,243
Purchase of common stock (1,718,026)
Debt issue costs (12,380) (89,880)
Distributions to minority interests in Affiliated Partnership (38,502) (38,503)
------------ ------------
Net cash provided (used) by financing activities (68,092) 4,277,713
------------ ------------
NET DECREASE IN CASH AND EQUIVALENTS (1,659,720) (346,553)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 3,406,702 2,350,828
------------ ------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 1,746,982 $ 2,004,275
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest (net of $376,000 and $299,000 capitalized
in 2003 and 2002, respectively) $ 1,763,079 $ 2,263,384
Income taxes $ 834,864 $ 1,810,949
Non-cash activities:
Property additions financed by accounts payable $ 1,380,025 $ 1,635,743
(See notes to interim unaudited condensed consolidated financial statements)
3
MAX & ERMA'S RESTAURANTS, INC.
NOTES TO CONDENSED CONSOLIDATED 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 and its Affiliated Partnership each have a 52-53 week
fiscal year, which ends on the last Sunday in October. Fiscal 2002 and
2003 each consist of 52 weeks and include one sixteen-week and three
twelve-week quarters.
2. Recently Issued Financial Accounting Standards
----------------------------------------------
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB No.
13, and Technical Corrections" ("SFAS 145"). SFAS 145 requires gains
and losses on extinguishments of debt to be classified as income or
loss from continuing operations rather than as extraordinary items as
previously required under SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," ("SFAS 4"). SFAS 145 will be effective for
fiscal years beginning after May 15, 2002 (fiscal 2003 for the
Company). Losses on extinguishment of debt previously classified as
extraordinary charges will be reclassified to conform to the provisions
of SFAS 145.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146") which
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to exit or disposal plan. SFAS 146 is to be applied
prospectively to exit or disposal activities initiated after December
31, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," ("SFAS 148").
SFAS 148 amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") to provide alternative methods for an entity
that voluntarily changes to the fair value based method of accounting
for stock-based compensation, amends the disclosure provisions of SFAS
123 and amends APB Opinion No. 28, "Interim Financial Reporting," to
require disclosure about those effects in interim financial
information. The transition guidance and annual disclosure provisions
of SFAS 148 are effective for fiscal years ending after
4
December 15, 2002. In addition, this Statement amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements. Certain of the disclosure
modifications are required for fiscal years ending after December 15,
2002 and are included in the notes to these consolidated financial
statements.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, an
interpretation of FASB Statements No. 5, 57 and 107 and Rescission of
FASB Interpretation No. 34." FIN 45 clarifies the requirements of SFAS
No. 5, "Accounting for Contingencies," relating to the guarantor's
accounting for, and disclosure of, the issuance of certain types of
guarantees. The disclosure provisions of FIN 45 are effective for the
current fiscal year. However, the provisions for initial recognition
and measurement are effective on a prospective basis for guarantees
that are issued or modified after December 31, 2002, irrespective of a
guarantor's year-end. The adoption of the initial recognition and
measurement provisions of FIN 45 did not have a material impact on the
Company's financial condition or results of operations.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities". FIN 46 clarifies the application of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk
for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 requires a
variable interest entity to be consolidated by a company, if that
company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. FIN 46 also requires disclosures
about variable interest entities that a company is not required to
consolidate but in which it has a significant variable interest. The
consolidation requirements of FIN 46 apply immediately to variable
interest entities created after January 31, 2003 and to existing
entities in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply to all
financial statements issued after January 31, 2003, regardless of when
the variable interest entity was established. The initial adoption of
this accounting pronouncement did not have a material impact on the
Company's consolidated financial statements.
"SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity," requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances), many of which were
previously classified as equity. This statement is effective for
financial instruments entered into or modified after May 31, 2003 and
otherwise shall be effective for the Company's 2004 financial
statements. Management does not expect the initial adoption of this
accounting pronouncement will have a material impact on the Company's
consolidated financial statements."
5
3. Stock Options
-------------
The Company accounts for employee and director stock options using the
intrinsic value method. Under this method, no compensation expense was
recorded in all years presented because all stock options were granted
at an exercise price equal to the fair market value of the Company's
stock on the date of the grant. If compensation expense for the
Company's stock option grants had been determined based on their
estimated fair value at the grant dates, the Company's net income and
earnings per share for the 40 weeks ending August 3, 2003 would have
been as follows:
Net income, as reported $2,177,515
Deduct: total stock-based compensation expense
determined under the fair value method for all awards,
net of related tax benefits (140,091)
----------
Pro forma net income $2,037,424
==========
Earnings per common share, basic:
As reported $ 0.89
==========
Pro forma $ 0.84
==========
Earnings per common share, diluted:
As reported $ 0.82
==========
Pro forma $ 0.77
==========
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
----------------------------------------------
REVENUES
- --------
Revenues for the third quarter of 2003 increased $3,878,000 or 11% from
the third quarter of 2002. The increase was a result of i) the opening of three
Max & Erma's restaurants during the fourth quarter of 2002, ii) the opening of
three Max & Erma's restaurants during the first three quarters of 2003 and iii)
an increase of $403,000 or 1.2% in same-store sales for restaurants opened at
least 18 months.
Year-to-date revenues rose $11,607,000 or 10% from 2002 to 2003. The
increase was a result of i) the opening of six restaurants during 2002, ii) the
opening of three restaurants during 2003 and iii) increased franchise fees and
royalties and offset a $326,000 or 0.3% year-to-date decline in same-store
sales.
The year-to-date decline in same-store sales for 2003 was entirely the
result of a winter snow storm which hit the mid-west over Valentine's Day
weekend and negatively affected both
6
the first and second quarter's same-store sales by a total of $350,000.
Year-to-date customer counts declined approximately 2% while the per person
guest check average rose 1.8%. The increase in same-store sales for the quarter
was a result of a 3.2% increase in the per person guest check average which was
partially offset by a 1.6% decline in customer counts. The increase in the per
person guest check averages over the periods was primarily a result of menu
price increases.
The Company expects to open three additional restaurants during the
remainder of 2003. All three were under construction at the end of the third
quarter and subsequently opened during the fourth quarter. The Company expects
to open four to five restaurants in each of 2004 and 2005. At the end of the
third quarter of 2003 four additional sites were under contract to purchase or
lease and the Company was negotiating the purchase or lease of six additional
locations.
The Company expects the continued increase in franchise fees and
royalties for the next several years as it plans to achieve a greater portion of
its growth objectives through franchising. Year-to-date franchise fees and
royalties have increased 47% from $618,000 in 2002 to $911,000 in 2003. The
number of franchised restaurants increased from twelve at the end of the third
quarter of 2002 to fifteen at the end of the third quarter 2003. Three
franchised restaurants opening during the first three quarters of 2003 in
Downingtown, Pennsylvania; Edinburgh, Indiana and a second location in the
Cleveland, Ohio airport. Franchised restaurants are under construction in the
Cincinnati, Ohio Airport; Green Bay, Wisconsin and Oaks, Pennsylvania. The
Company anticipates the opening of one additional franchised restaurant during
the fourth quarter of 2003 and six to eight franchised restaurants during 2004.
COSTS AND EXPENSES
- ------------------
Cost of goods sold, as a percentage of revenues, increased from 24.3%
for the third quarter of 2002 to 24.8% for the third quarter of 2003.
Year-to-date cost of goods sold, as a percentage of revenues, remained steady at
24.6% for 2002 and 2003. The increase for the quarter was a result of sharply
higher ground beef, chicken and produce prices, which offset an approximately 2%
menu price increase over last year. The third quarter of 2002 was the lowest
cost of goods sold percentage in the Company's history. There has been a gradual
increase in this percentage since the third quarter of 2002 due to rising ground
beef, chicken and produce prices. Management believes cost of goods sold, as a
percentage of revenues, may have stabilized due to more aggressive menu price
increases by the Company and a leveling off of prices for these key inventory
items.
Payroll and benefits, as a percentage of revenues, increased from 31.9%
for the third quarter of 2002 to 32.8% for the third quarter of 2003.
Year-to-date payroll and benefits, as a percentage of revenues, increased from
32.1% for 2002 to 32.8%. The increases for both the quarter and year-to-date
periods was primarily a result of higher worker's compensation and health
insurance costs. Effective January 1, 2003, the State of Ohio, where
approximately 40% of the Company's restaurants are located, eliminated a
worker's compensation premium discount,
7
which had the effect of increasing premiums by approximately 300% for
restaurants located in Ohio. On an annual basis, the increase equates to over
$400,000.
Other operating expenses, as a percentage of revenues, increased from
30.2% for the third quarter of 2002 to 30.9% for the third quarter of 2003 and
year-to-date increased from 30.2% for 2002 to 31.1% for 2003. The increases were
a result of higher occupancy costs, primarily rent and real estate taxes,
significantly higher natural gas costs in 2003 and an increase in carryout
supplies, as the Company has increased carryout sales in 2003.
Pre-opening expenses, as a percentage of revenues, increased from 0.6%
for the third quarter of 2002 to 0.7% for the third quarter of 2003.
Year-to-date pre-opening expenses, as a percentage of revenues, increased
slightly from 0.4% in 2002 to 0.5% in 2003. The increases were due to the
expected opening of three restaurants early in the fourth quarter of 2003 as
opposed to the opening of three restaurants late in the fourth quarter of 2002.
Pre-opening expenses are incurred and expensed for up to six months prior to the
opening of a restaurant. The majority of the pre-opening expenses for the fourth
quarter 2003 openings was incurred and expensed during the third quarter of
2003.
During the third quarter of 2003 the Company recorded a $158,000 loss
on disposition of assets for the write-off of site development costs associated
with five new restaurants. The Company expects that a greater portion of future
growth will come from franchised restaurants and plans to focus its resources on
fewer but higher sales potential sites or sites with the potential for a higher
sales-to-investment ratio.
ADMINISTRATIVE EXPENSES
- -----------------------
Administrative expenses, as a percentage of revenues, decreased from
8.2% for the third quarter of 2002 to 7.6% for the third quarter of 2003.
Year-to-date administrative expenses, as a percentage of revenues, decreased
from 8.1% for 2002 to 7.7% for 2003. In dollar terms, administrative expenses
increased 3% from the third quarter of 2002 to the third quarter of 2003 and on
a year-to-date basis increased 6% from 2002 to 2003. The decrease, as a
percentage of revenues, from 2002 to 2003 for both the quarter and year-to-date
periods was a result of significantly lower performance based bonus expense in
2003 coupled with increased revenues. The increase in dollars for both periods
was primarily a result of raises for corporate personnel and additional
personnel to support additional company-owned and franchised restaurants and was
to a great extent offset by a $961,000 year-to-date reduction in performance
base bonus expense.
INTEREST EXPENSE
- ----------------
Interest expense decreased 21% and 23%, respectively, for the third
quarter and year-to-date periods of 2002 to 2003 due to declining interest rates
and a reduction in interest bearing debt (term note and revolving credit line).
At August 3, 2003 the interest rate under the Company's revolving credit line
was 4% versus 5.0% at August 4, 2002. Through the use of an interest rate swap,
the interest rate on approximately 65% of the Company's term note was
essentially fixed at 9.5% at both August 3 and August 4, 2002. The interest rate
on the balance of the term note also declined from
8
5.0% at August 4, 2002 to 4.0% at August 3, 2003. The decline in interest rates
was due to a reduction in the prime interest rate. Total interest bearing debt
decreased from $33.1 million at August 4, 2002 to $28.7 million at August 3,
2003. The Company capitalized $376,000 and $299,000 of construction period
interest during the first 40 weeks of 2003 and 2002, respectively.
INCOME TAXES
- ------------
The Company's effective tax rate decreased from 27.9% for the first 40
weeks of 2002 to 20.2% for the first 40 weeks of 2003. The decline was due to an
increase in the amount of FICA tax on tips credit earned by the Company coupled
with a reduction in pre-tax income. At lower levels of pre-tax income the
credits have a greater impact on reducing the Company's effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's working capital ratio remained at .4 to 1 at October 27,
2002 and August 3, 2003. 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 2003, the Company expended approximately
$14,357,000 for property additions, $46,446,000 to reduce long-term obligations.
Funds for such expenditures were provided primarily by $46,196,000 from proceeds
of long-term obligations, $7,755,000 from the sale and leaseback of three
restaurant properties, $4,835,000 from operations and $1,660,000 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.
The Company intends to open three additional Max & Erma's restaurants
during the remainder of 2003 and four to five restaurants during each of 2004
and 2005. At August 3, 2003 the Company was contractually committed to the
purchase or lease of seven sites, three of which were under construction and
subsequently opened during the fourth quarter of 2003. Six additional sites had
been approved and were in some stage of negotiations. The Company intends on
achieving its growth objectives through an increase in the number of new
franchised restaurants and a slight reduction in new Company-owned restaurants.
Reducing the number of Company-owned restaurants will allow the Company to focus
on sites with higher sales potential or with the potential for a more attractive
sales-to-investment ratio.
The estimated cost to complete the seven restaurants that the Company
is contractually committed to is approximately $12.3 million as of August 3,
2003. Funding for new restaurants is expected to be provided by cash flow from
operations, the sale-leaseback of real estate, landlord construction allowances,
and the Company's revolving credit line. At August 3, 2003, the Company had
approximately $5.7 million available under its $15.0 million revolving credit
line, approximately
9
$10.0 million available under sale-leaseback commitments for four properties and
$1.9 million in landlord construction allowances under two ground leases.
Since October 27, 2002, there has been no material change in our
commitments with respect to our noncancellable operating leases.
In the fourth quarter of 2003, the Company's Board of Directors
authorized the repurchase of up to 200,000 shares of its common stock through
August 21, 2004. Funds for the repurchase of common stock will be provided by
cash from operations and the Company's revolving credit line.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
Management's Discussion and Analysis of Operations and Financial
Condition discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these consolidated financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. On an
ongoing basis, management evaluates its estimates and judgments. We believe that
of our significant accounting policies, the following may involve a higher
degree of judgment and complexity.
Derivative Instruments
- ----------------------
The Company utilizes interest rate swap agreements to manage interest rate
exposure on floating-rate obligations. It does not use derivative instruments
unless there is an underlying exposure and, therefore, does not use derivative
instruments for trading or speculative purposes. The evaluation of hedge
effectiveness is subject to assumptions based on the terms and timing of the
underlying exposures. All derivative instruments are recognized in the
Consolidated Balance Sheet at estimated fair value.
Asset Impairments
- -----------------
The Company reviews each restaurant to ascertain whether property and equipment
have been impaired based on the sum of expected future undiscounted cash flows
from operating activities. If the estimated net cash flows are less than the
carrying amount of such assets, the Company will recognize an impairment loss in
an amount necessary to write down the assets to a fair value as determined from
expected future discounted cash flows. The Company evaluates the recoverability
of its goodwill and other intangibles based on the estimated fair value of the
Company's operations.
Same-Store Sales
- ----------------
The Company discloses certain information regarding the performance of certain
restaurants in operation at least 18 consecutive months in its management's
discussion and analysis. Management excludes restaurants from this calculation
that do not meet this definition. In addition, restaurants are excluded when
unusual events or circumstances outside the Company's control significantly
change the business of the restaurant.
10
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 expected opening of Company-owned restaurants (paragraphs 4 and
16), the expected increase in franchise fees and royalties (paragraph 5), the
anticipated opening of franchised restaurants (paragraph 5), the stabilization
of cost of goods sold, as a percentage of revenue (paragraph 6), the expectation
that a greater percentage of growth will come from franchised openings
(paragraphs 10 and 16) and the expected sources of funding for new restaurants
(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.
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company's primary market risk results from fluctuations in interest
rates. The Company is exposed to interest rate risk through borrowings under its
revolving credit agreement, which permits borrowings up to $34.4 million. To
minimize the effect of interest rate fluctuations, the Company has entered into
an interest rate swap arrangement. Under this agreement, the Company pays a
fixed rate of interest on a portion of the outstanding balance.
Item 4 - CONTROLS AND PROCEDURES
-----------------------
As of the end of the period covered by this report, the Company's
management carried out an evaluation, with the participation of the Company's
principal executive officer and principal financial officer, of the
effectiveness of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of
1934). Based upon that evaluation, the Company's principal executive officer and
principal financial officer concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this report. It
should be noted that the design of any system of controls is based in part upon
certain
11
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote.
There were no changes in the Company's internal controls over financial
reporting that occurred during the Company's most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
Exhibit 31.1 - Rule 13a-14(a) Certification of Principal Executive
Officer
Exhibit 31.2 - Rule 13a-14(a) Certification of Principal Financial
Officer
Exhibit 32.1 - Section 1350 Certification of Principal Executive
Officer
Exhibit 32.2 - Section 1350 Certification of Principal Financial
Officer
(b) Reports on Form 8-K
Items 7 and 9 on a Current Report on Form 8-K, dated and filed on June
12, 2003, regarding second quarter 2003 financial results.
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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, President
and Chief Executive Officer
(Principal Executive Officer)
William C. Niegsch, Jr.
-----------------------------------------------------
William C. Niegsch, Jr.
Executive Vice President &
Chief Financial Officer
(Principal Financial and Accounting
Officer)
September 5, 2003
- ----------------------------------
Date
13
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
31.1 Rule 13a-14(a) Certification of Principal Executive Officer Page 15
31.2 Rule 13a-14(a) Certification of Principal Financial Officer Page 17
32.1 Section 1350 Certification of Principal Executive Officer Page 19
32.2 Section 1350 Certification of Principal Financial Officer Page 20
14