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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 February 15, 2004
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 February 15, 2004 there were 2,455,619 shares of common stock outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
February 15,
2004 October 26,
(UNAUDITED) 2003
------------- ------------
ASSETS
Current Assets:
Cash $ 2,384,243 $ 2,616,324
Inventories 1,249,188 1,161,927
Other Current Assets 2,246,979 2,215,619
------------ ------------
Total Current Assets 5,880,410 5,993,870
Property - At Cost: 92,500,232 82,885,574
Less Accumulated Depreciation and Amortization 38,112,331 35,848,525
------------ ------------
Property - Net 54,387,901 47,037,049
Other Assets 9,019,085 8,711,176
------------ ------------
Total $ 69,287,396 $ 61,742,095
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Maturities of Long-Term Obligations $ 4,103,271 $ 2,664,166
Accounts Payable 4,840,848 4,140,765
Accrued Payroll and Related Taxes 2,917,498 2,966,718
Accrued Liabilities 4,472,231 3,944,917
------------ ------------
Total Current Liabilities 16,333,848 13,716,566
Long-Term Obligations - Less Current Maturities 39,703,135 35,836,887
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 2,455,619 Shares
at 2/15/04 and 2,449,601 Shares at 10/26/03 245,561 244,960
Additional Capital 4,204
Accumulated Other Comprehensive Loss (482,290) (648,373)
Retained Earnings 13,482,938 12,592,055
------------ ------------
Total Stockholders' Equity 13,250,413 12,188,642
------------ ------------
Total $ 69,287,396 $ 61,742,095
============ ============
(See notes to interim unaudited condensed consolidated financial statements)
1
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Sixteen Weeks Ended
-------------------------
February 15, February 16,
2004 2003
----------- -----------
REVENUES: $53,421,522 $49,207,603
COSTS AND EXPENSES:
Costs of Goods Sold 13,238,458 11,912,018
Payroll and Benefits 17,203,869 15,871,669
Other Operating Expenses 16,780,990 15,447,021
Pre-Opening Expenses 147,288 201,137
Administrative Expenses 4,250,484 4,052,195
----------- -----------
Total Operating Expenses 51,621,089 47,484,040
----------- -----------
Operating Income 1,800,433 1,723,563
Interest Expense 596,554 487,719
----------- -----------
INCOME BEFORE INCOME TAXES 1,203,879 1,235,844
INCOME TAXES 313,000 328,000
----------- -----------
NET INCOME $ 890,879 $ 907,844
=========== ===========
NET INCOME PER SHARE:
Basic $ 0.36 $ 0.38
=========== ===========
Diluted $ 0.34 $ 0.34
=========== ===========
SHARES OUTSTANDING:
Basic 2,451,811 2,384,445
=========== ===========
Diluted 2,602,471 2,702,461
=========== ===========
(See notes to interim unaudited condensed consolidated financial statements)
2
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Sixteen Weeks Ended
----------------------------
February 15, February 16,
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 890,879 $ 907,844
Depreciation and amortization 2,402,506 1,868,112
Changes in other assets and liabilities 1,034,107 (334,862)
------------ ------------
Net cash provided by operating activities 4,327,492 2,441,094
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (10,024,530) (5,484,419)
Proceeds from sale of assets 3,693
Net (Increase) Decrease in other assets (226,060) 164,885
------------ ------------
Net cash used by investing activities (10,250,590) (5,315,841)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations (24,364,015) (16,921,781)
Proceeds from long-term obligations 30,085,951 18,749,181
Proceeds from sale of stock 25,059 186,251
Purchase of common stock (20,251)
Debt Issue Costs (35,727)
------------ ------------
Net cash provided by financing activities 5,691,017 2,013,651
------------ ------------
NET DECREASE IN CASH AND EQUIVALENTS (232,081) (861,096)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 2,616,324 3,406,702
------------ ------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 2,384,243 $ 2,545,606
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 927,689 $ 940,228
Income taxes $ 85,868 $ 132,908
Non-cash activities:
Property additions financed by accounts payable $ 778,787 $ 1,010,313
(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 2003
consist of 52 weeks and includes one sixteen-week and three twelve-week
quarters. Fiscal 2004 consist of 53 weeks and includes one
sixteen-week, two twelve-week and one thirteen-week quarters.
2. Recently Issued Financial Accounting Standards
In January 2003, the FASB issued FASB Interpretation No. 46 ("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. In December 2003, the FASB issued FIN
46R. It changed the effective date for interests in special-purpose
entities for periods ending after December 15, 2003, and for all other
types of entities for periods ending after March 15, 2004. The adoption
of FIN 46R for variable interest entities did not have a material
impact on the Company's consolidated financial statements. Management
does not expect the adoption of FIN 46R for all other types of entities
to have a material impact on the Company's 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
4
2004 financial statements. The adoption of SFAS 150 did not have a
material impact on the Company's consolidated financial statements."
3. Net Income Per Share
Basic income per share amounts are based on the weighted average number
of shares of common stock outstanding during the years presented.
Diluted income per share amounts are based on the weighted average
number of shares of common stock and dilutive stock options outstanding
during the periods presented.
4. Stock Options
During the three months ended February 15, 2004, the Company's stock
options activity and weighted average exercise prices were as follows:
Shares Exercise Price
------- --------------
Outstanding, October 26, 2003 378,700 $10.91
Granted - -
Exercised 8,999 6.59
------- ------
Outstanding, February 15, 2004 369,701 $11.01
======= ======
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 quarter ending February 16, 2003 would have
been as follows:
Net income, as reported $890,897
Deduct: total stock-based compensation
expense determined under the fair value
method for all awards, net of related tax
benefits (308,833)
--------
Pro forma net income $582,046
========
Earnings per common share, basic:
As reported $ 0.36
========
Pro forma $ 0.24
========
Earnings per common share, diluted:
As reported $ 0.34
========
Pro forma $ 0.22
========
The fair value of options granted was estimated on the date of the
grant using the Black-Scholes option-pricing model.
5
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We derive revenues and income from the operation and franchising of
restaurants. Our Company-owned and franchised restaurants sell both food and
alcoholic beverages (with the exception of two franchised locations that only
sell food). Our restaurants are primarily located in the mid-west, within a 400
mile radius surrounding Columbus, Ohio, our Company's headquarters, and to a
lesser extent in the southeast. Our franchised restaurants tend to be located on
the outer edge of the mid-west, i.e. Philadelphia, Green Bay and St. Louis, with
selective markets or locations within the mid-west also operated by franchisees.
We generally lease the real estate for our restaurants and invest
approximately $1.0 million dollars in furniture, fixtures and equipment and
building costs not totally funded by landlords. We anticipate that new
restaurants will generate annual sales of approximately $2.5 million each and an
average restaurant level profit of at least $300,000. Franchisees generally pay
an initial franchise fee of $40,000 per location, plus an annual royalty of 4%
of sales. We anticipate that each additional franchised location will pay annual
royalties of approximately $100,000.
The restaurant industry is very competitive. We typically compete with
several larger, national restaurant chains in most of our locations. By focusing
on becoming the "Hometown Favorite", we believe we compete very favorably with
larger chains. Nonetheless the amount of competition is one of the most
significant factors affecting the success of a restaurant location. While we
seek out less competitive sites, highly successful locations quickly attract
competition, which may affect sales.
During 2003 and into 2004, our restaurants experienced margin pressure
due to rising beef chicken prices. We believe that much of the reason for this
is an increased demand for a "Lo-Carb", more healthful diet. The demand for
these types of menu items has pushed beef and chicken prices to record highs. As
a result of the Canadian Mad Cow incident, beef prices have fallen somewhat
during the first quarter of 2004, but still remain at a historically high level.
Our approach to rising commodity prices has always been to cautiously raise
prices every six months at a rate consistent with inflation and not over react
to shorter-term price spikes. As a result of this policy, we have generally
maintained a gradually declining cost of goods sold.
We also have experienced sharply rising healthcare and worker's
compensation insurance costs over the past several years. We are implementing
several safety incentives and considering some level of self-funding to better
contain worker's compensation expense. During the first quarter of 2004, we
implemented a new health insurance program and increased our employee
contribution rates in an effort to reduce our health insurance costs. We believe
that the rising cost of healthcare will continue to be a challenge.
6
We have bank borrowings in excess of $32.0 million. The related notes
carry variable interest rates. As a result, our Company is exposed to a risk
associated with rising interest rates. To mitigate this risk, we have purchased
an interest rate swap, which essentially fixes the rate on approximately 40% of
the outstanding balance. However, rising interest rates would subject us to
higher interest expense and could significantly affect profitability.
Approximately two thirds of the outstanding balance under our loan
agreement relates to the repurchase of our common stock. In late 1998, we began
a repurchase program, which has resulted in the repurchase of approximately two
million shares of our common stock. We believe this has contributed
significantly to the increase in our common stock price since 1998. We intend on
maintaining a share repurchase program, but do not anticipate repurchasing a
significant number of shares due to the limited trading volume of our common
stock.
At our current growth rate of four to five restaurants per year, we
believe internally generated cash flow should be sufficient to fund growth,
replacement capital expenditures and current debt service, all of which
represent our major cash needs. A significant repurchase of our common stock, an
accelerated growth rate or extended periods of reduced profitability would
require additional borrowings. We believe we have adequate borrowing capacity to
meet our needs. However, the longer term goal is to reduce debt levels.
YEAR-TO-YEAR COMPARISONS AND ANALYSIS
RESULTS OF OPERATIONS
The following table sets forth our operating results as a percentage of
revenues:
Sixteen Weeks Ended
----------------------------
February 15, February 16,
2004 2003
------------ ------------
Revenues 100.0% 100.0%
Cost of Goods Sold (24.8) (24.2)
Payroll & Benefits (32.2) (32.3)
Other Operating Expenses (31.4) (31.4)
Pre-opening Opening Expenses (0.3) (0.4)
Administrative Expenses (7.9) (8.2)
Interest Expense (1.1) (1.0)
Income Taxes (0.6) (0.7)
----- -----
Net Income 1.7% 1.8%
===== =====
7
REVENUES
Revenues for the first quarter of 2004 increased $4,214,000 or 8.6%
from the first quarter of 2003. The increase was a result of i) the opening of
six restaurants during 2003, ii) the opening of one restaurant late in the first
quarter of 2004 and iii) increased franchise fees and royalties from the opening
of four franchised locations during 2003 and one franchised opening during the
first quarter of 2004. Same-store sales at restaurants opened at least eighteen
months declined $47,000, which is essentially flat.
Through the first eight weeks of the first quarter of 2004, same-store
sales had declined 1.9% as a result of weather and general softness of the
economy. Mid-way during the quarter we began to supplement our local store
marketing efforts with a limited use of coupons, during the traditionally slow
January/February time period. Same-store sales during the second half of the
first quarter rose $437,000 or 1.9% and as a result same-store sales overall for
the quarter were approximately even with last year. To further supplement our
current marketing efforts, we intend to develop television ads, which will air
in the second or third quarter of 2004.
We expect to open three to four additional restaurants during the
remainder of 2004. One restaurant was under construction at the end of the first
quarter of 2004. We were under contract to lease one additional site and in the
final stages of negotiations to lease five additional locations, all of which
would open in either 2004 and 2005.
We also expect continued increases in franchise fees and royalties. The
number of franchised restaurants increased from fourteen at the end of the first
quarter of 2003 to seventeen at the end of the first quarter of 2004. One
franchised restaurant opened during the first quarter of 2004 in Oaks,
Pennsylvania, a suburb of Philadelphia. Two additional franchised restaurants
were under construction in Seymour, Indiana and in the Cincinnati, Ohio Airport,
which subsequently opened early in the second quarter of 2004. We anticipate the
opening of four additional franchised restaurants during the remainder of 2004.
COSTS AND EXPENSES
Cost of goods sold, as a percentage of revenues, increased from 24.2%
for the first quarter of 2003 to 24.8% for the first quarter of 2004. The
increase was a result of record high beef and chicken prices, which essentially
offset the effect of an approximate 3.0% price increase.
Payroll and benefits, as a percentage of revenues, decreased slightly
from 32.3% for the first quarter of 2003 to 32.2% for the first quarter of 2004.
The decrease was a result of lower payroll expense and reduced health insurance
expense, but was offset to a great extent, by higher worker's compensation
insurance expense. Payroll expense declined due to a continued leveling off of
wage rates. Health insurance declined due to a change in our health plan during
the quarter and increased employee contributions for health insurance. Worker's
compensation insurance
8
increased due to a tripling of rates in Ohio, where approximately 40% of our
restaurants are located.
Other operating expenses, as a percentage of revenues, remained
constant at 31.4% for both the first quarter of 2003 and 2004. Most expenses in
this category remained relatively constant between 2003 and 2004 with the
exception of equipment lease expense and depreciation. At the start of fiscal
2004, we purchased most of our leased equipment for $6.4 million. As a result,
equipment lease expense declined $625,000 from the first quarter of 2003 and
depreciation related to the leased equipment increased $390,000.
Pre-opening expenses, as a percentage of revenues, declined from 0.4%
for the first quarter of 2003 to 0.3% for the first quarter of 2004. The decline
was a result of the timing of restaurant openings and a slightly reduced pace of
openings in 2004.
ADMINISTRATIVE EXPENSES
Administrative expenses, as a percentage of revenues, declined from
8.2% for its first quarter of 2003 to 7.9% for the first quarter of 2004. The
decrease was due to the fact that revenues grew faster than administrative
expenses. In dollar terms, administrative expenses increased $198,000 or 5% from
the first quarter of 2003 to the first quarter of 2004. The increase was a
result of raises for corporate personnel, the addition of several additional
corporate support personnel and higher employee benefit costs due primarily to
health insurance expense.
INTEREST EXPENSE
Interest expense increased 22% from the first quarter of 2003 to the
first quarter of 2004 due to an increase in the interest rate charged under our
revolving credit agreement and due to an increase in interest bearing debt.
Our interest rate is based upon the ratio of bank indebtedness to
earnings before interest, taxes, depreciation and amortization. Based upon
results for fiscal 2003, the interest rate under our credit agreement increased
to LIBOR plus 3.5% or prime plus -3/4 percent. As a result, the interest rate
under the revolving credit line was 4.75% at February 15, 2004, as compared to
4.5% at February 16, 2003. Through the use of an interest rate swap, the
interest rate on approximately 40% of our two term loans is essentially fixed at
9.9% at February 15, 2004 as compared to 9.5% at February 16, 2003. The interest
rate on the balance of the two term loans increased from 4.5% at February 16,
2003 to 4.75% at February 15, 2004.
Total interest bearing debt increased from $31.6 million at February
16, 2003 to $32.0 million at February 15, 2004. The increase was a result of a
second term loan in the amount of $6.0 million which funded on October 27, 2003,
the first day of fiscal 2004. The proceeds of the loan were used to purchase
$6.4 million dollars of previously leased equipment. Normal principal
amortization of the two term loans plus a reduction of the outstanding balance
under our revolving credit line resulted in the net
9
increase in interest bearing debt of only $400,000 from the first quarter of
2003. We capitalized $80,000 of construction period interest during the first
quarter of 2004 versus $188,000 during the first quarter of 2003.
INCOME TAXES
Our effective tax rate remained relatively constant at 26.0% and 26.5%,
respectively, for the first quarter of 2004 and first quarter of 2003. We expect
our effective tax rate will remain approximately 26% for fiscal 2004.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital ratio remained at .4 to 1 at October 26, 2003 and
February 15, 2004. Historically, we have 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 2004, we expended approximately $10,025,000
for property additions, and $24,364,000 to reduce long-term obligations. Funds
for such expenditures were provided primarily by $30,086,000 from proceeds of
long-term obligations, $4,327,000 from operations and $232,000 from cash on
hand. We routinely draw down and repay balances under our revolving credit
agreement, the gross amounts of which are included in the above numbers.
We intend to open three to four Max & Erma's restaurants during the
remainder of 2004 and four to five Max & Erma's restaurants during fiscal 2005.
At February 15, 2004, we were contractually committed to the lease of two sites,
one of which was under construction. Five additional sites had been approved and
were in final stages of negotiations.
The estimated cost to complete the two restaurants that we are
contractually committed to is approximately $2.0 million as of February 15,
2004. Funding for new restaurants is expected to be provided by cash flow from
operations, the sale-leaseback of real estate, landlord construction allowances
and our revolving credit line. At February 15, 2004, we had approximately $7.0
million available under our $15.0 million revolving credit line, approximately
$5.0 million available under sale-leaseback commitments for two properties and a
$900,000 landlord construction allowance. Typically, these have been the sources
of funding for capital expenditures and we expect that they will remain so.
In addition to expenditures for new restaurants, our other significant
uses of cash are for fixed asset replacements, debt repayment and the repurchase
of its common stock. We expect to expend approximately $3.0 million and $3.9
million annually on fixed asset replacement and debt service, respectively.
Expenditures for new restaurants, prior to signing the related contract to
purchase or lease, and the repurchase of common stock are of a more
discretionary nature and may be curtailed if
10
cash flow from operations and other financing sources were diminished. We have
not experienced any such problems in obtaining funding or maintaining recent
levels of cash flow from operations. However, if profitability of our
restaurants were to decline significantly, for an extended period of time, cash
flow from operations would be reduced and we might be forced to reduce expansion
plans and forego any repurchase of common stock. Based upon the first quarter of
2004, net income represented approximately 27% of net after tax cash flow.
Depreciation represented the other 73% or approximately $2.4 million for the
quarter. Therefore, our Company could operate at a break even for an extended
period of time and still generate adequate cash flow from operations to meet
required debt service and fund fixed asset replacements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Operations and Financial
Condition discusses our 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 our 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, our 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
Our Company utilizes interest rate swap agreements to manage interest rate
exposure on floating-rate obligations. We do not use derivative instruments
unless there is an underlying exposure and, therefore, do 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
We review each restaurant to ascertain whether property and equipment, goodwill
and other intangibles 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, we 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.
Same-Store Sales
Our Company discloses certain information regarding the performance of certain
restaurants in operation at least 18 consecutive months in our management's
discussion and analysis. We exclude restaurants from this calculation that do
not meet this definition. In addition, restaurants are excluded when unusual
events or circumstances outside our control significantly change the business of
the restaurant.
INFLATION
We believe the effects of inflation have not had a material impact on our
results of operations.
11
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 annual sales and profitability of new restaurants (paragraph 2),
the anticipated royalties from new franchised restaurants (paragraph 2), the
belief that we compete favorably with larger chains (paragraph 3), the belief
that the rising cost of healthcare will continue to be a challenge (paragraph
5), the belief that the repurchase of common stock has contributed to the
increase in our stock price (paragraph 7), the anticipation that we will not be
purchasing a significant number of additional shares under our stock repurchase
program (paragraph 7), the belief that we have sufficient internally generated
cash flow and borrowing capacity to meet our cash needs (paragraph 8), the
opening of additional restaurants (paragraph 12 and 25), the expectation of
increased franchise fees and royalties (paragraph 13), the opening of additional
franchised restaurants (paragraph 13), our effective tax rate for 2004
(paragraph 22), the estimated costs to complete new restaurants (paragraph 26),
and the source and availability of funding for new restaurants (paragraph 26).
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, our ability to open or franchise new restaurants as planned, changes
in competition in markets where we operate restaurants, the availability of
restaurant workers, our 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 our most recent Annual Report on Form 10-K and other filings from
time to time with the Securities and Exchange Commission. We undertake no
obligation to publicly update or revise any forward-looking statements.
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our Company's primary market risk results from fluctuations in interest
rates. We are exposed to interest rate risk through borrowings under our
revolving credit agreement, which permits borrowings up to $39.1 million. To
minimize the effect of interest rate fluctuations, we have entered into an
interest rate swap arrangement. Under this agreement, we pay a fixed rate of
interest on a portion of the outstanding balance.
Item 4 - CONTROLS AND PROCEDURES
Disclosure Controls and Procedures - Disclosure controls and procedures
are controls and other procedures that are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), is
12
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
we are required to disclose in the reports that we file under the Exchange Act
is accumulated and communicated to our management appropriate to allow timely
decisions regarding required disclosure.
As of the end of the period covered by this report, our management,
with the participation of our chief executive officer and chief financial
officer, carried out an evaluation of the effectiveness of our disclosure
controls and procedures pursuant to Rule 13a-15 promulgated under the Exchange
Act. Based upon this evaluation, our chief executive officer and our chief
financial officer concluded that our disclosure controls and procedures were (1)
designed to ensure that material information relating to our company is
accumulated and made known to our management, including our chief executive
officer and chief financial officer , in a timely manner, particularly during
the period in which this report was being prepared and (2) effective, in that
they provide reasonable assurance that information we are required to disclose
in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
Management believes, however, that a controls system, no matter how
well designed and operated, cannot provide absolute assurance that the
objectives of the controls system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected.
Internal Controls. There has been no change in our internal control
over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
promulgated under the Exchange Act) during our fiscal quarter ended February 15,
2004 that has materially affected, or is reasonably likely to materially affect,
our 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
- ------------------------
* Filed with this report.
+ Furnished with this report.
(b) Reports on Form 8-K
None
13
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, President
and Chief Executive Officer
(Principal Executive Officer)
/s/ William C. Niegsch, Jr.
---------------------------------------
William C. Niegsch, Jr.
Executive Vice President &
Chief Financial Officer
(Principal Financial and Accounting
Officer)
March 19, 2004
Date
14
EXHIBIT INDEX
Exhibit No. Exhibit Page No.
- ----------- ------- --------
31.1* Rule 13a-14(a) Certification of Principal Executive Officer Page 16
31.2* Rule 13a-14(a) Certification of Principal Financial Officer Page 18
32.1+ Section 1350 Certification of Principal Executive Officer Page 20
32.2+ Section 1350 Certification of Principal Financial Officer Page 21
* Filed with this report.
+ Furnished with this report.
15