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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 May 9, 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 May 9, 2004, there were 2,457,592 shares of common stock outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
May 9,
2004 October 26,
(UNAUDITED) 2003
------------ ------------
ASSETS
Current Assets:
Cash $ 1,757,423 $ 2,616,324
Inventories 1,291,326 1,161,927
Other Current Assets 2,462,258 2,215,619
------------ ------------
Total Current Assets 5,511,007 5,993,870
Property - At Cost 92,007,113 82,885,574
Less Accumulated Depreciation and Amortization 39,763,592 35,848,525
------------ ------------
Property - Net 52,243,521 47,037,049
Other Assets 9,030,573 8,711,176
------------ ------------
Total $ 66,785,101 $ 61,742,095
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Maturities of Long-Term Obligations $ 4,075,695 $ 2,664,166
Accounts Payable 4,549,397 4,140,765
Accrued Payroll and Related Taxes 2,989,463 2,966,718
Accrued Liabilities 3,751,531 3,944,917
------------ ------------
Total Current Liabilities 15,366,086 13,716,566
Long-Term Obligations - Less Current Maturities 37,364,524 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 2,457,592 Shares
at 05/09/04 and 2,449,601 Shares at 10/26/03 245,759 244,960
Additional Paid-In Capital 173,377
Accumulated Other Comprehensive Loss (344,648) (648,373)
Retained Earnings 13,980,003 12,592,055
------------ ------------
Total Stockholders' Equity 14,054,491 12,188,642
------------ ------------
Total $ 66,785,101 $ 61,742,095
============ ============
(See notes to interim unaudited condensed consolidated financial statements)
1
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Twelve Weeks Ended Twenty-eight Weeks Ended
------------------------- -------------------------
May 9, May 11, May 9, May 11,
2004 2003 2004 2003
----------- ----------- ----------- -----------
REVENUES: $41,882,192 $38,801,416 $95,303,714 $88,009,019
COSTS AND EXPENSES:
Costs of Goods Sold 10,832,967 9,667,975 24,071,425 21,579,993
Payroll and Benefits 13,633,259 12,892,380 30,837,128 28,764,049
Other Operating Expenses 13,022,428 12,040,253 29,803,418 27,487,274
Pre-Opening Expenses 101,746 166,361 249,034 367,498
Administrative Expenses 3,130,350 2,809,986 7,380,834 6,862,181
----------- ----------- ----------- -----------
Total Operating Expenses 40,720,750 37,576,955 92,341,839 85,060,995
----------- ----------- ----------- -----------
Operating Income 1,161,442 1,224,461 2,961,875 2,948,024
Interest Expense 515,120 398,379 1,111,674 886,098
Minority Interest in Income
of Affiliated Partnerships 19,252 19,251 19,252 19,251
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 627,070 806,831 1,830,949 2,042,675
INCOME TAXES 130,000 157,000 443,000 485,000
----------- ----------- ----------- -----------
NET INCOME $ 497,070 $ 649,831 $ 1,387,949 $ 1,557,675
=========== =========== =========== ===========
NET INCOME PER SHARE:
Basic $ 0.20 $ 0.26 $ 0.57 $ 0.64
=========== =========== =========== ===========
Diluted $ 0.19 $ 0.25 $ 0.54 $ 0.59
=========== =========== =========== ===========
SHARES OUTSTANDING:
Basic 2,457,539 2,470,907 2,454,266 2,421,500
=========== =========== =========== ===========
Diluted 2,580,060 2,609,337 2,592,867 2,662,551
=========== =========== =========== ===========
(See notes to interim unaudited condensed consolidated financial statements)
2
MAX & ERMA'S RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Twenty-eight Weeks Ended
----------------------------
May 9, May 11,
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,387,949 $ 1,557,675
Depreciation and amortization 4,313,898 3,320,454
Loss on Disposition of Assets 106,419 60,513
Minority interest in income of Affiliated Partnerships 19,252 19,251
Changes in other assets and liabilities (232,566) (1,430,818)
------------ ------------
Net cash provided by operating activities 5,594,952 3,527,075
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (12,562,965) (9,435,827)
Proceeds from sale of assets 2,805,704 7,754,757
Decrease (increase) in other assets (282,855) 173,376
------------ ------------
Net cash used by investing activities (10,040,116) (1,507,694)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations (41,851,228) (34,526,057)
Proceeds from long-term obligations 45,512,814 31,774,200
Proceeds from sale of stock 42,430 198,748
Purchase of common stock (20,721) -
Debt issue costs (77,780) (10,000)
Distributions to minority interests in Affiliated Partnerships (19,252) (19,251)
------------ ------------
Net cash provided by (used by) financing activities 3,586,263 (2,582,360)
------------ ------------
NET DECREASE IN CASH AND EQUIVALENTS (858,901) (562,979)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 2,616,324 3,406,702
------------ ------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 1,757,423 $ 2,843,723
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 1,487,453 $ 1,381,867
Income taxes $ 361,964 $ 709,624
Non-cash activities:
Property additions financed by accounts payable $ 817,439 $ 1,281,093
(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 consists of 52
weeks and includes one sixteen-week and three twelve-week quarters. Fiscal
2004 consists 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 2004
4
financial statements. The adoption of SFAS 150 did not have a material
impact on the Company's consolidated financial statements."
3. Long-Term Obligations
On October 27, 2003, the first day of fiscal 2004, the Company borrowed
$6,000,000 to finance the purchase of previously leased equipment. The
loan provides for monthly payments of $125,000 plus interest, beginning
December 31, 2003 through December 31, 2007. The loan bears interest at a
fluctuating rate based upon the prime or LIBOR rate determined by the
ratio of Indebtedness of the Company to the EBITDA of the Company (4.75%
at May 9, 2004).
4. 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.
5. Stock Options
During the 28-weeks ended May 9, 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 30,950 17.51
Exercised (10,999) (6.88)
Forfeited (2,000) (7.75)
-------- ------
Outstanding, May 9, 2004 396,651 $11.55
======== ======
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
28-weeks ending May 9, 2004 would have been as follows:
5
Twelve
Weeks Twelve Twenty Eight Twenty Eight
Ended Weeks Ended Weeks Ended Weeks Ended
May 9, 2004 May 11, 2003 May 9, 2004 May 11, 2003
----------- ------------ ----------- -------------
Net income, as reported $ 497,070 $ 649,831 $1,387,949 $ 1,557,675
Deduct: total stock-based compensation
expense determined under the fair
value method for all awards, net
of related tax benefits (120,517) (268,113) (429,350) (310,553)
--------- --------- ---------- -------------
Pro forma net income $ 376,553 $ 381,718 $ 958,599 $ 1,247,122
========= ========= ========== =============
Earnings per common share, basic:
As reported $ 0.20 $ 0.26 $ 0.57 $ 0.64
========= ========= ========== =============
Pro forma $ 0.15 $ 0.15 $ 0.39 $ 0.52
========= ========= ========== =============
Earnings per common share, diluted:
As reported $ 0.19 $ 0.25 $ 0.54 $ 0.59
========= ========= ========== =============
Pro forma $ 0.15 $ 0.15 $ 0.37 $ 0.47
========= ========= ========== =============
The fair value of options granted was estimated on the date of the grant using
the Black-Scholes option-pricing model.
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.
6
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 2004, our restaurants experienced margin pressure due to
rising beef and chicken prices. Through the first half of 2004, cost of goods
sold is in excess of a full percentage point over its targeted range due
entirely to higher beef, chicken and dairy 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. 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 have applied to the State of Ohio to self-fund our
Ohio Worker's Compensation insurance. We believe this will lower worker's
compensation expense for our Ohio restaurants. 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. For the
second quarter of 2004, health insurance costs had declined by approximately 30
basis points. However, we believe that the rising cost of healthcare will
continue to be a challenge.
We have bank borrowings in excess of $30.0 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 35% 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 currently
maintain 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.
7
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 Twenty-Eight Weeks Ended
------------------- ------------------------
May 9, May 11, May 9, May 11,
2004 2003 2004 2003
------ ------ ------ ------
Revenues 100.0 100.0 100.0 100.0
Cost of Goods Sold (25.9) (24.9) (25.3) (24.5)
Payroll & Benefits (32.5) (33.2) (32.3) (32.7)
Other Operating Expenses (31.1) (31.0) (31.3) (31.2)
Pre-Opening Expenses (0.2) (0.4) (0.3) (0.4)
Administrative Expenses (7.5) (7.3) (7.7) (7.8)
Interest Expense (1.2) (1.0) (1.2) (1.0)
Minority Interest (0.1) (0.1) - -
Income Taxes (0.3) (0.4) (0.5) (0.6)
------ ------ ------ ------
Net Income 1.2 1.7 1.4 1.8
====== ====== ====== ======
REVENUES
Revenues for the second quarter of 2004 increased $3,081,000 or 7.9% from
the second quarter of 2003. The increase was a result of i) the opening of three
restaurants during the second half of 2003, ii) the opening of two restaurants
during the first half of 2004, and iii) increased franchise fees and royalties
resulting from the opening of four franchised locations during 2003 and two
franchised openings thus far in 2004. Same-store sales at restaurants opened at
least eighteen months declined $39,000, which is essentially flat.
Year-to-date revenues increased $7,295,000 or 8.3% from 2003 to 2004. The
increase was a result of the opening of six restaurants during 2003, ii) the
opening of two restaurants during the first half of 2004, and iii) increased
franchised fees and royalties. Year-to-date same-store sales declined by
$85,000, which is also essentially flat.
Year-to-date our average guest check increased by approximately 4% due
largely to menu price increases over last year. Customer counts declined by
approximately an equal percentage. Early in fiscal 2004 weather negatively
impacted same-store sales. This decline was offset by a limited use of coupons
during the second half of the quarter. However, since then sales have remained
essentially flat. Late in the second quarter we initiated a test of television
advertising in the Columbus, Ohio market. The test will run into the second
quarter of 2004, at which time we will evaluate the results and determine if
television advertising should be used in any of our other markets. In making
that determination, we will compare same-store sales in the Columbus market
during the test to the remainder of our restaurants and evaluate the cost
effectiveness of the advertising.
8
We expect to open two to three additional restaurants during the remainder
of 2004. Two restaurants were under construction at the end of the second
quarter, both of which should open during the fourth quarter of 2004. One
additional site was under contract and is expected to open late in the fourth
quarter of 2004 or early in 2005. We are negotiating for five additional sites,
all of which should open in 2005.
We also expect continued increases in franchise fees and royalties. The
number of franchised restaurants increased from fourteen at the end of the
second quarter of 2003 to eighteen at the end of the second quarter of 2004.
Year-to-date franchise fees and royalties increased 22%. Two additional
franchised restaurants were under construction in Seymour, Indiana and
Chillicothe, Ohio. We anticipate the opening of these two restaurants plus one
to two additional franchised restaurants during the second half of 2004.
COSTS AND EXPENSES
Cost of goods sold, as a percentage of revenues, increased from 24.9% for
the second quarter of 2003 to 25.9% for the second quarter of 2004. Year-to-date
cost of goods sold, as a percentage of revenues, increased from 24.5% for 2003
to 25.3% for 2004. The increases were due primarily to record high beef and
chicken prices in 2004 and, to a lesser extent, higher dairy prices during the
second quarter of 2004. These higher costs entirely offset the effect of an
approximate 3.0% menu price increase over last year.
Payroll and benefits, as a percentage of revenues, decreased from 33.2%
for the second quarter of 2003 to 32.5% for the second quarter of 2004.
Year-to-date payroll and benefits decreased from 32.7% for 2003 to 32.3% for
2004. The decreases were a result of lower restaurant payroll and reduced health
insurance expense. The reduction from the second quarter of 2003 to the second
quarter of 2004 was also the result of opening three restaurants during the
second quarter of 2003 versus only one opening during the second quarter of
2004. The opening of a greater number of restaurants during a quarter generally
increases payroll and benefits, as a percentage of revenues, due to the initial
inefficiency of a new restaurant's workforce. Health insurance expense declined
due to a change in our health plan during the first quarter of 2004. We expect
that decline to continue for the remainder of 2004.
Other operating expenses, as a percentage of revenues, remained relatively
flat for both the quarter and year-to-date periods relative to last year. Most
expenses in this category remained relatively constant between 2003 and 2004
with the exception of equipment lease expense, which declined by 130 basis
points due to the purchase of most of our leased equipment. This decline was
offset by an 80 basis point increase in depreciation related to the purchased
equipment and minor increases in several other expenses such as utilities, rent
and carryout supplies.
Pre-opening expenses, as a percentage of revenues, declined from 0.4% for
the second quarter of 2003 to 0.2% for the second quarter of 2004. Year-to-date
pre-opening expenses, as a
9
percentage of revenues, decreased from 0.4% for 2003 to 0.3% for 2004. The
declines were 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, increased from 7.3%
for the second quarter of 2003 to 7.5% for the second quarter of 2004.
Year-to-date administrative expenses, as a percentage of revenues, decreased
slightly from 7.8% for 2003 to 7.7% for 2004. In dollar terms, administrative
expenses increased 11% and 8% for the quarter and year-to-date periods,
respectively. The increases in dollars were a result of raises for corporate
personnel, the addition of several corporate support personnel and higher
employee benefit costs. The total increases in dollars was generally in line
with our revenue growth and therefore, remained relative constant as a
percentage of revenues.
INTEREST EXPENSE
Interest expense increased 29% from the second quarter of 2003 to the
second quarter of 2004 and year-to-date 26% from 2003 to 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 May 9, 2004, as compared to 4.0% at May 11,
2003. Through the use of an interest rate swap, the interest rate on
approximately 35% of our two term loans is essentially fixed at 9.9% at May 9,
2004 as compared to 9.0% at May 11, 2003. The interest rate on the balance of
the two term loans increased from 4.0% at May 11, 2003 to 4.75% at May 9, 2004.
Total interest bearing debt increased from $26.2 million at May 11, 2003
to $30.0 million at May 9, 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. Scheduled principal amortization of the two term
loans resulted in the net increase in interest bearing debt of only $3.6 million
from the second quarter of 2003. We capitalized $100,000 of construction period
interest during the first 28 weeks of 2004 versus $293,000 during the first
quarter of 2003.
INCOME TAXES
Our effective tax rate remained relatively constant at 24.0% for the first
28 weeks of 2004 and 2003. We expect our effective tax rate will remain
approximately 24.0% for fiscal 2004, although at higher levels of pre-tax income
tax credit have a lesser effect and the effective tax rate rises.
10
LIQUIDITY AND CAPITAL RESOURCES
Our working capital ratio remained at 0.4 to 1 at October 26, 2003 and May
9, 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 28 weeks of 2004, we expended approximately $12,563,000
for property additions, and $41,851,000 to reduce long-term obligations. Funds
for such expenditures were provided primarily by $45,513,000 from proceeds of
long-term obligations, $5,595,000 from operations and $859,000 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 two to three Max & Erma's restaurants during the
remainder of 2004 and four to five Max & Erma's restaurants during fiscal 2005.
At May 9, 2004, we were contractually committed to the lease of three sites, two
of which were under construction. Five additional sites had been approved and
were in some stage of negotiations.
The estimated cost to complete the two restaurants that we are
contractually committed to is approximately $5.5 million as of May 9, 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 May 9, 2004, we had approximately $8.0 million
available under our $15.0 million revolving credit line and approximately $2.4
million in landlord construction allowances. 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 our 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 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 28 weeks of 2004, net income represented
approximately 24% of net after tax cash flow. Depreciation represented the other
76% or approximately $4.3 million. 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.
11
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.
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 anticipated revenues and profitability
12
from new restaurants (Paragraph 2), anticipated royalties from new franchised
restaurants (Paragraph 2), the belief that we compete favorably with larger
chains (Paragraph 3), the belief that safety programs and self-funding will
lower worker's compensation expense (Paragraph 5), 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 (Paragraphs 13 and 26), the expectation of increased
franchise fees and royalties (Paragraph 14), the opening of additional franchise
restaurants (Paragraph 14), the expectation that health insurance expense may
decline during the remainder of 2004 (Paragraph 16), the expectation that our
effective tax rate will remain approximately 24% for 2004 (Paragraph 23), the
estimated costs to complete new restaurants (Paragraph 27), the source and
availability of funding for new restaurants (Paragraph 27), the anticipated
expenditures on fixed assets and debt service (Paragraph 28) and the belief that
we could operate at a break even and still meet required debt service and fund
fixed asset replacements (Paragraph 28).
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 $38.0 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 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
13
under the Exchange Act is accumulated and communicated to our management as
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 May 9, 2004 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II - OTHER INFORMATION
Item 2 - CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSURER PURCHASES OF EQUITY
SECURITIES
(e) The following table provides information about purchases by the company
[and its affiliated purchasers] during the quarter ended May 9, 2004 of equity
securities that are registered by the company pursuant to Section 12 of the
Exchange Act:(1)
14
ISSUER PURCHASES OF EQUITY SECURITIES
(d)
(c) Maximum number
Total Number of of Shares that
(a) Shares Purchased May Yet Be
Total Number of (b) as Part of Publicly Purchased Under
Shares Purchased Average Price Announced Plans the Plans or
Four-Week Period (1) Paid per Share or Programs (2) Programs
- --------------------------------------------------------------------------------------------------------------------
02/17/04 - - - 71,292 128,708
03/14/04
- --------------------------------------------------------------------------------------------------------------------
03/15/04 - 27 $17.40 71,319 128,681
04/11/04
- --------------------------------------------------------------------------------------------------------------------
04/12/04 - - - - 128,681
05/09/04
- --------------------------------------------------------------------------------------------------------------------
Total 27 $17.40 71,319 128,681
- --------------------------------------------------------------------------------------------------------------------
(1) We repurchased an aggregate of 27 shares of our common stock pursuant to
the repurchase program that we publicly announced on September 4, 2003
(the "program").
(2) Our board of directors approved the repurchase by us of up to an aggregate
of 200,000 shares of our common stock/shares of our common stock pursuant
to the Program. The expiration date of this Program was extended to
August 21, 2004.
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on April 9, 2004 for
the purpose of electing three Class III directors for three-year terms expiring
in 2007 and ratifying Deloitte & Touche LLP as the Company's independent
auditors for the 2004 fiscal year.
Each nominee to the Company's Board of Directors was elected by the
following vote:
VOTES FOR VOTES WITHHELD
William E. Arthur 2,222,462 92,093
Todd B. Barnum 2,310,246 4,309
Thomas R. Green 2,293,709 20,846
Additionally, Deloitte & Touche LLP was ratified as the Company's
independent auditors for the 2004 fiscal year by a vote of 2,294,220 shares for
19,879 against and 456 shares abstained.
15
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
8-K filed March 18, 2004 regarding first quarter 2004 financial
results.
16
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)
June 16, 2004
- -------------
Date
17
EXHIBIT INDEX
Exhibit No. Exhibit Page No.
- ----------- ------- --------
31.1* Rule 13a-14(a) Certification of Principal Executive Officer Page 19
31.2* Rule 13a-14(a) Certification of Principal Financial Officer Page 21
32.1+ Section 1350 Certification of Principal Executive Officer Page 23
32.2+ Section 1350 Certification of Principal Financial Officer Page 24
* Filed with this report.
+ Furnished with this report.
18