<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended October 29, 1995
Commission File Number: 0-11514
Max & Erma's Restaurants, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware No. 31-1041397
------------------------------- --------------
(State of 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
---------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $.10 Par Value
-----------------------------
(title of class)
8% Convertible Subordinated Debentures Due 2004
-----------------------------------------------
(title of class)
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,
and (2) has been subject to the filing requirements for at least
the past 90 days. YES X NO
-------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
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State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value has been computed by reference to
the closing bid price of such stock, as of December 31, 1995.
Total shares outstanding 4,120,109
Number of shares owned beneficially 1,768,554
and/or of record by directors
and officers (1)
Number of shares held by persons 2,641,268
other than directors or
officers
Closing bid price $5.88
Market value of shares held by $15,530,656
persons other than directors
or officers
(1) For purposes of this computation all officers and directors are
included, although not all are necessarily "affiliates." Includes options
to purchase 289,713 shares of common stock, all of which are presently
exercisable.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
4,120,109 Common Shares
were outstanding at December 31, 1995
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Shareholders for the Fiscal Year Ended October 29,
1995 (in pertinent part, as indicated)...Parts II and IV.
2. Proxy Statement for 1996 Annual Meeting of Shareholders (in pertinent
part, as indicated)....Part III.
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PART I
Item 1. BUSINESS
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Max & Erma's Restaurants, Inc. (the "Company"), directly and through
affiliated partnerships, owns and operates a chain of thirty-five Max & Erma's
restaurants at December 31, 1995. The Company is a Delaware corporation
organized in 1982, as the successor to a restaurant business founded in 1971 by
Barry Zacks, former Chairman and Chief Executive Officer of the Company. The
Company has registered the phrase "Max & Erma's - Neighborhood Gathering Place"
and its associated logo as a service mark with the United States Patent and
Trademark Office.
The Company's executive offices are located at 4849 Evanswood Drive,
Columbus, Ohio 43229, and its telephone number is (614) 431-5800.
Description of Business
- -----------------------
Max & Erma's restaurants provide generous servings of consistently high
quality food at moderate prices in the casual setting of a neighborhood
gathering place. The menu includes Max & Erma's signature gourmet hamburgers,
specialty sandwiches, salads, appetizers, pasta dishes, chicken, seafood,
steaks, other entrees prepared in a variety of cuisines, desserts and a full
complement of alcoholic and non-alcoholic beverages. Management believes that
the decor and theme of Max & Erma's restaurants allow the introduction of a
broad range of menu items, thus permitting rapid adjustment to changing
customer preferences.
Max & Erma's restaurants are open for both lunch and dinner seven days
a week. Hours of operation are generally 11:00 a.m. to midnight. During
fiscal 1995, the average check was approximately $7.62 at lunch and $9.27 at
dinner, and the lunch and dinner meal periods accounted for approximately 36.4%
and 63.6% of net sales, respectively. Alcoholic beverages constituted
approximately 13.6% of net sales in fiscal 1995.
The Company's strategy is to compete in the casual dining segment of
the restaurant industry by offering a variety of high quality food in a casual,
comfortable and fun atmosphere and with a uniquely personable service style.
The philosophy of the Company is to focus on the details of the customer
experience that instill customer loyalty and promote repeat business.
Management believes that Max & Erma's reputation is built every day
with every customer served and that a key to customer loyalty is the server.
Waiters and waitresses are trained based on the "Fifty-two Moments of Truth," a
program based on the Company's consumer research which measures the events that
impact the customer's dining experience. Food is delivered to the table by the
server instead of a food runner, and servers are required to recheck the table
two minutes after delivering the meal. Moreover, the wait staff is empowered
to address customer problems without the assistance of restaurant management.
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Max & Erma's restaurants have always been known for gourmet hamburgers
and specialty sandwiches; however, one part of the Company's focus on the
customer is an evolving menu that changes to meet consumer tastes. The Company
believes its menu should be fun as well as innovative and reviews, and revises
as necessary, the menu twice each year, and in addition offers an annual summer
menu. In fiscal 1992, nightly dinner specials, such as fajitas, southwestern
style steak and jumbo fried shrimp, were introduced to increase weekday dinner
volume and to provide variety for frequent customers. Weekday lunch specials
were added in fiscal 1993, and separate lunch and dinner menus were introduced
during 1994. "Five Great Ways to be Good," a selection of healthy, low fat
menu items, was introduced at the start of 1995. By periodically modifying its
menu through the introduction of a broad range of appealing new menu items, the
Company has achieved a more diversified sales mix.
The Company makes extensive use of consumer focus groups to conduct
marketing research. Management incorporates the findings of this market
research in its advertising, menu development, employee training, and building
design and decor. According to customers, the major point of difference
between the Company and its competitors is that Max & Erma's restaurants are
perceived as being more of a "fun place," an image the Company tries to foster
in its advertising. The Company spends approximately 3.0% to 3.25% of net
sales annually on advertising and uses television, radio, direct mail,
billboards, special events and localized store marketing designed to increase
customer awareness and repeat business.
The Company owns thirty-three of the Max & Erma's restaurants currently
in operation. Two are owned by separate affiliated partnerships. In addition
to the specified percentage interest in the profits and losses of the
affiliated partnerships, the Company is paid an annual fee equal to 6% or 7% of
gross revenues for managing the two Max & Erma's restaurants owned by the
partnerships. Each management contract provides for monthly payments to the
Company for an initial term of two years and renewal terms aggregating 20
additional years upon the mutual agreement of the parties.
Competition
- -----------
The restaurant business, particularly in the casual dining segment, is
highly competitive in terms of quality and value of products served, type and
variety of menu offered, quality and efficiency of service, ambiance and
attractiveness of facilities and site location. Max & Erma's restaurants
compete with food service operations of various types within their respective
locations, including national and regional chains as well as locally-owned and
operated restaurants. Many of the Company's competitors are substantially
larger and have greater financial resources than the Company.
Employees
- ---------
At November 30, 1995, the Company had approximately 2,814 employees, of
which 819 were full-time restaurant employees, 1,822 were part-time restaurant
employees, 47 were corporate staff personnel and 126 were restaurant managerial
personnel. None of the Company's employees are represented by a labor union or
a collective bargaining unit. The Company considers relations with its
employees to be good.
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Restaurant Operations
- ---------------------
The Company strives to maintain quality and uniformity in its
restaurants through careful training and supervision of personnel. All
restaurants are operated in accordance with uniform Company specifications,
which are set forth in detailed operating manuals relating to food and beverage
preparation, maintenance of premises and employee conduct. The Company
utilizes an independent shopping service to monitor implementation of Company
operating standards. The Company and the shopping service have developed
testing standards for the major aspects of restaurant operation, including
physical appearance, cleanliness, wait staff and food quality. The shopping
service has "mystery shoppers" visit each restaurant four times each quarter to
evaluate and grade the restaurant. A report is prepared by the shopping
service for each visit and is reviewed by the Company's Chief Operating Officer
and the respective regional and general managers. A portion of the bonus for
each regional and general manager is based on the grade scores received on the
shopping service reports. The Company also makes available at each table
postage-paid comment cards addressed to the Company's President. The President
responds to any negative comments on a weekly basis.
Restaurant operations are administered by a management staff headed by
the Chief Operating Officer. A Regional Vice President of Operations reports
to the Chief Operating Officer. Seven regional managers, each of whom
supervises the operations of four to five restaurants, report to either the
Chief Operating Officer or the Regional Vice President of Operations. Each
restaurant has a general manager, who is responsible for training and
supervising 60 to 125 employees, and two or three assistant managers. Regional
managers are responsible for hiring their general and assistant managers.
General managers, with the assistance of the regional manager, are responsible
for hiring restaurant employees. The Company seeks to hire experienced
restaurant personnel who must complete a 14 week training program conducted by
the Company before becoming an assistant manager. The Company has historically
promoted from within to fill its regional and general manager positions.
Both regional and general managers receive a base salary plus a bonus
based upon performance against budget and average independent shopping service
scores. General managers prepare quarterly budgets for their stores and
regional managers prepare quarterly budgets for their regions. Bonuses are
based on specific goals derived from these quarterly budgets. Managers may
elect to receive some or all of their bonuses in the Company's common stock at
a one-third discount from fair market value. In addition, all regional
managers and general managers are eligible to receive stock options on a
periodic basis. Management believes that its bonus system and the ability to
purchase common stock promote loyalty and highly motivate managers to meet
Company goals.
Management believes that the combination of the authority delegated to
its regional and general managers, particularly with respect to hiring
employees, together with its goal-specific bonus plans, results in a positive
work environment and has contributed to low management turnover.
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Purchasing and Inventory Controls
- ---------------------------------
Meat and most other food and restaurant supply items are purchased
through one major distributor in order to obtain favorable prices and to ensure
consistent quality and delivery. For major items, the Company typically
negotiates prices directly with producers. For other items, the Company
provides the distributor with specifications and receives monthly prices for
such items, generally based upon a "cost plus" formula. Restaurant managers
purchase these items directly from the distributor, and each restaurant is
billed directly for its purchases. Although most of the Company's food and
supplies are presently furnished by one distributor, the Company believes
alternate food suppliers are available and has not experienced a shortage of
food or supplies. A daily inventory is taken for high cost items, such as
steaks, ground meat, seafood and liquor. A physical inventory of all items is
made at the end of each four week accounting period.
Future Expansion
- ----------------
In addition to two restaurants opened during the first quarter of 1996,
the Company intends to open six additional Max & Erma's restaurants during the
remainder of fiscal 1996 and an additional nine restaurants during fiscal 1997.
All but four of the existing Max & Erma's restaurants are located in suburban
areas. Of the existing restaurants, 19 are free-standing and 16 are in-line
shopping center/mall locations. The following table sets forth the location of
each existing Max & Erma's restaurant and the locations of four (all
free-standing) of the six restaurants scheduled to open during the remainder of
1996:
Existing Under Development
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ILLINOIS
Chicago.......... 4 2
INDIANA
Indianapolis..... 3 -
KENTUCKY
Lexington........ 1 1
MICHIGAN
Ann Arbor........ 1 -
Detroit.......... 5 -
Grand Rapids..... 1 -
NORTH CAROLINA
Charlotte........ 1 -
OHIO
Akron............ 1 -
Cincinnati....... 1 -
Cleveland........ 2 1
Columbus......... 8 -
Dayton........... 3 -
PENNSYLVANIA
Pittsburgh....... 4 -
-- -
TOTAL.... 35 4
== =
The Company's preference is to acquire the land and build new
free-standing restaurants. However, in order to acquire suitable sites, the
Company will utilize ground leases, or lease and convert existing premises.
Management believes that the clustering of three or more restaurants in markets
of sufficient size increases customer awareness, enhances the effectiveness of
advertising and improves management efficiency.
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Government Regulation
- ---------------------
The Company is subject to Federal, state and local laws affecting the
operation of its restaurants, including zoning, health, sanitation and safety
regulations and alcoholic beverage licensing requirements. Each restaurant is
operated in accordance with standardized procedures designed to assure
compliance with all applicable codes and regulations. The suspension of a food
service or liquor license could cause an interruption of operations at affected
restaurants.
Item 2. PROPERTIES
- ------- ----------
All but seven of the Company's restaurants are occupied under leases
expiring from 1996 to 2025, with renewal options for five to 20 additional
years. The affiliated partnership which owns one of the restaurants in
Columbus, Ohio also owns the premises on which it is located. Restaurant
leases are generally collateralized by liens on leasehold improvements,
equipment, furniture and fixtures. The Company leases its executive offices
(15,000 square feet) and general warehouse and storage facilities (17,000
square feet) in Columbus, Ohio under an operating lease expiring in October
2000.
The last 15 restaurants opened are based on a new design which the
Company has used as its prototype. The prototype gives Max & Erma's
restaurants a distinct identity and emphasizes an unpretentious neighborhood
ambiance. The prototype design downplays the use of brass, Tiffany lamps and
other design features common to the Company's older restaurants and to many
other casual dining restaurants. Max & Erma's restaurants established prior to
the introduction of the prototype vary in design and appearance, but average
6,000 square feet and seat an average of 160 customers. The current
freestanding prototype is approximately 7,200 square feet and seats 200 patrons
for dining in addition to the bar area and a 30 to 40 seat seasonal patio area.
The prototype design is readily adaptable to a variety of sites including
shopping center and mall locations.
The Company has recently revised the prototype design to reduce its
costs. The first revised prototype will open during the second quarter of
1996. It will be approximately 500 square feet smaller but seat approximately
the same number of patrons. The patio area will be optional, depending on the
climate of the restaurant location and size of the site. The Company believes
the revised prototype will cost approximately $200,000 less to construct.
The Company believes that its focus on selecting high profile
restaurant sites is critical to its success. The Company's present site
selection strategy is to locate its restaurants in prime, high visibility, high
traffic suburban locations. Management believes that selection of high profile
sites along with the implementation of its prototype restaurant will result in
improved unit economics.
Item 3. LEGAL PROCEEDINGS
- ------- -----------------
The Company is a defendant in various legal proceedings regarded as
normal to its business, and in the opinion of management, the ultimate outcome
of such proceedings will not materially affect the Company's financial position
or the results of its operations.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
- ------- -------------------------------------------------
STOCKHOLDER MATTERS
-------------------
The information contained under the caption "SELECTED QUARTERLY
FINANCIAL DATA" is incorporated herein by reference to the inside back cover of
the Company's Annual Report to Shareholders for the fiscal year ended October
29, 1995.
Item 6. SELECTED FINANCIAL DATA
- ------- -----------------------
Information required under this Item is incorporated herein by
reference to the Company's Annual Report to Shareholders for the fiscal year
ended October 29, 1995, page 10.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------- -----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Information required under this Item is incorporated herein by
reference to the Company's Annual Report to Shareholders for the fiscal year
ended October 29, 1995, pages 11 through 13.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
The balance sheets as of October 29, 1995 and October 30, 1994 and the
related statements of income, stockholders' equity and cash flows for each of
the three years in the period ended October 29, 1995, and the related notes to
the financial statements together with the independent auditors' report thereon
and the Selected Quarterly Financial Data are incorporated by reference to the
Company's Annual Report to Shareholders for the fiscal year ended October 29,
1995, pages 14 through 24 and the inside back cover.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
- ------- ---------------------------------------------
ON ACCOUNTING AND FINANCIAL DISCLOSURES
---------------------------------------
None.
PART III
Items 10, 11, 12 and 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT: EXECUTIVE COMPENSATION: SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT: AND CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under these Items is incorporated herein by
reference to the Company's Proxy Statement for 1996 Annual Meeting of
Stockholders, pursuant to Regulation 14A.
-8-
<PAGE> 9
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.
(a)(1) and (2): Financial Statements
The financial statements listed in the accompanying index to
financial statements on page 11 are filed as part of this
report.
(a)(3) and (c): Exhibits
The exhibits listed in the accompanying index to exhibits on
pages 12 through 15 are filed as part of this report.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: January 16, 1996 Max & Erma's Restaurants, Inc.
By: *Todd B. Barnum
--------------------------
Todd B. Barnum
Chairman of the Board, Chief
Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated and on the dates indicated.
Signature Title
- --------- -----
Chairman of the Board, Chief
*Todd B. Barnum Executive Officer and President,
---------------------------- Director (Principal Executive
Todd B. Barnum Officer)
Chief Operating Officer,
*Mark F. Emerson Director
----------------------------
Mark F. Emerson
Executive Vice President and Chief
*William C. Niegsch, Jr. Financial Officer, Director
---------------------------- (Principal Financial Officer)
William C. Niegsch, Jr.
Vice President of Marketing,
*Karen A. Brennan Director
----------------------------
Karen A. Brennan
*William E. Arthur Director
----------------------------
William E. Arthur
*Donald W. Kelley Director
----------------------------
Donald W. Kelley
*Robert A. Rothman Director
----------------------------
Robert A. Rothman
*Roger D. Blackwell Director
----------------------------
Roger D. Blackwell
*Michael D. Murphy Director
----------------------------
Michael D. Murphy
*By William C. Niegsch, Jr.
------------------------
William C. Niegsch, Jr.
Attorney-in-Fact
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MAX & ERMA'S RESTAURANTS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
ITEMS 8, 14(a)(1)
REFERENCE PAGE
--------------
ANNUAL REPORT
TO
SHAREHOLDERS
--------------
The following items are required to be
included in Items 8 and 14(a)(1) and
are incorporated by reference from the
attached Annual Report to
Shareholders of Max & Erma's
Restaurants, Inc.
for the fiscal year ended October 29, 1995:
- -Balance Sheets as of
October 29, 1995 and October 30, 1994 14 - 15
- -For the years ended October 29, 1995,
October 30, 1994 and October 31, 1993
-Statements of Income 16
-Statements of Stockholders' Equity 17
-Statements of Cash Flows 18
- -Notes to Financial Statements 19 - 23
- -Independent Auditors' Report 24
- -No financial statement schedules are required
to be filed because the conditions requiring
their filing do not exist or because the
information is given in the financial statements
or notes thereto.
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<PAGE> 12
REPORT ON FORM 10-K
MAX & ERMA'S RESTAURANTS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description Page No.
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<S> <C> <C>
2 Plan and Agreement of Reorganization, Reference is made to Exhibit 2 of Report on Form 10-K
as amended October 15, 1991 filed January 24, 1992.
3(a) Restated Certificate of Incorporation, Reference is made to Exhibit 4(c) of Report on Form 10-Q
as amended April 4, 1985 filed June 26, 1985.
3(b) Restated By-Laws, as amended April 4, Reference is made to Exhibit 4(d) of Report on Form 10-Q
1985 filed June 26, 1985.
3(c) Certificate of Amendment of Reference is made to Exhibit 3(c) of Report on Form 10-K
Certificate of Incorporation September filed January 23, 1987.
22, 1986
3(d) Certificate of Amendment of Reference is made to Exhibit 3(d) of Report on Form
Certificate of Incorporation May 30, 10-K filed January 25, 1991.
1990
4(a) Form of Common Stock Certificate Reference is made to Exhibit 4(a) of Registration
Statement on Form S-1 (Registration No. 2-85585).
4(b) Form of Indenture dated as of August Reference is made to Exhibit 4(a) of Registration
18, 1994, between Max & Erma's Statement on Form S-2 (Registration No. 33-80090).
Restaurants, Inc. and The Huntington
National Bank, as Trustee
4(c) Form of Debenture Reference is made to Exhibit 4(b) of Registration
Statement on Form S-2 (Registration No. 33-80090).
10(a) Max & Erma's, Ltd. Agreement of Reference is made to Exhibit 10(b) of Registration
Limited Partnership, dated May 17, Statement on Form S-1 (Registration No. 2-85585).
1972
10(b) First Amendment to Agreement of Reference is made to Exhibit 10(b) of Registration
Limited Partnership of Max & Erma's, Statement on Form S-1 (Registration No. 2-85585).
Ltd., dated September 9, 1974
10(c) Max & Erma's Convention Center Ltd. Reference is made to Exhibit 10(k) of Registration
Agreement of Limited Partnership, Statement on Form S-1 (Registration No. 2-85585).
dated July 27, 1981
10(d) Letter Agreement between Nine Limited Reference is made to Exhibit 10(bb) of Registration
Leasing, Max & Erma's, Inc., and Max & Statement on Form S-1 (Registration No. 2-85585).
Erma's Indianapolis, Ltd., dated April
24, 1977
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
Exhibit
No. Description Page No.
------- ----------- --------
<S> <C> <C>
10(e) Letter Agreement between Nine Limited Reference is made to Exhibit 10(dd) of Registration
Leasing, Max & Erma's, Inc., and Max & Statement on Form S-1 (Registration No. 2-85585).
Erma's East, Ltd., dated May 27, 1977
10(f) Letter Agreement between Nine Limited Reference is made to Exhibit 10(ee) of Registration
Leasing, Max & Erma's, Inc., and Max & Statement on Form S-1 (Registration No. 2-85585).
Erma's Dayton, Ltd., dated October 1, 1977
10(g) Letter Agreement between Nine Limited Reference is made to Exhibit 10(ff) of Registration
Leasing, Max & Erma's, Inc., and Max & Statement on Form S-1 (Registration No. 2-85585).
Erma's Lexington, Ltd., dated
September 27, 1978
10(h) Letter Agreement between Nine Limited Reference is made to Exhibit 10(gg) of Registration
Leasing, Max & Erma's, Inc., and Max & Statement on Form S-1 (Registration No. 2-85585).
Erma's North, Ltd., dated December 28,
1981
10(i)* Employment Agreement with Todd Barnum, Reference is made to Exhibit 10(b) of Report on
dated December 12, 1984 Form 10-K filed January 25, 1985.
10(j)* Employment Agreement with Mark F. Reference is made to Exhibit 10(c) of Report on
Emerson, dated December 12, 1984 Form 10-K filed January 25, 1985.
10(k)* Employment Agreement with William C. Reference is made to Exhibit 10(d) of Report on
Niegsch, Jr., dated December 12, 1984 Form 10-K filed January 25, 1985.
10(l)* Third Amended and Restated 1984 Reference is made to Exhibit 10(n) of Report on
Incentive Stock Option Plan Form 10-K filed January 25, 1993.
10(m)* Third Amended and Restated 1984 Reference is made to Exhibit 10(o) of Report on
Non-Statutory Stock Option Plan Form 10-K filed January 25, 1993.
10(n)* Board of Directors' resolution dated Reference is made to Exhibit 10(p) of Report on
October 19, 1992 relating to amendment Form 10-K filed January 25, 1993.
to Third Amended and Restated 1984
Non-Statutory Stock Option Plan
10(o)* 1992 Stock Option Plan Reference is made to Exhibit 10(q) of Report on
Form 10-K filed January 25, 1993.
10(p)* 1996 Stock Option Plan
10(q)* Indemnification Agreement (form) Reference is made to Exhibit 10(y) of Report on
between Max & Erma's Restaurants, Inc. Form 10-K filed January 23, 1987
and each of its directors dated as of
June 18, 1986
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
Exhibit
No. Description Page No.
------- ----------- --------
<S> <C> <C>
10(r)* Loan Agreement with Karen Brennan, Reference is made to Exhibit 10(cc) of Report on
dated February 12, 1988 Form 10-K filed January 27, 1989.
10(s)* Promissory Note from Karen Brennan, Reference is made to Exhibit 10(ee) of Report on
dated February 12, 1988 Form 10-K filed January 27, 1989.
10(t)* Stock Pledge and Option Agreement with Reference is made to Exhibit 10(ff) of Report on
Karen Brennan, dated February 12, 1988 Form 10-K filed January 27, 1989.
10(u) Lease between Max & Erma's Dublin, Reference is made to Exhibit 10(ee) of Report on Form
Inc. and Mango Investments, dated 10-K filed January 26, 1990.
February 9, 1989
10(v)* Employment Agreement with Karen Reference is made to Exhibit 10(ff) of Report on Form
Brennan, dated June 20, 1989 10-K filed January 26, 1990.
10(w)* Board of Directors' Resolution adopted Reference is made to Exhibit 10(w) of Report on Form
October 29, 1993 relating to officers' 10-K filed January 27, 1994.
bonuses
10(x)* Board of Directors' Resolution adopted Reference is made to Exhibit 10(x) of Report on Form 10-
October 4, 1994 relating to officers' K filed January 23, 1995.
bonuses
10(y)* Board of Directors' Resolution adopted
October 23, 1995 relating to officers'
bonuses
10(z)* Written description of split dollar Reference is made to footnote 3 to the Summary
life insurance program for officers Compensation Table presented in the Company's Proxy
Statement for the 1996 Annual Meeting of Shareholders,
which is incorporated by reference herein.
10(aa)* Board of Directors' Resolution adopted Reference is made to Exhibit 10(dd) of Report on Form
November 2, 1987 relating to split 10-K filed January 25, 1993.
dollar life insurance program for
officers
10(bb)* Board of Directors' Resolution adopted Reference is made to Exhibit 10(ee) of Report on
October 19, 1992 relating to split Form 10-K filed January 25, 1993.
dollar life insurance program for
officers
10(cc) Revolving Credit Agreement dated Reference is made to Exhibit 10(aa) of Report on
October 25, 1993 between Max & Erma's Form 10-K filed January 27, 1994.
Restaurants, Inc. and The Provident Bank
10(dd) Letter Agreement dated July 20, 1994 Reference is made to Exhibit 10(ab) of
between Max & Erma's Restaurants, Inc. Registration Statement on Form S-2 (Registration
and The Provident Bank No. 33-80090).
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
Exhibit
No. Description Page No.
------- ----------- --------
<S> <C> <C>
10(ee) Second Amendment to Revolving Credit
Agreement dated August 25, 1995
between Max & Erma's Restaurants, Inc.
and The Provident Bank
10(ff) Mortgage Commitment Letter dated
November 7, 1995 between Max & Erma's
Restaurants, Inc. and MetLife Capital
Financial Corporation
13 Annual Report to Stockholders for the Except for those pages which are specifically
Fiscal Year ended October 29, 1995 incorporated by reference, the Company's Annual Report
to Stockholders is not to be deemed as filed as part of
this report.
23 Consents of Experts and Counsel
24 Power of Attorney
27 Financial Data Schedule
<FN>
- ---------------------------------
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Report on Form 10-K pursuant to Item 14(c) of
the Report on Form 10-K.
</TABLE>
15
<PAGE> 1
EXHIBIT 10(p)
MAX & ERMA'S RESTAURANTS, INC.
1996 STOCK OPTION PLAN
1. PURPOSE. This plan (the "Plan") is intended as an incentive and to
encourage stock ownership by certain key employees, officers and directors of,
and consultants and advisers who render services to, Max & Erma's Restaurants,
Inc., a Delaware corporation (the "Company"), and any current or future
subsidiaries or parent of the Company by the granting of stock options (the
"Options") as provided herein. By encouraging such stock ownership, the
Company seeks to attract, retain and motivate employees, officers, directors,
consultants and advisers of training, experience and ability. The Options
granted under the Plan may be either incentive stock options ("ISOs") which
meet the requirements of section 422 of the Internal Revenue Code of 1986, as
amended from time to time hereafter (the "Code"), or options which do not meet
such requirements ("Non-Statutory Options").
2. EFFECTIVE DATE. The Plan will become effective on December 12, 1995
(the "Effective Date").
3. ADMINISTRATION.
(a) The Plan will be administered by a committee (the "Committee")
appointed by the Board of Directors of the Company (the "Board") which consists
of not fewer than three members of the Board. If any class of equity
securities of the Company is registered under section 12 of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), all members of the Committee
will be "disinterested persons" as defined in Rule 16b-3(c)(2)(i) promulgated
under the 1934 Act (or any successor rule of like tenor and effect) and
"outside directors" as defined in section 162(m) of the Code and the
regulations promulgated thereunder and will not be eligible to receive any
options under this Plan except pursuant to paragraph 4(b) of the Plan.
(b) Subject to the provisions of the Plan, the Committee is
authorized to establish, amend and rescind such rules and regulations as it
deems appropriate for its conduct and for the proper administration of
the Plan, to make all determinations under and interpretations of, and to take
such actions in connection with the Plan or the Options granted thereunder as
it deems necessary or advisable. All actions taken by the Committee under the
Plan are final and binding on all persons. No member of the Committee is
liable for any action taken or determination made relating to the Plan, except
for willful misconduct.
(c) The Company will indemnify each member of the Committee against
costs, expenses and liabilities (other than amounts paid in settlements to
which the Company does not consent, which consent will not be unreasonably
withheld) reasonably incurred by such member in connection with any action to
which he or she may be a party by reason of service as a member of the
Committee, except in relation to matters as to which he or she is adjudged in
such action to be personally guilty of negligence or willful misconduct in the
performance of his or her duties. The
<PAGE> 2
foregoing right to indemnification is in addition to such other rights
as the Committee member may enjoy as a matter of law, by reason of insurance
coverage of any kind, or otherwise.
4. ELIGIBILITY.
(a) The Committee may grant Options and Tax Offset Payments, as
defined in paragraph 10, to such key employees of (or, in the case of
Non-Statutory Options only, to directors who are not employees of and to
consultants and advisers who render services to) the Company or its
subsidiaries or parent as the Committee may select from time to time (the
"Optionees"); provided, however, that if any class of equity securities of the
Company is registered under section 12 of the 1934 Act, any member of the Board
who is not an employee of the Company may not receive any Option or Tax Offset
Payment under the Plan except pursuant to paragraph 4(b) of the Plan. The
Committee may grant more than one Option to an individual under the Plan.
(b) If any class of equity securities of the Company is registered
under section 12 of the 1934 Act, on October 15 of each year, each member of
the Board who is not an employee of the Company, including members of the
Committee, will automatically receive under this Plan a Non-Statutory Option to
purchase 3,000 shares of the Company's common stock, $.10 par value, at an
exercise price equal to 100% of the fair market value of the shares on the date
of grant. Such Option will not be exercisable until a period of one year from
the date of grant and will terminate on the fifth anniversary of the date of
grant. This paragraph 4(b) may not be amended more than once every six months,
other than to comport with changes in the Code, the Employee Retirement Income
Security Act of 1974, as amended from time to time, or the rules thereunder.
(c) No ISO may be granted to an individual who, at the time an ISO is
granted, is considered under section 422(b)(6) of the Code as owning stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company or of its parent or any subsidiary corporation;
provided, however, this restriction will not apply if at the time such ISO is
granted the option price per share of such ISO is at least 110% of the fair
market value of such share, and such ISO by its terms is not exercisable after
the expiration of five years from the date it is granted. This paragraph 4(c)
has no application to Options granted under the Plan as Non-Statutory Options.
(d) The aggregate fair market value (determined as of the date the
ISO is granted) of shares with respect to which ISOs are exercisable for the
first time by any Optionee during any calendar year under the Plan or any other
incentive stock option plan of the Company or a parent or subsidiary of the
Company may not exceed $100,000. This paragraph 4(d) has no application to
Options granted under the Plan as Non-Statutory Options.
5. STOCK SUBJECT TO PLAN. The shares subject to Options under the Plan
are the shares of common stock, $.10 par value, of the Company (the "Shares").
The Shares issued pursuant to Options granted under the Plan may be authorized
and unissued Shares, Shares purchased on the open market or in a private
transaction, or Shares held as treasury stock. The aggregate number of
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<PAGE> 3
Shares for which Options may be granted under the Plan may not exceed
400,000, subject to adjustment in accordance with the terms of paragraph 13 of
the Plan. The maximum number of Shares for which Options may be granted under
the Plan during the term of the Plan to any one individual may not exceed
200,000 subject to adjustment in accordance with the terms of paragraph 13 of
the Plan. The unpurchased Shares subject to terminated or expired Options may
again be offered under the Plan. The Committee, in its sole discretion, may
permit the exercise of any Option as to full Shares or fractional Shares.
Proceeds from the sale of Shares under Options will be general funds of the
Company.
6. TERMS AND CONDITIONS OF OPTIONS.
(a) At the time of grant, the Committee will determine whether the
Options granted will be ISOs or Non-Statutory Options. All Options and Tax
Offset Payments granted will be authorized by the Committee and, within a
reasonable time after the date of grant, will be evidenced by stock option
agreements in writing ("Stock Option Agreements"), in the form attached hereto
as Exhibit A, or in such other form and containing such terms and conditions
not inconsistent with the provisions of this Plan as the Committee may
determine. Any action under paragraph 13 may be reflected in an amendment to,
or restatement of, such Stock Option Agreements.
(b) The Committee may grant Options and Tax Offset Payments having
terms and provisions which vary from those specified in the Plan if such
Options or Tax Offset Payments are granted in substitution for, or in
connection with the assumption of, existing options granted by another
corporation and assumed or otherwise agreed to be provided for by the Company
pursuant to or by reason of a transaction involving a corporate merger,
consolidation, acquisition of property or stock, separation, reorganization or
liquidation to which the Company is a party.
7. PRICE. The Committee will determine the option price per Share (the
"Option Price") of each Option granted under the Plan. Notwithstanding the
foregoing, the Option Price of each ISO granted under the Plan may not be less
than the fair market value of a Share on the date of grant of such Option. The
date of grant will be the date the Committee acts to grant the Option or such
later date as the Committee specifies and the fair market value will be
determined in accordance with paragraph 26(c) and without regard to any
restrictions other than a restriction which, by its terms, will never lapse.
8. OPTION PERIOD. The Committee will determine the period during which
each Option may be exercised (the "Option Period"); provided, however, any ISO
granted under the Plan will have an Option Period which does not exceed 10
years from the date of grant.
9. NONTRANSFERABILITY OF OPTIONS. An Option will not be transferable
by the Optionee otherwise than by will or the laws of descent and distribution
and may be exercised, during the lifetime of the Optionee, only by the Optionee
or by the Optionee's guardian or legal representative.
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<PAGE> 4
10. TAX OFFSET PAYMENTS. The Committee has the authority and
discretion under the Plan to make cash grants to Optionees to offset a portion
of the taxes which may become payable upon exercise of Non-Statutory Options or
on certain dispositions of Shares acquired under ISOs ("Tax Offset Payments").
In the case of Non-Statutory Options, such Tax Offset Payments will be in an
amount determined by multiplying a percentage established by the Committee by
the difference between the fair market value of a Share on the date of exercise
and the Option Price, and by the number of Shares as to which the Option is
being exercised. If the Tax Offset Payment is being made on account of the
disposition of Shares acquired under an ISO, such Tax Offset Payments will be
in an amount determined by multiplying a percentage established by the
Committee by the difference between the fair market value of a Share on the
date of disposition, if less than the fair market value on the date of
exercise, and the Option Price, and by the number of Shares acquired under an
ISO of which an Optionee is disposing. The percentage will be established,
from time to time, by the Committee at that rate which the Committee, in its
sole discretion, determines to be appropriate and in the best interest of the
Company to assist Optionees in the payment of taxes. The Company has the right
to withhold and pay over to any governmental entities (federal, state or local)
all amounts under a Tax Offset Payment for payment of any income or other taxes
incurred on exercise.
11. EXERCISE OF OPTIONS.
(a) The Committee, in its sole discretion, will determine the
terms and conditions of exercise and vesting percentages of Options
granted hereunder. Notwithstanding the foregoing or the terms and conditions of
any Stock Option Agreement to the contrary, (i) if the Optionee's employment is
terminated as a result of disability or death, his or her Options will be
exercisable to the extent and for the period specified in paragraph 12(b); (ii)
if the Optionee's employment is terminated other than as a result of disability
or death or for cause, his or her Options will be exercisable to the extent and
for the period specified in paragraph 12(a); (iii) if a merger or similar
reorganization or sale of substantially all of the Company's assets occurs, all
outstanding Options will be exercisable to the extent and for the period
specified in paragraph 13(b) or paragraph 13(c), whichever paragraph applies;
and (iv) if a change in control occurs, all outstanding Options will be
exercisable for the period specified in paragraph 13(d).
(b) An Option may be exercised only upon delivery of a written notice
to the Committee, any member of the Committee, or any officer of the Company
designated by the Committee to accept such notices on its behalf, specifying
the number of Shares for which it is exercised.
(c) Within five business days following the date of exercise of an
Option, the Optionee or other person exercising the Option will make full
payment of the Option Price in cash or, with the consent of the Committee, (i)
by tendering previously acquired Shares (valued at fair market value, as
determined by the Committee, as of such date of tender); (ii) with a full
recourse promissory note of the Optionee for the portion of the Option Price in
excess of the par value of Shares subject to the Option, under terms and
conditions determined by the Committee; (iii) any
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<PAGE> 5
combination of the foregoing; or (iv) if the Shares subject to the Option have
been registered under the Securities Act of 1933, as amended (the "1933 Act"),
and there is a regular public market for the Shares, by delivering to the
Company on the date of exercise of the Option written notice of exercise
together with:
(A) written instructions to forward a copy of such
notice of exercise to a broker or dealer, as defined in section
3(a)(4) and 3(a)(5) of the 1934 Act ("Broker"), designated in
such notice and to deliver to the specified account maintained
with the Broker by the person exercising the Option a
certificate for the Shares purchased upon the exercise of the
Option, and
(B) a copy of irrevocable instructions to the
Broker to deliver promptly to the Company a sum equal to the
purchase price of the Shares purchased upon exercise of the
Option and any other sums required to be paid to the Company
under paragraph 18 of the Plan.
(d) If Tax Offset Payments sufficient to allow for
withholding of taxes are not being made at the time of exercise of an Option,
the Optionee or other person exercising such Option will pay to the Company an
amount equal to the withholding amount required to be made less any amount
withheld by the Company under paragraph 18.
12. TERMINATION OF EMPLOYMENT.
(a) Upon termination of an Optionee's employment with the
Company, any parent or subsidiary of the Company, or any successor corporation
to either the Company or any parent or subsidiary of the Company, other than
(i) termination of employment by reason of death or disability, as defined in
paragraph 26(b), or (ii) termination of employment for cause, as defined in
paragraph 26(f), the Optionee will have 30 days after the date of termination
(but not later than the expiration date of the Stock Option Agreement) to
exercise all Options held by him or her to the extent the same were exercisable
on the date of termination; provided, however, if such termination is a result
of the Optionee's retirement with the consent of the Company and if the
Committee, in its sole discretion, so permits, such Option shall then be
exercisable to the extent of 100% of the Shares subject thereto. The Committee
will determine in each case whether a termination of employment is a retirement
with the consent of the Company and, subject to applicable law, whether a leave
of absence is a termination of employment. The Committee may cancel an Option
during the 30-day period after termination of employment referred to in this
paragraph if the Optionee engages in employment or activities contrary, in the
opinion of the Committee, to the best interests of the Company or any parent or
subsidiary of the Company.
(b) Upon termination of employment by reason of death or
disability, the Optionee's personal representative, or the person or persons to
whom his or her rights under the Options pass by will or the laws of descent or
distribution, will have one year after the date of such termination (but not
later than the expiration date of the Stock Option Agreement) to exercise all
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<PAGE> 6
Options held by Optionee to the extent the same were exercisable on the
date of termination; provided, however, the Committee, in its sole discretion,
may permit the exercise of all or any portion of any Option granted to such
Optionee not otherwise exercisable.
(c) Upon termination of employment for cause (as defined in
paragraph 26(f)), all Options held by such Optionee will terminate on the date
of termination.
13. REORGANIZATIONS.
(a) If a stock split, stock dividend, combination or
exchange of shares, exchange for other securities, reclassification,
reorganization, redesignation or other change in the Company's capitalization
occurs, the Committee will proportionately adjust or substitute the aggregate
number of Shares for which Options may be granted under this Plan, the number
of Shares subject to outstanding Options and the Option Price of the Shares
subject to outstanding Options to reflect the same. The Committee will make
such other adjustments to the Options, the provisions of the Plan and the Stock
Option Agreements as may be appropriate and equitable, which adjustments may
provide for the elimination of fractional Shares.
(b) In the event of a change of the Company's common
stock, $.10 par value, resulting from a merger or similar reorganization as to
which the Company is the surviving corporation, or a merger or similar
reorganization involving only a change in the state of incorporation or an
internal reorganization not involving a change in control as defined in
paragraph 26(a), the number and kind of Shares which thereafter may be
purchased pursuant to an Option under the Plan and the number and kind of
Shares then subject to Options granted hereunder and the price per Share
thereof will be appropriately adjusted in such manner as the Board may deem
equitable to prevent dilution or enlargement of the rights available or granted
hereunder.
(c) Except as otherwise determined by the Board, a merger
or a similar reorganization which the Company does not survive (other than a
merger or similar reorganization involving only a change in the state of
incorporation or an internal reorganization not involving a change in control
as defined in paragraph 26(a)), or a sale of all or substantially all of the
assets of the Company, will cause every Option hereunder to terminate, to the
extent not then exercised, unless any surviving entity agrees to assume the
obligations hereunder on terms reasonably acceptable to the Board; provided,
however, that, in the case of such a merger or similar reorganization, or such
a sale of all or substantially all of the assets of the Company, if there is no
such assumption, the Board, in its sole discretion, may provide that some or
all of the unexercised portion of any one or more of the outstanding Options
will be immediately exercisable and vested as of such date prior to such
merger, similar reorganization or sale of assets as the Board determines. If
the Board makes an Option fully exercisable under this paragraph 13(c), the
Board will notify the Optionee that the Option will be fully exercisable for a
period of thirty (30) days from the date of such notice, and the Option will
terminate upon the expiration of such period.
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<PAGE> 7
(d) If a change in control (as defined in paragraph 26(a))
occurs, all outstanding Options granted under this Plan will become immediately
exercisable to the extent of 100% of the Shares subject thereto notwithstanding
any contrary waiting or vesting periods specified in this Plan or in any
applicable Stock Option Agreement.
14. SALE OF OPTION SHARES. If any class of equity securities of the
Company is registered pursuant to section 12 of the 1934 Act, any Optionee or
other person exercising the Option who is subject to section 16 of the 1934 Act
by virtue of his or her relationship to the Company shall not sell or otherwise
dispose of the Shares subject to Option unless at least six months have elapsed
from the date of the grant of the Option.
15. RIGHTS AS SHAREHOLDER. The Optionee has no rights as a
shareholder with respect to any Shares covered by an Option until the date of
issuance of a stock certificate to the Optionee for such Shares.
16. NO CONTRACT OF EMPLOYMENT. Nothing in the Plan or in any Option
or Stock Option Agreement confers on any Optionee any right to continue in the
employment or service of the Company or any parent or subsidiary of the Company
or interfere with the right of the Company to terminate such Optionee's
employment or other services at any time. The establishment of the Plan will
in no way, now or hereafter, reduce, enlarge or modify the employment
relationship between the Company or any parent or subsidiary of the Company and
the Optionee. Options granted under the Plan will not be affected by any
change of duties or position as long as the Optionee continues to be employed
by the Company or any parent or subsidiary of the Company.
17. AGREEMENTS AND REPRESENTATIONS OF OPTIONEES. As a condition to
the exercise of an Option, the Committee, in its sole determination, may
require the Optionee to represent in writing that the Shares being purchased
are being purchased only for investment and without any present intent at the
time of the acquisition of such Shares to sell or otherwise dispose of the
same.
18. WITHHOLDING TAXES. The Company or any parent or subsidiary of
the Company has the right (a) to withhold from any salary, wages, or other
compensation for services payable by the Company or any parent or subsidiary of
the Company to or with respect to an Optionee, or to demand payment from the
Optionee or other person to whom the Company is delivering certificates for
Shares purchased upon exercise of an Option of, amounts sufficient to satisfy
any federal, state or local withholding tax liability attributable to such
Optionee's (or any beneficiary's or personal representative's) receipt or
disposition of Shares purchased under any Option or (b) to take any such other
action as it deems necessary to enable it to satisfy any such tax withholding
obligations. The Committee, in its sole discretion, may permit an Optionee to
elect to have Shares that would be acquired upon exercise of Options (valued at
fair market value as of the date of exercise) withheld by the Company in
satisfaction of such Optionee's withholding tax liabilities.
19. EXCHANGES. The Committee may permit the voluntary surrender of
all or a portion of any Option granted under the Plan to be conditioned upon
the granting to the Optionee of a new
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<PAGE> 8
Option for the same or a different number of Shares as the Option surrendered,
or may require such voluntary surrender as a condition precedent to a grant of
a new Option to such Optionee. Subject to the provisions of the Plan, such new
Option will be exercisable at the then fair market value of the Shares, during
such period and on such other terms and conditions as are specified by the
Committee at the time the new Option is granted. Upon surrender, the Options
surrendered will be cancelled, and the Shares previously subject to them will
be available for the grant of other Options. The Committee also may grant Tax
Offset Payments to any Optionee surrendering such Option for a new Option.
20. COMPLIANCE WITH LAWS AND REGULATIONS. The Plan, the grant and
exercise of Options thereunder, and the obligation of the Company to sell and
deliver the Shares under such Options, will be subject to all applicable
federal and state laws, rules and regulations and to such approvals by any
government or regulatory agency as may be required. Options issued under this
Plan are not exercisable prior to (i) the date upon which the Company has
registered the Shares for which Options may be issued under the 1933 Act and
the completion of any registration or qualification of such Shares under state
law, or any ruling or regulation of any government body which the Company, in
its sole discretion, determines to be necessary or advisable in connection
therewith, or (ii) receipt by the Company of an opinion from counsel to the
Company stating that the exercise of such Options may be effected without
registering the Shares subject to such Options under the 1933 Act or under
state or other law.
21. ASSUMPTION. The Plan may be assumed by the successors and
assigns of the Company.
22. EXPENSES. The Company will bear all expenses and costs in
connection with administration of the Plan.
23. AMENDMENT, MODIFICATION AND TERMINATION OF THE PLAN. The Board
may terminate, amend or modify the Plan at any time without further action on
the part of the shareholders of the Company; provided, however, that (a) no
amendment to the Plan may cause the ISOs granted hereunder to fail to qualify
as incentive stock options under the Code; and (b) any amendment to the Plan
which requires the approval of the shareholders of the Company under the Code,
the regulations promulgated thereunder or the rules promulgated under section
16 of the 1934 Act will be subject to approval by the shareholders of the
Company in accordance with the Code, such regulations or such rules. No
amendment, modification or termination of the Plan may adversely affect in any
manner any Option previously granted to an Optionee under the Plan without the
consent of the Optionee or the transferee of such Option.
24. TERM OF PLAN. The Plan will become effective on the Effective
Date, subject to the approval of the Plan by the holders of a majority of the
shares of stock of the Company entitled to vote within twelve months of the
date of the Plan's adoption by the Board, and the exercise of all Options
granted prior to such approval will be subject to such approval. The Plan will
terminate on the tenth anniversary of the Effective Date, or such earlier date
as may be determined by the
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<PAGE> 9
Board. Termination of the Plan, however, will not affect the rights of
Optionees under Options previously granted to them, and all unexpired Options
will continue in force and operation after termination of the Plan except as
they may lapse or terminate by their own terms and conditions.
25. LIMITATION OF LIABILITY. The liability of the Company under
this Plan or in connection with any exercise of an Option is limited to the
obligations expressly set forth in the Plan and in any Stock Option Agreements,
and no term or provision of this Plan or of any Stock Option Agreements will be
construed to impose any further or additional duties, obligations or costs on
the Company not expressly set forth in the Plan or the Stock Option Agreements.
26. DEFINITIONS.
(a) CHANGE IN CONTROL. A "change in control" will be
deemed to have occurred if and when (i) a person, partnership, corporation,
trust or other entity ("Person") acquires or combines with the Company, or 50
percent or more of its assets or earning power, in one or more transactions,
and after such acquisition or combination, less than a majority of the
outstanding voting shares of the Person surviving such transaction (or the
ultimate parent of the surviving Person) is owned by the owners of the voting
shares of the Company outstanding immediately prior to such acquisition or
combination; or (ii) during any period of two consecutive years during the term
of this Plan, individuals who at the beginning of such period are members of
the Board ("Original Board Members") cease for any reason to constitute at
least a majority of the Board, unless the election of each Board member who was
not an Original Board Member has been approved in advance by Board members
representing at least two-thirds of the Board members then in office who were
Original Board Members.
(b) DISABILITY. The term "disability" means a physical or
mental condition resulting from bodily injury, disease, or mental disorder
which renders the Optionee incapable of continuing the Optionee's usual and
customary employment or service with the Company or any parent or subsidiary of
the Company.
(c) FAIR MARKET VALUE. If the Shares are publicly traded,
the term "fair market value" as used in this Plan means (i) the closing price
quoted in the Nasdaq National Market, if the Shares are so quoted, (ii) the
last quote reported by Nasdaq for small-cap issues, if the Shares are so
quoted, (iii) the mean between the bid and asked prices as reported by Nasdaq,
if the Shares are so quoted, or (iv) if the Shares are listed on a securities
exchange, the closing price at which the Shares are quoted on such exchange, in
each case at the close of the date immediately before the Option is granted or,
if there be no quotation or sale on that date, the next preceding date on which
the Shares were quoted or traded. In all other cases, the fair market value
will be determined in accordance with procedures established in good faith by
the Committee and with respect to ISOs, conforming to regulations issued by the
Internal Revenue Service regarding incentive stock options.
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<PAGE> 10
(d) KEY EMPLOYEES. The term "key employees" means those
executive, administrative, operational and managerial employees who are
determined by the Committee to be eligible for Options under the Plan.
(e) PARENT AND SUBSIDIARY. The terms "subsidiary" and
"parent" as used in the Plan have the respective meanings set forth in sections
424(f) and (e) of the Code.
(f) TERMINATION FOR CAUSE. The term "termination of
employment for cause" means termination of employment for (a) the commission of
an act of dishonesty, including but not limited to misappropriation of funds or
property of the Company; (b) the engagement in activities or conduct injurious
to the reputation of the Company; (c) the conviction or entry of a guilty or no
contest plea to a misdemeanor (involving an act of moral turpitude) or a
felony; (d) the violation of any of the terms and conditions of any written
agreement the Optionee may have with the Company or its parent or subsidiary
(following 30 days' written notice from the Company specifying the violation
and the employee's failure to cure such violation within such 30-day period) or
(e) any refusal to comply with the written directives, policies or regulations
established from time to time by the Board.
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[ISO /or/ NSO] No. 96-
------
EXHIBIT A
MAX & ERMA'S RESTAURANTS, INC.
[INCENTIVE /OR/ NONSTATUTORY]
STOCK OPTION AGREEMENT
UNDER THE
1996 STOCK OPTION PLAN
Max & Erma's Restaurants, Inc. (the "Company") hereby grants, effective
this ____ day of _____________________________________, 19___ (the "Effective
Date") to __________________________________ (the "Optionee") an option to
purchase _________ shares of its common stock, $.10 par value (the "Option
Shares"), at a price of ______________________Dollars ($__________) per share
pursuant to the Company's 1996 Stock Option Plan (the "Plan"), subject to the
following:
1. RELATIONSHIP TO THE PLAN. This option is granted pursuant to
the Plan, and is in all respects subject to the terms, provisions and
definitions of the Plan and any amendments thereto. The Optionee acknowledges
receipt of a copy of the Plan and represents that he or she is familiar with
the terms and conditions thereof. The Optionee accepts this option subject to
all the terms and provisions of the Plan (including without limitation
provisions relating to nontransferability, exercise of the option, sale of the
option shares, termination of the option, adjustment of the number of shares
subject to the option, and the exercise price of the option). The Optionee
further agrees that all decisions and interpretations made by the Compensation
Committee (the "Committee"), as established under the Plan, and as from time to
time constituted, are final, binding, and conclusive upon the Optionee and his
or her heirs. This option [IS/IS NOT] an Incentive Stock Option under the
Plan.
2. TIME OF EXERCISE. This option may be exercised, from time to
time, in full or in part, by the Optionee to the extent the option is vested
based upon the number of full years the Optionee is an employee of the Company
after the Effective Date (the "Vested Percentage") and remains exercisable
(subject to the provisions herein and the Plan) until it has been exercised as
to all of the Option Shares or the _____ anniversary of the Effective Date,
whichever occurs first. The Optionee is entitled to exercise this option to
the extent of the percentage of, and not to exceed in the aggregate, the
maximum number of the Option Shares, based upon the Vested Percentage, from
time to time, as determined in accordance with the following schedule:
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<PAGE> 12
Years of Employment Total
After the Effective Date Vested Percentage
------------------------ -----------------
Notwithstanding the foregoing, this option may not be exercised unless (i) the
Option Shares are registered under the Securities Act of 1933, as amended, and
are registered or qualified under applicable state securities or "blue sky"
laws, or (ii) the Company has received an opinion of counsel to the Company to
the effect that the option may be exercised and Option Shares may be issued by
the Company pursuant thereto without such registration or qualification. If
this option is not otherwise exercisable by reason of the foregoing sentence,
the Company will take reasonable steps to comply with applicable state and
federal securities laws in connection with such issuance.
3. METHODS OF EXERCISE. This option is exercisable by delivery to
the Company of written notice of exercise which specifies the number of shares
to be purchased and the election of the method of payment therefor, which will
be one of the methods of payment specified in paragraph 11(c) of the Plan. If
payment is otherwise than payment in full in cash, the method of payment is
subject to the consent of the Committee. Upon receipt of payment for the
shares to be purchased pursuant to the option or, if applicable, the shares to
be delivered pursuant to the election of an alternative payment method, the
Company will deliver or cause to be delivered to the Optionee, to any other
person exercising this option, or to a broker or dealer if the method of
payment specified in clause (iii) of paragraph 11(c) of the Plan is elected, a
certificate or certificates for the number of shares with respect to which this
option is being exercised, registered in the name of the Optionee or other
person exercising the option, or if appropriate, in the name of such broker or
dealer; provided, however, that if any law or regulation or order of the
Securities and Exchange Commission or other body having jurisdiction over the
exercise of this option will require the Company or Optionee (or other person
exercising this option) to take any action in connection with the shares then
being purchased, the delivery of the certificate or certificates for such
shares may be delayed for the period necessary to take and complete such
action.
4. ACQUISITION FOR INVESTMENT. This option is granted on the
condition that the acquisition of the Option Shares hereunder will be for the
account of the Optionee (or other person exercising this option) for investment
purposes and not with a view to resale or distribution, except that such
condition will be inoperative if the Option Shares are registered under the
Securities Act of 1933, as amended, or if in the opinion of counsel for the
Company such shares may be resold without registration. At the time of any
exercise of the option, the Optionee (or other person exercising this option)
will execute such further agreements as the Company may require to implement
the foregoing condition and to acknowledge the Optionee's (or such other
-A2-
<PAGE> 13
person's) familiarity with restrictions on the resale of the Option Shares
under applicable securities laws.
5. DISPOSITION OF SHARES. The Optionee or any other person who may
exercise this option will notify the Company within seven (7) days of any sale
or other transfer of any Option Shares. If any class of equity securities of
the Company is registered pursuant to section 12 of the Securities Exchange Act
of 1934, as amended, and the Optionee or any other person who may exercise this
option is subject to section 16 of that Act by virtue of such Optionee's or
person's relationship to the Company, the Optionee or other person exercising
this Option agrees not to sell or otherwise dispose of any Option Shares unless
at least six (6) months have elapsed from the Effective Date.
6. WITHHOLDING. As a condition to the issuance of any of the Option
Shares under this option, Optionee or any person who may exercise this option
authorizes the Company to withhold in accordance with applicable law from any
salary, wages or other compensation for services payable by the Company to or
with respect to Optionee any and all taxes required to be withheld by the
Company under federal, state or local law as a result of such Optionee's or
such person's receipt or disposition of Option Shares purchased under this
option. If, for any reason, the Company is unable to withhold all or any
portion of the amount required to be withheld, Optionee (or any person who may
exercise this option) agrees to pay to the Company upon exercise of this option
an amount equal to the withholding required to be made less the amount actually
withheld by the Company.
7. GENERAL. This Agreement will be construed as a contract
under the laws of the State of Ohio without reference to Ohio's choice of law
rules. It may be executed in several counterparts, all of which will
constitute one Agreement. It will bind and, subject to the terms of the Plan,
benefit the parties and their respective successors, assigns, and legal
representatives.
IN WITNESS WHEREOF, the Company and the Optionee have executed this
Agreement as of the date first above written.
OPTIONEE: MAX & ERMA'S RESTAURANTS, INC.
By:
- ------------------------------- -------------------------------
Its:
-------------------------------
-A3-
<PAGE> 1
EXHIBIT 10(y)
RESOLVED, that a cash bonus pool be established for the Company's four senior
officers for Fiscal 1996 calculated in the aggregate as follows:
1% of pre-tax earnings up to $1,032,000;
5% of pre-tax earnings between $1,032,001 and $2,064,000;
10% of pre-tax earnings between $2,064,001 and $3,095,000;
25% of pre-tax earnings over $3,095,000.
FURTHER RESOLVED, that the cash bonus pool be allocated and paid 40% to Mr.
Barnum and 20% to each of Mr. Emerson, Mr. Niegsch, and Ms. Brennan.
FURTHER RESOLVED, that the cash bonus pool be paid quarterly based on
estimates and adjusted for the annual amount at the fiscal year-end;
FURTHER RESOLVED, that the Company's officers attempt through estimates of
annual earnings to spread the quarterly bonus evenly throughout the four
quarters; and
FURTHER RESOLVED, that the cash bonus pool be capped at a total of $563,750,
which is 125% of the aggregate base salaries of $451,000.
<PAGE> 1
EXHIBIT 10(ee)
SECOND AMENDMENT TO
REVOLVING CREDIT AGREEMENT
This Second Amendment to the Revolving Credit Agreement, dated as of August 25,
1995 is made by and between The Provident Bank (the "Bank"), an Ohio banking
corporation, doing business at One East Fourth Street, Cincinnati, Ohio 45202,
and Max & Erma's Restaurants, Inc. (the "Borrower"), a Delaware corporation,
doing business at 4849 Evanswood Drive, Columbus, Ohio, 43229.
W I T N E S S E T H
WHEREAS, the parties hereto have previously entered into that certain Revolving
Credit Agreement dated as of October 25, 1993, as first amended on January 17,
1994, (hereinafter the "RCA"), whereby the Bank made certain loans to Borrower;
WHEREAS, the parties wish to further amend the RCA to provide for changes in
covenants and certain other provisions;
NOW, THEREFORE, in consideration of the premises and the mutual promises
contained herein, the parties hereto agree as follows:
1. The date in the last line of Section 1.1 (a) shall be amended to read
"January 1, 2003".
2. The second sentence of Section 1.1 (b) shall be deleted and the following
inserted in its place:
The initial Baseline Commitment of the Bank is $15,000,000 which Baseline
Commitment shall decreased by $750,000 every three months, with the first
decrease to occur on January 1, 1998.
3. A new Section 1.4 shall be inserted to read as follows:
1.4 AMENDMENT FEE. The Company agrees to pay to the Bank a $7,500.00 fee in
consideration of entering into the amendments set forth herein.
4. Section 1.4 (b) shall be deleted in its entirety and a new Section 1.4 (b)
inserted in its place:
(b) INTEREST. Each Loan shall bear interest on the unpaid principal
balance of all Loans made by the Bank for each day from the day such Loan is
made until it becomes due, at a fluctuating rate per annum which rate will be
immediately adjusted upon the execution of this Amendment. Thereafter such rate
will be adjusted based upon the Borrower's submission of financial information
pursuant to Section 5.2 herein beginning with the quarter ending in November,
1995. The interest rate adjustment will be effective the first Monday
following receipt by the Bank of the Quarterly Compliance Certificate pursuant
to Section 5.4 (c) herein. The interest rate will be established from the
following schedule based upon the Borrower's ratio of Unsubordinated
Indebtedness to the sum of Tangible Net Worth plus Subordinated Debt as of the
date of such fiscal quarter end:
<PAGE> 2
<TABLE>
<CAPTION>
Ratio at quarter end Rate for following quarter
-------------------- --------------------------
<S> <C>
Less than .75:1.0 One quarter (1/4%) above the Prime Rate.
.751 through 1.0:1.0 One half (1/2%) above the Prime Rate.
Greater than 1.0:1.0 Three quarters (3/4%) above the Prime Rate.
</TABLE>
Interest on all Loans shall be calculated on the basis of the actual number of
days elapsed over a year of 360 days. As used in this Agreement, the term
"Prime Rate" on any day shall mean the rate published or announced by the Bank
as its "Prime Rate" which rate may not be the Bank's lowest rate. Any change
in the interest rate on a Loan due to a change in the Prime Rate shall take
effect on the date of such change in the Prime Rate. Interest on the Loans
shall be payable quarterly on the last day of each December, March, June and
September, commencing on the first such date following the initial Loan. To
the extent permitted by applicable law, the Bank may charge interest at the
foregoing rates on all interest and other amounts owing hereunder which are not
paid when due.
5. A new Section 5.4 (c) shall be added which will read as follows:
(c) INTEREST RATE. Setting forth, in summary form, calculations showing the
ratio set forth in Section 1.4 (b).
6. A new Section 6.1 (a) (viii) will be added which shall read as follows:
(viii) Liens encumbering not more than five restaurant locations which shall
secure Indebtedness of the Company as provided for in Section 6.1 (b) (iv).
7. A new Section 6.1 (b) (iv) will be added which shall read as follows:
(iv) Indebtedness incurred; the terms of which are essentially as outlined
in that certain proposal for permanent financing submitted to the Borrower on
August 8, 1995 by MetLife Capital Corporation, a copy of which was provided
the Bank.
IN WITNESS WHEREOF, the parties have executed this Second Amendment to the
Revolving Credit Agreement as of the date first set forth above.
MAX & ERMA'S RESTAURANTS, INC. THE PROVIDENT BANK
By: /s/ William C. Niegsch, Jr. By: /s/ Michael G. Giuholi
------------------------------ ------------------------------
William C. Niegsch, Jr. Michael G. Giuholi
Executive Vice President Regional Vice President
-2-
<PAGE> 1
Exhibit 10(ff)
[MetLife Capital Financial Corporation Letterhead]
November 7, 1995
William C. Niegsch, Jr.
Chief Financial Officer
MAX & ERMA'S RESTAURANTS, INC.
4849 Evanswood Drive
Columbus, Ohio 43229
Dear Mr. Niegsch:
MetLife Capital Financial Corporation or its assigns ("METLIFE") is pleased to
inform you that your request for mortgage financing has been approved subject
to the usual terms, conditions, and remedies contained in METLIFE's customary
loan documents (subject to the BORROWER'S approval, as hereafter provided) and
subject to the following terms and conditions:
BORROWER. Max & Erma's Restaurants, Inc., a Delaware corporation
PROPERTY AND IMPROVEMENTS. The loan will be secured by a first deed of trust
or mortgage on Property and Improvements consisting of: (1) a 9,000 square foot
restaurant building; (2) a 7,300 square foot restaurant building; (3) a 7,300
square foot restaurant building; and (4) a 7,300 square foot restaurant
building ("Improvements"), located on a: (1) 66,200 square foot (1.52 acre);
(2) 102,000 square foot (2.34 acre); (3) 78,800 square foot (1.81 acre); and
(4) 65,800 square foot (1.51 acre) site commonly referred to as (1) 1904 Lake
Club Drive, Columbus, Ohio; (2) 6930 Miller Lane, Dayton, Ohio; (3) 2475
Higgins Road, Hoffman Estates, Illinois; and (4) 447 N. Milwaukee Avenue,
Vernon Hills, Illinois, including any easements or rights of way serving the
land (collectively, the "Property"). BORROWER shall furnish METLIFE with the
exact legal description of the Property.
BORROWER may make a one-time request that METLIFE approve a substitution of one
or more of the Properties and Improvements secured by a first deed of trust or
mortgage, for property and improvements acceptable to METLIFE and of equal or
greater value. BORROWER will provide all necessary documentation as reasonably
requested by METLIFE, and all fees and expenses shall be for the account of the
BORROWER.
LOAN AMOUNT. $6,000,000.00; 90% of the purchase price or cost to construct
(which cost specifically includes the purchase price of the real estate as
above provided but excludes developer's overhead and any leasing fees not paid
to independent third parties); 75% of appraised value (which appraisal shall be
subject to METLIFE's approval as outlined further herein); or the amount
obtained when using the monthly market rents per appraisal (as described below)
less a 3% vacancy factor divided by a 1.10 debt service coverage ratio with
that product divided by the actual mortgage constant; whichever is less.
<PAGE> 2
LOAN FEE. $500.00 to be paid at loan closing.
NONUTILIZATION FEE. In the event the BORROWER exercises the option to fix the
interest rate prior to the closing of the loan and subsequently fails to borrow
substantially all of the Loan Amount as reasonably determined by METLIFE, and
for any reason other than METLIFE's failure or refusal to close and fund the
loan, then BORROWER shall pay METLIFE a nonutilization fee. The nonutilization
fee will equal 7.3% of the Loan Amount for every 1% (or pro rata fraction of
1%) decrease in the weekly average yield of 10-Year U.S. Treasury Notes from
the Friday immediately preceding the date that the option to fix the interest
rate was exercised to the Friday immediately preceding the earlier of (a) the
date METLIFE cancels this commitment pursuant to the terms hereof, and (b) the
Expiration Date Of Commitment set forth below, as extended if applicable. The
nonutilization fee is in addition to and not in substitution for any claim
METLIFE may have against the Deposit or any other fee paid by BORROWER.
INTEREST RATE. 8.39% per annum.
INTEREST RATE AND PAYMENT ADJUSTMENTS. The Interest Rate expressed above will
be increased or decreased by the amount of the increase or decrease (expressed
in basis points) in the current weekly average yield of 10-Year U.S. Treasury
Notes as published in Federal Reserve Statistical Release H.15 (519) from the
Friday immediately preceding the date of this commitment letter to the Friday
immediately preceding the date the loan is funded; provided that in no event
shall the Interest Rate exceed the highest lawful rate of interest. The
current weekly average yield of the U.S. Treasury Notes referred to in this
paragraph, as of the Friday immediately preceding the date of this commitment
letter, is 6.04%.
BORROWER will have the option, to be exercised only once, upon written notice
to METLIFE at 10900 N.E. 8th Street, Suite 1300, Bellevue, WA 98004, Attn:
Real Estate Department, and subject to payment of a fee to be quoted by METLIFE
at the time of this notification, to request that METLIFE fix the Interest Rate
in accordance with the formula described above. Ten (10) business days after
METLIFE's receipt of such written notice, METLIFE shall fix the Interest Rate
based on the weekly average yield of 10-Year U.S. Treasury Notes in effect as
of the immediately preceding Friday. If BORROWER does not request that the
Interest Rate be fixed prior to loan closing, then the Interest Rate shall be
fixed at loan closing based on the weekly average yield of 10-Year U.S.
Treasury Notes in effect as of the immediately preceding Friday. BORROWER will
be furnished with the adjusted payment amount reflecting the fixed Interest
Rate.
PAYMENT SCHEDULE. Interest only shall be paid in advance for the month in
which loan closing occurs followed by 179 principal and interest payments due
and payable, in arrears, commencing on the first day of the second month
following the date of loan closing and every succeeding month thereafter, with
all unpaid principal and interest due on the 180th installment date.
Amortization of the loan will be based on a 15-year schedule.
-2-
<PAGE> 3
PAYMENT PROVISIONS. Payments shall be due on the first day of each month
except that if the loan is closed on any day after the first day of the month,
BORROWER will pay at loan closing the interest for the balance of the month.
Interest shall be computed on the basis of a 360-day year composed of twelve
30-day months.
PREPAYMENT PROVISIONS. Upon not less than thirty (30) days advance written
notice to METLIFE at any time after the fourth (4th) anniversary of the due
date of the first monthly principal and interest payment due under the
promissory note, and upon payment of a prepayment premium, BORROWER shall have
the right to prepay all, but not less than all, of the outstanding balance of
the loan on any regularly scheduled principal and interest payment date. The
prepayment premium shall be determined by (i) calculating the decrease
(expressed in basis points) in the current weekly average yield of 10-Year U.S.
Treasury Notes as published in Federal Reserve Statistical Release H.15 (519)
("Index"), from the Friday immediately preceding the date the interest rate is
fixed per the terms of this commitment letter to the Friday immediately
preceding the week in which the prepayment is made, (ii) dividing the decrease
by 100, (iii) multiplying the result by the following described applicable
"Premium Factor", and (iv) multiplying the product by the principal balance to
be prepaid. If the Index is unchanged or has increased from the Friday
immediately preceding the date of the proposal letter to the Friday immediately
preceding the prepayment date, no prepayment premium shall be due. The Premium
Factor shall be the amount shown on the following chart for the month in which
prepayment occurs:
<TABLE>
<CAPTION>
Number of Months
Remaining (Years) Premium Factor
--------- ------- --------------
<S> <C> <C>
180 - 169 (15) .073
168 - 157 (14) .069
156 - 145 (13) .064
144 - 133 (12) .059
132 - 121 (11) .054
120 - 109 (10) .049
108 - 97 (9) .044
96 - 85 (8) .039
84 - 73 (7) .035
72 - 61 (6) .030
60 - 49 (5) .025
48 - 37 (4) .020
36 - 25 (3) .015
24 - 13 (2) .010
12 - 1 (1) .005
</TABLE>
If the Federal Reserve Board ceases to publish Statistical Release H.15 (519),
then the decrease in the weekly average yield of 10-Year U.S. Treasury Notes
will be determined from another source designated by METLIFE.
- 3 -
<PAGE> 4
Prepayment prior to the fourth (4th) anniversary of the due date of the first
monthly principal and interest payment due under the promissory note will not
be permitted. METLIFE may elect to accelerate the loan at any time after
BORROWER's default, after applicable notice and the expiration of applicable
cure period, in which event BORROWER shall, subject to the terms of the
promissory note, be obligated to pay a prepayment premium equal to the amount
determined in accordance with the foregoing schedule unless METLIFE thereafter
agrees to decelerate the loan maturity. No prepayment premium shall be payable
with respect to condemnation awards or insurance proceeds from fire or other
casualty which METLIFE applies to prepayment, nor with respect to BORROWER's
prepayment of the loan in full during the last three (3) months of its term
unless an event of default has occurred, after applicable notice and the
expiration of applicable cure period. BORROWER expressly acknowledges that
METLIFE's damages in the event of any prepayment by BORROWER are difficult to
ascertain, and that such prepayment premium is not a penalty but is intended
solely to compensate METLIFE for the loss of its bargain and the reimbursement
of internal expenses and administrative fees and expenses incurred by METLIFE.
Notwithstanding the above, in the event of a sale or merger of the BORROWER,
upon not less than thirty (30) days advance written notice to METLIFE and upon
payment of a prepayment premium described above and an early prepayment fee
described below, BORROWER shall have the right to prepay all, but not less than
all, of the outstanding balance of the loan on any regularly scheduled
principal and interest payment date prior to the fourth (4th) anniversary of
the due date of the first monthly principal and interest payment due under the
promissory note. The early prepayment fee shall be determined by multiplying
the loan balance at the original date of funding by the following described
applicable "Fee Factor". The Fee Factor shall be the amount shown on the
following chart for the month in which the early prepayment occurs:
<TABLE>
<CAPTION>
Number of Months
Remaining (Years) Fee Factor
--------- ------ ----------
<S> <C> <C>
180 - 169 (15) .02
168 - 157 (14) .02
156 - 145 (13) .01
144 - 133 (12) .01
</TABLE>
RECOURSE. METLIFE shall have full recourse to the BORROWER for any failure to
make payments as and when due on the promissory note and for the breach of any
of the representations, warranties, indemnities and covenants contained in the
loan documents.
DEFAULT RIGHTS. In the event of default, after applicable notice and the
expiration of applicable cure period, and at METLIFE's sole option at any time
thereafter, unless and until such default is cured, BORROWER shall pay in
addition to each monthly payment on the loan one-twelfth of the annual real
estate taxes, assessments, insurance premiums, water and sewer rates, and other
charges (and ground rents if applicable) payable with respect to the Property
and Improvements (as reasonably estimated by METLIFE based on the cost of such
charges in immediately preceding
- 4 -
<PAGE> 5
years), to be held by METLIFE without interest to BORROWER, for the
payment of such obligations.
METLIFE shall be entitled to collect a late charge of five percent (5.00%) of
any payment not paid by the tenth (10th) day of the month in which it is due,
or the highest late charge permitted by law, whichever is less.
Upon the occurrence of any of the events of default outlined in the loan
documents, after notice and the expiration of any applicable cure period,
METLIFE shall have the option to declare the entire amount of principal and
accrued interest thereon due under the promissory note immediately due and
payable, and METLIFE may exercise any of its rights under the promissory note
and any document executed or delivered therewith. After acceleration or in the
event of nonpayment of the final installment, BORROWER shall pay interest on
the outstanding principal balance at the rate of five percent (5.00%) per annum
above Chase Manhattan Bank's prime interest rate in effect from time to time,
or fifteen percent (15.00%) per annum, whichever is higher, provided such
interest rate shall not exceed the maximum interest rate permitted by law. The
Default Rights stated herein are not exclusive and such other rights as METLIFE
deems appropriate shall be included in the loan documents.
REQUIRED DOCUMENTS. To evidence and secure this loan, BORROWER shall deliver,
not less than three (3) business days prior to the loan closing, the properly
executed documents appropriate, in the opinion of METLIFE's counsel, to
accomplish the commitment requirements. The documents shall be in the
customary form then generally used by METLIFE in the state in which the
Property is located, except as such customary forms may be modified by METLIFE
to effect the intent of specific requirements of this commitment or as
reasonably necessary to protect the interest of METLIFE as determined by
METLIFE's counsel and shall incorporate provisions requiring cross default and
cross collateralization. The documents may include, without limitation, a
promissory note, deed of trust or mortgage, assignment of rents and leases, and
certificate and indemnity agreement regarding hazardous substances. All
documents shall be subject to approval of METLIFE's counsel.
In the event BORROWER requests any modifications to the loan documents, such
requested modifications shall be provided to METLIFE in written form.
APPRAISAL. As a condition of loan closing, BORROWER shall furnish METLIFE with
a satisfactory appraisal report of the Property and Improvements prepared by an
MAI certified appraiser acceptable to METLIFE. Such appraisal shall be
furnished to METLIFE no later than five (5) days prior to loan closing.
If the appraisal report is prepared for someone other than METLIFE, then the
report must be supplemented with an acknowledgment by the appraiser that (i)
the report is being used by METLIFE for lending purposes, (ii) the appraiser
has read and understood the METLIFE Appraisal
- 5 -
<PAGE> 6
Policy Guidelines and Procedures, and (iii) the reported opinion of value would
not change if the appraisal were made under METLIFE Appraisal Policy Guidelines
and Procedures.
LEASING. All present and future tenants and leases, if any, shall be subject
to METLIFE's approval. Although such leases may have been received for review
by METLIFE prior to the date hereof, and although METLIFE may have conducted a
preliminary review and made comments to BORROWER or BORROWER's counsel with
respect thereto, such leases remain subject to METLIFE's approval based on a
complete review of such leases by METLIFE's outside counsel following the date
hereof. BORROWER shall furnish for METLIFE's approval such financial
information on each tenant as METLIFE shall deem reasonably necessary. All
tenants must execute an estoppel letter in form and substance acceptable to
METLIFE certifying among other things that they are in occupancy and open for
business, there are no defaults under their lease, and they have commenced full
rental payments without rental concessions or other inducements. In addition,
METLIFE may require that some or all tenants execute subordination and
attornment agreements in form and substance satisfactory to METLIFE.
TITLE. BORROWER shall furnish METLIFE with an ALTA Loan Policy of Title
Insurance, or the equivalent thereof if an ALTA policy is unavailable, insuring
METLIFE's interest as a first lien and including an ALTA Extended Coverage
Endorsement, an Address and Improvement Type Endorsement, an Environmental Lien
Endorsement and such other endorsements as METLIFE may reasonably require. The
insurer, the form of title insurance policy and endorsements, and any
exceptions to coverage shall be subject to METLIFE's reasonable approval. If
the Property is a leasehold then the lease shall be subject to METLIFE's
approval.
SURVEY. METLIFE shall be furnished with a current ALTA survey satisfactory to
METLIFE and title insurer by a registered public surveyor showing the location
of the Improvements and all other matters affecting the title, including
without limitation, all easements and encroachments, prepared in accordance
with current ALTA/ACSM standards for ALTA surveys, and containing a
certification as reasonably required by METLIFE. If any of the surveys
disclose a state of facts unacceptable to METLIFE, METLIFE may cancel this
commitment and the Deposit and any and all other sums deposited with METLIFE by
the BORROWER shall be returned to the BORROWER, less METLIFE'S expenses.
PERSONAL PROPERTY. BORROWER shall execute a security agreement and financing
statements which shall be a first lien covering all leases, rents, security
deposits, and personal property owned by BORROWER and described on Exhibit A
attached hereto and incorporated herein by reference.
CONSULTING ENGINEER. METLIFE will select an independent consulting engineer to
make an inspection of the Property and Improvements to insure that the Property
and Improvement's condition is satisfactory to METLIFE, in an aggregate cost
not to exceed $5,000.
- 6 -
<PAGE> 7
METLIFE shall have the right to require reasonable repairs to the Improvements
based upon the recommendations of the consulting engineer. Neither METLIFE nor
the consulting engineer shall have any responsibility whatsoever to any person
for design/structural failure or other architectural or engineering
inadequacies.
HAZARDOUS MATERIALS. The Property and Improvements shall neither contain, nor
incorporate, nor be threatened with contamination from outside sources, nor be
used in connection with the handling, storage or disposal of asbestos, PCBs,
ureaformaldehyde, or other hazardous materials, except as used and stored in
the ordinary course of BORROWER's business and in accordance with all
applicable laws and regulations. "Hazardous Materials" means any flammable,
explosive, or radioactive materials, petroleum products, or materials defined
under federal or state laws and regulations as "hazardous substances,"
"hazardous materials," or "toxic substances". BORROWER represents and warrants
that there are no Hazardous Materials on or about the Property or the
Improvements, except as used and stored in the ordinary course of BORROWER's
business and in accordance with all applicable laws and regulations. METLIFE
shall receive satisfactory evidence of compliance with the foregoing, which
evidence shall include the execution of a certificate and indemnity agreement
regarding hazardous substances or environmental indemnity agreement including
representations and warranties reasonably acceptable to METLIFE and the receipt
of a Phase I environmental audit in form and content reasonably acceptable to
METLIFE.
SITE INSPECTION. METLIFE's obligation to fund the loan shall be conditioned
upon an on-site inspection by a representative of METLIFE and METLIFE's
approval of the site, general location, and if the Improvements are existing,
quality and maintenance thereof within 60 days after execution hereof (and
METLIFE shall notify BORROWER thereof) and the site's condition being the same
condition at closing.
BORROWER'S EXISTENCE AND RELATED MATTERS. METLIFE shall be furnished with all
appropriate documentation evidencing the qualification of signatories to
execute the loan documents, and BORROWER's legal existence, organization, good
standing, and qualification to engage in any transaction or business in
connection with which the loan is made.
LEGAL COMPLIANCE AND UTILITIES. METLIFE shall be furnished with satisfactory
proof of compliance with any applicable laws and regulations including
particularly any licensing or zoning requirements and with a copy of the
unconditional, permanent certificate(s) of occupancy. METLIFE shall also be
furnished with satisfactory evidence that all utilities necessary for the full
use and enjoyment of the Property are available to the Property, and that water
and sanitary sewer systems are provided to the Property and maintained by
governmental authorities or by applicable public utilities.
LEGAL COUNSEL. Special counsel of METLIFE's selection will be used for the
drafting of documents and other attorney's services relating to the
transaction. METLIFE estimates that the fees and disbursements for such
counsel shall not exceed $10,000.00 barring unforeseen circumstances.
BORROWER's counsel must deliver to METLIFE a legal opinion satisfactory to
METLIFE and its
- 7 -
<PAGE> 8
counsel, which opinion shall include but not be limited to, a confirmation of
the legal validity and enforceability of the loan, and a statement that the
loan is not usurious. All legal matters, including title status, leases, loan
documentation, and status of zoning shall be subject to approval by METLIFE.
All fees and expenses of METLIFE's special counsel shall be paid by BORROWER
regardless of whether or not the loan actually closes.
INSURANCE. BORROWER shall furnish certificates of policies for such property,
rental loss, liability and other insurance in such amounts as METLIFE may from
time to time require. The policy(ies) shall be written by a corporate
insurer(s) having a Best's rating of A:X or better. Initially the property
insurance shall be in an amount not less than the full replacement cost of the
Property and Improvements (less a deductible not to exceed $25,000.00) with
"all risk" coverage, 90% co-insurance, "agreed amount," "inflation guard,"
"replacement cost," and waiver of subrogation endorsements and a lender's loss
payable endorsement (Form 438BFU or equivalent); and, as applicable, rental
loss insurance or business interruption insurance shall be in an amount
sufficient to cover any loss of rents (including expenses payable by tenants)
or profits for up to six months. Initially, the liability insurance shall be
in an amount not less than $2,000,000.00 combined single limit for personal
injury and property damage with provision for at least 30 days written notice
to METLIFE before cancellation and naming METLIFE as an additional insured. In
flood or earthquake hazard areas, METLIFE may require flood or earthquake
insurance. All insurance policies shall be subject to METLIFE's approval and
shall include any endorsements which METLIFE may reasonably require.
ANNUAL STATEMENTS. BORROWER will furnish to METLIFE, and will cause any
guarantor of BORROWER's obligation to furnish to METLIFE on request, within 90
days after the close of its fiscal year (i) annual balance sheet and profit and
loss statements prepared in accordance with generally accepted accounting
principles and practices consistently applied and, if METLIFE so requires,
accompanied by the annual audit report of an independent certified public
accountant reasonably acceptable to METLIFE, and (ii) an annual operating
statement for BORROWER, and (iii) all other financial information and reports
that METLIFE may from time to time reasonably request, including, if METLIFE so
requires, income tax returns of BORROWER and any guarantor of BORROWER's
obligation hereunder, and financial statements of any tenant designated by
METLIFE.
DUE ON SALE, CHANGE OF TITLE, OR ADDITIONAL FINANCING. The loan will be
accelerated if the title to the Property and Improvements is changed without
the prior written consent of METLIFE, which consent shall be at METLIFE's sole
discretion. Any transfer of any interest in the Property and Improvements or
in the income therefrom, by sale, lease (except for leases to tenants in the
ordinary course of managing income property which are approved by METLIFE
pursuant to the loan documents), contract, mortgage, deed of trust, further
encumbrance or otherwise (including any such transfers as security for
additional financing of the Property and Improvements), and any change in the
ownership interests in BORROWER because of acquisition by BORROWER of
twenty-five percent or more of its issued and outstanding common stock, except
((a) through or because of any corporate reorganization or merger involving
substantially all of BORROWER's
- 8 -
<PAGE> 9
assets and which does not effect a dissolution or material adverse change in
the successor BORROWER's financial statements, or (b) transfers and changes in
ownership by devise or descent, neither of which shall be considered a change
of title) shall be considered a change of title. METLIFE may condition its
consent to any change of title upon payment of a transfer fee of 1% of the
then outstanding loan balance. Notwithstanding the above and any other term of
this commitment letter, if BORROWER is sold or merged with another company at
any time, the loan may be prepaid, subject to the prepayment premium and early
prepayment penalty defined above, within 90 days of such sale or merger.
FINANCIAL RESPONSIBILITY. BORROWER must, in the opinion of METLIFE, be
"financially responsible" at the time of loan closing. "Financially
responsible" shall mean: having no material adverse change in financial
condition from the financial condition previously disclosed to METLIFE; having
no outstanding defaults, liens, court actions, or liabilities (including
contingent liabilities) which could, in the opinion of METLIFE, result in
insolvency or bankruptcy, and not "insolvent" or a "debtor" within the meaning
of the Bankruptcy Code.
COSTS PAYABLE BY BORROWER. BORROWER shall pay all reasonable costs associated
with the loan, including (without limitation) a $500.00 documentation/site
inspection fee for each site, the fees and costs of special counsel, the cost
of any environmental audits, the fees of the consulting engineer, appraisal
costs, any loan, escrow, recording and transfer fees and taxes, title charges,
survey costs, realty tax service fee, and all other costs incurred for the
documents and services described herein, whether the loan is closed or not,
unless the reason that the loan is not closed is because of the failure or
negligence or willful misconduct of METLIFE to close and fund.
RECEIPT OF DOCUMENTATION. BORROWER hereby acknowledges its responsibility to
provide all items required by this commitment letter in a timely manner. All
such items shall be in form and content acceptable to METLIFE and be provided
to METLIFE not less than three (3) business days prior to loan closing.
WIRE TRANSFER DEADLINE. All loans funded by METLIFE are subject to a wire
transfer deadline of 12:00 p.m. Pacific Time.
ASSIGNMENT. This commitment shall not be assignable by BORROWER. Any change
in the ownership interests in BORROWER shall be considered an assignment.
Transfers of stock of the Company shall not be considered a transfer of
ownership.
CONDEMNATION. At the time of loan closing, no proceeding shall have been
threatened or commenced by any authority having the power of eminent domain to
condemn any part of the Property which METLIFE, in its sole judgment, deems
material.
CANCELLATION. Any breach or default by the BORROWER in the performance of any
undertaking, obligation or requirement imposed on the BORROWER by the terms
hereof shall constitute an event upon the occurrence of which METLIFE may
cancel this commitment.
- 9 -
<PAGE> 10
METLIFE may cancel this commitment prior to closing for the disclosure of facts
materially impairing the security offered (in such an event, METLIFE shall
return BORROWER'S deposit, less expenses) or if METLIFE discovers that any of
the financial information or financial statements submitted to METLIFE in
connection with this transaction were not true, correct and complete.
BROKERAGE. METLIFE shall not be required to pay any brokerage fee or
commission arising from this commitment, and the BORROWER agrees to defend,
indemnify and hold METLIFE harmless against any and all expenses, liabilities,
and losses arising from such claims in connection therewith, including payment
of reasonable attorney's fees.
DEPOSIT. BORROWER has previously paid METLIFE a noninterest bearing Deposit in
the amount of $30,000.00, and upon acceptance of this commitment, shall pay
METLIFE an additional noninterest bearing deposit in the amount of $30,000.00.
This Deposit will be returned to BORROWER, less all costs incurred by METLIFE
in connection with the loan: (i) upon loan closing, which includes receipt of
all properly executed documentation, which documentation shall include the
final Policy of Title Insurance; or (ii) in the event that METLIFE and BORROWER
fail to agree upon a material provision of the loan documentation for this
transaction which is not already agreed upon herein, or (iii) upon METLIFE's
termination of this transaction because of a materially adverse change in
BORROWER'S, guarantors' (if any), or credit tenants' (if any) financial
condition, or (iv) upon the occurrence of any of the other conditions for
termination set forth herein. If this transaction is not fully closed by the
Expiration Date of Commitment for any other reason, then METLIFE will retain
the Deposit as liquidated damages.
PRIOR NEGOTIATIONS. This commitment constitutes the entire agreement between
METLIFE and BORROWER relating to the loan. Any and all prior proposals,
commitments, agreements, representations, and warranties made by METLIFE,
whether oral or written, are deemed superseded hereby. No extension,
amendment, or waiver of this commitment shall be valid or enforceable unless it
is made in writing and signed by both METLIFE and BORROWER.
IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT SHOULD BE READ
CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS
OR ORAL PROMISES NOT CONTAINED IN THIS WRITTEN CONTRACT MAY BE LEGALLY
ENFORCED. YOU MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN
AGREEMENT.
COMMITMENT ACCEPTANCE. Subject to the terms and conditions herein stated, this
commitment is an offer that may be accepted by you until November 10, 1995.
Effective acceptance requires actual receipt by METLIFE of a fully executed
counterpart of this commitment letter, without any changes thereto, on or
before such date.
EXPIRATION DATE OF COMMITMENT. This commitment will expire on June 30, 1996.
METLIFE will not be obligated to disburse the funds after this date.
Notwithstanding the foregoing, and subject to METLIFE's approval, BORROWER
shall have one (1) option to extend the expiration
- 10 -
<PAGE> 11
date of this commitment for an additional sixty (60) days upon written request
by BORROWER and payment of an extension fee of .50% of the Loan Amount on or
before June 30, 1996. The extension fee is in addition to any other Loan Fee
or Forward Commitment Fee and is payable upon the exercising of such extension
by BORROWER and shall be held and disbursed in the same manner as the Deposit.
METLIFE CAPITAL FINANCIAL CORPORATION
/s/ Andrew J. Ishii
BY: Andrew J. Ishii
Senior Real Estate Credit Analyst
The undersigned hereby accepts the foregoing commitment letter and agrees that
it will comply with all of the terms and conditions herein.
BORROWER's
Federal I.D. No.
31-1041397 MAX & ERMA'S RESTAURANTS, INC.
- ---------- a Delaware Corporation
Date: November 9, 1995 BY: /s/ William C. Niegsch, Jr.
-----------------------------------
William C. Niegsch, Jr.
Its: Executive Vice President and CFO
- 11 -
<PAGE> 12
EXHIBIT A
All buildings, structures, improvements, parking areas, landscaping,
equipment, fixtures and any other personal property incorporated into the
structure of the building on the Property (herein the "Premises") as defined in
the Commitment Letter dated November 1, 1995 from MetLife Capital Financial
Corporation to Max & Erma's Restaurants, Inc. (to which this Exhibit "A" is
attached) and necessary for the habitable use and occupation of the building on
the Premises, including and similar to, without being limited to, all heating,
air conditioning, and incinerating apparatus and equipment; all boilers,
engines, motors, dynamos, generating equipment, piping and plumbing fixtures,
water heaters, cooling, ventilating, sprinkling and vacuum cleaning systems,
fire extinguishing apparatus, carpeting, floor coverings, underpadding,
elevators, escalators, partitions, mantels, built-in mirrors, window shades,
blinds, draperies, screens, storm sash, awnings, and shrubbery and plants, and
including also all interest of any owner of the Premises in any of such items
hereafter at any time acquired under conditional sale contract, chattel
mortgage or other title retaining or security instrument, all of which property
mentioned in this paragraph shall be referred to as the "Improvements" and
shall be deemed part of the realty and not severable wholly or in part without
material injury to the freehold of the Premises.
- 12 -
<PAGE> 1
EXHIBIT 13
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
October 29, October 30, October 31, October 25, October 27, October 28,
(In thousands, except per share data) 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Revenues $64,198 $56,127 $43,515 $38,763 $36,402 $30,344
Operating Income 4,427 3,740 2,581 2,225 1,377 1,281
Interest Expense 1,208 851 350 335 419 49
Income Before Income Taxes 3,061 2,817 2,084 1,698 771 1,097
Net Income 2,139 2,001 1,371 1,083 429 836
Depreciation and Amoritization 4,201 3,599 2,405 2,112 1,878 1,367
EBITDA* 8,470 7,268 4,839 4,144 3,069 2,513
Capital Expenditures 16,191 7,700 6,765 2,445 2,095 5,745
PER SHARE DATA
Net Income $ .50 $ .47 $ .34 $ .28 $ .11 $ .18
Revenues 15.04 13.26 10.94 9.86 8.98 6.56
Assets 11.39 7.65 6.19 4.09 3.66 3.30
Stockholders' Equity 3.65 3.24 2.51 2.13 2.03 1.70
Market Price at Year End 7.63 7.73 7.62 4.09 2.73 3.00
Weighted Average Shares Outstanding 4,268 4,232 3,979 3,932 4,054 4,625
FINANCIAL POSITION
Cash $ 1,102 $ 993 $ 442 $ 299 $ 503 $ 365
Working Capital Deficit (3,546) (2,526) (2,748) (1,254) (2,320) (2,912)
Property-Net 42,502 27,530 21,505 13,531 12,134 12,189
Total Assets 48,611 32,383 24,630 16,065 14,820 15,263
Long-Term Obligations
(Less Current Maturities) 26,037 13,639 10,129 5,023 2,925 2,958
Stockholders' Equity 15,600 13,712 10,000 8,367 8,241 7,866
OTHER DATA AND RATIOS
Average Restaurant Sales $ 2,172 $ 2,191 $ 2,070 $ 2,035 $ 2,014 $ 2,064
Restaurants in Operation at Year End 33 27 24 20 19 18
Restaurant Profit Margin 14.4 % 14.1 % 14.1 % 13.7 % 11.7 % 12.0 %
Operating Profit Margin 6.9 % 6.7 % 5.9 % 5.7 % 3.8 % 4.2 %
Long-Term Debt-to-Equity Ratio 1.7 1.0 1.0 .6 .4 .4
Price Earnings Ratio (High/Low) 16.8/12.0 20.8/14.5 22.1/11.8 16.3/9.7 35.0/18.3 34.0/13.0
Return on Beginning Assets 6.6 % 8.1 % 8.5 % 7.3 % 2.8 % 6.6 %
Return on Beginning Equity 15.6 % 20.0 % 16.4 % 13.1 % 5.5 % 10.3 %
<FN>
* EBITDA, Earnings Before Interest, Taxes, Depreciation and Amortization, is operating income plus depreciation and amortization,
less minority interests in income of affiliated partnerships. EBITDA is not intended to represent cash flow from operations as
defined by generally accepted accounting principles.
</TABLE>
10
Max & Erma's Restaurants, Inc.
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
OUR SAME-STORE SALES HAVE BEEN POSITIVE EACH OF THE LAST FOUR YEARS AND THIRTEEN
OF THE LAST SIXTEEN QUARTERS.
- --------------------------------------------------------------------------------
REVENUE
Revenues for 1995 increased $8,071,000 or 14% from 1994. The increase was a
result of opening three restaurants during 1994 and seven restaurants during
1995 and an increase of 1.5% or $641,000 in sales at restaurants open eighteen
months or more from $43,781,000 in 1994 to $44,422,000 in 1995.
Revenues for 1994 increased $12,612,000 or 29% from 1993. The increase
was a result of the opening of four restaurants during 1993 and three
restaurants during 1994 and exclusive of an extra week in fiscal 1993, an
increase of 3.4% or $1,206,000 in sales at restaurants open eighteen
months or more from $35,891,000 in 1993 to $37,097,000 in 1994.
Same-store sales have been positive each of the last four years
and thirteen of the last sixteen quarters. Management believes these trends
are a result of moderate price increases of approximately 1 to 1.5 percent
annually which have enhanced the restaurants' price/value relationship,
effectiveness of the Company's marketing efforts, and a gradual
restructuring of the menu designed to build mid-week frequency, increase
the check average at dinner and speed table turns at lunch when diners are more
concerned about time.
Management believes same-store sales gains may be difficult to maintain
in the year ahead due to the intense competition in the casual dining
segment of the restaurant industry. To achieve positive same-store sales,
management's focus will be on further increasing the dinner check average
through the introduction of higher value entrees and enhanced server
training to maximize the sales potential of all customers.
While same-store sales gains may be difficult to achieve, management is
very confident that the overall revenue growth rate will accelerate in 1996.
This will occur through the addition of eight new restaurants, five of which
were under construction at the end of fiscal 1995, and higher than average
revenues being generated by the Company's new prototype restaurant. All of the
new restaurants planned for 1996 will be the Company's new free-standing
prototype. During 1995 the eight free-standing prototypes built to date
reported average annualized revenues of $2,427,000, 14% higher than the average
of the Company's other 25 restaurants.
RESTAURANT OPERATING PROFIT
The following table sets forth the Company's restaurant operating profit
as a percent of revenue:
<TABLE>
<CAPTION>
Years Ended
----------------------------
Oct. 29, Oct. 30, Oct. 31,
1995 1994 1993
- ----------------------------------------------------------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of Goods Sold (26.0) (25.9) (26.4)
Payroll & Benefits (30.3) (30.5) (30.6)
Other Operating Expenses (29.3) (29.5) (28.9)
------ ------ ------
Restaurant Operating Profit 14.4% 14.1% 14.1%
====== ====== ======
</TABLE>
Despite record high produce prices during the second quarter of 1995,
cost of goods sold, as a percentage of revenues, rose only slightly from 1994
to 1995. Cost of goods sold, as a percentage of revenues, decreased one-half of
a percentage point from 1993 to 1994 primarily as a result of lower chicken and
produce prices during much of 1994 and the effectiveness of the Company's
purchasing director, who joined the Company at the start of 1994. Annual price
increases of approximately 1 to 1.5 percent over the periods reported have also
aided in maintaining cost of goods sold within the Company's targeted range.
Payroll and benefits, as a percentage of revenues, declined slightly
from 30.6% in 1993 to 30.5% in 1994 and to 30.3% in 1995. The decline from
1993 through 1995 was a result of higher average revenues at the Company's
newer restaurants, which resulted in a higher payroll efficiency, typically
not expected at newer restaurants. Additionally, during 1995 the Company
reduced its benefit costs due to implementation of a self-funded health
insurance plan and lower workers' compensation insurance costs.
11
Max & Erma's Restaurants, Inc.
<PAGE> 3
Other operating expenses, as a percentage of revenues, increased from
28.9% in 1993 to 29.5% in 1994 due primarily to increased amortization of
pre-opening expenses. As a result of two restaurants opened in late 1993 and
three restaurants in early 1994, amortization of pre-opening expenses increased
from $326,000 in 1993 to $669,000 in 1994. Excluding amortization of
pre-opening expenses, other operating expenses, as a percentage of revenues,
rose only slightly from 28.1% in 1993 to 28.3% in 1994. Other operating
expenses, as a percentage of revenues, declined slightly from 29.5% in 1994 to
29.3% in 1995. The decline was a result of a decrease in amortization of
pre-opening expenses to $551,000 in 1995, or .9% as a percentage of revenues.
The increased ownership of real estate and the reduction of rental expense as a
result of ground leases should result in a further decline in other operating
expenses as a percentage of revenues in 1996. The Company owns the real estate
for all restaurants currently under development.
Inflation has had no significant impact on operating costs during the
years reported.
ADMINISTRATIVE EXPENSES
Administrative expenses increased approximately 18% from 1993 to 1994 and
approximately 15% from 1994 to 1995. The increases were primarily a result of
salary increases and additional corporate staff needed to support the
Company's growth and the introduction of a 401(k) savings plan during 1994.
As a percentage of revenues, administrative expenses decreased from
8.2% in 1993 to 7.5% in 1994 and 1995. The decline was a result of the
accelerated revenue growth rate in 1994. During 1995 the dollar increase in
administrative expenses approximately equaled the Company's revenue growth
rate due to development delays in several of the restaurants opened during the
second half of the year. With the opening of three restaurants during the
fourth quarter of 1995 and five restaurants under construction at year end,
management expects that revenue growth in 1996 will significantly exceed the
growth in administrative expenses, and thus decline even further as a
percentage of revenues.
INTEREST EXPENSE
Interest expense increased from $851,000 in 1994 to $1,208,000 in 1995 due
to an increase in the average balance in long-term obligations during the year
to $18.7 million dollars in 1995 from $12.5 million during 1994. Although the
interest rate on the Company's revolving credit agreement rose from 8.25% in
1994 to 9.75% during the first half of 1995, the impact on interest expense was
minimal because outstanding borrowings under the agreement were low. During the
second half of 1995 rates declined and the Company's lender reduced the
interest rate by 1/2% in conjunction with an increase in the dollar amount
available under the credit agreement. At the end of 1995 the interest rate on
the Company's revolving credit agreement was 9.0%, which was approximately
equal to the effective rate on the Company's convertible subordinated
debentures and capitalized equipment leases. Management believes interest
expense will continue to increase in 1996 as the Company borrows to fund a
portion of its capital expenditures. As described under Liquidity And Capital
Resources, a $6.0 million dollar 8.4% fixed rate mortgage commitment received
early in 1996 should reduce the Company's average interest rate slightly in
1996. The Company capitalized $337,000 of construction period interest during
1995.
Interest expense increased from $350,000 in 1993 to $851,000 in 1994 due
to the increase in the average balance in long-term obligations during the
year from $6.8 million during 1993 to $12.5 million during 1994 and due to
gradually increasing interest rates during 1994. The interest rate on the
Company's revolving credit agreement rose from 6.5% to 8.25% during 1994,
while it remained relatively constant during 1993 at approximately 6.5%. During
1994 the Company capitalized $71,000 of construction period interest as
compared to $94,000 capitalized during 1993.
12
Max & Erma's Restaurants, Inc.
<PAGE> 4
- ------------------------------------------------------------------------------
THE COMPANY HAS REVISED ITS PROTOTYPE DESIGN WHICH IT BELIEVES WILL LOWER THE
COST TO CONSTRUCT AND EQUIP BY $150,000 TO $200,000.
- ------------------------------------------------------------------------------
INCOME TAXES
The Company's effective tax rate declined from 34% in 1993 to 29% in 1994
and then rose to just over 30% in 1995. The decline from 1993 to 1994 was a
result of the initiation of a tax credit equal to FlCA taxes paid on declared
tips in excess of minimum wage, which was first available to the Company on
January 1, 1994. The rise in the effective tax rate from 1994 to 1995 was a
result of the expiration of the targeted jobs tax credit in early 1995.
Although some form of a jobs credit is being considered by Congress,
there is no assurance of its form or availability during 1996. Therefore, the
Company estimates that its effective tax rate will rise to approximately 32% in
1996. Enactment of a jobs credit would likely lower the Company's effective tax
rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital ratio remained constant at .5 to 1 at
October 30, 1994 and October 29, 1995. 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 1995, the Company expended approximately $16,191,000 for property
additions, $15,613,000 to reduce long-term obligations, $480,000 to repurchase
60,461 shares of its common stock and increased cash $109,000. Funds for such
expenditures were provided primarily by $26,588,000 from proceeds of long-term
obligations and $6,031,000 from operations. The Company routinely draws down and
repays its revolving credit agreement, the gross amounts of which are included
in the above numbers.
At October 29, 1995, the Company was committed to the opening of eight
restaurants during 1996, five of which were under construction and are expected
to open during the first and second quarters of 1996.
The Company owns ground and should commence construction during the
first quarter for a sixth 1996 location and is in the final stages of
negotiations for the remaining two 1996 sites. No sites are under contract for
the nine restaurants planned for 1997. However, the Company is in some stage of
negotiations on eight additional sites and reasonably believes it will meet its
1997 development goal.
During 1995 the average cost to build and equip an in-line shopping mall
location was $1.2 million. The average cost of land, building and equipment for
the free-standing restaurants opened during 1995 was $2.5 million. Variations in
cost are primarily caused by ground cost, site conditions and local permits and
fees. The Company has completed a revision to its prototype design which it
believes will lower the cost to construct and equip by $150,000 to $200,000 and
will incorporate the revisions into all future restaurants.
The Company expects to expend approximately $11.0 million in 1996 on the
completion of the eight restaurants planned for the year. Funding will be
provided by cash from operations, bank borrowings and equipment leasing. At
October 29, 1995, the Company had available $3.4 million dollars under its
revolving credit agreement and $2.8 million under equipment lease commitments.
Additionally, in early 1996 the Company received a $6.0 million dollar mortgage
loan commitment. The term of the mortgage will be 15 years with the interest
rate, currently 8.4%, to be fixed at closing. The Company expects to close this
loan during the first quarter of 1996. Proceeds will be used to reduce
outstanding borrowings under the Company's revolving credit agreement.
Management believes these funding sources, plus cash from operations, should be
adequate to meet its capital needs into 1997.
13
Max & Erma's Restaurants, Inc.
<PAGE> 5
BALANCE SHEETS
<TABLE>
<CAPTION>
October 29, October 30,
ASSETS 1995 1994
================================================================================================================
<S> <C> <C>
CURRENT ASSETS (note 3):
Cash and equivalents (note 1) $ 1,102,060 $ 993,349
Receivables:
Trade and other 164,142 83,065
Equipment desposits (note 4) 801,531 295,515
----------- -----------
TOTAL RECEIVABLES 965,673 378,580
Inventories (note 1) 539,025 439,478
Supplies 148,322 109,442
Prepaid expenses:
Insurance 193,508 149,190
Other 82,150 102,817
Deferred income taxes (notes 1 and 5) 255,000 157,000
----------- -----------
TOTAL CURRENT ASSETS 3,285,738 2,329,856
PROPERTY-AT COST (NOTES 1, 3 AND 4)
Land and buildings 19,886,562 9,241,452
Leasehold improvements 19,710,573 17,238,430
Equipment and fixtures 13,811,360 10,559,167
Construction in progress 4,155,152 2,704,092
----------- -----------
Total 57,563,647 39,743,141
Less accumulated depreciation and amortization 15,061,971 12,214,390
----------- -----------
PROPERTY-NET 42,501,676 27,528,751
OTHER ASSETS (note 3)
Goodwill (less accumulated amortization, 1995-$603,455; 1994-$553,167) (note 1) 336,077 386,365
Deferred Costs (less accumulated amortization, 1995-$628,715; 1994-$372,244)(note 1) 1,586,503 1,292,161
Deferred income taxes (notes 1 and 5) 156,000 201,000
Miscellaneous 744,514 644,931
----------- -----------
TOTAL OTHER ASSETS 2,823,094 2,524,457
----------- -----------
TOTAL $48,610,508 $32,383,064
=========== ===========
</TABLE>
See notes to financial statements.
14
Max & Erma's Restaurants, Inc.
<PAGE> 6
<TABLE>
<CAPTION>
October 29, October 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
=====================================================================================================
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term obligations (notes 3 and 4) $ 727,719 $ 484,661
Accounts payable 1,265,154 957,089
Construction payables 2,269,182 1,073,462
Accrued liabilities:
Payroll and related taxes 1,216,812 1,111,704
Taxes, other than income taxes 686,453 555,139
Income taxes (notes 1 and 5) 80,734
Other 666,453 593,105
---------- ----------
Total accrued liabilities 2,569,718 2,340,682
---------- ----------
TOTAL CURRENT LIABILITIES 6,831,773 4,855,894
LONG-TERM OBLIGATIONS-
Less current maturities (notes 3 and 4) 26,036,831 13,638,885
MINORITY INTERESTS IN AFFILIATED PARTNERSHIPS (notes 1 and 2) 141,935 176,737
COMMITMENTS AND CONTINGENCIES (notes 3 and 4)
STOCKHOLDERS' EQUITY (note 6):
Preferred stock-$.10 par value; authorized 500,000
shares, none outstanding
Common stock-$.10 par value; authorized 10,000,000
shares; issued and outstanding: 1995-4,117,885 shares;
1994-3,768,189 shares 411,789 376,819
Additional capital 11,296,383 8,657,770
Retained earnings 3,891,797 4,676,959
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 15,599,969 13,711,548
---------- ----------
TOTAL $48,610,508 $32,383,064
=========== ===========
</TABLE>
See notes to financial statements.
15
Max & Erma's Restaurants, Inc.
<PAGE> 7
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------
October 29, October 30, October 31,
1995 1994 1993
(52 weeks) (52 weeks) (53 weeks)
===============================================================================================
<S> <C> <C> <C>
REVENUES $ 64,198,284 $ 56,127,102 $43,514,993
OPERATING EXPENSES:
Cost of goods sold 16,723,445 14,533,731 11,491,340
Payroll and benefits 19,435,463 17,105,875 13,318,247
Other operating expenses 18,808,272 16,555,987 12,578,078
Administrative expenses (NOTE 7) 4,804,486 4,191,901 3,546,817
------------ ------------ -----------
TOTAL OPERATING EXPENSES 59,771,666 52,387,494 40,934,482
------------ ------------ -----------
OPERATING INCOME 4,426,618 3,739,608 2,580,511
------------ ------------ -----------
INTEREST EXPENSE (NOTES 3 AND 4) 1,207,695 851,011 349,574
MINORITY INTERESTS IN INCOME OF
AFFILIATED PARTNERSHIPS (NOTES 1 and 2) 157,712 71,495 147,114
------------ ------------ -----------
INCOME BEFORE INCOME TAXES 3,061,211 2,817,102 2,083,823
INCOME TAXES (NOTES 1 and 5):
State and local 184,000 189,000 178,000
Federal:
Current 791,000 827,000 514,000
Deferred (credit) (53,000) (200,000) 21,000
------------ ------------ -----------
TOTAL INCOME TAXES 922,000 816,000 713,000
------------ ------------ -----------
NET INCOME $ 2,139,211 $ 2,001,102 $ 1,370,823
============ ============ ===========
NET INCOME PER COMMON SHARE (NOTE 1) $ 0.50 $ 0.47 $ 0.34
============ ============ ===========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING (NOTE 1) 4,268,274 4,232,162 3,978,536
============ ============ ===========
</TABLE>
See notes to financial statements.
16
Max & Erma's Restaurants, Inc.
<PAGE> 8
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------ Additional Retained
Shares Amount Capital Earnings Total
=====================================================================================================================
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 25, 1992 2,690,411 $ 269,041 $ 6,791,650 $ 1,306,590 $ 8,367,281
Issuance of stock through option and
bonus plans (NOTE 6) 133,983 13,398 249,562 262,960
Shares issued in connection with
five-for-four stock split 674,408 67,441 (67,441)
Cash paid in lieu of fractional shares
in connection with five-for-four (1,556) (1,556)
stock split
NET INCOME 1,370,823 1,370,823
--------- ----------- ------------ ----------- -----------
BALANCE, OCTOBER 31, 1993 3,498,802 349,880 6,973,771 2,675,857 9,999,508
Issuance of stock through option and
bonus plans (NOTE 6), including
$8,922 related tax benefit 113,832 11,383 510,555 521,938
Issuance of stock for acquisition of
buildings (NOTE 4)
155,555 15,556 1,173,444 1,189,000
NET INCOME 2,001,102 2,001,102
--------- ----------- ------------ ----------- -----------
BALANCE, OCTOBER 30, 1994 3,768,189 376,819 8,657,770 4,676,959 13,711,548
Issuance of stock through option and
bonus plans (NOTE 6), including
$72,640 related tax benefit 39,091 3,909 227,579 231,488
Stock issued in connection with 10%
stock dividend 371,066 37,107 2,885,038 (2,922,145)
Cash paid in lieu of fractional shares in
connection with 10% stock dividend (2,228) (2,228)
Shares repurchased (60,461) (6,046) (474,004) (480,050)
NET INCOME 2,139,211 2,139,211
--------- ----------- ------------ ----------- -----------
BALANCE, OCTOBER 29, 1995 4,117,885 $ 411,789 $ 11,296,383 $ 3,891,797 $15,599,969
========= =========== ============ =========== ===========
</TABLE>
See notes to financial statements.
17
Max & Erma's Restaurants, Inc.
<PAGE> 9
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
October 29, October 30, October 31,
1995 1994 1993
(52 weeks) (52 weeks) (53 weeks)
==============================================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,139,211 $ 2,001,102 $ 1,370,823
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,201,100 3,598,735 2,404,555
Deferred income taxes (credit) (53,000) (200,000) 21,000
Minority interests in income of Affiliated Partnerships 157,712 71,495 147,114
Loss on property disposals 46,540 62,724 26,956
Issuance of common stock as compensation
through manager bonus plan 68,987 129,658 116,584
Changes in assets and liabilities:
Accounts receivable, inventories, supplies
and prepaid expenses (749,171) (77,767) (250,082)
Other assets (947,993) (522,885) (618,909)
Accounts payable, accrued and other liabilities 1,167,756 1,396,810 731,386
------------ ------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,031,142 6,459,872 3,949,427
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (16,191,324) (7,699,720) (6,764,507)
Reimbursable construction costs incurred (275,000) (200,000)
Construction costs reimbursed 275,000 200,000 300,000
Additions to other assets (126,337) (366,176) (114,828)
Proceeds from the sale of property 4,424 5,650 17,891
------------ ------------ -----------
NET CASH USED BY INVESTING ACTIVITIES (16,313,237) (7,860,246) (6,761,444)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations (15,612,803) (21,657,239) (8,885,080)
Proceeds from long-term obligations 26,588,540 24,337,475 11,868,533
Debt issue costs (977,272)
Proceeds from exercise of stock options 89,861 383,358 146,376
Distributions to minority interests in Affiliated Partnerships (192,514) (134,762) (173,263)
Cash paid for purchase of common stock (480,050)
Cash paid in lieu of fractional shares (2,228) (1,556)
------------ ------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,390,806 1,951,560 2,955,010
------------ ------------ -----------
NET INCREASE IN CASH AND EQUIVALENTS 108,711 551,186 142,993
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 993,349 442,163 299,170
------------ ------------ -----------
CASH AND EQUIVALENTS AT END OF YEAR $ 1,102,060 $ 993,349 $ 442,163
============ ============ ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest-net of $337,046, $70,646, and $94,306
capitalized in 1995, 1994 and 1993 $ 1,152,455 $ 663,940 $ 355,705
Income taxes 1,014,025 984,838 708,939
Noncash activities:
Property additions financed by capital leases 1,107,255 538,037 1,937,296
Property additions financed by issuance of stock 1,189,000
Property additions financed by construction payables 2,269,182 1,073,462 1,575,570
</TABLE>
See notes to financial statements.
18
Max & Erma's Restaurants, Inc.
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 29, 1995, OCTOBER 30, 1994 AND OCTOBER 31, 1993
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Max & Erma's Restaurants, Inc. (the
"Company") owns and operates restaurants under the trade name "Max & Erma's-
Neighborhood Gathering Place." At October 29, 1995, there are 33 Max & Erma's
restaurants in operation (27 at October 30, 1994) and 5 under construction in
Ohio, Illinois and Pennsylvania. The Company owns all of the restaurants,
except for two that are owned by separate limited partnerships ("Affiliated
Partnerships") in which the Company is the controlling general partner. A
restaurant owned by a franchisee was closed in fiscal 1995.
CONSOLIDATION - The financial statements include the accounts of the
Company and the Affiliated Partnerships. All significant intercompany
transactions and balances, including management fees, interest, receivables and
payables, have been eliminated.
CASH EQUIVALENTS - The Company considers all checking accounts, cash
funds and highly liquid debt instruments with a maturity of less than three
months at the date of purchase to be cash equivalents. All cash is principally
on deposit with two banks.
INVENTORIES - Inventories are valued at the lower of cost, using the
first-in, first-out (FIFO) method, or market, and consist of food and
beverages.
DEPRECIATION AND AMORTIZATION OF PROPERTY - Depreciation and
amortization of property are computed generally using the straight-line method
based on the estimated useful lives of the assets or the terms of the leases as
follows:
<TABLE>
<CAPTION>
Years
- ---------------------------------
<S> <C>
Buildings 15 to 30
Leashold improvments 10 to 15
Lease rights 6 to 23
Equipment and Fixtures 3 to 15
</TABLE>
INTANGIBLES - Goodwill is amortized over 16 1/2 to 20 years which are
the terms of the related restaurant leases, including renewal options.
Annually, or more frequently if events or circumstances change, a determination
is made by management to ascertain whether goodwill has 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 goodwill,
the Company will recognize an impairment loss in an amount necessary to write
down goodwill to a fair value as determined from expected future undiscounted
cash flows. Based upon its most recent analysis, the Company believes that
goodwill at October 29, 1995 is realizable and the amortization period is
appropriate.
Deferred costs include debt issue costs that relate to the August 18,
1994 issuance of Subordinated Convertible Debentures. The costs are being
amortized over the life of the debentures. Also included in deferred costs are
restaurant preopening costs which include hiring, training and certain other
incremental direct costs of opening restaurants which are amortized from the
opening date of the restaurant over a one-year period.
ADVERTISING - The Company expenses the costs of advertising (including
production costs) the first time the advertising takes place. Advertising
expense was $1,979,000, $1,834,000, and $1,463,000 for fiscal 1995, 1994 and
1993, respectively.
INCOME TAXES - The Company is subject to federal, state, and local
income taxes. Income taxes are provided for all taxable items included in the
statements of income in accordance with Statement of Financial Accounting
Standards No. 109.
NET INCOME PER COMMON SHARE - Net income per common share is based on
the weighted average number of shares of common stock and common stock
equivalents (stock options) outstanding during the year after giving retroactive
effect to a five-for-four stock split in March 1993 and a 10% stock dividend in
April 1995. The assumed conversion of the convertible debentures had an
insignificant impact on net income per share.
FISCAL YEAR-END - The Company and its Affiliated Partnerships each have
a 52-53 week accounting period which ends on the last Sunday in October. Fiscal
1995, 1994 and 1993 contained 52, 52 and 53 weeks, respectively.
RECLASSIFICATIONS - Certain amounts in the 1994 and 1993 financial
statements have been reclassified to conform with the 1995 presentation.
19
Max & Erma's Restaurants, Inc.
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
2. OWNERSHIP OF RESTAURANTS BY AFFILIATED PARTNERSHIPS
Two of the restaurants are owned by Affiliated Partnerships in which the Company
is the general partner. As a general partner, the Company is liable for all of
the debts and liabilities of the Affiliated Partnerships. During fiscal 1995,
1994 and 1993 the Company's share of the profits and losses of these two
Affiliated Partnerships was 56% and 40%, respectively.
In addition to its share of the profits and losses of the Affiliated
Partnerships, the Company receives a fee (percentage of gross revenues, as
defined) for managing the restaurants owned by the Affiliated Partnerships.
3. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
October 29, October 30,
1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
DEBT:
Revolving credit agreement, prime plus 1/4%
(total of 9% at October 29, 1995) $ 11,558,175
8% covertible subordinated debentures 10,384,000 $ 10,384,000
---------------- -------------
TOTAL DEBT 21,942,175 10,384,000
Capital leases (Note 4) 3,135,972 2,611,155
Accrued rent (Note 4) 1,686,403 1,128,391
---------------- -------------
TOTAL LONG-TERM OBLIGATIONS 26,764,550 14,123,546
Less current maturites 727,719 484,661
---------------- -------------
TOTAL LONG-TERM OBLIGATIONS-
LESS CURRENT MATURITES $26,036,831 $ 13,638,885
================ =============
</TABLE>
On August 18, 1994, the Company issued $10,384,000 of convertible
subordinated debentures which bear interest at 8% and are due in 2004. The
debentures are unsecured and convertible at any time before maturity, unless
previously redeemed, into shares of common stock of the Company at a conversion
price of $9.86 per share, subject to adjustment. The holders of the debentures
may tender to the Company for redemption at par (plus accrued interest) up to a
maximum of $519,200 per year beginning September 1, 1997 and each succeeding
year. The Company may redeem the debentures at any time subject to certain
restrictions and is obligated to purchase the debentures at the holders'option
upon the occurrence of certain changes in control of the Company.
At October 29, 1995, the Company's revolving credit agreement with a
bank permits it to borrow up to $15,000,000 until January 1, 1998 at which time
the available borrowing commitment decreases by $750,000 every three months. The
outstanding balance of the revolving line of credit bears interest at a rate
(as defined) ranging from prime plus 1/4% to prime plus 3/4% adjusted quarterly
based upon the Company's debt ratio. All of the Company's assets collateralize
the credit agreement, which also contains covenants that restrict the payment
of dividends and incurrence of additional debt and require the maintenance of
certain financial ratios. At October 29, 1995, approximately $900,000 is
available for payment of dividends under the terms of the bank agreement.
Future maturities of long-term debt obligations at October 29, 1995 are
as follows (see Note 4 for maturities of other long-term obligations):
<TABLE>
<CAPTION>
YEAR ENDING IN OCTOBER
- ---------------------------------------------
<S> <C>
1996 $ 0
1997 519,200
1998 519,200
1999 3,077,375
2000 3,519,200
Thereafter 14,307,200
-----------
TOTAL $21,942,175
===========
</TABLE>
In November 1995 the Company signed a $6 million mortgage commitment
which provides for borrowings to be repaid over fifteen years to finance the
cost of three existing restaurants and one restaurant under construction at
October 29, 1995. The commitment is expected to be finalized in 1996 upon the
completion of various due diligence matters.
4. LEASES
The Company leases certain land and buildings used in the restaurant operations
under various long-term capital and operating lease agreements. The initial
lease terms range from three to thirty years and expire between 1996 and 2025.
The leases include renewal options for five to twenty additional years. Several
leases provide for rent either solely or in addition to specified minimum
amounts based on percentages of the restaurant's annual gross revenue, as
defined. The Company is also obligated to pay certain real estate taxes,
insurance, common area charges and various other expenses related to the
properties. The leases are collateralized by subordinated liens on the
leasehold improvements, equipment and fixtures. Four of the leases contain
purchase options at fair market value and one of the leases is with an entity
in which an officer and a director of the Company have a significant interest.
The Company leases vehicles and equipment used in the restaurant
operations under both capital and operating lease agreements. Lease terms range
from three to five years and
20
Max & Erma's Restaurants, Inc.
<PAGE> 12
expire through 2000. The Company is required to pay certain taxes, insurance and
other expenses related to the leased property. The Company also leases other
equipment for periods of one year or less.
The following is a summary of property under capital leases included in
the accompanying balance sheets:
<TABLE>
<CAPTION>
OCTOBER 29, OCTOBER 30,
1995 1994
- ----------------------------------------------------------------
<S> <C> <C>
ASSET DESCRIPTION
Buildings $1,285,000 $1,285,000
Equipment and fixtures 3,636,219 2,606,032
---------- ----------
TOTAL 4,921,219 3,891,032
Less accumulated amortization 2,037,425 1,429,808
---------- ----------
NET $2,883,794 $2,461,224
========== ==========
</TABLE>
Future minimum lease payments under the capital leases and the present
value of such payments at October 29, 1995 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR:
- -------------------------------------------------------------
<S> <C>
1996 $ 940,285
1997 845,210
1998 699,988
1999 388,506
2000 178,111
Thereafter 712,500
----------
TOTAL MINIMUM LEASE PAYMENTS 3,764,600
Less amount representing interest 628,628
----------
Present value of minimum lease payments 3,135,972
Less current maturities 727,719
----------
TOTAL OBLIGATIONS UNDER CAPITAL LEASES-
LESS CURRENT MATURITIES $2,408,253
==========
</TABLE>
At October 29, 1995, the future minimum rental commitments under
noncancellable operating leases with an initial term in excess of one year are
as follows:
<TABLE>
<CAPTION>
RELATED UNRELATED
PARTIES PARTIES TOTAL
- -----------------------------------------------------
<S> <C> <C> <C>
FISCAL YEAR:
1996 $ 146,178 $ 2,592,246 $ 2,738,424
1997 146,178 2,626,023 2,772,201
1998 146,178 2,465,778 2,611,956
1999 146,178 2,447,534 2,593,712
2000 146,178 2,428,439 2,574,617
Thereafter 1,339,973 16,244,852 17,584,825
----------- ----------- -----------
TOTAL $ 2,070,863 $28,804,872 $30,875,735
=========== =========== ===========
</TABLE>
The above future minimum rental amounts include the land portion of
certain capital leases but exclude renewal options and additional rent based on
sales or increases in the United States Consumer Price Index (USCPI). For
operating leases which require increasing rental payments over the term of the
lease, the Company records rent expense on a straight-line basis. The related
accrued rent will generally reverse over the next fifteen years.
At October 29, 1995, the Company has unused equipment lease commitments
totalling $2,795,000 expiring in fiscal 1996.
Rent expense, including common area charges but excluding taxes,
insurance and other expenses related to the properties, consists of the
following:
<TABLE>
<CAPTION>
Years ended
------------------------------------
October 29, October 30, October 31,
1995 1994 1993
- ------------------------------------------------------------------------
<S> <C> <C> <C>
MINIMUM RENT ON OPERATING LEASES:
Related parties $ 157,215 $ 209,829 $ 309,382
Unrelated parties 3,400,264 2,859,879 2,266,903
CONTINGENT RENT BASED ON:
Percentage of gross revenue
unrelated parties - 329,295 351,040 338,901
Increases in the USCPI
related parties - 0 26,430 62,723
---------- ---------- ----------
TOTAL $3,886,774 $3,447,178 $2,977,909
========== ========== ==========
</TABLE>
The Company also has agreements with a partnership in which an outside
director of the Company is a partner that grants rights to the partnership to
install and operate coin-operated amusement equipment in certain restaurants.
Under the agreements, the Company has received games revenue averaging
approximately $121,000 per year over the last three years.
On March 14, 1994, the Company purchased land and building leased since
1975 from a director of the Company. The purchase price of approximately
$887,000 was paid with $250,000 cash and 83,333 unregistered shares of the
Company's common stock. On the same date, the Company also purchased land and
building leased since 1975 from a partnership in which a director and the
Chairman and Chief Executive Officer of the Company are general partners. The
purchase price of approximately $902,000 was paid with $350,000 cash and 72,222
unregistered shares of the Company's common stock.
At October 29, 1995 and October 30, 1994 the Company had made lease
deposits principally with one equipment lessor which are returned to the Company
upon installation of the equipment and execution of the leases.
21
Max & Erma's Restuarants, Inc.
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
5. INCOME TAXES
The Company's effective tax rate varies from the statutory Federal income tax
rate as a result of the following factors:
<TABLE>
<CAPTION>
1995 1994 1993
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Provision at statutory rate $ 1,041,000 $ 957,000 $ 709,000
State income taxes -
net of Federal benefit 121,000 124,000 117,000
Targeted jobs tax credit (84,000) (158,000) (103,000)
FICA tax credit (210,000) (142,000)
Other - net 54,000 35,000 (10,000)
----------- --------- ---------
TOTAL $ 922,000 $ 816,000 $ 713,000
=========== ========= =========
Effective Income Tax Rate 30.1% 29.0% 34.2%
=========== ========= =========
</TABLE>
The tax effects of significant items comprising the Company's net
deferred tax asset at October 29, 1995 and October 30, 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
- ------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS (LIABILITIES)
Rent expense $ 579,000 $ 421,000
Targeted jobs tax credits 181,000 97,000
FICA tax credits 353,000 143,000
Alternative minimum tax credit 51,000 51,000
Other 102,000 70,000
----------- ---------
TOTAL DEFERRED TAX ASSETS 1,266,000 782,000
----------- ---------
Accelerated deprecitation (501,000) (252,000)
Preopening costs (255,000) (86,000)
Prepaid insurance (63,000) (49,000)
Other (36,000) (37,000)
----------- ---------
TOTAL DEFERRED TAX LIABILITIES (855,000) (424,000)
----------- ---------
NET DEFERRED TAX ASSETS $ 411,000 $ 358,000
=========== =========
</TABLE>
The Company's Targeted Jobs tax credit and FICA tax credit carryforwards
expire in 2009 and the alternative minimum tax credit carryforward has no
expiration date.
6. STOCK OPTION AND BONUS PLANS
During fiscal 1993 the Company adopted the 1992 Stock Option Plan (the "1992
Plan"). The options granted under the 1992 Plan may be either incentive stock
options or non-statutory stock options. The terms of the 1992 Plan are at the
sole discretion of a committee of three non-employee members of the Company's
Board of Directors. The 1992 Plan provides that the Company may grant options
(generally at fair market value at the date of grant) for not more than 412,500
shares of common stock to certain key employees, officers and directors.
Options granted under the 1992 Plan are exercisable according to the terms of
each option. At October 29, 1995, 94,050 shares under option were exercisable
and 66,650 shares were reserved for future grants.
The Company also has a 1984 Incentive Stock Option Plan and a 1984
Non-Statutory Stock Option Plan, (collectively, the "1984 Option Plans"). The
1984 Option Plans provide that the Company may grant options (generally at fair
market value at date of grant) for not more than 1,283,335 shares of common
stock to certain employees and directors. Under the terms of the 1984 Option
Plans, options are exercisable over a period up to ten years from the grant date
as determined by the Company; however, options under the 1984 Incentive Plan are
not exercisable until at least one year after the grant date. Shares of common
stock purchased under the 1984 Option Plans vest at the rate of 20% per year of
service, including years of service prior to date of award. The Company may
repurchase, at the optionee's purchase price, non-vested shares if an optionee
terminates employment or directorship. At October 29, 1995, 263,000 shares under
option were exercisable. In conjunction with the adoption of the 1992 Plan no
further grants will be made under the 1984 Plans.
The Company provides for the payment of bonuses in cash and/or common
stock pursuant to The Manager Stock Bonus Plan ("Bonus Plan"). Under the terms
of the Bonus Plan, up to 8,962 shares of common stock remain available to be
issued at two-thirds of the fair market value at the date of award. During
fiscal 1995, 1994 and 1993, 8,467, 15,637, and 18,346 shares were issued under
this Plan.
22
Max & Erma's Restaurants, Inc.
<PAGE> 14
The following summarizes the stock option transactions from October 25,
1992 through October 29, 1995 adjusted to reflect the five-for-four stock split
in March 1993 and the 10% stock dividend in April 1995:
<TABLE>
<CAPTION>
NUMBER EXERCISE AGGREGATE
OF PRICE PER EXERCISE
OPTIONS SHARE PRICE
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, October 25, 1992 611,108 2.36-5.64 $ 1,955,847
Granted 142,450 5.11-10.00 1,159,938
Exercised (185,302) 2.36-5.64 (520,690)
Cancelled (16,270) 2.36-5.64 (71,716)
-------- -----------
Balance, October 31, 1993 551,986 2.36-10.00 2,523,379
Granted 81,950 7.27-8.75 644,438
Exercised (109,579) 2.36-5.64 (383,351)
Cancelled (13,063) 2.82-7.27 (50,680)
-------- -----------
Balance, October 30, 1994 511,294 2.36-10.00 2,733,786
Granted 140,700 6.82-11.00 1,260,375
Exercised (33,244) 2.36-5.79 (89,861)
Cancelled (14,300) 4.09-7.84 (120,563)
-------- -----------
Balance, October 29, 1995 604,450 2.36-11.00 $ 3,783,737
======== ===========
</TABLE>
The 1992 and 1984 Option Plans permit optionees to tender shares to the
Company in lieu of cash for the exercise of stock options. During fiscal 1993,
120,545 options with an aggregate exercise price of $374,314 were exercised by
the tendering of 51,071 shares with an equivalent market value.
7. EMPLOYEE BENEFIT PLANS
In the first quarter of fiscal 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 106 "Employers' Accounting for Postretirement
Benefits Other Than Pensions" which requires employers to accrue for costs of
retiree health care benefits which are provided to qualified employees. The
effect of adopting SFAS No. 106 did not have a material effect on the Company's
1994 financial statements.
Effective January 1, 1994, the Company adopted the Max & Erma's 401(k)
Savings Plan and Trust which allows employees who have attained age 21 and have
completed one year of service to defer receipt of a portion of their
compensation and contribute such amounts to various investment funds. The
Company matches a percentage of the employees' contributions.
Total expense for these plans for 1995 and 1994 was approximately
$138,000 and $83,000, respectively.
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1995, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The
statement, which is effective for fiscal years beginning after December 15,
1995, requires that an entity evaluate long-lived assets and certain other
identifiable intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. Impairment loss meeting the recognition criteria is to be
measured as the amount by which the carrying amount for financial reporting
purposes exceeds the fair value of the asset. The Company plans to adopt this
statement in fiscal 1997 and does not expect adoption of the statement to have
a material effect, if any, on the Company's financial position or results of
operations.
Also in 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which requires adoption no later than fiscal years beginning
after December 15, 1995. The new standard defines a fair value method of
accounting for stock options and similar equity instruments. Under the fair
value method, compensation cost is measured at the grant date based on the fair
value of the award and is recognized over the service period, which is usually
the vesting period. Pursuant to the new standard, companies are encouraged, but
not required, to adopt the fair value method of accounting for employee
stock-based transactions. Companies are also permitted to continue to account
for such transactions under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," but are required to disclose in a
note to the financial statements pro forma net income and earnings per share as
if the Company had applied the new method of accounting. The Company will not
adopt the new standard but will present the required pro forma footnote
disclosures commencing in fiscal 1997.
23
Max & Erma's Restaurants, Inc.
<PAGE> 15
AUDITOR'S REPORT
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Directors of Max & Erma's Restaurants, Inc.:
We have audited the accompanying balance sheets of Max & Erma's
Restaurants, Inc. as of October 29, 1995 and October 30, 1994, and the related
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended October 29, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of Max & Erma's Restaurants, Inc. at
October 29, 1995 and October 30, 1994, and the results of its operations and its
cash flows for each of the three years in the period ended October 29, 1995 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
December 11, 1995
Columbus, Ohio
MAX & ERMA'S OFFICERS AND DIRECTORS
WILLIAM E. ARTHUR, Director, Partner, Porter, Wright, Morris and Arthur o TODD
B. BARNUM, Chairman of the Board, Chief Executive Officer, President and
Director o ROGER BLACKWELL, Director, Professor of Marketing, The Ohio State
University o KAREN A. BRENNAN, Vice President Marketing and Strategic
Development and Director o MARK F. EMERSON, Chief Operating Officer and
Director o GREG HEYWOOD, Regional Vice President of Operations o DONALD W.
KELLEY, Director, Owner, Donald W. Kelley & Associates o MICHAEL D. MURPHY,
Private Investor o WILLIAM C. NIEGSCH, JR., Executive Vice President, Chief
Financial Officer, Treasurer, Secretary and Director o ROBERT A. ROTHMAN,
Director, Managing Partner, Amusement Investment Company
24
<PAGE> 16
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except per share data)
INCOME
BEFORE STOCK PRICE
TOTAL INCOME NET EARNINGS --------------------
REVENUES TAXES INCOME PER SHARE HIGH LOW
=============================================================================
<S> <C> <C> <C> <C> <C> <C>
1995
First Quarter $19,329 $ 886 $ 610 $ 0.14 $ 7.95 $ 6.02
Second Quarter 14,332 720 492 0.12 8.38 7.16
Third Quarter 15,181 777 542 0.13 8.25 7.63
Fourth Quarter 15,356 678 495 0.12 8.38 7.38
------- ------ ------ -------- -------- --------
YEAR $64,198 $3,061 $2,139 $ 0.50 $ 8.38 $ 6.02
======= ====== ====== ======== ======== ========
1994
First Quarter $16,601 $ 762 $ 517 $ 0.13 $ 8.75 $ 6.94
Second Quarter 13,276 593 428 0.10 9.77 7.95
Third Quarter 13,409 751 545 0.13 9.55 8.07
Fourth Quarter 12,841 711 511 0.12 8.18 6.82
------- ------ ------ -------- -------- --------
YEAR $56,127 $2,817 $2,001 $ 0.47 $ 9.77 $ 6.82
======= ====== ====== ======== ======== ========
</TABLE>
The Company's common stock trades on the NASDAQ National Market under the
symbol MAXE. At November 30, 1995 there were 838 stockholders of record of the
Company's common stock. The closing price for the Company's common stock at
October 29, 1995 was $7.63. The high and low prices for the Company's common
stock have been adjusted for a 10% stock dividend paid April 21, 1995.
SHAREHOLDER INFORMATION
QUARTERLY CALENDAR
Max & Erma's operates on a fiscal year ending on the last Sunday in October.
Quarterly results are announced within 30 days after the end of each quarter
and audited results are announced within 60 days after year end.
<TABLE>
<CAPTION>
FISCAL 1996 QUARTER-END DATES
<S> <C>
1st quarter February 18, 1996
2nd quarter May 12, 1996
3rd quarter August 4, 1996
4th quarter October 27, 1996
</TABLE>
DIVIDENDS:
The Company paid no cash dividends in fiscal 1993, 1994, or 1995. The Company
presently intends to retain its earnings to finance the growth and development
of its business and does not anticipate paying any cash dividends in the
foreseeable future.
GENERAL COUNSEL:
Porter, Wright, Morris and Arthur
Columbus, Ohio
AUDITORS:
Deloitte & Touche LLP
Columbus, Ohio
STOCK TRANSFER AGENT AND REGISTRAR:
The Huntington Trust Company
Stock Transfer Department
Huntington Center - HC1026
Columbus, Ohio 43287
614-480-3760
Stockholders are advised to notify the Transfer Agent of changes in address or
problems regarding missing or incorrect dividends or stock certificates.
ANNUAL STOCKHOLDERS MEETING:
March 15, 1996, 2:30 p.m.
Greater Columbus Convention Center
400 North High Street
Columbus, Ohio
10-K REPORT
Stockholders may obtain, without cost, a copy of Form 10-K for the Company's
fiscal year ended October 29, 1995, by writing to:
William C. Niegsch, Jr.
Max & Erma's Restaurants, Inc.
P.O. Box 297830
4849 Evanswood Drive
Columbus, Ohio 43229
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
No. 33-23950 and 33-70284 of Max & Erma's Restaurants, Inc. on Form S-8 of our
report dated December 11, 1995, incorporated by reference in this Annual Report
on Form 10-K of Max & Erma's Restaurants, Inc. for the year ended October 29,
1995.
/s/ Deloitte & Touche LLP
Columbus, Ohio
January 8, 1996
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
Each director and/or officer of Max & Erma's Restaurants, Inc. (the
"Corporation") whose signature appears below hereby appoints William C.
Niegsch, Jr., Mark F. Emerson and Todd B. Barnum as his or her attorneys or any
of them individually as his or her attorney, to sign, in his or her name and
behalf and in any and all capacities stated below, and to cause to be filed
with the Securities and Exchange Commission (the "Commission"), the
Corporation's Annual Report on Form 10-K (the "Form 10-K") for the fiscal year
ended October 29, 1995, and likewise to sign and file with the Commission any
and all amendments, including post-effective amendments, to the Form 10-K, and
the Corporation hereby also appoints such persons as its attorneys-in-fact and
each of them as its attorney-in-fact with like authority to sign and file the
Form 10-K and any amendments thereto granting to each such attorney-in-fact
full power of substitution and revocation, and hereby ratifying all that any
such attorney-in-fact or his substitute may do by virtue hereof.
IN WITNESS WHEREOF, we have hereunto set our hands this 12th day of
December, 1995.
Signature Title
- --------- -----
/s/ Todd B. Barnum Chairman, President, Chief Executive
- -------------------------- Officer and Director
Todd B. Barnum
/s/ Mark F. Emerson Chief Operating Officer and Director
- --------------------------
Mark F. Emerson
/s/ William C. Niegsch, Jr. Executive Vice President, Chief Financial
- -------------------------- Officer, Treasurer, Secretary and Director
William C. Niegsch, Jr.
/s/ Karen A. Brennan Vice President of Marketing and
- -------------------------- Strategic Development and Director
Karen A. Brennan
/s/ William E. Arthur Director
- --------------------------
William E. Arthur
<PAGE> 2
Signature Title
- --------- -----
/s/ Robert A. Rothman Director
- --------------------------
Robert A. Rothman
/s/ Roger D. Blackwell Director
- --------------------------
Roger D. Blackwell
/s/ Donald W. Kelley Director
- --------------------------
Donald W. Kelley
/s/ Michael D. Murphy Director
- --------------------------
Michael D. Murphy
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-29-1995
<PERIOD-START> OCT-31-1994
<PERIOD-END> OCT-29-1995
<CASH> 1,102,060
<SECURITIES> 0
<RECEIVABLES> 965,673
<ALLOWANCES> 0
<INVENTORY> 539,025
<CURRENT-ASSETS> 3,285,738
<PP&E> 57,563,647
<DEPRECIATION> 15,061,971
<TOTAL-ASSETS> 48,610,508
<CURRENT-LIABILITIES> 6,831,773
<BONDS> 26,036,831
<COMMON> 411,789
0
0
<OTHER-SE> 15,188,180
<TOTAL-LIABILITY-AND-EQUITY> 48,610,508
<SALES> 0
<TOTAL-REVENUES> 64,198,284
<CGS> 16,723,445
<TOTAL-COSTS> 54,967,180
<OTHER-EXPENSES> 4,962,198
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,207,695
<INCOME-PRETAX> 3,061,211
<INCOME-TAX> 922,000
<INCOME-CONTINUING> 2,139,211
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,139,211
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
</TABLE>
