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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 26, 1997
Commission File Number: 0-11514
Max & Erma's Restaurants, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware No. 31-1041397
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4849 Evanswood Drive Columbus, Ohio 43229
- -------------------------------------- ----------------------
(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 checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to the filing
requirements for at least the past 90 days. YES _X_ NO ___
Indicate by checkmark 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, 1997.
Total shares outstanding 4,250,663
Number of shares owned beneficially 1,791,131
and/or of record by directors
and officers (1)
Number of shares held by persons 2,745,632
other than directors or
officers
Closing bid price $6.13
Market value of shares held by $16,830,724
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
286,100 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.
4,250,663 Common Shares
were outstanding at December 31, 1997
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Shareholders for the Fiscal Year Ended October 26,1997 (in
pertinent parts, as indicated).....Parts II and IV.
2. Proxy Statement for 1998 Annual Meeting of Shareholders (in pertinent
parts, as indicated).....Part III.
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PART I
Item 1. BUSINESS
Max & Erma's Restaurants, Inc. (the "Company"), directly and through
affiliated partnerships, owns and operates a chain of forty-six Max & Erma's
restaurants at December 31, 1997. The Company is a Delaware corporation
organized in 1982, as the successor to a restaurant business founded in 1971.
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
1997, the average check was approximately $7.97 at lunch and $9.72 at dinner.
The lunch and dinner meal periods accounted for approximately 35.7% and 64.3%
of net sales, respectively. Alcoholic beverages constituted approximately 13.0%
of net sales in fiscal 1997.
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.
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
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well as innovative and reviews, and revises as necessary, the menu twice each
year, and in addition offers an annual summer menu. During 1996 the Company
expanded its entree offerings in an effort to increase its per person dinner
check average, a process that continued through 1997. 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 3.25% 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 forty-four 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.
During 1997 the Company entered into two separate franchise agreements
to operate a Max & Erma's restaurant in the Columbus, Ohio airport and two
restaurants in the Cleveland, Ohio airport. Terms of the agreements call for an
initial franchise fee of $25,000 to $40,000 plus a monthly royalty of 4 or 5%
of sales. All three restaurants are expected to open during 1998 and should
generate annual royalty payments of approximately $200,000.
In early 1998 the Company signed a letter of intent, which grants a
franchisee the right to operate Max & Erma's restaurants in the state of West
Virginia. Upon execution of a franchise agreement, the franchisee will be
obligated to open the first restaurant within 12 months. If a minimum sales
volume is achieved during the first 18 months of operation the franchisee will
be required to open at least two additional restaurants during the next four and
one-half years.
The Company anticipates testing a second restaurant concept during
1998. The "new concept" will occupy approximately 4,000 square feet of leased
space, open for dinner only, and primarily serve pasta and gourmet pizzas
prepared in a wood-burning oven. Management expects the "new concept" to
generate an average dinner check, including alcoholic beverages, of
appoximately $13 to $15 per person and annualized sales of approximately $1.25
million per location.
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.
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Employees
At November 30, 1997, the Company had 3,820 employees, of which 1,419
were full-time restaurant employees, 2,187 were part-time restaurant employees,
58 were corporate staff personnel and 156 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.
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 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. Ten 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 40 to 110
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-half 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.
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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 relatively low management turnover.
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.
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Future Expansion
In addition to two restaurants opened during the first quarter of
1998, the Company intends to open three additional Max & Erma's restaurants
during the remainder of fiscal 1998 and an additional five to six restaurants
during fiscal 1999. All but four of the existing Max & Erma's restaurants are
located in suburban areas. Of the existing restaurants, 30 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 two (all free-standing) of the three restaurants scheduled to open during
the remainder of 1998:
Existing Under Development
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GEORGIA
Atlanta.......... 2 -
ILLINOIS
Chicago.......... 6 1
INDIANA
Indianapolis..... 3 -
KENTUCKY
Lexington........ 2 -
MICHIGAN
Ann Arbor........ 1 -
Detroit.......... 6 -
Grand Rapids..... 1 -
NORTH CAROLINA
Charlotte........ 1 -
OHIO
Akron............ 1 -
Cincinnati....... 1 -
Cleveland........ 3 -
Columbus......... 10 -
Dayton........... 3 -
Toledo........... - 1
PENNSYLVANIA
Pittsburgh....... 5 -
SOUTH CAROLINA
Greenville 1 -
TOTAL.... 46 2
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.
Business Risks
The Company desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The
Reform Act only became law in late December 1995 and, except for the Conference
Reports, no official interpretations of the Reform Act's provisions have been
published. Many of the following important factors have been discussed in the
Company's prior filings with the Securities and Exchange Commission.
In addition to the other information in this Report, readers should
carefully consider that the following important factors, among others, in some
cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual results of operations for Fiscal
1998 and beyond, to differ materially from those expressed in any
forward-looking statements made by, or on behalf of the Company.
1. Dependence on Management - The Company's senior management has over 70
years experience with the Company. The loss of one or more key executives
could have an adverse effect on the Company.
2. Competition - The casual dining segment of the restaurant industry is
highly competitive. Many of the Company's competitors are larger national
chains with greater financial resources.
3. Restaurant Industry - The restaurant industry is affected by changing
trends, economic conditions, traffic patterns and weather. Increases in
food, labor and benefits costs along with the availability of employees
and suitable restaurant sites could affect future operating results.
4. Legal - The Company is exposed to various tort and other claims, most
notably liability claims resulting from the sale of alcoholic beverages.
While the Company currently maintains insurance for such claims, there is
no assurance of its adequacy or future availability. An uninsured or
excess claim could have a material adverse affect on the Company.
5. Government Regulation - The restaurant industry is subject to extensive
government regulations relating to the sale of food and alcoholic
beverages, and sanitation, fire and building codes. Suspension or
inability to renew any of the related licenses and permits could adversely
affect the Company's operations. Further more, government actions
affecting minimum wage rates, payroll tax rates and mandated benefits
could affect operating results.
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Item 2. PROPERTIES
All but six of the Company's restaurants are occupied under leases
(including the eight restaurant sale-leaseback referred to below) expiring from
1998 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.
In the first quarter of 1998 the Company completed a sale-leaseback of
eight Max & Erma's restaurant properties. The Company received net proceeds from
the sale of approximately $17.0 million, which was approximately net book value
of the properties. The related leases are for an initial term of twenty years
with three five-year renewal options. The properties may be purchased at fair
market value at the end of ten years and at the end of each five year period
thereafter.
The last 26 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 freestanding prototype is
approximately 6,700 square feet and seats 200 patrons for dining in addition to
the bar area. A 30 to 40 seat seasonal patio area is optional. The prototype
design is readily adaptable to a variety of sites including shopping center and
mall locations.
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.
The Company is under contract to lease 4,000 square feet in a
neighborhood shopping center for purposes of testing a new concept. The Company
is negotiating to lease an additional two to four locations during 1998 for
this new concept. Management plans on opening these new restaurants for dinner
only, thus making convenient neighborhood location the most important aspect of
the site selection criteria. The first lease is for an initial term of five
years with two five-year renewal options.
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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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information contained under the captions "SELECTED QUARTERLY
FINANCIAL DATA" and "SHAREHOLDER INFORMATION" is incorporated herein by
reference to the inside back cover of the Company's Annual Report to
Shareholders for the fiscal year ended October 26, 1997.
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 26, 1997, 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 26, 1997, pages 11 through 13.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The balance sheets as of October 26, 1997 and October 27, 1996 and the
related statements of income, stockholders' equity and cash flows for each of
the three years in the period ended October 26, 1997, 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 26,
1997, pages 14 through 24 and the inside back cover.
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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 1998 Annual Meeting of
Stockholders to be held on April 9, 1998, pursuant to Regulation 14A.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.
(a)(1) and (2) and (d): Financial Statements
The financial statements listed in the accompanying index to
financial statements on page 13 are filed as part of this
report.
(a)(3) and (c): Exhibits
The exhibits listed in the accompanying index to exhibits on
pages 14 through 17 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 14, 1998 Max & Erma's Restaurants, Inc.
By: /s/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.
<TABLE>
<CAPTION>
Signature Title
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<S> <C>
/s/Todd B. Barnum Chairman of the Board, Chief Executive
- ------------------------------- Officer and President, Director (Principal
Todd B. Barnum Executive Officer)
*/s/Mark F. Emerson Chief Operating Officer, Director
- -------------------------------
Mark F. Emerson
/s/William C. Niegsch, Jr. Executive Vice President and Chief
- ------------------------------- Financial Officer, Director,
William C. Niegsch, Jr. (Principal Financial Officer)
*/s/William E. Arthur Director
- -------------------------------
William E. Arthur
*/s/Donald W. Kelley Director
- -------------------------------
Donald W. Kelley
*/s/Robert A. Rothman Director
- -------------------------------
Robert A. Rothman
*/s/Roger D. Blackwell Director
- -------------------------------
Roger D. Blackwell
*/s/Michael D. Murphy Director
- -------------------------------
Michael D. Murphy
*/s/Thomas R. Green Director
- -------------------------------
Thomas R. Green
*By /s/ William C. Niegsch, Jr.
- -------------------------------
William C. Niegsch, Jr.
Attorney-in-Fact
</TABLE>
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MAX & ERMA'S RESTAURANTS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
ITEMS 8, 14(a)(1)
<TABLE>
<CAPTION>
REFERENCE PAGE
--------------
ANNUAL REPORT
TO
SHAREHOLDERS
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<S> <C>
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 26, 1997:
- -Balance Sheets as of
October 26, 1997 and October 27, 1996 14 - 15
- -For the years ended October 26, 1997,
October 27, 1996 and October 29, 1995
-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.
</TABLE>
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REPORT ON FORM 10-K
MAX & ERMA'S RESTAURANTS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description Page No.
No. ----------- --------
---
<S> <C> <C>
2 Plan and Agreement of Reorganization, as amended October Reference is made to Exhibit 2 of
15, 1991. Report on Form 10-K filed January
24, 1992.
3(a) Restated Certificate of Incorporation, as amended April 4, Reference is made to Exhibit 4(c) of
1985. Report on Form 10-Q filed June 26,
1985.
3(b) Restated By-Laws, as amended April 4, 1985. Reference is made to Exhibit 4(d) of
Report on Form 10-Q filed June 26,
1985.
3(c) Certificate of Amendment of Certificate of Incorporation Reference is made to Exhibit 3(c) of
September 22, 1986. Report on Form 10-K filed January
23, 1987.
3(d) Certificate of Amendment of Certificate of Incorporation Reference is made to Exhibit 3(d) of
May 30, 1990. Report on Form 10-K filed January
25, 1991.
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 18, 1994, between Max Reference is made to Exhibit 4(a) of
& Erma's Restaurants, Inc. and The Huntington National Registration Statement on Form S-2
Bank, as Trustee. (Registration No. 33-80090).
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 Limited Partnership, dated Reference is made to Exhibit 10(b)
May 17, 1972. of Registration Statement on Form
S-1 (Registration No. 2-85585).
10(b) First Amendment to Agreement of Limited Partnership of Max Reference is made to Exhibit 10(b)
& Erma's, Ltd., dated September 9, 1974. of Registration Statement on Form
S-1 (Registration No. 2-85585).
10(c) Max & Erma's Convention Center Ltd. Agreement of Limited Reference is made to Exhibit 10(k)
Partnership, dated July 27, 1981. of Registration Statement on Form
S-1 (Registration No. 2-85585).
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<TABLE>
<CAPTION>
Exhibit Description Page No.
No. ----------- --------
---
<S> <C> <C>
10(d) Letter Agreement between Nine Limited Leasing, Max & Reference is made to Exhibit 10(bb)
Erma's, Inc., and Max & Erma's Indianapolis, Ltd., dated of Registration Statement on Form
April 24, 1977. S-1 (Registration No. 2-85585).
10(e) Letter Agreement between Nine Limited Leasing, Max & Reference is made to Exhibit 10(dd)
Erma's, Inc., and Max & Erma's East, Ltd., dated May 27, of Registration Statement on Form
1977. S-1 (Registration No. 2-85585).
10(f) Letter Agreement between Nine Limited Leasing, Max & Reference is made to Exhibit 10(ee)
Erma's, Inc., and Max & Erma's Dayton, Ltd., dated October of Registration Statement on Form
1, 1977. S-1 (Registration No. 2-85585).
10(g) Letter Agreement between Nine Limited Leasing, Max & Reference is made to Exhibit 10(ff)
Erma's, Inc., and Max & Erma's Lexington, Ltd., dated of Registration Statement on Form
September 27, 1978. S-1 (Registration No. 2-85585).
10(h) Letter Agreement between Nine Limited Leasing, Max & Reference is made to Exhibit 10(gg)
Erma's, Inc., and Max & Erma's North, Ltd., dated December of Registration Statement on Form
28, 1981. S-1 (Registration No. 2-85585).
10(i)* Employment Agreement with Todd Barnum, dated December 12, Reference is made to Exhibit 10(b)
1984. of Report on Form 10-K filed January
25, 1985.
10(j)* Employment Agreement with Mark F. Emerson, dated December Reference is made to Exhibit 10(c)
12, 1984. of Report on Form 10-K filed January
25, 1985.
10(k)* Employment Agreement with William C. Niegsch, Jr., dated Reference is made to Exhibit 10(d)
December 12, 1984. of Report on Form 10-K filed January
25, 1985.
10(l)* Third Amended and Restated 1984 Incentive Stock Option Plan. Reference is made to Exhibit 10(n)
of Report on Form 10-K filed January
25, 1993.
10(m)* Third Amended and Restated 1984 Non-Statutory Stock Option Reference is made to Exhibit 10(o)
Plan. of Report on Form 10-K filed January
25, 1993.
10(n)* Board of Directors' resolution dated October 19, 1992 Reference is made to Exhibit 10(p)
relating to amendment to Third Amended and Restated 1984 of Report on Form 10-K filed January
Non-Statutory Stock Option Plan. 25, 1993.
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. Reference is made to Exhibit 10(p)
of Report on Form 10-K filed January
1996.
10(q)* Indemnification Agreement (form) between Max & Erma's Reference is made to Exhibit 10(y)
Restaurants, Inc. and each of its directors dated as of of Report on Form 10-K filed January
June 18, 1986. 23, 1987.
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<TABLE>
<CAPTION>
Exhibit Description Page No.
No. ----------- --------
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<S> <C>
10(s) Lease between Max & Erma's Dublin, Inc. and Mango Reference is made to Exhibit 10(ee)
Investments, dated February 9, 1989. of Report on Form 10-K filed January
26, 1990.
10(t)* Written description of split dollar life insurance program Reference is made to footnote 3 to
for officers. the Summary Compensation Table
presented in the Company's Proxy
Statement for the 1996 Annual
Meeting of Shareholders, which is
incorporated by Reference herein.
10(u)* Board of Directors' Resolution adopted November 2, 1987 Reference is made to Exhibit 10(dd)
relating to split dollar life insurance program for of Report on Form 10-K filed January
officers. 25, 1993.
10(v)* Board of Directors' Resolution adopted October 19, 1992 Reference is made to Exhibit 10(ee)
relating to split dollar life insurance program for of Report on Form 10-K filed January
officers. 25, 1993.
10(w) Revolving Credit Agreement dated October 25, 1993 between Reference is made to Exhibit 10(aa)
Max & Erma's Restaurants, Inc. and The Provident Bank. of Report on Form 10-K filed January
27, 1994.
10(x) Letter Agreement dated July 20, 1994 between Max & Erma's Reference is made to Exhibit 10(ab)
Restaurants, Inc. and The Provident Bank. of Registration Statement on Form
S-2 (Registration No. 33-80090).
10(y) Second Amendment to Revolving Credit Agreement dated August Reference is made to Exhibit 10(ee)
25, 1995 between Max & Erma's Restaurants, Inc. and The of Report on Form 10-K filed January
Provident Bank. 16, 1996.
10(z) Mortgage Commitment Letter dated November 7, 1995 between Reference is made to Exhibit 10(ff)
Max & Erma's Restaurants, Inc. and MetLife Capital of Report on Form 10-K filed January
Financial Corporation. 16, 1996.
10(aa)* Compensation Committee of the Board of Directors resolution
adopted October 1, 1997 relating to officers' bonuses.
10(bb) Letter Agreement dated November 13, 1997 between Max &
Erma's Restaurants, Inc. and Franchise Finance Corporation
of America regarding sale-leaseback transaction.
10(cc) Letter Agreement dated November 13, 1997 between Max & Erma's
Restaurants, Inc. and Franchise Finance Corporation of America
regarding forward commitment for sale-leaseback transactions.
10(dd) Commitment letter from Provident Bank dated December 8, 1997.
13 Portions of the Annual Report to Stockholders for the Fiscal Year
ended October 26, 1997, incorporated herein by reference (except
for those pages which are specifically 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
</TABLE>
*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.
<PAGE> 1
EXHIBIT 10(aa)
RESOLVED, that a cash bonus pool be established for certain of the Company's
officers for Fiscal 1998 calculated in the aggregate as follows:
1% of pre-tax earnings up to $1,486,000;
5% of pre-tax earnings between $1,486,000 and $2,974,000;
15% of pre-tax earnings between $2,974,000 and $4,461,000;
20% of pre-tax earnings over $4,461,000.
FURTHER RESOLVED, that the cash bonus pool be allocated and paid 40% to Mar.
Barnum; 20% to each of Mr. Emerson and Mr. Niegsch, 15% to Ms. Brannigan, and
5% unallocated.
FURTHER RESOLVED, that the cash bonus pool be paid quarterly based on pre-tax
earnings 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 $712,500
which is 125% of the aggregate base salaries of the four executives eligible
for such bonuses.
FURTHER RESOLVED, that Messrs. Heywood and Fournier have individual bonus
programs as follows for fiscal 1998:
A. GREGORY L. HEYWOOD
Mr. Heywood will be paid a bonus equal to the aggregate cash
bonuses paid for fiscal 1998 to the regional managers assigned to
report to Mr. Heywood.
B. LARRY B. FOURNIER
Mr. Fournier will be paid a cash bonus for each new
restaurant opened in fiscal 1998, in an amount equal to $35,000
divided by the number of planned new restaurants for fiscal 1998,
which bonus may be taken under the Manager Stock Bonus Plan in cash or
in the Company's common stock valued at one-half of fair market value.
<PAGE> 1
[FFCA LOGO]
FRANCHISE FINANCE
CORPORATION OF AMERICA
EXHIBIT 10(bb)
November 13, 1997
VIA TELECOPY AND
- ----------------
AIRBORNE EXPRESS
- ----------------
Mr. William Niegsch
Max & Erma's Restaurants, Inc.
4849 Evanswood Drive
Columbus, Ohio 43329
Re: Restaurant sites described on the attached Exhibit A
Dear Bill:
Max & Erma's Restaurants, Inc. ("Max & Erma's") has advised FFCA Acquisition
Corporation ("FFCA") of Max & Erma's desire to enter into a sale-leaseback
transaction with regards to the land, fixtures and improvements at the
above-referenced sites (individually, a "Property" and collectively, the
"Properties"). Upon the acceptance of this commitment letter (the "Commitment")
by Max & Erma's and the simultaneous acceptance of that certain forward
commitment of this date from FFCA with respect to five (5) additional
sale-leasebacks (the "Forward Commitment"), by Max & Erma's, FFCA commits to
purchase and lease back to Max & Erma's the Properties, all on the terms set
forth in this Commitment (collectively, the "Transaction").
A. Basic Commitment Terms.
-----------------------
Background: This Commitment outlines certain basic terms and conditions of
the Transaction; however, it is not meant to define all of the
terms and conditions of the Transaction, which will be set forth
more fully in the final documentation. The Transaction is
subject to, among other things, the approval by FFCA's in-house
site review and valuation department of the Properties and the
Base Price (as defined below), Max & Erma's compliance with all
of the requirements set forth in this Commitment and the receipt
by FFCA of all documents and other information requested by FFCA
and its counsel.
<PAGE> 2
Acceptance: Max & Erma's may accept this Commitment by signing and
returning a copy of this Commitment together with a check
for the portion of the Fee (as defined below) due herewith
to FFCA within 10 days of the date hereof.
Fee: Max & Erma's shall pay FFCA a $91,000.00 valuation,
underwriting and processing fee (1/2% of the Purchase
Price). One-half of the Fee, $45,500.00, is due upon the
acceptance by Max & Erma's of this Commitment; the other
half of the Fee is due at the Closing. Notwithstanding the
foregoing, if at any time prior to the Closing FFCA's
out-of-pocket expenses in connection with the Transaction
exceed the portion of the fee paid herewith, upon the
request of FFCA, Max & Erma's shall promptly pay such excess
amount to FFCA.
Refundability Although the Fee shall be deemed fully earned when received
of Fee: by FFCA, the portion of the Fee paid herewith shall be
refundable in full and this Commitment shall expire if (i)
FFCA's in-house site review and valuation department does
not approve the Properties and the Base Price, or (ii) Max &
Erma's and FFCA are unable to agree upon an alternative Base
Price. If both the Properties and the Base Price are
approved by FFCA, FFCA will promptly send Max & Erma's a
transaction approval letter, and the Fee will automatically
become nonrefundable on such date. If FFCA does not approve
the Properties, the portion of the Fee paid herewith will
promptly be returned to Max & Erma's. If FFCA approves the
Properties but not the Base Price, Max & Erma's will be
contacted by FFCA and given the opportunity to go forward
with the Transaction based upon the lower Base Price
approved by FFCA. If Max & Erma's agrees upon the lower Base
Price, Max & Erma's and FFCA will execute a letter amendment
to this Commitment, and the Fee will thereupon become
nonrefundable. If Max & Erma's does not agree to the lower
Base Price, the portion of the Fee paid herewith will be
promptly refunded to Max & Erma's. Notwithstanding the
foregoing, if for any reason the Transaction fails to close
on or before the Oustside Closing Date, at the request of
Max & Erma's, this Commitment shall terminate and FFCA shall
refund the Fee to Max & Erma's less only FFCA's
out-of-pocket expenses in connection with the Transaction.
Page 2
<PAGE> 3
Transaction FFCA's in-house site review and valuation department has
Processing: not inspected and approved the Properties. FFCA will not
order title insurance commitments and phase I environmental
reports or instruct its counsel to begin preparing the
Agreement or the Leases (as defined below) until Max &
Erma's has accepted this Commitment, FFCA has approved the
Properties and FFCA and Max & Erma's have agreed upon a Base
Price. The closing of the purchase and lease transactions
comprising the Transaction (the "Closing") must occur no
later than the Outside Closing Date (as defined below), or
this Commitment will expire.
B. Basic Sale Terms.
-----------------
Documentation: FFCA's counsel will prepare and submit to Max & Erma's
FFCA's proposed form of sale-leaseback agreement (the
"Agreement"). The Agreement shall (i) contain such
representations, warranties, covenants and agreements as are
usual and customary in transactions of this type, and (ii)
provide that Max & Erma's will indemnify FFCA against all
claims, suits and costs whatsoever relating to any breach of
Max & Erma's representations and warranties. The Agreement
shall require as conditions of the Closing that (i) FFCA be
provided with satisfactory phase I environmental reports,
title insurance commitments, ALTA as-built surveys, opinions
of counsel, certifications of Max & Erma's, non-foreign
certificates, and proof of insurance, (ii) Max & Erma's
execute leases containing the terms described in Section C
below (the form of which leases will be attached as an
exhibit to the Agreement), and (iii) Max & Erma's execute
such other documents as may be reasonably required by FFCA
or the title company.
Purchase Price The sum of (i) $18,200,000.00 (the "Base Price") which
for Properties: amount shall be allocated among the Properties based upon
the respective valuations ascribed to the Properties by
FFCA's in-house site inspection and valuation department.
The Base Price shall be inclusive of (i) the Fee, (ii) Max &
Erma's out-of-pocket expenses relating to the sale of the
Properties to FFCA, as may be approved as to category and
amount by FFCA in its reasonable discretion (the "Covered
Sale Soft Costs"), and (iii) such of Max & Erma's other out-
of-pocket expenses relating to Max & Erma's sale of the
Properties which are not covered as Covered Soft Costs, if
Page 3
<PAGE> 4
any, as may be approved as to category and amount by FFCA in
its sole discretion (the "Approved Sale Soft Costs").
Title to Title to the Properties shall be conveyed to FFCA by
Properties: limited or special warranty deeds, free and clear of all
liens and encumbrances, except those approved by FFCA.
Closing Costs: Max & Erma's shall pay FFCA's in-house site inspection
expenses and FFCA's reasonable attorneys' fees as well as
the cost of all environmental reports, Max & Erma's
attorneys' fees, and all other closing costs, including,
without limitation, all title insurance premiums, transfer
taxes, stamp taxes, transfer, escrow and recording fees,
real estate taxes and assessments, and survey fees; however,
it is understood that the cost of some or all of these items
may in certain circumstances be included in the Purchase
Price as either Covered Sale Soft Costs or Approved Sale
Soft Costs.
Sale Contingency: The closing of the purchase and lease transactions
comprising the Transaction are not severable and the closing
of the purchase transactions shall be conditioned upon the
simultaneous closing of the lease transactions.
Outside Closing December 22, 1997.
Date:
C. Basic Lease Terms.
------------------
Documentation: FFCA's counsel will prepare and submit to Max & Erma's
FFCA's proposed form of lease (the "Lease"), memorandum of
lease (the "Memorandum"), and UCC-1 financing statements
(the "Financing Statements"). At the Closing, FFCA and Max &
Erma's shall execute, for each Property, the Lease, the
Memorandum and the Financing Statements, and (ii) FFCA shall
be provided with any other documents as may be reasonably
required by FFCA or the title company. Each Lease shall (i)
contain such representations, warranties, covenants and
agreements as are usual and customary in transactions of
this type, and (ii) provide that (a) Max & Erma's shall be
responsible for all maintenance, utilities, insurance,
taxes, assessments and other expenses associated with each
Property, (b) Max & Erma's shall not assign, mortgage or
pledge its interest in any Lease without FFCA's consent,
which shall not be
Page 4
<PAGE> 5
unreasonably withheld, and (c) Max & Erma's shall indemnify
FFCA against all claims, suits and costs whatsoever relating
to the Properties.
Lease Term: Approximately twenty (20) years with three (3) successive
five-year extension options.
Base Annual Rental: From the date of the Closing through the tenth (10th)
anniversary of the Closing, Base Annual Rental shall be the
sum of the current ten-year U.S. Treasury Note rate in
effect 10 days prior to the date of the Closing initially
anticipated by FFCA (as determined by a letter from FFCA to
Max & Erma's) plus 3.35% times the Purchase Price, which
shall be payable in equal monthly installments on the first
day of each month. Commencing on the tenth (10th)
anniversary of the Closing and continuing through the
twentieth (20th) anniversary of the Closing, Base Annual
Rental shall be the current 10-year U.S. Treasury Note in
effect 10 days prior to the tenth (10th) anniversary of the
Closing plus 3.35% times the Purchase Price.
Additional Rent: Commencing on the second anniversary of the Closing and
continuing throughout the Lease Term (including all
extension thereof), Max & Erma's shall be required to pay as
Additional Rent an amount equal to the product of (i) the
Base Annual Rental then in effect and (ii) the lesser of (A)
4.5% or (B) an amount equal to three (3) times the average
increase in the U.S. Consumer Price Index during the
previous two (2) years prior to such date. Such Additional
Rent shall be payable in equal monthly installments and
shall be reset every other year thereafter based upon the
total payments of Base Annual Rental and Additional Rent
payable under such Lease.
Extension Option During any extension of the Lease Term for each Property,
Rents: the Lease shall continue in effect upon its original terms
except that the Base Annual Rental shall be the greater of
the Purchase Price times the current 5-year U.S. Treasury
Note in effect 10 days prior to the expiration of the Lease
Term.
Purchase Option: Max & Erma's shall have the option during the ninety (90)
days immediately preceding the 10th, 15th and 20th
anniversaries of each Lease and, if applicable, during the
ninety-day periods immediately preceding the end of the
Page 5
<PAGE> 6
first, second and third extension terms, to purchase any
Property for the greater of (i) its fair market value, or
(ii) the sum of FFCA's total investment in the Property.
D. Other Material Transaction Terms:
---------------------------------
Cross-Default: The Agreement, the Lease, and any other agreements
between FFCA and Max & Erma's with respect to the
Transaction shall be cross-defaulted with all other leases,
loan agreements, notes, mortgages, deeds of trust and other
agreements now or hereafter entered into between (or, in the
case of notes, in favor of) (i) FFCA, Franchise Finance
Corporation of America or any of its other subsidiaries and
affiliates, on the one hand, and (ii) Max & Erma's, or any
of its subsidiaries or affiliates, on the other hand.
E. Other Matters.
--------------
THE FOREGOING SUMMARY OF BASIC TERMS AND CONDITIONS IS NOT MEANT TO BE NOR
SHOULD IT BE CONSTRUED AS AN ATTEMPT TO DEFINE ALL OF THE TERMS AND CONDITIONS
REGARDING THE TRANSACTION. INSTEAD, IT IS INTENDED ONLY TO OUTLINE CERTAIN BASIC
POINTS OF THE BUSINESS UNDERSTANDING AROUND WHICH LEGAL DOCUMENTATION WILL BE
STRUCTURED. THE OUTLINED TERMS AND CONDITIONS ARE SUBJECT TO FINAL DOCUMENTATION
SATISFACTORY TO ALL PARTIES AND COMPLETE LEGAL REVIEW AND APPROVAL OF ALL
PERTINENT MATTERS.
This Commitment and the Transaction contemplated hereby (i) shall be subject
to, in FFCA's judgment, there being no adverse material change in Max & Erma's
financial condition, (ii) shall not be assignable by Max & Erma's or relied upon
by any third party without the prior written consent of FFCA, and (iii) shall be
governed by the internal laws of the State of Arizona, without giving effect to
conflict of law principles. This Commitment may be assigned by FFCA without the
consent of Max & Erma's. The Transaction shall constitute a sale and "true
lease" and not a transaction creating a financing lease, equitable mortgage,
deed of trust, security agreement, trust agreement or other financing or trust
arrangement. This Commitment (i) supersedes any previous discussions, agreements
and/or proposal/commitment letters relating to the Transaction, including, but
not limited to those certain commitment letters dated November 3, 1997 and
November 10, 1997, and (ii) may only be amended by a written agreement executed
by FFCA and Max & Erma's. FFCA reserves the right to cancel this Commitment in
the event Max & Erma's has made any misrepresentations or has withheld any
information with regard to the Transaction.
Page 6
<PAGE> 7
ANY ACTION ARISING OUT OF THIS COMMITMENT SHALL BE PROSECUTED ONLY IN THE
STATE OR FEDERAL COURTS LOCATED IN THE STATE OF ARIZONA. FFCA AND MAX & ERMA'S
WAIVES ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT TO ANY ACTION
ARISING OUT OF THIS COMMITMENT. MAX & ERMA'S WAIVE ANY RIGHT IT HAS OR MAY HAVE
TO SEEK OR RECOVER FROM FFCA OR ANY OF ITS AFFILIATES, OFFICERS, DIRECTORS AND
EMPLOYEES ANY AWARD OF SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES IN
CONNECTION WITH ANY DEFAULT BY FFCA UNDER THIS COMMITMENT.
Please indicate Max & Erma's acceptance of this Commitment by having a copy
of this Commitment signed and returned to FFCA to the attention of Michelle D.
Stewart, FFCA Acquisition Corporation, 17207 North Perimeter Drive, Scottsdale,
Arizona 85255, together with: a check payable to "FFCA Acquisition Corporation"
for $45,500.00; an executed copy of the Forward Commitment; and a check in the
amount required to be paid thereunder within ten (10) days from the date hereof
or this Commitment will automatically expire.
FFCA Acquisition Corporation,
a Delaware corporation
/s/ Mark E. Wood
Mark E Wood
Vice President, Corporate Finance
ACCEPTED AND AGREED TO on this 14th day of November, 1997.
MAX & ERMA'S RESTAURANTS, INC.,
a Delaware corporation
By /s/ William C. Niegsch, Jr.
------------------------------
Name William C. Niegsch, Jr.
----------------------------
Title Exec. V.P. & C.F.O.
Page 7
<PAGE> 8
EXHIBIT A
PROPERTY NAME PROPERTY ADDRESS OPENING DATE
3030 Lakecrest Circle
Beaumont Centre Lexington, KY 40513 September, 1996
201 South Bridewell Drive
Burr Ridge Burr Ridge, IL 60521 February, 1996
Canton MI December, 1996
936 Sheraton Drive
Cranberry Mars, PA 16046 December, 1995
8901 Kingsridge Drive
Dayton Dayton, OH 45459 December, 1975
6420 Grand Avenue
Gurnee Gurnee, IL 60031 June, 1996
Gwinnett GA April, 1997
Parkway West PA November, 1996
33675 Solon Road
Solon Solon, OH 44139 April, 1996
Page 8
<PAGE> 1
[FFCA LOGO]
FRANCHISE FINANCE
CORPORATION OF AMERICA
EXHIBIT 10(cc)
November 13, 1997
VIA TELECOPY AND
- ----------------
AIRBORNE EXPRESS
- ----------------
Mr. William Niegsch
Max & Erma's Restaurants, Inc.
4849 Evanswood Drive
Columbus, Ohio 43329
Dear Bill:
Max & Erma's Restaurants, Inc. ("Max & Erma's") has asked FFCA Acquisition
Corporation ("FFCA") to assist Max & Erma's in adding up to five (5) new Max &
Erma's restaurants to its system within the next 18 months. The land
underlying some or all of these new restaurant sites (the "Land") may be
purchased by FFCA and then leased to and developed by Max & Erma's pursuant to
FFCA's standard form build-to-suit sale-leaseback documentation wherein FFCA
purchases the Land, Max & Erma's then leases back the Land, develops the new
restaurant and related improvements thereon (the "Improvements") and FFCA funds
the cost of constructing the Improvements (collectively, a "Build-to-Suit
Sale-Leaseback Transaction"). Max & Erma's has also advised FFCA that
alternatively, some or all of these new restaurants may be existing
restaurants that would be acquired by Max & Erma's from third parties and then
sold to FFCA and leased back to Max & Erma's (an "Existing Store Sale-Leaseback
Transaction").
Upon the acceptance of this commitment letter (the "Commitment") by Max &
Erma's, and the simultaneous acceptance of that certain refinance commitment of
this date from FFCA with respect to 9 sale-leasebacks (the "Refinance
Commitment"), FFCA commits to purchase and lease back to Max & Erma's up to five
(5) restaurant properties identified by Max & Erma's (individually, a "Property"
and collectively, the "Properties"'), all on the terms set forth in this
Commitment (individually, a "Transaction" and collectively, the "Transac-
tions").
<PAGE> 2
A. Basic Commitment Terms.
-----------------------
Background: This Commitment outlines certain basic terms and conditions
of the Transactions; however, it is not meant to define all
of the terms and conditions of the Transactions, which will
be set forth more fully in a separate term sheet (the "Term
Sheet") and the final documentation for each Transaction.
Each Transaction is subject, among other things, to the
approval by FFCA's in-house site review and valuation
department of each Property and its Purchase Price and,
where applicable, Development Price, the satisfaction of the
conditions outlined in this Commitment, and the receipt by
FFCA of all documents and other information requested by
FFCA and its counsel.
Acceptance: Max & Erma's may accept this Commitment by signing and
returning a copy of this Commitment and delivering a check
for the Fee (as defined below) to FFCA within 10 days of the
date hereof.
Fee: Max & Erma's shall pay FFCA a $15,000.00 fee for this
Commitment.
Refundability Although the Fee shall be nonrefundable and fully earned
of Fee: when received by FFCA, all or part of the Fee may be
applied to the Property Commitment Fees as described in the
Property Commitment Fee Sections below. Notwithstanding
the foregoing, upon the expiration of the term of this
Commitment if the Fee has not been fully used and applied,
at the request of Max & Erma's FFCA shall either refund the
fee to Max & Erma's less only FFCA's out-of-pocket expenses
for Transactions that did not close, or it shall be applied
to any Fee owing under any renewal or extension of this
Commitment.
Transaction Max & Erma's will notify FFCA as soon as Max & Erma's
Processing: has identified a Property. Such notice shall include a copy
of the contract or option agreement (if applicable), a de-
scription of the Property (including the proposed or
existing, as appropriate, Improvements) and the proposed
Transaction, a detailed budget for the Improvements, if
applicable, and any other documents and information
available regarding the Property (the "Property Notice").
Upon receipt of the Property Notice, FFCA will prepare a
Term Sheet outlining the specific terms and conditions upon
which FFCA
Page 2
<PAGE> 3
would be willing to enter into the Transaction. FFCA's in-
house site review and valuation department will not inspect
any Property identified by Max & Erma's until a Term Sheet
has been accepted by Max & Erma's. FFCA will not order a
title insurance commitment and phase I environmental
report or instruct its counsel to begin preparing any of the
documentation, until FFCA has approved the Property and FFCA
and Max & Erma's have agreed upon a Purchase Price and, if
applicable, Development Price.
Commitment Term: The term of this Commitment shall commence on the date
this Commitment is accepted and automatically expire and be
of no further force or effect after April 30, 1999. Any
Property Notice received by FFCA after such date shall be
ineffective.
Transaction Notwithstanding anything in this Commitment to the contrary,
Amounts: the Purchase Price and, if applicable, the Development
Price for each Property shall not exceed the sum of
$2,023,000.00 (inclusive of the Property Commitment Fee and
the financed closing costs).
Transaction Types: Each of the Transactions shall be either an Existing Store
Sale-Leaseback Transaction or a Build-to-Suit Sale-Leaseback
Transaction.
Property Locations: All of the Properties shall be located in the United States
of America.
B. Basic Terms of Existing Store Sale-Leaseback Transaction.
---------------------------------------------------------
Property Commitment Max & Erma's shall pay FFCA a valuation underwriting
Fee: and processing fee equal to one-half percent (1/2%) of the
sum of the Purchase Price. When Max & Erma's accepts the
Property Commitment, $3,000.00 of the Fee shall be applied
towards the Property Commitment Fee owing thereunder.
One-half of the balance of the Property Commitment Fee shall
be due upon Max & Erma's acceptance of the Property
Commitment; the balance of the Property Commitment Fee
shall be due at the Closing.
Documentation: FFCA's counsel will submit to Max & Erma's FFCA's proposed
form of existing store sale-leaseback documents for each
approved Existing Store Sale-Leaseback Transaction.
Page 3
<PAGE> 4
Purchase Price: The sum of (i) the fair market value of the Property, as
determined by FFCA's in-house site inspection department,
(ii) the Property Commitment Fee, and (iii) any other trans-
action costs that may be agreed to by FFCA in its sole dis-
cretion.
Closing Costs: Max & Erma's shall pay FFCA's in-house site inspection
expenses and reasonable attorneys' fees as well as the cost
of all environmental reports, Max & Erma's attorneys' fees,
and all other closing costs, including, without limitation,
all title insurance premiums, transfer taxes, stamp taxes,
transfer, escrow and recording fees, real estate taxes and
assessments, and survey fees. Notwithstanding the
foregoing, some or all of these costs may be financed in the
Purchase Price.
Lease Term: Twenty (20) years with three (3) successive five-year
extension options.
Base Annual Rental: From the date of the Closing through the tenth (10th)
anniversary of the Closing, Base Annual Rental shall be the
sum of the current ten-year U.S. Treasury Note rate in ef-
fect 10 days prior to the date of the Closing initially
anticipated by FFCA (as determined by a letter from FFCA
to Max & Erma's) plus 3.35% times the Purchase Price, which
shall be payable in equal monthly installments on the first
day of each month. Commencing on the tenth (10th)
anniversary of the Closing and continuing through the
twentieth (20th) anniversary of the Closing, Base An- nual
Rental shall be the current 10-year U.S. Treasury Note in
effect 10 days prior to the tenth (1 0th) anniversary of the
Closing plus 3.35% times the Purchase Price.
Additional Rent: Commencing on the second anniversary of the Closing and
continuing throughout the Lease Term (including all
extensions thereof), Max & Erma's shall be required to pay
as Additional Rent an amount equal to the product of (i) the
Base Annual Rental then in effect and (ii) the lesser of (A)
4.5% or (B) an amount equal to three (3) times the average
increase in the U.S. Consumer Price Index during the
previous two (2) years prior to such date. Such Additional
Rent shall be payable in equal monthly installments and
shall be reset every other year thereafter based upon the
total payments of Base Annual Rental and Additional Rent
Page 4
<PAGE> 5
payable under such Lease.
Extension Option During any extension of the Lease Term, the lease shall
Rents: continue in effect upon its original terms except the Base
Annual Rental shall be the Purchase Price times the current
5-year U.S. Treasury Note in effect 10 days prior to the
expiration of the Lease Term.
Purchase Option: Max & Erma's shall have the option during the ninety (90)
days immediately preceding the 10th, 15th and 20th anni-
versaries of the lease and, if applicable, during the
ninety-day periods immediately preceding the end of the
first, second and third extension terms, to purchase
the Property for greater of (i) its fair market value, or
(ii) FFCA's total in vestment in the Property.
C. Basic Terms of Build-to-Suit Sale-Leaseback Transactions.
---------------------------------------------------------
Basic Terms: The basic terms and conditions for each Build-to-Suit
Sale-Leaseback Transaction shall be the same as for the
Existing Store Sale-Leaseback Transaction, except as
otherwise set forth in this section.
Property Upon Max & Erma's acceptance of each Property Commitment,
Commitment Fee: Max & Erma's shall pay FFCA an underwriting and processing
fee equal to one percent (1%) of the sum of Purchase Price
and the Development Price.
Documentation: FFCA's counsel will submit to Max & Erma's FFCA's proposed
form of build-to-suit sale-leaseback transaction
documentation for each approved Build-to-Suit Sale-
Leaseback Transaction.
Purchase Price: The Purchase Price of the Land shall be the sum of (i) the
fair market value of the Land, as such amount is determined
by FFCA's in-house site review and valuation department,
(ii) the Property Commitment Fee, and (iii) such other
transaction costs as FFCA may approve in its sole discre-
tion.
Closing Costs: Max & Erma's shall pay extents FFCA's in-house site
inspection and valuation expenses and attorneys' fees as
well as the cost of all environmental reports, Max & Erma's
attorneys' fees and all other closing costs, including,
without limita-
Page 5
<PAGE> 6
tion, all title insurance premextenums, transfer taxes,
stamp taxes, transfer, escrow and recording fees,
construction consultant fees, disbursement agent fees,
soil report expenses, real estate taxes and assessments,
and survey fees. Notwithstanding the foregoing, some or
all of these costs may be financed in the Purchase Price.
Lease Term: Approximately Twenty (20) years and four (4) months with
three (3) successive five-year extension options.
Base Annual Rental: From the date of the Closing through the tenth (10th)
anniversary of the Closing, Base Annual Rental shall be the
sum of the current ten-year U.S. Treasury Note rate in ef-
fect 10 days prior to the date of the Closing initially
anticipated by FFCA (as determined by a letter from FFCA
to Max & Erma's) plus 3.35% times the Purchase Price, which
shall be payable in equal monthly installments on the first
day of each month. Commencing on the tenth (l0th)
anniversary of the Closing and continuing through the
twentieth (20th) anniversary of the Closing, Base Annual
Rental shall be the current 10-year U.S. Treasury Note in
effect 10 days prior to the tenth (10th) anniversary of the
Closing plus 3.35% times the Purchase Price.
Additional Rent: Commencing on the second anniversary of the Closing, Max &
Erma's shall be required to pay as Additional Rent an amount
equal to the product of (i) the Base Annual Rental then
in effect and (ii) the lesser of (A) 4.5% or (B) an amount
equal to three (3) times the average increase in the U.S.
Consumer Price Index during the previous two (2) years prior
to such date. Such Additional Rent shall be payable in equal
monthly installments and shall be reset every other year
thereafter based upon the total payments of Base Annual
Rental and Additional Rent payable under such Lease.
Development Price: After purchasing and leasing the Land at each Property
back to Max & Erma's, FFCA will agree to fund the cost to
construct the Improvements, as approved by FFCA in its sole
discretion.
Basic Construction Max & Erma's, FFCA and Lawyers Title Insurance Corporation
Funding Terms: (" Title Company") will enter into FFCA's standard form
disbursement agreement wherein FFCA will agree to fund the
Development Price in progress payments through
Page 6
<PAGE> 7
Title Company and Max & Erma's will agree to complete the
Improvements as provided therein.
D. Other Material Transaction Terms.
---------------------------------
Cross-Default: The sale-leaseback agreements, leases, disbursement
agreements and any other agreements between FFCA and Max &
Erma's with respect to the Transactions shall be cross-
defaulted with all other leases, loan agreements, notes,
mortgages, deeds of trust and other agreements now or here-
after entered into between (i) FFCA, Franchise Finance
Corporation of America or any of its other subsidiaries and
affiliates, on the one hand, and (ii) Max & Erma's or any
of its subsidiaries or affiliates, on the other hand.
Right-of-First Max & Erma's shall afford FFCA the right to purchase and
Offer: lease back each Property before Max & Erma's solicits or
considers offers from any other investor or lender.
E. Other Matters.
--------------
THE FOREGOING SUMMARY OF BASIC TERMS AND CONDITIONS IS NOT MEANT TO BE NOR
SHOULD IT BE CONSTRUED AS AN ATTEMPT TO DEFINE ALL OF THE TERMS AND CONDITIONS
REGARDING THE TRANSACTIONS. INSTEAD, IT IS INTENDED ONLY TO OUTLINE CERTAIN
BASIC POINTS OF THE BUSINESS UNDERSTANDING AROUND WHICH LEGAL DOCUMENTATION WILL
BE STRUCTURED. THE OUTLINED TERMS AND CONDITIONS ARE SUBJECT TO FINAL
DOCUMENTATION SATISFACTORY TO ALL PARTIES AND COMPLETE LEGAL REVIEW AND
APPROVAL OF ALL PERTINENT MATTERS.
This Commitment and the Transactions contemplated hereby (i) shall be
subject to, in FFCA's sole judgment, there being no material adverse change in
Max & Erma's financial condition, (ii) shall not be assignable by Max & Erma's
or relied upon by any third party without the prior written consent of FFCA,
and (iii) shall be governed by the internal laws of the State of Arizona,
without giving effect to conflict of law principles. This Commitment may be
assigned by FFCA without the consent of Max & Erma's. Within forty-five days
following the end of each quarter during the Commitment Term, Max & Erma's shall
provide FFCA with Max & Erma's financial statements for the preceding quarter.
The closing of the purchase and lease transactions involved in any Transaction
are not severable and the closing of one shall be conditioned upon the closing
of the other. The sale, leaseback and, if applicable, Development Price cost
disbursement portions of each Transaction shall constitute a sale and "true
lease" and not a transaction creating a financing lease, equitable mortgage,
deed of trust, security agreement, trust agreement or other financing or trust
arrangement. This Commitment (i) su-
Page 7
<PAGE> 8
persedes any previous discussions, agreements and/or proposal/commitment letters
relating to the Transactions, including, but not limited to, those certain
commitment letters dated November 3, 1997 and November 10, 1997 and (ii) may
only be amended by a written agreement executed by FFCA and Max & Erma's. FFCA
reserves the right to cancel this Commitment in the event Max & Erma's has made
any misrepresentations or has withheld any information with regard to the
Transactions.
ANY ACTION ARISING OUT OF THIS COMMITMENT SHALL BE PROSECUTED ONLY IN THE
STATE OR FEDERAL COURTS LOCATED IN THE STATE OF ARIZONA. FFCA AND MAX & ERMA'S
WAIVE ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT TO ANY ACTION
ARISING OUT OF THIS COMMITMENT. MAX & ERMA'S WAIVE ANY RIGHT IT HAS OR MAY
HAVE TO SEEK OR RECOVER FROM FFCA OR ANY OF ITS AFFILIATES, OFFICERS, DIRECTORS
AND EMPLOYEES ANY AWARD OF SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE
DAMAGES IN CONNECTION WITH ANY DEFAULT BY FFCA UNDER THIS COMMITMENT.
Please indicate Max & Erma's acceptance of this Commitment by having a copy
of this Commitment signed and returned to FFCA to the attention of Michelle D.
Stewart, FFCA Acquisition Corporation, 17207 North Perimeter Drive,
Scottsdale, Arizona 85255, together with: a check for $15,000.00 payable to
"FFCA Acquisition Corporation"; an executed copy of the Refinance Commitment;
and a check in the amount required to be paid thereunder, within ten (10) days
from the date hereof or this Commitment will automatically expire.
FFCA Acquisition Corporation,
a Delaware corporation
/s/ Mark E. Wood
Mark E. Wood
Vice President, Corporate Finance
ACCEPTED AND AGREED TO on this 14th day of November, 1997.
Max & Erma's Restaurants, Inc.,
a Delaware corporation
By /s/ William C. Niegsch, Jr.
--------------------------------
Name William C. Niegsch, Jr.
------------------------------
Title Exec. V.P. & C.F.O
-----------------------------
Page 8
<PAGE> 9
EXHIBIT A
---------
TERM SHEET
This Term Sheet is subject to the terms and conditions of that certain
commitment letter dated November 13, 1997, between FFCA Acquisition Corporation
("FFCA"), and Max & Erma's Restaurants, Inc. ("Max & Erma's") (the "Commitment
Letter"). In the event of any conflict between the provisions of the Commitment
Letter and the terms of this Term Sheet, the terms of the Commitment Letter
shall prevail. Any capitalized term used herein without definition shall have
the same meaning given in the Commitment Letter.
Date:
---------------------------------------------
Buyer/Lessor: FFCA.
Seller/Lessee: Max & Erma's.
Property Location:
---------------------------------------------
---------------------------------------------
Property Legal Description: See attached Exhibit "A".
------------
Transaction Type (indicate one): Existing Store Sale-Leaseback Transaction
----
Build-to-Suit Sale-Leaseback Transaction
----
Property Commitment Fee: $________ minus a portion of the Preferred
Client Commitment Fee of
$3,000.00 = $___________;
$___________ is due upon execution of this
Term Sheet and $______________ is due at
the Closing.
Purchase Price: $
---------------------------------------------
[Development Price: $ ]
--------------------------------------------
Base Annual Rental: See Commitment Letter.
Additional Rental : See Commitment Letter.
Outside Closing Date:
---------------------------------------------
Page 9
<PAGE> 10
The Property [and] Purchase Price [and Development Price] referenced above
are subject to the approval of FFCA's in-house site inspection and valuation
department. FFCA will promptly notify Max & Erma's of the results of such
site inspection.
ACCEPTED AND AGREED TO this ____day of ________, 199__.
FFCA: MAX & ERMA'S
FFCA ACQUISITION CORPORATION, MAX & ERMA'S RESTAURANTS, INC.,
a Delaware corporation a Delaware corporation
By: By:
---------------------------- -----------------------------
Name: Name:
-------------------------- ---------------------------
Title: Title:
------------------------- --------------------------
Page 10
<PAGE> 1
THE PROVIDENT BANK
COMMERCIAL BANKING
One Columbus
10 W. Broad St.
Columbus, Ohio 43215
(814) 221-0388 EXHIBIT 10(dd)
December 8, 1997
Mr. William R. Niegsch, Jr.
Max & Erma's Restaurants, Inc.
4849 Evanswood Dr.
Columbus, OH 43229
Dear Bill:
This letter represents the commitment of the Provident Bank (the "Bank") to
provide the revolving credit facility described herein to Max & Erma's
Restaurants, Inc. (The "Borrower")
Amount: $12,000,000 revolving credit facility.
Interest rate: Unchanged from the current credit facility provided by
Bank.
Term: $600,000 quarterly reductions in the amount of the
credit facility to begin March 1, 2000, and continue
for nineteen subsequent quarters.
Security: Blanket lien on assets including restaurant equipment
and real estate subject to certain prior liens of
MetLife.
Fees &
Closing Costs: The Borrower will pay a $25,000 closing fee to the Bank
plus continue the current quarterly fee equal to 1/8%
per annum of the daily average unused portion of the
available revolving credit facility.
Compensating
balances: The Borrower agrees to maintain a $100,000 compensating
balance in its depository account maintained at Bank at
all times during the terms of this credit facility.
Loan agreement: Except for changes necessary to reflect this revised
revolving credit facility, the present loan agreement
and security documents will
<PAGE> 2
remain essentially unchanged. Notable exceptions
include the preparation and filing of any financial
statements or mortgages necessary to update the Banks
security position in the assets to be subjected to a
lien by the Bank. Also, a new financial covenant
requiring quarterly earning before taxes to exceed
$500,000.
Further, the Bank hereby consents to and waives any defaults which may arise as
a result of the Borrower completing the sale and lease back of nine restaurants
with Franchise Finance Corporation of America on a basis materially consistent
with that outlined in the October 15, 1997 correspondence, a copy of which has
been provided to the Bank.
Sincerely yours,
/s/ Michael G. Giulioli
Michael G. Giulioli
Regional Vice President
MGG:lat
<PAGE> 1
Exhibit 13
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
- -----------------------
October 26, October 27, October 29, October 30, October 31, October 25,
(In thousands, except per share data) 1997 1996 1995 1994 1993 1992
-------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues ........................... $ 91,626 $ 79,858 $ 64,198 $ 56,127 $ 43,515 $ 38,763
Operating Income ................... 5,967 5,312 4,427 3,740 2,581 2,225
Interest Expense ................... 2,704 2,060 1,208 851 350 335
Income Before Income Taxes ......... 3,173 3,176 3,061 2,817 2,084 1,698
Net Income ......................... 2,225 2,161 2,139 2,001 1,371 1,083
Depreciation and Amortization ...... 5,839 5,515 4,201 3,599 2,405 2,112
EBITDA* ............................ 11,716 10,750 8,470 7,268 4,839 4,144
Capital Expenditures ............... 10,381 13,898 16,191 7,700 6,765 2,445
PER SHARE DATA
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income ......................... $ .53 $ .51 $ .50 $ .47 $ .34 $ .28
Revenues ........................... 21.78 18.73 15.04 13.26 10.94 9.86
Assets ............................. 15.21 13.72 11.43 7.65 6.19 4.09
Stockholders' Equity ............... 4.75 4.20 3.65 3.24 2.51 2.13
Market Price at Year End ........... 6.31 6.63 7.63 7.73 7.62 4.09
Weighted Average Shares Outstanding 4,206 4,264 4,268 4,232 3,979 3,932
FINANCIAL POSITION
- ------------------------------------------------------------------------------------------------------------------------------------
Cash ............................... $ 1,149 $ 927 $ 1,102 $ 993 $ 442 $ 299
Working Capital Deficit ............ (4,270) (5,067) (3,316) (2,526) (2,748) (1,254)
Property-Net ....................... 58,084 52,715 42,502 27,530 21,505 13,531
Total Assets ....................... 63,956 58,484 48,800 32,383 24,630 16,065
Long-Term Obligations
(Less Current Maturities) ..... 36,359 32,349 26,037 13,639 10,129 5,023
Stockholders' Equity ............... 19,969 17,908 15,600 13,712 10,000 8,367
OTHER DATA AND RATIOS
- ------------------------------------------------------------------------------------------------------------------------------------
Average Restaurant Sales ........... $ 2,174 $ 2,209 $ 2,172 $ 2,191 $ 2,070 $ 2,035
Restaurants in Operation at Year End 44 39 33 27 24 20
Restaurant Profit Margin ........... 12.8% 13.0% 14.4% 14.1% 14.1% 13.7%
Operating Profit Margin ............ 6.5% 6.7% 6.9% 6.7% 5.9% 5.7%
Long-Term Debt-to-Equity Ratio ..... 1.8 1.8 1.7 1.0 1.0 .6
Price Earnings Ratio (High/Low) .... 13.9/9.4 16.2/10.8 16.8/12.0 20.8/14.5 22.1/11.8 16.3/9.7
Return on Beginning Assets ......... 3.8% 4.4% 6.6% 8.1 8.5% 7.3%
Return on Beginning Equity ......... 12.4% 13.9% 15.6% 20.0% 16.4% 13.1%
<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
<PAGE> 2
MANAGEMENT'S DISCUSSION
- -----------------------
AND ANALYSIS
- ------------
REVENUE
- -------
Revenues for 1997 increased $11,768,000 or 15% from 1996. The increase was a
result of i) opening six restaurants during 1996, ii) opening five restaurants
during 1997 and iii) an increase of $227,000 or .4% in sales at restaurants
opened eighteen months or more. Additional revenues from new restaurants and
same-store sales gains were offset by a one-half percent decline in average
weekly sales per restaurant during 1997. This decline occurred as restaurants
not yet included in same-store sales experienced a decline in sales from peak
"honeymoon" sales levels.
Revenues for 1996 increased $15,660,000 or 24% from 1995. The increase was a
result of opening seven restaurants during 1995 and six restaurants during 1996
and significantly higher average sales at the six restaurants opened during
1996. Revenues from the additional restaurants were partially offset by a
decline of 2.0% or $1,116,000 in sales at restaurants opened eighteen months or
more.
The decline in same-store sales experienced during 1996 was primarily a
result of harsh winter weather during the first quarter of 1996 and intense
competition in the casual dining segment of the restaurant industry. Much of the
decline in 1996 occurred at three of the Company's higher sales volume
restaurants, where in two cases as many as ten or more competitors opened over
an 18 to 24 month period. Despite this level of competition, which continued
into 1997, the Company was able to report positive same-store sales comparisons
in 1997 due to i) stable beverage sales, ii) menu price increases of
approximately 2% and iii) an increase in the dinner check average of just over
1%.
Management expects the prospects for same-store sales growth to remain
difficult in 1998, but is optimistic that moderate gains will continue based on
1997 results. New restaurants opened during 1997 reported weekly sales of
$52,491, approximately 25% higher than the chain-wide average of $41,799. Over
55% of the 29 restaurants included in same-store sales reported positive
comparison, with no restaurant off more than 6%, while one unit achieved a gain
in sales in excess of 15%.
During 1997 the Company entered into two separate franchise agreements to
operate a Max & Erma's restaurant in the Columbus, Ohio airport and two
restaurants in the Cleveland, Ohio airport. All three restaurants are expected
to open during 1998. Subsequent to the end of the year the Company signed a
letter of intent for a three restaurant franchise in West Virginia, with the
first restaurant expected to open in early 1999. In addition to opening five to
six Company owned Max & Erma's restaurants in 1998, it is management's intent to
continue to explore alternative revenue sources such as franchising,
acquisitions and alternative concepts.
In that regard, the Company anticipates testing a second restaurant concept
during 1998. The "new concept" will occupy approximately 4,000 square feet of
leased space, open for dinner only, and primarily serve pasta and gourmet pizzas
prepared in a wood-burning oven. Management expects the "new concept" to
generate an average dinner check, including alcoholic beverages, of
approximately $13 to $15 per person and annualized sales of approximately $1.25
million per location.
RESTAURANT OPERATING PROFIT
- ---------------------------
The following table sets forth the Company's restaurant operating profit as a
percent of revenue:
<TABLE>
<CAPTION>
October 26, October 27, October 29,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues ........................... 100.0% 100.0% 100.0%
Cost of Goods Sold ................. (27.0) (26.7) (26.0)
Payroll & Benefits ................. (31.0) (30.6) (30.3)
Other Operating Expenses ........... (29.2) (29.7) (29.3)
----- ----- -----
Restaurant Operating Profit ........ 12.8% 13.0% 14.4%
----- ----- -----
</TABLE>
11
<PAGE> 3
Cost of goods sold, as a percentage of revenues, increased from 26.0% in 1995
to 26.7% in 1996 and to 27.0% in 1997. The increase from 1995 to 1996 was a
result of higher pork and dairy prices throughout 1996 and the introduction of
higher cost entrees. The increase from 1996 to 1997 was primarily a result of
higher beef prices during 1997. The Company raised prices approximately 1% and
2%, in 1996 and 1997, respectively, in an effort to mitigate rising costs.
Payroll and benefits, as a percentage of revenues, increased from 30.3% in
1995 to 30.6% in 1996 and to 31.0% in 1997. The increases were a result of
higher wage rates brought on by extremely low unemployment levels and peak
demand for restaurant workers. Management believes payroll and benefits, as a
percentage of revenues, have at least stabilized as the Company reported payroll
and benefit costs at exactly 31.0% for all four quarters of 1997. Price
increases and removal of labor intensive items from the menu may allow the
Company to show some improvement in payroll and benefits, as a percentage of
revenues, during 1998.
Other operating expenses increased from 29.3% in 1995 to 29.7% in 1996. The
increase was primarily a result of an increase in amortization of pre-opening
expenses from $551,000 or .9% of revenues in 1995 to $1,073,000 or 1.3% of
revenues in 1996. Other operating expenses, as a percentage of revenues,
decreased to 29.2% in 1997 as a result of a decrease in amortization of
pre-opening expenses to $881,000 or 1.0% of revenues and reduced rental expense
and depreciation expense due to the Company's increased ownership of real
estate. As discussed below, the Company expects to complete a sale-leaseback
transaction in early 1998 which would increase other operating expenses, as a
percentage of revenues, by approximately one percentage point in 1998, but have
a more than offsetting reduction of interest expense.
Inflation has had no significant impact on operating costs during the years
reported.
ADMINISTRATIVE EXPENSES
- -----------------------
Administrative expenses, as a percentage of revenues, declined from 7.5% in 1995
to 6.3% in 1996 and 1997. The decline from 1995 to 1996 was a result of an
accelerated revenue growth rate in 1996, a continuing effort to control
corporate overhead and the fact that certain administrative costs were in place
in anticipation of 1996's higher than normal growth.
In dollar terms, administrative expenses increased 5% from 1995 to 1996 and
13% from 1996 to 1997. The increase was primarily a result of salary increases
and additional corporate staff to support the Company's growth.
The average increase in administrative expenses from 1995 to 1997 was 9% per
year, well below the average annual revenue growth rate of 21% per year.
Management expects this trend to continue, which should further reduce
administrative expenses as a percentage of revenues.
INTEREST EXPENSE
- ----------------
Interest expense increased from $2,060,000 in 1996 to $2,704,000 in 1997. The
increase was a result of an increase in the average balance of long-term
obligations from $30.3 million during 1996 to $34.5 million during 1997 and an
increase in the interest rate on the Company's revolving credit agreement. The
interest rate under the agreement increased from 8.5% for most of 1996 to 9.0%
at the end of 1997. During 1997 the Company capitalized $215,000 of construction
period interest as compared to $406,000 capitalized during 1996.
Interest expense increased from $1,208,000 in 1995 to $2,060,000 in 1996 due
to an increase in the average balance of long-term obligations during the year
from $18.7 million in 1995 to $30.3 million in 1996. A slight reduction in
interest rates during 1996 partially offset the effect of the increased
borrowing. During 1996 the Company obtained a $6.0 million 8.32% fixed rate
mortgage and the interest rate on its revolving credit agreement, which was 9.0%
for most of 1995, declined to 8.5% for most of 1996. During 1995 the Company
capitalized $337,000 of construction period interest.
The Company expects to complete a sale-leaseback of nine restaurant
properties during the first quarter of 1998. As a result of this, management
expects interest expense to decline by approximately 40% during 1998. A
significant portion of the decline will be offset by higher rental expense,
which will be included under other operating expenses.
12
<PAGE> 4
INCOME TAXES
- ------------
The Company's effective tax rate increased from 30% in 1995 to 32% in 1996 and
then declined back to 30% in 1997. The increase from 1995 to 1996 was a result
of the expiration of the targeted jobs tax credit during 1995. The decrease from
1996 to 1997 was a result of the work opportunity tax credit, a program similar
to the targeted jobs tax credit, which began just before the start of fiscal
1997 and increased FICA tax on tips credit due to the Company's growth.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's working capital ratio remained steady at .4 to 1 at both October
27, 1996 and October 26, 1997. 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 1997, the Company expended approximately $10,514,000 for property
additions, inclusive of $133,000 landlord construction allowance, $46,459,000 to
reduce long-term obligations, and $665,000 to repurchase approximately 100,000
shares of its common stock and increased cash $222,000. Funds for such
expenditures were provided primarily by $49,191,000 from proceeds of long-term
obligations, $7,870,000 from operations, $370,000 from the sale of common stock
and $467,000 from the sale of assets. The Company routinely draws down and
repays its revolving credit agreement, the gross amounts of which are included
in the above numbers.
At October 26, 1997, the Company was committed to the opening of five Company
owned Max & Erma's, three of which were under construction at October 26, 1997,
with two scheduled to open during the first quarter of 1998 and one scheduled
for the second quarter. Additionally, the Company was under contract to purchase
the ground for a fourth 1998 location, which would open during the second half
of the year. The Company is also negotiating for two additional Max & Erma's
sites, at least one of which would open in late 1998.
The Company expects to expend approximately $7.0 million in 1998 on the
completion of the five restaurants planned for the year. Although no sites are
currently under contract, the Company would anticipate spending an additional
two to three million dollars during 1998 on restaurants scheduled to open in
1999.
In addition to the Max & Erma's restaurants planned for 1998, the Company
will test a "new concept" by constructing and opening three to five test
locations at a total cost of 1.5 to 2.5 million dollars. The Company has signed
one lease for 4,000 square feet of leased space and anticipates entering into
two to four additional leases for approximately 3,500 to 4,000 square feet each.
Management estimates the costs to build and equip each restaurant at
approximately $500,000.
Funding for the above will be provided by cash from operations, the
sale-leaseback arrangement, bank borrowings and equipment leasing. At October
26, 1997 the Company had available $1.15 million dollars under its revolving
credit agreement and $2.5 million under equipment lease commitments. In early
1998 the Company obtained an $18.2 million sale-leaseback commitment on nine
existing Max & Erma's properties. The proceeds of the sale will be used to pay
off the balance due under the Company's revolving credit line and increase cash
by approximately $1.0 million. On December 31, 1997 the Company closed on the
sale-leaseback of eight of the properties. In addition the Company received an
18-month sale-leaseback commitment of $10.0 million to finance up to $2.0
million per restaurant of land and building costs for five future Max & Erma's.
Upon completion of the initial sale-leaseback transaction, the Company's
revolving credit line will be renewed at $12.0 million, with the entire amount
available. Management believes the funding available from the future
sale-leaseback commitment, the Company's revolving credit agreement, equipment
leasing and cash from operations should be adequate to meet its capital needs
through 1999.
Except for the historical information, the matters discussed in this report
are forward-looking statements which involve risks and uncertainties, including
but not limited to: business conditions in the restaurant industry and the
general economy; competitive factors; regulatory requirements; pricing
pressures; and management decisions to pursue new restaurant sites which involve
additional costs, risks and capital expenditures.
13
<PAGE> 5
BALANCE SHEETS
- --------------
<TABLE>
<CAPTION>
October 26, October 27,
ASSETS 1997 1996
- --------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and equivalents ............................................................. $ 1,149,482 $ 927,261
Receivables:
Trade and other ............................................................... 309,202 197,622
Equipment deposits ............................................................ 191,768 330,076
------------ ------------
TOTAL RECEIVABLES ........................................................... 500,970 527,698
Inventories ...................................................................... 738,124 641,196
Supplies ......................................................................... 186,190 167,264
Prepaid expenses:
Insurance ..................................................................... 158,673 205,822
Other ......................................................................... 134,164 99,778
Preopening costs (less accumulated amortization, 1997-$463,587; 1996-$546,374) ... 419,836 546,319
Deferred income taxes ............................................................ 50,000
------------ ------------
TOTAL CURRENT ASSETS ........................................................ 3,337,439 3,115,338
PROPERTY-AT COST
- --------------------------------------------------------------------------------------------------------------------
Land and buildings ............................................................... 38,836,615 31,178,365
Leasehold improvements ........................................................... 21,190,333 20,347,332
Equipment and fixtures ........................................................... 16,559,840 14,905,282
Construction in progress ......................................................... 2,635,361 3,654,485
------------ ------------
Total ......................................................................... 79,222,149 70,085,464
Less accumulated depreciation and amortization ................................... 21,138,547 17,370,256
------------ ------------
PROPERTY-NET ................................................................ 58,083,602 52,715,208
OTHER ASSETS
- --------------------------------------------------------------------------------------------------------------------
Goodwill (less accumulated amortization, 1997-$704,031; 1996-$653,743) ........... 235,501 285,789
Deferred Costs (less accumulated amortization, 1997-$322,005; 1996-$218,227) ..... 960,324 876,262
Deferred income taxes ............................................................ 579,000 620,000
Miscellaneous .................................................................... 760,093 871,644
------------ ------------
TOTAL OTHER ASSETS .......................................................... 2,534,918 2,653,695
------------ ------------
TOTAL ............................................................................ $ 63,955,959 $ 58,484,241
============ ============
</TABLE>
See notes to financial statements.
14
<PAGE> 6
<TABLE>
<CAPTION>
October 26, October 27,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- --------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current maturities of long-term obligations ..................................... $ 1,460,128 $ 1,407,604
Accounts payable ................................................................ 1,640,194 1,638,990
Construction payables ........................................................... 1,234,365 1,774,350
Accrued liabilities:
Payroll and related taxes .................................................... 1,363,695 1,305,276
Taxes, other than income taxes ............................................... 945,165 912,939
Income taxes ................................................................. 48,480 208,773
Other ........................................................................ 915,263 787,168
------------ ------------
Total accrued liabilities .................................................. 3,272,603 3,214,156
------------ ------------
Deferred income taxes ........................................................... 147,000
------------ ------------
TOTAL CURRENT LIABILITIES .................................................. 7,607,290 8,182,100
LONG-TERM OBLIGATIONS-
- --------------------------------------------------------------------------------------------------------------------
Less current maturities ...................................................... 36,358,966 32,349,305
MINORITY INTERESTS IN AFFILIATED PARTNERSHIPS ................................... 20,225 45,288
- --------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 3, 4 and 9)
- --------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Preferred stock- $.10 par value; authorized 500,000 shares, none outstanding
Common stock- $.10 par value; authorized 10,000,000 shares; issued and
outstanding:
1997-4,231,113; 1996-4,226,497 shares ...................................... 423,111 422,650
Additional capital ........................................................... 11,268,830 11,432,112
Retained earnings ............................................................ 8,277,537 6,052,786
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ................................................. 19,969,478 17,907,548
------------ ------------
TOTAL ........................................................................... $ 63,955,959 $ 58,484,241
============ ============
</TABLE>
See notes to financial statements.
15
<PAGE> 7
STATEMENTS OF INCOME
- --------------------
<TABLE>
<CAPTION>
YEAR ENDED
October 26, October 27, October 29,
1997 1996 1995
------------------------------------------------
<S> <C> <C> <C>
REVENUES ....................................................... $ 91,626,226 $ 79,857,589 $ 64,198,284
------------ ------------ ------------
OPERATING EXPENSES:
- --------------------------------------------------------------------------------------------------------------------
Cost of goods sold ............................................. 24,768,549 21,338,590 16,723,445
Payroll and benefits ........................................... 28,404,596 24,396,710 19,435,463
Other operating expenses ....................................... 26,753,835 23,741,859 18,808,272
Administrative expenses ........................................ 5,732,267 5,068,093 4,804,486
------------ ------------ ------------
TOTAL OPERATING EXPENSES .................................... 85,659,247 74,545,252 59,771,666
------------ ------------ ------------
OPERATING INCOME ............................................... 5,966,979 5,312,337 4,426,618
INTEREST EXPENSE ............................................... 2,703,781 2,059,732 1,207,695
- --------------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS IN INCOME OF
AFFILIATED PARTNERSHIPS ..................................... 90,447 76,616 157,712
------------ ------------ ------------
INCOME BEFORE INCOME TAXES ..................................... 3,172,751 3,175,989 3,061,211
------------ ------------ ------------
INCOME TAXES:
- --------------------------------------------------------------------------------------------------------------------
State and local ................................................ 202,000 223,000 184,000
Federal:
Current ..................................................... 902,000 854,000 791,000
Deferred (credit) ........................................... (156,000) (62,000) (53,000)
------------ ------------ ------------
TOTAL INCOME TAXES ........................................ 948,000 1,015,000 922,000
------------ ------------ ------------
NET INCOME ..................................................... $ 2,224,751 $ 2,160,989 $ 2,139,211
------------ ------------ ------------
NET INCOME PER COMMON SHARE .................................... $ 0.53 $ 0.51 $ 0.50
------------ ------------ ------------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING ............................... 4,205,625 4,264,032 4,268,274
------------ ------------ ------------
</TABLE>
See notes to financial statements.
16
<PAGE> 8
STATEMENT OF STOCKHOLDERS' EQUITY
- ---------------------------------
<TABLE>
<CAPTION>
Common Stock
------------ Additional Retained
Shares Amount Capital Earnings Total
- ----------------------------------------------------------------------------------------------------------------------
BALANCE, OCTOBER 30, 1994 3,768,189 $ 376,819 $ 8,657,770 $ 4,676,959 $ 13,711,548
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Issuance of stock through
option and bonus plans,
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
- ----------------------------------------------------------------------------------------------------------------------
Issuance of stock through
option and bonus plans,
including $13,399 related
tax benefit 131,612 13,161 288,175 301,336
Shares repurchased (23,000) (2,300) (152,446) (154,746)
Net income 2,160,989 2,160,989
--------- ------------- ------------ ------------- ------------
BALANCE, OCTOBER 27, 1996 4,226,497 422,650 11,432,112 6,052,786 17,907,548
- ----------------------------------------------------------------------------------------------------------------------
Issuance of stock through
option and bonus plans,
including $44,249 related
tax benefit 104,387 10,438 491,665 502,103
Shares repurchased (99,771) (9,977) (654,947) (664,924)
Net income 2,224,751 2,224,751
--------- ------------- ------------ ------------- ------------
BALANCE, OCTOBER 26, 1997 4,231,113 $ 423,111 $ 11,268,830 $ 8,277,537 $ 19,969,478
- ------------------------- --------- ------------- ------------ ------------- ------------
</TABLE>
See notes to financial statements.
17
<PAGE> 9
STATEMENTS OF CASH FLOWS
- ------------------------
<TABLE>
<CAPTION>
YEAR ENDED
October 26, October 27, October 29,
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- ----------------------------------------------------------------------------------------------------------------------
Net income ..................................................... $ 2,224,751 $ 2,160,989 $ 2,139,211
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................... 5,839,346 5,514,683 4,201,100
Deferred income tax credit .................................. (156,000) (62,000) (53,000)
Minority interests in income of Affiliated Partnerships ..... 90,447 76,616 157,712
Loss on property disposals .................................. 102,462 99,230 46,540
Issuance of common stock as compensation
through manager bonus plan ................................ 87,583 105,331 68,987
Changes in assets and liabilities:
Receivables, inventories, supplies and prepaids ............. 56,637 286,920 (749,171)
Capitalized preopening costs ................................ (754,213) (945,601) (916,639)
Other assets ................................................ (187,839) 22,022 (31,354)
Accounts payable, accrued and other liabilities ............. 567,272 1,453,886 1,167,756
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................. 7,870,446 8,712,076 6,031,142
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- ----------------------------------------------------------------------------------------------------------------------
Property additions ............................................. (10,381,284) (13,897,963) (16,191,324)
Reimbursable construction costs incurred ....................... (133,000) (275,000)
Construction costs reimbursed .................................. 275,000
Collections (additions) of (to) other assets ................... 77,629 (157,658) (126,337)
Proceeds from the sale of property ............................. 467,363 215,400 4,424
------------ ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES ....................... (9,969,292) (13,840,221) (16,313,237)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- ----------------------------------------------------------------------------------------------------------------------
Principal payments under long-term obligations ................. (46,459,439) (33,734,623) (15,612,803)
Proceeds from long-term obligations ............................ 49,190,666 38,929,346 26,588,540
Debt issue costs ............................................... (95,972)
Proceeds from exercise of stock options ........................ 370,274 182,604 89,861
Distributions to minority interests in Affiliated Partnerships . (115,510) (173,263) (192,514)
Cash paid for purchase of common stock ......................... (664,924) (154,746) (480,050)
Cash paid in lieu of fractional shares ......................... (2,228)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ................... 2,321,067 4,953,346 10,390,806
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS ................ 222,221 (174,799) 108,711
CASH AND EQUIVALENTS AT BEGINNING OF YEAR ...................... 927,261 1,102,060 993,349
------------ ------------ ------------
CASH AND EQUIVALENTS AT END OF YEAR ............................ $ 1,149,482 $ 927,261 $ 1,102,060
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES:
- ----------------------------------------------------------------------------------------------------------------------
Cash paid for:
Interest-net of $215,468, $405,746, and $337,046
capitalized in 1997, 1996 and 1995 .......................... $ 2,567,364 $ 2,020,919 $ 1,152,455
Income taxes ................................................ 1,290,251 823,827 1,014,025
Noncash activities:
Property additions financed by capital leases ............... 867,586 1,375,425 1,107,255
Property additions financed by construction payables ........ 1,234,365 1,774,350 2,269,182
</TABLE>
See notes to financial statements.
18
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
FOR THE YEARS ENDED OCTOBER 26, 1997,
OCTOBER 27, 1996 AND OCTOBER 29, 1995
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 26, 1997, there are 44 Max & Erma's restaurants in
operation (39 at October 27, 1996) (principally located in the Midwestern United
States) and 3 under construction in Ohio. 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.
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.
PREOPENING COSTS-Restaurant preopening costs which consist of hiring,
training and certain other incremental direct costs of opening restaurants are
accumulated and amortized from the opening date of the restaurant over a one
year period.
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
Leasehold improvements ............................. 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. Deferred costs
include debt issue costs that relate to the August 1994 issuance of Subordinated
Convertible Debentures and loan costs that relate to a $6 million mortgage loan
obtained in March 1996. The costs are being amortized over the life of the
debentures and mortgage loan, respectively.
ASSET IMPAIRMENTS-Annually, or more frequently if events or circumstances
change, a determination is made by management to ascertain whether property and
equipment, goodwill, and other intangibles have been impaired based on the sum
of expected future undiscounted cash flows from operating activities. If the
estimated net cash flows are less than the carrying amount of such assets, the
Company will recognize an impairment loss in an amount necessary to write down
the assets to a fair value as determined from expected future discounted cash
flows. Based upon its most recent analysis, the Company believes that such
assets at October 26, 1997 are realizable and the amortization periods are
appropriate.
ADVERTISING-The Company expenses the costs of advertising (including
production costs) the first time the advertising takes place. Advertising
expense was $2,811,000, $2,538,000 and $1,979,000 for fiscal 1997, 1996 and
1995, 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 (SFAS) No.
109.
NET INCOME PER SHARE-Net income per 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 10% stock
dividend in April 1995. The assumed conversion of the convertible debentures had
an insignificant impact on net income per share.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128. "Earnings per Share" which when adopted, will replace the current
methodology for calculating and presenting earnings per share under Accounting
Principles Board ("APB") Opinion No. 15, "Earnings per Share." Under SFAS No.
128, companies with complex capital structures will be required to present basic
earnings per share and diluted earnings per share while companies with simple
capital structures will only be required to present basic earnings per share.
Basic earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share is computed similarly to
the current computation of fully diluted earnings per share required under APB
Opinion No. 15. The standard, which is effective for financial statements for
periods ending after December 15, 1997, including interim periods, requires
restatement of all prior-period earnings per share data. Earlier application is
not per-
19
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
mitted. Earnings per share computed under SFAS No. 128 is approximately the same
as the Company's current presentation of earnings 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 1997,
1996 and 1995 each contained 52 weeks.
ESTIMATES-The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual amounts may differ from these amounts.
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 1997,
1996 and 1995 the Company's share of the profits and losses of these two
Affiliated Partnerships was 56% and 40%, respectively.
3. LONG-TERM OBLIGATIONS
- ------------------------
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
October 26, October 27,
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
DEBT:
Revolving credit agreement, prime plus 1/2%
(total of 9% at October 26, 1997) .............. $16,870,959 $12,256,518
8% convertible subordinated debentures ......... 9,864,000 10,384,000
8.32% mortgage loan ............................ 5,678,089 5,897,113
----------- -----------
TOTAL DEBT ................................... 32,413,048 28,537,631
Capital leases (Note 4) ........................ 2,834,060 3,110,664
Accrued rent (Note 4) .......................... 2,571,986 2,108,614
----------- -----------
TOTAL LONG-TERM OBLIGATIONS .................. 37,819,094 33,756,909
Less current maturities ........................ 1,460,128 1,407,604
----------- -----------
TOTAL LONG-TERM OBLIGATIONS-
LESS CURRENT MATURITIES ...................... $36,358,966 $32,349,305
----------- -----------
</TABLE>
At October 26, 1997, the Company's revolving credit agreement with a bank
permits it to borrow up to $18,000,000 until January 1, 1999, at which time the
available borrowing commitment decreases by $900,000 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 except four
restaurants described below 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 26, 1997, approximately $1,100,000 is available for payment of dividends
under the terms of the bank agreement.
In August 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.
In March 1996, the Company obtained a $6 million mortgage loan which bears
interest at 8.32% and is payable in monthly installments of $58,453 (principal
and interest) to 2011. The loan is collateralized by four restaurants.
Future maturities of long-term debt obligations at October 26, 1997, are as
follows (see Note 4 for maturities of other long-term obligations):
<TABLE>
<CAPTION>
Year ending in October
- --------------------------------------------------------------
<S> <C>
1998 ............................................. $ 757,157
1999 ............................................. 2,348,687
2000 ............................................. 4,400,077
2001 ............................................. 4,424,358
2002 ............................................. 4,450,738
Thereafter ....................................... $16,032,031
-----------
Total .......................................... $32,413,048
===========
</TABLE>
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 1998 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
20
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
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 expire through 2002. 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 26, October 27,
1997 1996
- ---------------------------------------------------------------
<S> <C> <C>
ASSET DESCRIPTION
Buildings .......................... $1,045,000 $1,045,000
Equipment and fixtures ............ 3,098,686 3,109,419
---------- ----------
TOTAL ........................... 4,143,686 4,154,419
Less accumulated amortization .... 1,679,557 1,371,633
---------- ----------
Net .............................. $2,464,129 $2,782,786
---------- ----------
</TABLE>
Future minimum lease payments under the capital leases and the present value
of such payments at October 26, 1997 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR:
- ---------------------------------------------------------------
<S> <C>
1998 ............................................. $ 883,710
1999 ............................................. 766,335
2000 .............................................. 655,667
2001 .............................................. 263,610
2002 ............................................. 100,524
Thereafter ........................................ 562,500
----------
TOTAL MINIMUM LEASE PAYMENTS .................... 3,232,346
Less amount representing interest ................. 398,286
----------
Present value of minimum lease payments ........... 2,834,060
----------
Less current maturities ........................... 702,971
----------
TOTAL OBLIGATIONS UNDER CAPITAL LEASES-
LESS CURRENT MATURITIES ......................... $2,131,089
==========
</TABLE>
At October 26, 1997, 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
1998 ................... $ 146,178 $3,413,696 $3,559,874
1999 ................... 146,178 3,396,412 3,542,590
2000 ................... 146,178 3,349,856 3,496,034
2001 ................... 146,178 2,663,535 2,809,713
2002 ................... 146,178 2,324,123 2,470,301
Thereafter ............. 1,047,619 15,573,885 16,621,504
---------- ----------- -----------
TOTAL ................ $1,778,509 $30,721,507 $32,500,016
========== =========== ===========
</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 26, 1997, the Company has unused equipment lease commitments
totaling $2,500,000 expiring in fiscal 2002.
Rent expense, including common area charges but excluding taxes, insurance
and other expenses related to the properties, consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rent on operating leases:
Related parties .................... $ 155,221 $ 151,403 $ 157,215
Unrelated parties .................. 4,369,709 3,870,177 3,400,264
Contingent rent based on:
Percentage of gross revenue
-unrelated parties ............. 198,806 246,365 329,295
---------- ---------- ----------
TOTAL .............................. $4,723,736 $4,267,945 $3,886,774
========== ========== ==========
</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 $140,000 per year over the last three years.
At October 26, 1997 and October 27, 1996, the Company had made lease deposits
principally with two equipment lessors which are returned to the Company upon
installation of the equipment and execution of the leases.
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>
1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Provision at statutory rate $1,079,000 $1,080,000 $1,041,000
State income taxes-
net of Federal benefit 132,000 147,000 121,000
Jobs related tax credits (30,000) (84,000)
FICA tax credit (243,000) (234,000) (210,000)
Other-net 10,000 22,000 54,000
----------- ---------- ----------
TOTAL $ 948,000 $1,015,000 $ 922,000
=========== ========== ==========
Effective Income Tax Rate 29.9% 32.0% 30.1%
=========== ========== ==========
</TABLE>
21
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
The tax effects of significant items comprising the Company's net deferred
tax asset at October 26, 1997 and October 27, 1996 are as follows:...
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS (LIABILITIES)
Rent expense ....................... $ 876,000 $ 718,000
Jobs related tax credits ........... 30,000 107,000
FICA tax credits ................... 332,000 453,000
Alternative minimum tax credit ..... 51,000 51,000
Other .............................. 208,000 186,000
---------- ----------
TOTAL DEFERRED TAX ASSETS ........ 1,497,000 1,515,000
---------- ----------
Accelerated depreciation ........... (577,000) (736,000)
Preopening costs ................... (160,000) (208,000)
Prepaid insurance .................. (66,000) (70,000)
Other .............................. (65,000) (28,000)
---------- ----------
TOTAL DEFERRED TAX LIABILITIES ... (868,000) (1,042,000)
---------- ----------
NET DEFERRED TAX ASSET ........... $ 629,000 $ 473,000
========== ==========
</TABLE>
The Company's jobs related tax credit and FICA tax credit carryforwards
expire in varying periods to 2011 and the alternative minimum tax credit
carryforward has no expiration date.
6. STOCK OPTION AND BONUS PLANS
- -------------------------------
In effect at October 26, 1997 are the 1992 and 1996 Stock Option Plans
(collectively the "Plans"). Options granted under the Plans may be either
incentive stock options or non-statutory stock options. The terms of the options
granted under the Plans are at the sole discretion of a committee of three
non-employee members of the Company's Board of Directors. The Plans provide that
the Company may grant options (generally at fair market value at the date of
grant) for not more than 412,500 and 400,000 shares of common stock,
respectively, to certain key employees, officers and directors. Options granted
under the Plans are exercisable according to the terms of each option, generally
ten years from the grant date and vest at the rate of 20% per year of service.
At October 26, 1997, 255,125 shares under option were exercisable and 5,175
shares were reserved for future grants under the 1992 Stock Option Plan. Under
the 1996 Stock Option Plan, 67,000 shares under option were exercisable and
208,000 shares were reserved for future grants at October 26, 1997.
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. Such options are exercisable over a
period up to ten years from the grant date as determined by the Company. Shares
of common stock purchased under the 1984 Option Plans vest at the rate of 20%
per year of service. The Company may repurchase, at the optionee's purchase
price, non-vested shares if an optionee terminates employment or directorship.
At October 26, 1997, 17,875 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") and the 1996 Employee
Incentive Stock Purchase and Manager Bonus Plan (the "1996 Bonus Plan"). Under
the terms of the Bonus Plan, no shares of common stock remain available to be
issued. During fiscal 1996 and 1995, 8,962 and 8,467 shares, respectively, were
issued under this Plan. During fiscal 1997, no shares were issued under this
Plan. Under the terms of the 1996 Bonus Plan, up to 79,636 shares of common
stock remain available to be issued at one-half of the fair market value of the
shares at the date of the award. During fiscal 1997, and 1996, 13,962 and 6,402
shares, respectively, were issued under this plan, at a weighted average fair
value of $6.27 and $6.86, respectively. During 1997 and 1996, the Company
recognized compensation expense of $87,583 and $105,331, respectively, related
to the granting of options at less than fair market value at the date of grant.
The following summarizes the stock option transactions from October 30, 1994
through October 26, 1997 adjusted to reflect the 10% stock dividend in April
1995:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Options Price
- ---------------------------------------------------------------
<S> <C> <C>
Balance, October 30, 1994 .......... 511,294 $ 5.35
Granted .......................... 140,700 $ 8.96
Exercised ........................ (33,244) $ 2.70
Cancelled ........................ (14,300) $ 8.43
------- ------
Balance, October 29, 1995 .......... 604,450 $ 6.26
Granted .......................... 149,500 $ 6.61
Exercised ........................ (154,425) $ 2.85
Cancelled ........................ (11,975) $ 7.82
------- ------
Balance, October 27, 1996 .......... 587,550 $ 7.21
Granted .......................... 187,000 $ 6.50
Exercised ........................ (90,425) $ 4.09
Cancelled ........................ (66,925) $ 8.25
------- ------
Balance, October 26, 1997 .......... 617,200 $ 7.34
======= ======
</TABLE>
Exercise prices for options totaling 148,200, 428,450, and 40,550 at October
26, 1997, ranged from $8.00 to $11.00, $6.45 to $7.88, and $4.09 to $6.13,
respectively. The weighted average
22
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
remaining contractual life of these options is 5.1, 4.6, and 2.5 years,
respectively. At October 26, 1997, 108,100, 209,350, and 22,550 shares are
exerciseable at a weighted average exercise price of $8.85, $7.08, and $4.41,
respectively.
The 1996, 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 1996,
91,146 options with an aggregate exercise price of $257,854 were exercised by
the tendering of 38,177 shares with an equivalent market value. No such options
were exercised in fiscal 1997 and 1995.
SFAS No. 123, "Accounting for Stock-Based Compensation" 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. 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 (APB) 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 applies APB No. 25 in
accounting for its stock-based compensation plans. Had compensation cost been
determined on the basis of fair value pursuant to SFAS No. 123, for options
granted in fiscal 1997 and 1996, net income and earnings per share would have
been as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------
<S> <C> <C>
Net Income
As reported ...................... $2,224,751 $2,160,989
---------- ----------
Pro forma ........................ $2,118,619 $1,927,537
---------- ----------
Earnings per share
As reported ...................... $ .53 $ .51
---------- ----------
Pro forma ........................ $ .51 $ .45
---------- ----------
</TABLE>
The following weighted average assumptions were used in the option pricing
model: a risk-free interest rate of 6.0% and 6.3% for 1997 and 1996,
respectively; an expected life of the options of five to six years; no expected
dividend yield and a volatility factor of 25.2%. The weighted average per share
fair value of the options granted in 1997 and 1996 was $2.48 and $2.44,
respectively.
Due to the inclusion of only 1997 and 1996 option grants, the effects of
applying SFAS No. 123 in 1997 and 1996 may not be representative of the
pro-forma impact in future years.
7. EMPLOYEE BENEFIT PLANS
- -------------------------
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.
The Company also provides certain retiree health care benefits to qualified
officers.
Total expense for these plans for 1997, 1996 and 1995 was approximately
$130,000, $125,000 and $138,000, respectively.
8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
- ------------------------------------------------
The carrying amounts of cash and equivalents at October 26, 1997 and October 27,
1996, approximate their fair value due to the short-term maturities of these
items.
The estimated fair value of the Company's long-term debt was approximately
$31,821,000 and $27,928,000 as compared to the carrying amounts of $32,413,048
and $28,537,631 at October 26, 1997 and October 27, 1996, respectively. The fair
value of the Company's long-term obligations is estimated based on the quoted
market prices for the same or similar issues of the subordinated debentures and
the current interest rates offered for debt of the same remaining maturities.
9. SUBSEQUENT EVENT
- -------------------
On December 31, 1997 the Company entered into a sale-leaseback transaction (at
approximate net book value) with regard to the land, buildings, fixtures and
improvements at eight restaurant sites. As a result of the sale, the Company
received approximately $17,000,000 in net proceeds, which were used to
substantially pay off borrowings under the Company's revolving line of credit.
The Company will lease back the restaurant sites under operating leases over a
twenty year period at a base annual rent of approximately $1,583,000 (plus taxes
and insurance). The base annual rent will be adjusted to the current ten year
Treasury Note rate in effect on the tenth anniversary of the closing, plus
3.35%. Also the Company will pay an additional rent beginning in the third year,
adjusted every two years thereafter, equal to the product of the base rent then
in effect and the lesser of 4.5% or three times the average increase in the U.S.
Consumer Price Index during the previous two years.
As a result of the sale-leaseback transaction, available borrowings under the
Company's line of credit were reduced to $12,000,000 until March 1, 2000 at
which time the available borrowing commitment decreases by $600,000 every three
months.
23
<PAGE> 15
INDEPENDENT AUDITOR'S 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 26, 1997 and October 27, 1996, and the related statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended October 26, 1997. 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 26, 1997 and October 27, 1996 and the results of
its operations and its cash flows for each of the three years in the period
ended October 26, 1997 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
December 10, 1997 (except for Note 9, as to
which the date is December 31, 1997)
Columbus, Ohio
24
<PAGE> 16
SELECTED QUARTERLY FINANCIAL DATA
- ---------------------------------
<TABLE>
<CAPTION>
Stock Price
Total Income Before Net Earnings ------------------------
(Thousands, except per share data) Revenues Income Taxes Income Per Share High Low
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997
First Quarter ...................... $ 26,510 $ 702 $ 491 $ 0.12 $ 6.88 $ 6.00
Second Quarter ..................... 21,099 882 613 0.15 6.38 5.00
Third Quarter ...................... 22,252 898 628 0.15 7.25 5.50
Fourth Quarter ..................... 21,765 691 493 0.12 7.38 6.25
--------- --------- --------- --------- -------- ---------
YEAR ............................ $ 91,626 $ 3,173 $ 2,225 $ 0.53 $ 7.38 $ 5.00
========= ========= ========= ========= ======== =========
1996
First Quarter ...................... $ 23,079 $ 581 $ 415 $ 0.10 $ 7.63 $ 5.50
Second Quarter ..................... 18,263 849 580 0.14 7.88 5.75
Third Quarter ...................... 19,415 926 626 0.15 8.25 5.88
Fourth Quarter ..................... 19,101 820 540 0.13 6.88 5.88
--------- --------- --------- --------- -------- ---------
YEAR ............................ $ 79,858 $ 3,176 $ 2,161 $ 0.51 $ 8.25 $ 5.50
========= ========= ========= ========= ======== =========
</TABLE>
The Company's common stock trades on the NASDAQ National Market under the symbol
MAXE. At November 28, 1997 there were 861 stockholders of record of the
Company's common stock. The closing price for the Company's common stock at
October 26, 1997 was $6.31.
SHAREHOLDERS 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 1998 Quarter-End Dates
-----------------------------------
<S> <C>
1st quarter February 15, 1998
2nd quarter May 10, 1998
3rd quarter August 2, 1998
4th quarter October 25, 1998
</TABLE>
DIVIDENDS:
- ----------
The Company paid no cash dividends in fiscal 1995, 1996 or 1997. 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 & Arthur
Columbus, Ohio
AUDITORS:
- ---------
Deloitte & Touche LLP
Columbus, Ohio
STOCK TRANSFER AGENT AND REGISTRAR:
- -----------------------------------
National City Bank
Corporate Trust Administration
P.O. Box 94915
Cleveland, OH 44101-4915
216-575-2644
Stockholders are advised to notify the Transfer Agent of changes in address or
problems regarding missing or incorrect dividends or stock certificates.
ANNUAL SHAREHOLDERS MEETING:
- ----------------------------
April 9, 1998, 2:30 p.m.
Hyatt Regency Columbus
at Greater Columbus Convention Center
350 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 26, 1997 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, 33-70284, 333-03081 and 333-03083 of Max & Erma's Restaurants, Inc.
on Form S-8 of our report dated December 10, 1997, (except for Note 9, as to
which the date is December 31, 1997) incorporated by reference in this Annual
Report on Form 10-K of Max & Erma's Restaurants, Inc. for the year ended
October 26, 1997.
DELOITTE & TOUCHE LLP
Columbus, Ohio
January 14, 1998
<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 27, 1997, 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 9th day of
December, 1997.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/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/William E. Arthur Director
- ----------------------------
William E. Arthur
/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
/s/Thomas R. Green Director
- ----------------------------
Thomas R. Green
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-26-1997
<PERIOD-START> OCT-28-1996
<PERIOD-END> OCT-26-1997
<EXCHANGE-RATE> 1
<CASH> 1,149,482
<SECURITIES> 0
<RECEIVABLES> 500,970
<ALLOWANCES> 0
<INVENTORY> 738,124
<CURRENT-ASSETS> 3,337,439
<PP&E> 79,222,149
<DEPRECIATION> 21,138,547
<TOTAL-ASSETS> 63,955,959
<CURRENT-LIABILITIES> 7,607,290
<BONDS> 36,358,966
0
0
<COMMON> 423,111
<OTHER-SE> 19,546,367
<TOTAL-LIABILITY-AND-EQUITY> 63,955,959
<SALES> 0
<TOTAL-REVENUES> 91,626,226
<CGS> 24,768,549
<TOTAL-COSTS> 79,926,980
<OTHER-EXPENSES> 5,732,267
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,703,781
<INCOME-PRETAX> 3,172,751
<INCOME-TAX> 948,000
<INCOME-CONTINUING> 2,224,751
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,224,751
<EPS-PRIMARY> .53
<EPS-DILUTED> .53
</TABLE>
