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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 25, 1998
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
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(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)
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, 1998.
<TABLE>
<S> <C>
Total shares outstanding 3,683,722
Number of shares owned beneficially 1,828,553
and/or of record by directors
and officers (1)
Number of shares held by persons 2,279,569
other than directors or
officers
Closing bid price $7.125
Market value of shares held by $16,241,929
persons other than directors
or officers
</TABLE>
(1) For purposes of this computation all officers and directors are included,
although not all are necessarily "affiliates." Includes options to purchase
424,400 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.
3,683,722 Common Shares
were outstanding at December 31, 1998
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Shareholders for the Fiscal Year Ended October 25, 1998
(in pertinent parts, as indicated).....Parts II and IV.
2. Proxy Statement for 1999 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 an
affiliated partnership, owns, operates and franchises (two) a chain of
forty-nine Max & Erma's restaurants at December 31, 1998. In addition, Ironwood
Cafe, LLC, a wholly-owned limited liability company owns and operates one
Ironwood Cafe. 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 are famous for gourmet burgers, overstuffed
sandwiches, homemade pasta dishes, chargrilled steak and chicken specialties,
super salads and taste-tempting munchies. Unique to the Max & Erma's concept is
the Build-Your-Own-Sundae Bar, a bathtub filled with vanilla ice cream, special
sauces and lots of toppings. In addition, the restaurants offer 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.
Antique artifacts and local paraphernalia make Max & Erma's a fun,
unique place to take friends and family. The use of brick, a combination of
light and dark colors, and dropped lighting creates a roomy, yet cozy feel for
customers to enjoy while dining. The neighborhood atmosphere is enhanced by
local items where each restaurant is located, including sports team
paraphernalia and historical artifacts as well as a giant bubble gum machine, a
three-dimensional burger, an antique love tester and many other things. Giant
murals, both inside and outside the restaurant, combine the history and
tradition of each market with Max & Erma's story.
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
1998, the average check was approximately $8.21 at lunch and $9.72 at dinner.
The lunch and dinner meal periods accounted for approximately 37.3% and 62.7% of
net sales, respectively. Alcoholic beverages constituted approximately 12.0% of
net sales in fiscal 1998.
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. The purpose
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of every associate is to "help our guests enjoy their total dining experiences
so they can't wait to come back." The Company believes that experience starts
with the food. That's why it uses only the freshest, high quality ingredients in
every menu item.
Freshness and quality are truly the foundations upon which Max & Erma's
was built. The Company strives to do things the right way, not the easy way. It
believes this dedication makes it better and that its guests return more often.
Market research indicates that customers often know what they are going to order
before they get to the restaurants because they crave certain signature items.
Being a "purpose-driven" company requires an ability to understand what
guests want, and a dedication to focus all associates' energies on exceeding
those expectations. Management believes that the best expressions of guests'
desires can be translated to a phrase that captures Max & Erma's character.
Specifically, the concept of the "Hometown Favorite" evokes images of trust,
friendliness and wholesomeness. This means that associates treat guests with
respect, like friends or neighbors, and provide them with the kind of food,
service and atmosphere that will make them want to return often.
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.
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 well as innovative, and reviews and revises
as necessary the menu twice each year, and in addition offers an annual summer
menu. 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 spent approximately 2.3% of sales on advertising in 1998 but anticipates
increasing its marketing expenditures during 1999 as it redirects dollars
previously spent on discounting and couponing. It primarily uses radio, direct
mail, billboards, special events and localized store marketing designed to
increase customer awareness and repeat business.
The Company owns forty-six of the Max & Erma's restaurants currently in
operation. One is owned by a separate affiliated partnership. In addition to the
specified percentage interest in the profits and losses of the affiliated
partnership, the Company is paid an annual fee equal to 6% of gross revenues for
managing the Max & Erma's restaurant owned by the partnership. The
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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 1998 two separate franchised Max & Erma's restaurants opened in
the Columbus, Ohio airport and in the Cleveland, Ohio airport. Terms of the
agreements call for an initial franchise fee plus a monthly royalty of 4 or 5%
of sales. Total franchise fees and royalty payments for 1998 were $55,000 and
$137,000 respectively. Additionally, in July 1998, the Company promoted a
veteran regional manager to the position of director of franchising with the
purpose of developing a complete franchising program. Beginning in 1999, the
Company expects to begin actively marketing Max & Erma's franchises primarily to
potential multi-unit operators.
During 1998 the Company also initiated a test of a second restaurant
concept, Ironwood Cafe. A typical Ironwood Cafe will occupy approximately 3,500
to 4,000 square feet of leased space, is open for dinner only, and primarily
serves pasta and gourmet pizzas prepared in a wood-burning oven. The Company
anticipates opening an additional two Ironwood Cafes during 1999. At the end of
1999 the Company will evaluate its expansion potential.
Competition
- -----------
The restaurant business, particularly in the casual dining segment, is
highly competitive in terms of quality and value of products served, type and
variety of menu offered, quality and efficiency of service, ambiance and
attractiveness of facilities and site location. Max & Erma's restaurants compete
with food service operations of various types within their respective locations,
including national and regional chains as well as locally-owned and operated
restaurants. Many of the Company's competitors are substantially larger and have
greater financial resources than the Company.
Employees
- ---------
At October 25, 1998, the Company had 3,899 employees, of which 574 were
full-time restaurant employees, 3,104 were part-time restaurant employees, 74
were corporate staff personnel and 147 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
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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. Eleven 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 approximately
40 to 100 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.
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.
Managing Partner Program
- ------------------------
At the start of 1999 the Company introduced its Managing Partner
Program on a test basis. Nine eligible general managers and the Company entered
into five year agreements in which the general manager places 1,000 shares of
Max & Erma's common stock which he or she owns in escrow with the Company and
agrees to manage their restaurant for a five year period. The shares of stock
are forfeited if the general manager terminates their employment during the term
of the agreement. In return the Company agrees to not relocate the general
manager during the term of the agreement. During the term of the agreement the
general manager's base salary is fixed. As additional compensation they receive
25% of the increase in profit before fixed expenses over a pre-established base
profit (generally the average of profit before fixed expenses for the most
recent
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three fiscal years). The Company believes the program will encourage the general
manager to both build sales and control margins, create a sense of ownership,
reduce management turnover and promote a longer term perspective.
Purchasing and Inventory Controls
- ---------------------------------
Meat and most other food and restaurant supply items are purchased
through one major distributor in order to obtain favorable prices and to ensure
consistent quality and delivery. For major items, the Company typically
negotiates prices directly with producers. For other items, the Company provides
the distributor with specifications and receives monthly prices for such items,
generally based upon a "cost plus" formula. Restaurant managers purchase these
items directly from the distributor, and each restaurant is billed directly for
its purchases. Although most of the Company's food and supplies are presently
furnished by one distributor, the Company believes alternate food suppliers are
available and has not experienced a shortage of food or supplies. A daily
inventory is taken for high cost items, such as steaks, ground meat, seafood and
liquor. A physical inventory of all items is made at the end of each four week
accounting period.
Future Expansion
- ----------------
The Company intends to open eight additional Max & Erma's restaurants
per year during fiscal 1999 and fiscal 2000 and two Ironwood Cafes during fiscal
1999. All but four of the existing Max & Erma's restaurants are located in
suburban areas. Of the existing Max & Erma's restaurants, 32 are free-standing
and 15 are in-line shopping center/mall locations. The following table sets
forth the location of each Company-owned existing Max & Erma's restaurants and
Ironwood Cafes and the locations of restaurants currently under development and
scheduled to open during 1999 and 2000:
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<TABLE>
<CAPTION>
Max & Erma's Ironwood Cafe
------------ -------------
Existing Under Development Existing Under Development
-------- ----------------- -------- -----------------
<S> <C> <C> <C> <C>
GEORGIA
Atlanta 2 --- --- ---
ILLINOIS
Chicago 7 --- --- ---
INDIANA
Indianapolis 3 2 --- ---
KENTUCKY
Lexington 2 --- --- ---
MICHIGAN
Ann Arbor 1 --- --- ---
Detroit 6 1 --- ---
Grand Rapids 1 --- --- ---
NORTH CAROLINA
Charlotte 1 --- --- ---
OHIO
Akron 1 --- --- ---
Cincinnati 1 2 --- 1
Cleveland 3 2 --- 1
Columbus 9 1 1 ---
Dayton 3 --- --- ---
Toledo 1 --- --- ---
Niles --- 1 --- ---
PENNSYLVANIA
Pittsburgh 5 2 --- ---
Erie --- 1 --- ---
SOUTH CAROLINA
Greenville 1 --- --- ---
VIRGINIA
Norfolk --- 1 --- ---
TOTAL 47 13 1 2
</TABLE>
The Company's preference is to acquire the land and build new
free-standing restaurants for Max & Erma's. However, in order to acquire
suitable sites, the Company will utilize ground leases, or lease and convert
existing premises. All sites under development are free-standing. 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.
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.
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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"). 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
1999 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.
6. Ironwood Cafe - The Company is testing a new concept, Ironwood Cafe. There
is no assurance that this concept will become profitable or achieve expected
results.
7. Franchising - The Company has begun and will expand franchising the Max &
Erma's concept. Failure to properly train, control and supervise franchisees
could have a detrimental effect on the overall reputation and results of
operations of Max & Erma's Company-owned restaurants. Additionally, there is
no assurance that franchised restaurants will open or generate franchise fees
as projected.
Item 2. PROPERTIES
- ------------------
All but five of the Company's restaurants are occupied under leases
expiring from 2000 to 2025, with renewal options for five to twenty 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,
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furniture and fixtures. The Company leases its executive offices (24,000 square
feet) and general warehouse and storage facilities (17,000 square feet) in
Columbus, Ohio under an operating lease expiring in January 2009.
During 1998 the Company completed a sale-leaseback of 13 Max & Erma's
restaurant properties. The Company received net proceeds from the sale of
approximately $25.5 million, which was approximately $1.4 million in excess of
net book value of the properties. The related leases are for an initial term of
twenty years with three five-year renewal options.
The last 29 Max & Erma's restaurants opened since mid-1993 are based on
a standard prototype design. 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 18 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 6,800 square feet and seats 210 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 currently under contract to lease two additional sites
for Ironwood Cafe. The restaurants will generally occupy 3,500 to 4,000 square
feet in neighborhood locations. Since Ironwood Cafe is open for dinner only, a
convenient neighborhood location is the most important aspect of the site
selection criteria. The leases are generally for an initial term of five years
with two five-year renewal options.
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.
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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 25, 1998.
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
25, 1998, 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 25, 1998, 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 25, 1998 and October 26, 1997 and the
related statements of income, stockholders' equity and cash flows for each of
the three years in the period ended October 25, 1998, 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 25,
1998, pages 14 through 24 and the inside back cover.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
- -----------------------------------------------------
ON ACCOUNTING AND FINANCIAL DISCLOSURES
---------------------------------------
None.
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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 1999 Annual Meeting of
Stockholders to be held on April 8, 1999, 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 14 are filed as part of this
report.
(a)(3) and (c): Exhibits
The exhibits listed in the accompanying index to exhibits on
pages 15 through 16 are filed as part of this report.
(b): Reports on Form 8-K
Report dated 9-13-98, filed 9-14-98, reporting that the Board
of Directors authorized the Company to repurchase 500,000
shares of the Company's common stock.
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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 15, 1999 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.
Signature Title
- --------- -----
/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
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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
---------------
<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 25, 1998:
- -Consolidated Balance Sheets as of
October 25, 1998 and October 26, 1997
- -For the years ended October 25, 1998, 14 - 15
October 26, 1997 and October 27, 1996
-Consolidated Statements of Income
-Consolidated Statements of Stockholders' Equity 16
-Consolidated Statements of Cash Flows 17
18
- -Notes to Consolidated Financial Statements
- -Independent Auditors' Report
- -No financial statement schedules are required 19 - 23
to be filed because the conditions requiring 24
their filing do not exist or because the information
is given in the consolidated 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 15, Reference is made to Exhibit 2 of
1991. Report on Form 10-K filed January 24,
1992.
3(a) Restated Certificate of Incorporation, as amended April 4, 1985. Reference is made to Exhibit 4(c) of
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 May Reference is made to Exhibit 3(d) of
30, 1990. Report on form 10-K filed January 25,
1991.
4 Form of Common Stock Certificate. Reference is made to Exhibit 4(a) of
Registration Statement on Form S-1
(Registration No. 2-85585).
10(a) Max & Erma's Ltd. Agreement of Limited Partnership, dated May Reference is made to Exhibit 10(b) of
17, 1972. 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) of
Erma's Ltd., dated September 9, 1974. 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) of
Partnership, dated July 27, 1981. Registration Statement on Form S-1
(Registration No. 2-85585).
10(d) Letter Agreement between Nine Limited Leasing, Max & & Erma's Reference is made to Exhibit 10(bb)
Inc., and Max & Erma's, Indianapolis, Ltd., dated April 24, 1977. of Registration Statement on Form S-1
(Registration No. 2-85585).
10(e) Letter Agreement between Nine Limited Leasing, Max & Erma's, Reference is made to Exhibit 10(dd)
Inc., and Max & Erma's East, Ltd., dated May 27, 1977. of Registration Statement on Form S-1
(Registration No. 2-85585).
10(f) Letter Agreement between Nine Limited Leasing, Max & Erma's, Reference is made to Exhibit 10(ee)
Inc., and Max & Erma's Dayton, Ltd., dated October 1, 1977. of Registration Statement on Form S-1
(Registration No. 2-85585).
10(g) Letter Agreement between Nine Limited Leasing, Max & Erma's, Reference is made to Exhibit 10(gg)
Inc., and Max & Erma's North, Ltd., dated December 28, 1981. of Registration Statement on Form S-1
(Registration No. 2-85585).
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C> <C>
10(h)* Employment Agreement with Todd Barnum, dated December 12, 1984. Reference is made to Exhibit 10(b) of
Report on Form 10-K filed January 25,
1985.
10(i)* Employment Agreement with Mark F. Emerson, dated December 12, Reference is made to Exhibit 10(c) of
1984. Report on Form 10-K filed January 25,
1985.
10(j)* Employment Agreement with William C. Niegsch, Jr., dated Reference is made to Exhibit 10(d) of
December 12, 1984. Report on Form 10-K filed January 25,
1985.
10(k)* 1992 Stock Option Plan. Reference is made to Exhibit 10(q) of
Report on Form 10-K filed January 25,
1993.
10(l)* 1996 Stock Option Plan. Reference is made to Exhibit 10(p) of
Report on Form 10-K filed January
1996.
10(m)* Indemnification Agreement (form) between Max & Erma's Reference is made to Exhibit 10(y) of
Restaurants, Inc. and each of its directors dated as of June Report on Form 10-K filed January 23,
18, 1986. 1987.
10(n) Lease between Max & Erma's Dublin, Inc. and Mango Investments, Reference is made to Exhibit 10(ee)
dated February 9, 1989. of Report on Form 10-K filed January
26, 1990.
10(o)* Written description of split dollar life insurance program for Reference is made to footnote 3 to
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(p)* Board of Directors' Resolution adopted November 2, 1987 Reference is made to Exhibit 10(dd)
relating to split dollar life insurance program for officers. of Report on Form 10-K filed January
25, 1993.
10(q)* Board of Directors' Resolution adopted October 19, 1992 Reference is made to Exhibit 10(ee)
relating to split dollar life insurance program for officers. of Report on Form 10-K filed January
25, 1993.
10(r) Amended and Restated Revolving Credit Agreement dated January
30, 1998 between Max & Erma's Restaurants, Inc. and The
Provident Bank.
10(s) First Amendment to Amended and Restated Revolving Credit
Agreement dated December 11, 1998 between Max & Erma's
Restaurants, Inc. and The Provident Bank.
10(t)* Compensation Committee of the Board of Directors
resolution adopted October 5, 1998 relating to officers'
bonuses.
13 Portions of the Annual Report to Stockholders for the
Fiscal Year ended October 25, 1998, 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.
16
<PAGE> 1
Exhibit 10(r)
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
This Amended and Restated Revolving Credit Agreement dated as of January
30, 1998 (the "Agreement"), is between Max & Erma's Restaurants, Inc., a
Delaware corporation (the "Company"), and The Provident Bank (the "Bank") amends
and restates in its entirety the Revolving Credit Agreement between the parties
dated October 25, 1993, as amended by First Amendment dated January 17, 1994,
Second Amendment dated August 25, 1995, Third Amendment dated February 17, 1996
and Fourth Amendment dated March __, 1997. The parties agree as follows:
SECTION 1
AMOUNT AND TERMS OF THE CREDIT
1.1 COMMITMENT OF THE BANK.
(a) COMMITMENT. The Bank agrees, on the terms and conditions
of this Agreement and provided that no Event of Default or Default (the
definitions of those and other capitalized terms used herein have the meanings
provided in Section 9) then exists, to make Loans to the Company at the main
office of the Bank, 1 East Fourth Street, Cincinnati, Ohio, from time to time on
and after the date hereof but prior to January 1, 2004 (the "Maturity Date").
(b) MAXIMUM COMMITMENT. The Bank agrees to lend to the Company
up to an amount (the "Maximum Commitment") equal to the lesser of (a) the Bank's
Baseline Commitment, or (b) the Residual Commitment. The initial Baseline
Commitment of the Bank is $12,000,000 which Baseline Commitment shall decrease
by $600,000 every three months, with the first decrease to occur on March 1,
2000. The Residual Commitment shall equal the Baseline Commitment less the
scheduled decreases, as reflected in the attached Schedule 1.1(b). The maximum
amount of all outstanding Loans of the Bank to the Company under this Agreement
shall not exceed the Maximum Commitment of the Bank. The Maximum Commitment of
the Bank as adjusted from time to time is hereinafter called the "Commitment" of
the Bank. No Commitment shall become effective until each of the parties hereto
shall have executed this Agreement or a counterpart hereof.
1.2 CANCELLATION OR REDUCTION OF THE COMMITMENT BY THE COMPANY. During
the period from and including the date of this Agreement to but excluding the
Maturity Date, the Commitment of the Bank may be cancelled or may be reduced
permanently from time to time by the Company in the amount of $100,000 or any
larger amount which is a whole multiple of $100,000 upon 10 Banking Days'
written notice to the Bank of the Company's election to do so, which notice
shall specify the date when such cancellation or reduction shall be effective
and on the effective date of such reduction the Commitment of the Bank shall be
reduced; provided that-
(a) any such cancellation or reduction shall be
irrevocable;
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<PAGE> 2
(b) in the event of a cancellation of the Commitment of
the Bank, (i) the Note shall be paid in full, (ii)
all Commitment Fees due to the date of cancellation
shall be paid in full and (iii) all expenses due
pursuant to Section 10.7 hereof shall be paid in
full; and
(c) in the event of a reduction of the Commitment of the
Bank to an amount less than the principal amount then
outstanding hereunder, the Note shall be prepaid so
that the unpaid aggregate principal amount of the
then outstanding Loans does not exceed the Commitment
of the Bank as so reduced.
1.3 COMMITMENT FEE. As consideration for the Commitment of the Bank,
the Company shall pay to the Bank, a Commitment Fee on the daily average unused
portion of the Bank's Commitment at a rate per annum equal to 1/8 of 1%,
commencing with the effective date hereof (calculated on the basis of the actual
number of days elapsed over a year of 360 days). The Commitment Fee shall be
payable quarterly on the date for payment of interest pursuant to Section 1.4
commencing with the first such date after the effective date hereof.
1.4 THE NOTE.
(a) FORM. The Loans made by the Bank pursuant hereto shall be
evidenced by a master promissory note of the Company substantially in the form
of Exhibit A, with appropriate insertions (the "Note"), payable to the order of
the Bank and representing the obligation of the Company to pay the amount of the
Commitment or, if less, the aggregate unpaid principal amount of all Loans made
by the Bank, with interest thereon as prescribed in this Section 1.4. The Note
shall (i) be dated the date of this Agreement- (ii) be stated to mature on the
Maturity Date; and (iii) bear interest at the applicable interest rate per annum
as provided in, and payable as specified in this Section 1.4. Each Loan made by
the Bank and each payment made on account of principal on the Note shall be
recorded by the Bank, on its books and records or endorsed on the grid attached
to the Note, such books and records or endorsements to constitute prima-facie
evidence of the amount of all Loans and payments; provided, however, that the
failure of the Bank to make such recordation shall not limit or otherwise affect
the obligations of the Company under the Note.
(b) INTEREST. Each Loan shall bear interest on the unpaid
principal balance of all Loans made by the Bank for each day from the day such
Loan is made until it becomes due, at a fluctuating rate per annum which rate
will be immediately adjusted upon the execution of this Amendment. Thereafter
such rate will be adjusted based upon the Borrower's submission of financial
information pursuant to Section 5.2 herein beginning with the quarter ending
November, 1995. The interest rate adjustment will be effective the first Monday
following receipt by the Bank of the Quarterly Compliance Certificate pursuant
to Section 5.4(c) herein. The interest rate will be established from the
following schedule based upon the Borrower's ratio of Unsubordinated
Indebtedness to the sum of Tangible Net Worth plus Subordinated Debt as of the
date of such fiscal quarter end:
2
<PAGE> 3
<TABLE>
<CAPTION>
RATIO AT QUARTER END RATE FOR FOLLOWING QUARTER
-------------------- --------------------------
<S> <C>
Less than 0.75:1.0 One quarter (1/4%) above the Prime Rate
0.751 through 1.0:1.0 One-half (1/2%) above the Prime Rate
Greater than 1.0:1.0 Three quarters (3/4%) above the Prime Rate
</TABLE>
Interest on all Loans shall be calculated on the basis of the actual number of
days elapsed over a year of 360 days. As used in this Agreement, the term "Prime
Rate" on any day shall mean the rate published or announced by the Bank as its
"Prime Rate" which rate may not be the Bank's lowest rate. Any change in the
interest rate on a Loan due to a change in the Prime Rate shall take effect on
the date of such change in the Prime Rate. Interest on the Loans shall be
payable quarterly on the last day of each December, March, June and September,
commencing on the first such date following the initial Loan. To the extent
permitted by applicable law, the Bank may charge interest at the foregoing rates
on all interest and other amounts owing hereunder which are not paid when due.
1.5 PREPAYMENTS AND RIGHT TO REBORROW. Outstanding Loans may be prepaid
in whole at any time or in part from time to time without premium or penalty. No
prepayment shall affect the Company's right to reborrow from the Bank under the
Commitment of the Bank up to the permissible amount hereunder prior to the
Maturity Date.
1.6 LOANS. Each Loan shall be made pursuant to the Bank's Automated
Line of Credit Service. Further, the Bank will, at the request of the Company
repay prior Loans pursuant to the Automated Line of Credit service. The Company
may request the Bank to make Loans by written or telephonic request made prior
to 2:00 p.m. Columbus, Ohio time. The proceeds of any such request will subject
to the satisfaction of the terms and conditions of this Agreement, promptly made
available to the Company by the Bank at the office of the Bank by crediting the
account of the Company on the books of such office of the Bank.
SECTION 2
GENERAL TERMS
2.1 PAYMENTS. The Company shall make all payments of principal,
interest and Commitment Fees to the Bank as payee at its main office, 1 East
Fourth Street, Cincinnati, Ohio, in immediately available funds prior to 3:00
p.m., Cincinnati, Ohio time, on the date such payments shall become due in
accordance with the terms hereof and of the Note.
2.2 PAYMENT ON NON-BANKING DAYS. Whenever any payment to be made
hereunder or under the Note shall be stated to be due on a day other than a
Banking Day, such payment shall be made on the next succeeding Banking Day and
such extension of time shall in such case be included in the computation of
payment of interest hereunder or under the Note or the Commitment Fees
hereunder, as the case may be.
3
<PAGE> 4
2.3 SETOFFS. Upon the occurrence of any Event of Default, the Bank
shall ha the right to setoff against all obligations of the Company to the Bank
hereunder, under the Note or under any of the Loan Documents, whether matured or
unmatured, all amounts owing to the Company by the Bank or any Affiliate of the
Bank, whether or not then due and payable, and all other funds or property of
the Company on deposit with or otherwise held by or in the custody of the Bank
or any Affiliate of the bank for the beneficial account of the Company.
2.4 CAPITAL ADEQUACY. If, on or after the date hereof, the Bank shall
have determined that the adoption of any applicable law, rule or regulation
regarding capital adequacy, or any change therein, or any change in the
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by the Bank with any request or directive regarding
capital adequacy (whether or not having the force of law) of any such authority,
central bank or comparable agency, has or would have the effect of reducing the
rate of return below that achieved on the date of this Agreement on the Bank's
capital as a consequence of its obligations hereunder to a level below that
which the bank could have achieved but for such adoption, change or compliance
(taking into consideration the Bank's policies with respect to capital adequacy)
by an amount deemed by the Bank to be material, then, sixty days after the Bank
delivers notice to the Company regarding such circumstances, the Company shall
pay to the Bank such additional amount or amounts as will compensate the Bank
for such reduction.
2.5 INTEREST AFTER MATURITY. Whenever any payment to be made hereunder,
under the Note or under any of the Loan Documents shall become due and payable,
whether at the stated maturity thereof, by acceleration or otherwise, interest
thereon shall thereafter be payable at a rate per annum equal to 1% above the
Prime Rate.
2.6 SECURITY. The obligations of the Company hereunder are secured
pursuant to the Security Agreement.
SECTION 3
CONDITIONS OF BORROWING
The obligation of the Bank to make the Loans to the Company provided
for hereunder shall be subject to the following conditions.
3.1 CONDITIONS PRECEDENT TO INITIAL LOAN. Prior to the initial Loan,
the Company shall furnish to the Bank all of the following, each dated the date
hereof (unless otherwise indicated) in form and substance satisfactory to the
Bank:
(a) NOTE. A properly executed Revolving Credit Note, drawn to
the order of the Bank in the principal amount of the Bank's Commitment.
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<PAGE> 5
(b) SECURITY AGREEMENT. A properly executed Security Agreement
in the form attached hereto as Exhibit B (the "Security Agreement").
(c) FINANCING STATEMENTS. Copies of duly completed and
executed Uniform Commercial Code financing statements and/or statements of
assignment and/or statements of amendment with respect to the property covered
by the Security Agreement in proper form for filing in all jurisdictions in
which such filing is necessary or appropriate to establish, perfect, protect and
preserve the rights, titles, interests, remedies, powers, privileges and Liens
of the Bank in such property.
(d) LIENS AND OTHER SEARCHES. Results of record searches by a
Person satisfactory to the Bank, of the Uniform Commercial Code filings which
may have been filed with respect to the personal property of the Company in the
state and county filing offices and real estate records in each of the
jurisdictions requested by the Bank, and of judgment and tax Liens with respect
to the Company.
(e) CERTIFIED RESOLUTIONS OF COMPANY. A certified copy of the
resolutions of the Board of Directors of the Company authorizing the execution,
delivery and performance of this Agreement, the Note issued hereunder, and the
Security Agreement.
(f) OPINION OF COUNSEL. The favorable opinion of counsel for
the Company ("Counsel"), which Counsel shall be acceptable to the Bank,
addressed to the Bank, and in a form and scope satisfactory to the Bank, to the
following effect-
(i) ORGANIZATION, GOOD STANDING, CORPORATE POWER. The
Company is a corporation duly organized, and is
validly existing and in good standing under the
laws of the jurisdiction in which incorporated.
The Company has all requisite power and authority,
corporate or otherwise, to own or lease its
property and carry on its business as and in the
places where such properties are now located,
leased or operated or such business is now
conducted and the Company has such power and
authority to enter into and perform all of its
obligations under this Agreement, the Note, and
the Security Agreement.
(ii) COMPANY AUTHORIZATION, EXECUTION, DELIVERY AND
ENFORCEABILITY OF AGREEMENTS. The execution,
delivery and performance by the Company of this
Agreement, the Note, and the Security Agreement
have been duly authorized by all necessary
corporate action. Each of this Agreement, the
Note, and the Security Agreement has been duly
executed and delivered by the Company. Each of
this Agreement and the Security Agreement
constitutes the legal, valid and binding
obligation of the Company, and is enforceable
against the Company in accordance with its terms.
5
<PAGE> 6
(iii) DELIVERY AND ENFORCEABILITY OF Note. The Note
issued and delivered to the Bank pursuant to the
provisions of this Agreement (assuming its due
execution and delivery) is a valid, binding and
enforceable obligation of the Company.
(iv) COMPLIANCE WITH LAWS AND OTHER INSTRUMENTS. To the
best of Counsel's knowledge, after due inquiry,
the Company is not in violation of or in default
under any provision of its Certificate of
Incorporation or Bylaws (each as amended to date);
any law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award
presently in effect and having applicability to
the Company; or any loan, indenture, credit
agreement, lease or other instrument which
violation or default could materially adversely
affect the business, financial position or results
of operations of the Company.
(v) NO VIOLATIONS OF CORPORATE DOCUMENTS OR
AGREEMENTS. To the best of Counsel's knowledge,
after due inquiry, the execution, delivery and
performance of this Agreement, the Note and the
Security Agreement by the Company does not result
in a violation of any terms or conditions of the
Certificate of Incorporation or Bylaws of the
Company, or breach any term or provision of, or
constitute a default under, any agreement, note or
other agreement to which the Company is a party
which violation, breach or default could
materially adversely affect the business,
financial position or results of operation of the
Company.
(vi) LITIGATION. To the best of Counsel's knowledge,
after due inquiry, there is no action, proceeding
or investigation pending or threatened which
questions the validity of this Agreement, the
Note, any of the Loan Documents or any action
taken or to be taken pursuant hereto or thereto,
or which might result, either in any case or in
the aggregate, in any material and adverse change
in the business, operations, affairs or condition
of the Company, its properties and assets or in
any material liability on the part of the Company
except as set forth on Schedule 4.6.
(vii) NOTE. The Note is entitled to the benefits of, and
is secured by valid Liens created by the Security
Agreement.
(viii) The provisions of the Security Agreement are
effective to create in favor of the Bank legal,
valid and enforceable Liens in all right, title
and interest of the Company in the Collateral, as
defined therein. All necessary filings, recordings
and actions have been taken so that the Liens
created by the Security Agreement constitute
perfected Liens in all right, title and interest
of the Company in the Collateral
6
<PAGE> 7
superior in right to any "Collateral Interest" (as
defined below), existing or future, which the
Company or any third Person may have against the
Collateral or interests therein except as
expressly permitted under this Agreement or the
Security Agreement, and such filings are the only
filings necessary to give constructive notice to
third Persons of the Lien created thereby. The
term "Collateral Interest" shall include (A) Liens
created under the Uniform Commercial Code, (B)
Liens of record, and (C) consensual Liens created
by the Company which are not of record. Such
Counsel shall be entitled to rely on the results
of searches conducted by the Bank, copies of which
have been made available to such Counsel.
(ix) QUALIFICATION OF OPINION. In giving the foregoing
opinions Counsel may state: (A) that the opinions
are qualified to the extent that the
enforceability of any provisions in this
Agreement, the Note or any of the Loan Documents,
or any rights granted pursuant hereto or thereto,
may be subject to and affected by applicable
bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting the rights of creditors
generally; and (B) that Counsel has relied upon
certificates of executive officers of the Company
as to the character of the properties owned and
the nature of the activities conducted by the
Company in jurisdictions other than that of its
incorporation and other matters of fact within the
knowledge of such officers.
(g) SECRETARY'S CERTIFICATE. Signed copies of a certificate of
the Secretary or Assistant Secretary of the Company which shall certify the
names of the officers of the Company authorized to sign this Agreement, the
Note, or any of the Loan Documents, together with the true signatures of such
officers. The Bank may conclusively rely upon such certificates until it shall
receive a further certificate of the Secretary or an Assistant Secretary of the
Company canceling or amending the prior certificate and submitting the
signatures of the officers named in such further certificate.
(h) CLOSING FEE. A payment for a closing fee of $25,000.
3.2 CONDITIONS PRECEDENT TO EACH LOAN. The obligation of the Bank to
make any Loan hereunder (including the initial Loan) shall be subject to the
further condition precedent that, at the time of each Loan, the Company shall be
in compliance with all of the provisions, warranties, covenants and conditions
contained in this Agreement, and there shall exist no Default or Event of
Default as set forth in Section 7. Each borrowing hereunder shall be deemed to
be a representation and warranty by the Company on the date of such borrowing
that the representations and warranties contained in Section 4 are true and
correct, and that the Company is then in compliance with the covenants contained
in Sections 5 and 6.
7
<PAGE> 8
SECTION 4
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to the Bank, which representations
and warranties will survive the execution and delivery of this Agreement and the
Note, as follows.
4.1 ORGANIZATION AND AUTHORITY. The Company is a corporation duly
incorporated, and is existing and in good standing under the laws of the
jurisdiction of its incorporation and has all requisite power and authority,
corporate or otherwise, to own or lease its properties and to carry on its
business as now conducted. The Company has all requisite power and authority,
corporate or otherwise, to enter into and perform all of its obligations under
this Agreement, the Note, and the Security Agreement. The execution, delivery
and performance of this Agreement, the Note and each of the Loan Documents have
been duly authorized by the Company by appropriate corporate action, there is no
prohibition, either in law, in its Certificate of Incorporation or Bylaws, in
any order, writ, injunction or decree of any court or arbitrator presently in
effect having applicability to the Company, or in any agreement to which it is a
party, which in any way prohibits or would be violated by the execution and
carrying out of this Agreement, the Note or any of the Loan Documents in any
respect; this Agreement, the Note and each of the Loan Documents have been duly
executed and delivered and are the legal, valid and enforceable obligations of
the Company, except as enforceability hereof or thereof may be limited by
bankruptcy, insolvency or laws affecting creditors' rights generally.
4.2 QUALIFICATION. The Company is duly qualified or licensed and in good
standing as a foreign corporation duly authorized to do business in each
jurisdiction in which the character of the properties owned or leased or the
nature of the activities conducted makes such qualifications or licensing
necessary.
4.3 FINANCIAL STATEMENTS. The Company has furnished to the Bank audited
financial statements of the Company including (a) an audited balance sheet as at
October 27, 1996; (b) an audited statement of operations for the year ended
October 27, 1996, (c) an audited statement of shareholders' equity for the year
ended October 27, 1996; and (d) an audited statement of cash flow for the year
ended October 27, 1996. The Company has also furnished to the Bank unaudited
financial statements for the interim period ending on, and as of August 3, 1997.
Except as disclosed to the Bank in writing prior to the date hereof, such
financial statements are complete and correct in all material respects, and
fairly reflect the financial condition of the Company as at such dates and the
results of operations of the Company for the periods ended on such dates. Since
August 3, 1997, no material or adverse change has occurred in the businesses
property or condition (financial or other) of the Company except as disclosed to
the Bank in writing prior to the date hereof.
4.4 TAX RETURNS AND PAYMENTS. The Company has filed all tax returns
required by law to be filed and has paid all taxes, assessments and other
governmental charges levied upon any of its properties, assets, income or
franchises, other than those not yet delinquent. The charges, accruals and
reserves on the books of the Company in respect to income taxes for all fiscal
8
<PAGE> 9
periods are adequate in the opinion of the Company, and the Company knows of no
unpaid assessment for additional income taxes for any fiscal period or of any
basis therefor.
4.5 TITLES TO PROPERTIES: Liens. The Company has good and marketable
title to all of its properties, in each case including the properties and assets
reflected in the balance sheet as of August 1, 1993 except properties held under
leases which are capitalized in accordance with generally accepted accounting
principles consistently applied and except properties and assets disposed of
since the date of such balance sheet in the ordinary course of business, and
none of such properties or assets is subject to any Lien except as permitted by
Section 6.1 (a). The Company enjoys peaceful and undisturbed possession under
all leases under which it operates, and all of such leases are valid, subsisting
and in full force and effect. None of such leases contains any provision
restricting incurrence of Indebtedness by the Company, or any provision which
materially adversely affects or in the future may (so far as the Company can now
foresee) materially adversely affect the operations of the Company under any
such lease.
4.6 LITIGATION, ETC. There is no action, proceeding or investigation
pending or, to the Company's knowledge, threatened (or any basis therefor known
to the Company) which questions the validity of this Agreement, the Note or any
of the Loan Documents, or any action taken or to be taken pursuant hereto or
thereto, or which might result, either in any case or in the aggregate, in any
material adverse change in the business, operations, affairs or condition of the
Company or its properties and assets or in any material liability on the part of
the Company except as set forth on Schedule 4.6.
4.7 COMPLIANCE WITH OTHER INSTRUMENTS, ETC. The Company is not in
violation of any provision of its Certificate of Incorporation or Bylaws, as
amended to date, or to the Company's knowledge, of any agreement, instrument,
judgment, decree, order, statute or governmental law, rule or regulation
applicable to the Company and the execution, delivery and performance of this
Agreement, the Note or any of the Loan Documents will not result in any such
violation or be in conflict with or constitute a default under any such
provisions or result in the creation of any Lien upon any of the properties or
assets of the Company which now or in the future may (so far as the Company can
now foresee) materially and adversely affect the business, operations, affairs
or condition of the Company or its properties or assets.
4.8 ERISA. Without in any way limiting the scope of Section 4.7, the
Company has not (a) incurred any material accumulated funding deficiency within
the meaning of the Employee Retirement Income Security Act of 1974, as amended
from time to time ("ERISA")- (b) incurred any material liability to the Pension
Benefit Guaranty Corporation established under ERISA (or any successor thereto
under ERISA) in connection with any employee benefit plan established or
maintained by the Company; nor (c) had any tax assessed against it by the
Internal Revenue Service for any alleged violation under Section 4975 of the
Internal Revenue Code.
4.9 PATENTS, TRADEMARKS, ETC. The Company owns or possesses all the
patents, trademarks, service marks, trade names, copyrights, licenses and rights
in respect of the foregoing, necessary for the conduct of its business as now
conducted, without any known
9
<PAGE> 10
conflict with the rights of others except such conflicts which would not
materially and adversely affect the business of the Company.
4.10 LIABILITIES. The Company has no material Liabilities, direct or
contingent except (a) as disclosed in the balance sheet of the Company as at
August 3, 1997; (b) as disclosed to the Bank in writing prior to the execution
of this Agreement; and (c) debt, contractual commitments, cancelled purchase
orders, and accruals, all arising out of the ordinary course of business.
4.11 SUBSIDIARIES AND AFFILIATES. The Company has no Subsidiaries or
Affiliate except those set forth on Schedule 4.11 attached hereto.
4.12 DISCLOSURE. Neither this Agreement nor any other document,
certificate or statement furnished to the Bank or to special counsel for the
Bank by the Company or its counsel in connection with the transactions
contemplated hereby contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained herein
and therein not misleading. There is no fact known to the Company which
materially and adversely affects or in the future may (so far as the Company can
now foresee) materially and adversely affect the business, operations, affairs
or condition of the Company or any of its properties or assets which has not
been set forth in this Agreement or in the other documents, certificates or
statements furnished to the Bank by or on behalf of the Company prior to the
date hereof in connection with the transactions contemplated hereby.
4.13 NO GOVERNMENTAL APPROVALS. No authorization, consent, approval or
exemption of, or registration, qualification or filing with, any governmental
authority is required to permit the execution, delivery and performance by the
Company of this Agreement, the Note, or the Security Agreement. The Company is
not an "investment company" within the meaning of the Investment Company Act of
1940, as amended.
4.14 INVESTMENTS, LOANS AND ADVANCES. The Company (a) is not a general
partner in any partnership or a member in any joint venture other than as
disclosed on Schedule 4.1 1, (b) does not own or hold the assets, stocks, bonds,
notes or other evidence of Indebtedness or any other security of any Person
other than as disclosed on Schedule 4.11 or in the financial statements
delivered to the Bank pursuant to Section 4.3, nor (c) is a party to any
agreement relating to commodity futures, financial futures or similar
investments.
4.15 INSURANCE. All of the properties and operations of the Company of
a character usually insured by Persons of established reputation engaged in the
same or a similar business similarly situated are adequately insured, by
financially sound and reputable insurers, against loss or damage of the kinds
and in the amounts customarily insured against by such Persons; and the Company
carries, with such insurers in customary amounts, such other insurance,
including public and product liability insurance, as is usually carried by
Persons of established reputation engaged in the same or a similar business
similarly situated.
4.16 ENVIRONMENTAL MATTERS. To the best of the Company's knowledge,
there are no materials presently located- on any real property owned by, leased
to or operated by the Company
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which are radioactive or toxic, or which under federal, state or local law,
statute, ordinance or regulations, or court or administrative order or decree,
or private agreement (the "Environmental Requirements") require special handling
in collection, storage, treatment or disposal ("Hazardous Materials") which are
not being handled in accordance with the Environmental Requirements and no part
of such real property has been contaminated by any Hazardous Materials.
4.17 SECURITY. The Note is entitled to the benefits of, and is secured
by valid Liens created by the Security Agreement.
4.18 PERFECTION. The provisions of the Security Agreement are effective
to create in favor of the Bank legal, valid and enforceable security interests
in all right, title and interest of the Company in the Collateral, as defined
therein. All necessary filings, recordings and actions have been taken so that
the security interests created by the Security Agreement constitute perfected
security interests in all right, title and interest of the Company in the
Collateral superior in right to any "Collateral Interest" (as defined below),
existing or future, which the Company or any third Person may have against the
Collateral or interests therein except as expressly permitted under this
Agreement or the Security Agreement, and such filings are the only filings
necessary to give constructive notice to third Persons of the security interest
created thereby. The term "Collateral Interest" shall include Liens created
under the Uniform Commercial Code, Liens of record, and consensual Liens created
by the Company which are not of record.
SECTION 5
AFFIRMATIVE COVENANTS
Until all Loans and other sums due and owing under this Agreement to
the Bank have been paid in full and the Company no longer has any right to
borrow hereunder, the Company covenants and agrees as follows.
5.1 USE OF PROCEEDS. The Company shall use the Loan proceeds disbursed
pursuant to this Agreement for legal and proper purposes.
5.2 PERIODIC FINANCIAL STATEMENTS. The Company shall furnish to the
Bank:
(a) Within 45 days after the end of its first three quarterly
accounting periods of its fiscal year (I) a balance sheet of the Company as at
the close of such period; (ii) a statement of operations for the Company for
such period and for the year to date; and (iii) a statement of cash flows as at
the close of such period; all in reasonable detail, prepared in accordance with
generally accepted accounting principles applied on a consistent basis and
certified as complete and correct, subject to changes resulting from year-end
adjustments, by the chief financial officer of the Company.
(b) On or before the 15th day of each four week accounting
period a statement of operations for each of the Company's restaurants for the
preceding month, prepared in accordance with generally accepted accounting
principles applied on a consistent basis and
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certified as complete and correct, subject to changes resulting from year-end
adjustments, by the chief financial officer of the Company.
5.3 ANNUAL FINANCIAL STATEMENTS. The Company shall furnish to the Bank
within 90 days after the close of each fiscal year a complete annual audit
report, including (a) a balance sheet of the Company as at the end of such
fiscal year; and (b) statements of operations, shareholders' equity and cash
flow for such fiscal year; all in reasonable detail and prepared in accordance
with generally accepted accounting principles applied on a consistent basis and
accompanied by an unqualified opinion thereon of Deloitte & Touche, or other
independent auditors of recognized national standing selected by the Company and
acceptable to the Bank.
5.4 QUARTERLY COMPLIANCE CERTIFICATE. The quarterly and annual
financial statements furnished pursuant to Sections 5.2 and 5.3 shall be
accompanied by a certificate of the chief financial officer of the Company:
(a) NO EVENT OF DEFAULT. Stating that except as disclosed in
the certificate, such officer, after reasonable investigation, has no knowledge
of any (i) Event of Default or (ii) Default;
(b) FINANCIAL RATIOS. Setting forth, in summary form,
calculations showing the financial status of the Company (at the end of, or, in
the case of incurrence tests, during such accounting Period) in respect of the
restrictions contained in Sections 6.1(a)(v), 6.1(b)(iii), 6.2 and 6.3 hereof;
and
(c) INTEREST RATE. Setting forth, in summary form,
calculations showing the ratio set forth in Section 1.4(b).
5.5 NOTICE OF EVENT OF DEFAULT. In addition to the certificate
furnished pursuant to Section 5.4, the Company shall furnish to the Bank,
forthwith upon any executive officer of the Company obtaining knowledge of any
Default or Event of Default, a certificate specifying the nature and period of
the existence thereof, and what action the Company has taken or is taking or
proposes to take in respect thereof.
5.6 AUDITORS' CERTIFICATE. The annual audit report called for by
Section 5.3 shall be accompanied by a certificate prepared by the Company's
independent auditors stating that except as disclosed in the certificate they
have knowledge of any Event of Default or Default which relates to the financial
and accounting matters set forth in Sections 6 and 7.
5.7 MAINTENANCE OF PROPERTIES AND INSURANCE. The Company shall at all
times maintain in good repair, working order and condition all properties used
or useful in the business of the Company and from time to time will make all
appropriate repairs, renewals and replacements thereof- maintain insurance upon
its property of such character and amounts as are usually maintained by
companies engaged in like business; furnish to the Bank, upon request, a
statement of its insurance coverage.
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5.8 INSPECTION. Upon request of the Bank, the Company shall allow any
authorized representatives of the Bank to visit and inspect any of its
properties, to examine and make copies of and from its books of record and
account and to discuss its affairs, finances and accounts with its officers,
employees and independent accountants, and shall furnish to the Bank any
information regarding its business affairs and financial condition within a
reasonable time after receipt of a written request therefor. Except (i) as the
Bank deems it necessary in connection with the enforcement of its rights arising
out of any Default or as required by law or with respect to disclosures to bank
regulatory authorities or the independent auditors or counsel or the employees,
officers or directors of the Bank, (ii) disclosure to any actual or potential
participant or assignee of the Bank's rights under this Agreement, or (iii) as
consented to by the Company, the Bank will not publish or disclose to any third
Person any information gained under any inspection conducted pursuant to this
Section 5.8 unless and until such information is or becomes a matter of public
knowledge.
5.9 PAYMENT OF TAXES AND CLAIMS. The Company shall promptly pay and
discharge all taxes and assessments levied and assessed or imposed upon its
property or upon its income as well as all claims which, if unpaid, might by law
become a Lien upon its property; provided, however, that nothing herein
contained shall require the Company to pay any such taxes, assessments or claims
so long as the Company shall in good faith contest the validity and stay the
execution and enforcement thereof.
5.10 REPORTS, ETC. The Company shall furnish to the Bank copies of all
material which the Company shall send to any class of its security holders or
file with the Securities and Exchange Commission or any national securities
exchange including, but not limited to, all registration statements, annual
reports on Form 10-K, quarterly reports on Form 10-Q, reports on Form 8-K, proxy
material and annual reports to shareholders, and any and all amendments thereof
or supplements thereto, within 15 days after mailing or filing such materials.
5.11 PRESERVATION OF CORPORATE EXISTENCE, ETC.: BUSINESS. Subject to the
provisions of Section 6.1(d) hereof, the Company shall, at all times preserve
and keep in full force and effect its corporate existence, rights and
franchises. The Company will engage primarily in a business of the same general
character as that now conducted.
5.12 COMPLIANCE WITH LAWS, ETC. The Company shall comply in all material
respects with all statutes, laws, ordinances and governmental rules, regulations
and orders to which it is subject or which are applicable to its business,
properties and assets.
5.13 BOOKS AND RECORDS. The Company shall keep adequate records and
books of account in which complete entries will be made in accordance with
generally accepted accounting procedures consistently applied, reflecting all
financial transactions.
5.14 NOTICE OF LITIGATION. The Company shall notify the Bank in writing
promptly of any litigation, arbitration proceeding or administrative
investigation, inquiry or other proceeding to which the Company is or hereafter
may become a party which may involve any risk of any
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material judgment or liability which would exceed the amounts covered by
insurance by $100,000 or more or which may otherwise result in any materially
adverse change in the business or assets or in the condition (financial or
otherwise) of the Company or which may impair the ability of the Company to
perform this Agreement.
5.15 ERISA. The Company shall comply in all material respects with the
applicable provisions of ERISA. The Company shall furnish to the Bank (a) as
soon as possible, and in any event within one Banking Day after any executive
officer of the Company knows or has reason to know that any Reportable Event (as
described in ERISA) with respect to any plan of the Company has occurred, a
statement of the chief financial officer of the Company setting forth details as
to such Reportable Event and the action which is proposed to be taken with
respect thereto, together with a copy of the notice of such Reportable Event
given to the Pension Benefit Guaranty Corporation, (b) promptly after filing
with the Internal Revenue Service, copies of each annual report with respect to
each plan subject to ERISA, (c) promptly upon filing with the Pension Benefit
Guaranty Corporation, a copy of any notice from the Company or the administrator
of any such plan to the Pension Benefit Guaranty Corporation that any such plan
is to be terminated, (d) promptly after receipt thereof, a copy of any notice
the Company, any such plan or the administrator of any such plan may receive
from the Pension Benefit Guaranty Corporation to terminate any such plan or to
appoint a trustee to administer any such plan, (e) promptly after receipt
thereof, a copy of any notice the Company or the administrator of such plan may
receive from the Internal Revenue Service relating to the disqualification of
any previously qualified plan, and (f) promptly after any executive officer of
the Company knows or has reason to know that the Company will be involved in a
withdrawal or partial withdrawal from a multiemployer plan, a statement to that
effect and setting forth the details of such withdrawal or partial withdrawal,
including the estimated liability of the Company with respect thereto.
5.16 PERFORMANCE OF CONTRACTS. The Company shall perform and comply
with all of its agreements if non-performance thereof could materially adversely
affect the business or credit of the Company or could impair the ability of the
Company to perform this Agreement, the Note or any of the Loan Documents.
5.17 ENVIRONMENTAL MATTERS. If at any time the Company obtains notice
that any real property owned by, leased to or operated by the Company has
located therein Hazardous Materials, the Company shall, within 30 days after
receipt of such notice, take or cause to be taken, at its sole expense, such
actions as may be necessary to comply with all Environmental Requirements.
5.18. LANDLORD WAIVERS. Immediately after execution hereof, the Company
shall use its best efforts to obtain from its landlords, in those jurisdictions
where such landlords are given a statutory Lien superior to or pari passu with
the Lien granted to the Bank under the Loan Documents, a Landlord's Waiver and
Consent in the form attached hereto as Schedule 5.18.
5.19. MANAGEMENT. The Company shall retain Todd B. Barnum in the
capacity of Chairman of the Board and Chief Executive Officer of the Company, or
replaced by an individual
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performing similar duties who shall be satisfactory to the Bank within 180 days
from the date Mr. Barnum shall cease to function in such capacity.
5.20. BANK ACCOUNTS. The Company will establish and maintain the Bank
as its principal bank of account and primary depositary. The Company will, at
all times, maintain a compensating balance of at least $100,000 in its
depository account maintained at the Bank.
SECTION 6
NEGATIVE COVENANTS
Until all Loans and other sums due and owing under this Agreement to
the Bank have been paid and the Company no longer has the right to borrow
hereunder, unless the Bank shall have otherwise agreed in writing, the Company
covenants and agrees as follows.
6.1 RESTRICTIONS. The Company will not either directly or indirectly:
(a) LIENS. Create, assume, or suffer to exist any mortgage,
pledge, encumbrance, security interest, lien or charge of any kind (collectively
"Liens") upon any of its property or assets, whether now owned or hereafter
acquired, or assign or otherwise convey any right to receive income, except-.
(i) Liens securing taxes, assessments, fees or
other governmental charges or levies or
securing the claims of materialmen,
mechanics, carriers, warehousemen, landlords
and other similar persons, the payment of
which is not at the time required by Section
5.9;
(ii) Liens incurred or deposits made in the
ordinary course of business (A) in
connection with workers' compensation,
unemployment insurance, social security and
other similar laws, or (B) to secure the
performance of bids, tenders, sales,
contracts, public or statutory obligations,
surety, customs, appeal and performance
bonds and other similar obligations not
incurred in connection with the borrowing of
money, the obtaining of advances or the
payment of the purchase price of property;
(iii) Attachment, judgment and other similar Liens
arising in connection with court
proceedings, provided, however, that the
execution or other enforcement of such Liens
is effectively stayed and the claims secured
thereby are currently being contested in
good faith by appropriate proceedings and as
to which the Company shall have set aside on
its books adequate reserves in accordance
with generally accepted accounting
principles;
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(iv) Easements, rights of way, restrictions,
leases, installations of public utilities,
title imperfections and restrictions,
reservations in land patents, zoning
ordinances and other similar encumbrances
affecting real or tangible personal
property, which in the aggregate do not
materially detract from the value of such
property or materially impair its use in the
operations of the business of the Company
taken as a whole;
(v) Liens securing purchase money obligations
respecting personal property of the Company so
long as such Liens apply only to the personal
property being purchased or leased;
(vi) Other Liens existing on the date hereof to the
extent shown in Schedule 6.1 attached hereto;
(vii) Liens securing the repayment of Indebtedness
owed by the Company to the Bank;
(viii) Liens encumbering not more than five
restaurant locations which shall secure
Indebtedness of the Company as provided for
in Section 6.1(b)(iv); and
(ix) Liens related to Indebtedness described in
Section 6.1(b)(iv) below.
(b) INDEBTEDNESS. Create, incur, assume or suffer to exist any
Indebtedness except:
(i) Indebtedness of the Company due to the Bank;
(ii) Subordinated Debt or unsecured Indebtedness
which is convertible into shares of the
Company, the terms and conditions of which
shall be satisfactory to the Bank;
(iii) Secured Indebtedness which is secured by
Liens permitted by Section 6.1(a)(v) and
(vi); and
(iv) Indebtedness incurred, the terms of which
are essentially as outlined in that certain
proposal for permanent financing submitted
to the Borrower on August 8, 1995 by MetLife
Capital Corporation, a copy of which was
provided the Bank.
(c) CONTINGENT LIABILITIES. Assume, guarantee, endorse,
contingently agree to purchase or otherwise become liable upon the obligation of
any one or more Persons if the amount of all such guaranties, endorsements, and
other contingent Liabilities at any one time outstanding exceeds $100,000 except
those liabilities associated with the establishment of a new
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wholly-owned subsidiary, the sole purpose of which is to operate one or more
Italian theme restaurants, or become a general partner in any partnership other
than (i) those partnerships reflected in Schedule 6.1(c) or (ii) those
partnerships established to own and operate one or more Max & Erma restaurants
as long as the partnership(s) are consolidated into the financial statements of
the Company provided to the Bank pursuant to Sections 5.2 and 5.3 hereof and
such partnerships and the Company execute documents, in form and substance
acceptable to the Bank, that allow the Bank to obtain a first priority security
interest in the assets of the partnerships, prohibit transfers of assets from
the Company to the partnerships and prohibit the assumption of partnership
Indebtedness by the Company.
(d) MERGER, CONSOLIDATION AND SALE OF ASSETS. Merge or
consolidate with any other corporation, or liquidate, or sell, lease, transfer
or otherwise dispose of (whether in one transaction or in a series of
transactions) all or a substantial part of its assets; PROVIDED, HOWEVER, that
the sale and leaseback of eight restaurants to Franchise Finance Corporation of
America completed in December 1997 will not violate this provision; PROVIDED
FURTHER, HOWEVER, that any future sale and leaseback transaction with Franchise
Finance Corporation of America shall be deemed to be permitted hereunder if it
meets all the following conditions: (1) no Default or Event of Default exists
hereunder, (2) the Company has received reasonably equivalent value in the
transaction and (3) the property involved in the transaction is not subject to
the Lien of the Bank.
(e) SALE AND LEASEBACK. Enter into any agreement with any
Person providing for the leasing by the Company of real or personal property
which has been or is to be sold or transferred by the Company to such Person or
of real or personal property intended to be used for substantially the same
purpose as the property sold or transferred by the Company; PROVIDED, HOWEVER,
that the sale and leaseback of eight restaurants to Franchise Finance
Corporation of America completed in December 1997 will not violate this
provision; PROVIDED FURTHER, HOWEVER, that any future sale and leaseback
transaction with Franchise Finance Corporation of America shall be deemed to be
permitted hereunder if it meets all the following conditions: (1) no Default or
Event of Default exists hereunder, (2) the Company has received reasonably
equivalent value in the transaction and (3) the property involved in the
transaction is not subject to the Lien of the Bank.
(f) ACCOUNTS RECEIVABLE. Discount or sell any of its notes or
accounts receivable.
(g) INVESTMENTS. Acquire or purchase the assets of any Person
or acquire or purchase the outstanding securities of any Person, or make any
additional investments in or capital contributions to any Person; provided,
however, that this prohibition shall not apply to the following: (i) purchases
of (A) U. S. Government securities directly or pursuant to repurchase agreements
with the Bank, (B) certificates of deposit of the Bank and (C) commercial paper
rated A-1 or P-1 if all of such investments have a maturity of one year or less;
or (ii) any such purchase or acquisition of assets for the sole purpose of
establishing or converting such assets into one or more Max & Erma's restaurants
as long as (A) the assets are consolidated into the financial statements of the
Company provided to the Bank pursuant to Sections 5.2 and 5.3 hereof and (B) the
Company executes documents, in form and substance acceptable to the Bank, that
allow the
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Bank to obtain a first priority security interest in such assets, prohibit the
transfer of assets from the Company to any entity owning the assets and prohibit
the assumption of Indebtedness by the Company in connection with the acquisition
of such assets; or (iii) the investment or capital contribution of up to
$2,500,000 in a new wholly owned subsidiary established to operate one or more
Italian theme restaurants. The investment limitation for this subsidiary shall
no longer apply after the Company has provided certification to the Bank along
with any supporting documentation which the Bank may reasonably request that for
the six months immediately preceding the date of such certification (A) a
minimum of four such restaurants have been in existence, and (B) the aggregate
Net Income for all such restaurants as evidenced by the restaurant Income
Statements for the six month period prepared in the form attached hereto as
Exhibit 6.1(g) is equal to or in excess of $250,000.
(h) LOANS AND ADVANCES. Make any loans or advances in excess
of an aggregate of $100,000 at any one time outstanding.
(i) SUBSIDIARIES. Create or suffer to exist any Subsidiaries
other than those listed on Schedule 4.11 hereof.
6.2 FINANCIAL RATIOS. The Company will not:
(a) CURRENT RATIO. Permit the ratio of Current Assets to
Current Liabilities at any time to be less than 0.35 to 1.
(b) INDEBTEDNESS/TANGIBLE NET WORTH RATIO. Permit the ratio of
Unsubordinated Indebtedness to the sum of Tangible Net Worth plus Subordinated
Debt at any time to exceed 1.0 to 1.
(c) INCOME AVAILABLE FOR FIXED CHARGES/FIXED CHARGES. Permit
the ratio of Income Available for Fixed charges to Fixed Charges at the end of
any fiscal quarter commencing with the fiscal quarter ending on October 31, 1993
for the immediately preceding 4 fiscal quarters to be less than 1.25 to 1.
(d) EARNINGS. As of each fiscal quarter end, permit the sum of
its net income before taxes for the then-present fiscal quarter and the three
immediately preceding fiscal quarters to be less than $2,000,000.
6.3 DIVIDENDS AND PURCHASES. The Company will not declare or pay any
dividends on, or make any distribution with respect to, any shares of capital
stock of the Company of any class (except in shares of such capital stock), if
at the time of such action an Event of Default shall have occurred and be
continuing, or would result therefrom.
6.4 TRANSACTIONS WITH AFFILIATES. The Company will not enter into any
transaction, including, without limitation, the purchase, sale or exchange of
any property or the rendering of any service, with any Affiliate of the Company
except in the ordinary course of and pursuant to the reasonable requirements of
the business of the Company and upon fair and reasonable terms
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no less favorable to the Company than would obtain in an arm's length
transaction with a Person not an Affiliate of the Company.
SECTION 7
EVENTS OF DEFAULT AND REMEDIES
If any of the following events ("Events of Default") shall occur and be
continuing:
(a) PRINCIPAL PAYMENTS. The Company shall default in the
payment of the principal of the Note when and as the same shall become due and
payable, after having received written notification of such payment being due,
whether at the due date thereof or by acceleration or otherwise;
(b) INTEREST PAYMENTS AND FEES. The Company shall default in
the payment of interest on the Note, or the payment of any Commitment Fee, when
and as the same shall become due and payable, whether at the due date thereof or
by acceleration or otherwise, provided such default shall continue for a period
of 10 days;
(c) REPRESENTATIONS AND WARRANTIES. Any representation or
warranty made by the Company in this Agreement or in connection with any Loans
hereunder, or in any Loan Document, agreement, report, certificate, financial
statement, or other instrument furnished in connection with this Agreement or
the Loans hereunder shall prove to be false or misleading in any material
respect;
(d) NEGATIVE COVENANTS. The Company shall fail to observe or
perform any covenant, condition or agreement in Section 6 of this Agreement;
(e) OTHER COVENANTS. The Company shall fail to observe or
perform any covenant, condition or agreement (other than those mentioned in
Section 6) to be observed or performed pursuant to the terms hereof or the terms
of any Loan Document, provided such default shall continue unremedied for 30
days after written notice thereof to the Company by the Bank;
(f) CROSS DEFAULT. (i) The Company [or any Subsidiary] shall
default with respect to the payment of any Indebtedness other than Indebtedness
represented by the Note, or (ii) any event or condition shall occur which
enables the holder of any Indebtedness (other than Indebtedness represented by
the Note) or any Person acting on such holder's behalf to accelerate the
maturity thereof, or (iii) the holder of any Indebtedness other than
Indebtedness represented by the Note shall accelerate the maturity of such
Indebtedness- provided no Default under this Section 7(f) shall be deemed to
occur where the amount, individually or in the aggregate, of such Indebtedness
does not exceed $200,000;
(g) JUDGMENTS. One or more judgments from which no appeal may
be taken or with respect to which the time to appeal has expired for the payment
of money aggregating
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$200,000 or more shall be rendered against the Company [and/or any Subsidiary]
and the same shall remain undischarged for a period of 30 consecutive days
during which the execution shall not be effectively stayed;
(h) BANKRUPTCY, ETC. The Company shall (i) apply for or
consent to the appointment of a receiver, trustee or liquidator for it or for
any of its property- (ii) admit in writing its inability to pay its debts as
they mature; (iii) make a general assignment for the benefit of creditors; (iv)
be adjudicated a bankrupt or insolvent; or (v) file a voluntary petition in
bankruptcy, or a petition or an answer seeking reorganization or an arrangement
with creditors or to take advantage of any bankruptcy, reorganization,
insolvency, readjustment of debt, dissolution or liquidation law or statute, or
answer admitting the material allegations of a petition filed against it in any
proceeding under any such law or if corporate action shall be taken by the
Company for the purpose of effecting any of the foregoing;
(i) REORGANIZATION, RECEIVER, ETC. An order, judgment or
decree shall be entered without the application, approval or consent of the
Company by any court of competent jurisdiction, approving a petition seeking
reorganization of the Company or appointing a receiver, trustee or liquidator of
the Company or of all or a substantial part of the assets thereof, and such
order, judgment or decree shall continue unstayed and in effect for any period
of 60 days,
(j) ERISA. A Reportable Event (as defined in ERISA) shall have
occurred with respect to any Plan (as defined therein) and, within 30 days after
the reporting of such Reportable Event to the Bank, the Bank shall have notified
the Company in writing that (i) it has made a determination that, on the basis
of such Reportable Event, there are reasonable grounds for the termination of
such Plan by the Pension Benefit Guaranty Corporation or for the appointment by
the appropriate United States District Court of a trustee to administer such
Plan; and (ii) as a result thereof an Event of Default exists hereunder; or a
trustee shall be appointed by a United States District Court to administer any
Plan; or the Pension Benefit Guaranty Corporation shall institute proceedings to
terminate any Plan;
(k) COLLATERAL DEFAULT. Any default shall occur pursuant to
the terms of any of the Loan Documents,
then (i) the Bank at any time thereafter during the continuance of any such
Event of Default specified above (other than in Section (h) or (i)), may, by
written notice to the Company terminate the Commitment of the Bank (if still in
existence), and declare the entire principal amount of the Note to be due and
payable forthwith, whereupon the Note including all principal and interest and
all other amounts payable hereunder or under any Loan Document shall forthwith
become due and payable; and (ii) automatically upon the occurrence of any of the
events specified in Section (h) or (i) the Commitment of the Bank shall
terminate (if still in existence) and the Note, including all principal and
interest and all other amounts payable hereunder or under any Loan Document
shall become immediately due and payable, in either case without presentment,
demand, protest, or notice of any kind, all of which are hereby expressly
waived, anything contained herein or in the Note or the Loan Documents to the
contrary notwithstanding.
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SECTION 8
ASSIGNMENTS/PARTICIPATIONS
8.1 ASSIGNMENT BY THE COMPANY. The Company may not assign its rights or
obligations hereunder or under the Note without the prior written consent of the
Bank.
8.2 ASSIGNMENTS BY THE Bank. The Bank may assign any of the Loans, the
Note, or its Commitment without the prior consent of the Company.
8.3 PARTICIPATIONS. The Bank may sell or agree to sell to one or more
other Persons a participation in all or any part of any Loans held by it or any
Loan made or to be made by it.
8.4 INFORMATION. Upon the request of the Bank, the Company shall furnish
any information concerning the Company required to be furnished under this
Agreement to assignees and participants (including prospective assignees and
participants).
SECTION 9
DEFINITIONS
9.1 DEFINITIONS. For purposes of this Agreement, the following terms
shall have the meanings specified.
"AFFILIATE" with respect to any Person shall mean each Person
that directly or indirectly (through one or more intermediaries or otherwise),
controls, is controlled by, or is under common control with such Person.
"AGREEMENT" is defined in the preamble.
"BANK" is identified in the preamble.
"BANKING DAYS" shall mean days other than Saturdays, Sundays
and other legal holidays or days on which the principal office of the Bank is
closed.
"BASELINE COMMITMENT" is defined at Section 1. 1 (b).
"CAPITAL EXPENDITURES" shall mean, as to any Person, for any
period, expenditures (including the aggregate amount due under capital leases
incurred during such period but excluding such amounts under capital leases of
assets as to which inclusion of which would cause such amount to be double
counted for such period) made by such Person to acquire or construct fixed
assets, plant and equipment (including renewals, improvements and replacements)
during such period, computed in accordance with generally accepted accounting
principles applied on a basis consistent with those used in making the
calculations for purposes of determining compliance with the provisions of this
Agreement.
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"COMMITMENT" is defined at Section 1. 1 (b).
"COMMITMENT FEE" is defined at Section 1.3.
"COMPANY" is identified in the preamble.
"COUNSEL" is identified at Section 3.1 (f).
"CURRENT ASSETS" shall mean all assets which may properly be
classified as current assets in accordance with generally accepted accounting
principles, applied on a consistent basis.
"CURRENT LIABILITIES" shall mean all Liabilities as may
properly be classified as current Liabilities in accordance with generally
accepted accounting principles, applied on a consistent basis, and, prior to the
Maturity Date, shall include the amount of all Loans which are outstanding
hereunder which are due within the next twelve months.
"DEFAULT" shall mean any condition or event which constitutes
an Event of Default or which would become an Event of Default with the giving of
notice or lapse of time or both (unless cured or waived).
"ENVIRONMENTAL REQUIREMENTS" is defined at Section 4.16.
"ERISA" is defined at Section 4.8.
"EVENTS OF DEFAULT" is defined at Section 7.
"FIXED CHARGES" shall mean, for any period, the sum of (a) one
fifth of the Indebtedness owing the Bank plus (b) the amount of all Indebtedness
(exclusive of Indebtedness owing the Bank) which is or should be classified as a
Current Liability plus (c) rental expense incurred during such period with
respect to non-capitalized leases, all of which shall be determined in
accordance with generally accepted accounting principles consistently applied.
"HAZARDOUS MATERIALS" is defined at Section 4.16.
"INCOME AVAILABLE FOR FIXED CHARGES" shall mean for the
immediately preceding 12 month period the sum of (a) the Net Income before
income taxes, plus (b) the aggregate amount of depreciation expense or
amortization of deferred charges, goodwill or other intangible assets, plus (c)
rental expense less (d) $25,000 times the number of restaurant locations which
the Company operates at the date of calculation, all of which shall be
determined in accordance with generally accepted accounting principles
consistently applied.
"INDEBTEDNESS" shall mean any Liabilities representing
obligations for borrowed money or the deferred purchase price of property or
services (except accruals and trade accounts payable arising in the ordinary
course of business) including, without limitation, capitalized lease
22
<PAGE> 23
obligations, and Liabilities similar to the foregoing of other Persons which are
secured by a Lien on any asset of the Company, or guaranteed directly or
indirectly by the Company.
"INVENTORY" shall mean all raw materials, work in process,
finished goods and materials and supplies of any kind, nature or description
which are or might be used or consumed in the business of the Company or used in
connection with the manufacturing, packing, shipping, advertising, selling or
finishing of such goods, merchandise and other personal property, and all goods,
merchandise and other personal property wherever located, to be furnished by the
Company under any contract or contract for service or held for sale or lease,
whether now owned or hereafter acquired, and all documents of title or other
documents representing the foregoing.
"LIABILITIES" as applied to any Person, shall mean (a) all
items (except items of capital stock of capital surplus, of general contingency
reserves or of retained earnings and amounts attributable to minority interest,
if any) which in accordance with generally accepted accounting principles would
be included in determining total liabilities as shown on the liability side of a
balance sheet of such Person as at the date as of which Liabilities are to be
determined, including specifically capitalized lease obligations and (b) all
obligations secured by any Lien or conditional sale or other title retention
agreement to which any property or asset owned or held by such Person is
subject, whether or not the obligations secured thereby shall have been assumed
(excluding non-capitalized leases which may amount to title retention
agreements).
"LIENS" are identified at Section 6.1 (a).
"LOAN" shall mean a loan made by the Bank pursuant to Section
1.
"LOAN DOCUMENTS" shall mean the Note, the Security Agreement
and all other documents, instruments and certificates to be delivered hereunder
or thereunder.
"MATURITY DATE" is defined at Section 1.1 (a).
"MAXIMUM COMMITMENT" is defined at Section I.I(b).
"NET INCOME" shall mean for any period the net income (loss)
of the Company incurred during such period as determined in accordance with
generally accepted accounting principles consistently applied.
"NOTE" is defined at Section 1.4(a).
"PERSON" shall mean and include an individual, partnership,
corporation, trust, unincorporated organization, a government or any department
or agency thereof or any other entity.
"PRIME RATE" is defined at Section 1.4(b).
23
<PAGE> 24
"RESIDUAL COMMITMENT" is defined at Section 1. 1 (b).
"SECURITY AGREEMENT" is defined at Section 3.1 (b).
"SUBORDINATED DEBT" shall mean all unsecured Indebtedness of
the Company maturing more than 12 months from the date of determination thereof
which in each case shall be subordinated to all Loans and all other amounts owed
to the Bank, all on specific terms and conditions satisfactory to and approved
in writing by the Bank prior to the incurrence thereof.
"SUBSIDIARY" shall mean any corporation which is incorporated
under the laws of the United States or Canada at least a majority of the
outstanding voting stock of which shall, at the time as of which any
determination is being made, be owned by the Company either directly or through
Subsidiaries.
"TANGIBLE NET WORTH" shall mean the total of the capital stock
(net of treasury stock), paid in surplus and retained earnings (deficit) as
determined in accordance with generally accepted accounting principles
consistently applied, minus the following items (without duplication of
deductions), if any, appearing on the balance sheet of the Company:
(a) all deferred charges (net of amortization);
(b) the book amount of all assets which would be treated as
intangibles (including capital leases) under generally accepted
accounting principles, including, without limitation, such items as good
will, unamortized debt discount and expense and corporate organization
expenses, treasury stock, trademarks, trademark applications, trade
names, service marks, brand names, copyrights, patents, patent
applications and licenses, and rights with respect to the foregoing; and
(c) any write-up in the book amount of any asset resulting
from a revaluation thereof from the book amount entered upon
acquisition.
"UNSUBORDINATED INDEBTEDNESS" as applied to any Person, shall
mean all Indebtedness of such Person less Subordinated Debt of such Person.
"WHOLLY OWNED SUBSIDIARY" shall mean a Subsidiary, all of the
voting stock (other than directors' qualifying shares) of which and all other
stock and equity securities of which are owned by the Company, or by the Company
and one or more Wholly Owned Subsidiaries.
9.2 ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with generally accepted accounting
principles consistent with those applied in the preparation of the financial
statements of the Company at the date hereof.
24
<PAGE> 25
SECTION 10
MISCELLANEOUS
10.1 TERM OF AGREEMENT: SUCCESSORS AND ASSIGNS. This Agreement and all
covenants, agreements, representations and warranties made herein and in the
certificates delivered pursuant hereto shall survive the making by the Bank of
the Loans and the execution and delivery to the Bank of the Note and shall
continue in full force and effect until the termination of the Commitment or
until payment in full of the Note, whichever is later. Whenever in this
Agreement either of the parties hereto are referred to, such reference shall be
deemed to include the permitted successors and assigns of such party; and all
terms and provisions of this Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective permitted successors and
assigns.
10.2 NOTICES. Notices, demands and communications shall be deemed to
have been properly given to the Company when deposited in the United States
mail, registered or certified, postage prepaid, and addressed to the Company at
P.O. Box 297830, 4849 Evanswood Drive, Columbus, OH 43229, Attention- Chief
Financial Officer, whether or not the same are actually received by the Company.
Except for purposes of notification of an Event of Default hereunder, such
communication shall be effective only upon receipt by the Company at the address
indicated. Any communication to the Bank shall be deemed properly given if
similarly mailed and addressed to The Provident Bank, 1 East Fourth Street,
Cincinnati, OH 45269.
10.3 NO IMPLIED WAIVERS. No delay on the part of the bank in exercising
any right, power or privilege granted hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, power or
privilege preclude any other or further exercise thereof. The rights and
remedies herein expressly specified are cumulative and not exclusive of any
other rights and remedies which the Bank would otherwise have.
10.4 AMENDMENTS, MODIFICATIONS, ETC. No amendment, modification,
termination, or waiver of any provision of this Agreement or of the Note nor
consent to any departure by the Company therefrom, shall in any event be
effective unless the same shall be in writing and signed by the Bank, and then
such waiver or consent shall be effective only in the specific instance and for
the specific purpose for which given. No notice or demand on the Company in any
case shall entitle the Company to any other or further notice or demand in
similar or other circumstances.
10.5 APPLICABLE LAW. This Agreement and the Note shall be deemed to be
contracts made under the laws of the State of Ohio, and for all purposes shall b
construed in accordance with the laws of such state.
10.6 SEVERABILITY. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provisions in any other jurisdiction.
25
<PAGE> 26
10.7 EXPENSES. All legal fees, costs or expenses, incurred by the Bank
in connection with the preparation, execution, delivery and enforcement of this
Agreement, the Note or any of the Loan Documents shall be paid by the Company.
10.8 COUNTERPARTS. This Agreement may be signed in any number of
counterparts with the same effect as if the signatures thereto were upon the
same instrument. Complete sets of counterparts shall be lodged with the Company
and the Bank.
10.9 MERGER. This Agreement, the Note and the Loan Documents reflect
the entire understanding of the parties with respect to their subject matter and
supersede all prior agreements or understandings with respect thereto in their
entirety.
10.10 HEADINGS. Headings of the sections of this Agreement are for
convenience only and shall not affect the construction of this Agreement.
10.11 EFFECTIVE DATE. This Agreement shall become effective upon the
execution of a counterpart hereof by each of the parties.
The parties hereto have caused this Agreement to be duly executed by
their respective duly authorized officers as of the date first above written.
MAX & ERMA'S RESTAURANTS, INC. THE PROVIDENT BANK
By: /s/ William C. Niegsch Jr. By: /s/ Michael G. Giwlock
---------------------------- ------------------------
Name: William C. Niegsch Jr. Name: Michael G. Giwlock
-------------------------- ----------------------
Its: Exec. V.P. Its: Regional Vice President
--------------------------- -----------------------
Dated: 1/30/98 Dated: 7/30/98
------------------------- ---------------------
26
<PAGE> 27
EXHIBIT B
SECURITY AGREEMENT
27
<PAGE> 28
SCHEDULE 1.1(B)
---------------
<TABLE>
<CAPTION>
DATES RESIDUAL COMMITMENT
<S> <C>
Prior to March 1, 2000 $12,000,000.00
March 1, 2000 - May 31, 2000 11,400,000.00
June 1, 2000 - August 31, 2000 10,800,000.00
September 1, 2000 - November 30, 2000 10,200,000.00
December 1, 2000 - February 28, 2001 9,600,000.00
March 1, 2001 - May 31, 2001 9,000,000.00
June 1, 2001 - August 31, 2001 8,400,000.00
September 1, 2001 - November 30, 2001 7,800,000.00
December 1, 2001 - February 28, 2002 7,200,000.00
March 1, 2002 - May 31, 2002 6,600,000.00
June 1, 2002 - August 31, 2002 6,000,000.00
September 1, 2002 - November 30, 2002 5,400,000.00
December 1, 2002 - February 28, 2003 4,800,000.00
March 1, 2003 - May 31, 2003 4,200,000.00
June 1, 2003 - August 31, 2003 3,600,000.00
September 1, 2003 - November 30, 2003 3,000,000.00
December 1, 2003 - February 28, 2004 2,400,000.00
March 1, 2004 - May 31, 2004 1,800,000.00
June 1, 2004 - August 31, 2004 1,200,000.00
September 1, 2004 - November 30, 2004 600,000.00
December 1, 2004 - February 28, 2005 000.00
</TABLE>
28
<PAGE> 29
EXHIBIT A
MAX & ERMA'S RESTAURANTS, INC.
AT THE FOLLOWING LOCATIONS:
ADDRESS COUNTY
1. 1904 Lake Club Drive Franklin
Columbus, OH 43232
2. 8901 Kingsridge Drive Montgomery
Dayton, OH 45459
3. 8930 Wesleyan Drive Marion
Indianapolis, IN 46268
4. 153 Patchen Dr. #4 Fayette
Lexington, KY 40502
5. 4550 Kenny Road Franklin
Columbus, OH 43220
6. 31205 Orchard Lake Road Oakland
Farmington Hills, MI 48018
7. 1275 E. Dublin-Granville Road Franklin
Columbus, OH 43229
8. 8817 US 31 South Marion
Indianapolis, IN 46227
9. 630 Stanwix Street (HORNE'S) Allegheny
Pittsburgh, PA 15222
10. 70 North Adams Road Oakland
Rochester Hills, MI 48309
11. 1910 Cochran Road Allegheny
Pittsburgh, PA 15220
12. 5899 E. 86th Marion
Castieton, IN 46250
29
<PAGE> 30
13. 4849 Evanswood Drive Franklin
Columbus, OH 43229
14. 411 Metro Place North Franklin
Dublin, OH 43017
15. Laurel Park Place Mail, Bl 10 Wayne
37714 Six Mile Road
Livonia, MI 48152
16. 210 S. Woodward Avenue Oakland
Birmingham, MI 48010
17. 5533 Walnut Street Allegheny
Pittsburgh, PA 15222
18. 220 City Center Drive Franklin
Columbus, OH 43215
19. The Concord Center Washtenaw
445 E. Eisenhower Blvd., Suite 1
Ann Arbor, MI 48108
20. The Flats Cuyahoga
1106 Old River Road
Cleveland, OH 44113
21. 30105 Detroit Road Cuyahoga
Westlake, OH 44145
22. Rosemont Commons Shopping Center Summit
3750 West Market Street, Unit B
Fairlawn, OH 44313
23. North Point Shopping Center Cook
306 Rand Road
Arlington Heights, IL 60004
24. The Market Place at Vernon Hills Lake
Milwaukee Avenue
Vernon Hills, IL
25. Beaver Creek, OH Greene
(street address unknown)
30
<PAGE> 1
Exhibit 10(s)
FIRST AMENDMENT TO
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
DATED AS OF JANUARY 30, 1998
THIS FIRST AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY
AGREEMENT ("First Amendment") dated as of December 11, 1998, between MAX &
ERMA'S RESTAURANTS, INC., a Delaware corporation ("Borrower") and THE PROVIDENT
BANK, an Ohio banking association (the "Lender").
WITNESSETH:
WHEREAS, the Borrower and the Lender, parties to the Amended and
Restated Loan and Security Agreement, dated as of January 30, 1998 (the
"Agreement"), have agreed to amend the Agreement by this First Amendment on the
terms and conditions hereinafter set forth. Terms not otherwise defined herein
are used as defined in the Agreement as amended hereby.
NOW, THEREFORE, the Borrower and the Lender hereby agree as follows:
Section 1. AMENDMENT OF THE AGREEMENT. The Agreement is, effective the
date hereof, hereby amended as follows:
1.1. In Section 1.1(a), the "Maturity Date" shall be
changed from January 1, 2004 to August 1, 2006.
1.2. Section 1.1(b) is amended and restated in its
entirety as follows:
(b) MAXIMUM COMMITMENT. The Bank agrees to lend to
the Company up to an amount (the "Maximum
Commitment") equal to the lesser of (a) the Bank's
Baseline Commitment, or (b) the Residual Commitment.
The Baseline Commitment of the Bank is $20,000,000
which Baseline Commitment shall decrease by
$1,000,000 every three months, with the first
decrease to occur on November 1, 2001; PROVIDED,
HOWEVER, that $9,000,000 of the Baseline Commitment
shall be reserved for a single Loan to be made on or
before January 31, 1999 (the "Fixed Rate Advance"),
which Fixed Rate Advance shall bear interest as
specified in Section 1.4(c). The Residual Commitment
shall equal the Baseline Commitment less the
scheduled decreases, as reflected in the attached
Schedule 1.1(b). The maximum amount of all
outstanding Loans of the Bank to the Company under
this Agreement shall not exceed the Maximum
Commitment of the Bank. The Maximum Commitment of the
Bank as adjusted from time
1
<PAGE> 2
to time is hereinafter called the "Commitment" of the
Bank. No Commitment shall become effective until each
of the parties hereto shall have executed this
Agreement or a counterpart hereof.
1.3. Section 1.2 is amended and restated in its entirety
as follows:
1.2 CANCELLATION OR REDUCTION OF THE COMMITMENT BY
THE COMPANY. During the period from and including the
date of this Agreement to but excluding the Maturity
Date, the Commitment of the Bank may, subject to the
payment of the Interest Preservation Amount described
in Section 1.5, be cancelled or may be reduced
permanently from time to time by the Company in the
amount of $100,000 or any larger amount which is a
whole multiple of $100,000 upon 10 Banking Days'
written notice to the Bank of the Company's election
to do so, which notice shall specify the date when
such cancellation or reduction shall be effective and
on the effective date of such reduction the
Commitment of the Bank shall be reduced; PROVIDED
that-
(a) any such cancellation or reduction shall be
irrevocable;
(b) in the event of a cancellation of the Commitment
of the Bank, (i) the Note shall be paid in full, (ii)
all Commitment Fees due to the date of cancellation
shall be paid in full and (iii) all expenses due
pursuant to Section 10.7 hereof shall be paid in
full; and
(c) in the event of a reduction of the Commitment of
the Bank to an amount less than the principal amount
then outstanding hereunder, the Note shall be prepaid
so that the unpaid aggregate principal amount of the
then outstanding Loans does not exceed the Commitment
of the Bank as so reduced.
1.4. Section 1.4(b) is amended and restated in its
entirety as follows:
(b) INTEREST. Each Loan other than the Fixed Rate
Advance shall bear interest on the unpaid principal
balance of all Loans made by the Bank for each day
from the day such Loan is made until it becomes due,
at a fluctuating rate per annum which rate will be
immediately adjusted upon the execution of this
Amendment. Thereafter such
2
<PAGE> 3
rate will be adjusted based upon the Borrower's submission of financial
information pursuant to Section 5.2 herein beginning with the quarter
ending November, 1995. The interest rate adjustment will be effective
the first Monday following receipt by the Bank of the Quarterly
Compliance Certificate pursuant to Section 5.4(c) herein. The interest
rate will be established from the following schedule based upon the
Borrower's ratio of Unsubordinated Indebtedness to the sum of Tangible
Net Worth plus Subordinated Debt as of the date of such fiscal quarter
end:
<TABLE>
<CAPTION>
Ratio at quarter end Rate for following quarter
- -------------------- --------------------------
<S> <C>
Less than 0.75:1.0 The Prime Rate
0.751 through 1.25:1.0 One-quarter percent (1/4%) above
the Prime Rate
1.251 through 1.5:1.0 One half percent (1/2%) above
the Prime Rate
Greater than 1.51:1.0 Three quarters (3/4%) above the
Prime Rate
</TABLE>
Interest on all Loans shall be calculated on the basis of the actual
number of days elapsed over a year of 360 days. As used in this
Agreement, the term "Prime Rate" on any day shall mean the rate
published or announced by the Bank as its "Prime Rate" which rate may
not be the Bank's lowest rate. Any change in the interest rate on a
Loan due to a change in the Prime Rate shall take effect on the date of
such change in the Prime Rate. Interest on the Loans shall be payable
quarterly on the last day of each December, March, June and September,
commencing on the first such date following the initial Loan. To the
extent permitted by applicable law, the Bank may charge interest at the
foregoing rates on all interest and other amounts owing hereunder which
are not paid when due.
1.5. A new Section 1.4(c) is added to the Agreement as follows:
(c) The Fixed Rate Advance shall bear interest on the unpaid principal
balance from the day such Fixed Rate Advance is made until it becomes
due, at a per annum rate of 7.38%. Interest on the Fixed Rate Advance
shall be
3
<PAGE> 4
calculated on the actual number of days elapsed over a year of
360 days. Interest on the Fixed Rate Advance shall be payable
quarterly on the last day of each December, March, June and
September, commencing on the first such date following the
disbursement of the Fixed Rate Advance.
1.6. Section 1.5 is amended and restated in its entirety as
follows:
1.5 PREPAYMENTS AND RIGHT TO REBORROW. Outstanding Loans may
be prepaid in whole at any time or in part from time to time
without premium or penalty; PROVIDED, HOWEVER, that any and
all prepayments that reduce the outstanding principal balance
under the Note to less than the amount of the Fixed Rate
Advance will be required to be accompanied by a payment (the
"Interest Preservation Amount") equal to two percent (2%) of
the difference between the amount of the Fixed Rate Advance
and the then-current principal balance outstanding under the
Note. No prepayment shall affect the Company's right to
reborrow from the Bank under the Commitment of the Bank up to
the permissible amount hereunder prior to the Maturity Date.
1.7. Section 5.1 is amended and restated in its entirety as
follows:
5.1 USE OF PROCEEDS. The Company shall use the Loan proceeds
disbursed pursuant to this Agreement for legal and proper
purposes; PROVIDED, HOWEVER, that the Fixed Rate Advance (as
defined in Section 1.1(b) hereof) shall be used solely to
redeem the convertible subordinated debentures of the Company,
and for other specific general corporate purposes approved by
the Bank.
1.8. Section 6.2(b) is amended and restated in its entirety as
follows:
(b) INDEBTEDNESS/TANGIBLE NET WORTH RATIO. Permit the ratio of
Unsubordinated Indebtedness to the sum of Tangible Net Worth
plus Subordinated Debt at any time to exceed 1.75 to 1.
1.9. Exhibit A and Schedule 1.1(b) attached to the Agreement are hereby
deleted and replaced by the new Exhibit A-2 and Schedule 1.1(b)-2 attached to
this First Amendment.
4
<PAGE> 5
Section 2. GOVERNING LAW. This First Amendment shall be governed by and
construed in accordance with the laws of the State of Ohio.
Section 3. COSTS AND EXPENSES. The Borrower hereby agrees to pay on
demand all reasonable costs and expenses of the Lender in connection with the
preparation, execution and delivery of this First Amendment and the other
documents to be delivered in connection herewith, including, without limitation,
the reasonable fees and out-of-pocket expenses of counsel to the Lender with
respect thereto.
Section 4. COUNTERPARTS. This First Amendment may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which when taken together shall constitute one and the same agreement.
Section 5. CONDITIONS PRECEDENT. Simultaneously with the execution
hereof, the Lender shall receive all of the following, each dated the date
hereof, in form and substance satisfactory to the Lender:
5.1. Certified copies of (a) the resolutions of the board of
directors or other appropriate management committee of the Company evidencing
authorization of the execution, delivery, and performance of this First
Amendment; and (b) all documents evidencing other necessary corporate action and
governmental approvals, if any, with respect to this First Amendment, or the
transactions contemplated hereby.
5.2. The executed Note.
5.3. A $25,000 closing fee.
5.4. Such other documents as the Lender may, in its reasonable
discretion, so require.
Section 6. REAFFIRMATION OF REPRESENTATIONS AND WARRANTIES; NO
DEFAULTS. The Borrower hereby expressly acknowledges and confirms that the
representations and warranties of the Borrower set forth in Section 9 of the
Agreement are true and accurate on this date with the same effect as if made on
and as of this date; that no financial condition or circumstance exists which
would inevitably result in the occurrence of an Event of Default under Section
13 of the Agreement; and that no event has occurred or no condition exists which
constitutes, or with the running of time or the giving of notice would
constitute an Event of Default under Section 13 of the Agreement.
Section 7. REAFFIRMATION OF DOCUMENTS. Except as herein expressly
modified, the parties hereto ratify and confirm all of the terms, conditions,
warranties and covenants of the Agreement, and all security agreements, pledge
agreements, mortgage deeds, notes, assignments, subordination agreements, or
other instruments or documents executed in connection with the Agreement. This
First Amendment does not constitute the extinguishment of any obligation or
5
<PAGE> 6
indebtedness previously incurred, nor does it in any manner affect or impair any
security interest granted to the Lender, all of such security interests to be
continued in full force and effect until the indebtedness described herein is
fully satisfied.
The parties have executed this First Amendment as of the date first
above written.
THE PROVIDENT BANK
By: /s/ Michael G. Guilioli
-------------------------------
Name: Michael G. Guilioli
Its: Senior Vice President
MAX & ERMA'S RESTAURANTS, INC.
By: /s/ William C. Niegsch, Jr.
-------------------------------
Name: William C. Niegsch, Jr.
Its: Executive Vice President
6
<PAGE> 7
EXHIBIT A-2
[Form of Note to follow]
7
<PAGE> 8
SCHEDULE 1.1(b)-2
DATES RESIDUAL COMMITMENT
Prior to November 1, 2001 $20,000,000.00
November 1, 2001 - January 31, 2002 19,000,000.00
February 1, 2002 - April 30, 2002 18,000,000.00
May 1, 2002 - July 31, 2002 17,000,000.00
August 1, 2002 - October 31, 2002 16,000,000.00
November 1, 2002 - January 31, 2003 15,000,000.00
February 1, 2003 - April 30, 2003 14,000,000.00
May 1, 2003 - July 31, 2003 13,000,000.00
August 1, 2003 - October 31, 2003 12,000,000.00
November 1, 2003 - January 31, 2004 11,000,000.00
February 1, 2004 - April 30, 2004 19,000,000.00
May 1, 2004 - July 31, 2004 9,000,000.00
August 1, 2004 - October 31, 2004 8,000,000.00
November 1, 2004 - January 31, 2005 7,000,000.00
February 1, 2005 - April 30, 2005 6,000,000.00
May 1, 2005 - July 31, 2005 5,000,000.00
August 1, 2005 - October 31, 2005 4,000,000.00
November 1, 2005 - January 31, 2006 3,000,000.00
February 1, 2006 - April 30, 2006 2,000,000.00
May 1, 2006 - July 31, 2006 1,000,000.00
August 1, 2006 0
8
<PAGE> 1
EXHIBIT 10(t)
FURTHER RESOLVED, that a cash bonus pool be established for certain of the
Company's officers for Fiscal 1999 calculated in the aggregate as follows:
1% of pre-tax earnings up to $1,783,000;
7% of pre-tax earnings between $1,783,000 and $3,566,000;
15% of pre-tax earnings between $3,567,000 and $5,349,000;
25% of pre-tax earnings over $5,349,000.
FURTHER RESOLVED, that pre-tax earnings for this purpose means pre-tax earnings
plus the accrual for this executive bonus program and any non-recurring charges
for the fiscal year (including any charges for closing restaurants or adopting
the new FASB policy for restaurant pre-opening expenses);
FURTHER RESOLVED, that the cash bonus pool be allocated and paid 40% to Mr.
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 $783,750,
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 1999:
A. GREGORY L. HEYWOOD
------------------
Mr. Heywood will be paid a bonus equal to the aggregate cash bonuses paid
for fiscal 1999 to the regional managers assigned to report to Mr. Heywood.
B. LARRY B. FOURNIER
-----------------
Mr. Fournier will be paid a cash bonus of $5,000 for each new Max & Erma's
restaurant opened in fiscal 1999, 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.
C. KATHIE A. SERIF
---------------
Mrs. Serif will be paid a one time cash $10,000 bonus and an incentive
bonus equal to 5% of pre-tax earnings of each Company owned Ironwood Cafe
restaurant.
<PAGE> 1
Exhibit 13
[Logo] Selected Financial Data
<TABLE>
<CAPTION>
(In thousands, except per share and
other data and ratios) October 25, October 26, October 27, October 29, October 30, October 31,
1998 1997 1996 1995 1994 1993
-------------------------------------------------------------------------------
RESULTS OF OPERATIONS
<S> <C> <C> <C> <C> <C> <C>
Revenues ........................... $ 100,531 $ 91,626 $ 79,858 $ 64,198 $ 56,127 $ 43,515
Operating Income ................... 5,243 5,967 5,312 4,427 3,740 2,581
Interest Expense ................... 1,839 2,704 2,060 1,208 851 350
Income Before Income Taxes ......... 3,322 3,173 3,176 3,061 2,817 2,084
Net Income ......................... 2,337 2,225 2,161 2,139 2,001 1,371
Depreciation and Amortization ...... 5,868 5,839 5,515 4,201 3,599 2,405
EBITDA* ............................ 11,029 11,716 10,750 8,470 7,268 4,839
Capital Expenditures ............... 10,016 10,381 13,898 16,191 7,700 6,765
PER DILUTED SHARE DATA
Net Income ......................... $ .55 $ .53 $ .51 $ .50 $ .47 $ .34
Revenues ........................... 23.78 21.78 18.73 15.04 13.26 10.94
Assets ............................. 10.87 15.21 13.72 11.43 7.65 6.19
Stockholders' Equity ............... 4.41 4.75 4.20 3.65 3.24 2.51
Shares Outstanding ................. 4,226 4,206 4,264 4,268 4,232 3,979
FINANCIAL POSITION
Cash ............................... $ 2,151 $ 1,149 $ 927 $ 1,102 $ 993 $ 442
Working Capital Deficit ............ (2,632) (4,290) (5,067) (3,316) (2,526) (2,748)
Property-Net ....................... 38,097 58,084 52,715 42,502 27,530 21,505
Total Assets ....................... 45,958 63,956 58,484 48,800 32,383 24,630
Long-Term Obligations
(Less Current Maturities) ..... 20,010 36,359 32,349 26,037 13,639 10,129
Stockholders' Equity ............... 18,648 19,969 17,908 15,600 13,712 10,000
OTHER DATA AND RATIOS
Average Restaurant Sales ........... $ 2,140 $ 2,174 $ 2,209 $ 2,172 $ 2,191 $ 2,070
Company-owned Restaurants
in Operation at Year End ......... 49 44 39 33 27 24
Restaurant Profit Margin ........... 12.3% 12.8% 13.0% 14.4% 14.1% 14.1%
Operating Profit Margin ............ 5.2% 6.5% 6.7% 6.9% 6.7% 5.9%
Long-Term Debt-to-Equity Ratio ..... 1.1 1.8 1.8 1.7 1.0 1.0
Market Price Per Share at Year End.. $ 6.38 $ 6.31 $ 6.63 $ 7.63 $ 7.73 $ 7.62
Price Earnings Ratio (High/Low) .... 14.8/10.7 13.9/9.4 16.2/10.8 16.8/12.0 20.8/14.5 22.1/11.8
Return on Beginning Assets ......... 3.7% 3.8% 4.4% 6.6% 8.1% 8.5%
Return on Beginning Equity ......... 11.7% 12.4% 13.9% 15.6% 20.0% 16.4%
</TABLE>
* EBITDA, Earnings Before Interest, Taxes,
Depreciation and Amortization, is operating income
plus depreciation and amortization, less minority
interests in income of affiliated partnerships.
1998 EBITDA was reduced by a $575,000 loss on
disposition of assets. EBITDA is not intended to
represent cash flow from operations as defined by
generally accepted accounting principles.
<PAGE> 2
[Logo] Management's Discussion and Analysis
Revenue
- -------
Revenues for 1998 increased $8,904,000 or 9.7% from 1997. The increase was a
result of i) opening five restaurants during 1998, ii) opening five restaurants
during 1997, iii) the opening of two franchised Max & Erma's restaurants that
generated franchise fees and royalties of $192,000 during 1998 and iv) the
opening of the Company's first Ironwood Cafe. These factors offset a $533,000 or
0.7% decline in sales at restaurants opened 18 months or more and the closing
and relocation of a restaurant during the third quarter of 1998. The relocation
of this restaurant is included in the five 1998 restaurant openings referred to
previously.
Revenues for 1997 increased $11,768,000 or 15% from 1996. The increase was a
result of i) opening five restaurants during 1997, ii) opening six restaurants
during 1996 and iii) an increase of $227,000 or 0.4% in sales at restaurants
opened 18 months or more.
Despite a 1-1/2 to 2 percent annual menu price increase over the periods
reported, same-store sales rose only slightly (0.4%) from 1996 to 1997 and then
declined 0.7% from 1997 to 1998. In addition to the menu price increase, the
same-store sales increase in 1997 was a result of stable beverage sales and a
slight increase in the dinner check average. The decline in same-store sales in
1998 was a result of a 4% decline in same-store beverage sales and planned
reduction of the frequency and dollar amount of couponing and discounting. The
1998 same-store sales decline occurred primarily during the third quarter of
1998 when the Company elected to forego a direct mail coupon program which
contributed to a same-store sales decline of $624,000 during the quarter.
However, marketing expenditures during the third quarter were reduced $450,000,
primarily from the elimination of the direct mail coupon program. Management
believes the incremental same-store sales which may have resulted from a direct
mail coupon program in the third quarter would not have been profitable sales.
The Company anticipates that additional revenue growth during 1999 will come
from the opening of eight Max & Erma's, two Ironwood Cafes and possibly from
additional franchised Max & Erma's late in the fiscal year. During the second
half of 1998 the Company promoted a veteran regional manager to the position of
Director of Franchising. By the end of 1998, a complete franchising program had
been developed and various franchise market areas had been identified. A
franchise marketing effort began at the start of fiscal 1999, targeting
potential multi-unit operators. The Company believes franchise openings could
occur by late 1999 or early 2000.
Restaurant Operating Profit
- ---------------------------
The following table sets forth the Company's restaurant operating profit as a
percentage of revenue:
<TABLE>
<CAPTION>
October 25, October 26, October 27,
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of Goods Sold (26.5) (27.0) (26.7)
Payroll & Benefits (31.3) (31.0) (30.6)
Other Operating Expenses (29.9) (29.2) (29.7)
----- ----- -----
Restaurant Operating Profit 12.3% 12.8% 13.0%
----- ----- -----
</TABLE>
Cost of goods sold, as a percentage of revenues, increased slightly from 26.7%
in 1996 to 27.0% in 1997 and then decreased to 26.5% in 1998. The increase from
1996 to 1997 was a result of higher beef prices during 1997. The decrease from
1997 to 1998 was a result of more normal beef prices and menu changes made at
the start of 1998, which removed certain higher cost menu items. Additionally,
slower selling menu items were eliminated in an effort to cut waste. The
decrease in 1998 cost of goods sold occurred despite sharp increases in produce
costs during the first half of the year and in dairy costs during the fourth
quarter. The Company estimates these increases added approximately $300,000 and
$130,000 to produce and dairy costs respectively, during 1998. Produce prices
returned to normal by the second half of the year. Dairy prices remained above
normal levels in early 1999, but are expected to decline.
Payroll and benefits, as a percentage of revenues, increased from 30.6% in 1996
to 31.0% in 1997 and to 31.3% in 1998. The increases were a result of higher
wage rates brought on by extremely low unemployment levels and continued demand
for restaurant workers.
Other operating expenses, as a percentage of revenues, decreased from 29.7% in
1996 to 29.2% in 1997, as a result of a decrease in amortization of pre-opening
expenses from 1.3% of revenues in 1996 to 1.0% in 1997 and increased ownership
of real estate which reduced rental expense, as a percentage of revenues. Other
operating expenses, as a percentage of revenues, increased from 29.2% in 1997 to
29.9% in 1998 primarily as a result of the sale-leaseback of eight restaurant
properties during the first quarter of 1998, which increased rental expense for
1998 by $1,226,000 and reduced depreciation $313,000. This resulted in a net
increase to other operating expenses of $913,000 or 0.9% of revenues. This
increase, along with increases in other operating expense categories, was
partially offset by lower but more cost-effective marketing expenditures. At the
end of fiscal 1998 the Company completed a second sale-leaseback transaction
involving five additional restaurant properties. The Company anticipates the
annualized effect of this transaction will be to increase rent $777,000 and
decrease depreciation $185,000. Proceeds of both transactions were used to pay
down borrowings under the Company's revolving credit line, which reduced annual
interest expense approximately $1,530,000 and $700,000 for the two transactions
respectively.
Administrative Expenses
- -----------------------
Administrative expenses, as a percentage of revenues, remained constant at 6.3%
in 1996 and 1997, and then rose slightly to 6.6% in 1998. In dollar terms,
administrative expenses increased 13% from 1996 to 1997 and 15% from 1997 to
1998.
The increases in administrative expenses were primarily a result of raises for
corporate employees, additional employees needed to support the increased number
of restaurants and in anticipation of 1999's accelerated growth rate. In
addition, during 1998 the Company incurred overhead expenses totaling
approximately
<PAGE> 3
$170,000 in connection with the development of the Ironwood Cafe concept and
opening of the initial Ironwood Cafe and approximately $100,000 associated with
the addition of a Director of Franchising and development of a franchising
program. Excluding these costs, administrative expenses would have remained at
6.3% of revenues during 1998.
Loss On Disposition Of Assets
- -----------------------------
During fiscal 1998 the Company recorded a $575,000 loss on the disposition of
assets. The loss consisted of $278,000 related to the closing and relocation of
its original Lexington, Kentucky restaurant, a $175,000 provision for loss on
the closing of its Columbus, Ohio Convention Center location, which subsequently
was closed during the first quarter of 1999, and a $122,000 loss on the
sale-leaseback of five restaurants during the fourth quarter in 1998. The two
closed restaurants reported average annual sales of $1,161,000 with no
significant operating profit contribution. The Company believes its resources
could be more productively used at new, better-located restaurants.
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 decreased 47% during 1998 from $2,704,000 in 1997 to
$1,839,000. The decrease was primarily a result of the sale-leaseback of eight
restaurant properties during the first quarter of 1998. The Company received net
proceeds of approximately $17.0 million, all of which were used to reduce
borrowings under the Company's revolving credit line, resulting in interest
savings of approximately $1.15 million during 1998. The interest rate on the
Company's revolving credit line also declined from 9.0% at the end of 1997 to
8.25% at the end of 1998. The Company capitalized $178,000 of construction
period interest during 1998.
The Company expects a further reduction in interest expense in 1999 as a result
of a second sale-leaseback transaction involving an additional five restaurants
which was completed at the end of 1998. The net proceeds of $8.5 million were
used to pay off remaining borrowings under the Company's revolving credit line
and increased cash approximately $1.0 million. Subsequently, the Company
increased its revolving credit line to $20.0 million. In early 1999 the Company
borrowed approximately $8.0 million under its credit line to redeem its
outstanding convertible debentures, resulting in annual interest savings of
approximately $150,000. The Company recorded an extraordinary charge in the
first quarter of 1999 of approximately $400,000, net of tax ($0.10 per diluted
share), related to the early extinguishment of debt.
Income Taxes
- ------------
The Company's effective tax rate decreased from 32% in 1996 to 30% in 1997 and
1998. The decrease from 1996 to 1997 was a result of the introduction of the
Work Opportunity Tax Credit Program, which began just before the start of 1997
and increased FICA tax on tips credit resulting from the Company's growth.
Ironwood Cafe
- -------------
During 1998 the Company opened the first Ironwood Cafe. At October 25, 1998 one
additional Ironwood Cafe was under construction, which the Company anticipates
opening during the first quarter of 1999. The Company also expects to open one
additional Ironwood Cafe during the second half of 1999. Operating results for
1998 include overhead and development expenses and operating losses of
approximately $315,000 associated with the Ironwood Cafe concept and initial
opening. By the end of 1999, the Company will determine the future development
potential of Ironwood Cafe.
Year 2000
- ---------
The Company has reviewed its computer systems and software with respect to the
Year 2000 issue. The Company has identified three critical areas of information
technology: register systems, network and accounting software and payroll
processing. Register systems currently being installed are Year 2000 compliant.
Older register systems function and accumulate data without regard to date and
therefore Year 2000 is not an issue. The Company's main accounting software is
supplied by an outside vendor and has been represented to be Year 2000 compliant
in the course of normal system upgrades. Certain database and spreadsheet
software may need to be upgraded during fiscal 1999 at an expected cost not to
exceed $50,000 which would be expensed as incurred. During 1998 the Company
expended approximately $25,000 for computer equipment used exclusively to
process payroll. The related software was provided by the Company's outside
payroll service and has been represented to be Year 2000 compliant.
The Company believes that little, if any, of its non-information technology
equipment and systems are date dependent.
The Company presently has one major outside food products supplier to its
restaurants. It has inquired of that supplier as to its Year 2000 compliance
efforts and been assured that all operational areas are Year 2000 compliant.
Failure of that supplier to deliver food products to the Company's restaurants
could lead to a cessation of operations. While the Company has no contingency
plan regarding replacement of that vendor, it believes it could be replaced and
operations resumed within a 30 day period.
Because the Company's Year 2000 compliance is, like most businesses, dependent
in many ways upon the Year 2000 compliance of key third party vendors, including
gas and electric utility service providers, food suppliers, payroll processors,
credit card processors, and others, there can be no assurance that the
compliance of the Company's information technology and non-information
technology equipment with Year 2000 will prevent a material adverse impact on
the Company's results of operations, financial condition
<PAGE> 4
and cash flows. The Company believes that the most reasonably likely worst case
scenario resulting from noncompliance with Year 2000 by the Company or its key
third party suppliers would be the temporary shutdown of some or all of its
restaurants due the unavailability of gas and electricity service or food
products to some or all of its restaurants. The shutdown of some or all of the
Company's restaurants for any substantial period of time would cause the Company
to lose revenues from sales, but the Company would not be able to reduce all
costs of operations associated with such shutdown restaurants, such as rent and
other fixed costs, interest, and certain employee and administrative costs.
Accordingly, if a substantial number of the Company's restaurants were shutdown
for any substantial period of time, such shutdowns could have a material adverse
effect on the Company's results of operations, financial condition and cash
flows.
Liquidity And Capital Resources
- -------------------------------
The Company's working capital ratio increased from .4 to 1 at October 26, 1997
to .6 to 1 at October 25, 1998. Historically the Company has been able to
operate with a working capital deficiency because i) restaurant operations are
primarily conducted on a cash basis, ii) high turnover (about once every 10
days) permits limited investment in inventory, and iii) trade payables for food
purchases usually become due after receipt of cash from the related sales.
During 1998, the Company expended approximately $10,016,000 for property
additions, $59,880,000 to reduce long-term obligations, and $3,959,000 to
repurchase approximately 500,000 shares of its common stock and increased cash
$1,002,000. Funds for such expenditures were provided primarily by $40,867,000
from proceeds of long-term obligations, $25,536,000 of net proceeds from the
sale-leaseback of assets, and $8,560,000 from operations. The Company routinely
draws down and repays its revolving credit line, the gross amounts of which are
included in the above numbers.
At October 25, 1998, the Company was committed to the opening of eight Max &
Erma's and two Ironwood Cafes during 1999. Purchase contracts or leases have
been signed for all restaurants scheduled to open in 1999. At October 25, 1998
one Ironwood Cafe was under construction and scheduled to open during the first
quarter of 1999. Construction commenced during the first quarter of 1999 on two
Max & Erma's restaurants, with the first location scheduled to open late in the
second quarter. The Company anticipates that the remaining seven Max & Erma's
restaurants will open during the third and fourth quarters, along with one
additional Ironwood Cafe.
The Company expects to expend approximately $17.0 million on the construction of
the eight Max & Erma's planned for 1999 plus an additional $1.0 million on the
two Ironwood Cafes. The Company is currently negotiating for an additional five
of the eight Max & Erma's locations planned for fiscal 2000. It is likely that
the Company would expend $3 to $4 million dollars during 1999 on locations
scheduled to open in 2000.
Funding for the above will be provided by the sale-leaseback of the related real
estate, equipment leasing, cash from operations and to the extent necessary the
Company's revolving credit line. At October 25, 1998 the Company had available
the entire balance of its $12.0 million credit agreement. Subsequent to the end
of 1998 the credit line was increased to $20.0 million, with the $8.0 million
increase used to fund the redemption of the Company's 8% convertible
subordinated debentures. The remaining $12.0 million available under the credit
agreement may be used to fund development of new restaurants, along with $2.75
million of equipment lease commitments. At October 25, 1998 the Company had no
commitments for sale-leaseback financing of real estate. However, the Company
believes it will be able to obtain such commitments during the first half of
1999 under terms similar to the two transactions completed during 1998.
Recent Accounting Pronouncements
- --------------------------------
Restaurant preopening costs are accumulated and amortized from the opening date
of the restaurant over a one-year period. In fiscal 2000 the Company will be
required to expense such capitalized costs ($339,768 at October 25,1998) as a
cumulative effect of a change in accounting principle in accordance with
Statement of Position No. 98-5 "Reporting on the Costs of Start-Up Activities."
Safe Harbor Statement Under The Private
Securities Litigation Reform Act Of 1995
- ----------------------------------------
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. The words "plan," "anticipate,"
"believe," "expect," "estimate," and "project" and similar words and expressions
identify forward-looking statements which speak only as of the date hereof.
Forward-looking statements in this MD&A include statements regarding anticipated
revenue growth from the opening of new restaurants (paragraph 4), anticipated
dairy prices (paragraph 6), the annualized effect of sale-leaseback transactions
(paragraphs 8 and 14), the Company's anticipated growth rate (paragraph 10), the
opening, cost and financing of additional Ironwood Cafe restaurants (paragraphs
16, 23 and 24), the opening, cost and financing of additional Max & Erma's
restaurants (paragraphs 14, 23 and 24), future sources of capital (paragraph
25), Year 2000 preparedness and contingency plans (paragraphs 17, 18, 19 and
20), and sale-leaseback financing commitments (paragraph 25). Investors are
cautioned that forward-looking statements involve risks and uncertainties that
could cause actual results to differ materially from historical or anticipated
results due to many factors, including, but not limited to, the Company's
ability to open or franchise new restaurants as planned, changes in competition
in markets where the Company operates restaurants, the level of market
acceptance of the Company's new restaurant concept (Ironwood Cafe), the
Company's ability to control administrative expenses, changes in interest rates,
changes in cash flows from operations, the availability of real estate for
purchase or lease, and other risks, uncertainties and factors described in the
Company's most recent Annual Report on Form 10-K and other filings from time to
time with the Securities and Exchange Commission. The Company undertakes no
obligation to publicly update or revise any forward-looking statements.
<PAGE> 5
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 25, OCTOBER 26,
------------ ------------
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents ............................................................. $ 2,151,323 $ 1,149,482
Receivables:
Trade and other ............................................................... 602,370 309,202
Equipment deposits ............................................................ 191,768
------------ ------------
TOTAL RECEIVABLES ........................................................... 602,370 500,970
Inventories ...................................................................... 855,202 738,124
Supplies ......................................................................... 220,998 186,190
Prepaid expenses:
Income taxes .................................................................. 161,743
Insurance ..................................................................... 191,234 158,673
Other ......................................................................... 96,647 134,164
Preopening costs (less accumulated amortization, 1998-$411,273; 1997-$463,587) ... 339,768 419,836
Deferred income taxes ............................................................ 50,000 50,000
------------ ------------
TOTAL CURRENT ASSETS ........................................................ 4,669,285 3,337,439
PROPERTY-AT COST:
Land and buildings ............................................................... 21,532,100 38,836,615
Leasehold improvements ........................................................... 21,744,580 21,190,333
Equipment and fixtures ........................................................... 16,956,707 16,559,840
Construction in progress ......................................................... 423,359 2,635,361
------------ ------------
Total ......................................................................... 60,656,746 79,222,149
Less accumulated depreciation and amortization ................................... 22,559,784 21,138,547
------------ ------------
PROPERTY-NET ................................................................ 38,096,962 58,083,602
OTHER ASSETS:
Goodwill (less accumulated amortization, 1998-$754,319; 1997-$704,031) ........... 185,213 235,501
Deferred costs (less accumulated amortization, 1998-$435,783; 1997-$322,005) ..... 866,857 960,324
Deferred income taxes ............................................................ 1,252,000 579,000
Miscellaneous (less accumulated amortization, 1998-$109,523; 1997-$93,391)........ 887,639 760,093
------------ ------------
TOTAL OTHER ASSETS .......................................................... 3,191,709 2,534,918
------------ ------------
TOTAL ............................................................................ $ 45,957,956 $ 63,955,959
------------ ------------
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
<TABLE>
<CAPTION>
OCTOBER 25, OCTOBER 26,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term obligations ..................................... $ 772,634 $ 1,460,128
Accounts payable ................................................................ 2,059,841 1,640,194
Construction payables ........................................................... 778,685 1,234,365
Accrued liabilities:
Payroll and related taxes .................................................... 1,656,381 1,363,695
Taxes, other than income taxes ............................................... 1,074,508 945,165
Income taxes ................................................................. 48,480
Other ........................................................................ 958,748 935,488
------------ ------------
Total accrued liabilities .................................................. 3,689,637 3,292,828
------------ ------------
TOTAL CURRENT LIABILITIES .................................................. 7,300,797 7,627,515
LONG-TERM OBLIGATIONS-
Less current maturities ...................................................... 20,009,596 36,358,966
COMMITMENTS AND CONTINGENCIES (Notes 3, 4 and 7)
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:
1998-3,772,388 shares; 1997-4,231,113 shares ............................... 377,239 423,111
Additional capital ........................................................... 7,655,299 11,268,830
Retained earnings ............................................................ 10,615,025 8,277,537
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ................................................. 18,647,563 19,969,478
------------ ------------
TOTAL ........................................................................... $ 45,957,956 $ 63,955,959
------------ ------------
</TABLE>
See notes to consolidated financial statements.
<PAGE> 7
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 25, OCTOBER 26, OCTOBER 27,
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
REVENUES ....................................................... $100,530,584 $ 91,626,226 $ 79,857,589
------------ ------------ ------------
OPERATING EXPENSES:
Cost of goods sold ............................................. 26,626,172 24,768,549 21,338,590
Payroll and benefits ........................................... 31,478,566 28,404,596 24,396,710
Other operating expenses ....................................... 30,017,231 26,753,835 23,741,859
Administrative expenses ........................................ 6,590,443 5,732,267 5,068,093
Loss on disposition of assets .................................. 575,000
------------ ------------ ------------
TOTAL OPERATING EXPENSES .................................... 95,287,412 85,659,247 74,545,252
------------ ------------ ------------
OPERATING INCOME ............................................... 5,243,172 5,966,979 5,312,337
INTEREST EXPENSE ............................................... 1,838,608 2,703,781 2,059,732
MINORITY INTERESTS IN INCOME OF
AFFILIATED PARTNERSHIPS ..................................... 82,076 90,447 76,616
------------ ------------ ------------
INCOME BEFORE INCOME TAXES ..................................... 3,322,488 3,172,751 3,175,989
------------ ------------ ------------
INCOME TAXES:
State and local ................................................ 235,000 202,000 223,000
Federal:
Current ..................................................... 1,423,000 902,000 854,000
Deferred (credit) ........................................... (673,000) (156,000) (62,000)
------------ ------------ ------------
TOTAL INCOME TAXES ........................................ 985,000 948,000 1,015,000
------------ ------------ ------------
NET INCOME ..................................................... $ 2,337,488 $ 2,224,751 $ 2,160,989
------------ ------------ ------------
NET INCOME PER COMMON SHARE:
Basic ....................................................... $ 0.56 $ 0.53 $ 0.52
------------ ------------ ------------
Diluted ..................................................... $ 0.55 $ 0.53 $ 0.51
------------ ------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ....................................................... 4,207,137 4,166,738 4,136,143
------------ ------------ ------------
Diluted ..................................................... 4,226,213 4,205,625 4,264,032
------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
<PAGE> 8
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Issuance of stock through
option and bonus plans,
including $41,191 related
tax benefit 41,144 4,114 295,414 299,528
Shares repurchased (499,869) (49,986) (3,908,945) (3,958,931)
Net income 2,337,488 2,337,488
------------ ------------- ------------ ------------- ------------
BALANCE, OCTOBER 25, 1998 3,772,388 $ 377,239 $ 7,655,299 $ 10,615,025 $ 18,647,563
------------ ------------- ------------ ------------- ------------
</TABLE>
See notes to consolidated financial statements.
<PAGE> 9
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
October 25, October 26, October 27,
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................... $ 2,337,488 $ 2,224,751 $ 2,160,989
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................... 5,868,472 5,839,346 5,514,683
Deferred income tax credit .................................. (673,000) (156,000) (62,000)
Accretion of deferred sale/leaseback gain ................... (65,324)
Minority interests in income of Affiliated Partnerships ..... 82,076 90,447 76,616
Loss on disposition of assets ............................... 575,000
Loss on property disposals .................................. 111,084 102,462 99,230
Issuance of common stock as compensation
through manager bonus plan ................................ 104,520 87,583 105,331
Changes in assets and liabilities:
Receivables, inventories, supplies and prepaids ............. (467,356) 56,637 286,920
Capitalized preopening costs ................................ (638,259) (754,213) (945,601)
Other assets ................................................ 4,689 (187,839) 22,022
Accounts payable, accrued and other liabilities ............. 1,321,212 567,272 1,453,886
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................. 8,560,602 7,870,446 8,712,076
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions ............................................. (10,015,912) (10,381,284) (13,897,963)
Reimbursable construction costs incurred ....................... (133,000)
Construction costs reimbursed .................................. 57,283
Collections (additions) of (to) other assets ................... (153,285) 77,629 (157,658)
Proceeds from the sale of property ............................. 25,535,856 467,363 215,400
------------ ------------ ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES ............ 15,423,942 (9,969,292) (13,840,221)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations ................. (59,879,928) (46,459,439) (33,734,623)
Proceeds from long-term obligations ............................ 40,867,040 49,190,666 38,929,346
Debt issue costs ............................................... (25,000) (95,972)
Proceeds from exercise of stock options ........................ 116,417 370,274 182,604
Distributions to minority interests in Affiliated Partnerships . (102,301) (115,510) (173,263)
Cash paid for purchase of common stock ......................... (3,958,931) (664,924) (154,746)
------------ ------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES ............ (22,982,703) 2,321,067 4,953,346
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS ................ 1,001,841 222,221 (174,799)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR ...................... 1,149,482 927,261 1,102,060
------------ ------------ ------------
CASH AND EQUIVALENTS AT END OF YEAR ............................ $ 2,151,323 $ 1,149,482 $ 927,261
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest-net of $176,816, $215,468, and $405,746
capitalized in 1998, 1997 and 1996 .......................... $ 1,769,440 $ 2,567,364 $ 2,020,919
Income taxes ................................................ 1,868,223 1,290,251 823,827
Noncash activities:
Property additions financed by capital leases ............... 51,002 867,586 1,375,425
Property additions financed by construction payables ........ 778,685 1,234,365 1,774,350
Stock options issued for property additions ................. 37,400
Deferred gain from sale/leaseback of property ............... 1,547,004
</TABLE>
See notes to consolidated financial statements.
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 25, 1998,
OCTOBER 26, 1997 AND OCTOBER 27, 1996
1. Accounting Policies
- ----------------------
DESCRIPTION OF BUSINESS-Max & Erma's Restaurants, Inc. and subsidiaries (the
"Company") owns, operates and franchises restaurants under the trade name "Max &
Erma's-Neighborhood Gathering Place." At October 25, 1998, there are 50 Max &
Erma's restaurants in operation (44 at October 26, 1997) (principally located in
the Midwestern United States) and two commenced construction in the first
quarter of fiscal 1999. 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 and two that are franchised
to unrelated parties. In addition, at October 25, 1998, the Company owns and
operates one Ironwood Cafe and one Ironwood Cafe is under construction.
CONSOLIDATION-The consolidated financial statements include the accounts of the
Company, the Affiliated Partnerships, and Ironwood Cafe LLC. All significant
intercompany transactions and balances 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
three 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. In fiscal 2000 the Company will be required to expense such
capitalized costs as a cumulative effect of a change in accounting principle in
accordance with Statement of Position No. 98-5 "Reporting on the Costs of
Start-Up Activities".
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>
CONTINGENT RENT-The Company expenses contingent rent based on gross sales on a
quarterly basis.
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 issuance 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. Deferred debt issuance costs and loan costs are being
amortized over the life of the loan debentures and mortgage loan, respectively.
Miscellaneous assets principally consist of liquor license costs which are being
amortized over 40 years.
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 25, 1998 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
$2,289,000, $2,811,000, and $2,538,000 for fiscal 1998, 1997 and 1996,
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 consolidated
statements of income in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109.
NET INCOME PER SHARE-In fiscal 1998, the Company adopted SFAS No. 128, "Earnings
Per Share" which required retroactive adoption. The new standard simplifies the
computation of earnings per share and requires the presentation of basic and
diluted earnings per share. Basic income per share amounts are based on the
weighted average number of shares of common stock outstanding during the years
presented. Diluted income per share amounts are based on the weighted average
number of shares of common stock and stock options outstanding during the years
presented, adjusted for the dilutive effect, if any, of the convertible
debentures. The assumed conversion of the convertible debentures had no impact
on net income per share in 1998, 1997, and 1996.
SEGMENT-The Company presently operates in one segment as determined under SFAS
No. 131 "Disclosures about Segments of an Enterprise and Related Information".
FISCAL YEAR-END-The Company, its subsidiary and its Affiliated Partnerships each
have a 52-53 week accounting period which ends on the last Sunday in October.
Fiscal 1998, 1997 and 1996 each contained 52 weeks.
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1998,
1997 and 1996 the Company's share of the profits and losses of these two
Affiliated Partnerships was 56% and 40%, respectively. At October 25, 1998 no
amounts were due to Affiliated Partners.
3. Long-Term Obligations
- ------------------------
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
OCTOBER 25, OCTOBER 26,
1998 1997
- --------------------------------------------------------------
<S> <C> <C>
Debt:
Revolving credit agreement, prime plus 1/2%
(total of 9% at October 26, 1997) .... $16,870,959
8% convertible subordinated debentures $8,842,000 9,864,000
8.32% mortgage loan .................. 5,440,131 5,678,089
---------- -----------
Total debt ........................ 14,282,131 32,413,048
Deferred gain on sale/leaseback ...... 1,424,165
Capital leases (Note 4) .............. 2,003,091 2,834,060
Accrued rent (Note 4) ................ 3,072,843 2,571,986
---------- -----------
Total long-term obligations ....... 20,782,230 37,819,094
Less current maturities .............. 772,634 1,460,128
---------- -----------
Total long-term obligations-
less current maturities ........... $20,009,596 $36,358,966
---------- -----------
</TABLE>
The Company's revolving credit agreement with a bank, as amended in December
1998, permits it to borrow up to $20,000,000 until November 1, 2001 at which
time the available borrowing commitment decreases by $1,000,000 every three
months. The first $9,000,000 of the outstanding balance bears interest at a
fixed rate of 7 3/8% and the remaining outstanding borrowing commitment bears
interest at a rate (as defined) ranging from prime 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 25, 1998, approximately $11,000,000 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. In
November 1998 the Company redeemed the $8,842,000 outstanding debentures by
utilizing approximately $9,000,000 of borrowings under its bank credit
agreement. The Company will recognize an extraordinary charge against income of
approximately $400,000, net of tax ($0.10 per diluted share) related to the
write-off of unamortized debt issuance costs.
In March 1996 the Company obtained a $6 million mortgage loan which bears
interest at 8.32% and is payable in monthly installments of $58,453 (principal
and interest) to 2011. The loan is collateralized by four restaurants.
Future maturities of long-term debt obligations at October 25, 1998 (adjusted to
reflect the amended bank credit agreement and redemption of the debentures) are
as follows (see Note 4 for maturities of other long-term obligations):
<TABLE>
<CAPTION>
YEAR ENDING IN OCTOBER
- --------------------------------------------------------------
<S> <C>
1999 ..............................................$ 254,980
2000 .............................................. 280,877
2001 .............................................. 1,347,158
2002 .............................................. 2,731,538
2003 .............................................. 2,760,199
Thereafter ........................................ 6,907,379
-----------
Total ..........................................$14,282,131
-----------
</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 five to thirty years and expire between 2000 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. Two of the leases contain purchase options
at fair market value and one of the leases is with an entity in which an officer
and a director of the Company have a significant interest.
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2003. 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 consolidated balance sheets:
<TABLE>
<CAPTION>
OCTOBER 25, OCTOBER 26,
1998 1997
- --------------------------------------------------------------
<S> <C> <C>
ASSET DESCRIPTION
Buildings ............................. $1,045,000 $1,045,000
Equipment and fixtures ................ 2,107,918 3,098,686
---------- ----------
Total .............................. 3,152,918 4,143,686
Less accumulated depreciation.......... 1,554,334 1,679,557
---------- ----------
Net ................................ $1,598,584 $2,464,129
---------- ----------
</TABLE>
Future minimum lease payments under the capital leases and the present value of
such payments at October 25, 1998 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR:
- --------------------------------------------------------------
<S> <C>
1999 .............................................. $ 656,808
2000 .............................................. 555,058
2001 .............................................. 288,694
2002 .............................................. 163,584
2003 .............................................. 115,056
Thereafter ........................................ 465,000
----------
Total minimum lease payments ................... 2,244,200
Less amount representing interest.................. 241,109
----------
Present value of minimum lease payments............ 2,003,091
Less current maturities............................ 517,654
----------
TOTAL OBLIGATIONS UNDER CAPITAL LEASES-
LESS CURRENT MATURITIES......................... $1,485,437
----------
</TABLE>
At October 25, 1998, the future minimum rental commitments under noncancellable
operating leases with an initial term in excess of one year are as follows:
Related Unrelated
Parties Parties Total
- --------------------------------------------------------------
FISCAL YEAR
1999 $ 146,178 $ 6,577,863 $ 6,724,041
2000 146,178 6,594,383 6,740,561
2001 146,178 6,125,494 6,271,672
2002 146,178 5,808,065 5,954,243
2003 146,178 4,918,740 5,064,918
Thereafter 901,441 53,949,200 54,850,641
---------- ----------- -----------
Total $1,632,331 $83,973,745 $85,606,076
---------- ----------- -----------
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.
On December 31, 1997 the Company entered into a sale-leaseback transaction 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 proceeds, which were used to substantially pay off borrowings under the
Company's revolving line of credit. The Company leased 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 transaction resulted in
a deferred gain of approximately $1,547,000 which is being accreted to income as
a reduction of rent expense over the twenty year lease term. On October 23,
1998, the Company also entered into a sale-leaseback transaction with regard to
the land, buildings, fixtures and improvements at five restaurant sites. As a
result of the sale, the Company received approximately $8,500,000 in net
proceeds, which were used to substantially pay off borrowings under the
Company's revolving line of credit. The Company leased back the restaurant sites
under operating leases over a twenty year period at a base annual rent of
approximately $826,000 (plus taxes and insurance). The transaction resulted in a
loss on disposition of assets of $122,000 (see Note 9). The base annual rents
under all such leases will be adjusted to the current ten year Treasury Note
rate in effect on the tenth anniversary of the closings, plus 3.35%. Also, the
Company will pay additional rent beginning in the third year of the leases,
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.
At October 25, 1998, the Company has unused equipment lease commitments totaling
$2,750,000, generally expiring in one year.
Rent expense, including common area charges but excluding taxes, insurance and
other expenses related to all operating leases, consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------
<S> <C> <C> <C>
Minimum rent:
Related Parties $ 145,913 $ 155,221 $ 151,403
Unrelated Parties 6,311,896 4,369,709 3,870,177
Contingent rent based on:
Percentage of gross
revenue-unrelated parties 136,464 198,806 246,365
---------- ---------- ----------
TOTAL $6,594,273 $4,723,736 $4,267,945
---------- ---------- ----------
</TABLE>
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
$145,000 per year over the last three years.
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>
1998 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Provision at statutory rate $1,130,000 $1,079,000 $1,080,000
State income taxes-
net of Federal benefit 155,000 132,000 147,000
Jobs related tax credit (40,000) (30,000)
FICA tax credit (301,000) (243,000) (234,000)
Other-net 41,000 10,000 22,000
---------- ---------- ----------
Total $ 985,000 $ 948,000 $1,015,000
---------- ---------- ----------
Effective Income Tax Rate 29.7% 29.9% 32.0%
---------- ---------- ----------
</TABLE>
The tax effects of significant items comprising the Company's net deferred tax
asset at October 25, 1998 and October 26, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS (LIABILITIES)
Rent expense........................... $1,054,000 $ 876,000
Deferred gain.......................... 709,000
Jobs related tax credit................ 40,000 30,000
FICA tax credit ....................... 7,000 332,000
Alternative minimum tax credit ........ 51,000 51,000
Other ................................. 253,000 208,000
---------- ----------
TOTAL DEFERRED TAX ASSETS .......... 2,114,000 1,497,000
---------- ----------
Accelerated depreciation .............. (455,000) (577,000)
Preopening costs ...................... (129,000) (160,000)
Prepaid insurance...................... (66,000) (66,000)
Other.................................. (162,000) (65,000)
---------- ----------
TOTAL DEFERRED TAX LIABILITIES ..... (812,000) (868,000)
---------- ----------
NET DEFERRED TAX ASSET.............. $1,302,000 $ 629,000
---------- ----------
</TABLE>
The Company's jobs related tax credit and FICA tax credit carryforwards expire
in varying periods to 2012 and the alternative minimum tax credit carryforward
has no expiration date.
6. Stock Option And Bonus Plans
- -------------------------------
In effect at October 25, 1998 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 generally first exercisable three years after the date of
grant and expire six years after the date of grant, according to the terms of
each option. At October 25, 1998, 293,950 shares under option were exercisable
and 30,100 shares were reserved for future grants under the 1992 Stock Option
Plan. Under the 1996 Stock Option Plan, 192,000 shares under option were
exercisable and 20,000 shares were reserved for future grants at October 25,
1998.
The Company provides for the payment of bonuses in cash and/or common stock
pursuant to The Manager Stock Bonus Plan ("Bonus Plan"). During fiscal 1996,
8,962 shares were issued under this Plan. During fiscal 1998 and 1997, no shares
were issued under this Plan. Under the terms of the Bonus Plan, no shares of
common stock remain available to be issued. Additionally, the Company provides
for the payment of bonuses in cash and/or common stock pursuant to the 1996
Employee Incentive Stock Purchase and Manager Bonus Plan (the "1996 Bonus
Plan"). During fiscal 1998, 1997, and 1996, 16,382, 13,962, and 6,402 shares,
respectively, were issued under the 1996 Bonus Plan, at a weighted average fair
value of $6.38, $6.27, and $6.86, respectively. Under the terms of this plan, up
to 63,254 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 1998, 1997
and 1996, the Company recognized compensation expense of $104,520, $87,583 and
$105,331, respectively, related to the granting of shares under these plans at
less than fair market value at the date of grant.
The following summarizes the stock option transactions from October 29, 1995
through October 25, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
- ------------------------------------------------------------------------------------
<S> <C> <C>
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
Granted ...................................... 195,000 6.24
Exercised .................................... (24,750) 4.70
Cancelled .................................... (34,400) 6.68
--------- --------
Balance, October 25, 1998 .................... 753,050 $ 7.20
--------- --------
</TABLE>
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At October 25, 1998, October 26, 1997, and October 27, 1996 options exercisable
under the Company's stock option plans totaled 485,950, 340,000, and 244,725,
respectively, and had a weighted average option price per share of $7.44,
$7.47,and $6.07, respectively. Exercise prices for options totaling 103,000 and
650,050 at October 25, 1998 ranged from $9.00 to $11.00 and $5.94 to $8.75,
respectively. The weighted average contractual life of these options is 4.4 and
4.2 years, respectively. At October 25, 1998, 82,900 and 403,050 shares are
exercisable at a weighted average exercise price of $9.52 and $7.02,
respectively.
The 1992 and 1996 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 1998 and 1997. During fiscal 1998 the Company repurchased
35,303 shares of common stock from certain officers at a cost of $273,599.
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 1996 through 1998, net income and earnings per share would
have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------
<S> <C> <C> <C>
Net Income:
As reported ........... $2,337,488 $2,224,751 $ 2,160,989
---------- ---------- -----------
Pro forma.............. $2,142,260 $1,953,749 $ 2,001,811
---------- ---------- -----------
Basic earnings per share:
As reported ........... $ 0.56 $ 0.53 $ 0.52
---------- ---------- -----------
Pro forma.............. $ 0.51 $ 0.47 $ 0.48
---------- ---------- -----------
Diluted earnings per share:
As reported ........... $ 0.55 $ 0.53 $ 0.51
---------- ---------- -----------
Pro forma.............. $ 0.51 $ 0.46 $ 0.47
---------- ---------- -----------
</TABLE>
The following weighted average assumptions were used in the option pricing
model: a risk free interest rate of 4.76%, 6.0% and 6.3% for 1998, 1997 and
1996, respectively; an expected life of the options of three; no expected
dividend yield and a volatility factor of 37.2% in 1998 and 25.2% in 1997 and
1996. The weighted average per share fair value of the options granted in 1998,
1997 and 1996 was $2.75, $2.48 and $2.44, respectively.
Due to the inclusion of only 1996 through 1998 option grants, the effects of
applying SFAS No. 123 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 1998, 1997 and 1996 was approximately
$159,000, $130,000, and $125,000, respectively.
8. Estimated Fair Value of Financial Instruments
- ------------------------------------------------
The carrying amounts of cash and equivalents, receivables, accounts and
construction payables, and accrued liabilities at October 25, 1998 and October
26, 1997 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
$14,017,000 and $31,821,000 as compared to the carrying amounts of $14,282,131
and $32,413,048 at October 25, 1998 and October 26, 1997, 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. Loss on Disposition of Assets
- --------------------------------
During fiscal 1998 the Company recorded a $575,000 loss on the disposition of
assets. The loss consisted of $278,000 related to the closing and relocation of
the original Lexington, Kentucky restaurant, a $175,000 provision recorded in
the fourth quarter, which approximates the net book value of the assets to be
disposed of, for the loss on the closing of its Columbus, Ohio Convention Center
restaurant which was closed in December 1998, and a $122,000 loss recorded in
the fourth quarter on the sale-leaseback of five restaurants (see Note 4).
During fiscal 1998, the original Lexington, Kentucky and Columbus, Ohio
Convention Center restaurants recorded operating income (loss), excluding the
above mentioned provisions, of $8,627 and $(13,545), respectively.
<PAGE> 15
INDEPENDENT AUDITOR'S REPORT
TO THE STOCKHOLDERS AND DIRECTORS OF MAX & ERMA'S RESTAURANTS, INC.:
We have audited the accompanying consolidated balance sheets of Max & Erma's
Restaurants, Inc. and subsidiaries as of October 25, 1998 and October 26, 1997,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended October 25, 1998.
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 consolidated financial statements present fairly, in all
material respects, the financial position of Max & Erma's Restaurants, Inc. and
subsidiaries at October 25, 1998 and October 26, 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
October 25, 1998 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Columbus, Ohio
December 7, 1998
-----------------------------------
MAX & ERMA'S OFFICERS AND DIRECTORS
-----------------------------------
William E. Arthur, Director, Partner, Porter, Wright, Morris & Arthur Todd B.
Barnum, Chairman of the Board, Chief Executive Officer, President and Director
Roger D. Blackwell, Director, Professor of Marketing, The Ohio State University
Bonnie J. Brannigan, Vice President of Marketing and Planning Mark F. Emerson,
Chief Operating Officer and Director Larry B. Fournier, Vice President of
Development Kathie A. Serif, Vice President, Ironwood Cafe Thomas R. Green,
Director, Chief Executive Officer, Lancaster Pollard & Company Gregory L.
Heywood, Regional Vice President of Operations Donald W. Kelley, Director,
Owner, Donald W. Kelley & Associates Michael D. Murphy, Director, Private
Investor William C. Niegsch, Jr., Executive Vice President, Chief Financial
Officer, Treasurer, Secretary and Director Robert A. Rothman, Director, Managing
Partner, Amusement Investment Company
[Picture]
<PAGE> 16
[Logo] Selected Quarterly Financial Data
<TABLE>
<CAPTION>
Diluted
(Thousands, except per share Total Income Before Net Earnings Stock Price
data) Revenues Income Taxes Income Per Share High Low
---------------------------------------------------------------------------------------
1998
<S> <C> <C> <C> <C> <C> <C>
First Quarter ............ $ 29,545 $ 955 $ 665 $ 0.16 $ 6.75 $ 5.88
Second Quarter ........... 23,628 1,107 760 0.18 8.13 5.88
Third Quarter ............ 23,692 1,082 759 0.18 8.00 6.63
Fourth Quarter ........... 23,666 178 153 0.04 8.00 6.25
--------- --------- --------- --------- -------- ---------
YEAR .................. $ 100,531 $ 3,322 $ 2,337 $ 0.55 $ 8.13 $ 5.88
--------- --------- --------- --------- -------- ---------
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
--------- --------- --------- --------- -------- ---------
</TABLE>
The Company's common stock trades on the NASDAQ National Market under the symbol
MAXE. At November 30, 1998 there were 869 stockholders of record of the
Company's common stock. The closing price for the Company's common stock at
October 25, 1998 was $6.38.
-----------------------
Shareholder Information
-----------------------
QUARTERLY CALENDAR:
Max & Erma's operates on a fiscal year ending on the last Sunday in October.
Quarterly results are announced within 30 days after the end of each quarter and
audited results are announced within 60 days after year end.
Fiscal 1999 Quarter-End Dates
------------------------------------
1st quarter February 14, 1999
2nd quarter May 9, 1999
3rd quarter August 1, 1999
4th quarter October 31, 1999
DIVIDENDS:
The Company paid no cash dividends in fiscal 1996, 1997 or 1998. 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 8, 1999, 2:30 p.m.
Max & Erma's Corporate Office
4849 Evanswood Drive
Columbus, OH 43229
10-K REPORT:
Stockholders may obtain, without cost, a copy of Form 10-K for the Company's
fiscal year ended October 25, 1998, 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 7, 1998 incorporated by reference in this
Annual Report on Form 10-K of Max & Erma's Restaurants, Inc. for the year ended
October 25, 1998.
DELOITTE & TOUCHE LLP
Columbus, Ohio
January 15, 1999
<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 26,
1998, 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 8th day of
December, 1998.
SIGNATURE TITLE
- --------- -----
*/s/ Todd B. Barnum Chairman, President, Chief Executive
- -------------------------------- Officer and Director
Todd B. Barnum
*/s/ Mark F. Emerson Chief Operating Officer and Director
- ---------------------------------
Mark F. Emerson
*/s/ William C. Niegsch, Jr. Executive Vice President, Chief
- -------------------------------- Financial Officer, Treasurer,
William C. Niegsch, Jr. Secretary and Director
*/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> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-25-1998
<PERIOD-START> OCT-27-1997
<PERIOD-END> OCT-25-1998
<EXCHANGE-RATE> 1
<CASH> 2,151,323
<SECURITIES> 0
<RECEIVABLES> 602,370
<ALLOWANCES> 0
<INVENTORY> 855,202
<CURRENT-ASSETS> 4,669,285
<PP&E> 60,656,746
<DEPRECIATION> 22,559,784
<TOTAL-ASSETS> 45,957,956
<CURRENT-LIABILITIES> 7,300,797
<BONDS> 20,009,596
0
0
<COMMON> 377,239
<OTHER-SE> 18,270,324
<TOTAL-LIABILITY-AND-EQUITY> 45,957,956
<SALES> 0
<TOTAL-REVENUES> 100,530,584
<CGS> 26,626,172
<TOTAL-COSTS> 88,121,969
<OTHER-EXPENSES> 7,165,443
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,838,608
<INCOME-PRETAX> 3,322,488
<INCOME-TAX> 985,000
<INCOME-CONTINUING> 2,337,488
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,337,488
<EPS-PRIMARY> .56
<EPS-DILUTED> .55
</TABLE>
