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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 31, 1999
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. Employe
incorporation or organization) Identification No.)
4849 Evanswood Drive Columbus, Ohio 43229
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 431-5800
-------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $.10 Par Value
-----------------------------
(title of class)
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, 1999.
<TABLE>
<S> <C>
Total shares outstanding 2,664,938
Number of shares owned beneficially 1,864,568
and/or of record by directors and officers (1)
Number of shares held by persons 1,279,870
other than directors or officers
Closing bid price $7.09
Market value of shares held by $9,079,078
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
479,500 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.
2,664,938 Common Shares
were outstanding at December 31, 1999
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Shareholders for the Fiscal Year Ended October 31, 1999 (in
pertinent parts, as indicated).....Parts II and IV.
2. Proxy Statement for 2000 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 (three) a chain of
fifty-five Max & Erma's restaurants at December 31, 1999. In addition, Ironwood
Cafe, LLC, a wholly-owned limited liability company owns and operates two
Ironwood Cafe restaurants, which are in the process of being closed or sold (see
Note 9 to Financial Statements in Part II, Item 8). 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 of each restaurant
is enhanced by inclusion of local items in each restaurant's decor, including
sports team paraphernalia and historical artifacts. Additional decor items
include 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
1999, the average check was approximately $8.67 at lunch and $9.91 at dinner.
The lunch and dinner meal periods accounted for approximately 38.2% and 61.8% of
net sales, respectively. Alcoholic beverages constituted approximately 11.0% of
net sales in fiscal 1999.
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 the dining experience
starts with the food and therefore 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
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 1999. It primarily
uses radio, direct mail, billboards, special events and localized store
marketing designed to increase customer awareness and repeat business.
The Company owns fifty-one 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. An additional
franchise opened in early fiscal 2000 on the Ohio Turnpike. Terms of the
agreements generally call for an initial franchise fee plus a monthly royalty of
4 or 5% of sales. The Ohio Turnpike location is similar in design to the airport
locations except it does not sell alcoholic beverages.
During 1998 the Company initiated a test of a second restaurant
concept, Ironwood Cafe. Ironwood Cafes occupy approximately 3,500 to 4,000
square feet of leased space, open for dinner only, and primarily serve pasta and
gourmet pizzas prepared in a wood-burning oven. The first Ironwood Cafe did not
achieve a profitable sales level and was closed during the second quarter of
1999. Two additional Ironwood Cafes opened during 1999 in Cleveland and
Cincinnati, Ohio, also did not achieve profitable sales levels, and are in the
process of being closed or sold during the first quarter of fiscal 2000.
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 31, 1999, the Company had 4,486 employees, of which 673 were
full-time restaurant employees, 3,577 were part-time restaurant employees, 70
were corporate staff personnel and 166 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. Twelve 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 encourages the
general manager to both build sales and control margins, creates a sense of
ownership, reduces management turnover and promotes a longer-term perspective.
At the start of fiscal 2000, the Company entered into nine additional Managing
Partner Agreements.
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 2000 and 2001. All but four of the existing Max & Erma's
restaurants are located in suburban areas. Of the existing Company-owned Max &
Erma's restaurants, 36 are freestanding and 16 are in-line shopping center/mall
locations. The following table sets forth the location of each Company-owned
existing Max & Erma's restaurant as of December 31, 1999 and the locations of
restaurants currently under development and scheduled to open during fiscal 2000
and 2001:
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<TABLE>
<CAPTION>
Max & Erma's
------------
Existing Under Development
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<S> <C> <C>
GEORGIA
Atlanta 2 --
ILLINOIS
Chicago 7 --
INDIANA
Indianapolis 3 1
KENTUCKY
Lexington 2 --
Louisville -- 2
MICHIGAN
Ann Arbor 1 --
Detroit 6 1
Grand Rapids 1 1
NORTH CAROLINA
Charlotte 1 1
OHIO
Akron 1 --
Cincinnati 2 1
Cleveland 4 1
Columbus 9 1
Dayton 3 --
Toledo 1 --
Niles -- 1
PENNSYLVANIA
Pittsburgh 6 2
Erie 1 --
SOUTH CAROLINA
Greenville 1 --
VIRGINIA
Norfolk 1 --
TOTAL 52 12
</TABLE>
The Company's preference is to acquire the land and build new
freestanding 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 freestanding. Management believes that
the clustering of three or more restaurants in markets of sufficient size
increases customer awareness, enhances the effectiveness of advertising and
improves management efficiency.
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Government Regulation
The Company is subject to Federal, state and local laws affecting the
operation of its restaurants, including zoning, health, sanitation and safety
regulations and alcoholic beverage licensing requirements. Each restaurant is
operated in accordance with standardized procedures designed to assure
compliance with all applicable codes and regulations. The suspension of a food
service or liquor license could cause an interruption of operations at affected
restaurants.
Business Risks
The Company desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). 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
2000 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 torts 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. 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.
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Item 2. PROPERTIES
All but one 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 restaurant in Columbus, Ohio
also owns the premises on which it is located. Restaurant leases are generally
collateralized by liens on leasehold improvements, equipment, furniture and
fixtures. The Company leases its executive offices (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 the first quarter of fiscal 2000 the Company completed two
sale-leaseback transactions for six restaurants. The Company received proceeds
of approximately $2,900,000 (net of payoff of the approximately $5,200,000
mortgage loan), and $4,900,000, respectively. The transactions resulted in a
deferred gain of approximately $970,000, which will be accreted to income as a
reduction of rent expenses over the twenty year lease term and a loss on
disposition of assets of approximately $119,000.
The last 34 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.
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 31, 1999.
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 31, 1999, page 5.
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 31, 1999, pages 6 through 8.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of October 31, 1999, the Company's total long-term indebtedness
(including current maturities) was approximately $28.3 million. Approximately
$23.1 million of such indebtedness is the Company's revolving credit line and
bears interest at variable rates. A one percentage point increase or decrease in
interest rates will increase or decrease the Company's pre-tax income by
approximately $230,000. Based upon quarter ending balances the average
borrowings under the Company's revolving credit line during 1999 was $18.3
million. The high and low balance outstanding under the revolving credit line
during 1999 was $23.1 million and $12.1 million, respectively. As required under
the Company's revolving credit agreement the Company has entered into a
$20,000,000 interest rate protection agreement. The agreement does not convert
any of the Company's borrowings from variable rate to fixed rate until fiscal
2001. For a further description of the Company's indebtedness, see Item 8,
Financial Statements and Supplementary Data - Notes 3 and 4 to the Consolidated
Financial Statements.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The balance sheets as of October 31, 1999 and October 25, 1998 and the
related statements of income, stockholders' equity and cash flows for each of
the three years in the period ended October 31, 1999, 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 31,
1999, pages 9 through 20 and the inside back cover.
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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
Items 10, 11, 12 and 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT: EXECUTIVE COMPENSATION: SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT: AND CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under these Items is incorporated herein by
reference to the Company's Proxy Statement for 2000 Annual Meeting of
Stockholders to be held on April 12, 2000, 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
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: January 18, 2000 Max & Erma's Restaurants, Inc.
By: */s/Todd B. Barnum
-------------------------------------
Todd B. Barnum
Chairman of the Board,
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
*/s/Todd B. Barnum Chairman of the Board, Chief Executive
- --------------------------- Officer and President, Director (Principal
Todd B. Barnum Executive Officer)
*/s/Mark F. Emerson Chief Operating Officer, Director
- ---------------------------
Mark F. Emerson
*/s/William C. Niegsch, Jr. Executive Vice President and Chief
- --------------------------- Financial Officer, Director,
William C. Niegsch, Jr. (Principal Financial Officer)
*/s/William E. Arthur Director
- ---------------------------
William E. Arthur
*/s/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 William C. Niegsch, Jr.
- ---------------------------
William C. Niegsch, Jr.
Attorney-in-Fact
</TABLE>
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MAX & ERMA'S RESTAURANTS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
ITEMS 8, 14(a)(1)
<TABLE>
<CAPTION>
REFERENCE PAGE
ANNUAL REPORT
TO SHAREHOLDERS
---------------
<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 31, 1999:
- -Consolidated Balance Sheets as of
October 31, 1999 and October 25, 1998
- -For the years ended October 31, 1999, 9 - 10
October 25, 1998 and October 26, 1997
-Consolidated Statements of Income
-Consolidated Statements of Stockholders' Equity 11 - 12
-Consolidated Statements of Cash Flows 13
14
- -Notes to Consolidated Financial Statements
- -Independent Auditors' Report
- -No financial statement schedules are required 15-19
to be filed because the conditions requiring 20
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
No. Description Page 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)
17, 1972. of Registration Statement on Form
S-1 (Registration No. 2-85585).
10(b) First Amendment to Agreement of Limited Partnership of Max & Reference is made to Exhibit 10(b)
Erma's Ltd., dated September 9, 1974. of Registration Statement on Form
S-1 (Registration No. 2-85585).
10(c) 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(d) 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(e) 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(f) 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).
10(g)* 1992 Stock Option Plan. Reference is made to Exhibit 10(q)
of Report on Form 10-K filed January
25, 1993.
10(h)* 1996 Stock Option Plan. Reference is made to Exhibit 10(p)
of Report on Form 10-K filed January
1996.
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
Exhibit
No. Description Page No.
- ------- ----------- --------
<S> <C> <C>
10(i)* Indemnification Agreement (form) between Max & Erma's Reference is made to Exhibit 10(y)
Restaurants, Inc. and each of its directors dated as of June of Report on Form 10-K filed January
18, 1986. 23, 1987.
10(j)* 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 2000 Annual
Meeting of Shareholders, which is
incorporated by Reference herein.
10(k)* 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(l)* 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(m)* Form of Severance Agreement in Event of Change In Control for
Senior Executive Officers.
10(n)* List of Senior Executive Officers with Severance
Agreements in the form of Exhibit 10(m).
10(o)* Form of Severance Agreement in Event of Change In Control for
Officers.
10(p)* List of Officers with Severance Agreements in the form of
Exhibit 10(o).
10(q) Third Amended and Restated Revolving Credit Agreement dated
January 7, 2000, between Max & Erma's Restaurants, Inc. and The
Provident Bank.
10(r)* Compensation Committee of the Board of Directors
resolution adopted October 1, 1999, relating to
officers' bonuses.
13 Portions of the Annual Report to Stockholders for the
Fiscal Year ended October 31, 1999, 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(m)
MAX & ERMA'S RESTAURANTS, INC.
SEVERANCE AGREEMENT
-------------------
IN THE EVENT OF CHANGE IN CONTROL
---------------------------------
This Agreement is made this 10th day of January, 2000, by and between
__________ ("Executive") and MAX & ERMA'S RESTAURANTS, INC., a Delaware
corporation with its principal office at 4849 Evanswood Drive, Columbus, Ohio,
its affiliates, subsidiaries, successors, and assigns (the "Company").
RECITALS
A. The Company competes in the casual dining segment of the restaurant
industry by operating Max & Erma's Restaurants that offer a variety of high
quality food in a casual, comfortable, and fun atmosphere and with a uniquely
personable style.
B. The Executive is a principal officer of the Company and an integral
part of its management.
C. The Company considers the Executive's continued services to be in
the best interest of the Company and desires, through this Agreement, to assure
the Executive's continued services on behalf of the Company on an objective and
impartial basis and without distraction or conflict of interest in the event of
an attempt to obtain control of the Company.
AGREEMENT
NOW, THEREFORE, the parties agree as follows:
1. DEFINITIONS. For purposes of this Agreement, the following terms
shall have the following meanings unless otherwise expressly provided in this
Agreement:
(a) Change in Control. A "Change in Control" shall be deemed
to have occurred if and when, after the date hereof, (i) any "person"
(as that term is used in Section 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") on the date
hereof), including any "group" as such term is used in Section 13(d)(3)
of the Exchange Act on the date hereof, shall acquire (or disclose the
previous acquisition of) beneficial ownership (as that term is defined
in Section 13(d) of the Exchange Act and the rules thereunder on the
date hereof) of shares of the outstanding stock of any class or classes
of the Company which results in such person or group possessing more
than 50% of the total voting power of the Company's outstanding voting
securities ordinarily having the right to vote for the election of
directors of the Company; or (ii) as the result of, or in connection
with, any tender or exchange offer, merger or other business
combination, or contested election, or any combination of the foregoing
transactions (a "Transaction"), the owners of the voting shares of the
Company
<PAGE> 2
outstanding immediately prior to such Transaction own less than
a majority of the voting shares of the Company after the Transaction;
or (iii) during any period of two consecutive years during the term of
this Agreement, individuals who at the beginning of such period
constitute the Board of Directors of the Company (or who take office
following the approval of a majority of the directors then in office
who were directors at the beginning of the period) cease for any reason
to constitute at least one-half thereof, unless the election of each
director who was not a director at the beginning of such period has
been approved in advance by directors of the Company representing at
least one-half of the directors then in office who were directors at
the beginning of the period; or (iv) the sale, exchange, transfer, or
other disposition of all or substantially all of the assets of the
Company (a "Sale Transaction").
Notwithstanding the foregoing, a "Change in Control" shall not
be deemed to have occurred for purposes of this Agreement (a) if the
Executive, alone or as part of any "group" as such term is used in
Section 13(d)(3) of the Exchange Act on the date hereof, shall acquire
(or disclose the previous acquisition thereof) beneficial ownership (as
that term is defined in Section 13(d) on the Exchange Act and the rules
thereunder on the date hereof) of shares of the outstanding stock of
any class or classes of the Company that results in the Executive or
the Executive as part of any "group" possessing more than 50% of the
total voting power of the Company's outstanding voting securities
ordinarily having the right to vote for the election of directors of
the Company; (b) upon the occurrence of any Transaction, Sale
Transaction, consolidation, or reorganization involving the Company and
the Executive, alone or with other officers of the Company, or any
entity in which the Executive (alone or with other officers) has,
directly or indirectly, any equity or ownership interest, except where
such entity is a publicly traded company and the Executive does not own
more than a 1% interest in such entity prior to the Transaction, Sale
Transaction, consolidation, or reorganization; (c) in a transaction
otherwise commonly referred to as a "management leveraged buyout"; or
(d) in an acquisition of stock of the Company by employee benefit plans
sponsored by the Company.
(b) Date of Termination. "Date of Termination" shall mean (i)
if the Executive's employment is terminated for Disability, 30 days
after a Notice of Termination is given (provided that the Executive
shall not have returned to the performance of his duties on a full-time
basis during such 30-day period), (ii) if the Executive's employment is
terminated for Cause, the date specified in the Notice of Termination,
(iii) if the Executive's employment is terminated by death, the date of
death, and (iv) if the Executive's employment is terminated for any
other reason, the date on which a Notice of Termination is given, or,
if the Company terminates the Executive's employment without giving a
Notice of Termination, the date on which such termination is effective.
(c) Disability. The Executive's employment shall be deemed to
have been terminated by "Disability" if, as a result of his incapacity
due to physical or mental illness, he shall have been absent from his
duties with the Company on a full-time basis for the entire period of
six consecutive months, and within 30 days after written notice of
termination is given (which may occur before or after the end of such
six-month period) he shall not have returned to the full-time
performance of his duties.
<PAGE> 3
(d) Effective Period. The "Effective Period" means the
13-month period following any Change in Control (even if such 13-month
period shall extend beyond the term of this Agreement or any extension
thereof).
(e) Notice of Termination. A "Notice of Termination" shall
mean a notice which shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the
Executive's employment.
(f) Termination for Cause. The Company shall only have "Cause"
to terminate the Executive's employment hereunder upon the occurrence
of one or more of the following grounds:
(i) Commission of a crime which is a felony, fraud,
or embezzlement, or any misdemeanor involving an act of moral
turpitude or committed in connection with the Executive's
employment and which causes the Company a substantial
detriment or embarrassment;
(ii) Engagement in activities or conduct clearly
injurious to the best interests or reputation of the Company;
(iii) The willful and continued refusal or failure to
perform reasonably assigned duties and responsibilities in a
competent or satisfactory manner as determined by the Company;
(iv) The willful and continued insubordination of the
Executive;
(v) The willful and continued violation of any of the
material terms and conditions of this Agreement or any other
written agreement or agreements that the Executive may from
time to time have with the Company; or
(vi) The willful and continued violation of any of
the Company's rules of conduct or behavior, such as may be
provided in any employee handbook or as the Company may
promulgate from time to time.
Notwithstanding the foregoing, the Executive shall not be
deemed to have been terminated for Cause under this Agreement unless
and until there shall have been delivered to the Executive a copy of a
resolution duly adopted by the affirmative vote of not less than
three-quarters of the Board at a meeting called and held for such
purposes, after notice to the Executive and an opportunity for the
Executive, together with the Executive's counsel (if the Executive
chooses to have counsel present at such meeting), to be heard before
the Board, finding that, in the good faith opinion of the Board, the
Executive had committed an act constituting Cause as defined in this
Agreement and specifying the particulars of the act constituting Cause
in detail. Nothing in this Agreement will limit the right of the
Executive or the Executive's beneficiaries to contest the validity or
propriety of any such determination.
(g) Termination For Good Reason. "Good Reason" shall mean,
unless the Executive shall have consented in writing thereto,
termination by the Executive of his employment following a Change in
Control because of any of the following:
<PAGE> 4
(i) A reduction in Executive's title, duties,
responsibilities, or status, as compared to such title,
duties, responsibilities, or status immediately prior to the
Change in Control or as the same may be increased after the
Change in Control;
(ii) The assignment to the Executive of duties
inconsistent with the Executive's office on the date of the
Change in Control or as the same may be increased after the
Change in Control;
(iii) A reduction by the Company in the Executive's
base salary as in effect immediately prior to the Change in
Control or as the same may be increased after the Change in
Control, or a reduction by the Company after a Change in
Control in the Executive's total compensation (including
bonus) so that the Executive's total cash compensation in a
given calendar year is less than 90% of Executive's total
compensation for the prior calendar year;
(iv) A requirement that the Executive relocate
anywhere not mutually acceptable to the Executive and the
Company or the imposition on the Executive of business travel
obligations substantially greater than his business travel
obligations during the year prior to the Change in Control;
(v) The relocation of the Company's principal
executive offices to a location outside the greater Columbus,
Ohio area;
(vi) The failure by the Company to continue in effect
any material fringe benefit or compensation plan, retirement
plan, life insurance plan, health and accident plan, or
disability plan in which the executive is participating at the
time of a Change in Control (or plans providing the Executive
with substantially similar benefits), the taking of any action
by the Company which would adversely affect the Executive's
participation in or materially reduce his benefits under any
of such plans or deprive him of any material fringe benefit
enjoyed by him at the time of the Change in Control, or the
failure by the Company to provide him with the number of paid
vacation days to which he is then entitled on the basis of
years of service with the Company in accordance with the
normal vacation policy then in effect immediately prior to the
Change in Control;
(vii) Any breach of this Agreement on the part of the
Company; or
(viii) Failure of any successor to assume all
obligations under this Agreement.
(h) Termination for Retirement. Termination by the Company of
the Executive's employment based on "Retirement" shall mean termination
in accordance with the Corporation's normal retirement policy
applicable to its salaried employees as in effect immediately prior to
the Change in Control or in accordance with any other retirement
arrangement established with the Executive's consent with respect to
the Executive.
<PAGE> 5
(i) Window Period. The "Window Period" means the thirteenth
(13th) month following any Change in Control (even if such thirteenth
(13th) month shall extend beyond the term of this Agreement or any
extension thereof).
2. PREVIOUS AGREEMENT TERMINATED. The Employment Agreement between the
Company and the Executive, dated December 12, 1984, is hereby terminated.
3. TERM. Unless sooner terminated as herein provided, the term of this
Agreement shall commence on the date hereof and shall continue until the third
anniversary of the Commencement Date (the "Termination Date"); provided,
however, that commencing on the Termination Date and on each anniversary date
thereof the term of this Agreement shall automatically be extended for one
additional year beyond the then existing term unless, not later than one hundred
twenty (120) days immediately preceding the Termination Date of the then
existing term, the Company shall have given the Executive notice that it wishes
to terminate this Agreement in which case the Agreement shall terminate at the
end of the then existing term. The Company may not give such notice at any time
while it has knowledge that any third person has taken steps or announced an
intention to take steps reasonably calculated to effect a Change in Control.
Notwithstanding the above, if a "Change in Control" (as defined herein) of the
Company occurs during the term of this Agreement, the term of this Agreement
will be extended for thirteen (13) months beyond the end of the month in which
any such Change in Control occurs. It is understood that no amounts or benefits
shall be payable under this Agreement unless (i) there shall have been a Change
in Control during the term of this Agreement and (ii) the Executive's employment
is terminated at any time during the Effective Period or the Window Period as
provided in Section 5 hereof. It is further understood that the Company may
terminate the Executive's employment at any time after a Change in Control,
subject to the Company providing, if required to do so in accordance with the
terms hereof, the severance payments and benefits hereinafter specified, which
payments and benefits shall only be available if a Change in Control has
occurred prior to such termination. Prior to a Change in Control, this Agreement
shall terminate immediately if the Executive's employment with the Company is
terminated for any reason, and Executive shall be entitled to no payments or
benefits hereunder.
4. TERMINATION FOLLOWING A CHANGE IN CONTROL. Any termination of
Executive's employment by the Company for Cause, Disability, or otherwise or by
the Executive for Good Reason, which occurs at any time during the Effective
Period or the Window Period, shall be communicated by written Notice of
Termination to the other party.
5. COMPENSATION UPON TERMINATION FOLLOWING A CHANGE IN CONTROL. The
Executive shall be entitled to the severance benefits provided in Section 5
hereof if his employment is terminated within the Effective Period or the Window
Period following a Change in Control of the Company (even if such Effective
Period or the Window Period extends beyond the term of this Agreement or any
extension thereof) unless his termination is (i) because of his death or
Retirement, (ii) by the Company for Cause or Disability, or (iii) by the
Executive other than for Good Reason; provided however, that the Executive may
terminate his employment for any reason during the Window Period, and shall be
entitled to the severance benefits provided in Section 5(c) hereof.
(a) For Cause. If, at any time during the Effective Period or
the Window Period, the Executive's employment shall be terminated for
Cause, the Company shall pay his full base salary through the Date of
Termination at the rate in effect at the time Notice of
<PAGE> 6
Termination is given, and the Company shall have no further obligations
to the Executive under this Agreement.
(b) Death, Disability, or Retirement. If, at any time during
the Effective Period or the Window Period, the Executive's employment
is terminated by reason of the Executive's death, Disability, or
Retirement, the Company shall pay to the Executive or his legal
representative his full base salary through the Date of Termination,
and the Company shall have no further obligation to the Executive or
his legal representative under this Agreement.
(c) For Good Reason or without Cause. If, at any time during
the Effective Period or the Window Period, the Executive's employment
is terminated by the Company for any reason other than Cause, death,
Disability, or Retirement; or is terminated by the Executive for Good
Reason, at any time during the Effective Period; or is terminated by
the Executive during the Window Period for any reason, then:
(i) The Company shall pay to the Executive, not later
than 30 days following the Date of Termination, the
Executive's accrued but unpaid base salary through the Date of
Termination plus compensation for any current and carried-over
unused vacation days in accordance with the applicable
personnel policy and the unpaid balance of the current year's
premiums under any split dollar life insurance policy on the
life of the Executive held by the Company.
(ii) The Company shall pay to the Executive, not
later than 30 days following the Date of Termination, an
amount in cash equal to the product of (x) the average annual
bonus paid to the Executive for the last three full fiscal
years ending prior to the Date of Termination or, if the
Executive has been employed by the Company for less than three
full fiscal years prior to the Date of Termination, the
average annual bonus paid to the Executive for the entire
period of the Executive's employment prior to the Date of
Termination and (y) the fraction obtained by dividing (A) the
number of days between the Date of Termination and the last
day of the last full fiscal year ending prior to such date and
(B) 365.
(iii) All outstanding stock options issued to the
Executive shall become 100% vested and thereafter exercisable
in accordance with such governing stock option plans and
agreements, and the ownership of the unvested portion of the
Company's cash value of any split dollar life insurance policy
shall become 100% vested in the Executive.
(iv) In lieu of any further payments of salary to the
Executive after the Date of Termination, the Company shall pay
to the Executive, not later than thirty (30) days following
the Date of Termination and notwithstanding any dispute
between the Executive and Company as to the payment to the
Executive of any other amounts under this Agreement or
otherwise, a lump sum cash severance payment (the "Severance
Payment") equal to 2.99 times the average annual compensation
which was payable to the Executive by the Company (or any
other company (an "Affiliate") affiliated with the Company
within the meaning of Section 1504 of the Internal Revenue
Code of 1986, as amended (the "Code")) and includable in the
Executive's gross income for federal income tax purposes for
the
<PAGE> 7
five taxable years ending prior to the date on which a
Change in Control of the Company occurred (or such portion of
such period during which the Executive performed personal
services for the Company or an Affiliate). Compensation
payable to the Executive by the Company or an Affiliate shall
include every type and form of compensation includable in the
Executive's gross income for federal income tax purposes in
respect of the Executive's employment by the Company or an
Affiliate.
(d) Excess Parachute Payments. If any portion of the aggregate
payments under Section 5 hereof which are considered "parachute
payments" within the meaning of Section 280G(b)(2) of the Internal
Revenue Code of 1986, as amended (the "Code"), shall be determined by
the Corporation's independent auditors to be nondeductible to the
Company, then the aggregate present value of all of the amounts payable
to the Executive under Section 5(c) hereof shall be reduced to the
maximum amount which would cause all of the payments under Section 5(c)
to be deductible and in such event the executive shall have the option,
but not the obligation, to designate or select those kinds of payments
which shall be reduced and the order of such reductions, but failure of
the Executive to make such selections within a period of 30 days
following notice of the determination that a reduction is necessary
will result in a reduction of all such payments, pro rata. If the
Executive disagrees with the determination of the reduced amount by the
Company's auditors, he may contest that determination by giving notice
of such contest within 30 days of learning of the determination and may
use an accountant of his choice in connection with such contest. The
Company shall pay all of the Executive's costs in connection with such
contest if the ultimate determination by the two accountants (that of
the Company and that of the Executive) in consultation with each other,
or by a third accountant jointly chosen by the two first-named
accountants in the event the first two cannot agree, represents a
lesser reduction in the amounts payable under Section 5(c) hereof than
the Company's independent auditors established in the first instance.
Otherwise, the Executive shall pay his own and any additional costs
incurred by the Company in contesting such determination. If there is a
final determination by the Internal Revenue Service or a court of
competent jurisdiction that the Company overpaid amounts under Section
280G of the Code, the amount of the overpayment shall be treated as a
loan to the Executive and shall be repaid immediately, together with
interest on such amount at the prime rate of interest at Huntington
National Bank, Columbus, Ohio, or any successor thereto, in effect from
time to time. If the Internal Revenue Service or a court of competent
jurisdiction finally determines, or if the Code or regulations
thereunder shall change such that the Corporation underpaid the
Executive under Section 280G of the Code, the Corporation shall pay the
difference to the Executive with interest as specified above.
(e) Avoidance of Penalty Taxes. This Section 5 shall be
interpreted so as to avoid the imposition of excise taxes on the
Executive under Section 4999 of the Code, and the Executive may in his
sole discretion elect to reduce any payments he may be eligible to
receive under this Agreement to prevent the imposition of such excise
taxes.
(f) Other Rights not Affected. The Executive's right to
receive payment under this Agreement shall not decrease the amount of,
or otherwise adversely affect, any other benefits payable to the
Executive under any plan, agreement, or arrangement relating to
employee benefits provided by the Company.
<PAGE> 8
(g) No Duty to Mitigate. The Executive shall not be required
to mitigate the amount of any payment provided for in this Section 5 by
seeking other employment or otherwise, nor shall the amount of any
payment provided for in this Section 5 be reduced by any compensation
earned by the Executive as the result of employment by another employer
or by reason of the Executive's receipt of or right to receive any
retirement or other benefits after the Date of Termination of
employment or otherwise.
6. SUCCESSORS; BINDING AGREEMENT
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Company and its
subsidiaries to expressly assume and agree to perform this Agreement in
the same manner and to the same extent that the Company would be
required to perform it if no succession had taken place. Failure of the
Company to obtain such agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle the
Executive to compensation in the same amount and on the same terms as
he would be entitled hereunder if he terminated his employment for Good
Reason during the Effective Period or for any reason during the Window
Period, except that for purposes of implementing the foregoing, the
date on which any such succession becomes effective shall be deemed the
Date of Termination. As used in this Agreement, "Company" shall mean
the Company as defined above and any successor to its business and/or
assets as aforesaid which executes and delivers the agreement provided
for in this Section 6 or which otherwise becomes bound by all the terms
and provisions of this Agreement by operation of law. Nothing contained
in this Section 6 shall be construed to modify or affect the definition
of a "Change in Control" contained in Section 1 hereof.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees,
and legatees.
7. ARBITRATION. Any dispute or controversy arising out of or relating
to this Agreement, or any breach thereof, shall be settled by arbitration in
accordance with the rules of the American Arbitration Association. The award of
the arbitrator shall be final, conclusive, and nonappealable and judgment upon
such award rendered by the arbitrator may be entered in any court having
jurisdiction thereof. The arbitrator shall mean an arbitrator qualified to serve
in accordance with the rules of the American Arbitration Association and one who
is approved by both the Company and the Executive. In the absence of such
approval, each party shall designate a person qualified to serve as an
arbitrator in accordance with the rules of the American Arbitration Association
and the two persons so designated shall select the arbitrator from among those
persons qualified to serve in accordance with the rules of the American
Arbitration Association. The arbitration shall be held in Columbus, Ohio or
other such place as may be agreed upon at the time by the parities to the
arbitration.
8. ENFORCEMENT OF AGREEMENT. The Company is aware that upon the
occurrence of a Change in Control, the Board of Directors or a shareholder of
the Company may then cause or attempt to cause the Company to refuse to comply
with its obligations under this Agreement, or may cause or attempt to cause the
Company to institute, or may institute arbitration or litigation seeking to have
this Agreement declared unenforceable, or may take or attempt to take other
<PAGE> 9
action to deny the Executive the benefits intended under this Agreement. In
these circumstances, the purpose of this Agreement could be frustrated.
Accordingly, if following a Change in Control it should appear to the Executive
that the Company has failed to comply with any of its obligations under Section
5(c) of this Agreement or in the event that the Company or any other person
takes any action to declare Section 5(c) of this Agreement void or
unenforceable, or institutes any arbitration, litigation, or other legal action
designed to deny, diminish or to recover from the Executive the benefits
entitled to be provided to him under Section 5(c), and that the Executive has
complied with all his obligations under this Agreement, the Company authorizes
the Executive to retain counsel of his choice, at the expense of the Company as
provided in this Section, to represent him in connection with the initiation or
defense of any pre-suit settlement negotiations, arbitration, litigation, or
other legal action, whether such action is by or against the Company or any
Director, officer, shareholder, or other person affiliated with the Company, in
any jurisdiction. Notwithstanding any existing or prior attorney-client
relationship between the Company and such counsel, the Company consents to the
Executive entering into an attorney-client relationship with such counsel, and
in that connection the Company and the Executive agree that a confidential
relationship shall exist between the Executive and such counsel, except with
respect to any fee and expense invoices generated by such counsel. The
reasonable fees and expenses of counsel selected by the Executive as hereinabove
provided shall be paid or reimbursed to the Executive by the Company on a
regular, periodic basis upon presentation by the Executive of a statement or
statements prepared by such counsel in accordance with its customary practices,
up to a maximum of 25% of the amount due to the Executive under Section 5(c).
Any legal expenses incurred by the Company by reason of any dispute between the
parties as to enforceability of Section 5(c) or the terms contained in Section
5(c), notwithstanding the outcome of any such dispute, shall be the sole
responsibility of the Company, and the Company shall not take any action to seek
reimbursement from the Executive for such expenses.
9. NOTICES. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed in the
case of the Executive, to:
--------------------
--------------------
--------------------
and in the case of the Company, to the principal executive offices of the
Company, provided that all notices to the Company shall be directed to the
attention of the Company's Chief Executive Officer with copies to the Secretary
of the Company, or to such other addresses as either party may have furnished to
the other in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
10. NO WAIVER. No provisions of this Agreement may be modified, waived,
or discharged unless such waiver, modification or discharge is agreed to in
writing signed by the executive and a duly authorized officer of the Company. No
waiver by either party hereto at any time of any breach by the other party
hereto of, or compliance with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time
<PAGE> 10
11. SAVING. If any provision of this Agreement is later found to be
completely or partially unenforceable, the remaining part of that provision of
any other provision of this Agreement shall still be valid and shall not in any
way be affected by the finding. Moreover, if any provision is for any reason
held to be unreasonably broad as to time, duration, geographical scope, activity
or subject, such provision shall be interpreted and enforced by limiting and
reducing it to preserve enforceability to the maximum extent permitted by law.
12. GOVERNING LAW. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Ohio without reference to its choice of
law rules.
13. FINAL AGREEMENT. This Agreement replaces any existing agreement
between the Executive and the Company relating to the same subject matter and
may be modified only by an agreement in writing signed by the parties.
MAX & ERMA'S RESTAURANTS, INC.
By:
--------------------------------------
-----------------------------------------
Its:
------------------------------------
-----------------------------------------
EXECUTIVE
-----------------------------------------
-----------------------------------------
<PAGE> 1
EXHIBIT 10 (n)
List of Senior Executive Officers with Severance Agreements in the form of
Exhibit 10(m).
Todd B. Barnum, Chief Executive Officer, President and Chairman of the Board
Mark F. Emerson, Chief Operating Officer
William C. Niegsch, Jr., Executive Vice President and Chief Financial Officer
<PAGE> 1
Exhibit (o)
MAX & ERMA'S RESTAURANTS, INC.
SEVERANCE AGREEMENT
-------------------
IN THE EVENT OF CHANGE IN CONTROL
---------------------------------
This Agreement is made this 10th day of January, 2000, by and between
__________ ("Executive") and MAX & ERMA'S RESTAURANTS, INC., a Delaware
corporation with its principal office at 4849 Evanswood Drive, Columbus, Ohio,
its affiliates, subsidiaries, successors, and assigns (the "Company").
RECITALS
A. The Company competes in the casual dining segment of the restaurant
industry by operating Max & Erma's Restaurants that offer a variety of high
quality food in a casual, comfortable, and fun atmosphere and with a uniquely
personable style.
B. The Executive is a principal officer of the Company and an integral
part of its management.
C. The Company considers the Executive's continued services to be in
the best interest of the Company and desires, through this Agreement, to assure
the Executive's continued services on behalf of the Company on an objective and
impartial basis and without distraction or conflict of interest in the event of
an attempt to obtain control of the Company.
AGREEMENT
NOW, THEREFORE, the parties agree as follows:
1. DEFINITIONS. For purposes of this Agreement, the following terms
shall have the following meanings unless otherwise expressly provided in this
Agreement:
(a) Change in Control. A "Change in Control" shall be deemed
to have occurred if and when, after the date hereof, (i) any "person"
(as that term is used in Section 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") on the date
hereof), including any "group" as such term is used in Section 13(d)(3)
of the Exchange Act on the date hereof, shall acquire (or disclose the
previous acquisition of) beneficial ownership (as that term is defined
in Section 13(d) of the Exchange Act and the rules thereunder on the
date hereof) of shares of the outstanding stock of any class or classes
of the Company which results in such person or group possessing more
than 50% of the total voting power of the Company's outstanding voting
securities ordinarily having the right to vote for the election of
directors of the Company; or (ii) as the result of, or in connection
with, any tender or exchange offer, merger or other business
combination, or contested election, or any combination of the foregoing
transactions (a "Transaction"), the owners of the voting shares of the
Company outstanding immediately prior to such Transaction own less than
a majority of the voting
<PAGE> 2
shares of the Company after the Transaction; or (iii) during any period
of two consecutive years during the term of this Agreement, individuals
who at the beginning of such period constitute the Board of Directors
of the Company (or who take office following the approval of a majority
of the directors then in office who were directors at the beginning of
the period) cease for any reason to constitute at least one-half
thereof, unless the election of each director who was not a director at
the beginning of such period has been approved in advance by directors
of the Company representing at least one-half of the directors then in
office who were directors at the beginning of the period; or (iv) the
sale, exchange, transfer, or other disposition of all or substantially
all of the assets of the Company (a "Sale Transaction").
Notwithstanding the foregoing, a "Change in Control" shall not
be deemed to have occurred for purposes of this Agreement (a) if the
Executive, alone or as part of any "group" as such term is used in
Section 13(d)(3) of the Exchange Act on the date hereof, shall acquire
(or disclose the previous acquisition thereof) beneficial ownership (as
that term is defined in Section 13(d) on the Exchange Act and the rules
thereunder on the date hereof) of shares of the outstanding stock of
any class or classes of the Company that results in the Executive or
the Executive as part of any "group" possessing more than 50% of the
total voting power of the Company's outstanding voting securities
ordinarily having the right to vote for the election of directors of
the Company; (b) upon the occurrence of any Transaction, Sale
Transaction, consolidation, or reorganization involving the Company and
the Executive, alone or with other officers of the Company, or any
entity in which the Executive (alone or with other officers) has,
directly or indirectly, any equity or ownership interest, except where
such entity is a publicly traded company and the Executive does not own
more than a 1% interest in such entity prior to the Transaction, Sale
Transaction, consolidation, or reorganization; (c) in a transaction
otherwise commonly referred to as a "management leveraged buyout"; or
(d) in an acquisition of stock of the Company by employee benefit plans
sponsored by the Company.
(b) Date of Termination. "Date of Termination" shall mean (i)
if the Executive's employment is terminated for Disability, 30 days
after a Notice of Termination is given (provided that the Executive
shall not have returned to the performance of his duties on a full-time
basis during such 30-day period), (ii) if the Executive's employment is
terminated for Cause, the date specified in the Notice of Termination,
(iii) if the Executive's employment is terminated by death, the date of
death, and (iv) if the Executive's employment is terminated for any
other reason, the date on which a Notice of Termination is given, or,
if the Company terminates the Executive's employment without giving a
Notice of Termination, the date on which such termination is effective.
(c) Disability. The Executive's employment shall be deemed to
have been terminated by "Disability" if, as a result of his incapacity
due to physical or mental illness, he shall have been absent from his
duties with the Company on a full-time basis for the entire period of
six consecutive months, and within 30 days after written notice of
termination is given (which may occur before or after the end of such
six-month period) he shall not have returned to the full-time
performance of his duties.
<PAGE> 3
(d) Effective Period. The "Effective Period" means the
12-month period following any Change in Control (even if such 12-month
period shall extend beyond the term of this Agreement or any extension
thereof).
(e) Notice of Termination. A "Notice of Termination" shall
mean a notice which shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the
Executive's employment.
(f) Termination for Cause. The Company shall only have "Cause"
to terminate the Executive's employment hereunder upon the occurrence
of one or more of the following grounds:
(i) Commission of a crime which is a felony, fraud,
or embezzlement, or any misdemeanor involving an act of moral
turpitude or committed in connection with the Executive's
employment and which causes the Company a substantial
detriment or embarrassment;
(ii) Engagement in activities or conduct clearly
injurious to the best interests or reputation of the Company;
(iii) The willful and continued refusal or failure to
perform reasonably assigned duties and responsibilities in a
competent or satisfactory manner as determined by the Company;
(iv) The willful and continued insubordination of the
Executive;
(v) The willful and continued violation of any of the
material terms and conditions of this Agreement or any other
written agreement or agreements that the Executive may from
time to time have with the Company; or
(vi) The willful and continued violation of any of
the Company's rules of conduct or behavior, such as may be
provided in any employee handbook or as the Company may
promulgate from time to time.
Notwithstanding the foregoing, the Executive shall not be
deemed to have been terminated for Cause under this Agreement unless
and until there shall have been delivered to the Executive a copy of a
resolution duly adopted by the affirmative vote of not less than
three-quarters of the Board at a meeting called and held for such
purposes, after notice to the Executive and an opportunity for the
Executive, together with the Executive's counsel (if the Executive
chooses to have counsel present at such meeting), to be heard before
the Board, finding that, in the good faith opinion of the Board, the
Executive had committed an act constituting Cause as defined in this
Agreement and specifying the particulars of the act constituting Cause
in detail. Nothing in this Agreement will limit the right of the
Executive or the Executive's beneficiaries to contest the validity or
propriety of any such determination.
(g) Termination For Good Reason. "Good Reason" shall mean,
unless the Executive shall have consented in writing thereto,
termination by the Executive of his employment following a Change in
Control because of any of the following:
<PAGE> 4
(i) A reduction in Executive's title, duties,
responsibilities, or status, as compared to such title,
duties, responsibilities, or status immediately prior to the
Change in Control or as the same may be increased after the
Change in Control;
(ii) The assignment to the Executive of duties
inconsistent with the Executive's office on the date of the
Change in Control or as the same may be increased after the
Change in Control;
(iii) A reduction by the Company in the Executive's
base salary as in effect immediately prior to the Change in
Control or as the same may be increased after the Change in
Control, or a reduction by the Company after a Change in
Control in the Executive's total compensation (including
bonus) so that the Executive's total cash compensation in a
given calendar year is less than 90% of Executive's total
compensation for the prior calendar year;
(iv) A requirement that the Executive relocate
anywhere not mutually acceptable to the Executive and the
Company or the imposition on the Executive of business travel
obligations substantially greater than his business travel
obligations during the year prior to the Change in Control;
(v) The relocation of the Company's principal
executive offices to a location outside the greater Columbus,
Ohio area;
(vi) The failure by the Company to continue in effect
any material fringe benefit or compensation plan, retirement
plan, life insurance plan, health and accident plan, or
disability plan in which the executive is participating at the
time of a Change in Control (or plans providing the Executive
with substantially similar benefits), the taking of any action
by the Company which would adversely affect the Executive's
participation in or materially reduce his benefits under any
of such plans or deprive him of any material fringe benefit
enjoyed by him at the time of the Change in Control, or the
failure by the Company to provide him with the number of paid
vacation days to which he is then entitled on the basis of
years of service with the Company in accordance with the
normal vacation policy then in effect immediately prior to the
Change in Control;
(vii) Any breach of this Agreement on the part of the
Company; or
(viii) Failure of any successor to assume all
obligations under this Agreement.
(h) Termination for Retirement. Termination by the Company of
the Executive's employment based on "Retirement" shall mean termination
in accordance with the Corporation's normal retirement policy
applicable to its salaried employees as in effect immediately prior to
the Change in Control or in accordance with any other retirement
arrangement established with the Executive's consent with respect to
the Executive.
<PAGE> 5
2. PREVIOUS AGREEMENT TERMINATED. Any prior severance agreement in the
event of a change in control between the Company and the Executive is hereby
terminated.
3. TERM. Unless sooner terminated as herein provided, the term of this
Agreement shall commence on the date hereof and shall continue until the third
anniversary of the Commencement Date (the "Termination Date"); provided,
however, that commencing on the Termination Date and on each anniversary date
thereof the term of this Agreement shall automatically be extended for one
additional year beyond the then existing term unless, not later than one hundred
twenty (120) days immediately preceding the Termination Date of the then
existing term, the Company shall have given the Executive notice that it wishes
to terminate this Agreement in which case the Agreement shall terminate at the
end of the then existing term. The Company may not give such notice at any time
while it has knowledge that any third person has taken steps or announced an
intention to take steps reasonably calculated to effect a Change in Control.
Notwithstanding the above, if a "Change in Control" (as defined herein) of the
Company occurs during the term of this Agreement, the term of this Agreement
will be extended for twelve (12) months beyond the end of the month in which any
such Change in Control occurs. It is understood that no amounts or benefits
shall be payable under this Agreement unless (i) there shall have been a Change
in Control during the term of this Agreement and (ii) the Executive's employment
is terminated at any time during the Effective Period as provided in Section 5
hereof. It is further understood that the Company may terminate the Executive's
employment at any time after a Change in Control, subject to the Company
providing, if required to do so in accordance with the terms hereof, the
severance payments and benefits hereinafter specified, which payments and
benefits shall only be available if a Change in Control has occurred prior to
such termination. Prior to a Change in Control, this Agreement shall terminate
immediately if the Executive's employment with the Company is terminated for any
reason, and Executive shall be entitled to no payments or benefits hereunder.
4. TERMINATION FOLLOWING A CHANGE IN CONTROL. Any termination of
Executive's employment by the Company for Cause, Disability, or otherwise or by
the Executive for Good Reason, which occurs at any time during the Effective
Period, shall be communicated by written Notice of Termination to the other
party.
5. COMPENSATION UPON TERMINATION FOLLOWING A CHANGE IN CONTROL. The
Executive shall be entitled to the severance benefits provided in Section 5
hereof if his employment is terminated within the Effective Period following a
Change in Control of the Company (even if such Effective Period extends beyond
the term of this Agreement or any extension thereof) unless his termination is
(i) because of his death or Retirement, (ii) by the Company for Cause or
Disability, or (iii) by the Executive other than for Good Reason.
(a) For Cause. If, at any time during the Effective Period,
the Executive's employment shall be terminated for Cause, the Company
shall pay his full base salary through the Date of Termination at the
rate in effect at the time Notice of Termination is given, and the
Company shall have no further obligations to the Executive under this
Agreement.
(b) Death, Disability, or Retirement. If, at any time during
the Effective Period, the Executive's employment is terminated by
reason of the Executive's death, Disability, or Retirement, the Company
shall pay to the Executive or his legal representative his full
<PAGE> 6
base salary through the Date of Termination, and the Company shall have
no further obligation to the Executive or his legal representative
under this Agreement.
(c) For Good Reason or without Cause. If, at any time during
the Effective Period, the Executive's employment is terminated by the
Company for any reason other than Cause, death, Disability, or
Retirement; or is terminated by the Executive for Good Reason, at any
time during the Effective Period, then:
(i) The Company shall pay to the Executive, not later
than 30 days following the Date of Termination, the
Executive's accrued but unpaid base salary through the Date of
Termination plus compensation for any current and carried-over
unused vacation days in accordance with the applicable
personnel policy and the unpaid balance of the current year's
premiums under any split dollar life insurance policy on the
life of the Executive held by the Company.
(ii) The Company shall pay to the Executive, not
later than 30 days following the Date of Termination, an
amount in cash equal to the product of (x) the average annual
bonus paid to the Executive for the last three full fiscal
years ending prior to the Date of Termination or, if the
Executive has been employed by the Company for less than three
full fiscal years prior to the Date of Termination, the
average annual bonus paid to the Executive for the entire
period of the Executive's employment prior to the Date of
Termination and (y) the fraction obtained by dividing (A) the
number of days between the Date of Termination and the last
day of the last full fiscal year ending prior to such date and
(B) 365.
(iii) All outstanding stock options issued to the
Executive shall become 100% vested and thereafter exercisable
in accordance with such governing stock option plans and
agreements, and the ownership of the unvested portion of the
Company's cash value of any split dollar life insurance policy
shall become 100% vested in the Executive.
(iv) In lieu of any further payments of salary to the
Executive after the Date of Termination, the Company shall pay
to the Executive, not later than thirty (30) days following
the Date of Termination and notwithstanding any dispute
between the Executive and Company as to the payment to the
Executive of any other amounts under this Agreement or
otherwise, a lump sum cash severance payment (the "Severance
Payment") equal to 1.5 times the average annual compensation
which was payable to the Executive by the Company (or any
other company (an "Affiliate") affiliated with the Company
within the meaning of Section 1504 of the Internal Revenue
Code of 1986, as amended (the "Code")) and includable in the
Executive's gross income for federal income tax purposes for
the five taxable years ending prior to the date on which a
Change in Control of the Company occurred (or such portion of
such period during which the Executive performed personal
services for the Company or an Affiliate). Compensation
payable to the Executive by the Company or an Affiliate shall
include every type and form of compensation includable in the
Executive's gross income for federal income tax purposes in
respect of the Executive's employment by the Company or an
Affiliate.
<PAGE> 7
(d) Excess Parachute Payments. If any portion of the aggregate
payments under Section 5 hereof which are considered "parachute
payments" within the meaning of Section 280G(b)(2) of the Internal
Revenue Code of 1986, as amended (the "Code"), shall be determined by
the Corporation's independent auditors to be nondeductible to the
Company, then the aggregate present value of all of the amounts payable
to the Executive under Section 5(c) hereof shall be reduced to the
maximum amount which would cause all of the payments under Section 5(c)
to be deductible and in such event the executive shall have the option,
but not the obligation, to designate or select those kinds of payments
which shall be reduced and the order of such reductions, but failure of
the Executive to make such selections within a period of 30 days
following notice of the determination that a reduction is necessary
will result in a reduction of all such payments, pro rata. If the
Executive disagrees with the determination of the reduced amount by the
Company's auditors, he may contest that determination by giving notice
of such contest within 30 days of learning of the determination and may
use an accountant of his choice in connection with such contest. The
Company shall pay all of the Executive's costs in connection with such
contest if the ultimate determination by the two accountants (that of
the Company and that of the Executive) in consultation with each other,
or by a third accountant jointly chosen by the two first-named
accountants in the event the first two cannot agree, represents a
lesser reduction in the amounts payable under Section 5(c) hereof than
the Company's independent auditors established in the first instance.
Otherwise, the Executive shall pay his own and any additional costs
incurred by the Company in contesting such determination. If there is a
final determination by the Internal Revenue Service or a court of
competent jurisdiction that the Company overpaid amounts under Section
280G of the Code, the amount of the overpayment shall be treated as a
loan to the Executive and shall be repaid immediately, together with
interest on such amount at the prime rate of interest at Huntington
National Bank, Columbus, Ohio, or any successor thereto, in effect from
time to time. If the Internal Revenue Service or a court of competent
jurisdiction finally determines, or if the Code or regulations
thereunder shall change such that the Corporation underpaid the
Executive under Section 280G of the Code, the Corporation shall pay the
difference to the Executive with interest as specified above.
(e) Avoidance of Penalty Taxes. This Section 5 shall be
interpreted so as to avoid the imposition of excise taxes on the
Executive under Section 4999 of the Code, and the Executive may in his
sole discretion elect to reduce any payments he may be eligible to
receive under this Agreement to prevent the imposition of such excise
taxes.
(f) Other Rights not Affected. The Executive's right to
receive payment under this Agreement shall not decrease the amount of,
or otherwise adversely affect, any other benefits payable to the
Executive under any plan, agreement, or arrangement relating to
employee benefits provided by the Company.
(g) No Duty to Mitigate. The Executive shall not be required
to mitigate the amount of any payment provided for in this Section 5 by
seeking other employment or otherwise, nor shall the amount of any
payment provided for in this Section 5 be reduced by any compensation
earned by the Executive as the result of employment by another employer
or by reason of the Executive's receipt of or right to receive any
retirement or other benefits after the Date of Termination of
employment or otherwise.
<PAGE> 8
6. SUCCESSORS; BINDING AGREEMENT
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Company and its
subsidiaries to expressly assume and agree to perform this Agreement in
the same manner and to the same extent that the Company would be
required to perform it if no succession had taken place. Failure of the
Company to obtain such agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle the
Executive to compensation in the same amount and on the same terms as
he would be entitled hereunder if he terminated his employment for Good
Reason during the Effective Period, except that for purposes of
implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the Date of Termination. As used in
this Agreement, "Company" shall mean the Company as defined above and
any successor to its business and/or assets as aforesaid which executes
and delivers the agreement provided for in this Section 6 or which
otherwise becomes bound by all the terms and provisions of this
Agreement by operation of law. Nothing contained in this Section 6
shall be construed to modify or affect the definition of a "Change in
Control" contained in Section 1 hereof.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees,
and legatees.
7. ARBITRATION. Any dispute or controversy arising out of or relating
to this Agreement, or any breach thereof, shall be settled by arbitration in
accordance with the rules of the American Arbitration Association. The award of
the arbitrator shall be final, conclusive, and nonappealable and judgment upon
such award rendered by the arbitrator may be entered in any court having
jurisdiction thereof. The arbitrator shall mean an arbitrator qualified to serve
in accordance with the rules of the American Arbitration Association and one who
is approved by both the Company and the Executive. In the absence of such
approval, each party shall designate a person qualified to serve as an
arbitrator in accordance with the rules of the American Arbitration Association
and the two persons so designated shall select the arbitrator from among those
persons qualified to serve in accordance with the rules of the American
Arbitration Association. The arbitration shall be held in Columbus, Ohio or
other such place as may be agreed upon at the time by the parities to the
arbitration.
8. ENFORCEMENT OF AGREEMENT. The Company is aware that upon the
occurrence of a Change in Control, the Board of Directors or a shareholder of
the Company may then cause or attempt to cause the Company to refuse to comply
with its obligations under this Agreement, or may cause or attempt to cause the
Company to institute, or may institute arbitration or litigation seeking to have
this Agreement declared unenforceable, or may take or attempt to take other
action to deny the Executive the benefits intended under this Agreement. In
these circumstances, the purpose of this Agreement could be frustrated.
Accordingly, if following a Change in Control it should appear to the Executive
that the Company has failed to comply with any of its obligations under Section
5(c) of this Agreement or in the event that the Company or any other person
takes any action to declare Section 5(c) of this Agreement void or
unenforceable, or institutes any arbitration, litigation, or other legal action
designed to deny, diminish or to recover from the Executive the benefits
entitled to be provided to him under Section 5(c), and that the Executive has
complied with all his obligations under this Agreement, the Company authorizes
<PAGE> 9
the Executive to retain counsel of his choice, at the expense of the Company as
provided in this Section, to represent him in connection with the initiation or
defense of any pre-suit settlement negotiations, arbitration, litigation, or
other legal action, whether such action is by or against the Company or any
Director, officer, shareholder, or other person affiliated with the Company, in
any jurisdiction. Notwithstanding any existing or prior attorney-client
relationship between the Company and such counsel, the Company consents to the
Executive entering into an attorney-client relationship with such counsel, and
in that connection the Company and the Executive agree that a confidential
relationship shall exist between the Executive and such counsel, except with
respect to any fee and expense invoices generated by such counsel. The
reasonable fees and expenses of counsel selected by the Executive as hereinabove
provided shall be paid or reimbursed to the Executive by the Company on a
regular, periodic basis upon presentation by the Executive of a statement or
statements prepared by such counsel in accordance with its customary practices,
up to a maximum of 25% of the amount due to the Executive under Section 5(c).
Any legal expenses incurred by the Company by reason of any dispute between the
parties as to enforceability of Section 5(c) or the terms contained in Section
5(c), notwithstanding the outcome of any such dispute, shall be the sole
responsibility of the Company, and the Company shall not take any action to seek
reimbursement from the Executive for such expenses.
9. NOTICES. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed in the
case of the Executive, to:
--------------------
--------------------
--------------------
and in the case of the Company, to the principal executive offices of the
Company, provided that all notices to the Company shall be directed to the
attention of the Company's Chief Executive Officer with copies to the Secretary
of the Company, or to such other addresses as either party may have furnished to
the other in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
10. NO WAIVER. No provisions of this Agreement may be modified, waived,
or discharged unless such waiver, modification or discharge is agreed to in
writing signed by the executive and a duly authorized officer of the Company. No
waiver by either party hereto at any time of any breach by the other party
hereto of, or compliance with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time
11. SAVING. If any provision of this Agreement is later found to be
completely or partially unenforceable, the remaining part of that provision of
any other provision of this Agreement shall still be valid and shall not in any
way be affected by the finding. Moreover, if any provision is for any reason
held to be unreasonably broad as to time, duration, geographical scope, activity
or subject, such provision shall be interpreted and enforced by limiting and
reducing it to preserve enforceability to the maximum extent permitted by law.
12. GOVERNING LAW. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Ohio without reference to its choice of
law rules.
<PAGE> 10
13. FINAL AGREEMENT. This Agreement replaces any existing agreement
between the Executive and the Company relating to the same subject matter and
may be modified only by an agreement in writing signed by the parties.
MAX & ERMA'S RESTAURANTS, INC.
By:
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-----------------------------------------
Its:
------------------------------------
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EXECUTIVE
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<PAGE> 1
EXHIBIT 10(p)
List of Officers with Severance Agreements in the form of Exhibit 10(o)
Bonnie J. Brannigan, Vice President of Marketing & Planning
Larry B. Fournier, Vice President of Development
Gregory L. Heywood, Regional Vice President
<PAGE> 1
EXHIBIT 10(q)
THIRD AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
This Third Amended and Restated Revolving Credit Agreement dated as of
January 7, 2000 (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 Second Amended and Restated Revolving Credit
Agreement between the parties dated October 29, 1999. 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 October 31, 2007 (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 "Baseline Commitment"
of the Bank is $40,000,000. Any amounts outstanding under the Baseline
Commitment as of October 31, 2000 (the "Initial Term Loan") shall be payable by
the Company to the Bank in 28 equal quarterly installments of principal and
interest commencing January 31, 2001 and terminating on the Maturity Date
pursuant to the terms of the Note and Section 1.4 of this Agreement. As of
October 31, 2001, the Residual Commitment (the "Secondary Term Loan") shall be
payable by the Company to the Bank in 24 equal quarterly installments of
principal and interest commencing January 31, 2002 and terminating on the
Maturity Date pursuant to the terms of the Note and Section 1.4 of this
Agreement. The "Residual Commitment" shall equal the Baseline Commitment less
the Initial Term Loan. As of the date of the closing of the Secondary Term Loan,
the Bank shall have no further obligation to fund any Loans under this
Agreement. 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
1
<PAGE> 2
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.
1.3 Fees.
(a) 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 1/2 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.
(b) Closing Fee. As consideration for the Commitment of the
Bank, the Company paid the Bank $100,000 on July 6, 1999 an additional Closing
Fee of $75,000 on October 29, 1999. The Company shall pay to The Huntington
National Bank a fee of $25,000 upon the execution of this Agreement. The Company
hereby agrees to pay an additional Closing Fee equal to 0.25% of any new funds
above the amount of the Maximum Commitment made available to the Company by the
Bank in the future. Any such new funds shall be subject to the terms of this
Agreement as amended from time to time.
(c) Agency Fee. As consideration for the Bank agreeing to
serve as agent and participate a portion of the Commitment, the Company shall
pay to the Bank an Agency Fee of (1) $50,000 upon the execution of this
Agreement and (2) $25,000 on each November 1 thereafter until the Maturity Date.
1.4 The Note.
(a) Form. The Loans made by the Bank pursuant hereto shall be
evidenced by a Revolving Credit Note of the Company substantially in the form of
Exhibit A-3, with appropriate insertions (the "Note"), payable to the order of
the Bank and representing the
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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 Company's submission of financial
information pursuant to Section 5.2 herein beginning with the quarter ending
November, 1999. 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 according to the
following schedule based upon the ratio of the Indebtedness of the Company to
EBITDA of the Company during the immediately preceding twelve month period as of
the date of each fiscal quarter end:
<TABLE>
<CAPTION>
Ratio at quarter end Rate for following quarter
-------------------- --------------------------
<S> <C>
Less than 2.0:1.0 Either the Prime Rate minus 25 basis points or the
LIBOR Rate plus 250 basis points.
2.01 through 2.5:1.0 Either the Prime Rate plus 25 basis points or the
LIBOR Rate plus 300 basis points
Greater than 2.51:1.0 Either the Prime Rate plus 75 basis points or the
LIBOR Rate plus 350 basis points
</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. "LIBOR Rate" shall mean the offered
rate for U.S. Dollar deposits of not less than $1,000,000.00 for a period of
time equal to each Interest Period as of 11:00 A.M. City of London, England time
two London Business Days prior to the first date of each Interest Period of this
Note as shown on the display designated as "British Bankers Assoc. Interest
Settlement Rates" on the Telerate System ("Telerate"), Page 3750 or Page 3740,
or such other page or pages as may replace such pages on Telerate for the
purpose of displaying such rate; provided, however, that if such rate is not
available on Telerate
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<PAGE> 4
then such offered rate shall be otherwise independently determined by the Bank
from an alternate, substantially similar independent source available to the
Bank or shall be calculated by the Bank by a substantially similar methodology
as that theretofore used to determine such offered rate in Telerate. "London
Business Day" means any day other than a Saturday, Sunday or a day on which
banking institutions are generally authorized or obligated by law or executive
order to close in the City of London, England. Each change in the rate to be
charged hereunder will become effective without notice on the commencement of
each Interest Period based upon the Index then in effect. "Interest Period"
means each consecutive one, two, three or six month period (the first of which
shall commence on the date of this Agreement) effective as of the first day of
each Interest Period and ending on the last day of each Interest Period,
provided that if any Interest Period is scheduled to end on a date for which
there is no numerical equivalent to the date on which the Interest Period
commenced, then it shall end instead on the last day of such calendar month.
Under no circumstances will the interest rate on this Note be more than the
maximum rate allowed by applicable law.
(c) Interest Payments. Interest on the Loans shall be payable
quarterly on the last day of each January, April, July, and October, 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.
(d) Principal. Principal on the Loans shall be due and payable
pursuant to the terms of the Note and shall be due and payable in full on the
Maturity Date; provided, however, that any Excess Cash Flow payments the Company
makes shall be applied to principal reduction of the Initial Term Loan and the
Secondary Term Loan in the inverse order of maturity. The Company shall be
required to pay any Excess Cash Flow to the Bank. "Excess Cash Flow" of the
Company means, for any fiscal year, the difference between (i) the sum of net
income plus depreciation plus amortization minus (ii) the sum of required
principal debt payments plus required capital lease payments plus the cash
balance required to maintain compliance with all covenants of the Agreement plus
Unfunded Capital Expenditures. "Unfunded Capital Expenditures" means the sum of
(a)(i) the number of Company restaurants that have been open more than one year
as of the date this covenant is calculated multiplied by (ii) $47,000 plus (b)
Capital Expenditures that are not intended to be financed in a Permitted
Sale/Leaseback with an Approved Sale/Leaseback Creditor.
1.5 Prepayments and Right to Reborrow. Except as set forth below,
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. The Company may prepay all or any
portion of the principal amount of the Loans bearing interest at a LIBOR Rate,
provided that if the Company makes any such prepayment other than on the last
day of an Interest Period, the Company shall pay all accrued interest on the
principal amount prepaid with such prepayment and, on demand, shall reimburse
the Bank and hold the Bank harmless from all losses and expenses incurred by the
Bank as a result of such prepayment, including, without limitation, any losses
and expenses arising from the liquidation or reemployment of deposits acquired
to fund or maintain the principal amount prepaid. Such
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<PAGE> 5
reimbursement shall be calculated as though the Bank funded the principal amount
prepaid through the purchase of U.S. Dollar deposits in the London, England
interbank market having a maturity corresponding to such Interest Period and
bearing an interest rate equal to the LIBOR Rate for such Interest Period,
whether in fact that is the case or not. The Bank 's determination of the amount
of such reimbursement shall be conclusive in the absence of manifest error.
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.
1.7 Letters of Credit.
(a) The Company may request a Letter of Credit by completing
the Bank's then standard application for a Letter of Credit and delivering the
application to the Bank at least two days before the date on which the Letter of
Credit is to be issued. On the date the Letter of Credit is to be issued, the
Bank shall deliver the Letter of Credit to the Company, or to the Person
designated by the Company. No Letter of Credit shall be issued with an
expiration date after the Maturity Date or which is payable in a currency other
than United States dollars. Except as otherwise provided herein, all the terms
of the Letter of Credit and such standard application shall govern the Letter of
Credit. The amount of each Letter of Credit must be approved by the Bank
(provided that there shall never be more than $500,000 in face amount of Letters
of Credit outstanding), and the Bank may disapprove a Letter of Credit request
at any time for any reason. The Commitment shall be reduced by the face amount
of any Letter of Credit.
(b) The Company shall immediately reimburse the Bank for the
amount paid on all drafts drawn under Letters of Credit issued hereunder. If,
notwithstanding the foregoing sentence, the Company should fail to so
immediately reimburse the Bank, then, in addition to any other remedy which the
Bank may have with respect to such failure, any amount paid by the Bank on any
draft under a Letter of Credit shall be treated as a Loan (bearing interest as
provided in Section 1.4).
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.
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<PAGE> 6
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.
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 the interest rate per annum then in
effect plus 300 basis points.
2.6 Security. The obligations of the Company hereunder are secured
pursuant to the Security Agreements.
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:
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<PAGE> 7
(a) Note. A properly executed Revolving Credit Note, drawn to
the order of the Bank in the principal amount of the Bank's Commitment.
(b) Security Agreements. A properly executed Third Amended and
Restated Security Agreement in the form attached hereto as Exhibit B-1 (the
"Personal Property Security Agreement") and a properly executed Amended and
Restated Intellectual Property Security Agreement in the form attached hereto as
Exhibit B-2 (the "Intellectual Property Security Agreement" and, collectively
with the Personal Property Security Agreement, the "Security Agreements").
(c) Financing Statements, Assignments, Etc. 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 Agreements 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 Agreements.
(f) Opinion of Counsel. The counsel for the Company
("Counsel"), shall deliver a revised version of its October 29, 1999 opinion,
addressed to the Bank and each of the participants, and in a form and scope
satisfactory to the Bank, to the following effect-
(g) Payments Due at Closing. The Company shall pay the
Closing Fee described in Section 1.3(b), and the out-of-pocket expenses of the
Bank incurred in connection with the closing, including, without limitation,
legal fees and lien search expenses.
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
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<PAGE> 8
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.
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 Agreements. 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 25 , 1998; (b) an audited statement of operations for the year ended
October 25, 1998, (c) an audited statement of shareholders' equity for the year
ended October 25 , 1998; and (d) an audited statement of cash flow for the year
ended October 25 , 1998. The Company has also furnished to the Bank unaudited
financial statements for the interim period ending on, and as of August 1, 1999.
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 1, 1999, 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.
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<PAGE> 9
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
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, 1999 except properties held under
leases which are capitalized in accordance with GAAP 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.
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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 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 of
AUGUST 1, 1999; (b) as disclosed to the Bank in writing prior to the execution
of this Agreement; and (c) debt, contractual commitments, canceled 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 Agreements. 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 4.11, (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.
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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 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 Agreements.
4.18 Perfection. The provisions of the Security Agreements 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 Agreements 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 Agreements, 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 (a) repayment of term indebtedness owing to the
Bank, (b) store expansion, (c) common stock repurchases and (d) general working
capital purposes; provided, however, that the maximum amount of Loan proceeds
that may be used to repurchase common stocks is $20,000,000.
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
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GAAP 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 GAAP and certified as complete and
correct, subject to changes resulting from year-end adjustments, by the chief
financial officer of the Company.
(c) Within 45 days after the end of each quarterly accounting
periods of the Company's fiscal year, a report that lists (i) all new store
openings in such quarter, (ii) the addresses of all new stores (including the
county where such store is located) and (iii) the proceeds used by the Company
from Loans made hereunder to acquire assets that are intended to be financed in
a Permitted Sale/Leaseback with an Approved Sale/Leaseback Creditor.
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 GAAP 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.
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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.
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.
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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 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
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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 a form acceptable to the Bank.
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 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.
5.21. Interest Rate Protection. The Company shall maintain an interest
rate protection agreement concerning a minimum of $20,000,000 of the Commitment
in a form substantially similar to the interest rate swap described in the
letter agreement dated December 1, 1999 between the Company and National City
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;
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(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 GAAP;
(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) Existing Liens of General Electric Capital
Corporation encumbering not more than four
(4) restaurant locations which shall secure
Indebtedness of the Company incurred in a
Permitted Sale/Leaseback; and
(ix) Liens related to Indebtedness incurred in a
Permitted Sale/Leaseback.
(b) Subsidiaries. Create or suffer to exist any Subsidiaries
other than those listed on Schedule 4.11 hereof unless such Subsidiaries sign
the appropriate documentation
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subjecting each such Subsidiary to the terms and conditions of this Agreement
including, without limitation, terms which evidence that the repayment of the
Indebtedness is secured by all of the assets of such Subsidiary.
(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 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's 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; Change of
Control; Change of Management. 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 a Permitted Sale/Leaseback with an Approved
Sale/Leaseback Creditor shall be permitted. The Company shall not suffer a
Change of Control to occur. "Change of Control" means that the individuals
serving as the officers and the Board of Directors of the Company as of the date
of this Agreement fail to own at least 30% of the outstanding common stock of
the Company or the composition of the Board of Directors of the Company changes
so that at least 6 (which 6 Directors must include Todd B. Barnum, Mark F.
Emerson and William C. Niegsch, Jr.) of the 8 Directors sitting in such office
as of the date of this Agreement are not serving as a Director of the Company
without the prior written consent of the Bank. The Company shall not suffer a
change in management of the Company such that Todd B. Barnum is no longer the
President and either Mark F. Emerson or William C. Niegsch, Jr. is no longer an
officer of the Company, without the prior written consent 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 any future sale and leaseback transaction with Franchise Finance
Corporation of America, General Electric Capital Corporation or any other
creditor that issues a commitment (in form and substance satisfactory to the
Bank) to provide sale/leaseback financing to the Company (an "Approved
Sale/Leaseback Creditor") shall be deemed to be permitted hereunder if it meets
all the following conditions: (1) no Default or Event of Default exists
hereunder and (2) the Company has received reasonably equivalent value in the
transaction (a "Permitted Sale/Leaseback").
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(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 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.
6.2 Financial Ratios. The Company will not:
(a) Current Ratio. After November 1, 1999, permit the ratio of
Current Assets to Current Liabilities at any time to be less than 0.35 to 1.
(b) Liabilities/Tangible Net Worth Ratio. Permit the ratio of
Liabilities to Tangible Net Worth at any time to exceed (i) 17.0 to 1 on October
31, 2001, (ii) 10.0 to 1 on October 31, 2002, (iii) 7.5 to 1 on October 31,
2003, (iv) 5.0 to 1 on October 31, 2004, (v) 3.5 to 1 on October 31, 2005 and
thereafter.
(c) Fixed Charge Coverage Ratio. Permit the ratio of Fixed
Charge Coverage Ratio at the end of any fiscal quarter commencing with the
fiscal quarter ending on October 31, 1999 for the immediately preceding four
fiscal quarters to be less than 1.15 to 1. "Fixed Charge Coverage Ratio" means,
for the Company during the four fiscal quarter period being measured, the
quotient of (a) the sum of (i) net income (adjusted upward to the extent
non-recurring, non-cash charges are reflected therein and adjusted downward to
the extent non-recurring, non-cash gains are reflected therein), plus (ii)
depreciation plus (iii) accrued interest expense plus (iv)
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income taxes payable during such period plus (v) amortization minus (vi) one
time non-cash charges reflected within net income, divided by (b) the sum of (v)
current maturities of other long term indebtedness plus (w) current maturities
of capitalized lease obligations plus (x) accrued interest expense plus (y)
either (1) before October 31, 2000 , the amount of Indebtedness outstanding
under the Note on the fiscal quarter end date this ratio is being measured
divided by seven or (2) after October 31, 2000 but before October 31, 2001, (A)
the amount of long term Indebtedness of the Company outstanding under the
Initial Term Loan that matured in the prior 12 months plus (B) the amount of
long term Indebtedness of the Company outstanding under the Residual Commitment
on the fiscal quarter end date this ratio is being measured divided by six or
(3) after October 31, 2001, the amount of long term Indebtedness of the Company
outstanding under the Initial Term Loan on the fiscal quarter end date this
ratio is being measured plus the amount of long term Indebtedness of the Company
outstanding under the Secondary Term Loan on the fiscal quarter end date this
ratio is being measured plus (z) Store Capital Expenditures in the prior 12
months. "Store Capital Expenditures" means the greater of (A) the product of (i)
the number of Company restaurants that have been open more than one year as of
the fiscal quarter end date this ratio is being measured multiplied by (ii)
$47,000 or (B) the actual Capital Expenditures on such restaurants during the
preceding four fiscal quarters.
(d) Earnings Before Taxes. As of each fiscal quarter end,
permit the sum of its net income before taxes plus one time non-cash charges
reflected within net income for the then-present fiscal quarter and the one
immediately preceding fiscal quarter to be less than $0.
(e) Tangible Net Worth. Permit its Tangible Net Worth to be
less than (i) $3,000,000 from the date hereof through October 31, 2001, (ii)
$4,500,000 from November 1, 2001 through October 31, 2002, (iii) $6,000,000 from
November 1, 2002 through October 31, 2003, (iv) $7,500,000 from November 1, 2003
through October 31, 2004, (v) $9,000,000 from November 1, 2004 through October
31, 2005, (vi) $10,500,000 from November 1, 2005 through October 31, 2006 and
(vii) $12,000,000 from November 1, 2006 the Maturity Date.
(f) Interest Coverage Ratio. As of each fiscal quarter end for
the immediately preceding four fiscal quarters, permit the ratio of (a) (i) the
Company's net income plus (ii) interest plus (iii) taxes plus (iv) one time
non-cash charges reflected within net income to (b) the Company's interest
expense to be less than 2.5 to 1.0.
(g) Senior Debt to EBITDA. Permit the ratio of (i) the
Company's Indebtedness to (ii) the Company's EBITDA (excluding one time charges
in an amount up to $2,000,000 related to the termination of the Ironwoods Cafe
concept) to be greater than 3.0 at the end of any fiscal quarter commencing with
the fiscal quarter ending on October 31, 1999 for the immediately preceding four
fiscal quarters.
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.
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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 no less favorable
to the Company than would obtain in an arm's length transaction with a Person
not an Affiliate of the Company.
6.5 Limitation on Store Openings; Notice of Store Openings. The Company
will not open more than ten new stores per fiscal year. The company will notify
the Bank of each new store opening by delivering an updated Exhibit C that
contains a complete list of all borrower's operating stores.
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;
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(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 $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
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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.
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.
"Approved Sale/Leaseback Creditor" is defined at Section
6.1(e).
"Bank" is identified in the preamble.
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"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 GAAP.
"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 GAAP.
"Current Liabilities" shall mean all Liabilities as may
properly be classified as current Liabilities in accordance with GAAP 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).
"EBITDA" shall mean earnings of the Company before interest,
taxes, depreciation and amortization, as determined in accordance with GAAP.
"Environmental Requirements" is defined at Section 4.16.
"ERISA" is defined at Section 4.8.
"Events of Default" is defined at Section 7.
"GAAP" means generally accepted accounting principles
consistently applied, as reflected in the financial statements delivered
pursuant to Section 4.3 hereof.
"Hazardous Materials" is defined at Section 4.16.
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"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
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; provided, however, that Indebtedness shall not
include any Capital Expenditures which qualify for a Permitted Sale/Leaseback
with an Approved Sale/Leaseback Creditor.
"Initial Term Loan" is defined at Section 1.1(b).
"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.
"Letter of Credit" means a commercial letter of credit issued
hereunder by the Bank pursuant to this Agreement on behalf of the Company.
"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 GAAP 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 the reimbursement obligations under a Letter
of Credit 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 Agreements
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 1.1(b).
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"Net Income" shall mean for any period the net income (loss)
of the Company incurred during such period as determined in accordance with.
"Note" is defined at Section 1.4(a).
"Permitted Sale/Leaseback" is defined at Section 6.1(e).
"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).
"Residual Commitment" is defined at Section 1.1(b).
"Secondary Term Loan" is defined at Section 1.1(b).
"Security Agreements" 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 GAAP, 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 GAAP, 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.
25
<PAGE> 26
"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 GAAP consistent with those applied
in the preparation of the financial statements of the Company at the date
hereof.
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
26
<PAGE> 27
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
be 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.
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. GIULIOLI
---------------------------- ------------------------
Name: William C. Niegsch, Jr. Name: Michael G. Giulioli
Its: Chief Financial Officer Its: Senior Vice President
27
<PAGE> 28
EXHIBIT A-3
REVOLVING CREDIT NOTE
DOCUMENT #192053
<PAGE> 29
EXHIBIT B-1
THIRD AMENDED AND RESTATED PERSONAL PROPERTY SECURITY AGREEMENT
DOCUMENT #192054
<PAGE> 30
EXHIBIT B-2
AMENDED AND RESTATED INTELLECTUAL PROPERTY SECURITY AGREEMENT
DOCUMENT #192055
<PAGE> 31
EXHIBIT C
MAX & ERMA'S RESTAURANTS, INC.
AT THE FOLLOWING LOCATIONS:
ADDRESS COUNTY
4849 Evanswood Drive, Columbus, Ohio Franklin
739 S. Third St., Columbus, Ohio 43206 Franklin
1904 Lake Club Drive, Columbus, Ohio 43232 Franklin
8901 Kingsridge Drive, Dayton, Ohio 45459 Montgomery
8930 Wesleyan Road, Indianapolis, IN 46268 Marion
4550 Kenny Road, Columbus, Ohio 43220 Franklin
31205 Orchard Lake Road, Farmington Hills, MI 48334 Oakland
1275 E. Dublin-Granville Road, Columbus, Ohio 43229 Franklin
8817 US 31 South, Indianapolis, IN 46227 Marion
630 Stanwix St., Pittsburgh, PA 15222 Allegheny
70 N. Adams Road, Rochester Hills, MI 48309 Oakland
37714 Six Mile Road, Livonia, MI 48152 Wayne
411 Metro Place North, Dublin, Ohio 43017 Franklin
5533 Walnut Street, Shadyside, PA 15232 Allegheny
1910 Cochran Road, Pittsburgh, PA 15220 Allegheny
250 Merrill Street, Birmingham, MI 48009 Oakland
5899 East 86th Street, Indianapolis, IN 46250 Marion
220 City Center Drive, Columbus, Ohio 43215 Franklin
445 E. Eisenhower Blvd., Suite 1, Ann Arbor, MI 48108 Washtenaw
1106 Old River Road, Cleveland, Ohio 44113 Cuyahoga
306 Rand Road, Arlington Heights, IL 60004 Cook
3750 W. Market St., Fairlawn, Ohio 44333 Summit
30105 Detroit Road, Westlake, Ohio 44115 Cuyahoga
2739 Fairfield Commons, Beavercreek, OH 45431 Greene
447 N. Milwaukee Ave., Vernon Hills, IL 60061 Lake
7800 Montgomery Road, Kenwood, Ohio 45236 Hamilton
<PAGE> 32
27466 Novi Road, #B237, Novi, MI 48377 Oakland
3191 28th St., SE, Grand Rapids, MI 49508 Kent
2020 W. 75th Street, Woodridge, Ill 60517 DuPage
2475 Higgins Road, Hoffman Estates, IL 60195 Cook
1317 Hamilton Road, Gahanna, OH 43230 Franklin
8619 J.W. Clay Blvd., Charlotte, NC 28262 Mecklenburg
6930 Miller Lane, Dayton, Ohio 45414 Montgomery
936 Sheraton Drive, Mars, PA 16046 Allegheny
201 S. Bridewell Drive, Burr Ridge, IL 60521 DuPage
33675 Solon Road, Solon, OH 44139 Cuyahoga
6420 Grand Avenue, Gurnee, IL 60031 Lake
3030 Lakecrest Circle, Lexington, KY 40513 Fayette
130 Andrew Drive, Pittsburgh, PA 15275 Allegheny
2240 Canton Center North, Canton, MI 48187 Wayne
1155 Mt. Vernon Highway, Atlanta, GA 30338 Fulton
3040 Steve Reynolds Blvd., Duluth, GA 30095 Gwinnett
36 Beacon Drive, Greenville SC 29615 Greenville
1515 Polaris Parkway, Columbus, OH 43240 Franklin
4279 Cemetery Road, Hilliard, OH 43026 Franklin
1391 Arrowhead Drive, Maumee, OH 43537 Lucas
28254 Diehl Road, Warrenville, IL 60555 DuPage
1848 Alysheba Way, Lexington, KY 40509 Fayette
7085 Engle Road, Middleburg Heights, OH 44130 Cuyahoga
2740 Mosside Blvd, Monroeville, PA 15146 Allegheny
2080 Interchange Road, Erie PA 16509 Erie
9226 Schulze Drive, West Chester, OH 45069 Butler
<PAGE> 1
EXHIBIT 10 (r)
1999 EXECUTIVE CASH BONUS POOL
- ------------------------------
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:
4% of Adjusted Operating Earnings up to $4,650,000
13% of Adjusted Operating Earnings from $4,650,000 to $6,200,000
20% of Adjusted Operating Earnings over $6,200,000
FURTHER RESOLVED, that Adjusted Operating Earnings for this purpose
shall mean operating income plus the accrual for this executive bonus
program, plus any nonrecurring charges for the fiscal year (including,
for example, any charges for closing restaurants), less any
nonrecurring gains (including, for example, any gain on the sale of
restaurant assets);
FURTHER RESOLVED, that the cash bonus pool be allocated and paid 40% to
Mr. Barnum; and 20% to each of Mr. Emerson, Mr. Niegsch, and Mrs.
Brannigan;
FURTHER RESOLVED, that the cash bonus pool be paid quarterly based on
estimates and adjusted for the annual amount at the fiscal year-end;
FURTHER RESOLVED, that the Company's officers attempt through estimates
of annual Adjusted Operating Earnings to spread the quarterly bonus
evenly throughout the four quarters; and
FURTHER RESOLVED, that the cash bonus pool not be capped.
<PAGE> 1
EXHIBIT 13
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In Thousands, except per share OCTOBER 31 OCTOBER 25 OCTOBER 26 OCTOBER 27 OCTOBER 29 OCTOBER 30
and other data and ratios) 1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Revenues $108,640 $ 100,531 $ 91,626 $ 79,858 $ 64,198 $ 56,127
Operating Income 2,331 5,243 5,967 5,312 4,427 3,740
Interest Expense 1,672 1,839 2,704 2,060 1,208 851
Income Before Income Taxes 550 3,322 3,173 3,176 3,061 2,817
Extraordinary Loss (346)
Cumulative Effect of
Accounting Change (207)
Net Income 141 2,337 2,225 2,161 2,139 2,001
Proforma Net Income Assuming
Retroactive Change 348 2,390 2,313 2,248 1,884 2,124
Depreciation and Amortization 4,899 5,868 5,839 5,515 4,201 3,599
EBITDA* 7,121 11,029 11,716 10,750 8,470 7,268
Capital Expenditures 14,250 10,016 10,381 13,898 16,191 7,700
PER DILUTED SHARE DATA
Extraordinary Loss $ (.11)
Cumulative Effect of
Accounting Change (.06)
Net Income .04 $ .55 $ .53 $ .51 $ .50 $ .47
Proforma Net Income Assuming
Retroactive Change .10 .57 .55 .53 .44 .50
Revenues 32.43 23.78 21.78 18.73 15.04 13.26
Assets 16.39 10.87 15.21 13.72 11.43 7.65
Stockholders' Equity 3.25 4.41 4.75 4.20 3.65 3.24
Average Shares Outstanding 3,350 4,226 4,206 4,264 4,268 4,232
FINANCIAL POSITION
Cash and Equivalents $ 1,319 $ 2,151 $ 1,149 $ 927 $ 1,102 $ 993
Working Capital Deficit (6,271) (2,632) (4,290) (5,067) (3,316) (2,526)
Property-Net 46,841 38,097 58,084 52,715 42,502 27,530
Total Assets 54,897 45,958 63,956 58,484 48,800 32,383
Long-Term Obligations
(Less Current Maturities) 33,914 20,010 36,359 32,349 26,037 13,639
Stockholders' Equity 10,878 18,648 19,969 17,908 15,600 13,712
OTHER DATA AND RATIOS
Average Restaurant Sales $ 2,239 $ 2,140 $ 2,174 $ 2,209 $ 2,172 $ 2,191
Company-owned Restaurants
in Operation at Year End 53 49 44 39 33 27
Restaurant Profit Margin 11.9% 12.3% 12.8% 13.0% 14.4% 14.1%
Operating Profit Margin 2.1% 5.2% 6.5% 6.7% 6.9% 6.7%
Long-Term Debt-to-Equity Ratio 3.1 1.1 1.8 1.8 1.7 1.0
Market Price Per Share at Year End $ 6.63 $ 6.38 $ 6.31 $ 6.63 $ 7.63 $ 7.73
Price Earnings Ratio (High/Low) N/M 14.8/10.7 13.9/9.4 16.2/10.8 16.8/12.0 20.8/14.5
Return on Beginning Assets .3% 3.7% 3.8% 4.4% 6.6% 8.1%
Return on Beginning Equity .8% 11.7% 12.4% 13.9% 15.6% 20.0%
</TABLE>
* EBITDA, Earnings Before Interest, Taxes Depreciation and Amortization,
is operating income plus depreciation and amortization, less minority
interests in income of affiliated partnerships. EBITDA for 1999 and
1998, respectively, was reduced by a $2,000,000 and $575,000 loss on
disposition of assets. EBITDA is not intended to represent cash flow
from operations as defined by generally accepted accounting principles.
5 Max & Erma's Restaurants, Inc.
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
REVENUES
Revenues for 1999 increased $8,108,000 or 8.1% from 1998. The increase was a
result of i) opening four Max & Erma's restaurants during 1999, ii) opening two
Ironwood Cafe restaurants during 1999, iii) the opening of five Max & Erma's and
one Ironwood Cafe restaurants during 1998, iv) one additional week in fiscal
1999, and (v) a $134,000 or 0.2% increase in sales at restaurants opened 18
months or more. These factors offset the closing of two Max & Erma's restaurants
during the third quarter of 1998 and first quarter of 1999, and the closing of
the original Ironwood Cafe during the second quarter of 1999.
Revenues for 1998 increased $8,904,000 or 9.7% from 1997. The increase was a
result of i) opening five Max & Erma's restaurants during 1998, ii) opening five
Max & Erma's 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.
Extremely harsh winter weather during the first two weeks of January for the
most part offset positive same-store sales the remainder of 1999. During that
two-week period same-store sales declined $650,000 or 20%. Exclusive of that two
week period same-store sales rose $784,000 or 0.9% from 1998 to 1999. The
decline in same-store sales from 1997 to 1998 of 0.7% was a result of a 4%
decline in same-store beverage sales and a planned reduction of the frequency
and dollar amount of couponing and discounting. During the third quarter of 1998
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 of 1998 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 the coupon program
would not have been profitable sales.
The Company anticipates an increase in the revenue growth rate in fiscal 2000
due to i) an increase in the unit growth rate from four or five restaurants per
year to eight per year, ii) additional franchise openings, and iii) positive
same-store sales trends which developed during the second half of 1999. The
Company expects to open eight restaurants during 2000. Three restaurants were
under construction at the end of the year. Construction commenced on two
additional restaurants early in the first quarter of 2000. A franchised Max &
Erma's restaurant opened on the Ohio Turnpike early in the first quarter of
2000. Additionally, the Company's first multi-unit franchise agreement was
signed during 1999. The agreement requires the opening of the first of four Max
& Erma's restaurants in Richmond and Charlottesville, Virginia by August, 2000.
Finally, a redirecting of the Company's advertising expenditures away from mass
media and discounting and toward local store, relationship-based marketing has
resulted in positive same-store sales of 1.0% and 1.4%, respectively, for the
third and fourth quarters of 1999. Management believes these trends will
continue into 2000.
RESTAURANT OPERATING PROFIT
The following table sets forth the Company's restaurant operating profit as a
percentage of revenues:
<TABLE>
<CAPTION>
October 31, October 25, October 26,
1999 1998 1997
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of Goods Sold (25.8) (26.5) (27.0)
Payroll & Benefits (32.0) (31.3) (31.0)
Other Operating Expenses (29.8) (29.2) (28.2)
Preopening Costs (0.5) (0.7) (1.0)
----- ----- -----
Restaurant Operating Profit 11.9% 12.3% 12.8%
----- ----- -----
</TABLE>
Cost of goods sold, as a percentage of revenues, decreased from 27.0% for 1997
to 26.5% for 1998 and to 25.8% for 1999. The decrease from 1997 to 1998 was a
result of higher beef prices during 1997, which declined during 1998, and menu
changes made at the start of 1998, which removed certain higher cost menu items.
Additionally, slower selling items were eliminated in an effort to cut waste.
The decrease in 1998 occurred despite sharply higher produce and dairy costs.
The decrease from 1998 to 1999 occurred as produce and dairy prices returned to
normal levels, while most other inventory costs remained stable. Menu prices
increased 2% to 3% annually over the periods reported.
Payroll and benefits, as a percentage of revenues, increased from 31.0% in 1997
to 31.3% in 1998 and to 32.0% in 1999. 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, increased from 28.2% for
1997 to 29.2% for 1998 and to 29.8% for 1999. The increases were primarily a
result of the sale-leaseback of eight restaurant properties at the start of 1998
and five restaurant properties at the end of 1998. On an annualized basis the
two transactions increased rent approximately $2,280,000 and reduced
depreciation approximately $570,000 for a net increase to other operating
expenses of approximately $1,710,000 or 1.6%, as a percentage of
Max & Erma's Restaurants, Inc. 6
<PAGE> 3
1999 revenues. Exclusive of the effect of the two sale-leaseback transactions,
other operating expenses, as a percentage of revenues, remained relatively
constant over the periods reported.
Preopening costs, as a percentage of revenues, declined from 1.0% in 1997 to
0.7% in 1998 and to 0.5% in 1999. The variation in this expense category is a
result of the Company's adoption of AICPA Statement of Position 98-5, "Reporting
the Costs of Start-Up Activities", which requires that pre-opening expenses be
expensed as incurred rather than capitalized. Prior to adoption of the new
standard on October 26, 1998, the first day of fiscal 1999, the Company
amortized pre-opening expenses over a 12-month period. Variation in this expense
will occur as a result of the number and timing of restaurant openings.
Additionally, the decline from 1998 to 1999 was a result of the amortization
during 1998 exceeding the incurred expenses for restaurants opened during 1999.
The cumulative effect on prior years of the accounting change resulted in a 1999
charge of $207,000, net of tax, or $0.06 per diluted share. Management believes
that pre-opening expenses will increase during fiscal 2000 as the number of
restaurant openings increases.
LOSS ON DISPOSITION OF ASSETS
During fiscal 1999, the Company recorded a $2,000,000 loss on the disposition of
assets related to the closing of the three Ironwood Cafe restaurants, one of
which closed during the second quarter. The remaining two will be closed or sold
in the first quarter of fiscal 2000. Only one of the three restaurants
maintained a sales level within the targeted range. None of the three
restaurants achieved profitability. The Company decided there was no expansion
potential for the concept and that its resources could more effectively be used
elsewhere. In addition to the loss on disposition of assets, operating losses
and overhead expenses of Ironwood Cafe totaled approximately $468,000 and
$315,000 in 1999 and 1998, respectively.
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.
INTEREST EXPENSE
Interest expense decreased 47% from $2,704,000 in 1997 to $1,839,000 in 1998 and
decreased an additional 9% to $1,672,000 in 1999. The decreases were primarily a
result of the two sale-leaseback transactions during 1998. The Company received
net proceeds of $25.5 million from the two transactions, all of which were used
to reduce borrowings under the Company's revolving credit line, resulting in an
annual interest savings of approximately $2.2 million. This savings was
partially offset by interest on $12,000,000 of borrowings under the Company's
revolving credit line used to repurchase approximately 1.5 million shares of the
Company's common stock since the fourth quarter of 1998.
During 1999, the Company also 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 $346,000, net
of tax ($0.11 per diluted share), related to the early extinguishment of debt.
Interest rates during the periods reported were relatively stable and ranged
from 8.25% to 9.0%. At October 31, 1999 the interest rate under the Company's
revolving credit line was 8.75%. The Company capitalized $215,000, $177,000 and
$285,000 of construction period interest during 1997, 1998 and 1999,
respectively.
At the end of fiscal 1999, the Company increased its revolving credit line to
$30.0 million, a portion of which was used to repay a $3.5 million short-term
bank note. In the first quarter of fiscal 2000 the Company's revolving credit
line was further increased to $40.0 million. Total borrowings under the
revolving credit line were approximately $23.0 million at October 31, 1999.
During the first quarter of fiscal 2000 the Company expects to complete two
sale-leaseback transactions on six restaurant properties. The proceeds of the
two transactions will be used to pay off an existing $5.2 million mortgage and
reduce borrowings under the revolving credit line by approximately $7.8 million.
INCOME TAXES
The Company's effective tax rate remained relatively steady at approximately 30%
during 1997 and 1998. During 1999, the Company reported an income tax credit of
$144,000, primarily associated with the FICA tax on tips credit. At historical
levels of pre-tax income, these tax credits have generally served to reduce the
Company's effective tax rate to approximately 30%.
YEAR 2000
During 1999, the Company successfully upgraded its computer system and software
to be Year 2000 compliant. During 1998 and 1999 the Company expended
approximately $145,000 in upgrades to computer hardware and software at both the
corporate office and restaurant level to become Year 2000 compliant. The Company
experienced no material problems with its systems or third party vendors related
to the Year 2000.
7 Max & Erma's Restaurants, Inc.
<PAGE> 4
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital ratio decreased from .6 to 1 at October 25, 1998
to .4 to 1 at October 31, 1999, principally due to increased trade and
construction payables. 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 1999, the Company expended approximately $14,250,000 for property
additions, $43,335,000 to reduce long-term obligations, and $8,094,000 to
repurchase approximately 1,049,000 shares of its common stock. Funds for such
expenditures were provided primarily by $56,825,000 from proceeds of long-term
obligations, $8,340,000 from operations and a decrease in cash of $832,000. The
Company routinely draws down and repays its revolving credit line, the gross
amounts of which are included in the above numbers.
At October 31, 1999, the Company was committed to the opening of eight Max &
Erma's during 2000. Purchase contracts or leases have been signed for all
restaurants scheduled to open in 2000. At October 31, 1999, three Max & Erma's
were under construction and scheduled to open during the first half of 2000.
Construction commenced during the first quarter of 2000 on two additional Max &
Erma's restaurants.
The Company expects to expend an additional $15.0 million on the construction of
the eight Max & Erma's planned for 2000. The Company has signed purchase
contracts or leases for all eight Max & Erma's locations planned for fiscal
2000. It is likely that the Company would expend $8 to $9 million dollars during
2000 on locations scheduled to open in 2001.
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
borrowings under the Company's revolving credit line. At October 31, 1999, the
Company had available approximately $7.0 million under its $30.0 million
revolving credit line along with $4.3 million of equipment lease commitments.
During the first quarter of fiscal 2000, the Company's revolving credit line was
increased to $40.0 million. Additionally, the Company had approximately $42.6
million of commitments for sale-leaseback financing of real estate. During the
first quarter of 2000, the Company expects to complete the sale-leaseback of six
properties. The sale proceeds of approximately $13 million will be used to pay
off a $5.2 million mortgage and reduce the outstanding balance under its
revolving credit line by approximately $7.8 million. The remaining commitment of
approximately $28.6 million may be used for the sale-leaseback of 13 properties
through January, 2002.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards(SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS 133, as amended by SFAS No.137, is required to be
adopted for the Company's 2001 annual consolidated financial statements. The
Company has not determined what, if any, impact the adoption of this standard
will have on its consolidated financial statements. The Company is therefore
unable to disclose the impact that adopting SFAS 133 will have on its financial
position and results of operations when such statement is adopted.
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), the
continuation of positive same-store sales trends (paragraph 4), the expected
opening of franchise restaurants (paragraph 4), expected increases in
pre-opening expenses (paragraph 9), the timing and completion of sale-leaseback
transactions (paragraph 15 and 22) and the opening, cost and financing of
additional Max & Erma's restaurants (paragraphs 20, 21 and 22).
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 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.
Max & Erma's Restaurants, Inc. 8
<PAGE> 5
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31 OCTOBER 25
1999 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 1,318,944 $ 2,151,323
Receivables:
Trade and other 207,376 602,370
Equipment deposits 124,928
----------- -----------
TOTAL RECEIVABLES 332,304 602,370
Inventories 929,364 855,202
Supplies 222,187 220,998
PREPAID EXPENSES:
Income taxes 386,581 161,743
Insurance 66,767 191,234
Other 127,047 96,647
Preopening costs (less accumulated amortization,-$411,273) 339,768
Deferred income taxes 450,000 50,000
----------- -----------
TOTAL CURRENT ASSETS 3,833,194 4,669,285
PROPERTY-AT COST:
Land and buildings 28,897,922 21,532,100
Leasehold improvements 24,079,005 21,744,580
Equipment and fixtures 18,563,845 16,956,707
Construction in progress 1,787,278 423,359
----------- -----------
Total 73,328,050 60,656,746
Less accumulated depreciation and amortization 26,486,963 22,559,784
----------- -----------
PROPERTY-NET 46,841,087 38,096,962
OTHER ASSETS:
Goodwill (less accumulated amortization, 1999-$806,144; 1998-$754,319) 133,388 185,213
Deferred costs (less accumulated amortization, 1999-$37,931; 1998-$435,783) 1,029,818 866,857
Deferred income taxes 1,976,000 1,252,000
Miscellaneous (less accumulated amortization, 1999-$127,702; 1998-$109,523) 1,083,219 887,639
----------- -----------
TOTAL OTHER ASSETS 4,222,425 3,191,709
----------- -----------
TOTAL $54,896,706 $45,957,956
=========== ===========
</TABLE>
See notes to consolidated financial statements.
9 Max & Erma's Restaurants, Inc.
<PAGE> 6
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31 OCTOBER 25
1999 1998
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations $ 736,475 $ 772,634
Accounts payable 3,331,951 2,059,841
Construction payables 2,070,464 778,685
Accrued liabilities:
Payroll and related taxes 1,209,867 1,656,381
Taxes, other than income taxes 1,417,484 1,074,508
Utilities 526,502 420,979
Other 811,848 537,769
----------- -----------
Total accrued liabilities 3,965,701 3,689,637
----------- -----------
TOTAL CURRENT LIABILITIES 10,104,591 7,300,797
LONG-TERM OBLIGATIONS-
Less current maturities 33,913,675 20,009,596
COMMITMENTS AND CONTINGENCIES (Notes 1, 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:
1999-2,746,737 shares; 1998-3,772,388 shares 274,674 377,239
Additional capital 7,655,299
Retained earnings 10,603,766 10,615,025
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 10,878,440 18,647,563
----------- -----------
TOTAL $54,896,706 $45,957,956
=========== ===========
</TABLE>
See notes to consolidated financial statements.
Max & Erma's Restaurants, Inc. 10
<PAGE> 7
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Y E A R E N D E D
OCTOBER 31 OCTOBER 25 OCTOBER 26
(53 weeks) 1999 (52 weeks) 1998 (52 weeks) 1997
<S> <C> <C> <C>
REVENUES $ 108,639,772 $ 100,530,584 $ 91,626,226
------------- ------------- -------------
OPERATING EXPENSES:
Cost of goods sold 28,035,861 26,626,172 24,768,549
Payroll and benefits 34,808,482 31,478,566 28,404,596
Other operating expenses 32,369,479 29,298,904 25,873,139
Administrative expenses 8,560,018 6,590,443 5,732,267
Preopening costs 534,739 718,327 880,696
Loss on disposition of assets 2,000,000 575,000
------------- ------------- -------------
TOTAL OPERATING EXPENSES 106,308,579 95,287,412 85,659,247
------------- ------------- -------------
OPERATING INCOME 2,331,193 5,243,172 5,966,979
INTEREST EXPENSE 1,671,969 1,838,608 2,703,781
MINORITY INTERESTS IN INCOME OF
AFFILIATED PARTNERSHIPS 109,465 82,076 90,447
------------- ------------- -------------
INCOME BEFORE INCOME TAXES 549,759 3,322,488 3,172,751
------------- ------------- -------------
INCOME TAXES:
State and local 52,000 235,000 202,000
Federal:
Current 842,000 1,423,000 902,000
Deferred (credit) (1,038,000) (673,000) (156,000)
------------- ------------- -------------
TOTAL INCOME TAXES (CREDIT) (144,000) 985,000 948,000
------------- ------------- -------------
INCOME BEFORE EXTRAORDINARY ITEM
AND CHANGE IN ACCOUNTING PRINCIPLE $ 693,759 $ 2,337,488 $ 2,224,751
EXTRAORDINARY LOSS (346,000)
CUMULATIVE EFFECT ON PRIOR YEARS OF
CHANGE IN ACCOUNTING PRINCIPLE (207,000)
------------- ------------- -------------
NET INCOME $ 140,759 $ 2,337,488 $ 2,224,751
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
11 Max & Erma's Restaurants, Inc.
<PAGE> 8
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Y E A R E N D E D
OCTOBER 31 OCTOBER 25 OCTOBER 26
(53 weeks) 1999 (52 weeks) 1998 (52 weeks) 1997
<S> <C> <C> <C>
INCOME PER SHARE BEFORE EXTRAORDINARY LOSS
AND CHANGE IN ACCOUNTING PRINCIPLE:
Basic $ .21 $ .56 $ .53
---------- ---------- ----------
Diluted $ .21 $ .55 $ .53
---------- ---------- ----------
EXTRAORDINARY LOSS PER SHARE:
Basic and Diluted $ (.11)
----------
CHANGE IN ACCOUNTING PRINCIPLE PER SHARE
Basic and Diluted $ (.06)
----------
NET INCOME PER SHARE
Basic $ .04 $ .56 $ .53
---------- ---------- ----------
Diluted $ .04 $ 55 $ .53
---------- ---------- ----------
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 3,296,659 4,207,137 4,166,738
---------- ---------- ----------
Diluted 3,349,819 4,226,213 4,205,625
---------- ---------- ----------
PRO FORMA AMOUNTS ASSUMING
RETROACTIVE APPLICATION OF CHANGE IN
ACCOUNTING PRINCIPLE
Income before extraordinary item $ 693,759 $2,391,747 $2,313,441
---------- ---------- ----------
Basic earnings per share $ .21 $ .57 $ .56
---------- ---------- ----------
Diluted earnings per share $ .21 $ .57 $ .55
---------- ---------- ----------
Net Income $ 347,759 $2,391,747 $2,313,441
---------- ---------- ----------
Basic earnings per share $ .11 $ .57 $ .56
---------- ---------- ----------
Diluted earnings per share $ .10 $ .57 $ .55
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
Max & Erma's Restaurants, Inc. 12
<PAGE> 9
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
<S> <C> <C> <C> <C> <C>
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
Issuance of stock through
option and bonus plans,
including $27,137 related
tax benefit 23,217 2,322 181,486 183,808
Shares repurchased (1,048,868) (104,887) (7,836,785) (152,018) (8,093,690)
Net income 140,759 140,759
--------- ------------ ------------ ------------ ------------
BALANCE, OCTOBER 31, 1999 2,746,737 $ 274,674 $ $ 10,603,766 $ 10,878,440
========= ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
13 Max & Erma's Restaurants, Inc.
<PAGE> 10
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
OCTOBER 31 OCTOBER 25 OCTOBER 26
(53 weeks) 1999 (52 weeks) 1998 (52 weeks) 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 140,759 $ 2,337,488 $ 2,224,751
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,899,099 5,868,472 5,839,346
Deferred income tax credit (1,038,000) (673,000) (156,000)
Accretion of deferred sale/leaseback gain (77,350) (65,324)
Minority interests in income of Affiliated Partnerships 109,465 82,076 90,447
Loss on disposition of assets 2,000,000 575,000
Loss on property disposals 160,522 111,084 102,462
Issuance of common stock as compensation
through manager bonus plan 132,521 104,520 87,583
Extraordinary item 346,000
Cumulative effect of change in accounting principle 207,000
Changes in assets and liabilities:
Receivables, inventories, supplies and prepaids 116,227 (467,356) 56,637
Capitalized preopening costs (638,259) (754,213)
Other assets (668,684) 4,689 (187,839)
Accounts payable, accrued and other liabilities 2,012,532 1,321,212 567,272
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,340,091 8,560,602 7,870,446
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (14,249,979) (10,015,912) (10,381,284)
Reimbursable construction costs incurred (133,000)
Construction costs reimbursed 75,717 57,283
Collections (additions) of (to) other assets (213,755) (153,285) 77,629
Proceeds from the sale of property 16,351 25,535,856 467,363
------------ ------------ ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (14,371,666) 15,423,942 (9,969,292)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations (43,334,748) (59,879,928) (46,459,439)
Proceeds from long-term obligations 56,824,743 40,867,040 49,190,666
Debt issue costs (125,000) (25,000)
Proceeds from exercise of stock options 24,149 116,417 370,274
Distributions to minority interests in Affiliated Partnerships (96,258) (102,301) (115,510)
Cash paid for purchase of common stock (8,093,690) (3,958,931) (664,924)
------------ ------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 5,199,196 (22,982,703) 2,321,067
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (832,379) 1,001,841 222,221
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 2,151,323 1,149,482 927,261
------------ ------------ ------------
CASH AND EQUIVALENTS AT END OF YEAR $ 1,318,944 $ 2,151,323 $ 1,149,482
============ ============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest-net of $285,005, $176,816, and $215,468
capitalized in 1999, 1998 and 1997 $ 1,386,965 $ 1,769,440 $ 2,567,364
Income taxes 834,446 1,868,223 1,290,251
Noncash activities:
Property additions financed by capital leases 51,002 867,586
Property additions financed by construction payables 2,070,464 778,685 1,234,365
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.
Max & Erma's Restaurants, Inc. 14
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1999,
OCTOBER 25, 1998 AND OCTOBER 26, 1997
1. ACCOUNTING POLICIES
Description of Business-Max & Erma's Restaurants, Inc. and subsidiaries (the
"Company") owns and operates restaurants under the trade name "Max & Erma's -
Neighborhood Gathering Place." At October 31, 1999, there are fifty-three Max &
Erma's restaurants in operation (50 at October 25, 1998) (principally located in
the Midwestern United States) and three under construction in Ohio, Virginia and
Michigan. The Company owns all of the restaurants, except for one that is owned
by a separate limited partnership ("Affiliated Partnership") in which the
Company is the controlling general partner (two in fiscal 1998 and 1997) and two
which are franchised to unrelated parties. See Note 9 regarding the Company's
operation of Ironwood Cafes.
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 AND 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
four 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-Prior to fiscal 1999, restaurant preopening costs, which
consist of hiring, training and certain other incremental direct costs of
opening restaurants, were accumulated and amortized from the opening date of the
restaurant over a one-year period. In fiscal 1999, the Company expensed such
capitalized costs as a cumulative effect of a change in accounting principle in
the amount of $207,000, net of $133,000 tax benefit, ($.06 per basic and diluted
share) in accordance with Statement of Position No. 98-5 "Reporting on the Costs
of Start-Up Activities". Such costs are now currently expensed as incurred.
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
Equipment and fixtures 3 to 15
</TABLE>
INTANGIBLES-Goodwill is amortized over 16-1/2 to 20 years which are the terms of
the related restaurant leases, including renewal options. Deferred costs
principally include debt issuance costs that relate to various debt agreements
and are being amortized over the terms of the agreements. 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. See Note 9 regarding provision for impairment of assets at October 31,
1999.
ADVERTISING-The Company expenses the costs of advertising (including production
costs) the first time the advertising takes place. Advertising expense was
$2,532,000, $2,289,000 and $2,811,000 for fiscal 1999, 1998 and 1997,
respectively.
CONTINGENT RENT-The Company expenses contingent rent based on gross sales on a
quarterly basis.
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-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.
SEGMENT-The Company presently operates in one segment as determined in
accordance with 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 1999 contained 53 weeks, while 1998 and 1997 each contained 52 weeks.
15 Max & Erma's Restaurants, Inc.
<PAGE> 12
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.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS-The Financial Accounting
Standards Board has issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". SFAS No. 133, as amended by SFAS No. 137, is required
to be adopted for the Company's 2001 annual consolidated financial statements.
The Company has not determined what, if any, impact the adoption of this
standard will have on its consolidated financial statements. The Company is
therefore unable to disclose the impact that adopting SFAS No. 133 will have on
its financial position and results of operations when such statement is adopted.
2. OWNERSHIP OF RESTAURANTS BY
AFFILIATED PARTNERSHIPS
Two of the restaurants are owned by Affiliated Partnerships in which the Company
is the general partner. One of the restaurants was closed in December 1998 (see
Note 9). As a general partner, the Company is liable for all of the debts and
liabilities of the Affiliated Partnerships. During fiscal 1999, 1998 and 1997
the Company's share of the profits and losses of these two Affiliated
Partnerships was approximately 60% and 40%, respectively. At October 31, 1999,
no amounts were due to Affiliated Partners.
3. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 25,
1999 1998
- -----------------------------------------------------------------
<S> <C> <C>
Debt:
Revolving credit agreement $23,108,177
8% convertible subordinated debentures $8,842,000
8.32% mortgage loan 5,181,604 5,440,131
----------- -----------
Total debt 28,289,781 14,282,131
Deferred gain on sale-leaseback 1,346,815 1,424,165
Capital leases (Note 4) 1,485,436 2,003,091
Accrued rent (Note 4) 3,528,118 3,072,843
----------- -----------
Total long-term obligations 34,650,150 20,782,230
Less current maturities 736,475 772,634
----------- -----------
Total long-term obligations-
less current maturities $33,913,675 $20,009,596
=========== ===========
</TABLE>
The Company's revolving credit agreement with a bank, as amended effective
October 29, 1999, permits it to borrow the lesser of $30,000,000, subsequently
increased to $40,000,000 in the first quarter of 2000, (the "Baseline
Commitment") or the Residual Commitment (the "Secondary Term Loan"). Amounts
outstanding under the Baseline Commitment as of October 31, 2000 (referred to as
the Initial Term Loan) are payable in quarterly installments of principal and
interest commencing January 31, 2001 through October 31, 2007. Amounts
outstanding under the Secondary Term Loan are equal to the Baseline Commitment
less the Initial Term Loan. Amounts outstanding under the Secondary Term Loan
are payable in 24 quarterly installments of principal and interest commencing
January 31, 2002 through October 31, 2007. Each loan bears interest at a
fluctuating quarterly rate based upon the prime or LIBOR rate determined by the
ratio of the Indebtedness of the Company to EBITDA of the Company (8.75% rate at
October 31, 1999). The agreement requires the Company to enter into a
$20,000,000 Interest rate protection agreement in fiscal 2000. The Company must
pay a quarterly commitment fee on the unused portion of the commitment and an
annual agency fee. Substantially all of the Company's assets collateralize the
credit agreement. Covenants of the revolving credit agreement require the
Company to maintain certain financial ratios and prohibits payment of dividends.
In August 1994, the Company issued $10,384,000 of unsecured 8% convertible
subordinated debentures due in 2004. 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 and recognized an extraordinary
charge against income of $346,000, net of $240,000 tax benefit, ($.11 per basic
and 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 (see Note
4).
Future maturities of long-term debt obligations at October 31, 1999 are as
follows (see Note 4 for maturities of other long-term obligations):
<TABLE>
<CAPTION>
YEAR ENDING IN OCTOBER
- ---------------------------------------------------------------
<S> <C>
2000 $ 280,877
2001 2,781,034
2002 3,632,706
2003 3,661,367
2004 3,692,504
Thereafter 14,241,293
-----------
Total $28,289,781
===========
</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,
Max & Erma's Restaurants, Inc. 16
<PAGE> 13
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. 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
2004. 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 31, OCTOBER 25,
1999 1998
- -------------------------------------------------------------------
<S> <C> <C>
ASSET DESCRIPTION
Buildings ............................. $1,045,000 $1,045,000
Equipment and fixtures ................ 2,056,131 2,107,918
---------- ----------
TOTAL .............................. 3,101,131 3,152,918
Less accumulated depreciation.......... 2,051,318 1,554,334
---------- ----------
NET ................................ $1,049,813 $1,598,584
========== ==========
</TABLE>
Future minimum lease payments under the capital leases and the present value of
such payments at October 31, 1999 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR:
- --------------------------------------------------------------
<S> <C>
2000 $ 562,280
2001 296,194
2002 163,584
2003 115,056
2004 90,000
Thereafter 435,000
----------
TOTAL MINIMUM LEASE PAYMENTS 1,662,114
Less amount representing interest 176,678
----------
Present value of minimum lease payments 1,485,436
Less current maturities 449,070
----------
TOTAL OBLIGATIONS UNDER CAPITAL LEASES-
LESS CURRENT MATURITIES $1,036,366
==========
</TABLE>
At October 31, 1999, the future minimum rental commitments under noncancellable
operating leases with an initial term in excess of one year are as follows:
<TABLE>
<CAPTION>
RELATED UNRELATED
PARTIES PARTIES TOTAL
- ----------------------------------------------------------------------
<S> <C> <C> <C>
FISCAL YEAR
2000 $ 146,178 $ 6,908,418 $ 7,054,596
2001 146,178 6,630,955 6,777,133
2002 146,178 6,303,381 6,449,559
2003 146,178 5,550,137 5,696,315
2004 146,178 5,212,019 5,358,197
Thereafter 755,261 52,610,598 53,365,859
---------- ----------- -----------
TOTAL $1,486,151 $83,215,508 $84,701,659
========== =========== ===========
</TABLE>
The above future minimum rental amounts include the land portion of certain
capital leases but exclude renewal options and additional rent based on sales or
increases in the United States Consumer Price Index (USCPI). For operating
leases which require increasing rental payments over the term of the lease, the
Company records rent expense on a straight-line basis. The related accrued rent
will generally reverse over the next fifteen years.
In fiscal 1998, the Company entered into a sale-leaseback transaction with
regard to the land, buildings, fixtures and improvements at eight restaurant
sites whereby the Company leases back the restaurant sites under operating
leases over a twenty-year period. 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. Also in fiscal 1998, the Company
entered into a sale-leaseback transaction with regard to the land, buildings,
fixtures and improvements at five restaurant sites whereby the Company leases
back the restaurant sites under operating leases over a twenty-year period. 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.
During the first quarter of fiscal 2000, the Company expects to complete two
sale-leaseback transactions with regard to the land, buildings, fixtures and
improvements at six restaurant sites whereby the Company leases back the
restaurant sites under operating leases over a twenty-year period under terms
similar to those in the preceding paragraph. The Company will receive proceeds
of approximately $2,900,000 (net of payoff of the approximately $5,200,000
mortgage loan) and $4,900,000, respectively. The transactions are expected to
result in a deferred gain of approximately $975,000 which will be accreted to
income as a reduction of rent expense over the twenty-year lease term and a loss
on disposition of assets of approximately $119,000.
At October 31, 1999, the Company has unused equipment lease commitments totaling
$4,300,000, 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>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
MINIMUM RENT:
Related Parties $ 149,921 $ 145,913 $ 155,221
Unrelated Parties 7,913,441 6,311,896 4,369,709
CONTINGENT RENT BASED ON:
Percentage of gross
revenue-unrelated parties 82,131 136,464 198,806
---------- ---------- ----------
TOTAL $8,145,493 $6,594,273 $4,723,736
========== ========== ==========
</TABLE>
The Company also has agreements with a partnership in which an outside director
of the Company is a partner that grants rights to the partnership to install and
operate coin-operated amusement equipment in certain restaurants. Under the
agreements, the Company has received games revenue averaging approximately
$140,000 per year over the last three years.
17 Max & Erma's Restaurants, Inc.
<PAGE> 14
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>
1999 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision at statutory rate $ 187,000 $1,130,000 $1,079,000
State income taxes-
net of Federal benefit 34,000 155,000 132,000
Jobs related tax credit (54,000) (40,000) (30,000)
FICA tax credit (351,000) (301,000) (243,000)
Other-net 40,000 41,000 10,000
--------- ---------- ----------
TOTAL(BENEFIT) $(144,000) $ 985,000 $ 948,000
========= ========== ==========
Effective Income Tax Rate(benefit) (26.2)% 29.7% 29.9%
========= ========== ==========
</TABLE>
The tax effects of significant items comprising the Company's net deferred tax
asset at October 31, 1999 and October 25, 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS (LIABILITIES)
Rent expense $1,125,000 $1,054,000
Loss of disposition of assets 452,000
Deferred gain 648,000 709,000
Jobs related tax credit 40,000
FICA tax credit 27,000 7,000
Alternative minimum tax credit 51,000
Officers' benefits 182,000 159,000
Other 55,000 94,000
---------- ----------
TOTAL DEFERRED TAX ASSETS 2,489,000 2,114,000
---------- ----------
Accelerated depreciation (28,000) (455,000)
Preopening costs (129,000)
Prepaid insurance (30,000) (66,000)
Other (5,000) (162,000)
---------- ----------
TOTAL DEFERRED TAX LIABILITIES (63,000) (812,000)
---------- ----------
NET DEFERRED TAX ASSET $2,426,000 $1,302,000
========== ==========
</TABLE>
The Company's FICA tax credit carryforwards expire in varying periods to 2014.
6. STOCK OPTION AND BONUS PLANS
In effect at October 31, 1999 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 31, 1999, 316,050 shares under option were exercisable
and 21,700 shares were reserved for future grants under the 1992 Stock Option
Plan. Under the 1996 Stock Option Plan, 239,000 shares under option were
exercisable and 13,000 shares were reserved for future grants at October 31,
1999.
The Company provides for the payment of bonuses in cash and/or common stock
pursuant to The Manager Stock Bonus Plan ("Bonus Plan"). No shares were issued
under this Plan in fiscal 1999, 1998 and 1997. 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 1999, 1998, and 1997, 19,417, 16,382, and 13,962
shares, respectively, were issued under the 1996 Bonus Plan, at a weighted
average fair value of $6.82, $6.38, and $6.27, respectively. Under the terms of
this plan, up to 43,837 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
1999, 1998 and 1997, the Company recognized compensation expense of $132,521,
$104,520 and $87,583, 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 27, 1996
through October 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
- --------------------------------------------------------------
<S> <C> <C>
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
Granted 71,000 7.29
Exercised (3,800) 6.35
Cancelled (55,600) 6.97
------- -----
Balance, October 31, 1999 764,650 $7.22
======= =====
</TABLE>
At October 31, 1999, October 25, 1998 and October 26, 1997 options exercisable
under the Company's stock option plans totaled 555,050, 485,950 and 340,000,
respectively, and had a weighted average option price per share of $7.44, $7.44
and $7.47, respectively. Exercise prices for options totaling 103,000 and
661,650 at October 31, 1999 ranged from $9.00 to $11.00 and $5.94 to $8.18,
respectively. The weighted average contractual life of these options is 4.4 and
3.5 years, respectively. At October 31, 1999, 103,000 and 452,050 shares are
exercisable at a weighted average exercise price of $9.80 and $6.90,
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. No such options were
exercised in fiscal 1999, 1998 or 1997. During fiscal 1999 and 1998 the Company
repurchased 27,632 and 35,303 shares of common stock from certain officers at a
cost of $210,693 and $273,599, respectively.
Max & Erma's Restaurants, Inc. 18
<PAGE> 15
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 1999, net income and earnings per share would have been as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income (Loss):
As reported $ 140,759 $ 2,337,488 $ 2,224,751
=========== ============= =============
Pro forma $ (115,342) $ 2,022,608 $ 1,787,650
=========== ============= =============
Basic Earnings (Loss) per share:
As reported $ 0.04 $ 0.56 $ 0.53
=========== ============= =============
Pro forma $ (0.03) $ 0.48 $ 0.43
=========== ============= =============
Diluted Earnings (Loss) per share:
As reported $ 0.04 $ 0.55 $ 0.53
=========== ============= =============
Pro forma $ (0.03) $ 0.48 $ 0.43
=========== ============= =============
</TABLE>
The following weighted average assumptions were used in the option pricing
model: a risk free interest rate of 6.21% 4.76% and 6.0% for 1999, 1998 and
1997, respectively; an expected life of the options of five to six years; no
expected dividend yield and a volatility factor of 30.5%, 37.2% and 25.2% in
1999, 1998 and 1997, respectively. The weighted average per share fair value of
the options granted in 1999, 1998 and 1997 was $2.98, $2.75 and $2.48,
respectively.
Due to the inclusion of only 1996 through 1999 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 1999, 1998 and 1997 was approximately
$206,000, $159,000 and $130,000, 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 31, 1999 and October
25, 1998 approximate their fair value due to the short-term maturities of these
items.
The carrying amount of the Company's long-term debt approximated its fair value
at October 31, 1999. The estimated fair value of the Company's long-term debt
was approximately $14,017,000 as compared to the carrying amount of $14,282,131
at October 25, 1998. The fair value of the Company's long-term debt 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 1999, the Company recorded a $2,000,000 loss on the closing and/or
sale of its three Ironwood Cafe restaurants. A $700,000 loss was recorded in the
second quarter related to the closing of the original Columbus, Ohio restaurant.
In the fourth quarter the Company recorded a loss of $1,300,000 related to the
closing of the remaining two restaurants which will close or be sold in the
first quarter of fiscal 2000. The $1,300,000 expense principally consists of
impairment of property costs associated with such restaurants which never
achieved profitable sales levels and, accordingly, is included in accumulated
depreciation and amortization of property at October 31, 1999. During fiscal
1999 and 1998 the Ironwood Cafe restaurants recorded operating losses, excluding
the above mentioned provisions, of approximately $468,000 and $315,000,
respectively.
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.
19 Max & Erma's Restaurants, Inc.
<PAGE> 16
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 31, 1999 and October 25, 1998,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended October 31, 1999.
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 31, 1999 and October 25, 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 1999 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for preopening costs in 1999.
/s/ DELOITTE & TOUCHE LLP
Columbus, Ohio
December 10, 1999
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 THOMAS R. GREEN, Director, Chief Executive Officer, Lancaster
Pollard & Company GREGORY L. HEYWOOD, Regional Vice President of Operations
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
Max & Erma's Restaurants, Inc. 20
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-23950, 33-70284, 333-03081 and 333-03083 of Max & Erma's Restaurants, Inc. on
Form S-8 of our report dated December 10, 1999 incorporated by reference in this
Annual Report on Form 10-K of Max & Erma's Restaurants, Inc. for the year ended
October 31, 1999.
DELOITTE & TOUCHE LLP
Columbus, Ohio
January 18, 2000
<PAGE> 1
EXHIBIT 24
Each director and officer of Max & Erma's Restaurants, Inc., a Delaware
corporation (the "Company"), whose signature appears below hereby appoints Todd
B. Barnum or William C. Niegsch, Jr., or either of them, as his or her
attorney-in-fact, 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 Company's Annual Report on Form 10-K (the "Annual
Report") for the fiscal year ended October 31, 1999, and likewise to sign and
file any amendments, including post-effective amendments, to the Annual Report,
and the Company 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
Annual Report and any amendments thereto in its name and behalf, each such
person and the Company hereby granting to such attorney-in-fact full power of
substitution and revocation, and hereby ratifying all that such attorney-in-fact
or his substitute may do by virtue hereof.
IN WITNESS WHEREOF, we have executed this Power of Attorney, in counterparts if
necessary, effective as of December 14, 1999.
DIRECTORS/OFFICERS:
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
*/s/Todd B. Barnum Chairman, Chief Executive Officer,
- --------------------------- and President (Principal Executive
Todd B. Barnum Officer)
*/s/William C. Niegsch, Jr. Executive Vice President, Chief Financial
- --------------------------- Officer, Treasurer and Secretary (Principal
William C. Niegsch, Jr. Financial and Principal Accounting Officer)
*/s/Mark F. Emerson Chief Operating Officer, and a Director
- ---------------------------
Mark F. Emerson
*/s/Roger D. Blackwell Director
- ---------------------------
Roger D. Blackwell
*/s/Robert A. Rothman Director
- ---------------------------
Robert A. Rothman
*/s/William E. Arthur Director
- ---------------------------
William E. Arthur
*/s/Thomas R. Green Director
- ---------------------------
Thomas R. Green
*/s/Michael D. Murphy Director
- ---------------------------
Michael D. Murphy
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> OCT-26-1998
<PERIOD-END> OCT-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,318,944
<SECURITIES> 0
<RECEIVABLES> 332,304
<ALLOWANCES> 0
<INVENTORY> 929,364
<CURRENT-ASSETS> 3,833,194
<PP&E> 73,328,050
<DEPRECIATION> 26,486,963
<TOTAL-ASSETS> 54,896,706
<CURRENT-LIABILITIES> 10,104,591
<BONDS> 33,913,675
0
0
<COMMON> 274,674
<OTHER-SE> 10,603,766
<TOTAL-LIABILITY-AND-EQUITY> 54,896,706
<SALES> 0
<TOTAL-REVENUES> 108,639,772
<CGS> 28,035,861
<TOTAL-COSTS> 95,748,561
<OTHER-EXPENSES> 10,560,018
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,671,969
<INCOME-PRETAX> 549,759
<INCOME-TAX> (144,000)
<INCOME-CONTINUING> 693,759
<DISCONTINUED> 0
<EXTRAORDINARY> (346,000)
<CHANGES> (207,000)
<NET-INCOME> 140,759
<EPS-BASIC> .04
<EPS-DILUTED> .04
</TABLE>
