Exhibit 10.3
THIS NOTE AND THE SHARES ISSUABLE ON CONVERSION HEREOF HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”) OR ANY STATE SECURITIES
LAW. THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT AND NEITHER THIS NOTE NOR ANY
SHARES ISSUABLE ON CONVERSION THEREOF MAY BE TRANSFERRED, SOLD OR OFFERED FOR
SALE, IN WHOLE OR IN PART, UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT
FOR SUCH SECURITY UNDER THE ACT AND QUALIFICATION UNDER ANY APPLICABLE STATE
SECURITIES LAW, OR THERE IS AN OPINION OF COUNSEL SATISFACTORY TO BORROWER THAT
SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED AS TO SAID TRANSFER, SALE
OR OFFER.
CONVERTIBLE PROMISSORY NOTE

  $2,000,000   Columbus, Ohio   October 29, 2007

     FOR VALUE RECEIVED, MAX & ERMA’S RESTAURANTS, INC. (“Borrower”) promises to
pay to the order of DONAL H. MALENICK (hereinafter called “Lender,” which term
shall include any holder hereof), at such place as Lender may designate or, in
the absence of such designation, at 4461 Wayside Drive, Naples, FL 34119, the
sum of Two Million Dollars ($2,000,000.00) (hereinafter called the “Principal
Sum”), together with interest as hereinafter provided. Borrower promises to pay
the Principal Sum and the interest thereon at the time and in the manner
hereinafter provided in this note (this “Note”).
INTEREST
     Interest will accrue on the unpaid balance of the Principal Sum until paid
at the rate of 8 1/2% per annum.
     All interest shall be calculated on the basis of a 360 day year for the
actual number of days the Principal Sum or any part thereof remains unpaid.
There shall be no penalty for prepayment. In the event that the Principal Sum is
not paid on or before the Maturity Date (as defined below), interest shall
accrue on the unpaid balance of the Principal Sum after the Maturity Date at a
variable rate of interest per annum, which shall change in the manner set forth
below, equal to three quarters of a percentage point (3/4%) in excess of the
Prime Commercial Rate.
     “Prime Commercial Rate” means the rate announced by National City Bank as
its prime rate, which rate may not be National City Bank’s lowest rate. Subject
to any maximum or minimum interest rate limitation specified herein or by
applicable law, any variable rate of

 

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interest on the obligation evidenced hereby shall change automatically without
notice to Borrower immediately with each change in the Prime Commercial Rate.
MANNER OF PAYMENT
     The Principal Sum shall be due and payable in two installments, and at
maturity, whether by demand, acceleration or otherwise. The first installment of
the Principal Sum shall be in the amount of One Million Dollars ($1,000,000.00)
and shall be due and payable in cash later than ten (10) days following receipt
by Borrower of landlord construction reimbursement from The Foundry at South
Strabane LLC, the landlord of the Borrower, with respect to the Borrower’s
Washington, Pennsylvania restaurant. The second installment shall be in the
amount of the entire unpaid balance of the Principal Sum and shall be due and
payable in cash on the earlier of (a) April 16, 2009 and (b) the consummation of
a transaction for the sale of the Borrower or additional equity of the Borrower
pursuant to which the holders of indebtedness under the Credit Agreement (as
defined in the Security Agreement, as defined below) and the Purchasers (as
defined in the Intercreditor Agreement, as defined below) have been paid in full
(the earlier of (a) and (b), the “Maturity Date”). Accrued interest on the
Principal Sum shall be due and payable in cash on the same date as the first
installment of the Principal Sum and quarterly on the last day of each full
calendar quarter thereafter, and at maturity, whether by acceleration or
otherwise.
SUBORDINATION AND INTERCREDITOR PROVISIONS
     Certain rights and remedies of the Lender hereunder may be subject to, or
limited by, the terms of that certain Intercreditor Agreement (as amended from
time to time, the “Intercreditor Agreement”) dated as of even date herewith
among the Lender as a Junior Creditor, the Bank (as defined therein), the
Purchasers (as defined therein) and the Borrower, to which reference is made as
to its terms.
ELECTION TO RECEIVE SHARES
     At the option of Lender, which may be exercised at any time prior to the
Maturity Date by delivery of a conversion notice in the form attached hereto as
Exhibit A, in repayment of the second installment of the Principal Sum and all
then-accrued and unpaid interest on the second installment of the Principal Sum,
Lender may receive unregistered shares of common stock of Borrower (the “Common
Stock”), the number of shares (the “Shares”) to be computed by dividing the
then-outstanding principal and interest by $5.00 (the “Conversion Price”).
Lender shall give Borrower at least three (3) business days’ notice of his
election to receive shares in repayment of the second installment.
     No fractional Shares or scrip representing fractional shares shall be
issued. Instead of any fractional shares which otherwise would be issuable upon
conversion, Borrower shall pay a cash adjustment in respect of such fraction in
an amount equal to the same fraction times the Conversion Price.

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     The Conversion Price shall be adjusted from time to time in the following
manner upon the occurrence of the following events:
     (a) Dividend, Subdivision, Combination or Reclassification of Common Stock.
If Borrower shall, at any time or from time to time, (A) declare a dividend on
the Common Stock payable in shares of its capital stock (including Common
Stock), (B) subdivide the outstanding Common Stock into a larger number of
shares of Common Stock, (C) combine the outstanding Common Stock into a smaller
number of shares of its Common Stock, or (D) issue any shares of its capital
stock in a reclassification of the Common Stock (including any such
reclassification in connection with a consolidation or merger in which Borrower
is the continuing corporation), then in each such case, the Conversion Price in
effect at the time of the record date for such dividend or of the effective date
of such subdivision, combination or reclassification shall be adjusted so that
Lender upon conversion after such date shall be entitled to receive the
aggregate number and kind of shares of capital stock which, if this Note had
been converted immediately prior to such date, such holder would have owned upon
such conversion and been entitled to receive by virtue of such dividend,
subdivision, combination or reclassification. Any such adjustment shall become
effective immediately after the record date of such dividend or the effective
date of such subdivision, combination or reclassification. Such adjustment shall
be made successively whenever any event listed above shall occur. If a dividend
is declared and such dividend is not paid, the Conversion Price shall again be
adjusted to be the Conversion Price, in effect immediately prior to such record
date (giving effect to all adjustments that otherwise would be required to be
made pursuant to this section from and after such record date).
     (b) Certain Distributions. If Borrower shall, at any time or from time to
time, fix a record date for the distribution to all holders of Common Stock
(including any such distribution made in connection with a consolidation or
merger in which Borrower is the continuing corporation) of evidences of
indebtedness, assets or other property (other than regularly scheduled cash
dividends or cash distributions payable out of consolidated earnings or earned
surplus or dividends payable in capital stock for which adjustment is made under
the preceding paragraph) or subscription rights, options or warrants, upon
conversion of the Note after that corporate event, Lender will be entitled to
receive the securities or assets Lender would have received if Lender had
converted the Note immediately before the first such corporate event and not
disposed of the securities or assets received as a result of the or any
subsequent corporate event.
     (c) Issuance of Common Stock Below Conversion Price.
          (i) If Borrower shall, at any time and from time to time, after the
date hereof consummate an Equity Financing (as defined below), at a price per
share of Common Stock or preferred stock, as the case may be (the “Equity
Price”) which is at a lower price per share than the Conversion Price in effect
immediately prior to such Equity Financing, then, subject to subparagraph
(c)(ii) below, the Conversion Price shall be reduced to the Equity Price. For
purposes of this subparagraph (c)(i) an “Equity Financing” means the sale or
issuance of shares of Common Stock or preferred stock, as the case may be (or
rights, options, warrants or

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convertible or exchangeable securities containing the right to subscribe for or
purchase shares of Common Stock or preferred stock, as the case may be
(collectively, “Securities”)) by Borrower, in a transaction or series of related
or unrelated transactions other than those described in subparagraph (c)(ii)
below). The Equity Price for Securities is determined by dividing (x) the total
consideration received or receivable by Borrower in consideration of the sale or
issuance of such Securities, plus the total consideration payable to the Company
upon exercise or conversion or exchange thereof, by (y) the total number of
shares of Common Stock and preferred stock, as the case may be, covered by such
Securities.
          (ii) No adjustment shall be made to the Conversion Price pursuant to
subparagraph (c)(i) above in connection with the (A) issuance of shares in any
of the transactions described in paragraphs (a) or (b) above; (B) issuance of
shares of Common Stock or preferred stock, as the case may be, upon the exercise
of options or the grant of options provided that such options were or are issued
pursuant to stock option plans approved by the stockholders of Borrower;
(C) issuance of shares of Common Stock or preferred stock, as the case may be,
upon the exercise or conversion of rights, options, warrants or convertible or
exchangeable securities containing the right to subscribe for or purchase shares
of Common Stock or preferred stock outstanding on the date of this Note; and (D)
contributions of Common Stock or preferred stock to the Borrower’s 401(k) Plan.
     (d) De Minimus Adjustments. No adjustment shall be made under this section
if the amount of such adjustment would result in a change in the Conversion
Price of less than 1%, but in such case any adjustment that would otherwise be
required to be made shall be carried forward and shall be made at the time of
and together with the next subsequent adjustment, which together with any
adjustment so carried forward, would result in a change of at least 1%.
Notwithstanding the provisions of the first sentence of this paragraph, any
adjustment postponed pursuant to this paragraph shall be made no later than the
earlier of the Maturity Date.
INVESTMENT EXPERIENCE
     Lender is an “accredited investor” as defined in Rule 501(a) under the
Securities Act of 1933, as amended (the “Act”), and resides in the state of
Florida. Lender acknowledges that he is a director of Borrower and is aware of
Borrower’s business affairs and financial condition, has had access to and has
acquired sufficient information about Borrower, so as to allow Lender to reach
an informed and knowledgeable decision to acquire the Note. Lender independently
has such business and financial experience as is required to give him the
capacity to protect his own interests in connection with the purchase of the
Note.
     Without limiting the ability to resell the Shares pursuant to an effective
registration statement, or upon any exemption from registration that may be
legally available, Lender represents that he or she is purchasing the Note, and
will acquire the Shares for such Lender’s own account as principal for
investment purposes, and not with a view to a distribution. Lender understands
that the acquisition of the Note has not been registered under the Act or
registered or qualified under any state securities law in reliance on specific
exemptions therefrom, which exemptions may depend upon, among other things, the
bona fide nature of such Lender’s

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investment intent as expressed herein. Lender will not, directly or indirectly,
offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to
buy, purchase or otherwise acquire or take a pledge of) any of the Note or the
Shares, except in compliance with the Act and any applicable state securities
laws, and the rules and regulations promulgated thereunder.
     Lender recognizes that an investment in the Note, and if issued on
conversion, the Shares, involves a high degree of risk in that:
     (a) an investment in Lender is highly speculative and only investors who
can afford the loss of their entire investment should consider investing in
Borrower and the Note and the Shares;
     (b) Lender may not be able to liquidate this investment;
     (c) transferability of the Note and the Shares is extremely limited;
     (d) Lender could sustain the loss of his entire investment in the Note and
the Shares;
     (e) no return on investment, whether through distributions, appreciation,
transferability or otherwise, and no performance by, through or of Borrower, has
been promised, assured, represented or warranted by Borrower, or by any officer,
director, employee, agent or representative thereof; and
     (f) while the Common Stock is presently quoted on the NASDAQ Global Market:
(i) the issuance of the Note and the Shares are not registered under applicable
federal or state securities laws, and thus may not be sold, conveyed, assigned
or transferred unless such transaction is registered under such laws or unless
an exemption from registration is available under such laws, as more fully
described below, and (ii) the Note is not quoted, traded or listed for trading
or admitted for quotation on any organized market or quotation systems and there
is therefore no present public or other market for such Note, and (iii) there
can be no assurance that the Common Stock will continue to be quoted, traded or
listed for trading on the NASDAQ Global Market or on any other organized market
or trading system.
SECURITY
     This Note is secured by the security interests and assignments granted by
Borrower to Lender in the Security Agreement dated as of even date herewith.
     If, at the time of payment and discharge hereof, Borrower shall be then
directly or contingently liable to Lender as maker, indorser, surety or
guarantor of any other note, bill of exchange, or other instrument, then Lender
may continue to hold any of the Collateral as security therefor, even though
this Note shall have been surrendered to Borrower. Lender shall not be bound to
take any steps necessary to preserve any rights in the Collateral against prior
parties. If any obligation evidenced by this Note is not paid when due, Lender
may, at its option, demand,

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sue for, collect or make any compromise or settlement it deems desirable with
reference to the Collateral, and shall have the rights of a secured party under
the laws of the State of Ohio, and Borrower shall be liable for any deficiency.
DEFAULT
     Upon the occurrence of any of the following events:
     (a) Borrower fails to make any payment of interest or of the Principal Sum
on or before the date such payment is due;
     (b) the failure of Borrower to pay any installment when due hereunder or to
perform any covenant, term, or agreement in any instrument or agreement
evidencing or related to any obligation of Borrower to Lender;
     (c) if bankruptcy, reorganization, arrangement, insolvency, liquidation or
receivership proceedings are instituted by or against Borrower under federal or
state law;
then Lender may, at its option, without notice or demand, accelerate the
maturity of the obligations evidenced hereby, which obligations shall become
immediately due and payable. In the event Lender shall institute any action for
the enforcement or collection of the obligations evidenced hereby, Borrower
agrees to pay all costs and expenses of such action, including reasonable
attorneys’ fees, to the extent permitted by law.
TRANSFERABILITY
     This Note shall be transferred on the books of Borrower only by the
registered holder hereof or by its attorney duly authorized in writing or by
delivery to Borrower of a duly executed Assignment. Borrower shall be entitled
to treat any holder of record of the Note as the holder in fact thereof and
shall not be bound to recognize any equitable or other claim to or interest in
this Note in the name of any other person, whether or not it shall have express
or other notice thereof, save as expressly provided by the laws of the State of
Ohio.
     Lender acknowledges that Lender has been advised by Borrower that neither
this Note nor the Shares issued pursuant hereto have been registered under the
Act, that the Note is being or has been issued and the Shares may be issued on
the basis of the statutory exemption provided by Section 4(2) of the Act or
Regulation D promulgated thereunder, or both, relating to transactions by an
issuer not involving any public offering, and that Borrower’s reliance thereon
is based in part upon the representations made by Lender. Lender acknowledges
that Lender has been informed by Borrower of, or is otherwise familiar with, the
nature of the limitations imposed by the Act and the rules and regulations
thereunder on the transfer of securities. In particular, Lender agrees that no
sale, assignment or transfer of the Note or the Shares shall be valid or
effective, and Borrower shall not be required to give any effect to any such
sale, assignment or transfer, unless (i) the sale, assignment or transfer of the
Note or the Shares is

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registered under the Act, it being understood that neither the Note nor the
Shares are currently registered for sale and that Borrower has no obligation to
so register the Note or the Shares, (ii) Borrower has received an opinion of
counsel satisfactory to Borrower and its counsel that such sale, assignment, or
transfer is otherwise exempt from registration under the Act.
          (c) Unless registered pursuant to the provisions of the Act, the
certificate(s) evidencing the Shares issued upon exercise of the conversion
right set forth above shall bear the following legend:
“THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE, AND ARE BEING OFFERED
AND SOLD PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND SUCH LAWS. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR PURSUANT
TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT OR SUCH OTHER LAWS.”
GENERAL PROVISIONS
     Borrower, and any indorser, surety, or guarantor, hereby severally waive
presentment, notice of dishonor, protest, notice of protest, and diligence in
bringing suit against any party hereto, and consent that, without discharging
any of them, the time of payment may be extended an unlimited number of times
before or after maturity without notice. Lender shall not be required to pursue
any party hereto, including any guarantor, or to exercise any rights against any
collateral herefor before exercising any other such rights.
     The obligations evidenced hereby may from time to time be evidenced by
another note or notes given in substitution, renewal or extension hereof. Any
security interest or mortgage which secures the obligations evidenced hereby
shall remain in full force and effect notwithstanding any such substitution,
renewal, or extension.
     The captions used herein are for reference only and shall not be deemed a
part of this Note. If any of the terms or provisions of this Note shall be
deemed unenforceable, the enforceability of the remaining terms and provisions
shall not be affected. This Note shall be governed by and construed in
accordance with the law of the State of Ohio.

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WAIVER OF RIGHT TO TRIAL BY JURY
     BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM,
DEMAND, ACTION OR CAUSE OF ACTION (1) ARISING UNDER THIS NOTE OR ANY OTHER
INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH,
OR (2) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF
BORROWER OR LENDER WITH RESPECT TO THIS NOTE OR ANY OTHER INSTRUMENT, DOCUMENT
OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE TRANSACTIONS
RELATED HERETO OR THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE; AND BORROWER
HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT BORROWER OR
LENDER MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT
AS WRITTEN EVIDENCE OF THE CONSENT OF BORROWER TO THE WAIVER OF THE RIGHT OF
BORROWER TO TRIAL BY JURY.
WARRANT OF ATTORNEY
     Borrower authorizes any attorney at law to appear in any Court of Record in
the State of Ohio or in any other state or territory of the United States after
the above indebtedness becomes due, whether by acceleration or otherwise, to
waive the issuing and service of process, and to confess judgment against
Borrower in favor of Lender for the amount then appearing due together with
costs of suit, and thereupon to waive all errors and all rights of appeal and
stays of execution. The attorney at law authorized hereby to appear for Borrower
may be an attorney at law representing Lender, and Borrower hereby expressly
waives any conflict of interest that may exist by virtue of such representation.
Borrower also agrees that the attorney acting for Borrower as set forth in this
section may be compensated by Lender for such services.
[Signature Page Follows]

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WARNING-BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL.
IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR
PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU
REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED
GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY
OTHER CAUSE.

            Borrower:

MAX & ERMA’S RESTAURANTS, INC.
      By:   /s/ William C. Niegsch, Jr.        William C. Niegsch, Jr.       
Its: Chief Financial Officer     

 
Signature Page to Convertible Promissory Note

 

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EXHIBIT A
FORM OF CONVERSION NOTICE
TO:   Max & Erma’s Restaurants, Inc.
          4849 Evanswood Drive
          Columbus, Ohio 43229
     The undersigned owner of the Convertible Promissory Note, made October 29,
2007 (the “Note”), issued by Max & Erma’s Restaurants, Inc. (the “Company”)
hereby irrevocably exercises its option to convert the second installment of the
Principal Sum into shares of common stock, $0.10 par value (the “Common Stock”),
in accordance with the terms and conditions of the Note. The undersigned directs
that the Common Stock issuable and certificates therefore deliverable upon
conversion be issued in the name of and delivered to the undersigned unless a
different name has been indicated below. All capitalized terms used and not
defined herein have the respective meanings assigned to them in the Note.
Dated: ____________________________
Signature: _________________________
Print Name: ________________________
Address: __________________________
_________________________________
Tax ID or SSN#: _____________________