Document:

EX-10.2

 

Exhibit 10.2

FIRST AMENDMENT TO NOTE PURCHASE AGREEMENT

     THIS FIRST AMENDMENT TO NOTE PURCHASE AGREEMENT (“Amendment”), is entered into as of the
26th day of October, 2007, is made by and between Max & Erma’s Restaurants, Inc., a
Delaware corporation (the “Company”), and the Purchasers party hereto (the “Purchasers”).

WITNESSETH:

     WHEREAS, the Company and the Purchasers, are parties to that certain Note Purchase Agreement
dated May 5, 2006, (the “Note Purchase Agreement”); and

     WHEREAS, the Company has requested that the Purchasers amend certain provisions of the Note
Purchase Agreement, and the Purchasers have agreed to the Company’s requested amendments to the
Note Purchase Agreement on the terms and conditions set forth herein.

     NOW, THEREFORE, in consideration of the matters set forth in the recitals and the covenants
and provisions set forth herein, and other valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:

	1.	 	Defined Terms. Capitalized terms used but not defined herein shall have the meanings
ascribed to them in the Note Purchase Agreement or the other Purchaser Documents.

	2.	 	Amendments to Agreement. Upon satisfaction of the conditions set forth in Section 3
hereof, the Note Purchase Agreement is hereby amended as follows.

	 	2.1.	 	A new Section 3.2(e) is hereby added to the Note Purchase Agreement as follows:

     “(e) Notwithstanding the provisions of Sections 3.2(a) and 3.2(b) to the
contrary, for the Quarterly Interest Payment Dates of December 31, 2007 and March
31, 2008, the Company may elect to pay interest on each Note at a Cash Rate equal to
the Modified Cash Rate and increase the outstanding principal amount of each Note on
each such Quarterly Interest Payment Date by an amount equal to the difference
between the Cash Rate and the Modified Cash Rate set forth in Section 3.2(a) (with
such amounts added to the principal amount of each Note to be treated as Principal
Increases hereunder) together with such Principal Increases in respect of interest
accruing at the PIK Rate. In each quarter that the Company elects to pay cash
interest at the Modified Cash Rate, the Default Rate of Interest pursuant to Section
3.2(d) shall be in effect and the incremental interest shall be added to the
principal amount of each Note as Principal Increases. Principal Increases added to
the Notes pursuant to this Section 3.2(e) on December 31, 2007 are, collectively,
the “December PIK Interest.” Any cash payments made by the Company to redeem the
Principal Increases specified in this Section 3.2(e) shall be deemed to be regularly scheduled payments of
interest.”

 

 

	 	2.2.	 	Section 3.3 of the Note Purchase Agreement is hereby amended by deleting the word “All”
from the first sentence thereof and substituting the words “Except as provided in Section
3.2(e),” therefor.
	 
	 	2.3.	 	A new Section 7.2(d) is hereby added to the Note Purchase Agreement as follows:

     “(d) On the second Banking Day of each week, the Company shall furnish the
Purchasers with an updated 13-week cash flow forecast with a reconciliation of
actual cash flow to forecasted cash flows for the prior week, with such cash flow
forecast to be in form and substance acceptable to the Purchasers in their sole
discretion. “

	 	2.4.	 	A new Section 7.28 is hereby added to the Note Purchase Agreement as follows:

     “7.28 Equity Increase or Sale. The Company shall engage an investment
bank of national standing, acceptable to the Purchasers in their sole discretion
(the “Investment Bank”) and will diligently pursue an effort to raise equity or to
sell the Company (each, a “Capital Transaction”) prior to June 30, 2008. KeyBank
Capital Markets is acceptable to the Purchasers as Investment Bank. The Purchasers
shall have the right to terminate the Amendment Period and exercise any available
remedies under the Purchaser Documents if, at any time, the Purchasers determine in
their discretion that (x) the Company is not diligently pursuing the effort to
consummate a Capital Transaction, or (y) the amount of equity proposed to be raised
by the Company is insufficient; provided, however, that the modification of
financial covenants pursuant to Section 8.2(l) shall survive and remain effective
until March 31, 2009 notwithstanding termination of the Amendment Period pursuant to
this Section 7.28. If the Company does not consummate an Capital Transaction prior
to June 30, 2008, then the Company will immediately commence an effort to refinance
the Notes.”

	 	2.5.	 	A new Section 7.29 is hereby added to the Note Purchase Agreement as follows:

     “7.29 Access. The Company shall provide to the Purchasers prompt
access to (i) the Investment Bank and any other consultant or investment banker
retained by the Company, on at least a semi-monthly basis, and (ii) all opinions,
reports and other communications provided by the Investment Bank or any other
consultant or investment banker retained by the Company; provided,
however, that the Company may redact from any such materials, opinions,
reports and other communications provided to the Purchasers any information
contained therein solely to the extent such information is reasonably determined by
the Company’s counsel to be subject to the attorney-client privilege;
provided, further, that upon the Company’s reasonable request, the
Purchasers shall enter into a reasonable non-reliance agreement as a condition to its receipt of any
such materials, opinions, reports and other communications.”

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	 	2.6.	 	A new Section 7.30 is hereby added to the Note Purchase Agreement as follows:

     “7.30 Malenick Bridge Loan. The Purchasers consent to the obtaining by
the Company of a $2,000,000 loan from the Investor on or prior to November 5, 2007
on terms and conditions satisfactory to the Purchasers in their sole discretion (the
“Malenick Loan”). The Company will use the proceeds of the Malenick Loan only for
working capital purposes. The Purchasers consent to the Malenick Loan being secured
by a maximum of $1,050,000 in the Company’s right to receive a construction
allowance payment of approximately $1,200,000 from South Strabane, LLC for
reimbursement of tenant construction improvements to a store in Washington,
Pennsylvania (the “Landlord Receivable”), provided that for purposes of clarity,
such security interest is limited to $1,050,000 and limited to the Landlord
Receivable. Obligations under the Malenick Loan shall be subordinated to
obligations under the Note Purchase Agreement and the other Purchaser documents by a
subordination agreement consistent with this Amendment and in form and substance
acceptable to the Purchasers. The terms and conditions in the documents evidencing
the Malenick Loan, attached hereto as Exhibits B and C, are satisfactory to the
Purchasers.”

	 	2.7.	 	Section 8.1(i) of the Note Purchase Agreement is hereby amended by adding the following
at the end thereof:

“Notwithstanding the foregoing, the Company may make the following payments on the
Malenick Loan: (a) upon receipt by the Company of any cash installment of the
Landlord Receivable, the Company may pay amounts on account of the Malenick Loan
equal to such cash installments, up to an aggregate of One Million Dollars
($1,000,000.00) (the “Initial Malenick Payment”) plus interest that accrues in
respect of Initial Malenick Payment at a rate of 8.50% per annum, (b) thereafter,
the Company may make regular cash interest payments of 8.50% per annum interest on
the remaining outstanding principal amount of the Malenick Loan, provided that there
does not exist an Event of Default hereunder or under the Senior Debt Documents and
an Event of Default hereunder or under the Senior Debt Documents would not exist
after giving effect to such payment (based on a pro forma calculation using the most
recently delivered financial statements required pursuant to Section 7.2 and taking
such payment into account), and (c) provided that there does not exist an Event of
Default hereunder or under the Senior Debt Documents and an Event of Default
hereunder or under the Senior Debt Documents would not exist after giving effect to
such payment (based on a pro forma calculation using the most recently delivered
financial statements required pursuant to Section 7.2 and taking such payment into
account), the Company may pay the remaining outstanding principal on the earlier of
(i) April 16, 2009 or (ii) the consummation of a transaction for the sale of the Company or additional equity of the Company pursuant to which the Senior Debt
and the Notes have been paid in full.”

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	 	2.8.	 	Sections 8.2(b) and (f) of the Note Purchase Agreement are hereby deleted in their
entirety and replaced in each case with “[intentionally omitted]”.

	 	2.9.	 	A new Section 8.2(l) shall be added to the Note Purchase Agreement which shall read as
follows:

“(l) During the Amendment Period, the Borrower shall not be required to comply with
the financial covenants set forth in Sections 8.2(a)-(k) provided that during such
period (1) the Company shall continue to deliver the quarterly compliance
certificate pursuant to Section 7.4, including, without limitation, calculation of
the financial ratios in 8.2(d) and 8.2(e), and (2) the Company shall maintain a
minimum Adjusted EBITDA of (a) $750,000 for the fiscal quarter ending on October 28,
2007, (b) $2,200,000 for the fiscal quarter ending on February 17, 2008 and (c)
$1,500,000 for each of the fiscal quarters ending on May 11, 2008, August 3, 2008
and October 26, 2008. For purposes of this paragraph, “Adjusted EBITDA” will
include an add-back for pre-opening expenses, in addition to the other add-backs
included in the definition of “Adjusted EBITDA” set forth in the Note Purchase
Agreement. For the avoidance of doubt, after the termination of the Amendment
Period for any reason other than pursuant to Section 7.28, the financial covenants
set forth in Sections 8.2(a), (c) through (e), and (g) through (k) shall apply, and
if the Amendment Period is terminated due to an Event of Default (or an Event of
Default under the Senior Credit Agreement), such termination of the Amendment Period
shall not operate as a waiver of such Event of Default.

	 	2.10.	 	Section 8.2(k) of the Note Purchase Agreement is hereby amended by adding he following
at the end thereof:

“The Company shall not permit Capital Expenditures during the fiscal year ended
October 26, 2008 to exceed $2,600,000, exclusive of $800,000 already committed for
the remodeling of three restaurants and exclusive of landlord remodeling
allowances. From October 27, 2008 until March 31, 2009, the Company shall not
permit Capital Expenditures to exceed $1,083,333, exclusive of landlord remodeling
allowances.”

	 	2.11.	 	Section 8.5 of the Note Purchase Agreement is hereby amended by adding the following
at the end thereof:

“Between the First Amendment Effective Date and March 31, 2009, the Company shall
not commit to open any new restaurants.”

	 	2.12.	 	Section 10 is hereby amended by deleting the word “and” at the end of clause (o) and
inserting new clauses (q) and (r) as follows::

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     “(q) Senior Forbearance. The Senior Lender shall terminate the
Forbearance Period (as defined in the Forbearance Agreement) prior to March 31,
2009; and

     (r) Intercreditor Agreement. The Investor shall breach any of the
terms or conditions of the Intercreditor Agreement.”

	 	2.13.	 	Section 12 of the Note Purchase Agreement is amended by inserting the following
definitions in the proper alphabetical order therein:

“Amendment Period” means the period commencing on the First Amendment
Effective Date and ending on the earliest of (i) October 27, 2008, (ii) the
occurrence of an Event of Default under the Note Purchase Agreement, and (iii) the
occurrence of an Event of Default under the Senior Credit Agreement.

“First Amendment” means that certain First Amendment to Note Purchase
Agreement, by and among the Company and the Purchasers party thereto, dated as of
the First Amendment Effective Date.

“First Amendment Effective Date” means October 26, 2007.

“Forbearance Agreement” shall mean that certain Forbearance Agreement, dated
as of the date hereof, between the Senior Lender and the Company.

“Intercreditor Agreement” shall mean that certain Intercreditor Agreement
among the Purchasers, the Senior Lender, the Company and the Investor, as the same
may be amended from time to time in accordance with the terms therein.

“Investor” shall mean Donal H. Malenick.

“Modified Cash Rate” shall mean the three month London interbank offered
rate (“Libor”), as published in the “Money Rates” section of the Wall Street
Journal, on the first day of any quarterly interest period, plus one percent
(1.00%), per annum; provided, however, that Libor shall be 5.00% for the period from
October 1, 2007 to December 31, 2007.

	3.	 	Amendment Fee. On the First Amendment Effective Date, the Company shall pay an
amendment fee (“Amendment Fee”) of 1.00% of the outstanding principal amount of each Note, pro
rata to the Purchasers, which Amendment Fee shall be fully earned as of the First Amendment
Effective Date and may be paid in cash or, at the Company’s election, by adding such fee to
the outstanding principal amount of each Note, on a pro rata basis as Principal Increases. On
March 31, 2008, the Company shall pay an additional amendment fee (the “Incremental Amendment
Fee”) of 3.00% of the outstanding principal amount of each Note, pro rata to the Purchasers,
which Incremental Amendment Fee shall be fully earned as of March 31, 2008 and may be paid in
cash or, at the Company’s election, by adding such fee to
the outstanding principal amount of each Note, on a pro rata basis, as Principal Increases,
provided that, the Purchasers shall be deemed to have waived their right to
payment of the Incremental Amendment Fee in the event that either (x) the Company, pursuant to
Section 

5

 

	 	 	3.1(a), repays the Notes in full in cash on or before March 31, 2008 or (y) the Company
pays the December PIK Interest and the March 31, 2008 quarterly interest payment shall
be made at the Cash Rate. In the event that the Company elects to add either the Amendment Fee
or Incremental Amendment Fee to the outstanding principal amount of each Notes as provided
herein, such amounts shall be treated and payable as Principal Increases pursuant to the terms
of the Note Purchase Agreement.

	4.	 	Conditions. The effectiveness of this Amendment is subject to the following
conditions precedent:

	 	4.1.	 	the execution and delivery of this Amendment by the Company and the Purchasers;
	 
	 	4.2.	 	the execution and delivery of the Forbearance Agreement among the Company and the
Senior Lender, substantially in the form attached hereto as Exhibit “A”;
	 
	 	4.3.	 	the execution and delivery of the Convertible Promissory Note, dated as of the date
hereof, issued by the Company and payable to the Investor, substantially in the form
attached hereto as Exhibit “B”;
	 
	 	4.4.	 	the execution and delivery of the Security Agreement, dated as of the date hereof,
between the Company and the Investor, substantially in the form attached hereto as Exhibit
“C”;
	 
	 	4.5.	 	the execution and delivery of the Intercreditor Agreement by the parties thereto,
substantially in the form attached hereto as Exhibit “D”;
	 
	 	4.6.	 	evidence satisfactory to the Purchasers of the receipt by the Company of not less than
$2 million in cash in immediately available funds from the Investor;
	 
	 	4.7.	 	the Company shall have paid all reasonable fees, costs and expenses of the Purchasers
in connection with this Amendment, including, without limitation, the fees, costs and
expenses of Proskauer Rose, LLP.

	5.	 	Representations and Warranties. The Company hereby represents and warrants to each
Purchaser as follows:

	 	5.1.	 	the outstanding principal amount of the Notes as of October 1, 2007 is $7,043,500.
	 
	 	5.2.	 	the Company is duly organized, validly existing and in good standing under the laws of
the jurisdiction of its formation;
	 
	 	5.3.	 	the Company has the power and authority to execute, deliver and perform its obligations
under this Agreement;
	 
	 	5.4.	 	the execution, delivery and performance by the Company of this Agreement have been duly
authorized by all necessary corporate action and do not and will not require any
registration with, consent or approval of, notice to or action by, any Person (including
any governmental agency);

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	 	5.5.	 	this Amendment, the Note Purchase Agreement and the other Purchaser Documents to which
the Company is a party constitute the legal, valid and binding obligation of the Company,
enforceable against such Person in accordance with their terms;
	 
	 	5.6.	 	no Default or Event of Default exists or shall exist immediately following the
consummation of the transactions contemplated hereby;
	 
	 	5.7.	 	all representations and warranties by the Company contained in the Note Purchase
Agreement that are qualified by materiality or Material Adverse Effect are true and correct
and that are not so qualified are true and correct in all material respects as of the date
hereof, except to the extent made as of a specific date, in which case each such
representation and warranty shall be true and correct as of such date; and
	 
	 	5.8.	 	by its signatures below, the Company agrees that it shall constitute an Event of
Default if any representation or warranty made herein should be false or misleading in any
material respect.

	6.	 	No Waiver. Nothing contained herein shall be deemed to constitute a waiver of
compliance with any term or condition contained in the Note Purchase Agreement or any of the
other Purchaser Documents and nothing contained herein shall constitute a course of conduct or
dealing among the parties hereto. Except as expressly stated herein, each Purchaser reserves
all rights, privileges and remedies under the Purchaser Documents. Except as amended hereby,
the Note Purchase Agreement and the other Purchaser Documents remain unmodified and in full
force and effect. All references in the Purchaser Documents to the Note Purchase Agreement
shall be deemed to be references to the Note Purchase Agreement as amended hereby.

	7.	 	Counterparts. This Amendment may be executed by one or more of the parties to this
Amendment and any number of separate counterparts, each of which when so executed, shall be
deemed an original and all said counterparts when taken together shall be deemed to constitute
but one and the same instrument.

	8.	 	Successors and Assigns. This Amendment shall be binding upon and inure to the
benefit of the Company and its successors and assigns and the Purchasers and their successors
and permitted assigns.

	9.	 	Further Assurance. The Company hereby agrees from time to time, as and when
requested by the Purchasers, to execute and deliver or cause to be executed and delivered, all
such documents, instruments and agreements and to take or cause to be taken such further or
other action as the Purchasers may reasonably deem necessary or desirable in order to carry
out the intent and purposes of this Amendment, the Note Purchase Agreement and the Purchaser
Documents.

	10.	 	GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND
PERFORMED IN SUCH STATE.

	11.	 	Severability. Wherever possible, each provision of this Amendment shall be
interpreted in such manner as to be effective and valid under applicable law, but if any
provision of this

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	 	 	Amendment shall be prohibited by or invalid under such law, such provision shall be ineffective
to the extent of such prohibition or invalidity without invalidating the remainder of such
provision or the remaining provisions of this Amendment.

	12.	 	Reaffirmation. The Company hereby ratifies and reaffirms all of its payment and
performance obligations, contingent or otherwise, under each of the Purchaser Documents to
which it is a party (after giving effect hereto). The Company hereby consents to this
Amendment and acknowledges that each of the Purchaser Documents remains in full force and
effect and is hereby ratified and reaffirmed. Except as expressly set forth herein, the
execution of this Amendment shall not operate as a waiver of any right, power or remedy of the
Purchasers, constitute a waiver of any provision of any of the Purchaser Documents or serve to
effect a novation of the obligations under the Note Purchase Agreement.

	13.	 	Acknowledgment of Rights; Release of Claims. The Company hereby acknowledges that:
(a) it has no defenses, claims or set-offs to the enforcement by any Purchaser of the
liabilities, obligations and agreements of the Company under the Note Purchase Agreement or
other Purchaser Documents on the date hereof; (b) to its knowledge, each Purchaser has fully
performed all undertakings and obligations owed to it as of the date hereof; (c) except to the
limited extent expressly set forth in this Amendment, no Purchaser waives, diminishes or
limits any term or condition contained in the Note Purchase Agreement or any of the other
Purchaser Documents; and (d) the Purchasers may enforce the payment of the liabilities and the
performance of the obligations of the Company as set forth in the Purchaser Documents and as
provided by applicable law. All rights and remedies available to the Purchasers either under
the Purchaser Documents, at law or in equity, are preserved. In consideration of the
Purchasers’ agreements contained in this Amendment, the Company hereby irrevocably releases
and forever discharges each Purchaser (in such capacity) and their respective Affiliates, and
each such Person’s respective directors, officers, employees, agents, attorneys and
representatives (each, a “Released Person”) of and from all damages, losses, claims,
demands, liabilities, obligations, actions or causes of action whatsoever which the Company
may now have or claim to have against any Released Person for or because of any matter or
thing done, omitted or suffered to be done or omitted by any of the Released Persons prior to
and including the date hereof and on account of or in any way concerning, arising out of or
founded upon the Note Purchase Agreement or any other Purchaser Document, whether presently
known or unknown and of every nature and extent whatsoever. The provisions of this Paragraph
14 shall survive the termination of the Note Purchase Agreement and payment in full of the
obligations thereunder.

	14.	 	Negotiations. The Company stipulates and agrees that each of the Purchaser Documents
and this Amendment are products of and result from arms-length negotiations between the
parties and that neither the Purchasers nor any other party has exerted or attempted to exert
improper or unlawful pressure in connection with the execution or delivery of this Amendment
or any of the Purchaser Documents. Without in any way limiting the foregoing, each of the
parties hereto stipulates and agrees that at all times during the course of the negotiations
surrounding the execution and delivery of the Purchaser Documents and this Amendment, such
party has, to the extent deemed necessary or advisable in its sole discretion, been advised
and assisted by competent counsel of its own choosing, and that counsel has been present and
actively participated in the negotiations surrounding the Purchaser Documents and this
Amendment.

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     The parties hereto have caused this Amendment to be duly executed by their respective duly
authorized officers as of the date first written above.

	 	 	 	 	 
	 	COMPANY:

MAX & ERMA’S RESTAURANTS, INC.

 	 
	 	By:  	/s/ William C. Niegsch, Jr. 	 
	 	 	Name:  	William C. Niegsch, Jr. 	 
	 	 	Title:  	Chief Financial Officer 	 
	 

[First Amendment to Note Purchase Agreement]

 

 

	 	 	 	 	 
	 	PURCHASERS:

FM MEZZANINE PARTNERS LLC 

	 
	 	By: 	GSO Debt Funds Management LLC

as Subadvisor to FriedbergMilstein LLC

 	 
	 	By:  	/s/ Lee M. Shaiman 	 
	 	 	Name:  	Lee M. Shaiman 	 
	 	 	Title:  	Authorized Signatory 	 
	 

[First Amendment to Note Purchase Agreement]EX-10.3

 

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

 

 

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

3

 

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

4

 

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,

5

 

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

6

 

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.

7

 

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]

8

 

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

 

 

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#: _____________________

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