Chain Leader

David Farkas

Max & Erma's
January 16, 2008

I got a call from Harry Bond on Tuesday. Harry, CEO of Bradley, Ill.-based Monical’s Pizza, keeps his eye on chains in the Midwest because that’s where his franchisees operate their stores. Harry, after plowing through financial documents on EDGAR, had discovered something curious.

“You should have look at some recent credit agreements between banks and restaurant companies,” he offered. There could be a story there.” He mentioned Max & Erma’s, a Midwest casual-dining chain that operates some 90 units..

Now, I have a soft spot in my heart for Max & Erma’s. After all, like me, it’s Ohio-based (Columbus, specifically); it’s got a pretty good burger; and, over the years, company officials always returned my calls. I don’t know about Harry, but I felt a little sad after discovering its recent problems.

Not that the chain hasn’t had them. About ten years ago, officials jumped on the upscale casual-dining bandwagon, creating a concept called Ironwood Café.  They spent a lot of time and money devising the menu and the look.

I remember dropping by the Ironwood in Mentor, Ohio, one of three units the company opened. I don’t recall much except for two things: the pre-cut carrot nubbins on my plate and something one of the managers said after I asked why the cooks didn’t cut carrots. “We don’t have knives in the kitchen,” she said.

Somehow, that didn’t seem to bode well for a restaurant.

Alas, the company wrote off its mistake a few years later, losing about $700,000 in the process, announcing its focus was now Max & Erma’s restaurants.

(It wasn’t the first Columbus-based chain to become disastrously enamored of a new concept. Bob Evans Farms figured it could pull-off Mexican food after decades of frying eggs and sausage and hatched Cantina del Rio in 1992. Four years later, the company shuttered all 14 of them. This century it was Wendy’s turn to fall in love with a hot category (fast-casual) paying $274 million for Baja Fresh.)

In any case, today, according to filings, Max & Erma’s lender, National City Bank, is leaning on it big-time. In September, company management announced they had “amended” loan their covenants, agreeing to sell the company or raise equity another way.

If they can’t do either by June 30, 2008, the new covenant calls for ending ties with the bank. Ouch 

The bank isn’t the only entity with its foot on the company’s neck. NASDAQ sent Max & Erma’s a “deficiency letter” in December, informing it of imminent de-listing if within the next 90 days if their stock (sticker symbol: MAXE) didn’t maintain a market value of at least $5 million for 10 consecutive trading days.

Over the last six months the share price has dropped from $9 to $2.50. 

The company has until March 12 to comply. If it can’t, management may end up asking for permission to list on the decidedly smaller and less glamorous NASDAQ Capital Market. There’s no guarantee NASDAQ will grant it.//end

Posted by David Farkas on January 16, 2008 | Comments (0)