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UNITED STATES
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
 
 Max & Ermas Restaurants, Inc.
 
  Delaware
    
    No. 31-1041397(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)4849 Evanswood Drive, Columbus, Ohio
    
    43229(Address of principal executive offices)
    
    (Zip Code)
 (614) 431-5800
    Common
Shares, $.10 Par Value
  o þ
 o þ
 þ o
 o
 o o þ
 o þ
    1.
    
    Annual Report to Stockholders for the Fiscal Year Ended October 29, 2006 (in pertinent parts,
as indicated) . . . Parts II and IV.
 2.
    
    Proxy Statement for 2007 Annual Meeting of Stockholders (in pertinent parts, as indicated) . . . Part III.




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TABLE OF CONTENTS  PART IItem 1.BUSINESSItem 1A. RISK FACTORSItem 1B.UNRESOLVED STAFF COMMENTSItem 2. PROPERTIESItem 3. LEGAL PROCEEDINGSItem 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIItem 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESItem 6. SELECTED FINANCIAL DATAItem 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSItem 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAItem 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURESItem 9A. CONTROLS AND PROCEDURESItem 9B. Other InformationPART IIIItems 10, 11, 12 and 13 and 14. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS; CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND PRINCIPAL ACCOUNTING FEES AND SERVICESPART IVItem 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESSIGNATURESINDEX TO EXHIBITSEX-10(M)EX-13EX-23EX-24EX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  
  
 Item 1. BUSINESS
   Description of Business




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2




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Competition
  Employees
  Restaurant Operations
    3




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Managing Partner Program
  Purchasing and Inventory
  4




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Government Regulation
  Future Expansion
  Company Owned
    
    FranchisedExisting
    
    Under Development
    
    Existing
    
    Under DevelopmentArizonaPhoenix
    
    
    
    
    
    
    1GeorgiaAtlanta
    
    
    1IllinoisChicago
    
    
    8IndianaAztar Casino
    
    
    
    
    
    
    
    
    
    
    1Columbus
    
    
    
    
    
    
    
    
    
    
    1Indianapolis
    
    
    4Merrillville
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Mishawaka
    
    
    
    
    
    
    
    
    
    
    1Seymour
    
    
    
    
    
    
    
    
    
    
    1KentuckyCrestview Hills
    
    
    1Lexington
    
    
    2Louisville
    
    
    2MichiganAnn Arbor
    
    
    1Detroit
    
    
    10
    
    
    
    
    
    
    
    1Grand Rapids
    
    
    1Lansing
    
    
    1MissouriSt. Louis
    
    
    
    
    
    
    
    
    
    
    2NevadaLas Vegas
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2North CarolinaCharlotte
    
    
    2
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Company Owned
    
    FranchisedExisting
    
    Under Development
    
    Existing
    
    Under DevelopmentOhioAkron
    
    
    1Canton
    
    
    1Chillicothe
    
    
    
    
    
    
    
    
    
    
    1Cincinnati
    
    
    5
    
    
    
    
    
    
    
    1Cleveland
    
    
    5
    
    
    
    
    
    
    
    2Columbus
    
    
    13
    
    
    
    2
    
    
    
    2Dayton
    
    
    4
    
    
    
    
    
    
    
    1Findlay
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Niles
    
    
    1Sandusky
    
    
    
    
    
    
    
    
    
    
    1Toledo
    
    
    3Wilmington
    
    
    
    
    
    
    
    
    
    
    1PennsylvaniaErie
    
    
    1Philadelphia
    
    
    
    
    
    
    
    
    
    
    2Pittsburgh
    
    
    9VirginiaNorfolk
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Richmond
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Virginia Beach
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1West VirginiaHuntington
    
    
    
    
    
    
    
    
    
    
    1WisconsinGreen Bay
    
    
    
    
    
    
    
    
    
    
    1TOTAL
    
    
    78
    
    
    
    3
    
    
    
    21
    
    
    
    7
  
 Item 1A. RISK FACTORS
   1.
    
    Dependence on Senior Management. Our four senior management officials have over 94 years
combined experience with us. Although we have attempted to develop additional management
capabilities, the loss of one or more of the senior executives could have a material adverse
effect on us.
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##### Table of Contents



2.
    
    Competition. The casual dining segment of the restaurant industry is highly competitive with
respect to price, service, food quality, location, and employees, including restaurant
managers. Many of our competitors are larger in size, have greater financial and other
resources, and have longer operating histories.3.
    
    Restaurant Industry Changes. The restaurant industry is affected by changes in consumer
tastes and attitudes, economic conditions, traffic patterns and changes, and other factors,
which requires regular changes in the operation of restaurants to remain competitive. There is
a risk that we will not effectively adapt to changes in the industry.4.
    
    Cost of Doing Business. The restaurant business is subject to sudden cost changes,
particularly for food, energy, labor and insurance. We may not be able to recover cost
increases by increasing prices for our menu items.5.
    
    Legal. We may be exposed to various tort and other claims including notably liability claims
resulting from the sale of alcoholic beverages. While we currently maintain insurance for
such claims, there can be no assurance that such insurance will be adequate or available in
the future. An uninsured or excess claim could have a material adverse effect on us.6.
    
    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. Changes in regulations or the suspension or inability to renew any of the
related licenses and permits could adversely affect our operations. Also, government actions
affecting minimum wages, payroll tax rates, and mandated benefits could adversely affect
operating results.7.
    
    Franchising. We intend to expand the franchising of the Max Ermas concept. Failure to
properly select, train, and supervise franchisees could have a detrimental effect on the
overall reputation and results of operations of the restaurants owned by us.8.
    
    Unfavorable Publicity. Adverse publicity resulting from poor food quality, illness, injury
or other health concerns or operations at one or a limited number of our restaurants or
franchisees restaurants could have material adverse effect on our business, results of
operations and financial condition.9.
    
    Acts of God, Terrorism. Our business could be materially adversely affected by acts of God,
including extremely harsh weather or natural disasters, and by terrorist acts such as the
events of September 11, 2001.
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10.
    
    Consumer Perceptions of Food Safety. Our business could be materially adversely affected by
consumer perceptions of food safety in the United States or in the market areas in which we
operate, whether such perceptions are based on fact or not and whether such perceptions are
caused by acts of terrorism or other events.11.
    
    Leverage; Interest Rate Risk. Our business is relatively highly leveraged, resulting in long
term indebtedness (including current maturities) of approximately $31.1 million as of October
29, 2006, $24.1 million of which represents the balance due under our revolving credit
agreement and bears interest at variable rates. A one-percentage
point increase or decrease
in interest rates could increase or decrease our pre-tax income by approximately $241,000. A
change in interest rates will likely have a significant impact on our earnings. In addition,
as a result of our substantial leverage, we are restricted by loan covenants that may impact
our ability to grow in the future.12.
    
    Utilization of FICA Tax on Tips Credit. We have recorded a deferred tax asset of $4,170,000
for unused FICA Tax on Tips Credit. The credits expire from 2023 through 2026. To utilize
the credits, we must return to a continued level of profitability. If we do not return to
sustained profitability, we may not be able to recognize the tax benefit of future credits and
could be forced to write off all or a portion of the existing deferred tax asset associated
with credits previously earned.13.
    
    Bank Covenants. We have attained waivers and/or amendments of certain loan covenant
violations under our revolving credit agreement over the last three quarters of 2005 and the
first, second and fourth quarters of 2006. While we have a very good relationship with our
lenders, there can be no assurance that they will continue to waive covenant violations or
make further amendments to our credit agreement. To assure compliance with our loan
covenants, we must return to profitability.
 
 Item 1B. UNRESOLVED STAFF COMMENTS
  
 Item 2. PROPERTIES
   8




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Item 3. LEGAL PROCEEDINGS
  
 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
  
 Item 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
  9




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Item 6. SELECTED FINANCIAL DATA
  
 Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
  
 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
     10




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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
  
 Item 9A. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures.
  Internal Controls.
 
 Item 9B. Other Information
  11




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Items 10, 11, 12 and 13 and 14. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT; EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS; CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS AND PRINCIPAL ACCOUNTING FEES AND SERVICES
  
  
 Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
       12




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SIGNATURES
  Dated:  January 17, 2007
    Max & Ermas Restaurants, Inc.By:

/s/ Todd B. BarnumTodd B. BarnumChairman of the Board and
Chief Executive Officer th
 Signature
    
    
    
    Title/s/Todd B. Barnum
    
    
    
    Chairman of the Board, Chief ExecutiveTodd B. Barnum
    
    
    
    Officer and Director (Principal Executive Officer)/s/William C. Niegsch, Jr.
    
    
    
    Executive Vice President, ChiefWilliam C. Niegsch, Jr.
    
    
    
    Financial Officer, Treasurer, Secretary andDirector (Principal Financial and Accounting Officer)*/s/Jay B. Barney
    
    
    
    DirectorJay B. Barney*/s/Mark F. Emerson
    
    
    
    DirectorMark F. Emerson*/s/Michael G. Giulioli
    
    
    
    DirectorMichael G. Giulioli*/s/Donal H. Malenick
    
    
    
    DirectorDonal H. Malenick*/s/William C. Niegsch, Jr.William C. Niegsch, Jr.Attorney-in-Fact
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REFERENCE PAGEANNUAL REPORTTO SHAREHOLDERSThe following items are required to be included in Item 8 are
incorporated by reference from the attached Annual Report to
Shareholders of Max & Ermas Restaurants, Inc. for the fiscal year
ended October 29, 2006: Consolidated Balance Sheets as of
October 29, 2006 and October 30, 2005
    
    10-11For the years ended October 29, 2006,
October 30, 2005 and October 31, 2004: Consolidated Statements of Operations
    
    12 Consolidated Statements of Stockholders Equity
    
    13 Consolidated Statements of Cash Flows
    
    14 Notes to Consolidated Financial Statements
    
    15-19 Report
of Independent Registered Public Accounting Firm
    
    20No financial statement schedules are required to be filed
because the conditions requiring their filing do not exist or
because the information is given in the consolidated
financial statements or notes thereto.
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ExhibitNo.
    
    Description
    
    Page No.2
    
    Plan and Agreement of Reorganization, as amended
October 15, 1991.
    
    Reference is made
to Exhibit 2 of
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 September 22, 1986.
    
    Reference is made
to Exhibit 3(c) of
Report on Form 10-K
filed January 23,
1987.3(d)
    
    Certificate of Amendment of Certificate of
Incorporation May 30, 1990.
    
    Reference is made
to Exhibit 3(d) of
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 17, 1972.
    
    Reference is made
to Exhibit 10(b) of
Registration
Statement on Form
S-1 (Registration
No. 2-85585).10(b)
    
    First Amendment to Agreement of Limited Partnership of
Max & Ermas Ltd., dated September 9, 1974.
    
    Reference is made
to Exhibit 10(b) of
Registration
Statement on Form
S-1 (Registration
No. 2-85585).10(c)*
    
    1992 Stock Option Plan.
    
    Reference is made
to Exhibit 10(q) of
Report on Form 
10-K filed January 25,
1993.10(d)*
    
    1996 Stock Option Plan.
    
    Reference is made
to Exhibit 10(p) of
Report on Form 
10-K filed January 1996.10(e)*
    
    2002 Stock Option Plan.
    
    Reference is made
to Exhibit 4(a) of
Form S-8 filed June
28, 2002.10(f)*
    
    Indemnification Agreement (form) between Max & Ermas
Restaurants, Inc. and each of its directors.
    
    Reference is made
to Exhibit 10.1 of
Report on Form 8-K
filed June 16,
2006.10(g)*
    
    Written description of split dollar life insurance
program for officers.
    
    Reference is made
to footnote 3 to
the Summary
Compensation Table
presented in the
Companys Proxy
Statement for the
2003 Annual Meeting
of Shareholders,
which is
incorporated by
Reference herein.
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ExhibitNo.
    
    Description
    
    Page No.10(h)*
    
    Board of Directors Resolution adopted November 2, 1987
relating to split dollar life insurance program for
officers.
    
    Reference is made
to Exhibit 10(dd)
of Report on Form
10-K filed January
25, 1993.10(i)*
    
    Board of Directors Resolution adopted October 19, 1992
relating to split dollar life insurance program for
officers.
    
    Reference is made
to Exhibit 10(ee)
of Report on Form
10-K filed January
25, 1993.10(j)*
    
    Form of Severance Agreement in Event of Change In
Control for Senior Executive Officers.
    
    Reference is made
to Exhibit 10(m) of
Report on Form 
10-K filed January 18,
2000.10(k)*
    
    List of Senior Executive Officers with Severance
Agreements in the form of Exhibit 10(j).
    
    Reference is made
to Exhibit 10(o) of
Report on Form 
10-K filed January 16,
2004.10(l)*
    
    Form of Severance Agreement in Event of Change In
Control for Executive Officers.
    
    Reference is made
to Exhibit 10(o) of
Report on Form 
10-K filed January 18,
2000.10(m)*
    
    List of Executive Officers with Severance Agreements in
the form of Exhibit 10(l).10(n)*
    
    Description of the Material Terms of Max & Ermas
Restaurants, Inc.s Fiscal 2006 Executive Compensation
Program.
    
    Reference is made
to Exhibit 10 of
Report on Form 8-K
filed November 8,
2005.10(o)*
    
    Description of the Material Terms of Max & Ermas
Restaurants, Inc.s Fiscal 2007 Executive Compensation
Program.
    
    Reference is made
to Exhibit 10.1 of
Report on Form 8-K
filed October 23,
2006.10(p)*
    
    Independent Contractor Consulting Agreement, dated July
25, 2005, between Max & Ermas Restaurants, Inc. and
Bonnie Brannigan.
    
    Reference is made
to Exhibit 10.1 of
Report on Form 8-K
filed July 28,
2005.10(q)
    
    Sixth Amended and Restated Revolving Credit Agreement,
dated May 4, 2006, between Max & Ermas Restaurants,
Inc. and National City Bank.
    
    Reference is made
to Exhibit 10.1 of
Report on Form 8-K
filed May 9, 2006.10(r)
    
    Note Purchase Agreement, dated May 5, 2006, between Max
& Ermas Restaurants, Inc. and the purchasers listed on
Schedule A attached thereto.
    
    Reference is made
to Exhibit 10.2 of
Report on Form 8-K
filed May 9, 2006.10(s)*
    
    Employment Agreement, dated May 29, 2006, between Max &
Ermas Restaurants, Inc. and Robert A. Lindeman.
    
    Reference is made
to Exhibit 10.1 of
Report on Form 8-K
filed June 2, 2006.10(t)*
    
    Severance Agreement in Event of Change In Control,
dated May 29, 2006, between Max & Ermas Restaurants,
Inc. and Robert A. Lindeman.
    
    Reference is made
to Exhibit 10.2 of
Report on Form 8-K
filed June 2, 2006.10(u)*
    
    Schedule of Max & Ermas Restaurants, Inc.s Director
Fees, effective June 13, 2006.
    
    Reference is made
to Exhibit 10.3 of
Report on Form 8-K
filed June 16,
2006.10(v)*
    
    Schedule of Max & Ermas Restaurants, Inc.s Director
Fees, effective commencing with fiscal 2007.
    
    Reference is made
to Exhibit 10.2 of
Report on Form 8-K
filed October 23,
2006.13
    
    Portions of the Annual Report to Stockholders for the
Fiscal Year ended October 29, 2006, 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
    
    Consent of Deloitte & Touche LLP.24
    
    Power of Attorney.
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ExhibitNo.
    
    Description
    
    Page No.31.1
    
    Rule 13a-14(a) Certification of Chief Executive Officer.31.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer.32.1
    
    Section 1350 Certification of Chief Executive Officer.32.2
    
    Section 1350 Certification of Chief Financial Officer.
 
 *
    
    Management contract or compensatory plan or arrangement required to be filed as an exhibit to
this Report on Form 10-K pursuant to Item 15(a)(3) of the Report on Form 10-K. 17