##### 



Exhibit 13




---



##### 








---



##### 



2006
    
    2005FOR THE YEARRevenues
    
    $
    180,289,781
    
    
    $
    183,705,077Operating Income (Loss)
    
    
    1,068,504
    
    
    
    (140,277
    )Loss Before Income Taxes
    
    
    (2,068,641
    )
    
    
    (2,610,085
    )Income Taxes (Credit)
    
    
    (1,605,000
    )
    
    
    (1,295,000
    )Cumulative Effect of Change in Accounting Principle ($0.05 per share)
    
    
    (115,000
    )Net Income (Loss)
    
    
    (578,641
    )
    
    
    (1,315,085
    )Net Income (Loss) Per Diluted Share
    
    
    (0.23
    )
    
    
    (0.52
    )Diluted Shares Outstanding
    
    
    2,551,018
    
    
    
    2,537,277Capital Expenditures
    
    $
    5,524,182
    
    
    $
    9,966,903AT YEAR ENDTotal Assets
    
    $
    72,354,665
    
    
    $
    73,857,285Long-Term Obligations Less Current Maturities
    
    
    43,065,227
    
    
    
    41,817,482Stockholders Equity
    
    
    13,033,657
    
    
    
    13,307,307Number of Restaurants:Company-Owned
    
    
    78
    
    
    
    79Franchised
    
    
    21
    
    
    
    23Number of Employees
    
    
    5,158
    
    
    
    5,344PERFORMANCE RATIOSRestaurant Profit Margin
    
    
    9.1
    %
    
    
    8.7
    %Operating Profit (Loss) Margin
    
    
    0.6
    %
    
    
    (0.1
    )%Net Loss Margin
    
    
    (0.3
    )%
    
    
    (0.7
    )%Return on Beginning Assets
    
    
    (0.8
    )%
    
    
    (1.8
    )%Return on Beginning Equity
    
    
    (4.4
    %
    
    
    (9.4
    )%
  01
    
    Financial Highlights
    
    
    02
    
    
    Letter to Shareholders
    
    
    04
    
    
    Selected Financial Data
    
    
    05
    
    
    Managements Discussion
and Analysis10
    
    Financial Statements
    
    
    15
    
    
    Notes to Financial
Statements
    
    
    20
    
    
    Report of Independent
Registered Public
Accounting Firm
    
    
    21
    
    
    Selected Quarterly Financial Data




---



##### 



Max & Ermas Restaurants, Inc.
 2




---



##### 



reporting sales $200,000
 above
    
 2006 Annual Report
 3




---



##### 



October 29
    
    
    October 30
    
    
    October 31    
    
    October 26
    
    
    October 27
    
    
    October 28(In Thousands, except per share and other data and ratios)
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002    
    
    2001RESULTS OF OPERATIONSRevenues
    
    $
    180,290
    
    
    $
    183,705
    
    
    $
    182,959
    
    
    $
    167,083
    
    
    $
    151,991
    
    
    $
    141,088Operating Income (Loss)
    
    
    1,069
    
    
    
    (140
    )
    
    
    3,134
    
    
    
    3,213
    
    
    
    6,638
    
    
    
    5,726Interest Expense
    
    
    3,079
    
    
    
    2,431
    
    
    
    2,154
    
    
    
    1,680
    
    
    
    2,082
    
    
    
    2,619Income (Loss) Before Income Taxes
    
    
    (2,069
    )
    
    
    (2,610
    )
    
    
    960
    
    
    
    1,494
    
    
    
    4,498
    
    
    
    3,107Cumulative Effect of Change
in Accounting
Principle(1)
    
    
    (115
    )Net Income (Loss)
    
    
    (579
    )
    
    
    (1,315
    )
    
    
    1,097
    
    
    
    1,494
    
    
    
    3,288
    
    
    
    2,391Proforma Net Income (Loss)Assuming
Retroactive
Change(2)
    
    
    (359
    )
    
    
    (1,325
    )
    
    
    1,087
    
    
    
    1,484
    
    
    
    3,279
    
    
    
    2,382Depreciation and Amortization
    
    
    8,024
    
    
    
    8,444
    
    
    
    8,219
    
    
    
    6,364
    
    
    
    5,659
    
    
    
    5,405Capital Expenditures
    
    
    5,524
    
    
    
    9,967
    
    
    
    19,444
    
    
    
    19,055
    
    
    
    17,794
    
    
    
    13,544PER DILUTED SHARE DATAIncome (Loss) Before Cumulative Effect
    
    $
    (0.18
    )
    
    $
    (0.52
    )
    
    $
    0.42
    
    
    $
    0.56
    
    
    $
    1.27
    
    
    $
    0.93Cumulative Effect of Change
in Accounting Principle
    
    
    (0.05
    )Net Income (Loss)
    
    
    (0.23
    )
    
    
    (0.52
    )
    
    
    0.42
    
    
    
    0.56
    
    
    
    1.27
    
    
    
    0.93Proforma Net Income (Loss)Assuming
Retroactive
Change(2)
    
    
    (0.14
    )
    
    
    (0.52
    )
    
    
    0.42
    
    
    
    0.56
    
    
    
    1.27
    
    
    
    0.93Revenues
    
    
    70.67
    
    
    
    72.41
    
    
    
    70.81
    
    
    
    63.10
    
    
    
    58.67
    
    
    
    55.07Assets
    
    
    28.36
    
    
    
    29.11
    
    
    
    27.52
    
    
    
    23.32
    
    
    
    23.92
    
    
    
    21.44Stockholders Equity
    
    
    5.10
    
    
    
    5.24
    
    
    
    5.44
    
    
    
    4.60
    
    
    
    4.38
    
    
    
    3.59Average Shares Outstanding (000s)
    
    
    2,551
    
    
    
    2,537
    
    
    
    2,584
    
    
    
    2,648
    
    
    
    2,591
    
    
    
    2,562FINANCIAL POSITIONCash and Equivalents
    
    $
    2,492
    
    
    $
    2,911
    
    
    $
    2,188
    
    
    $
    2,616
    
    
    $
    3,407
    
    
    $
    2,351Working Capital Deficit
    
    
    (8,682
    )
    
    
    (12,089
    )
    
    
    (9,568
    )
    
    
    (7,723
    )
    
    
    (8,102
    )
    
    
    (9,120
    )Property  Net
    
    
    50,809
    
    
    
    55,663
    
    
    
    55,350
    
    
    
    47,037
    
    
    
    47,693
    
    
    
    42,803Total Assets
    
    
    72,355
    
    
    
    73,857
    
    
    
    71,107
    
    
    
    61,742
    
    
    
    61,971
    
    
    
    54,933Long-Term Obligations(Less Current Maturities)
    
    
    43,065
    
    
    
    41,817
    
    
    
    41,053
    
    
    
    35,837
    
    
    
    36,862
    
    
    
    32,228Stockholders Equity
    
    
    13,034
    
    
    
    13,307
    
    
    
    14,056
    
    
    
    12,189
    
    
    
    11,358
    
    
    
    9,202OTHER DATA AND RATIOSAverage Restaurant Sales
    
    $
    2,300
    
    
    $
    2,344
    
    
    $
    2,376
    
    
    $
    2,385
    
    
    $
    2,369
    
    
    $
    2,350Same-Store Sales Increase (Decrease)
    
    
    (2.7
    )%
    
    
    (3.2
    )%
    
    
    (0.4
    )%
    
    
    (0.3
    )%
    
    
    0.9
    %
    
    
    2.3
    %Company-owned Restaurants
in Operation at Year End
    
    
    78
    
    
    
    79
    
    
    
    78
    
    
    
    73
    
    
    
    67
    
    
    
    61Restaurant Profit Margin
    
    
    9.1
    %
    
    
    8.7
    %
    
    
    9.5
    %
    
    
    10.5
    %
    
    
    12.3
    %
    
    
    11.4
    %Operating Profit (Loss) Margin
    
    
    0.6
    %
    
    
    (0.1
    )%
    
    
    1.7
    %
    
    
    1.9
    %
    
    
    4.4
    %
    
    
    4.1
    %Long-Term Debt-to-Equity Ratio
    
    
    3.3
    
    
    
    3.1
    
    
    
    2.9
    
    
    
    2.9
    
    
    
    3.2
    
    
    
    3.5Market Price Per Share at Year End
    
    $
    8.15
    
    
    $
    12.36
    
    
    $
    13.35
    
    
    $
    17.75
    
    
    $
    14.00
    
    
    $
    10.50Price Earnings Ratio (High/Low)
    
    
    N/M
    
    
    
    N/M
    
    
    
    45.2/31.8
    
    
    
    32.5/23.2
    
    
    
    12.4/8.3
    
    
    
    12.7/9.0Return on Beginning Assets
    
    
    (0.8
    )%
    
    
    (1.8
    )%
    
    
    1.8
    %
    
    
    2.4
    %
    
    
    6.0
    %
    
    
    4.3
    %Return on Beginning Equity
    
    
    (4.4
    )%
    
    
    (9.4
    )%
    
    
    9.0
    %
    
    
    13.2
    %
    
    
    35.7
    %
    
    
    38.0
    %
 
 (1)
    
    Fiscal 2006 includes the cumulative effect of change in accounting principle, net of
$60,000 tax benefit, due to the adoption of FIN 47 Accounting for Conditional Asset
Retirement Obligations.(2)
    
    Proforma amounts reflect the amounts the Company would have reported had the asset
retirement obligations been recorded at the inception of the leases. Max & Ermas Restaurants, Inc.
 4




---



##### 



OVERVIEW
         2006 Annual Report
 5




---



##### 



YEAR-TO-YEAR COMPARISONS AND ANALYSIS
RESULTS OF OPERATIONS
  2006
    
    2005
    
    2004Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of Goods Sold
    
    
    (25.4
    )
    
    
    (25.5
    )
    
    
    (25.8
    )Payroll & Benefits
    
    
    (32.2
    )
    
    
    (32.3
    )
    
    
    (32.7
    )Other Operating Expenses
    
    
    (33.2
    )
    
    
    (33.3
    )
    
    
    (31.7
    )Administrative Expenses
    
    
    (8.0
    )
    
    
    (8.0
    )
    
    
    (7.8
    )Pre-Opening Expenses
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    (0.3
    )Impairment of Fixed Assets
    
    
    (0.5
    )
    
    
    (0.8
    )
    
    
    Interest Expense
    
    
    (1.7
    )
    
    
    (1.3
    )
    
    
    (1.2
    )(Income Taxes) Tax Credit
    
    
    0.9
    
    
    
    0.7
    
    
    
    0.1Change in Accounting Principle
    
    
    (0.1
    )
    
    
    
    
    
    
    Net Income (Loss)
    
    
    (0.3
    )%
    
    
    (0.7
    )%
    
    
    0.6
    %
 REVENUES
       COSTS AND EXPENSES
   Max & Ermas Restaurants, Inc.
 6




---



##### 



ASSET IMPAIRMENT
      ADMINISTRATIVE EXPENSES
  INTEREST EXPENSE
    3 4
 3 4
  2006 Annual Report
 7




---



##### 



INCOME TAXES
   LIQUIDITY AND CAPITAL RESOURCES
          Operating
    
    
    Capital
    
    
    Long-Term
    
    
    ConstructionLeases
    
    
    Leases
    
    
    Debt (1)
    
    
    CommitmentsLess than 1 Year

    
    $
    14,639,224
    
    
    $
    90,000
    
    
    $
    5,422,000
    
    
    $
    3,0000,0001-3 Years
    
    
    26,967,070
    
    
    
    180,000
    
    
    
    10,196,000
    
    
    
    3-5 Years


    
    
    24,197,350
    
    
    
    180,000
    
    
    
    20,883,000
    
    
    
    More than 5 Years
    
    
    114,753,185
    
    
    
    630,000
    
    
    
    7,508,000
    
    
    
    Total
    
    $
    180,556,829
    
    
    $
    1,080,000
    
    
    $
    44,009,000
    
    
    $
    3,000,000
 
 (1)
    
    Includes interest at 9.0%, which was the rate in effect at October 29, 2006 under the
companys Revolving Credit Agreement and 14.5% which was the rate of the $7.0 million senior
subordinated note issued May 5, 2006. INFLATION
  RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
   Max & Ermas Restaurants, Inc.
 8




---



##### 



CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  ASSET IMPAIRMENTS
  SAME-STORE SALES
  SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
   2006 Annual Report
 9




---



##### 



Consolidated Balance Sheets
 October 29
    
    
    October 302006
    
    
    2005ASSETSCURRENT ASSETS:Cash and equivalents
    
    $
    2,491,877
    
    
    $
    2,910,889Receivables:Trade and other
    
    
    1,748,635
    
    
    
    172,685Franchise
    
    
    305,301
    
    
    
    457,324Total receivables
    
    
    2,053,936
    
    
    
    630,009Inventories
    
    
    1,260,537
    
    
    
    1,401,368Supplies
    
    
    515,456
    
    
    
    580,166Prepaid expenses
    
    
    526,546
    
    
    
    471,470Deferred income taxes
    
    
    725,000
    
    
    
    650,000TOTAL CURRENT ASSETS
    
    
    7,573,352
    
    
    
    6,643,902PROPERTYAT COST:Land and buildings
    
    
    33,558,261
    
    
    
    33,445,024Leasehold improvements
    
    
    30,714,247
    
    
    
    32,552,563Equipment and fixtures
    
    
    39,432,387
    
    
    
    38,351,393Total property
    
    
    103,704,895
    
    
    
    104,348,980Less accumulated depreciation and amortization
    
    
    52,896,054
    
    
    
    48,686,165PROPERTYNET
    
    
    50,808,841
    
    
    
    55,662,815OTHER ASSETS:Goodwill
    
    
    51,980
    
    
    
    62,073Deferred costs (less accumulated amortization of
2006$453,240 and 2005$299,357)
    
    
    1,065,647
    
    
    
    726,935Deferred income taxes
    
    
    10,677,000
    
    
    
    8,784,000Miscellaneous (less accumulated amortization of
2006$167,429 and 2005 $181,578)
    
    
    2,177,845
    
    
    
    1,977,560TOTAL OTHER ASSETS
    
    
    13,972,472
    
    
    
    11,550,568TOTAL
    
    $
    72,354,665
    
    
    $
    73,857,285
  Max & Ermas Restaurants, Inc.
 10




---



##### 



Consolidated Balance Sheets
 October 29
    
    
    October 302006
    
    
    2005LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Current maturities of long-term obligations
    
    $
    2,729,989
    
    
    $
    4,227,282Accounts payable
    
    
    4,245,631
    
    
    
    4,725,923Construction payables
    
    
    584,046
    
    
    
    863,135Accrued liabilities:Payroll and related taxes
    
    
    2,770,583
    
    
    
    2,718,540Taxes, other than income taxes
    
    
    1,718,683
    
    
    
    2,097,075Interest
    
    
    657,715
    
    
    
    656,525Gift cards
    
    
    1,903,767
    
    
    
    1,661,105Utilities
    
    
    846,111
    
    
    
    817,496Other
    
    
    799,256
    
    
    
    965,415Total accrued liabilities
    
    
    8,696,115
    
    
    
    8,916,156TOTAL CURRENT LIABILITIES
    
    
    16,255,781
    
    
    
    18,732,496LONG-TERM OBLIGATIONSLess current maturities
    
    
    43,065,227
    
    
    
    41,817,482COMMITMENTS AND CONTINGENCIES(Note 1)STOCKHOLDERS EQUITY:Preferred stock$.10 par value; authorized 500,000 shares, none
outstanding Common
stock$.10 par value; authorized 2006 and 20055,000,000
shares; issued and outstanding: 2006
2,551,974 and 20052,546,778 shares
    
    
    255,196
    
    
    
    254,677Additional paid in capital
    
    
    982,697
    
    
    
    678,225Retained earnings
    
    
    11,795,764
    
    
    
    12,374,405TOTAL STOCKHOLDERS EQUITY
    
    
    13,033,657
    
    
    
    13,307,307TOTAL
    
    $
    72,354,665
    
    
    $
    73,857,285
  2006 Annual Report
 11




---



##### 



Consolidated Statements of Operations
 YEAR ENDEDOctober 29
    
    
    October 30
    
    
    October 31(52 weeks)2006
    
    

(52 weeks)2005
    
    

(53 weeks)2004REVENUES
    
    $
    180,289,781
    
    
    $
    183,705,077
    
    
    $
    182,958,795OPERATING EXPENSES:Cost of goods sold
    
    
    45,802,663
    
    
    
    46,868,766
    
    
    
    47,134,328Payroll and benefits
    
    
    57,969,321
    
    
    
    59,315,489
    
    
    
    59,870,241Other operating expenses
    
    
    59,922,708
    
    
    
    61,074,546
    
    
    
    58,028,046Administrative expenses
    
    
    14,490,692
    
    
    
    14,744,764
    
    
    
    14,189,562Preopening costs
    
    
    190,460
    
    
    
    391,789
    
    
    
    602,677Impairment of assets
    
    
    845,433
    
    
    
    1,450,000
    
    
    
    TOTAL OPERATING EXPENSES
    
    
    179,221,277
    
    
    
    183,845,354
    
    
    
    179,824,854OPERATING INCOME (LOSS)
    
    
    1,068,504
    
    
    
    (140,277
    )
    
    
    3,133,941INTEREST EXPENSE
    
    
    3,079,391
    
    
    
    2,431,305
    
    
    
    2,154,254MINORITY INTEREST IN INCOME OF
AFFILIATED PARTNERSHIP
    
    
    57,754
    
    
    
    38,503
    
    
    
    19,252(LOSS) INCOME BEFORE INCOME TAXES
    
    
    (2,068,641
    )
    
    
    (2,610,085
    )
    
    
    960,435INCOME TAXES (BENEFIT):FederalCurrent
    
    
    245,000
    
    
    
    604,000
    
    
    
    380,000Deferred
    
    
    (1,830,000
    )
    
    
    (2,459,000
    )
    
    
    (627,000
    )State and localCurrent
    
    
    58,000
    
    
    
    95,000
    
    
    
    260,000Deferred
    
    
    (78,000
    )
    
    
    465,000
    
    
    
    (150,000
    )TOTAL INCOME TAXES (BENEFIT)
    
    
    (1,605,000
    )
    
    
    (1,295,000
    )
    
    
    (137,000
    )(LOSS) INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE
    
    
    (463,641
    )
    
    
    (1,315,085
    )
    
    
    1,097,435CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
NET OF $60,000 DEFERRED INCOME TAX BENEFIT
    
    
    (115,000
    )NET (LOSS) INCOME
    
    $
    (578,641
    )
    
    $
    (1,315,085
    )
    
    $
    1,097,435NET (LOSS) INCOME PER SHARE:Basic (loss) income per share before cumulative effect
of change in accounting principle
    
    $
    (0.18
    )
    
    $
    (0.52
    )
    
    $
    0.45Cumulative effect of change in accounting principle
    
    
    (0.05
    )BASIC (LOSS) INCOME PER SHARE
    
    $
    (0.23
    )
    
    $
    (0.52
    )
    
    $
    0.45Diluted (loss) income per share before cumulative effect
of change in accounting principle
    
    $
    (0.18
    )
    
    $
    (0.52
    )
    
    $
    0.42Cumulative effect of change in accounting principle
    
    
    (0.05
    )DILUTED (LOSS) INCOME PER SHARE
    
    $
    (0.23
    )
    
    $
    (0.52
    )
    
    $
    0.42WEIGHTED AVERAGE SHARES OUTSTANDING:Basic
    
    
    2,551,018
    
    
    
    2,537,277
    
    
    
    2,459,767Diluted
    
    
    2,551,018
    
    
    
    2,537,277
    
    
    
    2,583,762
 
 See notes to consolidated financial statements. Max
& Ermas Restaurants, Inc.




---



##### 



Consolidated
Statements of Shareholders Equity
 AccumulatedAdditional
    
    
    OtherCommon Stock
    
    
    Paid In
    
    
    Comprehensive
    
    
    RetainedShares
    
    
    Amount
    
    
    Capital
    
    
    (Loss) Income
    
    
    Earnings
    
    
    TotalBALANCE
 OCTOBER 26, 2003
    
    
    2,449,601
    
    
    $
    244,960
    
    
    $
    
    
    
    $
    (648,373
    )
    
    $
    12,592,055
    
    
    $
    12,188,642Issuance of stock through
option plans, including $152,466 related tax benefit
    
    
    58,889
    
    
    
    5,888
    
    
    
    340,009
    
    
    
    
    
    
    
    
    
    
    
    345,897Shares repurchased
    
    
    (1,162
    )
    
    
    (116
    )
    
    
    (20,605
    )
    
    
    
    
    
    
    
    
    
    
    (20,721
    )Comprehensive income:Change in fair value of
interest rate protection
agreement, net of
income tax ($158,598)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    444,967
    
    
    
    
    
    
    
    444,967Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,097,435
    
    
    
    1,097,435Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,542,402BALANCE
 OCTOBER 31, 2004
    
    
    2,507,328
    
    
    
    250,732
    
    
    
    319,404
    
    
    
    (203,406
    )
    
    
    13,689,490
    
    
    
    14,056,220Issuance of stock through
option plans, including
$110,611 related tax benefit
    
    
    39,450
    
    
    
    3,945
    
    
    
    358,821
    
    
    
    
    
    
    
    
    
    
    
    362,766Comprehensive loss:Change in fair value of
interest rate protection
agreement, net of
income tax ($109,526)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    203,406
    
    
    
    
    
    
    
    203,406Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,315,085
    )
    
    
    (1,315,085
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,111,679
    )BALANCE
 OCTOBER 30, 2005
    
    
    2,546,778
    
    
    
    254,677
    
    
    
    678,225
    
    
    
    
    
    
    
    12,374,405
    
    
    
    13,307,307Issuance of stock through
option plans, including
$14,568 related tax benefit
    
    
    5,196
    
    
    
    519
    
    
    
    78,220
    
    
    
    
    
    
    
    
    
    
    
    78,739Stock compensation
    
    
    
    
    
    
    
    
    
    
    226,252
    
    
    
    
    
    
    
    
    
    
    
    226,252Net loss and comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (578,641
    )
    
    
    (578,641
    )BALANCE
 OCTOBER 29, 2006
    
    
    2,551,974
    
    
    $
    255,196
    
    
    $
    982,697
    
    
    $
    
    
    
    $
    11,795,764
    
    
    $
    13,033,657
  2006
Annual Report
 13




---



##### 



Consolidated Statements of Cash Flows
 YEAR ENDEDOctober 29
    
    
    October 30
    
    
    October 31(52 weeks)2006
    
    

(52 weeks)2005
    
    

(53 weeks)2004CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) income
    
    $
    (578,641
    )
    
    $
    (1,315,085
    )
    
    $
    1,097,435Adjustments to reconcile net (loss) income to net cash
provided by operating activities:Depreciation and amortization
    
    
    8,024,286
    
    
    
    8,443,967
    
    
    
    8,219,095Deferred income tax credit
    
    
    (1,968,000
    )
    
    
    (1,994,000
    )
    
    
    (777,000
    )Stock compensation expense
    
    
    226,252
    
    
    
    
    
    
    
    Cumulative effect of change in accounting principle
    
    
    175,000
    
    
    
    
    
    
    
    Accretion of deferred sale-leaseback gain
    
    
    (126,267
    )
    
    
    (126,267
    )
    
    
    (126,267
    )Minority interests on income of Affiliated Partnership
    
    
    57,754
    
    
    
    38,503
    
    
    
    19,252Impairment of fixed assets
    
    
    384,265
    
    
    
    1,011,000
    
    
    
    Loss on disposition of assets
    
    
    243,416
    
    
    
    206,237
    
    
    
    214,435Proceeds from lease incentives
    
    
    
    
    
    
    1,000,000
    
    
    
    2,430,000Changes in assets and liabilities:Receivables,
inventories, supplies and prepaid expenses
    
    
    264,038
    
    
    
    403,208
    
    
    
    (865,071
    )Other assets
    
    
    (90,068
    )
    
    
    (387,936
    )
    
    
    (46,769
    )Accounts
payable, accrued and other liabilities
    
    
    (822,030
    )
    
    
    3,195,194
    
    
    
    1,165,649Total adjustments
    
    
    6,368,646
    
    
    
    11,789,906
    
    
    
    10,233,324Net cash provided by operating activities
    
    
    5,790,005
    
    
    
    10,474,821
    
    
    
    11,330,759CASH FLOWS FROM INVESTING ACTIVITIES:Property additions
    
    
    (5,524,182
    )
    
    
    (9,966,903
    )
    
    
    (19,443,999
    )Changes in other assets
    
    
    34,473
    
    
    
    77,731
    
    
    
    127,959Proceeds from the sale of property
    
    
    
    
    
    
    31,333
    
    
    
    2,807,133Net cash used in investing activities
    
    
    (5,489,709
    )
    
    
    (9,857,839
    )
    
    
    (16,508,907
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments under long-term obligations
    
    
    (54,881,248
    )
    
    
    (52,820,697
    )
    
    
    (84,232,469
    )Proceeds from long-term obligations
    
    
    54,729,000
    
    
    
    52,793,019
    
    
    
    88,907,129Debt issuance costs
    
    
    (588,045
    )
    
    
    (79,596
    )
    
    
    (78,765
    )Proceeds from exercise of stock options
    
    
    78,739
    
    
    
    252,155
    
    
    
    193,431Distributions to minority interests in Affiliated Partnership
    
    
    (57,754
    )
    
    
    (38,503
    )
    
    
    (19,252
    )Cash paid for purchase of common stock
    
    
    
    
    
    
    
    
    
    
    (20,721
    )Net cash (used in) provided by financing activities
    
    
    (719,308
    )
    
    
    106,378
    
    
    
    4,749,353NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS
    
    
    (419,012
    )
    
    
    723,360
    
    
    
    (428,795
    )CASH AND CASH EQUIVALENTSBeginning of year
    
    
    2,910,889
    
    
    
    2,187,529
    
    
    
    2,616,324CASH AND CASH EQUIVALENTSEnd of year
    
    $
    2,491,877
    
    
    $
    2,910,889
    
    
    $
    2,187,529SUPPLEMENTAL DISCLOSURES:Cash paid for:Interestnet
of $44,440, $93,958, and $170,407
capitalized in 2006, 2005 and 2004, respectively
    
    $
    2,924,379
    
    
    $
    2,103,280
    
    
    $
    2,136,691Income taxes
    
    $
    274,088
    
    
    
    299,245
    
    
    $
    689,856Noncash activities:Property additions financed by construction payables
    
    $
    584,046
    
    
    
    863,135
    
    
    $
    989,466Property additions to be reimbursed by sale-leaseback
    
    $
    1,537,500
 
 See notes to consolidated financial statements. Max
& Ermas Restaurants, Inc.




---



##### 



1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Description
of Business
  Consolidation
 Fiscal Year-End
 Cash
and Cash Equivalents
 Inventories
 Preopening Costs Reporting on the Costs of
Start-Up Activities.
 Depreciation and Amortization of Property
 YearsBuildings
    
    
    15 to 30Leasehold improvements
    
    
    10 to 15Equipment and fixtures
    
    
    3 to 15
 Leasehold Improvements
 Other
Assets Goodwill and Other Intangible Assets,
 Asset
Impairments
 Asset Retirement Obligations Accounting for Conditional Asset Retirement ObligationsAn
Interpretation of FASB Statement No. 143,
  Revenue Recognition
 Self-Insurance
 Advertising
 Contingent Rent
 Income
Taxes Accounting for Income Taxes.
 Net Income (Loss) Per Share
 2006 Annual Report




---



##### 



2006
    
    
    2005
    
    
    2004Basic weighted-average
shares outstanding
    
    
    2,551,018
    
    
    
    2,537,277
    
    
    
    2,459,767Dilutive effect of
stock options
    
    
    
    
    
    
    
    
    
    
    123,995Diluted weighted-average
shares outstanding
    
    
    2,551,018
    
    
    
    2,537,277
    
    
    
    2,583,762
 Stock-Based
Employee Compensation Plans Share-Based Payment.
   2005
    
    
    2004Net (loss) income:As reported
    
    $
    (1,315,085
    )
    
    $
    1,097,435Pro forma
    
    $
    (1,468,036
    )
    
    $
    944,484Basic (loss) income per share:As reported
    
    $
    (0.52
    )
    
    $
    0.45Pro forma
    
    $
    (0.58
    )
    
    $
    0.38Diluted (loss) income per share:As reported
    
    $
    (0.52
    )
    
    $
    0.42Pro forma
    
    $
    (0.58
    )
    
    $
    0.37
 Segment Disclosures About Segments of an Enterprise and Related Information.
 Estimates
 Commitments and Contingencies
 Recently
Issued Financial Accounting Standards Accounting for Uncertainty in Income Taxes Accounting for Income Taxes,
 Accounting Changes and Error Corrections,
 Fair Value
Measurements
 Accounting for Rental Cost
Incurred During a Construction Period
 How
Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement (That Is Gross Versus Net Presentation)
 2. OWNERSHIP OF RESTAURANT BY AFFILIATED PARTNERSHIP




---



##### 



3. LONG-TERM OBLIGATIONS
  October 29,
    
    
    October 30,2006
    
    
    2005Debt:Revolving credit agreement
    
    $
    11,870,000
    
    
    $
    13,346,239Equipment note
    
    
    
    
    
    
    3,250,000Amended term loan
    
    
    12,200,000
    
    
    
    14,600,000Senior subordinated note
    
    
    7,000,000
    
    
    
    Total debt
    
    
    31,070,000
    
    
    
    31,196,239Deferred gain on sale/leaseback (Note 4)
    
    
    1,387,585
    
    
    
    1,513,853Deferred lease incentives (Note 1)
    
    
    5,099,147
    
    
    
    5,400,420Accrued rent (Note 4)
    
    
    6,482,252
    
    
    
    6,561,292Deferred compensation plan (Note 7)
    
    
    951,898
    
    
    
    717,617Capital leases
    
    
    629,334
    
    
    
    655,343Asset retirement obligations
    
    
    175,000
    
    
    
    Total long-term obligations
    
    
    45,795,216
    
    
    
    46,044,764Less current
maturities of debt
    
    
    (2,729,989
    )
    
    
    (4,227,282
    )Total long-term obligations 
less current maturities
    
    $
    43,065,227
    
    
    $
    41,817,482
 3 4
     Year Ending in October2007
    
    $
    2,400,0002008
    
    
    2,400,0002009
    
    
    2,400,0002010
    
    
    2,400,0002011
    
    
    14,470,000Thereafter
    
    
    7,000,000Total
    
    $
    31,070,000
 4. LEASES
    October 29,
    
    
    October 30,2006
    
    
    2005Asset DescriptionBuildings
    
    $
    750,000
    
    
    $
    1,045,000Equipment and fixtures
    
    
    496,207
    
    
    
    499,846Total
    
    
    1,246,207
    
    
    
    1,544,846Less accumulated amortization
    
    
    (1,148,130
    )
    
    
    (1,396,769
    )Net
    
    $
    98,077
    
    
    $
    148,077
  Years Ending in October2007
    
    $
    90,0002008
    
    
    90,0002009
    
    
    90,0002010
    
    
    90,0002011
    
    
    90,000Thereafter
    
    
    630,000Total minimum lease payments
    
    
    1,080,000Less amount representing interest
    
    
    (450,666
    )Present
value of minimum lease payments
    
    
    629,334Less current maturities
    
    
    (28,716
    )Total obligations under capital leases
less current maturities
    
    $
    600,618
 2006 Annual Report




---



##### 



Years Ending in October2007
    
    $
    14,639,2242008
    
    
    13,771,2892009
    
    
    13,195,7812010
    
    
    12,377,3722011
    
    
    11,819,978Thereafter
    
    
    114,753,185Total
    
    $
    180,556,829
    2006
    
    
    2005
    
    
    2004Minimum rent
    
    $
    15,545,618
    
    
    $
    15,709,259
    
    
    $
    15,148,347Contingent rent based on
percentage of gross
revenue
    
    
    136,868
    
    
    
    139,471
    
    
    
    183,263Total
    
    $
    15,682,486
    
    
    $
    15,848,730
    
    
    $
    15,331,610
  5. INCOME TAXES
  2006
    
    
    2005
    
    
    2004(Benefit) provision
at statutory rate
    
    $
    (703,000
    )
    
    $
    (887,000
    )
    
    $
    327,000State income taxesnet of federal benefit
    
    
    (13,000
    )
    
    
    7,000
    
    
    
    70,000Jobs-related tax credit
    
    
    (13,000
    )
    
    
    (90,000
    )
    
    
    (58,000
    )FICA tax credit
    
    
    (913,000
    )
    
    
    (881,000
    )
    
    
    (867,000
    )Nondeductible stock
compensation
    
    
    51,000
    
    
    
    
    
    
    
    State of Ohio adjustment
    
    
    
    
    
    
    550,000
    
    
    
    Revision of deferred taxes
    
    
    
    
    
    
    
    
    
    
    375,000Othernet
    
    
    (14,000
    )
    
    
    6,000
    
    
    
    16,000Total (benefit)
    
    $
    (1,605,000
    )
    
    $
    (1,295,000
    )
    
    $
    (137,000
    )
   October 29,
    
    
    October 30,2006
    
    
    2005Deferred tax assets (liabilities)Accrued rent
    
    $
    2,383,000
    
    
    $
    2,418,000Depreciation
    
    
    2,994,000
    
    
    
    2,308,000Deferred gain
    
    
    579,000
    
    
    
    629,000Officers benefits
    
    
    570,000
    
    
    
    473,000Gift cards
    
    
    704,000
    
    
    
    625,000FICA tax credit
    
    
    4,170,000
    
    
    
    3,046,000Partnership
    
    
    162,000
    
    
    
    80,000Total deferred tax assets
    
    
    11,562,000
    
    
    
    9,579,000Prepaid insurance and other
    
    
    (160,000
    )
    
    
    (145,000
    )Total deferred tax liabilities
    
    
    (160,000
    )
    
    
    (145,000
    )Net deferred tax asset
    
    $
    11,402,000
    
    
    $
    9,434,000
   6. STOCK OPTION AND BONUS PLANS
    Max
& Ermas Restaurants, Inc.




---



##### 



WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Term
    
    
    ValueBalanceOctober 26, 2003
    
    
    378,700
    
    
    $
    10.91Granted
    
    
    30,950
    
    
    
    17.51Exercised
    
    
    (85,999
    )
    
    
    (6.73
    )Cancelled
    
    
    (10,000
    )
    
    
    (11.13
    )BalanceOctober 31, 2004
    
    
    313,651
    
    
    
    12.69Exercised
    
    
    (63,301
    )
    
    
    (9.51
    )Cancelled
    
    
    (28,400
    )
    
    
    (13.96
    )BalanceOctober 30, 2005
    
    
    221,950
    
    
    $
    13.44Granted
    
    
    100,196
    
    
    
    11.51Exercised
    
    
    (5,196
    )
    
    
    (6.18
    )Cancelled
    
    
    (28,000
    )
    
    
    (10.12
    )BalanceOctober 29, 2006
    
    
    288,950
    
    
    $
    13.22
    
    
    
    6.71
    
    
    $
    0.00Exercisable at October 29,2006
    
    
    157,770
    
    
    $
    13.61
    
    
    
    5.96
    
    
    $
    0.00
  Options Outstanding
    
    Options ExercisableNumber
    
    
    
    
    
    
    
    
    
    Number
    
    WeightedOutstanding at
    
    Weighted Average
    
    Weighted
    
    Exercisable at
    
    AverageRange of Exercise
    
    October 29,
    
    Remaining
    
    Average Exercise
    
    October 29,
    
    ExercisePrices
    
    2006
    
    Contractual Life
    
    Price
    
    2006
    
    Price$8.50-$10.30
    
    
    43,000
    
    
    
    4.92
    
    
    $
    10.09
    
    
    
    38,000
    
    
    $
    10.30$10.90-$17.75
    
    
    245,950
    
    
    
    7.02
    
    
    $
    13.77
    
    
    
    119,770
    
    
    $
    14.66
   Number of
    
    
    Weighted AverageShares
    
    
    Grant Date Fair ValueUnvestedbeginning of year
    
    
    65,370
    
    
    $
    5.29Granted
    
    
    100,196
    
    
    
    3.23Vested
    
    
    (34,386
    )
    
    
    5.43Unvestedend of year
    
    
    131,180
    
    
    $
    4.63
   7. EMPLOYEE BENEFIT PLANS
    8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
   9. IMPAIRMENT OF ASSETS
   10. CHANGE IN ACCOUNTING PRINCIPLE
    2006
    
    
    2005
    
    
    2004Net (loss) income before
cumulative effect of change
in accounting principle:As reported
    
    $
    (463,641
    )
    
    $
    (1,315,085
    )
    
    $
    1,097,435Less total asset retirement
expenses determined under
FIN 47net of income tax
benefit
    
    
    (10,000
    )
    
    
    (10,000
    )
    
    
    (10,000
    )Add cumulative effect
adjustment
    
    
    115,000
    
    
    
    
    
    
    
    Pro forma net (loss) income
    
    $
    (358,641
    )
    
    $
    (1,325,085
    )
    
    $
    1,087,435Diluted (loss) income per share:As reported
    
    $
    (0.23
    )
    
    $
    (0.52
    )
    
    $
    0.42Pro forma
    
    $
    (0.14
    )
    
    $
    (0.52
    )
    
    $
    0.42
 2006 Annual Report




---



##### 



Report Of Independent Registered Public Accounting Firm
 To the Stockholders and Directors of
Max & Ermas Restaurants, Inc.:
     
   Max & Ermas Officers and Directors
 Todd B. Barnum  Steve Catanese  Gregory L. Heywood  James E. Howenstein  Robert A. Lindeman  William
C. Niegsch, Jr.  Dave Divittorio  Mary Hamill  Donal H. Malenick  Michael G. Giulioli  Jay B. Barney  Mark F. Emerson
 Max & Ermas Restaurants, Inc.




---



##### 



Selected Quarterly Financial Data
 Income
    
    
    
    
    
    
    DilutedUnaudited
    
    Total
    
    
    (Loss) Before
    
    
    Net Income
    
    
    Earnings (Loss)
    
    
    Stock Price(Thousands, except per share data)
    
    Revenues
    
    
    Income Taxes
    
    
    (Loss)
    
    
    Per Share
    
    
    High
    
    
    Low2006First Quarter
    
    $
    57,617
    
    
    $
    (493
    )
    
    $
    (32
    )
    
    $
    (0.01
    )
    
    $
    12.75
    
    
    $
    10.05Second Quarter
    
    
    42,781
    
    
    
    (30
    )
    
    
    161
    
    
    
    0.06
    
    
    
    10.99
    
    
    
    9.22Third Quarter
    
    
    40,646
    
    
    
    (811
    )
    
    
    (295
    )
    
    
    (0.12
    )
    
    
    9.84
    
    
    
    7.06Fourth Quarter
    
    
    39,245
    
    
    
    (735
    )
    
    
    (413
    )(1)
    
    
    (0.16
    )(1)
    
    
    8.60
    
    
    
    7.75YEAR
    
    $
    180,290
    
    
    $
    (2,069
    )
    
    $
    (579
    )
    
    $
    (0.23
    )
    
    $
    12.75
    
    
    $
    7.062005First Quarter
    
    $
    57,270
    
    
    $
    820
    
    
    $
    655
    
    
    $
    0.26
    
    
    $
    15.59
    
    
    $
    12.35Second Quarter
    
    
    43,025
    
    
    
    (1,799
    )
    
    
    (944
    )
    
    
    (0.37
    )
    
    
    15.67
    
    
    
    12.44Third Quarter
    
    
    42,813
    
    
    
    (846
    )
    
    
    (946
    )
    
    
    (0.37
    )
    
    
    15.50
    
    
    
    14.01Fourth Quarter
    
    
    40,597
    
    
    
    (785
    )
    
    
    (80
    )
    
    
    (0.03
    )
    
    
    14.75
    
    
    
    12.05YEAR
    
    $
    183,705
    
    
    $
    (2,610
    )
    
    $
    (1,315
    )
    
    $
    (0.52
    )
    
    $
    15.67
    
    
    $
    12.05
 
 (1)
    
    Includes $115,000 ($.05 per share) cumulative effect of change in accounting principle (net of
$60,000 tax benefit) due to the adoption of FIN 47 Accounting for Conditional Asset Retirement
Obligations.  Stockholder Information
 QUARTERLY CALENDAR:
  Fiscal 2007
    
    Quarter-End Dates1st quarter
    
    February 18, 20072nd quarter
    
    May 13, 20073rd quarter
    
    August 5, 20074th quarter
    
    October 28, 2007
 DIVIDENDS:
  GENERAL COUNSEL:
 INDEPENDENT REGISTERED PUBLIC ACCOUNTANT:
 STOCK TRANSFER AGENT AND REGISTRAR:
  10-K REPORT:




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