##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark one)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended August 5, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from _________ to _________
 Commission file number 0-1154
 MAX & ERMAS RESTAURANTS, INC.
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    31-1041397
(I.R.S. Employer
identification no.)4849 Evanswood Drive, Columbus, Ohio
(Address of principal executive offices)
    
    43229
(Zip Code)
 (614) 431-5800
 þ o
  o o þ
 o þ




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONITEM 1  FINANCIAL STATEMENTS MAX & ERMAS RESTAURANTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETSITEM 2   MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSItem 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKItem 4  CONTROLS AND PROCEDURESPART II  OTHER INFORMATIONItem 6  EXHIBITSSIGNATURESEXHIBIT INDEXEX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  
 PART I  FINANCIAL INFORMATION
 
 ITEM 1  FINANCIAL STATEMENTS
MAX & ERMAS RESTAURANTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 August 5, 2007(UNAUDITED)
    
    
    October 29, 2006ASSETSCurrent Assets:Cash and Equivalents
    
    $
    2,182,210
    
    
    $
    2,491,877Inventories
    
    
    1,238,260
    
    
    
    1,260,537Other Current Assets
    
    
    2,874,786
    
    
    
    3,820,938Total Current Assets
    
    
    6,295,256
    
    
    
    7,573,352Property  At Cost
    
    
    108,067,125
    
    
    
    103,704,895Less Accumulated Depreciation and Amortization
    
    
    56,496,990
    
    
    
    52,896,054Property  Net
    
    
    51,570,135
    
    
    
    50,808,841Deferred Income Taxes and Other Assets
    
    
    16,158,537
    
    
    
    13,972,472Total
    
    $
    74,023,928
    
    
    $
    72,354,665LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Current Maturities of Long-Term Obligations
    
    $
    2,795,843
    
    
    $
    2,729,989Accounts Payable
    
    
    6,707,446
    
    
    
    4,829,677Accrued Payroll and Related Taxes
    
    
    2,638,174
    
    
    
    2,770,583Accrued Liabilities
    
    
    5,690,203
    
    
    
    5,925,532Total Current Liabilities
    
    
    17,831,666
    
    
    
    16,255,781Long-Term Obligations  Less Current Maturities
    
    
    43,277,774
    
    
    
    43,065,227Stockholders Equity:Preferred Stock  $.10 Par Value;Authorized 500,000 Shares  None OutstandingCommon Stock  $.10 Par Value;Authorized 5,000,000 Shares,
Issued and Outstanding 2,554,474 Shares
At 08/5/07 and 2,551,974 Shares at 10/29/06
    
    
    255,446
    
    
    
    255,196Additional Paid-In Capital
    
    
    1,184,040
    
    
    
    982,697Retained Earnings
    
    
    11,475,002
    
    
    
    11,795,764Total Stockholders Equity
    
    
    12,914,488
    
    
    
    13,033,657Total
    
    $
    74,023,928
    
    
    $
    72,354,665
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MAX & ERMAS RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Twelve Weeks Ended
    
    
    Forty Weeks EndedAugust 5, 2007
    
    
    August 6, 2006
    
    
    August 5, 2007
    
    
    August 6, 2006REVENUES:
    
    $
    39,201,281
    
    
    $
    40,646,117
    
    
    $
    135,857,076
    
    
    $
    141,044,845COSTS AND EXPENSES:Costs of Goods Sold
    
    
    9,813,242
    
    
    
    10,226,514
    
    
    
    33,973,015
    
    
    
    35,979,771Payroll and Benefits
    
    
    13,025,873
    
    
    
    13,325,262
    
    
    
    43,938,773
    
    
    
    45,273,003Other Operating Expenses
    
    
    13,443,840
    
    
    
    13,414,347
    
    
    
    45,206,962
    
    
    
    46,760,200Pre-Opening Expenses
    
    
    39,599
    
    
    
    28,139
    
    
    
    52,667
    
    
    
    36,288Impairment of Assets
    
    
    431,000
    
    
    
    339,000
    
    
    
    431,000
    
    
    
    843,524Administrative Expenses
    
    
    3,540,209
    
    
    
    3,298,643
    
    
    
    11,219,616
    
    
    
    11,151,354Total Operating Expenses
    
    
    40,293,763
    
    
    
    40,631,905
    
    
    
    134,822,033
    
    
    
    140,044,140Operating Income (Loss)
    
    
    (1,092,482
    )
    
    
    14,212
    
    
    
    1,035,043
    
    
    
    1,000,705Interest Expense
    
    
    777,546
    
    
    
    806,152
    
    
    
    2,619,051
    
    
    
    2,276,207Minority Interest in Income
of Affiliated Partnership
    
    
    19,252
    
    
    
    19,251
    
    
    
    57,755
    
    
    
    57,754LOSS BEFORE INCOME TAXES
    
    
    (1,889,280
    )
    
    
    (811,191
    )
    
    
    (1,641,763
    )
    
    
    (1,333,256
    )INCOME TAXES (CREDIT)
    
    
    (921,000
    )
    
    
    (516,000
    )
    
    
    (1,321,000
    )
    
    
    (1,168,000
    )NET LOSS
    
    $
    (968,280
    )
    
    $
    (295,191
    )
    
    $
    (320,763
    )
    
    $
    (165,256
    )NET LOSS PER SHARE:Basic
    
    $
    (0.38
    )
    
    $
    (0.12
    )
    
    $
    (0.13
    )
    
    $
    (0.06
    )Diluted
    
    $
    (0.38
    )
    
    $
    (0.12
    )
    
    $
    (0.13
    )
    
    $
    (0.06
    )SHARES OUTSTANDING:Basic
    
    
    2,555,664
    
    
    
    2,551,974
    
    
    
    2,554,545
    
    
    
    2,550,731Diluted
    
    
    2,555,664
    
    
    
    2,551,974
    
    
    
    2,554,545
    
    
    
    2,550,731
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MAX & ERMAS RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Forty Weeks EndedAugust 5, 2007
    
    
    August 6, 2006CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (320,763
    )
    
    $
    (165,256
    )Depreciation and amortization
    
    
    6,092,586
    
    
    
    6,230,312Minority interest in income of Affiliated Partnerships
    
    
    57,755
    
    
    
    57,755Decrease (increase) in deferred tax asset
    
    
    (1,666,000
    )
    
    
    (1,537,000
    )Loss on disposition of assets
    
    
    282,456
    
    
    
    192,456Impairment of fixed assets
    
    
    431,000
    
    
    
    465,600Stock based compensation
    
    
    181,218
    
    
    
    74,981Decrease in inventories
    
    
    22,277
    
    
    
    126,828Increase (decrease) in accounts payable
    
    
    877,015
    
    
    
    (1,115,171
    )Decrease in accrued liabilities
    
    
    (367,738
    )
    
    
    (929,119
    )Changes in other assets and liabilities
    
    
    1,719,500
    
    
    
    (231,831
    )Net cash provided by operating activities
    
    
    7,309,306
    
    
    
    3,169,555CASH FLOWS FROM INVESTING ACTIVITIES:Property additions
    
    
    (5,229,357
    )
    
    
    (3,681,830
    )Proceeds from sale of assets
    
    
    46,716Net decrease (increase) in other assets
    
    
    (701,205
    )
    
    
    26,663Net cash used by investing activities
    
    
    (5,883,846
    )
    
    
    (3,655,167
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments under long-term obligations
    
    
    (54,091,504
    )
    
    
    (38,010,732
    )Proceeds from long-term obligations
    
    
    52,418,000
    
    
    
    38,434,000Proceeds from exercise of stock options
    
    
    20,375
    
    
    
    64,171Debt issue costs
    
    
    (24,243
    )
    
    
    (631,897
    )Distributions to minority interests in Affiliated Partnerships
    
    
    (57,755
    )
    
    
    (57,755
    )Net cash used by financing activities
    
    
    (1,735,127
    )
    
    
    (202,213
    )NET DECREASE IN CASH AND EQUIVALENTS
    
    
    (309,667
    )
    
    
    (687,825
    )CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    2,491,877
    
    
    
    2,910,889CASH AND EQUIVALENTS AT END OF PERIOD
    
    $
    2,182,210
    
    
    $
    2,223,064SUPPLEMENTAL DISCLOSURES:Cash paid during the period for:Interest
    
    $
    2,987,195
    
    
    $
    1,137,048Income taxes
    
    $
    242,260
    
    
    $
    4,915Non-cash activities:Property additions financed by accounts payable
    
    $
    1,302,868
    
    
    $
    462,843Property additions financed by financing lease obligations
    
    $
    1,537,500
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MAX & ERMAS RESTAURANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 1.
    
    PresentationThe accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and include all of the information and disclosures
required by accounting principles generally accepted in the United States of America for interim
reporting, which are less than those required for annual reporting. In the opinion of
management, all adjustments, consisting of only normal recurring accruals, considered necessary
for a fair presentation have been included.The Company and its Affiliated Partnership each have a 52-53 week fiscal year, which ends on the
last Sunday in October. Fiscal 2007 and 2006 each consists of 52 weeks and includes one
sixteen-week and three twelve-week quarters.
 2.
    
    New Financial Accounting StandardsIn June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). FIN 48 is an interpretation of FASB Statement No. 109, Accounting for
Income Taxes, and seeks to reduce the diversity in practice associated with certain aspects of
measurement and recognition in accounting for income taxes. In addition, FIN 48 requires
expanded disclosure with respect to the uncertainty in income taxes and is effective as of the
beginning of the Companys 2008 fiscal year. The Company is currently evaluating the impact of
FIN 48 on its consolidated financial statements.In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), to
eliminate the diversity in practice that exists due to the different definition of fair value
and the limited guidance for applying those definitions in accounting principles generally
accepted in the United States of America that are dispersed among the many accounting
pronouncements that require fair value measurements. SFAS 157 will apply to fiscal years
beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS 157
on its consolidated financial statements.In June 2006, the FASB ratified the Emerging Issues Task Force (EITF) position EITF 06-3, How
Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement (That Is Gross Versus Net Presentation) (EITF 06-3), that addresses
disclosure requirements for taxes assessed by a governmental authority that is both imposed
concurrently with a specific revenue-producing transaction between a seller and a customer and
may include, but is not limited to, sales, use, value-added, and some excise taxes. EITF 06-3
requires disclosure of the method of accounting for the applicable assessed taxes and the amount
of assessed taxes that are included in revenues if they are accounted for under the gross
method. The provisions of EITF 06-3 are effective for interim and annual reporting periods
beginning after December 15, 2006, with earlier application permitted. The Company presents
sales and other taxes collected from customers on a net basis, accordingly such taxes are not
included in revenues and cost of goods sold.
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In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 108, Quantifying Misstatements (SAB 108). SAB 108 provides guidance on
quantifying and evaluating the materiality of unrecorded misstatements requiring the use of both
a balance sheet and an income statement approach when quantifying and evaluating the materiality
of a misstatement. SAB 108 is effective for fiscal years ending after November 15, 2006. The
adoption of SAB 108 did not have a material effect on the Companys financial statements.In February 2007, the FASB issued SFAS No. 159, Establishing the Fair Value Option for
Financial Assets and Liabilities, to permit all entities to choose to elect to measure eligible
financial instruments at fair value. SFAS No. 159 applies to fiscal years beginning after
November 15, 2007, with early adoption permitted for an entity that has also elected to apply
the provisions of SFAS No. 157, Fair Value Measurements. An entity is prohibited from
retrospectively applying SFAS No. 159, unless it chooses early adoption. Management is
currently evaluating the impact of SFAS No. 159 on its consolidated financial statements.
 3.
    
    Net Income Per ShareBasic income per share amounts are based on the weighted average number of shares of common
stock outstanding during the periods presented. Diluted income per share amounts are based on
the weighted average number of shares of common stock and dilutive stock options outstanding
during the periods presented. Options to purchase 391,450 shares of common stock were
outstanding at August 5, 2007, but were not included in the computation of diluted earnings per
share because the Company reported a net loss for the quarter and year-to-date periods and,
therefore, the effect would be antidilutive. Options to purchase 310,950 shares of common stock
were outstanding at August 6, 2006, but were not included in the computation of diluted earnings
per share because the Company reported a net loss for the quarter and year-to-date periods and,
therefore, the effect would be antidilutive. The difference between basic shares outstanding
and diluted shares outstanding were as follows:
 Twelve Weeks Ended
    
    
    Forty Weeks EndedAugust 5, 2007
    
    
    August 6, 2006
    
    
    August 5, 2007
    
    
    August 6, 2006Basic Shares
Outstanding
    
    
    2,555,664
    
    
    
    2,551,974
    
    
    
    2,554,545
    
    
    
    2,550,731Dilutive Effect of
Stock OptionsDiluted Shares
Outstanding
    
    
    2,555,664
    
    
    
    2,551,974
    
    
    
    2,554,545
    
    
    
    2,550,731
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4.
    
    Stock OptionsDuring the forty weeks ended August 5, 2007, the Companys stock option activity and weighted
average exercise prices were as follows:
 Shares
    
    
    Exercise PriceOutstanding, October 29, 2006
    
    
    288,950
    
    
    $
    13.22Granted
    
    
    105,000
    
    
    
    8.48Exercised
    
    
    (2,500
    )
    
    
    (8.15
    )Outstanding, August 5, 2007
    
    
    391,450
    
    
    $
    11.98
 Stock-based employee compensation expense for the forty weeks ended August 5, 2007 was $181,218
leaving a remaining unrecognized compensation expense at August 5, 2007 of $451,457 to be
recognized over a weighted average period of 3.8 years. Stock-based employee compensation
expense for the forty weeks ended August 6, 2006 was $74,981.
 5.
    
    Income TaxesFor the first 40 weeks of 2007, we reported a tax credit of $1,321,000, which reflects the tax
benefit of the reported loss before income taxes and the FICA tax on tips credit of
approximately $880,000. For 2006, we recorded a tax credit of $1,168,000 which reflected the
tax benefit of the reported loss before income taxes and the FICA tax on tips credit of
approximately $715,000. Fluctuations in pre-tax income or a pre-tax loss may cause our
effective tax rate or tax credits recorded to vary from quarter to quarter. Included in the
total net deferred tax asset balance of $13,068,000 at August 5, 2007 is $5,150,000 related to
FICA tax on tips credits that begin expiring in 2023. The Company has considered all available
evidence, including expected future taxable income and ongoing prudent and feasible tax planning
strategies, in assessing the need for a valuation allowance. Due to changes in facts and
circumstances and the significant management judgments and estimates involved in determining
the proper valuation allowance, differences between actual future events and prior judgments and
estimates could result in adjustments. Decreases in the expected future taxable income of the
Company may trigger adjustments in future periods. In the event the Company were to determine
it is more likely than not that it will not fully recognize deferred tax assets, an adjustment
to the deferred tax assets would be charged to income in the period such determination was made.
 6.
    
    Asset ImpairmentDuring the third quarter of 2007, the Company recorded a $431,000 asset impairment charge for
the write down of restaurant assets at three under-performing locations. Testing for impairment
of long-lived assets requires significant management judgement regarding future cash flows,
asset lives and discount rates. Changes in estimates could result in future impairment charges.
 7.
    
    Bank CovenantsAt August 5, 2007, the Company was not in compliance with the liabilities to tangible net
worth, fixed charge coverage and financial ratio covenants of its bank loan agreement. The Company has obtained waivers for the defaults
for the period ended August 5, 2007, and the debt covenants have been amended on a go forward
basis. Accordingly, the Company has classified amounts due under its bank loan agreement as long-term obligations less amounts appropriately classified as
current maturities. The Company must improve its operating results and cash flows or take other
actions to improve its capitalization to meet the debt covenants in the future. Any failure to
comply with the debt covenants in the future could result in an event of default under the
borrowing agreements, in which case the lenders could elect to declare all amounts outstanding
thereunder to be due and payable, which could have a material adverse effect on the Companys
financial condition.
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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 OVERVIEW
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YEAR-TO-YEAR COMPARISONS AND ANALYSIS
 RESULTS OF OPERATIONS
  Twelve Weeks Ended
    
    
    Forty Weeks EndedAugust 5, 2007
    
    
    August 6, 2006
    
    
    August 5, 2007
    
    
    August 6, 2006Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of Goods Sold
    
    
    (25.0
    )
    
    
    (25.2
    )
    
    
    (25.0
    )
    
    
    (25.5
    )Payroll & Benefits
    
    
    (33.3
    )
    
    
    (32.8
    )
    
    
    (32.3
    )
    
    
    (32.1
    )Other Operating Expenses
    
    
    (34.3
    )
    
    
    (33.0
    )
    
    
    (33.3
    )
    
    
    (33.2
    )Pre-Opening Expenses
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    
    
    
    
    Impairment of Assets
    
    
    (1.1
    )
    
    
    (0.8
    )
    
    
    (0.3
    )
    
    
    (0.6
    )Administrative Expenses
    
    
    (9.0
    )
    
    
    (8.1
    )
    
    
    (8.2
    )
    
    
    (7.9
    )Interest Expense
    
    
    (2.0
    )
    
    
    (2.0
    )
    
    
    (1.9
    )
    
    
    (1.6
    )Minority Interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income Tax Credit
    
    
    2.3
    
    
    
    1.3
    
    
    
    1.0
    
    
    
    0.8Net Income (Loss)
    
    
    (2.5
    )%
    
    
    (0.7
    )%
    
    
    (0.2
    )%
    
    
    (0.1
    )%
 REVENUES
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COSTS AND EXPENSES
   10




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ASSET IMPAIRMENT
    ADMINISTRATIVE EXPENSES
  11




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INTEREST EXPENSE
    INCOME TAXES
  12




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LIQUIDITY AND CAPITAL RESOURCES
       13




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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Same-Store Sales
  Asset Impairment
  Self-Insurance Reserves
  Income Taxes and Deferred Tax Asset
  14




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INFLATION
  SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
  15




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Item 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 Item 4  CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures.
  16




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Internal Controls
 17




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PART II  OTHER INFORMATION
 
 Item 6  EXHIBITS
 
 
 *
    
    Filed with this report.+
    
Furnished with this report. 18




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SIGNATURES
  MAX & ERMAS RESTAURANTS, INC.Registrant/s/ Todd B. BarnumTodd B. BarnumChairman of the Board and
Chief Executive Officer
(Principal Executive Officer)/s/ William C. Niegsch, Jr.William C. Niegsch, Jr.Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer) 
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EXHIBIT INDEX
 Exhibit No.
    
    Exhibit
    
    Page No.31.1*
    
    Rule 13a-14(a) Certification of Principal Executive Officer
    
    Page31.2*
    
    Rule 13a-14(a) Certification of Principal Financial Officer
    
    Page32.1+
    
    Section 1350 Certification of Principal Executive Officer
    
    Page32.2+
    
    Section 1350 Certification of Principal Financial Officer
    
    Page
 
 *
    
    Filed with this report.+
    
    Furnished with this report. 20