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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended February 17, 2008
 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
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer  
o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company
þ
 o þ




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONITEM 1  FINANCIAL STATEMENTSITEM 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
 February 17,2008
    
    
    October 28, 2007(UNAUDITED)ASSETSCurrent Assets:Cash and Equivalents
    
    $
    2,627,767
    
    
    $
    2,465,852Inventories
    
    
    1,277,732
    
    
    
    1,320,669Other Current Assets
    
    
    5,334,827
    
    
    
    4,776,568Total Current Assets
    
    
    9,240,326
    
    
    
    8,563,089Property  At Cost
    
    
    112,852,912
    
    
    
    112,989,108Less Accumulated Depreciation and Amortization
    
    
    59,996,104
    
    
    
    57,971,840Property  Net
    
    
    52,856,808
    
    
    
    55,017,268Deferred Income Taxes and Other Assets
    
    
    14,849,445
    
    
    
    14,979,932Total
    
    $
    76,946,579
    
    
    $
    78,560,289LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Current Maturities of Long-Term Obligations
    
    $
    3,953,581
    
    
    $
    2,914,530Accounts Payable
    
    
    6,289,472
    
    
    
    9,280,424Accrued Payroll and Related Taxes
    
    
    2,674,682
    
    
    
    2,966,378Accrued Liabilities
    
    
    7,831,017
    
    
    
    6,548,035Total Current Liabilities
    
    
    20,748,752
    
    
    
    21,709,367Long-Term Obligations  Less Current Maturities
    
    
    47,197,287
    
    
    
    47,164,076Stockholders 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 02/17/08 and 2,554,474 Shares at 10/28/07
    
    
    255,446
    
    
    
    255,446Additional Paid-In Capital
    
    
    1,215,845
    
    
    
    1,165,389Retained Earnings
    
    
    7,529,249
    
    
    
    8,266,011Total Stockholders Equity
    
    
    9,000,540
    
    
    
    9,686,846Total
    
    $
    76,946,579
    
    
    $
    78,560,289
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MAX & ERMAS RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Sixteen Weeks EndedFebruary 17, 2008
    
    
    February 18, 2007REVENUES
    
    $
    55,199,867
    
    
    $
    55,520,863COSTS AND EXPENSES:Costs of Goods Sold
    
    
    14,233,737
    
    
    
    13,847,613Payroll and Benefits
    
    
    17,981,543
    
    
    
    17,469,800Other Operating Expenses
    
    
    18,488,120
    
    
    
    17,888,307Pre-Opening Expenses
    
    
    159,673
    
    
    
    11,878Administrative Expenses
    
    
    3,869,250
    
    
    
    4,454,792Impairment of Assets
    
    
    423,849
    
    
    
    Total Operating Expenses
    
    
    55,156,172
    
    
    
    53,672,390Operating Income
    
    
    43,695
    
    
    
    1,848,473Interest Expense
    
    
    1,136,206
    
    
    
    1,069,891Other Non-Operating Expense
    
    
    19,252
    
    
    
    19,251INCOME (LOSS) BEFORE INCOME TAXES
    
    
    (1,111,763
    )
    
    
    759,331INCOME TAXES (CREDIT)
    
    
    (375,000
    )
    
    
    10,000NET INCOME (LOSS)
    
    $
    (736,763
    )
    
    $
    749,331NET INCOME (LOSS) PER SHAREBasic and Diluted
    
    $
    (0.29
    )
    
    $
    0.29SHARES OUTSTANDING:Basic and Diluted
    
    
    2,554,474
    
    
    
    2,552,867
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MAX & ERMAS RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Sixteen Weeks EndedFebruary 17, 2008
    
    
    February 18, 2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (736,763
    )
    
    $
    749,331Depreciation and amortization
    
    
    2,478,497
    
    
    
    2,440,257Other Non-Operating Expenses
    
    
    19,252
    
    
    
    19,251Loss on disposition of assets
    
    
    15,843
    
    
    
    148,275Impairment of fixed assets
    
    
    423,849Stock based compensation
    
    
    50,456
    
    
    
    66,748Decrease in inventories
    
    
    42,937
    
    
    
    18,291Decrease in accounts payable
    
    
    (1,210,110
    )
    
    
    (18,724
    )Increase in accrued liabilities
    
    
    991,289
    
    
    
    1,115,675Changes in other assets and liabilities
    
    
    (296,838
    )
    
    
    200,790Net cash provided by operating activities
    
    
    1,778,412
    
    
    
    4,739,894CASH FLOWS FROM INVESTING ACTIVITIES:Property additions
    
    
    (1,497,315
    )
    
    
    (1,280,887
    )Net decrease (increase) in other assets
    
    
    37,564
    
    
    
    (205,704
    )Net cash used by investing activities
    
    
    (1,459,751
    )
    
    
    (1,486,591
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments under long-term obligations
    
    
    (20,200,967
    )
    
    
    (21,570,352
    )Proceeds from long-term obligations
    
    
    20,105,637
    
    
    
    18,426,000Proceeds from exercise of stock options
    
    
    
    
    
    
    20,375Debt issue costs
    
    
    (42,164
    )
    
    
    (17,866
    )Distributions to Minority Interests in Affiliated Partnerships
    
    
    (19,252
    )
    
    
    (19,251
    )Net cash used in financing activities
    
    
    (156,746
    )
    
    
    (3,161,094
    )NET INCREASE IN CASH AND EQUIVALENTS
    
    
    161,915
    
    
    
    92,209CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    2,465,852
    
    
    
    2,491,877CASH AND EQUIVALENTS AT END OF PERIOD
    
    $
    2,627,767
    
    
    $
    2,584,086SUPPLEMENTAL DISCLOSURES:Cash paid during the period for:Interest
    
    $
    1,339,108
    
    
    $
    1,426,093Income taxes
    
    $
    751
    
    
    $
    18,538Non-cash activities:Property additions financed by accounts payable
    
    $
    186,851
    
    
    $
    324,177Property addition financed by financing lease obligations
    
    $
    1,610,936
    
    
    $
    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 2008 and 2007 each consist 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. FIN 48 was adopted in the first quarter of
2008 (see note 7).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 does not expect the impact of adopting SFAS 157
to be material to its consolidated financial statements.In February 2007, the FASB issued SFAS No. 159, Establishing the Fair Value Option for Financial
Assets and Liabilities(SFAS 159) to permit all entities to choose to elect to measure eligible
financial instruments at fair value. SFAS 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. An entity is prohibited from retrospectively applying SFAS No. 159,
unless it chooses early adoption. The Company is currently evaluating the impact of SFAS No.
159 on its consolidated financial statements.
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3.
    
    Net Income Per ShareBasic income per share amounts are based on the weighted average number of shares of common
stock outstanding during the years 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 488,150 shares of common stock were outstanding at
February 17, 2008, but were not included in the computation of diluted earnings per share
because the Company reported a net loss for the quarter, therefore, the effect would be
anti-dilutive. Options to purchase 288,950 shares of common stock were outstanding at February
18, 2007, but were not included in the computation of diluted earnings per share because the
exercise prices were greater than the average market price of the common shares, therefore, the
effect would be anti-dilutive. The difference between basic shares outstanding and diluted shares outstanding were as follows:
 Sixteen Weeks EndedFebruary 17, 2008
    
    February 18, 2007Basic Shares
Outstanding
    
    
    2,554,474
    
    
    
    2,552,867Dilutive Effect of
Stock Options
    
    
    
    
    
    
    Diluted Shares
Outstanding
    
    
    2,554,474
    
    
    
    2,552,867
 4.
    
    Stock OptionsDuring the sixteen weeks ended February 17, 2008, the Companys stock option activity and
weighted average exercise prices were as follows:
 Shares
    
    
    Exercise PriceOutstanding, October 28, 2007
    
    
    301,150
    
    
    $
    11.42Granted
    
    
    200,000
    
    
    
    4.50Exercised
    
    
    
    
    
    
    Forfeited
    
    
    ( 13,000
    )
    
    
    13.30Outstanding, February 17, 2008
    
    
    488,150
    
    
    $
    8.54
 Stock-based employee compensation expense for the sixteen weeks ended February 17, 2008 was
$50,546 ($66,748 expense for the sixteen weeks ended February 18, 2007) leaving a remaining
unrecognized compensation expense at February 17, 2008 of $417,000, to be recognized over a
weighted average period of 6.5 years.
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5.
    
    Long-Term ObligationsOn October 29, 2007, the first day of fiscal 2008, the Company issued a $2.0 million, 8.5%
convertible promissory note to a director of the Company. One million dollars is due ten days
after the Company receives a construction allowance from the landlord of one of the restaurants
that opened during the fourth quarter of 2007. The second million dollars is due on the earlier
of April 16, 2009, or upon the re-capitalization or sale of the Company. The remaining $1.0
million note balance is convertible into shares of common stock at a rate of $5.00 per share or
the equity price per share realized in a re-capitalization or sale transaction. The proceeds of
the note were used to increase working capital.At February 17, 2008, the Company was in compliance with the minimum quarterly adjusted EBITDA
covenant of $2.2 million required by its bank loan agreement and senior subordinated note
agreement. The Company projects that it will be in compliance with the minimum quarterly
adjusted EBITDA covenant, through the fourth quarter of 2008 and the covenants under the amended
bank agreement through the first quarter of 2009, and therefore has classified this related debt
as long-term (less 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.6.
    
    Asset ImpairmentDuring the first quarter of 2008, the Company recorded a $424,000 asset impairment charge
primarily for the write-down of restaurant assets and goodwill at two under-performing locations
and goodwill at four locations (including the two above-mentioned). Testing for impairment of
long-lived assets requires significant management judgment regarding future cash flows, asset
lives and discount rates. Changes in estimates could result in future impairment charges.7.
    
    Income Taxes an Deferred Tax AssetWe adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No.
48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109
(FIN 48), in the first quarter of 2008. FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial statements in accordance with FASB
Statement 109, Accounting for Income Taxes, and prescribes a recognition threshold and
measurement process for financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and
transition.Based on our evaluation, we have concluded that there are no significant uncertain tax positions
requiring recognition in our financial statements. Our evaluation was performed for the tax
years ended October 26, 2003, October 31, 2004, October 30, 2005, October 29,
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2006 and October 28, 2007, the tax years which remain subject to examination by major tax
jurisdictions as of April 13, 2008.We may from time to time, be assessed interest or penalties by major tax jurisdictions, although
any such assessments historically have been minimal and immaterial to our financial results. In
the event we have received an assessment for interest and/or penalties, it has been classified
in the financial statements as selling, general and administrative expense.For the sixteen weeks of 2008, the Company reported a tax credit of $375,000, which reflects the
tax benefit of the reported loss before income taxes and $468,000 of FICA tax on tips credit
earned during the quarter, both of which were offset by a $304,000 increase to the deferred tax
asset valuation allowance. For the sixteen weeks of 2007, the FICA tax on tips and work
opportunity tax credits of $462,000 essentially offset our income tax expense. The Company has
determined that it is more likely than not that it will not realize the entire value of its
deferred tax asset. The Company has recorded a valuation allowance totaling $1.6 million at
February 17, 2008 related to a portion of the FICA tax on tips credit that may expire before
being utilized. 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 our company may trigger adjustments in future
periods. In the event we were to determine it is more likely than not that we will not fully
recognize the remaining net deferred tax assets, an adjustment to the deferred tax assets would
be charged to income in the period such determination was made.
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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 OVERVIEW
    8




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YEAR-TO-YEAR COMPARISONS AND ANALYSIS
 RESULTS OF OPERATIONS
  Sixteen Weeks EndedFebruary 17, 2008
    
    February 18, 2007Revenues
    
    
    100.0
    %
    
    
    100.0
    %Cost of Goods Sold
    
    
    (25.8
    )
    
    
    (24.9
    )Payroll & Benefits
    
    
    (32.6
    )
    
    
    (31.5
    )Other Operating Expenses
    
    
    (33.5
    )
    
    
    (32.2
    )Pre-Opening Expenses
    
    
    (0.3
    )
    
    
    Impairment of Assets
    
    
    (0.8
    )
    
    
    Administrative Expenses
    
    
    (7.0
    )
    
    
    (8.0
    )Interest Expense
    
    
    (2.0
    )
    
    
    (2.0
    )Income Tax Credit (Expense)
    
    
    0.7
    
    
    
    Net Income (Loss)
    
    
    (1.3)
    %
    
    
    1.4
    %
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REVENUES
      11




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COSTS AND EXPENSES
     ASSET IMPAIRMENT
   12




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ADMINISTRATIVE EXPENSES
  INTEREST EXPENSE
     13




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INCOME TAXES AND DEFERRED TAX ASSET
  LIQUIDITY AND CAPITAL RESOURCES
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Same-Store Sales
  Asset Impairment
  16




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Self-Insurance Reserves
  Income Taxes and Deferred Tax Asset
  Classification of Debt as Long-Term
  INFLATION
  17




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SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
   
 Item 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Item 4
 CONTROLS AND PROCEDURES
 Overview
  Disclosure Controls and Procedures
  19




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Remediation
  Changes in Internal Control Over Financial Reporting
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PART II  OTHER INFORMATION
 
 Item 6
 EXHIBITS
     
 *
    
    Filed with this report.+
    
    Furnished with this report. 21




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SIGNATURES
  MAX & ERMAS RESTAURANTS, INC. 
Registrant/s/   Robert A. LindemanRobert A. LindemanPresident and CEO
(Principal Executive Officer)/s/   William C. Niegsch, Jr.William C. Niegsch, Jr.Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer) March 27, 2008
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EXHIBIT INDEX
 Exhibit No.
    
    Exhibit
    
    Page No.31.1*
    
    Rule 13a-14(a) Certification of Principal Executive Officer
    
    Page 2431.2*
    
    Rule 13a-14(a) Certification of Principal Financial Officer
    
    Page 2532.1+
    
    Section 1350 Certification of Principal Executive Officer
    
    Page 2632.2+
    
    Section 1350 Certification of Principal Financial Officer
    
    Page 27
 
 *
    
    Filed with this report.+
    
    Furnished with this report. 23