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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 18, 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
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  o 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
 February 18, 2007
    
    
    October 29, 2006(UNAUDITED)ASSETSCurrent Assets:Cash and Equivalents
    
    $
    2,584,086
    
    
    $
    2,491,877Inventories
    
    
    1,242,246
    
    
    
    1,260,537Other Current Assets
    
    
    3,009,657
    
    
    
    3,820,938Total Current Assets
    
    
    6,835,989
    
    
    
    7,573,352Property  At Cost
    
    
    105,267,446
    
    
    
    103,704,895Less Accumulated Depreciation and Amortization
    
    
    54,443,415
    
    
    
    52,896,054Property  Net
    
    
    50,824,031
    
    
    
    50,808,841Other Assets
    
    
    14,630,588
    
    
    
    13,972,472Total
    
    $
    72,290,608
    
    
    $
    72,354,665LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Current Maturities of Long-Term Obligations
    
    $
    2,762,976
    
    
    $
    2,729,989Accounts Payable
    
    
    4,676,121
    
    
    
    4,829,677Accrued Payroll and Related Taxes
    
    
    2,719,846
    
    
    
    2,770,583Accrued Liabilities
    
    
    7,091,944
    
    
    
    5,925,532Total Current Liabilities
    
    
    17,250,887
    
    
    
    16,255,781Long-Term Obligations  Less Current Maturities
    
    
    41,169,610
    
    
    
    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 02/18/07 and 2,551,974 Shares at 10/29/06
    
    
    255,446
    
    
    
    255,196Additional Paid-In Capital
    
    
    1,069,570
    
    
    
    982,697Retained Earnings
    
    
    12,545,095
    
    
    
    11,795,764Total Stockholders Equity
    
    
    13,870,111
    
    
    
    13,033,657Total
    
    $
    72,290,608
    
    
    $
    72,354,665
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MAX & ERMAS RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Sixteen Weeks EndedFebruary 18, 2007
    
    
    February 19, 2006REVENUES
    
    $
    55,520,863
    
    
    $
    57,617,407COSTS AND EXPENSES:Costs of Goods Sold
    
    
    13,847,613
    
    
    
    14,933,621Payroll and Benefits
    
    
    17,469,800
    
    
    
    18,174,303Other Operating Expenses
    
    
    17,888,307
    
    
    
    19,229,282Pre-Opening Expenses
    
    
    11,878Administrative Expenses
    
    
    4,454,792
    
    
    
    4,444,580Impairment of Assets
    
    
    
    
    
    
    504,524Total Operating Expenses
    
    
    53,672,390
    
    
    
    57,286,310Operating Income
    
    
    1,848,473
    
    
    
    331,097Interest Expense
    
    
    1,069,891
    
    
    
    823,853Minority Interest in Income
of Affiliated Partnerships
    
    
    19,251INCOME (LOSS) BEFORE INCOME
TAXES
    
    
    759,331
    
    
    
    (492,756
    )INCOME TAXES (CREDIT)
    
    
    10,000
    
    
    
    (461,000
    )NET INCOME (LOSS)
    
    $
    749,331
    
    
    $
    (31,756
    )NET INCOME (LOSS) PER SHAREBasic
    
    $
    0.29
    
    
    $
    (0.01
    )Diluted
    
    $
    0.29
    
    
    $
    (0.01
    )SHARES OUTSTANDING:Basic
    
    
    2,552,867
    
    
    
    2,548,866Diluted
    
    
    2,552,867
    
    
    
    2,548,866
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MAX & ERMAS RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Sixteen Weeks EndedFebruary 18, 2007
    
    
    February 19, 2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    749,331
    
    
    $
    (31,756
    )Depreciation and amortization
    
    
    2,440,257
    
    
    
    2,500,660Minority interest in income of Affiliated Partnerships
    
    
    19,251Loss on disposition of assets
    
    
    148,275
    
    
    
    66,984Impairment of fixed assets
    
    
    
    
    
    
    45,598Stock based compensation
    
    
    66,748
    
    
    
    21,988Decrease in inventories
    
    
    18,291
    
    
    
    121,026Decrease in accounts payable
    
    
    (18,724
    )
    
    
    (844,432
    )Increase in accrued liabilities
    
    
    1,115,675
    
    
    
    694,066Changes in other assets and liabilities
    
    
    200,790
    
    
    
    (1,127,519
    )Net cash provided by operating activities
    
    
    4,739,894
    
    
    
    1,446,615CASH FLOWS FROM INVESTING ACTIVITIES:Property additions
    
    
    (1,280,887
    )
    
    
    (1,540,695
    )Net decrease (increase) in other assets
    
    
    (205,704
    )
    
    
    9,629Net cash used by investing activities
    
    
    (1,486,591
    )
    
    
    (1,531,066
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments under long-term obligations
    
    
    (21,570,352
    )
    
    
    (9,548,981
    )Proceeds from long-term obligations
    
    
    18,426,000
    
    
    
    9,448,000Proceeds from exercise of stock options
    
    
    20,375
    
    
    
    64,171Debt issue costs
    
    
    (17,866
    )
    
    
    (56,147
    )Distributions to Minority Interests in Affiliated Partnerships
    
    
    (19,251
    )Net cash used in financing activities
    
    
    (3,161,094
    )
    
    
    (92,957
    )NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS
    
    
    92,209
    
    
    
    (177,408
    )CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    2,491,877
    
    
    
    2,910,889CASH AND EQUIVALENTS AT END OF PERIOD
    
    $
    2,584,086
    
    
    $
    2,733,481SUPPLEMENTAL DISCLOSURES:Cash paid during the period for:Interest
    
    $
    1,426,093
    
    
    $
    1,310,659Income taxes
    
    $
    18,538
    
    
    $
    58,478Non-cash activities:Property additions financed by accounts payable
    
    $
    324,177
    
    
    $
    288,117Property addition 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 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 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
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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.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 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 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 exercise prices were greater than the average market price of the common shares and,
therefore, the effect would be antidilutive. Options to purchase 296,950 shares were
outstanding at February 19, 2006, but were not included in the computation of diluted earnings
per share because the Company reported a net loss for the sixteen weeks ended February 19, 2006.4.
    
    Stock OptionsDuring the sixteen weeks ended February 18, 2007, the Companys stock option activity and
weighted average exercise prices were as follows:
 Shares
    
    
    Exercise PriceOutstanding, October 29, 2006
    
    
    228,950
    
    
    $
    13.22Granted
    
    
    2,500
    
    
    
    8.15Exercised
    
    
    (2,500
    )
    
    
    (8.15
    )Outstanding, February 18, 2007
    
    
    288,950
    
    
    $
    13.22
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The options granted during the quarter were exercisable and exercised within 30 days of grant
date and had an intrinsic value of $10, 200.Stock-based employee compensation expense for the sixteen weeks ended February 18, 2007 was
$66,748 leaving a remaining unrecognized compensation expense at February 18, 2007 of $347,679
to be recognized over a weighted average period of 1.9 years. Stock-based employee compensation
expense for the sixteen weeks ended February 19, 2006 was $21,988.5.
    
    Asset ImpairmentDuring the first quarter of 2006, the Company recorded a $505,000 asset impairment charge
related to the closing and write-off of restaurant assets at one restaurant. The charge
consisted primarily of the payment of a $440,000 lease termination fee.6.
    
    Minority Interest in Income of Affiliated PartnershipThe Company may absorb deficits in limited partner capital accounts as an expense. If this
situation later reverses the Company will recoup that prior expense. This may create variation
in the annual allocation of partnership profit and losses.
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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 OVERVIEW
    7
    Table of Contents       8




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YEAR-TO-YEAR COMPARISONS AND ANALYSIS
 RESULTS OF OPERATIONS
  Sixteen Weeks EndedFebruary 18, 2007
    
    February 19, 2006Revenues
    
    
    100.0
    %
    
    
    100.0
    %Cost of Goods Sold
    
    
    (24.9
    )
    
    
    (25.9
    )Payroll & Benefits
    
    
    (31.5
    )
    
    
    (31.5
    )Other Operating Expenses
    
    
    (32.2
    )
    
    
    (33.4
    )Pre-Opening Expenses
    
    
    
    
    
    
    Impairment of Assets
    
    
    
    
    
    
    (0.9
    )Administrative Expenses
    
    
    (8.0
    )
    
    
    (7.7
    )Interest Expense
    
    
    (2.0
    )
    
    
    (1.4
    )Income Tax Credit (Expense)
    
    
    
    
    
    
    0.8Net Income
    
    
    1.4
    %
    
    
    0.0
    %
 REVENUES
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COSTS AND EXPENSES
   10
    Table of Contents     ASSET IMPAIRMENT
  ADMINISTRATIVE EXPENSES
  INTEREST EXPENSE
  11
    Table of Contents     INCOME TAXES
  LIQUIDITY AND CAPITAL RESOURCES
    12
    Table of Contents     CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Same-Store Sales
  Asset Impairment
  Self-Insurance Reserves
  13




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Income Taxes and Deferred Tax Asset
  INFLATION
  SAFE HARBOR STATEMENT UNDER THE PRIVATE  SECURITIES LITIGATION REFORM ACT OF 1995
 14
    Table of Contents     
 Item 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 Item 4  CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures.
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Internal Controls
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PART II  OTHER INFORMATION
 
 Item 6  EXHIBITS
 Exhibit 31.1*
    
    
    
    Rule 13a-14(a) Certification of Principal Executive OfficerExhibit 31.2*
    
    
    
    Rule 13a-14(a) Certification of Principal Financial OfficerExhibit 32.1+
    
    
    
    Section 1350 Certification of Principal Executive OfficerExhibit 32.2+
    
    
    
    Section 1350 Certification of Principal Financial Officer
 
 *
    
    Filed with this report.+
    
    Furnished with this report. 17




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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) March 28, 2007
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EXHIBIT INDEX
 Exhibit No.
    
    Exhibit
    
    Page No.31.1*
    
    Rule 13a-14(a) Certification of Principal Executive Officer
    
    Page 2031.2*
    
    Rule 13a-14(a) Certification of Principal Financial Officer
    
    Page 2232.1+
    
    Section 1350 Certification of Principal Executive Officer
    
    Page 2432.2+
    
    Section 1350 Certification of Principal Financial Officer
    
    Page 25
 
 *
    
    Filed with this report.+
    
    Furnished with this report. 19