##### 



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 August 6, 2006
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
  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




---



##### 



PART I  FINANCIAL INFORMATION
ITEM 1  FINANCIAL STATEMENTS
MAX & ERMAS RESTAURANTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 August 6, 2006(UNAUDITED)
    
    
    October 30, 2005ASSETSCurrent Assets:Cash
    
    $
    2,223,064
    
    
    $
    2,910,889Inventories
    
    
    1,274,540
    
    
    
    1,401,368Other Current Assets
    
    
    2,435,441
    
    
    
    2,387,896Total Current Assets
    
    
    5,933,045
    
    
    
    6,700,153Property  At Cost
    
    
    103,482,974
    
    
    
    104,292,729Less Accumulated Depreciation and Amortization
    
    
    51,329,985
    
    
    
    48,686,165Property  Net
    
    
    52,152,989
    
    
    
    55,606,564Other Assets
    
    
    13,409,524
    
    
    
    11,550,568Total
    
    $
    71,495,558
    
    
    $
    73,857,285LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Current Maturities of Long-Term Obligations
    
    $
    2,729,519
    
    
    $
    4,227,282Accounts Payable
    
    
    4,426,117
    
    
    
    5,589,058Accrued Payroll and Related Taxes
    
    
    2,536,881
    
    
    
    2,718,540Accrued Liabilities
    
    
    5,450,156
    
    
    
    6,197,616Total Current Liabilities
    
    
    15,142,673
    
    
    
    18,732,496Long-Term Obligations  Less Current Maturities
    
    
    43,057,114
    
    
    
    41,817,482Stockholders Equity:Preferred Stock  $.10 Par Value;
Authorized 500,000 Shares  None OutstandingCommon Stock  $.10 Par Value;
Authorized 5,000,000 Shares,
Issued and Outstanding 2,551,974 Shares
At 08/6/06 and 2,546,778 Shares at 10/30/05
    
    
    255,196
    
    
    
    254,677Additional Paid-In Capital
    
    
    831,426
    
    
    
    678,225Retained Earnings
    
    
    12,209,149
    
    
    
    12,374,405Total Stockholders Equity
    
    
    13,295,771
    
    
    
    13,307,307Total
    
    $
    71,495,558
    
    
    $
    73,857,285
  1




---



##### 



MAX & ERMAS RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Twelve Weeks Ended
    
    
    Forty Weeks EndedAugust 6, 2006
    
    
    August 7, 2005
    
    
    August 6, 2006
    
    
    August 7, 2005REVENUES:
    
    $
    40,646,117
    
    
    $
    42,812,593
    
    
    $
    141,044,845
    
    
    $
    143,108,284COSTS AND EXPENSES:Costs of Goods Sold
    
    
    10,226,514
    
    
    
    10,885,092
    
    
    
    35,979,771
    
    
    
    36,495,241Payroll and Benefits
    
    
    13,325,262
    
    
    
    14,199,428
    
    
    
    45,273,003
    
    
    
    46,049,942Other Operating Expenses
    
    
    13,414,347
    
    
    
    14,170,918
    
    
    
    46,760,200
    
    
    
    47,226,112Pre-Opening Expenses
    
    
    28,139
    
    
    
    173,728
    
    
    
    36,288
    
    
    
    297,766Impairment of Assets
    
    
    339,000
    
    
    
    
    
    
    
    843,524
    
    
    
    1,450,000Administrative Expenses
    
    
    3,298,643
    
    
    
    3,646,076
    
    
    
    11,151,354
    
    
    
    11,567,774Total Operating Expenses
    
    
    40,631,905
    
    
    
    43,075,242
    
    
    
    140,044,140
    
    
    
    143,086,835Operating Income (Loss)
    
    
    14,212
    
    
    
    (262,649
    )
    
    
    1,000,705
    
    
    
    21,449Interest Expense
    
    
    806,152
    
    
    
    564,284
    
    
    
    2,276,207
    
    
    
    1,808,519Minority Interest in Income
of Affiliated Partnership
    
    
    19,251
    
    
    
    19,251
    
    
    
    57,754
    
    
    
    38,503LOSS BEFORE INCOME TAXES
    
    
    (811,191
    )
    
    
    (846,184
    )
    
    
    (1,333,256
    )
    
    
    (1,825,573
    )INCOME TAXES (CREDIT)
    
    
    (516,000
    )
    
    
    100,000
    
    
    
    (1,168,000
    )
    
    
    (590,000
    )NET LOSS
    
    $
    (295,191
    )
    
    $
    (946,184
    )
    
    $
    (165,256
    )
    
    $
    (1,235,573
    )NET LOSS PER SHARE:Basic
    
    $
    (.12
    )
    
    $
    (0.37
    )
    
    $
    (0.06
    )
    
    $
    (0.49
    )Diluted
    
    $
    (.12
    )
    
    $
    (0.37
    )
    
    $
    (0.06
    )
    
    $
    (0.49
    )SHARES OUTSTANDING:Basic
    
    
    2,551,974
    
    
    
    2,546,778
    
    
    
    2,550,731
    
    
    
    2,534,427Diluted
    
    
    2,551,974
    
    
    
    2,546,778
    
    
    
    2,550,731
    
    
    
    2,534,427
  2




---



##### 



MAX & ERMAS RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Forty Weeks EndedAugust 6, 2006
    
    
    August 7, 2005CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss)
    
    $
    (165,256
    )
    
    $
    (1,235,573
    )Depreciation and amortization
    
    
    6,230,312
    
    
    
    6,545,126Minority interest in income of Affiliated Partnership
    
    
    57,754
    
    
    
    38,503Proceeds from lease incentives
    
    
    
    
    
    
    1,000,000Impairment of assets
    
    
    465,600
    
    
    
    1,011,000Changes in other assets and liabilities
    
    
    (3,399,605
    )
    
    
    71,030Net cash provided by operating activities
    
    
    3,150,303
    
    
    
    7,430,086CASH FLOWS FROM INVESTING ACTIVITIES:Property additions
    
    
    (3,681,830
    )
    
    
    (7,622,719
    )Decrease in other assets
    
    
    26,663
    
    
    
    (43,870
    )Net cash used by investing activities
    
    
    (3,655,167
    )
    
    
    (7,666,589
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments under long-term obligations
    
    
    (38,010,732
    )
    
    
    (48,182,605
    )Proceeds from long-term obligations
    
    
    38,434,000
    
    
    
    49,112,697Proceeds from exercise of stock options
    
    
    64,171
    
    
    
    252,155Debt issue costs
    
    
    (631,897
    )
    
    
    (59,395
    )Distributions to minority interests in Affiliated Partnership
    
    
    (38,503
    )
    
    
    (38,503
    )Net cash provided by (used by) financing activities
    
    
    (182,961
    )
    
    
    1,084,349NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS
    
    
    (687,825
    )
    
    
    847,846CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    2,910,889
    
    
    
    2,187,529CASH AND EQUIVALENTS AT END OF PERIOD
    
    $
    2,223,064
    
    
    $
    3,035,375SUPPLEMENTAL DISCLOSURES:Cash paid during the period for:Interest (net of $15,000 and $76,000 capitalized in 2006
and 2005)
    
    $
    1,137,048
    
    
    $
    1,747,685Income taxes
    
    $
    4,915
    
    
    $
    383,819Non-cash activities:Property additions financed by accounts payable
    
    $
    462,843
    
    
    $
    1,089,239
  3




---



##### 



MAX & ERMAS RESTAURANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 Presentation
   New Financial Accounting Standards
   4




---



##### 



Net Income Per Share
  5




---



##### 



Twelve Weeks Ended
    
    
    Forty Weeks EndedAugust 6, 2006
    
    
    August 7, 2005
    
    
    August 6, 2006
    
    
    August 7, 2005Basic Shares
Outstanding
    
    
    2,551,974
    
    
    
    2,546,778
    
    
    
    2,550,731
    
    
    
    2,534,427Dilutive Effect of
Stock OptionsDiluted Shares
Outstanding
    
    
    2,551,974
    
    
    
    2,546,778
    
    
    
    2,550,731
    
    
    
    2,534,427
 Stock Options
  Shares
    
    
    Exercise PriceOutstanding, October 30, 2005
    
    
    221,950
    
    
    $
    13.44Granted
    
    
    100,196
    
    
    
    11.51Forfeited
    
    
    (6,000
    )
    
    
    (16.50
    )Exercised
    
    
    (5,196
    )
    
    
    (6.18
    )Outstanding, August 6, 2006
    
    
    310,950
    
    
    $
    12.88
   6




---



##### 



Accounting for Stock-Based Compensation
 Twelve Weeks Ended
    
    
    Forty Weeks EndedAugust 7, 2005
    
    
    August 7, 2005Net loss, as reported
    
    $
    (946,184
    )
    
    $
    (1,235,573
    )Deduct: total stock-based compensation
expense determined under the fair
value method for all awards, net of related tax benefits
    
    
    
    
    
    
    (6,384
    )Pro forma net income (loss)
    
    $
    (946,184
    )
    
    $
    (1,241,957
    )As reported loss per common share:Basic
    
    $
    (0.37
    )
    
    $
    (0.49
    )Diluted
    
    $
    (0.37
    )
    
    $
    (0.49
    )Pro forma loss per common share:Basic
    
    $
    (0.37
    )
    
    $
    (0.49
    )Diluted
    
    $
    (0.37
    )
    
    $
    (0.49
    )
  7




---



##### 



Asset Impairment
    Debt Restructuring
  8




---



##### 



ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 OVERVIEW
    9




---



##### 



10




---



##### 



YEAR-TO-YEAR COMPARISONS AND ANALYSIS
 RESULTS OF OPERATIONS
  Twelve Weeks Ended
    
    
    Forty Weeks EndedAugust 6, 2006
    
    
    August 7, 2005
    
    
    August 6, 2006
    
    
    August 7, 2005Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of Goods Sold
    
    
    (25.2
    )
    
    
    (25.5
    )
    
    
    (25.5
    )
    
    
    (25.5
    )Payroll & Benefits
    
    
    (32.8
    )
    
    
    (33.2
    )
    
    
    (32.1
    )
    
    
    (32.2
    )Other Operating Expenses
    
    
    (33.0
    )
    
    
    (33.1
    )
    
    
    (33.2
    )
    
    
    (33.0
    )Pre-Opening Expenses
    
    
    (0.1
    )
    
    
    (0.4
    )
    
    
    
    
    
    
    (0.2
    )Impairment of Assets
    
    
    (0.8
    )
    
    
    
    
    
    
    (0.6
    )
    
    
    (1.0
    )Administrative Expenses
    
    
    (8.1
    )
    
    
    (8.5
    )
    
    
    (7.9
    )
    
    
    (8.1
    )Interest Expense
    
    
    (2.0
    )
    
    
    (1.3
    )
    
    
    (1.6
    )
    
    
    (1.3
    )Minority Interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (Taxes) Credit
    
    
    1.3
    
    
    
    (0.2
    )
    
    
    0.8
    
    
    
    0.4Net Loss
    
    
    (0.7
    )%
    
    
    (2.2
    )%
    
    
    (0.1
    )%
    
    
    (0.9
    )%
 REVENUES
   11




---



##### 



COSTS AND EXPENSES
  12




---



##### 



ASSET IMPAIRMENT
     13




---



##### 



ADMINISTRATIVE EXPENSES
  INTEREST EXPENSE
 3 4
  INCOME TAXES
  14




---



##### 



LIQUIDITY AND CAPITAL RESOURCES
      15




---



##### 



CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Derivative Instruments
  16




---



##### 



Same-Store Sales
  Asset Impairment
  INFLATION
  SAFE HARBOR STATEMENT UNDER THE PRIVATE  SECURITIES LITIGATION REFORM ACT OF 1995
  17




---



##### 



Item 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   Item 4  CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures.
 18




---



##### 



Internal Controls
  PART II  OTHER INFORMATION
 Item 6  EXHIBITS
 
 
 19




---



##### 



SIGNATURES
  MAX & ERMAS RESTAURANTS, INC.Registrant/s/
    
    Todd B. BarnumTodd. B. BarnumChairman of the Board andChief 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)September 13, 2006

Date
 20




---



##### 



EXHIBIT INDEX
 Exhibit No.
    
    Exhibit
    
    Page No.31.1*
    
    Rule 13a-14(a) Certification of Principal Executive Officer
    
    Page 2231.2*
    
    Rule 13a-14(a) Certification of Principal Financial Officer
    
    Page 2432.1+
    
    Section 1350 Certification of Principal Executive Officer
    
    Page 2632.2+
    
    Section 1350 Certification of Principal Financial Officer
    
    Page 27
   21