UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended March 30, 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: 0-28234
Mexican
Restaurants, Inc.
(Exact
name of registrant as specified in its charter)
|
Texas
|
76-0493269
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(IRS
Employer Identification Number)
|
|
1135
Edgebrook, Houston, Texas
|
77034-1899
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: 713-943-7574
Indicate
by check mark whether the Registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No
¨
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definitions of
"accelerated filer” and “large accelerated filer" in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer ý
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No
x
Number of
shares outstanding of each of the issuer’s classes of common stock, as of May
12, 2008: 3,249,516
shares of common stock, par value $.01.
Table
of Contents
Part
I – Financial Information
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Page
No.
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Item
1.
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Financial
Statements:
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3
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4
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5
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6
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9
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12
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13
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Part
II – Other Information
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13
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14
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15
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2
PART 1 - FINANCIAL INFORMATION
Item 1. Financial
Statements
Mexican Restaurants, Inc. and
Subsidiaries
|
(Unaudited)
|
||||||||
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ASSETS
|
3/30/2008
|
12/30/07
|
||||||
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Current
assets:
|
||||||||
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Cash
|
$ | 492,793 | $ | 1,154,629 | ||||
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Royalties
receivable
|
65,466 | 61,233 | ||||||
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Other
receivables
|
766,259 | 832,790 | ||||||
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Inventory
|
718,189 | 750,516 | ||||||
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Income
taxes receivable
|
350,830 | 372,576 | ||||||
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Prepaid
expenses and other current assets
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786,786 | 975,195 | ||||||
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Total
current assets
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3,180,323 | 4,146,939 | ||||||
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Property
and equipment
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37,687,202 | 37,028,882 | ||||||
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Less
accumulated depreciation
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(19,942,598 | ) | (19,175,946 | ) | ||||
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Net
property and equipment
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17,744,604 | 17,852,936 | ||||||
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Goodwill
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11,403,805 | 11,403,805 | ||||||
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Deferred
tax assets
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437,127 | 439,985 | ||||||
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Other
assets
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484,349 | 512,261 | ||||||
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Total
Assets
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$ | 33,250,208 | $ | 34,355,926 | ||||
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LIABILITIES AND
STOCKHOLDERS' EQUITY
|
||||||||
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Current
liabilities:
|
||||||||
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Accounts
payable
|
$ | 1,834,795 | $ | 2,181,873 | ||||
|
Accrued
sales and liquor taxes
|
145,249 | 130,941 | ||||||
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Accrued
payroll and taxes
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1,067,164 | 1,135,326 | ||||||
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Accrued
expenses
|
993,366 | 1,461,141 | ||||||
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Current
portion of liabilities associated with leasing and exit
activities
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53,674 | 148,681 | ||||||
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Total
current liabilities
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4,094,248 | 5,057,962 | ||||||
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Long-term
debt
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6,200,000 | 6,400,000 | ||||||
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Other
liabilities associated with leasing and exit activities, net of
current
portion
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561,763 | 577,582 | ||||||
|
Deferred
gain
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1,092,749 | 1,144,785 | ||||||
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Other
liabilities
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1,906,553 | 1,910,270 | ||||||
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Total
liabilities
|
13,855,313 | 15,090,599 | ||||||
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Commitments
and Contingencies
|
||||||||
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Stockholders'
equity:
|
||||||||
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Preferred
stock, $0.01 par value, 1,000,000 shares
|
||||||||
|
authorized,
none issued
|
-- | -- | ||||||
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Common
stock, $0.01 par value, 20,000,000 shares
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||||||||
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authorized,
4,732,705 shares issued
|
47,327 | 47,327 | ||||||
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Additional
paid-in capital
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19,306,968 | 19,275,067 | ||||||
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Retained
earnings
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13,183,413 | 13,107,896 | ||||||
|
Treasury
stock of 1,483,189 and 1,485,689 common shares, at 3/30/08
and
12/30/07, respectively
|
(13,142,813 | ) | (13,164,963 | ) | ||||
|
Total
stockholders' equity
|
19,394,895 | 19,265,327 | ||||||
|
Total
Liabilities and Stockholders' Equity
|
$ | 33,250,208 | $ | 34,355,926 | ||||
See
accompanying notes to consolidated financial statements.
3
Mexican
Restaurants, Inc. and Subsidiaries
(Unaudited)
|
13-Week
Period
Ended
3/30/2008
|
13-Week
Period Ended
4/1/2007
|
|||||||
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Revenues:
|
||||||||
|
Restaurant
sales
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$ | 20,244,473 | $ | 20,327,818 | ||||
|
Franchise
fees, royalties and other
|
158,581 | 162,244 | ||||||
| 20,403,054 | 20,490,062 | |||||||
|
Costs
and expenses:
|
||||||||
|
Cost
of sales
|
5,789,894 | 5,746,999 | ||||||
|
Labor
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6,431,823 | 6,848,819 | ||||||
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Restaurant
operating expenses
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5,070,497 | 5,098,166 | ||||||
|
General
and administrative
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2,101,582 | 1,908,880 | ||||||
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Depreciation
and amortization
|
858,858 | 821,773 | ||||||
|
Pre-opening
costs
|
36,884 | - | ||||||
|
Impairment
costs
|
32,252 | - | ||||||
|
Vidor
fire gain
|
(126,371 | ) | - | |||||
|
Loss
on sale of property and equipment
|
27,007 | 7,315 | ||||||
| 20,222,426 | 20,431,952 | |||||||
|
Operating
income
|
180,628 | 58,110 | ||||||
|
Other
income (expense):
|
||||||||
|
Interest
income
|
2,082 | 1,963 | ||||||
|
Interest
expense
|
(141,523 | ) | (99,632 | ) | ||||
|
Other,
net
|
7,332 | 11,203 | ||||||
| (132,109 | ) | (86,466 | ) | |||||
|
Income
(loss) from continuing operations before income
taxes
|
48,519 | (28,356 | ) | |||||
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Income
tax expense (benefit)
|
12,166 | ( 7,098 | ) | |||||
|
Income
(loss) from continuing operations
|
36,353 | (21,258 | ) | |||||
|
Discontinued
operations:
|
||||||||
|
Loss
from discontinued operations
|
- | (21,453 | ) | |||||
|
Restaurant
closure income (expense)
|
52,289 | (59,020 | ) | |||||
|
Gain
on sale of assets
|
- | 3,412 | ||||||
|
Income
(loss) from discontinued operations before
income taxes
|
52,289 | (77,061 | ) | |||||
|
Income
tax benefit (provision)
|
(13,125 | ) | 28,775 | |||||
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Income
(loss) from discontinued operations
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39,164 | (48,286 | ) | |||||
|
Net
income (loss)
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$ | 75,517 | $ | (69,544 | ) | |||
|
Basic
income (loss) per share
|
||||||||
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Income
(loss) from continuing operations
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$ | 0.01 | $ | (0.01 | ) | |||
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Income
(loss) from discontinued operations
|
0.01 | (0.01 | ) | |||||
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Net
income (loss)
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$ | 0.02 | $ | (0.02 | ) | |||
|
Diluted income
(loss) per share
|
||||||||
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Income
(loss) from continuing operations
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$ | 0.01 | $ | (0.01 | ) | |||
|
Income
(loss) from discontinued operations
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0.01 | (0.01 | ) | |||||
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Net
income (loss)
|
$ | 0.02 | $ | (0.02 | ) | |||
|
Weighted
average number of shares outstanding (basic)
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3,247,167 | 3,460,322 | ||||||
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Weighted
average number of shares outstanding (diluted)
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3,314,286 | 3,460,322 | ||||||
See
accompanying notes to consolidated financial statements.
4
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Mexican
Restaurants, Inc. and Subsidiaries
|
||||||||
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(Unaudited)
|
||||||||
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13
Weeks Ended
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13
Weeks Ended
|
|||||||
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3/30/2008
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4/1/2007
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|||||||
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Cash
flows from operating activities:
|
||||||||
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Net
income (loss)
|
$ | 75,517 |
$
(69,544
|
) | ||||
|
Adjustments
to reconcile net income (loss) to net cash provided by
|
||||||||
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(used
in) operating activities:
|
||||||||
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Depreciation
and amortization
|
858,858 | 821,773 | ||||||
|
Deferred
gain amortization
|
(52,036 | ) | (52,035 | ) | ||||
|
Loss
(income) from discontinued operations
|
(39,164 | ) | 48,286 | |||||
|
Impairment
costs
|
32,252 | - | ||||||
|
Vidor
fire gain
|
(126,371 | ) | - | |||||
|
Loss
on sale of property & equipment
|
27,007 | 7,315 | ||||||
|
Stock
based compensation expense
|
44,500 | 26,053 | ||||||
|
Excess
tax benefit – stock-based compensation expense
|
(876 | ) | - | |||||
|
Deferred
income tax benefit
|
(10,267 | ) | (5,191 | ) | ||||
|
Changes
in operating assets and liabilities:
|
||||||||
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Royalties
receivable
|
(4,233 | ) | (7,893 | ) | ||||
|
Other
receivables
|
68,015 | (9,330 | ) | |||||
|
Inventory
|
23,475 | (9,102 | ) | |||||
|
Income
taxes receivable
|
22,622 | 53,029 | ||||||
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Prepaid
and other current assets
|
188,409 | 77,827 | ||||||
|
Other
assets
|
17,274 | (7,780 | ) | |||||
|
Accounts
payable
|
(366,116 | ) | (352,197 | ) | ||||
|
Accrued
expenses and other liabilities
|
(521,629 | ) | (578,056 | ) | ||||
|
Liabilities
associated with leasing and exit activities
|
(19,954 | ) | (7,077 | ) | ||||
|
Deferred
rent and other long-term liabilities
|
(3,717 | ) | 49,372 | |||||
|
Total
adjustments
|
138,049 | 54,994 | ||||||
|
Net
cash provided by (used in) continuing operations
|
213,566 | (14,550 | ) | |||||
|
Net
cash used in discontinued operations
|
(40,092 | ) | (182,816 | ) | ||||
|
Net
cash provided by (used in) operating activities
|
173,474 | (197,366 | ) | |||||
|
Cash
flows from investing activities:
|
||||||||
|
Insurance
proceeds received from Vidor fire loss
|
200,000 | - | ||||||
|
Purchase
of property and equipment
|
(844,861 | ) | (1,166,537 | ) | ||||
|
Proceeds
from sale of property and equipment
|
- | 1,200 | ||||||
|
Net
cash used in continuing operations
|
(644,861 | ) | (1,165,337 | ) | ||||
|
Net
cash provided by discontinued operations
|
- | 4,020 | ||||||
|
Net
cash used in investing activities
|
(644,861 | ) | (1,161,317 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Borrowings
under line of credit agreement
|
760,000 | 1,550,000 | ||||||
|
Payments
under line of credit agreement
|
(960,000 | ) | (350,000 | ) | ||||
|
Excess
tax benefit – stock-based compensation expense
|
876 | - | ||||||
|
Exercise
of stock options
|
8,675 | - | ||||||
|
Net
cash provided by (used in) financing activities
|
(190,449 | ) | 1,200,000 | |||||
|
Net
decrease in cash
|
(661,836 | ) | (158,683 | ) | ||||
|
Cash
at beginning of period
|
1,154,629 | 653,310 | ||||||
|
Cash
at end of period
|
$ | 492,793 | $ | 494,627 | ||||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash
paid during the period:
|
||||||||
|
Interest
|
$ | 141,752 | $ | 84,224 | ||||
|
Income
taxes
|
$ | - | $ | - | ||||
See
accompanying notes to consolidated financial statements.
5
MEXICAN
RESTAURANTS, INC. AND SUBSIDIARIES
(Unaudited)
1. Basis
of Presentation
In the opinion of Mexican Restaurants,
Inc. (the “Company”), the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring accruals
and adjustments) necessary for a fair presentation of the consolidated financial
position as of March 30, 2008, and the consolidated statements of operations and
cash flows for the 13-week periods ended March 30, 2008 and April 1,
2007. The consolidated statements of operations for the 13-week
period ended March 30, 2008 is not necessarily indicative of the results to be
expected for the full year. During the interim periods, the Company
follows the accounting policies described in the notes to its consolidated
financial statements in its Annual Report and Form 10-K for the year ended
December 30, 2007 filed with the Securities and Exchange Commission on March 26,
2008. Reference should be made to such consolidated financial
statements for information on such accounting policies and further financial
detail.
|
|
Impact
of Recently Issued Accounting
Standards
|
|
|
In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations” (“SFAS No. 141(R)”), which is a revision of
SFAS 141 “Business Combinations”. SFAS No. 141(R)
significantly changes the accounting for business combinations. Under this
statement, an acquiring entity will be required to recognize all the
assets acquired and liabilities assumed in a transaction at the
acquisition-date fair value with limited exceptions. Additionally,
SFAS No. 141(R) includes a substantial number of new disclosure
requirements. SFAS No. 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning
of the first annual reporting period beginning on or after
December 15, 2008. Earlier adoption is prohibited. The Company is in
the process of evaluating the impact the adoption of
SFAS No. 141(R) will have on its results of operations and
financial condition should the Company enter into business combinations
after adoption.
|
|
|
In
December 2007, the FASB issued FASB Statement No. 160,
“Noncontrolling Interests in Consolidated Financial Statements — An
Amendment of ARB No. 51” (“SFAS No. 160”), which is an
amendment to ARB No. 51 “Consolidated Financial Statements”.
SFAS No. 160 establishes new accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, this statement requires the
recognition of a noncontrolling interest (minority interest) as equity in
the consolidated financial statements and separate from the parent’s
equity. The amount of net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the
income statement. SFAS No. 160 clarifies that changes in a
parent’s ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains its
controlling financial interest. In addition, this statement requires that
a parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. Such gain or loss will be measured using the fair value of
the noncontrolling equity investment on the deconsolidation date.
SFAS No. 160 also includes expanded disclosure requirements
regarding the interests of the parent and its noncontrolling interest.
SFAS No. 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008.
Earlier adoption is prohibited. The Company is in the process of
evaluating the impact the adoption of SFAS No. 160
will have on its results of operations and financial condition. Presently,
there are no significant noncontrolling interests in any of the Company’s
consolidated subsidiaries. Therefore, we currently believe the
impact of SFAS No. 160, if any, will primarily depend on the materiality
of noncontrolling interests arising in future transactions to which the
consolidated financial statement presentation and disclosure provisions of
SFAS No. 160 will apply.
|
2.
Income Taxes
In May 2006, the State of Texas enacted
a new business tax that is imposed on gross margin to replace the State’s
current franchise tax regime. The new legislation’s effective date
was January 1, 2008, which means that our first Texas margins tax (“TMT”) return
will be due May 15, 2008 and will be based on our 2007
operations. Although the TMT is imposed on an entity’s gross margin
rather than on its net income, certain aspects of the tax make it similar to an
income tax. In accordance with the guidance provided in SFAS No. 109,
we have properly determined the impact of the newly-enacted legislation in the
determination of our reported state current and deferred income tax
liability.
6
3. Stock-Based
Compensation
At March
30, 2008, the Company had one equity-based compensation plan from which
stock-based compensation awards can be granted to eligible employees, officers
or directors. The current plan is the 2005 Long Term Incentive
Plan. The 1996 Long Term Incentive Plan, the Stock Option Plan for
Non-Employee Directors and the 1996 Manager’s Stock Option Plan have terminated
by their own terms, but still have options which remain exercisable until the
earlier of ten years from the date of grant or no more than 90 days after the
optionee ceases to be an employee of the company. These plans are
described in more detail in Note 5 of our consolidated financial statements in
our Annual Report on Form 10-K for the fiscal year ended December 30,
2007. The Company utilizes SFAS No.123 (Revised) Share-Based Payments
(“SFAS No.123(R)”) in accounting for its stock based compensation.
On May
22, 2007, the Company’s Board of Directors approved a restricted stock grant of
10,000 shares to its President, with such grant vesting over a four-year
period. Also, restricted stock grants for an aggregate of 11,000
shares were made to four employees of its Michigan operations, with such grants
vesting over a five-year period. In addition, the Board approved a
stock option grant to the Company’s President for 50,000 options with a grant
date price of $8.43. The options vest over a five-year period, with
no vesting in the first year and vesting of 10%, 20%, 30% and 40% in the second,
third, fourth and fifth years, respectively.
In August
2007, the Company’s Board of Directors approved restricted stock grants for an
aggregate of 20,000 shares to two employees, with one 10,000 share grant vesting
over five years and the second 10,000 share grant vesting as follows: 2,000
shares vested on August 30, 2007 with the remaining 8,000 shares vesting at
2,000 shares per year over four years. The Company’s Board also
approved a 20,000 stock option grant to one employee and a 5,000 stock option
grant to another employee with such grants vesting over five years.
On
November 13, 2007, the Company’s Board of Directors approved restricted stock
grants aggregating 10,000 shares to four employees, with such grants vesting
over a five year period. In addition, the Board approved a stock
option grant to an employee for 5,000 options with a grant date price of
$6.90. This option grant vests over a five year period.
On
December 17, 2007, the Company’s Board of Directors awarded 5,000 restricted
shares each to two officers, with such shares vesting at 20% per
year.
The
Company receives a tax deduction for certain stock option exercises during the
period the options are exercised, generally for the excess of the price for
which the options were sold over the exercise prices of the
options. There were 2,500 stock options exercised in the 13-week
period ending March 30, 2008. The Company received cash in the amount
of $8,675 from the exercise of these options.
4. Income
per Share
Basic
income per share is based on the weighted average shares outstanding without any
dilutive effects considered. Since the adoption of SFAS No. 123(R) in
fiscal year 2006, diluted income per share is calculated using the treasury
stock method, which considers unrecognized compensation expense as well as the
potential excess tax benefits that reflect the current market price and total
compensation expense to be recognized under SFAS No. 123(R). If the sum of the
assumed proceeds, including the unrecognized compensation costs calculated under
the treasury stock method, exceeds the average stock price, those options would
be considered antidilutive and therefore excluded from the calculation of
diluted income per share. For the quarter ended March 30, 2008, the incremental
shares added in the calculation of diluted income per share were
67,119. For the quarter ended April 1, 2007 all incremental shares
were antidilutive.
5. Vidor
Fire
The consolidated statement of
operations for the quarter ended March 30, 2008 includes a separate line item
for a gain of $126,371 resulting from the write-off of assets damaged by the
February 19th fire at our Casa Olé restaurant located in
Vidor, Texas, offset by insurance proceeds for the replacement of assets. The
Company’s insurers paid $200,000 in the first quarter and the Company has spent
$64,958 for the replacement of assets. The Company anticipates finalizing all
claim amounts, including amounts related to business interruption, during the
second quarter of 2008 and the restaurant is scheduled to reopen in June.
7
6. Long-term
Debt
On June 29, 2007 the Company entered
into a Credit Agreement (the “Wells Fargo Agreement”) with Wells Fargo Bank,
N.A. (“Wells Fargo”) in order to increase the revolving loan amount available to
the Company from $7.5 million to $10 million. In connection
with the execution of the Wells Fargo Agreement, the Company prepaid and
terminated its then existing credit facility between the Company and Bank of
America. The Wells Fargo Agreement provides for a revolving loan of
up to $10 million, with an option to increase the revolving loan by an
additional $5 million, for a total of $15 million. The Wells Fargo
Agreement terminates on June 29, 2010. At the Company’s option, the
revolving loan bears an interest rate equal to either the Wells Fargo’s Base
Rate plus a stipulated percentage or LIBOR plus a stipulated
percentage. Accordingly, the Company is impacted by changes in the
Base Rate and LIBOR. The Company is subject to a non-use fee of 0.50%
on the unused portion of the revolver from the date of the Wells Fargo
Agreement. The Wells Fargo Agreement also allows up to $2.0 million
in annual stock repurchases. The Company has pledged the stock of its
subsidiaries, its leasehold interests, its patents and trademarks and its
furniture, fixtures and equipment as collateral for its credit facility with
Wells Fargo. The Wells Fargo Agreement requires the Company to
maintain certain minimum EBITDA levels, leverage ratios and fixed charge
coverage ratios. As of March 30, 2008, the Company was in compliance
with all debt covenants and as of the date hereof expects to be in compliance
with its debt covenants during the balance of fiscal year 2008.
|
7.
|
Restaurant
Closure Costs
|
In the first quarter of 2008, the
Company recorded restaurant closure income of $52,289, all of which is included
in discontinued operations. This closure income related to the
revision by management of the estimated repair and maintenance costs, utility
costs and property taxes associated with restaurants closed in prior
years. In the first quarter of 2007, restaurant closure costs totaled
$59,020.
8. Impairment of
Long-Lived Assets
In accordance with SFAS No.
144, “Accounting for the Impairments or Disposal of Long-Lived
Assets”, long-lived
assets, such as property and equipment, and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset. For the quarter ended
March 30, 2008, the Company recorded impairment costs of $32,252 related to two
under-performing restaurants operating in the Houston area.
9. Related Party
Transactions
On June 12, 2007, the Company’s Director of Franchise Operations, Mr. Forehand, resigned his position and entered into a five-year employment agreement, which provides for a reduced operational role with the Company. He continues to serve as a Director and as Vice Chairman of the Company’s Board of Directors.
On June
15, 2007, Mr. Forehand entered into an Asset Purchase Agreement to purchase the
assets of the Company’s Casa Olé restaurant located in Stafford, Texas, an
under-performing restaurant, for an agreed price of 26,806 shares of the
Company’s common stock. The stock was valued at $8.14 per share,
which was the ten-day weighted average stock price as of June 12, 2007, for a
total value of $218,205. The sale resulted in a non-cash loss of
$79,015. The restaurant operations were taken over by Mr. Forehand
after the close of business on July 1, 2007. The Stafford restaurant
operates under the Company’s uniform franchise agreement and is subject to a
monthly royalty fee. For the 13-week period ended March 30, 2008, the
Company recognized royalty income of $5,735.
On June
13, 2007, Mr. Forehand entered into a Stock Purchase Agreement to sell 200,000
shares of his personally-owned common stock back to the Company. The
stock was valued at $8.14 per share, which was the ten-day weighted average
stock price as of June 12, 2007, and the Company finalized the stock purchase on
July 6, 2007.
8
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10.
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Fair
Value Measurements
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The
Company adopted Statement of Financial Accounting Standards No. 157, “Fair Value
Measurements” on December 31, 2007, for our financial assets and financial
liabilities. As permitted by Financial Accounting Standards Board
Staff Position No. 157-2, we will adopt FAS 157 for our nonfinancial assets and
nonfinancial liabilities on December 29, 2008. FAS 157 defines fair
value, provides guidance for measuring fair value, and requires certain
disclosures. FSP 157-2 amends FAS 157 to delay the effective date of
the application of FAS 157 to fiscal years beginning after November 15, 2008 for
all nonfinancial assets and nonfinancial liabilities. Nonfinancial
assets and nonfinancial liabilities for which we have not applied the provisions
of FAS 157 include those measured at fair value in goodwill impairment testing
and those initially measured at fair value in a business combination, and fair
value measurement used in long lived assets under FAS 144.
FAS 157
discusses valuation techniques, such as the market approach (comparable market
prices), the income approach (present value of future income or cash flow), and
the cost approach (cost to replace the service capacity of an asset or
replacement cost). The statement utilizes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels. The following is a brief description of those
three levels:
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·
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Level
1: Observable inputs such as quoted prices (unadjusted) in
active markets for identical assets or
liabilities.
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·
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Level
2: Inputs other than quoted prices that are observable for the
asset or liability, either directly or indirectly. These
include quoted prices for similar assets or liabilities in active markets
and quoted prices for identical or similar assets or liabilities in
markets that are not active.
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·
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Level
3: Unobservable inputs that reflect the reporting entity’s own
assumptions.
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The adoption of this statement did not have a material impact on our
consolidated financial statements.
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In
February 2007, the FASB issued SFAS No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities — including an
amendment of FASB Statement No. 115” (“SFAS No. 159”). This
Statement provides an opportunity to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. SFAS No. 159
becomes effective for the fiscal years beginning after November 15,
2007. The Company adopted SFAS No. 159 on December 31, 2007,
which did not have a material impact on the Company’s consolidated
financial position, results of operations or cash
flows.
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Special
Note Regarding Forward-Looking Statements
This Form 10-Q contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the
following: national, regional or local economic and real estate conditions;
inflation; increased food, labor and benefit costs; growth strategy; dependence
on executive officers; geographic concentration; increasing susceptibility to
adverse conditions in the region; changes in consumer tastes and eating and
discretionary spending habits; the risk of food-borne illness; demographic
trends; inclement weather; traffic patterns; the type, number and location of
competing restaurants; the availability of experienced management and hourly
employees; seasonality and the timing of new restaurant openings; changes in
governmental regulations; dram shop exposure; and other factors not yet
experienced by the Company. The use of words such as “believes”,
“anticipates”, “expects”, “intends” and similar expressions are intended to
identify forward-looking statements, but are not the exclusive means of
identifying such statements. Readers are urged to carefully review
and consider the various disclosures made by the Company in this report and in
the Company’s most recently filed Annual Report and Form 10-K that attempt to
advise interested parties of the risks and factors that may affect the Company’s
business. The Company undertakes no obligation to update any such
statements or publicly announce any updates or revisions to any of the
forward-looking statements contained herein, to reflect any change in its
expectations with regard thereto or any change in events, conditions,
circumstances or assumptions underlying such statements.
9
General
The
Company operates and franchises Mexican-theme restaurants featuring various
elements associated with the casual dining experience under the names Casa Olé,
Monterey’s Tex-Mex Café, Monterey’s Little Mexico, Tortuga Coastal Cantina,
Crazy Jose’s, La Señorita and Mission Burrito. At March 30, 2008 the
Company operated 59 restaurants, franchised 18 restaurants and licensed one
restaurant in various communities in Texas, Louisiana, Oklahoma and
Michigan.
The
Company’s primary source of revenues is the sale of food and beverages at
Company-owned restaurants. The Company also derives revenues from
franchise fees, royalties and other franchise-related activities with respect to
its franchised restaurants. Franchise fee revenue from an individual
franchise sale is recognized when all services relating to the sale have been
performed and the restaurant has commenced operation. Initial
franchise fees relating to area franchise sales are recognized ratably in
proportion to the services that are required to be performed pursuant to the
area franchise or development agreements and proportionately as the restaurants
within the area are opened.
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Since its inception as a public company in 1996, the Company has primarily
grown through the acquisition of other Mexican food restaurant
companies.
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Results
of Operations
Revenues. The
Company’s revenues for the first quarter of fiscal year 2008 decreased $87,008
or 0.4% to $20.4 million compared with $20.5 million for the same quarter in
fiscal year 2007. Restaurant sales for first quarter 2008 decreased
$83,345 or 0.4% to $20.2 million compared with $20.3 million for the first
quarter of fiscal year 2007. The decrease in restaurant revenues
reflects the sale of one Casa Olé restaurant in June of 2007 and the six week
closure of another Casa Olé restaurant that was extensively damaged by fire, the
impact of which was partially offset by an increase in same-store
sales. For the first quarter ended March 30, 2008, Company-owned
same-restaurant sales increased approximately 1.2% and franchised-owned
same-restaurant sales, as reported by franchisees, increased approximately 3.3%
over the same quarter in fiscal 2007.
Costs
and Expenses. Costs of sales, consisting of food,
beverage, liquor, supplies and paper costs, increased as a percent of restaurant
sales 30 basis points to 28.6% compared with 28.3% in the first quarter of
fiscal year 2007. The increase primarily reflects higher commodity
prices, especially cheese, dry goods and tortillas. In March of 2008,
the Company raised menu prices at most of our concepts in an effort to offset
some of the rise in commodity costs.
Labor and
other related expenses decreased as a percentage of restaurant sales 190 basis
points to 31.8% as compared with 33.7% in the first quarter of fiscal year
2007. The decrease primarily reflects a one-time credit adjustment to
group health insurance related to improved program coverage, and also improved
hourly labor utilization.
Restaurant
operating expenses, which primarily include rent, property taxes, utilities,
repair and maintenance, liquor taxes, property insurance, general liability
insurance and advertising, decreased as a percentage of restaurant sales 10
basis points to 25.0% as compared with 25.1% in the first quarter of fiscal year
2007. The decrease primarily reflects lower advertising expense and insurance
expense as a percentage of restaurant sales, partially offset by higher rent
expense.
General and
administrative expenses consist of expenses associated with corporate and
administrative functions that support restaurant operations. As a
percentage of total revenue, general and administrative expenses increased 100
basis points to 10.3% for the first quarter of fiscal year 2008 as compared with
9.3% for the first quarter of fiscal year 2007. In absolute dollars,
general and administrative costs were $192,702 higher in the first quarter of
fiscal year 2008 compared with the first quarter of fiscal year
2007. The increase primarily reflects consulting fees related to
marketing and market research for Mission Burrito concept development, an
increase in legal expenses, consulting fees related to Sarbanes-Oxley
compliance, banking fees and stock-based compensation expense.
Depreciation and
amortization expenses include the depreciation of fixed assets and the
amortization of intangible assets. Depreciation and amortization
expense increased as a percentage of total sales 20 basis points to 4.2% for the
first quarter of fiscal year 2008 as compared with 4.0% the same quarter in
fiscal year 2007. Such expense for the first quarter of fiscal year
2008 was $37,085 higher than for the first quarter in fiscal year
2007. The increase reflects additional depreciation expense for
remodeled restaurants, new restaurants, and the replacement of equipment and
leasehold improvements in various existing restaurants.
10
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The Company opened one new Mission Burrito restaurant during the first
quarter of 2008, incurring $36,884 in pre-opening
costs.
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Impairment Costs. In accordance with
Statement of Financial Accounting Standards No. 144, “Accounting for the
Impairments or Disposal of Long-Lived Assets”, long-lived assets, such as
property and equipment, and purchased intangibles subject to amortization, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset. For the 13-week period
ended March 30, 2008, the Company recorded impairment costs of $32,252 related
to two underperforming restaurants operating in the Houston area.
Vidor
Fire. The consolidated statement of operations for the
quarter ended March 30, 2008 includes a separate line item for a gain of
$126,371 resulting from the write-off of assets damaged by the February 19th
fire at our Casa Olé restaurant located in Vidor, Texas, offset by insurance
proceeds for the replacement of assets. The Company’s insurers paid $200,000 in
the first quarter and the Company has spent $64,958 for the replacement of
assets. The Company anticipates finalizing all claim amounts, including amounts
related to business interruption, during the second quarter of 2008 and the
restaurant is scheduled to reopen in June.
Gain/Loss on Sale of
Assets. During the first quarter of fiscal year 2008, the
Company recorded losses of $27,007 primarily related to the routine disposal of
restaurant assets.
Other Income
(Expense). Net expense increased $45,643 to $132,109 in
the first quarter of fiscal year 2008 compared with a net expense of $86,466 in
the first quarter of fiscal year 2007. Interest expense increased
$41,891 to $141,523 in the first quarter of fiscal year 2008 compared with
interest expense of $99,632 in the first quarter of fiscal year
2007. Average debt outstanding was higher during the first quarter of
fiscal year 2008 than it was for the first quarter of fiscal year
2007. As of March 30, 2008, the Company’s outstanding debt was $6.2
million. The Company paid down $200,000 of its revolving line of
credit during the first quarter of fiscal year 2008.
Income Tax
Expense. The Company’s effective tax rate from continuing
operations for the first quarter of fiscal year 2008 was an expense of 25.1% as
compared to a benefit of 25.0% for the first quarter of fiscal year
2007. In determining the quarterly provision for income taxes, the
Company uses an estimated annual effective tax rate based on forecasted annual
income and permanent items, statutory tax rates and tax planning opportunities
in the various jurisdictions in which the Company operates. The
impact of significant discrete items is separately recognized in the quarter in
which they occur.
Restaurant Closure
Costs. For the 13-week
period ended March 30, 2008, the Company recorded net restaurant closure income
of $52,289 related to the revision by management of estimated repair and
maintenance costs, utility costs and property taxes associated with restaurants
closed in prior years. In the first quarter of 2007, restaurant
closure costs totaled $59,020.
Liquidity
and Capital Resources
The Company
met capital requirements for the first 13-week period of fiscal year 2008
primarily by drawing on its cash reserves. In the first 13-week
period for fiscal year 2008, the Company had cash flow provided by operating
activities of $173,474, compared with cash flow used in operating activities of
$197,366 in the initial 13-week period of fiscal year 2007. The
increase in cash flow from operating activities primarily reflects the increase
in operating income. During the first quarter of fiscal year 2008,
the Company made a net payment of $200,000 towards the Company’s line of credit,
compared to a use of cash of $1.2 million primarily related to payment of
capital expenditures during the first quarter of fiscal year 2007. As
of March 30, 2008, the Company had a working capital deficit of $913,925
compared with a working capital deficit of $911,023 at December 30, 2007 and
approximately $1.2 million at April 1, 2007. A working capital
deficit is common in the restaurant industry, since restaurant companies do not
typically require a significant investment in either accounts receivable or
inventory.
11
The Company's principal capital
requirements are the funding of routine capital expenditures, new restaurant
development or acquisitions and remodeling of older units. During the
13-week period ended March 30, 2008, total cash used for capital requirements
was $844,861, which included approximately $350,000 spent for routine capital
expenditures, approximately $420,000 for new restaurant development and
approximately $70,000 spent to-date to reconstruct the restaurant in Vidor,
Texas destroyed by fire in February 2008. The Company opened one new
Mission Burrito restaurant during the first 13-week period of 2008 and a second
Mission Burrito restaurant is under construction and scheduled to open in late
May 2008. Currently, three Mission Burrito leases are under review
and are expected to be signed sometime during the second quarter of
2008. The Company is also planning the conversion of one existing
Company-owned restaurant to a Mission Burrito restaurant, the conversion of
which is expected to start later this fiscal year. The Company’s
management anticipates that it will spend approximately $3.5 million for capital
expenditures during the remainder of fiscal year 2008, exclusive of costs to
rebuild the one restaurant destroyed by fire, which will be reimbursed to the
Company with insurance proceeds.
Prior to fiscal
2008, the Company has incurred debt to carry out acquisitions, to repurchase its
common stock, to develop new restaurants and to remodel existing restaurants, as
well as to accommodate other working capital needs. During the
13-week period ended March 30, 2008, the Company made a net payment of $200,000
towards its line of credit. As of March 30, 2008, the Company had
$6.2 million drawn on its line of credit.
On June 29, 2007 the Company entered
into a Credit Agreement (the “Wells Fargo Agreement”) with Wells Fargo Bank,
N.A. (“Wells Fargo”) in order to increase the revolving loan amount available to
the Company from $7.5 million under its then existing credit facility with Bank
of America to $10 million. In connection with the execution of
the Wells Fargo Agreement, the Company prepaid and terminated its then existing
credit facility between the Company and Bank of America. The Wells
Fargo Agreement provides for a revolving loan of up to $10 million, with an
option to increase the revolving loan by an additional $5 million, for a total
of $15 million. The Wells Fargo Agreement terminates on June 29,
2010. At the Company’s option, the revolving loan bears an interest
rate equal to either the Wells Fargo’s Base Rate plus a stipulated percentage or
LIBOR plus a stipulated percentage. Accordingly, the Company is
impacted by changes in the Base Rate and LIBOR. The Company is
subject to a non-use fee of 0.50% on the unused portion of the revolver from the
date of the Wells Fargo Agreement. The Wells Fargo Agreement also
allows up to $2.0 million in annual stock repurchases. The Company
has pledged the stock of its subsidiaries, its leasehold interests, its patents
and trademarks and its furniture, fixtures and equipment as collateral for its
credit facility with Wells Fargo. The Wells Fargo Agreement requires
the Company to maintain certain minimum EBITDA levels, leverage ratios and fixed
charge coverage ratios. As of March 30, 2008, the Company was in
compliance with all debt covenants and as of the date hereof expects to be in
compliance with its debt covenants during the balance of fiscal year
2008.
On May 9, 2005, the Company announced
its plan to implement a limited stock repurchase program in a manner permitted
under its bank financing agreement. The Company entered into a
repurchase plan designed to comply with Rules 10b5-1 and 10b-18 under the
Securities and Exchange Act of 1934 under which an agent appointed by the
Company determined the time, amount, and price at which purchases of common
stock were made, subject to certain parameters established in advance by the
Company. Under this program, the Company purchased shares through the
third quarter of fiscal year 2006 at which time the maximum authority was
reached. The Company presently has no further authority to repurchase
outstanding shares of its common stock under this program. On June
13, 2007, Mr. Forehand entered into a Stock Purchase Agreement to sell 200,000
shares of his personally-owned common stock back to the Company. The
stock was valued at $8.14 per share, which was the ten-day weighted average
stock price as of June 12, 2007, and the Company finalized the stock purchase on
July 6, 2007. Shares previously acquired are being held for general
corporate purposes, including the offset of the dilutive effect on shareholders
from the exercise of stock options.
The Company’s management believes that
with its operating cash flow and the Company’s revolving line of credit under
the Wells Fargo Agreement, funds will be sufficient to meet operating
requirements and to finance routine capital expenditures and new restaurant
growth through the next 12 months. Unless the Company violates a debt
covenant, the Company’s credit facility with Wells Fargo is not subject to
triggering events that would cause the credit facility to become due sooner than
the maturity dates described in the previous paragraphs.
We are exposed to market risk from
changes in interest rates on debt and changes in commodity prices. Our exposure
to interest rate fluctuations is limited to our outstanding bank debt. At March
30, 2008, there was $6.2 million outstanding under our revolving credit facility
which currently bears interest at 225 basis points (depending on our leverage
ratios) over the London Interbank Offered Rate or LIBOR. Should
interest rates based on these borrowings increase by one percentage point, our
estimated quarterly interest expense would increase by $15,500.
12
Item
4T. Controls and Procedures
Evaluation of Controls and
Procedures
The Company maintains disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to
ensure that information required to be disclosed in Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms, and that such
information is accumulated and communicated to the Company’s management,
including its Chief Executive Officer (“CEO”) and Chief Financial Officer
(“CFO”), as appropriate, to allow timely decisions regarding required
disclosures.
The Company evaluated the effectiveness
of the design and operation of its disclosure controls and procedures pursuant
to Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the
end of the period covered by this report. Based on the evaluation, performed
under the supervision and with the participation of our management, including
the CEO and the CFO, the Company’s management, including the CEO and CFO,
concluded that the Company’s disclosure controls and procedures were effective
as of the period covered by this report.
Changes
in Internal Control Over Financial Reporting
During the period covered by this
report, there were no changes in the Company’s internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act) that materially
affected or are reasonably likely to materially affect the Company’s internal
control over financial reporting.
PART II - OTHER
INFORMATION
Item
1A. Risk Factors
There have been no material changes
in the Company’s risk factors from the disclosure included in the Annual Report
on Form 10-K for the fiscal year ended December 30, 2007.
13
Item
6. Exhibits
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Exhibit
Number
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Document
Description
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31.1
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Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
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31.2
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Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
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32.1
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Certification
of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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32.2
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Certification
of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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Items 1, 2, 3, 4 and 5 of this Part II
are not applicable and have been omitted.
14
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Mexican Restaurants,
Inc.
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Dated: May
14, 2008
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By: /s/
Curt Glowacki
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Curt
Glowacki
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Chief
Executive Officer
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(Principal
Executive Officer)
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Dated: May
14, 2008
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By: /s/ Andrew
J. Dennard
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Andrew
J. Dennard
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Executive
Vice President, Chief Financial Officer & Treasurer
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(Principal
Financial Officer and Principal Accounting Officer)
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