form10-q.htm
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 September 27, 2009
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the Registrant was required to submit and post such files).
Yes ¨ No
¨
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of "large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer ý Smaller
reporting company ¨
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
November 10, 2009: 3,288,141 shares, par value
$.01.
Table
of Contents
Part
I – Financial Information
|
|
Page
No.
|
|
|
|
Item
1.
|
Financial
Statements:
|
|
|
|
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
6
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|
|
9
|
|
|
13
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|
|
14
|
|
|
|
Part
II – Other Information
PART
1 - FINANCIAL INFORMATION
|
Item
1. Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
Restaurants, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
12/28/2008 (1) |
|
|
ASSETS
|
|
|
9/27/2009
|
(As
adjusted) |
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
|
|
$ |
189,684 |
|
|
$ |
879,206 |
|
Royalties
receivable
|
|
|
90,583 |
|
|
|
144,196 |
|
Other
receivables
|
|
|
821,362 |
|
|
|
1,117,815 |
|
Inventory
|
|
|
569,798 |
|
|
|
597,237 |
|
Income
taxes receivable
|
|
|
255,308 |
|
|
|
194,856 |
|
Prepaid
expenses and other current assets
|
|
|
1,133,408 |
|
|
|
902,340 |
|
Assets
related to discontinued operations
|
|
|
145,098 |
|
|
|
196,465 |
|
Assets
held for sale
|
|
|
-- |
|
|
|
1,111,513 |
|
Total
current assets
|
|
|
3,205,241 |
|
|
|
5,143,628 |
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
17,726,315 |
|
|
|
17,866,902 |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
5,017,243 |
|
|
|
6,273,705 |
|
Deferred
tax assets
|
|
|
1,948,763 |
|
|
|
1,976,427 |
|
Other
assets
|
|
|
175,020 |
|
|
|
208,325 |
|
Other
assets related to discontinued operations
|
|
|
33,878 |
|
|
|
34,178 |
|
Total
Assets
|
|
$ |
28,106,460 |
|
|
$ |
31,503,165 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
1,994,563 |
|
|
$ |
2,288,698 |
|
Accrued
sales, liquor, and payroll taxes
|
|
|
862,701 |
|
|
|
1,054,078 |
|
Accrued
expenses
|
|
|
989,569 |
|
|
|
1,191,740 |
|
Liabilities
related to assets held for sale
|
|
|
-- |
|
|
|
195,740 |
|
Current
portion of liabilities associated with leasing and exit
activities
|
|
|
352,623 |
|
|
|
325,625 |
|
Total
current liabilities
|
|
|
4,199,456 |
|
|
|
5,055,881 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
5,150,000 |
|
|
|
7,500,000 |
|
Liabilities
associated with leasing and exit activities, net of current
portion
|
|
|
636,631 |
|
|
|
567,445 |
|
Deferred
gain
|
|
|
780,535 |
|
|
|
936,642 |
|
Other
liabilities
|
|
|
1,962,476 |
|
|
|
1,956,921 |
|
Total
Liabilities
|
|
|
12,729,098 |
|
|
|
16,016,889 |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value, 1,000,000 shares authorized, none
issued
|
|
|
-- |
|
|
|
-- |
|
Common
stock, $0.01 par value, 20,000,000 shares
|
|
|
|
|
|
|
|
|
|
authorized,
4,732,705 shares issued
|
|
|
47,327 |
|
|
|
47,327 |
|
Additional
paid-in capital
|
|
|
19,270,442 |
|
|
|
19,442,049 |
|
Retained
earnings
|
|
|
8,860,188 |
|
|
|
9,120,885 |
|
Treasury
stock at cost of 1,444,564 and 1,481,064 common shares at
9/27/09
and 12/28/08, respectively
|
|
|
(12,800,595 |
) |
|
|
(13,123,985 |
) |
Total
stockholders' equity
|
|
|
15,377,362 |
|
|
|
15,486,276 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$ |
28,106,460 |
|
|
$ |
31,503,165 |
|
(1)
|
December
28, 2008 balances have been reclassified for discontinued
operations. See Note 7.
|
See
accompanying notes to consolidated financial statements.
Mexican
Restaurants, Inc. and Subsidiaries
(Unaudited)
|
|
13-Week
Period
Ended
9/27/2009
|
|
|
13-Week
Period Ended
9/28/2008
|
|
|
39-Week
Period
Ended
9/27/2009
|
|
|
39-Week
Period
Ended
9/28/2008
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
sales
|
|
$ |
17,096,233 |
|
|
$ |
17,451,128 |
|
|
$ |
54,217,484 |
|
|
$ |
54,565,676 |
|
Franchise
fees, royalties and other
|
|
|
128,962 |
|
|
|
135,496 |
|
|
|
393,829 |
|
|
|
406,252 |
|
Business
interruption
|
|
|
107,318 |
|
|
|
127,525 |
|
|
|
210,846 |
|
|
|
248,717 |
|
|
|
|
17,332,513 |
|
|
|
17,714,149 |
|
|
|
54,822,159 |
|
|
|
55,220,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
4,961,965 |
|
|
|
5,073,611 |
|
|
|
15,475,502 |
|
|
|
15,711,467 |
|
Labor
|
|
|
5,835,840 |
|
|
|
5,765,679 |
|
|
|
18,008,937 |
|
|
|
17,746,704 |
|
Restaurant
operating expenses
|
|
|
4,419,617 |
|
|
|
4,698,151 |
|
|
|
13,724,614 |
|
|
|
13,748,135 |
|
General
and administrative
|
|
|
1,530,024 |
|
|
|
1,754,122 |
|
|
|
4,848,791 |
|
|
|
5,450,463 |
|
Depreciation
and amortization
|
|
|
891,681 |
|
|
|
805,218 |
|
|
|
2,644,651 |
|
|
|
2,414,883 |
|
Pre-opening
costs
|
|
|
21,745 |
|
|
|
43,810 |
|
|
|
21,745 |
|
|
|
91,121 |
|
Impairment
and restaurant closure costs
|
|
|
116,937 |
|
|
|
67,597 |
|
|
|
354,168 |
|
|
|
122,426 |
|
Loss
(gain) on involuntary disposals
|
|
|
18,330 |
|
|
|
140,938 |
|
|
|
26,127 |
|
|
|
(134,771 |
) |
Loss
on sale of other property and equipment
|
|
|
46,430 |
|
|
|
131,509 |
|
|
|
120,126 |
|
|
|
173,179 |
|
|
|
|
17,842,569 |
|
|
|
18,480,635 |
|
|
|
55,224,661 |
|
|
|
55,323,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(510,056 |
) |
|
|
(766,486 |
) |
|
|
(402,502 |
) |
|
|
(102,962 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
815 |
|
|
|
1,242 |
|
|
|
2,678 |
|
|
|
4,152 |
|
Interest
expense
|
|
|
(39,870 |
) |
|
|
(92,003 |
) |
|
|
(144,981 |
) |
|
|
(325,215 |
) |
Other,
net
|
|
|
6,742 |
|
|
|
10,500 |
|
|
|
26,844 |
|
|
|
27,958 |
|
|
|
|
(32,313 |
) |
|
|
(80,261 |
) |
|
|
(115,459 |
) |
|
|
(293,105 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
(542,369 |
) |
|
|
(846,747 |
) |
|
|
(517,961 |
) |
|
|
(396,067 |
) |
Income
tax benefit
|
|
|
309,755 |
|
|
|
362,961 |
|
|
|
306,772 |
|
|
|
260,198 |
|
Loss
from continuing operations
|
|
|
(232,614 |
) |
|
|
(483,786 |
) |
|
|
(211,189 |
) |
|
|
(135,869 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
|
- |
|
|
|
76,807 |
|
|
|
36,021 |
|
|
|
138,846 |
|
Restaurant
closure income (expense)
|
|
|
- |
|
|
|
(6,062 |
) |
|
|
(190,941 |
) |
|
|
46,227 |
|
Gain
(loss) on sale of assets
|
|
|
- |
|
|
|
- |
|
|
|
386,502 |
|
|
|
(2,075 |
) |
Income
from discontinued operations before income taxes
|
|
|
- |
|
|
|
70,745 |
|
|
|
231,582 |
|
|
|
182,998 |
|
Income
tax expense
|
|
|
- |
|
|
|
(91,518 |
) |
|
|
(281,090 |
) |
|
|
(117,112 |
) |
Income
(loss) from discontinued operations
|
|
|
- |
|
|
|
(20,773 |
) |
|
|
(49,508 |
) |
|
|
65,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(232,614 |
) |
|
$ |
(504,559 |
) |
|
$ |
(260,697 |
) |
|
$ |
(69,983 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(0.07 |
) |
|
$ |
(0.14 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.04 |
) |
Income
(loss) from discontinued operations
|
|
|
- |
|
|
|
(0.01 |
) |
|
|
(0.02 |
) |
|
|
0.02 |
|
Net
loss
|
|
$ |
(0.07 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income
(loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(0.07 |
) |
|
$ |
(0.14 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.04 |
) |
Income
(loss) from discontinued operations
|
|
|
- |
|
|
|
(0.01 |
) |
|
|
(0.02 |
) |
|
|
0.02 |
|
Net
loss
|
|
$ |
(0.07 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares (basic)
|
|
|
3,286,201 |
|
|
|
3,259,087 |
|
|
|
3,276,306 |
|
|
|
3,252,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares (diluted)
|
|
|
3,286,201 |
|
|
|
3,259,087 |
|
|
|
3,276,306 |
|
|
|
3,252,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
Mexican Restaurants, Inc. and
Subsidiaries
|
|
|
|
(Unaudited)
|
|
|
|
39-Week
|
|
|
39-Week
|
|
|
|
Period
Ended
|
|
|
Period
Ended
|
|
|
|
9/27/2009
|
|
|
9/28/2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(260,697 |
) |
|
$ |
(69,983 |
) |
(Income)
loss from discontinued operations
|
|
|
49,508 |
|
|
|
(65,886 |
) |
Loss
from continuing operations
|
|
|
(211,189 |
) |
|
|
(135,869 |
) |
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,644,651 |
|
|
|
2,414,883 |
|
Deferred
gain amortization
|
|
|
(156,107 |
) |
|
|
(156,107 |
) |
Impairment
and restaurant closure costs
|
|
|
354,168 |
|
|
|
122,426 |
|
(Gain)
loss on involuntary disposals
|
|
|
26,127 |
|
|
|
(134,771 |
) |
Loss
on sale of other property & equipment
|
|
|
120,126 |
|
|
|
173,179 |
|
Stock
based compensation expense
|
|
|
232,827 |
|
|
|
141,785 |
|
Excess tax expense (benefit) – stock based compensation expense,
net
|
|
|
39,751 |
|
|
|
(485 |
) |
Deferred
income tax benefit
|
|
|
(13,629 |
) |
|
|
(190,753 |
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
Royalties
receivable
|
|
|
53,613 |
|
|
|
(71,082 |
) |
Other
receivables
|
|
|
296,453 |
|
|
|
(63,884 |
) |
Inventory
|
|
|
27,440 |
|
|
|
(123,389 |
) |
Income
taxes receivable
|
|
|
(100,203 |
) |
|
|
(43,144 |
) |
Prepaid
and other current assets
|
|
|
(231,068 |
) |
|
|
(182,346 |
) |
Other
assets
|
|
|
1,392 |
|
|
|
42,421 |
|
Accounts
payable
|
|
|
(374,993 |
) |
|
|
(32,472 |
) |
Accrued
expenses and other liabilities
|
|
|
(577,674 |
) |
|
|
(611,787 |
) |
Liabilities
associated with leasing and exit activities
|
|
|
180,088 |
|
|
|
(102,357 |
) |
Deferred
rent and other long-term liabilities
|
|
|
(65,488 |
) |
|
|
(9,856 |
) |
Total
adjustments
|
|
|
2,457,474 |
|
|
|
1,172,261 |
|
Net
cash provided by continuing operations
|
|
|
2,246,285 |
|
|
|
1,036,392 |
|
Net
cash provided by (used in) discontinued operations
|
|
|
(455,820 |
) |
|
|
147,437 |
|
Net
cash provided by operating activities
|
|
|
1,790,465 |
|
|
|
1,183,829 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Insurance
proceeds received from involuntary disposals
|
|
|
54,731 |
|
|
|
385,770 |
|
Purchase
of property and equipment
|
|
|
(2,762,320 |
) |
|
|
(2,953,593 |
) |
Proceeds
from landlord for lease buildout
|
|
|
75,000 |
|
|
|
99,144 |
|
Proceeds
from sale of property and equipment
|
|
|
- |
|
|
|
24,071 |
|
Net
cash used in continuing operations
|
|
|
(2,632,589 |
) |
|
|
(2,444,608 |
) |
Purchase
of property and equipment
|
|
|
(15,250 |
) |
|
|
(478,566 |
) |
Cash
received from sale of La Senorita
|
|
|
2,557,603 |
|
|
|
- |
|
Net
cash provided by (used in) discontinued operations
|
|
|
2,542,353 |
|
|
|
(478,566 |
) |
Net
cash used in investing activities
|
|
|
(90,236 |
) |
|
|
(2,923,174 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings
under line of credit agreement
|
|
|
900,000 |
|
|
|
2,260,000 |
|
Payments
under line of credit agreement
|
|
|
(3,250,000 |
) |
|
|
(1,160,000 |
) |
Excess
tax benefit – stock based compensation expense, net
|
|
|
(39,751 |
) |
|
|
485 |
|
Exercise
of stock options
|
|
|
- |
|
|
|
15,755 |
|
Net
cash provided by (used in) financing activities
|
|
|
(2,389,751 |
) |
|
|
1,116,240 |
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash
|
|
|
(689,522 |
) |
|
|
(623,105 |
) |
|
|
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
|
879,206 |
|
|
|
1,154,629 |
|
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$ |
189,684 |
|
|
$ |
531,524 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
138,762 |
|
|
$ |
354,413 |
|
Income
taxes
|
|
$ |
88,150 |
|
|
$ |
92,771 |
|
See
accompanying notes to consolidated financial statements.
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 September 27, 2009, and the consolidated statements of operations
and cash flows for the 13-week and 39-week periods ended September 27, 2009 and
September 28, 2008. The consolidated statements of operations for the
13-week and 39-week periods ended September 27, 2009 and
September 28, 2008 are not necessarily indicative of the results to
be expected for the full year or any other interim period. During the
interim periods, we follow the accounting policies described in the notes to our
consolidated financial statements in the Annual Report and Form 10-K for the
year ended December 28, 2008 filed with the Securities and Exchange Commission
on March 26, 2009. Reference should be made to such consolidated
financial statements for information on such accounting policies and further
financial detail.
The Company classifies as discontinued
operations for all periods presented any component of the Company’s business
that the Company believes is probable of being sold within the next 12 months
and that has operations and cash flows that are clearly distinguishable
operationally and for financial reporting purposes. For those
components, the Company has no significant continuing involvement after
disposal, and their operations and cash flows are eliminated from ongoing
operations. Sales of significant components of the Company’s business
not classified as discontinued operations are reported as a component of income
from continuing operations.
|
Impact
of Recently Issued Accounting
Standards
|
On
September 27, 2009, the Company adopted changes issued by the Financial
Accounting Standards Board (“FASB”) to the authoritative hierarchy of U.S.
Generally Accepted Accounting Principles (“GAAP”). These changes establish
the FASB Accounting Standards Codification (“ASC”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with GAAP. Rules and interpretive releases of the Securities
and Exchange Commission (“SEC”) under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. The FASB will no
longer issue new standards in the form of Statements, FASB Staff Positions, or
Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting
Standards Updates (“ASU”). The ASU will not be authoritative in their own
right as they will only serve to update the Codification. These changes
and the Codification itself do not change GAAP. Other than the manner in
which new accounting guidance is referenced, the adoption of these changes had
no impact on our consolidated balance sheets, results of operations or cash
flows.
|
In April 2008, the FASB amended FASB ASC Subtopic 350-30 “General
Intangibles Other Than Goodwill.” FASB ASC Subtopic 350-30
defines the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset to improve consistency between the useful life of a
recognized intangible asset and the period of expected cash flows used to
measure the fair value of the asset. The requirement for
determining the useful lives must be applied prospectively to intangible
assets acquired after the effective date and the disclosure requirements
must be applied prospectively to all intangible assets recognized as of,
and subsequent to, the effective date. FASB ASC Subtopic 350-30
is effective for financial statements issued for fiscal years beginning
after December 15, 2008. Such adoption has not had a material
effect on our consolidated balance sheets, results of operations or cash
flows.
|
In June 2008, the
FASB amended FASB ASC 260, “Earnings Per Share”. As required by
FASB ASC 260, unvested share-based payment awards that contain rights to receive
nonforfeitable dividends (whether paid or unpaid) are participating securities,
and should be included in the two-class method of computing EPS. The
amendment is effective for fiscal years beginning after December 15, 2008,
and interim periods within those years. Such adoption has not had a material
effect on our consolidated balance sheets, results of operations or cash
flows.
|
In May 2009,
the FASB issued FASB ASC 855, “Subsequent Events”, which establishes
guidance for the accounting for and the disclosure of events that happen
after the date of the balance sheet but before the release of
the consolidated financial statements, otherwise known as “subsequent
events”. FASB ASC 855 requires us to disclose the date through
which we have evaluated subsequent events and whether the date corresponds
with the release of our financial statements. The guidance is
effective for interim reporting periods ending after June 15, 2009.
The adoption of FASB ASC 855 resulted in additional quarterly and annual
disclosures only.
|
In August 2009, the FASB issued ASU No.
2009-05, an update to FASB ASC 820, “Fair Value Measurements and
Disclosures.” This update provides amendments to reduce potential
ambiguity in financial reporting when measuring the fair value of
liabilities. Among other provisions, this update provides clarification
that in circumstances in which a quoted price in an active market for the
identical liability is not available, a reporting entity is required to measure
fair value using one or more of the valuation techniques described in ASU
2009-05. ASU 2009-05 will become effective for the Company’s annual
financial statements for the year ended January 3, 2010. We do not expect
that the adoption of ASU 2009-05 will have a material impact on our consolidated
balance sheets, results of operations or cash flows.
2.
Income Taxes
In 2006,
the State of Texas enacted a business tax that is imposed on gross margin to
replace the State’s then-current franchise tax regime. The
legislation’s effective date was January 1, 2007, and as a result our first
Texas margins tax (“TMT”) return in 2008 was 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. We have properly determined the impact of the legislation
in the determination of our reported state current and deferred income tax
liability.
In
determining the 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.
3.
|
Stock-Based
Compensation
|
At
September 27, 2009, we had one equity-based compensation plan from which
stock-based compensation awards can be granted to eligible employees, officers
or directors, known as the 2005 Long Term Incentive Plan. On May 28,
2008, the shareholders approved an amendment to the 2005 Long Term Incentive
Plan to increase from 350,000 to 425,000 shares the number of shares authorized
for issuance under this plan. The Company’s 1996 Long Term Incentive
Plan, Stock Option Plan for Non-Employee Directors and 1996 Manager’s Stock
Option Plan have each terminated in accordance with its terms, but there are
still options which remain exercisable under these plans 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 Company plans are
described in more detail in Note 5 of the consolidated financial statements in
our Annual Report on Form 10-K for the fiscal year ended December 28,
2008.
On May
28, 2008, our Board of Directors approved restricted stock grants to one Board
member for 3,000 shares, vesting in equal increments over three years, and one
consultant for 2,000 shares, vesting in equal increments over two
years.
On May
28, 2008, our shareholders approved the grant of 60,000 long-term performance
units under the 2005 Long Term Incentive Plan to Mr. Glowacki.
In
accordance with the May 22, 2007 Board approved grant, 10,000 shares of
restricted stock were granted to Mr. Glowacki on May 22, 2009. The
shares will vest over a four year period at a rate of 25% per year.
We
receive a tax deduction for certain stock option exercises during the period in
which the options are exercised. These deductions are generally for
the excess of the price for which the options were sold over the exercise prices
of the options. No stock options were exercised during the 13-week
period ended September 27, 2009 and we received $5,865 for the exercise of
options for 1,750 shares during the 13-week period ended September 28,
2008. No stock options were exercised during the 39-week period ended
September 27, 2009 and we received $15,755 for the exercise of options for 4,625
shares during the 39-week period ended September 28, 2008.
4. Income
(Loss) per Share
Basic
income per share is based on the weighted average shares outstanding without any
dilutive effects considered. 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. 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 13-week and 39-week periods ended
September 27, 2009, weighted-average shares outstanding, assuming dilution,
excludes the impact of 2,975 and 1,938 common stock equivalents, respectively,
due to our net loss position in those periods. For the 13-week and
39-week periods ended September 28, 2008, weighted-average shares outstanding,
assuming dilution, excludes the impact of 60,783 and 59,178 common stock
equivalents, respectively, due to our net loss position in those
periods.
5. Long-term
Debt
We entered into a Credit Agreement with
Wells Fargo Bank, N.A. (“Wells Fargo”) in June 2007 (the “Wells Fargo
Agreement”). Originally, the Wells Fargo Agreement provided for
a revolving loan of up to $10 million, but the Wells Fargo Agreement was amended
effective December 28, 2008, reducing the revolving loan by the amount of the
net proceeds received from the sale of La Senorita, which reduced the revolver
availability to approximately $7.3 million on April 7,
2009. Effective June 28, 2009, the Wells Fargo Agreement was further
amended primarily to extend the maturity date from June 29, 2010 to June 29,
2012. The June 2009 amendment to the Wells Fargo Agreement also
increased the stipulated percentages payable in connection with London Interbank
Offered Rate (“LIBOR”) loans and letters of credit and changed total leverage
ratio limits as a condition precedent to loans for growth capital
expenditures. Under the Wells Fargo Agreement, we are required to
maintain certain leverage ratios and fixed charge coverage ratios. We
were in compliance with all covenants under the Wells Fargo Agreement at
September 27, 2009.
At our option, the
revolving loan bears an interest rate equal to the Wells Fargo Base Rate plus a
stipulated percentage or LIBOR plus a stipulated
percentage. Accordingly, we are impacted by changes in the Base Rate
and LIBOR. We are 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. We have pledged the stock of our
subsidiaries, our leasehold interests, our patents and trademarks and our
furniture, fixtures and equipment as collateral for our credit facility with
Wells Fargo.
6. Related
Party Transactions
Our Vice
Chairman of the Board of Directors owns a Casa Olé franchise restaurant for
which the Company receives royalties. For the 13-week periods ended
September 27, 2009 and September 28, 2008, the Company recognized royalty income
of $5,660 and $5,426, respectively, related to this restaurant. For
the 39-week periods ended September 27, 2009 and September 28, 2008, the Company
recognized royalty income of $17,908 and $17,126, respectively, related to this
restaurant.
7.
|
Discontinued
Operations
|
On April
7, 2009, we sold substantially all of the operating assets and liabilities of
our La Senorita restaurant chain (consisting of five site locations) located in
Michigan. On January 24, 2009, we closed one underperforming Mission
Burrito restaurant. The results of operations for the current and
prior periods for the La Senorita chain and the closed Mission Burrito
restaurant have been reported as discontinued operations.
Also, the
assets and liabilities related to the sale of the La Senorita chain that were
sold have been classified as held for sale in the consolidated balance sheet as
of December 28, 2008. The assets and liabilities of the Mission
Burrito restaurant and certain assets and liabilities of La Senorita that were
not sold have been classified as related to discontinued
operations. Current liabilities related to discontinued operations of
the closed Mission Burrito restaurant include estimated lease obligations and
are included with current portion of liabilities associated with leasing and
exit activities.
8.
|
Fair
Value of Measurements
|
The
carrying amount of receivables, accounts payables and accrued expenses
approximates fair value because of the immediate or short-term maturity of these
financial instruments. The fair value of long-term debt is determined
using current applicable rates for similar instruments and approximates the
carrying value of such debt.
In
connection with preparation of the consolidated financial statements, we
evaluated subsequent events after the consolidated balance sheet date of
September 27, 2009 through November 12, 2009, the date the consolidated
financial statements were issued.
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 us in this report and in our most
recently filed Annual Report and Form 10-K that attempt to advise readers of the
risks and factors that may affect our business. We undertake 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 our expectations with regard thereto or any change in events,
conditions, circumstances or assumptions underlying such
statements.
General
We
operate and franchise Mexican-theme restaurants featuring various elements
associated with the casual dining experience under the names Casa Olé,
Monterey’s Little Mexico, Tortuga Coastal Cantina, Crazy Jose’s and Mission
Burrito. On April 7, 2009, we sold our La Senorita chain in order to
focus our resources on our other store brands. At September 27, 2009
we operated 55 restaurants, franchised 17 restaurants and licensed two
restaurants in various communities in Texas, Louisiana and
Oklahoma.
Our
primary source of revenues is the sale of food and beverages at Company-owned
restaurants. We also derive revenues from franchise fees, royalties
and other franchise-related activities with respect to our 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 operations. 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.
|
Over the last five years, we have focused our growth and development
efforts primarily upon assimilating two significant acquisitions (13
restaurants purchased in 2004 from a franchisee and two Mission Burrito
restaurants, and related concept rights, acquired in 2006), developing new
prototypes for our Casa Olé, Monterey’s and Mission Burrito restaurant
concepts and initiating a program whereby we remodel several of our
existing restaurants each year.
|
|
On October 6, 2009, we
implemented planned expense reductions to reduce general and
administrative expenses to achieve a level of expense that management
believes is sustainable through fiscal year 2010. In
implementing the cost savings, severance pay of approximately $190,000 was
incurred related to staff reductions at the corporate
office. Total cost savings of approximately $1.1 million
through fiscal year 2010 is expected from planned general and
administrative expense reductions related to the decrease in corporate
payroll costs as well as reduced marketing and other general and
administrative costs.
|
Results
of Operations
Revenues. Our
revenues for the third quarter of fiscal year 2009 decreased $381,636 or 2.2% to
$17.3 million compared with $17.7 million for the same quarter in fiscal year
2008. Restaurant sales for third quarter 2009 decreased by $354,895
or 2.0% to $17.1 million compared with $17.4 million for the third quarter of
2008. Franchised-owned restaurant sales, as reported by franchisees,
decreased approximately 3.4% over the same quarter in fiscal
2008. The decrease in restaurant revenues primarily reflects a
decrease in same-store sales, partially offset by new restaurant revenues and
revenues of restaurants that were temporarily closed last year due to Hurricanes
Gustav and Ike. For the third quarter ended September 27, 2009,
Company-owned same-restaurant sales decreased approximately 11.4%, caused by a
weakened economy.
On a
year-to-date basis, the Company’s revenue decreased $398,486 to $54.8 million
compared to $55.2 million for the same 39-week period in fiscal
2008. Restaurant sales for the 39-week period ended September 27,
2009 decreased $348,192 to $54.2 million compared to $54.6 million for the same
39-week period in fiscal 2008. Franchised-owned restaurant sales, as
reported by franchisees, decreased approximately 2.9% over the same 39-week
period in fiscal 2008. The decrease in restaurant revenues primarily
reflects a decrease in same-store sales, partially offset by new restaurant
revenues and revenues of restaurants that were temporarily closed last year due
to Hurricanes Gustav and Ike. For the 39-week period ended September
27, 2009, Company-owned same-restaurant sales decreased approximately
5.6%.
Costs and
Expenses. Costs of sales, consisting of food, beverage,
liquor, supplies and paper costs, was 29.0% as a percentage of restaurant sales
for the third quarter of fiscal year 2009 compared with 29.1% for the third
quarter of fiscal year 2008. As a percentage of restaurant sales,
dairy, cheese and tortilla costs declined 106 basis points in the third quarter
of fiscal year 2009, but were offset by higher costs in all other
categories.
On a
year-to-date basis, costs of sales decreased as a percent of restaurant sales 30
basis points to 28.5% compared with 28.8% for the same 39-week period of fiscal
year 2008. The decrease primarily reflects cost improvements for
dairy and cheese, which declined as a percentage of restaurant sales by 90 basis
points, offset by increases in all other costs and expenses except for dry
goods.
Labor and
other related expenses increased as a percentage of restaurant sales 110 basis
points to 34.1% as compared with 33.0% in the third quarter of fiscal year
2008. The increase reflects labor cost leverage that is lost
when same-store sales decline; for example, both management labor and back of
the house labor, which are semi-fixed in nature, increased as a percentage of
sales due to the decline in sales.
On a
year-to-date basis, labor and other related expenses increased as a percentage
of restaurant sales 70 basis points to 33.2% compared with 32.5% for the 39-week
period of fiscal year 2008. Again, the increase primarily
reflects labor cost leverage that is lost when same-store sales
decline.
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 100
basis points to 25.9% as compared with 26.9% in the third quarter of fiscal year
2008. The decrease reflects lower electric and gas expenses of 150
basis points, lower marketing expenses of 80 basis points, offset by higher
coupon, rent, insurance and property tax expenses for a combined increase of 124
basis points.
On a
year-to-date basis, restaurant operating expenses increased 10 basis points to
25.3% compared with 25.2% for the 39-week period in fiscal year
2008. The increase primarily reflects the same that was discussed in
the previous paragraph except the offsetting items were proportionally
higher.
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 decreased 110
basis points to 8.8% for the third quarter of fiscal year 2009 as compared with
9.9% for the third quarter of fiscal year 2008. On a year-to-date
basis, general and administrative expenses decreased 110 basis points to 8.8%
compared with the 39-week period of fiscal 2008. In absolute dollars,
general and administrative costs decreased $224,098 and $601,672 in the 13-week
and 39-week periods of fiscal year 2009, respectively, compared with the same
periods of fiscal year 2008. General and administrative expenses as a
percentage of total revenues decreased due to the planned reduction in salaries,
bonuses and most department expenses, partially offset by higher legal and stock
compensation expense, both related to the sale of La Senorita.
Depreciation
and amortization expense include the depreciation of fixed assets and the
amortization of intangible assets. Depreciation and amortization
expense increased as a percentage of total sales 60 basis points to 5.1% for the
third quarter of fiscal year 2009 as compared with 4.5% the same quarter in
fiscal year 2008. Such expense for the third quarter of fiscal year
2009 was $86,463 higher than the third quarter in fiscal year
2008. The increase reflects additional depreciation expense for
remodeled restaurants, new restaurants, and the replacement of equipment and
leasehold improvements in various existing restaurants.
On a
year-to-date basis, depreciation and amortization expenses increased as a
percentage of total sales 40 basis points to 4.8% for the 39-week period of
fiscal year 2009 as compared with 4.4% the same 39-week period of fiscal year
2008, or $229,768 higher than the same 39-week period of fiscal year
2008. The increase was due to the reasons discussed
above.
During
the third quarter ended September 27, 2009, we opened a new Mission Burrito
restaurant, incurring $21,745 in pre-opening costs. During the third
quarter of fiscal year 2008, we re-opened one Casa Olé restaurant that had been
closed for repairs due to a fire, incurring $43,810 in pre-opening
costs.
Impairment and
Restaurant Closure Costs. 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.
The
consolidated statements of operations for the 13-week and 39-week periods ended
September 27, 2009, include a separate line item for impairment and restaurant
closure costs of $116,937 and $354,168, respectively. The impairments
and closure costs were primarily related to rent differential adjustments for
two subleased restaurants located in Idaho, asset impairments for the corporate
office, and to a lesser extent, two under-performing restaurants operating in
the Houston area. The consolidated statements of operations for the
13-week and 39-week periods ended September 28, 2008, include a separate line
item for impairment and restaurant closure costs of $67,597 and $122,426,
respectively. The impairments and closure costs were primarily
related to the same two under-performing restaurants operating in the Houston
area and the two Idaho subleased restaurants.
Loss (Gain) on
Involuntary Disposals. The consolidated statements of
operations for the 13-week and 39-week periods ended September 27, 2009 include
a separate line item for a loss of $18,330 and $26,127
respectively. The losses resulted from costs related to our Hurricane
Ike insurance claim, partially offset by insurance proceeds received for the
replacement of assets. We are currently working with our insurance
company to finalize all insurance claims related to the property damage from
last year’s hurricane. The consolidated statements of operations for
the 13-week and 39-week periods ended September 28, 2008 includes a separate
line item for a loss of $140,938 and a gain of $134,771, respectively, resulting
from inventory losses caused by Hurricane Ike and the write-off of assets
damaged by the February 2008 fire at the Company’s Casa Olé restaurant located
in Vidor, Texas, net of insurance proceeds for the replacement of
assets. The claim related to the Vidor fire has been fully settled
with the insurance company.
Loss on Sale of
Other Property and Equipment. The consolidated statements of
operations for the 13-week and 39-week periods ended September 27, 2009 include
a separate line item for a loss of $46,430 and $120,126, respectively, primarily
related to the routine disposal of restaurant assets. The
consolidated statements of operations for the 13-week and 39-week periods ended
September 28, 2008 includes a separate line item for a loss of $131,509 and
$173,179, respectively, primarily related to the disposal of restaurant assets
during the conversion of an existing restaurant into a Mission Burrito
restaurant.
Other Income
(Expense). Net expense decreased $47,948 to $32,313 in
the 13-week period ended September 27, 2009 compared with a net expense of
$80,261 in the 13-week period ended September 28, 2008. Interest
expense decreased $52,133 to $39,870 in the 13-week period ended September 27,
2009 compared with interest expense of $92,003 in the 13-week period ended
September 28, 2008. The decrease in interest expense reflects lower
interest rates and lower average debt balances during the third quarter of
fiscal year 2009 as compared to the third quarter of fiscal year
2008. Net expense decreased $177,647 to $115,459 in the 39-week
period ending September 27, 2009 compared with a net expense of $293,105 in the
39-week period ended September 28, 2008. Interest expense decreased
$180,234 to $144,981 in the 39-week period ended September 27, 2009 compared
with interest expense of $325,215 in the 39-week period ended September 28,
2008. The decrease in interest expense reflects lower interest rates
and lower average debt balances during the 39-week period of fiscal year 2009 as
compared to the 39-week period of fiscal year 2008.
Income
Taxes. Our effective tax rate from continuing operations
for the 13-week period ended September 27, 2009 was a benefit of 57.1% as
compared to a benefit of 42.9% for the 13-week period ended September 28,
2008. Our effective tax rate from continuing operations for the
39-week period ended September 27, 2009 was a benefit of 59.2% as compared to a
benefit of 65.7% for the 39-week period ended September 28, 2008. The
decrease in the year-to-date effective rate is attributed primarily to an
increase in FICA tip credits and other permanent differences. We did
not have any discontinued operations during the 13-week period ended September
27, 2009. Our effective tax rate from discontinued operations for the
13-week period ended September 28, 2008 was an expense of 129.4%. Our
effective tax rate from discontinued operations for the 39-week period ended
September 27, 2009 was an expense of 121.4% as compared to an expense of 64.0%
for the 39-week period ended September 28, 2008. The increase in the
year-to-date effective rate is attributed to income tax expense related to the
sale of our La Senorita chain in Michigan in addition to a capital loss related
to the La Senorita sale that has been fully reserved.
Discontinued
Operations. On April 7, 2009, we sold substantially all of the
operating assets and liabilities of our La Senorita restaurant chain (consisting
of five site locations) located in Michigan for $2,557,603 as adjusted under the
terms of the purchase agreement. We recorded a gain on this sale of
$387,083, net of allocated goodwill, in the second quarter of
2009. Proceeds from the sale were used to pay down long-term
debt. On January 24, 2009, we closed one underperforming Mission
Burrito restaurant. The results of operations for the current and
prior periods for the La Senorita chain and the closed Mission Burrito
restaurant have been reported as discontinued operations. For the 13-week period
ended September 27, 2009, we did not have any discontinued
operations. For the 39-week period ended September 27, 2009, we
recognized net income from discontinued operations of $231,582 from the sale of
the chain and the closure of the Mission Burrito restaurant. Income
from discontinued operations of $36,021 during the 39-week period ended
September 27, 2009 reflects operating income from the La Senorita restaurants,
partially offset by operating losses from the closed Mission Burrito
restaurant. Restaurant closure costs of $190,941, for the 39-week
period ending September 27, 2009, primarily reflect costs associated with the
closure of the Mission Burrito restaurant. Gain on sale of assets of
$386,502 during the 39-week period ended September 27, 2009 resulted primarily
from the sale of La Senorita.
The
assets and liabilities related to the sale of the La Senorita chain that were
sold have been classified as held for sale in the consolidated balance sheet as
of December 28, 2008. The assets and liabilities of the Mission
Burrito restaurant and certain assets and liabilities of La Senorita that were
not sold have been classified as related to discontinued
operations. We used the furniture and equipment from the closed
Mission Burrito restaurant at our new Mission Burrito restaurant that we opened
third quarter. Current liabilities related to discontinued operations
of the closed Mission Burrito restaurant include estimated lease obligations and
are included with current portion of liabilities associated with leasing and
exit activities.
Liquidity
and Capital Resources
We
financed our capital expenditure requirements for the 39-week period ended
September 27, 2009 primarily from our operating cash flows. In the
39-week period of fiscal year 2009, we had cash flows provided by operating
activities of approximately $1.8 million, compared with cash flows provided by
operating activities of approximately $1.2 million in the comparable 39-week
period of fiscal year 2008. The increase in cash flows from operating
activities reflects the receipt of insurance receivables related to last year’s
hurricanes and the Pasadena, Texas restaurant fire. During the
39-week period ended September 27, 2009, we made draws of $900,000 and payments
of $3,250,000 on our line of credit. Proceeds from the sale of La
Senorita contributed to the amount paid on the line of credit. As of
September 27, 2009, we had a working capital deficit of $994,215 compared with a
working capital deficit (excluding assets held for sale) of $1,023,766 at
December 28, 2008. 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.
Our principal capital requirements are
the funding of routine capital expenditures, new restaurant development or
acquisitions and remodeling of older units. During the 39-week period
ended September 27, 2009, total cash used for capital requirements was
$2,777,570 with $2,762,320 used in continuing operations and $15,250 used in
discontinued operations. Total cash used for capital
requirements included $1,835,598 spent for routine capital expenditures,
$540,155 for new restaurant development, $76,394 for replacement of damaged
assets and $325,422 for remodels. We opened one new restaurant during
the third quarter of fiscal year 2009. We do not plan to open any new
restaurants during the remainder of fiscal year 2009. We anticipate
that we will spend approximately $400,000 for capital expenditures during the
remainder of fiscal year 2009.
We entered into a Credit Agreement with
Wells Fargo Bank, N.A. (“Wells Fargo”) in June 2007 (the “Wells Fargo
Agreement”). Originally, the Wells Fargo Agreement provided for
a revolving loan of up to $10 million, but the Wells Fargo Agreement was amended
effective December 28, 2008, reducing the revolving loan by the amount of the
net proceeds received from the sale of La Senorita, which reduced the revolver
availability to approximately $7.3 million on April 7,
2009. Effective June 28, 2009, the Wells Fargo Agreement was further
amended primarily to extend the maturity date from June 29, 2010 to June 29,
2012. The June 2009 amendment to the Wells Fargo Agreement also
increased the stipulated percentages payable in connection with London Interbank
Offered Rate (“LIBOR”) loans and letters of credit under the Wells Fargo
Agreement, added as a condition precedent to loans made to the Company for
growth capital expenditures that the Company’s total leverage ratio not exceed
certain stated amounts, and amended certain financial covenants.
At our option, the revolving loan bears an interest rate equal to the Wells
Fargo Base Rate plus a stipulated percentage or LIBOR plus a stipulated
percentage. Accordingly, we are impacted by changes in the Base Rate
and LIBOR. We are 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. We have pledged the stock of our
subsidiaries, our leasehold interests, our patents and trademarks and our
furniture, fixtures and equipment as collateral for our credit facility with
Wells Fargo.
Although the Wells Fargo Agreement
permits us to implement a share repurchase program for up to $2.0 million
annually under
certain conditions, we currently have no repurchase programs in
effect. 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.
On April
7, 2009, we sold substantially all of the operating assets and liabilities of
our La Senorita restaurant chain (consisting of five site locations) located in
Michigan for an adjusted price of $2.6 million. Proceeds from the
sale were used to pay down long-term debt. We recorded a gain on the
sale of La Senorita of $387,083 in the second quarter of 2009.
Our management believes that with our
operating cash flows and our 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 we violate a debt covenant, our credit facility
with Wells Fargo, as amended, is not subject to triggering events that would
cause the credit facility to become due sooner than the maturity date described
in the previous paragraphs. As of September 27, 2009, 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 next 12 months, although we
continue to closely monitor the impact of the continued deterioration of the
casual dining market on our operating results.
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 outstanding bank debt. At September
27, 2009, there was $5.15 million outstanding under the revolving credit
facility which currently bears interest at 275 basis points (depending on
leverage ratios) over LIBOR. Should interest rates based on these
borrowings increase by one percentage point, estimated quarterly interest
expense would increase by $12,875.
Effects
of Inflation
Components of our operations subject to
inflation include food, beverage, lease and labor costs. Our leases require us
to pay taxes, maintenance, repairs, insurance and utilities, all of which are
subject to inflationary increases. We believe inflation in the costs of various
items has had a material impact on our results of operations in recent
years.
Commodity
Price Risk
We are exposed to market price
fluctuations in beef, chicken, pork, dairy products, produce, tortillas and
other food product prices. Given the historical volatility of these product
prices, this exposure can impact our food and beverage costs. Because we
typically set our menu prices in advance of these product purchases, we cannot
quickly take into account changing costs. To the extent that we are
unable to pass the increased costs on to our guests through price increases, our
results of operations would be adversely affected. We currently do not use
financial instruments to hedge our risk to market price fluctuations in food
product prices.
Interest
Rates
We do not have, or participate in, any
transactions involving derivative, financial and commodity
instruments. Our long-term debt bears interest at floating market
rates, based upon either the prime rate or LIBOR plus a stipulated percentage,
and therefore we experience changes in interest expense when market interest
rates change.
The subprime mortgage crisis,
subsequent disruptions to the financial markets, and continuing economic
downturn may adversely impact the availability of credit already arranged and
the availability and cost of credit in the future. The disruptions in
the financial markets have had an adverse effect on the U.S. and world economy,
and have negatively impacted recent consumer spending patterns. There
can be no assurance that various U.S. and world government responses to the
disruptions in the financial markets in the near future will restore consumer
confidence, stabilize the markets, or increase liquidity or the availability of
credit. Our future performance could be hindered by our accessibility
to obtain financing.
Evaluation
of Controls and Procedures
We maintain 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 our management, including our
Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as
appropriate, to allow timely decisions regarding required
disclosures.
We evaluated the effectiveness of the
design and operation of our 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 management, including our
CEO and CFO, our management, including our CEO and CFO, concluded that our
disclosure controls and procedures were effective as of the period covered by
this report.
Changes
in Internal Control Over Financial Reporting
During the last quarterly period
covered by this report, there were no changes in our 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 our internal
control over financial reporting.
PART
II - OTHER INFORMATION
There have been no material changes in
the Company’s risk factors from the disclosure set forth in our Annual Report on
Form 10-K for the fiscal year ended December 28, 2008.
You should carefully consider the risk
factors set forth in our Annual Report on Form 10-K and the other information
set forth in the Annual Report in Form 10-K and this Quarterly Report on Form
10-Q. You should be aware that these risk factors and other
information may not describe every risk facing us. Additional risks
and uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition and/or operating results.
Exhibit
Number
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Document Description
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Items 1, 2, 3, 4 and 5 of this Part II
are not applicable and have been omitted.
Pursuant
to the requirements of the Securities 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.
Dated: November
12, 2009
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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: November
12, 2009
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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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