Mexican Restaurants, Inc. Form 10-Q for the Period Ending 10/1/06
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 October 1, 2006
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 an accelerated filer (as defined in
Rule
12b-2 of the Exchange Act).
Yes
¨ No
x
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 13, 2006: 3,436,309
shares of common stock, par value $.01.
Table
of Contents
Part
I - Financial Information
|
|
Page
No.
|
|
|
|
Item
1.
|
|
|
|
|
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|
|
2
|
|
|
3
|
|
|
4
|
|
|
5
|
Item
2.
|
|
9
|
Item
3.
|
|
14
|
Item
4.
|
|
14
|
|
|
|
Part
II - Other Information
Item
1A.
|
|
16
|
Item
2.
|
|
16
|
Item
6.
|
|
16
|
|
|
|
Signatures
|
|
17
|
|
|
|
Exhibit
31.1
|
|
18
|
Exhibit
31.2
|
|
19
|
Exhibit
32.1
|
|
20
|
Exhibit
32.2
|
|
21
|
PART
1 - FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
Restaurants, Inc. and
Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
10/1/2006
|
|
1/1/2006
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$
|
486,491
|
|
$
|
788,109
|
|
Royalties
receivable
|
|
|
|
|
|
123,695
|
|
|
176,649
|
|
Other
receivables
|
|
|
|
|
|
1,237,968
|
|
|
2,088,035
|
|
Inventory
|
|
|
|
|
|
712,481
|
|
|
744,397
|
|
Prepaid
expenses and other current assets
|
|
|
|
|
|
935,467
|
|
|
833,678
|
|
Total
current assets
|
|
|
|
|
|
3,496,102
|
|
|
4,630,868
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
|
|
|
34,997,514
|
|
|
31,511,205
|
|
Less
accumulated depreciation
|
|
|
|
|
|
(17,143,000
|
)
|
|
(15,315,864
|
)
|
Net
property, plant and equipment
|
|
|
|
|
|
17,854,514
|
|
|
16,195,341
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
11,403,805
|
|
|
10,902,664
|
|
Deferred
tax assets
|
|
|
|
|
|
-
|
|
|
256,274
|
|
Property
held for sale, net
|
|
|
|
|
|
-
|
|
|
625,318
|
|
Other
assets
|
|
|
|
|
|
424,155
|
|
|
526,804
|
|
Total
Assets
|
|
|
|
|
$
|
33,178,576
|
|
$
|
33,137,269
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Current
installments of long-term debt
|
|
|
|
|
$
|
1,000,000
|
|
$
|
1,000,000
|
|
Accounts
payable
|
|
|
|
|
|
1,598,640
|
|
|
1,710,068
|
|
Income
taxes payable
|
|
|
|
|
|
121,902
|
|
|
203,116
|
|
Accrued
sales and liquor taxes
|
|
|
|
|
|
291,296
|
|
|
127,283
|
|
Accrued
payroll and taxes
|
|
|
|
|
|
1,464,998
|
|
|
1,685,235
|
|
Accrued
expenses and other
|
|
|
|
|
|
1,375,558
|
|
|
1,536,895
|
|
Total
current liabilities
|
|
|
|
|
|
5,852,394
|
|
|
6,262,597
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current portion
|
|
|
|
|
|
2,450,000
|
|
|
4,500,000
|
|
Other
liabilities
|
|
|
|
|
|
2,045,582
|
|
|
1,930,056
|
|
Deferred
gain
|
|
|
|
|
|
1,404,963
|
|
|
1,561,070
|
|
Deferred
tax liability
|
|
|
|
|
|
56,311
|
|
|
-
|
|
Total
Liabilities
|
|
|
|
|
$
|
11,809,250
|
|
$
|
14,253,723
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $.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
|
|
|
|
|
|
19,041,236
|
|
|
19,406,139
|
|
Retained
earnings
|
|
|
|
|
|
13,768,591
|
|
|
11,620,788
|
|
Treasury
stock of 1,296,396 and 1,375,728 common shares at
|
|
|
|
|
|
|
|
|
|
|
10/1/06
and 1/1/06, respectively
|
|
|
|
|
|
(11,487,828
|
)
|
|
(12,190,708
|
)
|
Total
stockholders' equity
|
|
|
|
|
|
21,369,326
|
|
|
18,883,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
|
|
|
$
|
33,178,576
|
|
$
|
33,137,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
Restaurants, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13-Week
|
|
13-Week
|
|
39-Week
|
|
39-Week
|
|
|
|
|
|
Period
Ended
|
|
Period
Ended
|
|
Period
Ended
|
|
Period
Ended
|
|
|
|
|
|
10/01/2006
|
|
10/02/2005
|
|
10/01/2006
|
|
10/02/2005
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
sales
|
|
|
|
|
$
|
20,832,658
|
|
$
|
19,593,256
|
|
$
|
63,733,466
|
|
$
|
59,784,137
|
|
Franchise
fees, royalties and other
|
|
|
|
|
|
195,503
|
|
|
179,382
|
|
|
629,116
|
|
|
532,456
|
|
Business
interruption
|
|
|
|
|
|
-
|
|
|
-
|
|
|
59,621
|
|
|
-
|
|
|
|
|
|
|
|
21,028,161
|
|
|
19,772,638
|
|
|
64,422,203
|
|
|
60,316,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
|
|
|
5,760,865
|
|
|
5,408,112
|
|
|
17,598,055
|
|
|
16,508,511
|
|
Labor
|
|
|
|
|
|
6,920,514
|
|
|
6,562,936
|
|
|
20,770,774
|
|
|
19,776,820
|
|
Restaurant
operating expenses
|
|
|
|
|
|
5,174,645
|
|
|
4,779,591
|
|
|
15,043,981
|
|
|
13,935,315
|
|
General
and administrative
|
|
|
|
|
|
1,703,966
|
|
|
1,671,393
|
|
|
5,403,634
|
|
|
5,177,406
|
|
Depreciation
and amortization
|
|
|
|
|
|
830,417
|
|
|
704,492
|
|
|
2,375,155
|
|
|
2,050,882
|
|
Pre-opening
costs
|
|
|
|
|
|
-
|
|
|
16,050
|
|
|
64,248
|
|
|
55,875
|
|
Restaurant
closure costs
|
|
|
|
|
|
17,458
|
|
|
-
|
|
|
95,589
|
|
|
-
|
|
Hurricane
Rita (gain) loss
|
|
|
|
|
|
-
|
|
|
274,328
|
|
|
(366,808
|
)
|
|
274,328
|
|
(Gain)
loss on sale of assets
|
|
|
|
|
|
7,729
|
|
|
158,868
|
|
|
(486
|
)
|
|
292,261
|
|
|
|
|
|
|
|
20,415,594
|
|
|
19,575,770
|
|
|
60,984,142
|
|
|
58,071,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
|
|
|
612,567
|
|
|
196,868
|
|
|
3,438,061
|
|
|
2,245,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
|
|
|
4,349
|
|
|
1,557
|
|
|
5,609
|
|
|
2,821
|
|
Interest
expense
|
|
|
|
|
|
(109,230
|
)
|
|
(136,437
|
)
|
|
(308,222
|
)
|
|
(423,152
|
)
|
Other,
net
|
|
|
|
|
|
21,244
|
|
|
31,320
|
|
|
68,686
|
|
|
90,429
|
|
|
|
|
|
|
|
(83,637
|
)
|
|
(103,560
|
)
|
|
(233,927
|
)
|
|
(329,902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes
|
|
|
|
|
|
528,930
|
|
|
93,308
|
|
|
3,204,134
|
|
|
1,915,293
|
|
Income
tax expense
|
|
|
|
|
|
153,541
|
|
|
25,011
|
|
|
1,056,331
|
|
|
614,768
|
|
Income
from continuing operations
|
|
|
|
|
|
375,389
|
|
|
68,297
|
|
|
2,147,803
|
|
|
1,300,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
|
|
|
|
-
|
|
|
(58,765
|
)
|
|
-
|
|
|
(146,035
|
)
|
Loss
on sale of assets
|
|
|
|
|
|
-
|
|
|
(210
|
)
|
|
-
|
|
|
(210
|
)
|
Loss
from discontinued operations before income taxes
|
|
|
|
|
|
-
|
|
|
(58,975
|
)
|
|
-
|
|
|
(146,245
|
)
|
Income
tax benefit
|
|
|
|
|
|
-
|
|
|
21,873
|
|
|
-
|
|
|
54,236
|
|
Loss
from discontinued operations
|
|
|
|
|
|
-
|
|
|
(37,102
|
)
|
|
-
|
|
|
(92,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
$
|
375,389
|
|
$
|
31,195
|
|
$
|
2,147,803
|
|
$
|
1,208,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
$
|
0.11
|
|
$
|
0.02
|
|
$
|
0.63
|
|
$
|
0.38
|
|
Loss
from discontinued operations
|
|
|
|
|
|
-
|
|
|
(0.01
|
)
|
|
-
|
|
|
(0.03
|
)
|
Net
income
|
|
|
|
|
$
|
0.11
|
|
$
|
0.01
|
|
$
|
0.63
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
$
|
0.10
|
|
$
|
0.02
|
|
$
|
0.59
|
|
$
|
0.34
|
|
Loss
from discontinued operations
|
|
|
|
|
|
-
|
|
|
(0.01
|
)
|
|
-
|
|
|
(0.02
|
)
|
Net
income
|
|
|
|
|
$
|
0.10
|
|
$
|
0.01
|
|
$
|
0.59
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares (basic)
|
|
|
|
|
|
3,400,944
|
|
|
3,435,787
|
|
|
3,386,965
|
|
|
3,422,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares (diluted)
|
|
|
|
|
|
3,633,868
|
|
|
3,709,391
|
|
|
3,647,249
|
|
|
3,719,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican
Restaurants, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
39-Weeks
Ended
|
|
39-Weeks
Ended
|
|
|
|
10/01/2006
|
|
10/02/2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
2,147,803
|
|
$
|
1,208,516
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,375,155
|
|
|
2,050,882
|
|
Deferred
gain amortization
|
|
|
(156,107
|
)
|
|
(156,138
|
)
|
Loss
from discontinued operations
|
|
|
-
|
|
|
92,009
|
|
Asset
impairments and restaurant closure costs
|
|
|
95,589
|
|
|
-
|
|
Hurricane
Rita (gain) loss
|
|
|
(366,808
|
)
|
|
274,328
|
|
Loss
(gain) on sale of property, plant and equipment
|
|
|
(486
|
)
|
|
292,261
|
|
Stock
option compensation expense
|
|
|
44,820
|
|
|
-
|
|
Deferred
compensation
|
|
|
-
|
|
|
6,303
|
|
Deferred
taxes
|
|
|
312,585
|
|
|
122,126
|
|
Changes
in assets and liabilities, net of effects of business acquisition:
|
|
|
|
|
|
|
|
Royalties
receivable
|
|
|
52,954
|
|
|
(69,621
|
)
|
Other
receivables
|
|
|
453,411
|
|
|
142,961
|
|
Income
tax receivable/payable
|
|
|
(81,214
|
)
|
|
344,146
|
|
Inventory
|
|
|
40,671
|
|
|
(84,342
|
)
|
Prepaid
and other current assets
|
|
|
(101,789
|
)
|
|
15,754
|
|
Other
assets
|
|
|
14,554
|
|
|
871
|
|
Accounts
payable
|
|
|
(182,351
|
)
|
|
25,720
|
|
Accrued
expenses and other liabilities
|
|
|
(313,150
|
)
|
|
(206,639
|
)
|
Other
liabilities
|
|
|
115,526
|
|
|
111,052
|
|
Total
adjustments
|
|
|
2,303,360
|
|
|
2,961,673
|
|
Net
cash provided by continuing operations
|
|
|
4,451,163
|
|
|
4,170,189
|
|
Net
cash used in discontinued operations
|
|
|
-
|
|
|
(151,506
|
)
|
Net
cash provided by operating activities
|
|
|
4,451,163
|
|
|
4,018,683
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Insurance
proceeds from Hurricane Rita losses
|
|
|
785,028
|
|
|
-
|
|
Purchase
of property, plant and equipment
|
|
|
(3,803,476
|
)
|
|
(2,953,767
|
)
|
Proceeds
from sale of property, plant and equipment
|
|
|
765,000
|
|
|
361,334
|
|
Business
acquisition, net of cash acquired
|
|
|
(742,490
|
)
|
|
-
|
|
Net
cash used in continuing operations
|
|
|
(2,995,938
|
)
|
|
(2,592,433
|
)
|
Net
cash used in discontinued operations
|
|
|
-
|
|
|
(10,013
|
)
|
Net
cash used in investing activities
|
|
|
(2,995,938
|
)
|
|
(2,602,446
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
borrowings (payments) under line of credit
|
|
|
450,000
|
|
|
(1,250,000
|
)
|
Payments
on long term notes payable
|
|
|
(2,500,000
|
)
|
|
-
|
|
Purchase
of treasury stock
|
|
|
(261,730
|
)
|
|
(750,267
|
)
|
Windfall
tax benefit - stock-based compensation expense
|
|
|
52,462
|
|
|
-
|
|
Exercise
of stock options
|
|
|
502,425
|
|
|
419,119
|
|
Net
cash used in financing activities
|
|
|
(1,756,843
|
)
|
|
(1,581,148
|
)
|
|
|
|
|
|
|
|
|
Decrease
in cash and cash equivalents
|
|
|
(301,618
|
)
|
|
(164,911
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
788,109
|
|
|
1,293,836
|
|
Cash
and cash equivalents at end of period
|
|
$
|
486,491
|
|
$
|
1,128,925
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
287,091
|
|
$
|
281,853
|
|
Income
Taxes
|
|
$
|
774,819
|
|
$
|
79,645
|
|
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 October 1, 2006, and the consolidated
statements of income and cash flows for the 13-week and 39-week periods ended
October 1, 2006 and October 2, 2005. The consolidated statements of income
for
the 13-week and 39-week periods ended October 1, 2006 and October 2, 2005
are
not
necessarily indicative of the results to be expected for the full year. During
the interim periods, the Company follows the accounting policies set forth
in
its consolidated financial statements in its Annual Report and Form 10-K filed
with the Securities and Exchange Commission on March 30, 2006, as amended by
Form 10-K/A filed with the Commission on April 13, 2006. Reference should be
made to such financial statements for information on such accounting policies
and further financial detail.
The
consolidated statements of income and cash flows for the 13-week and 39-week
periods ended October 2, 2005 have been adjusted to remove the operations of
closed restaurants, which have been reclassified as discontinued operations.
Consequently, the consolidated statements of income and cash flows for the
13-week and 39-week periods ended October 2, 2005 shown in the accompanying
consolidated financial statements have been reclassified to conform to the
October 1, 2006 presentations. These reclassifications have no effect on total
assets, total liabilities, stockholders’ equity or net income.
Impact of Recently Issued Accounting Standards
In
September 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value
in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those pronouncements that fair value is the relevant
measurement attribute. This Statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years. We have not yet completed our evaluation of the
impact of the adoption of SFAS No. 157, but presently we anticipate that its
adoption will not have a material impact on our financial
statements.
On
September 13, 2006, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 108. The interpretations in this Staff Accounting
Bulletin are being issued to address diversity in practice in quantifying
financial statement misstatements and the potential under current practice
for
the build up of improper amounts on the balance sheet. Staff Accounting Bulletin
No. 108 is effective for fiscal years ending after November 15, 2006, and we
do
not expect the adoption of the new standard to have any material impact on
our
financial position or results of operations.
In
June
2006, the Financial Accounting Standards Board released FASB Interpretation
No.
48 (FIN 48), “Accounting for Uncertainty in Income Taxes”. This Interpretation
clarifies the accounting for uncertainty in income taxes recognized in a
company’s financial statements in accordance with FASB Statement No. 109,
Accounting
for Income Taxes.
FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return when it is more likely than not that the position would
be
sustained upon examination by the tax authorities. This Interpretation is
effective for fiscal years beginning after December 15, 2006. We have not yet
completed our evaluation of the impact of the recognition and measurement
requirements of FIN 48 on our existing
tax positions, but presently we anticipate that its adoption will not have
a
material impact on our financial statements. FIN 48 also requires expanded
disclosures including identification of tax positions for which it is reasonably
possible that total amounts of unrecognized tax benefits will significantly
change in the next twelve months, a description of tax years that remain subject
to examination by major tax jurisdiction, a tabular reconciliation of the total
amount of unrecognized tax benefits at the beginning and end of each annual
reporting period, the total amount of unrecognized tax benefits that, if
recognized, would affect the effective tax rate and the total amounts of
interest and penalties recognized in the statements of operations and financial
position.
2. Stock-Based
Compensation
At
October 1, 2006, the Company had several equity-based compensation plans from
which stock-based compensation awards can be granted to eligible employees,
officers or directors. The current plans are 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. These plans are described in
more detail in Note 5 of our consolidated financial statements in our Annual
Report on Form 10-K and Form 10-K/A for the fiscal year ended January 1,
2006.
Effective
January 2, 2006, the Company adopted SFAS No. 123 (Revised) Share-Based
Payments
(SFAS
No.123(R)) utilizing the modified prospective approach. Prior to the adoption
of
SFAS No. 123(R), the Company accounted for the equity-based compensation plans
under the recognition and measurement provisions of Accounting Principles Board
Opinion No. 25, Accounting
for Stock Issued to Employees,
and
related interpretations (the intrinsic value method), and accordingly, did
not
recognize any compensation expense for stock option grants.
Under
the
modified prospective approach, SFAS No. 123(R) applies to new awards and to
unvested awards that were outstanding on January 2, 2006, and those that are
subsequently modified, repurchased or cancelled. Under the modified prospective
approach, compensation cost recognized in the 13-week and 39-week periods ended
October 1, 2006 includes compensation cost for all stock-based payments granted
to, but not yet vested as of January 1, 2006, based on the grant-date fair
value
estimated in accordance with the original provisions of SFAS No. 123 and
compensation cost for all share-based payments granted subsequent to adoption,
based on the grant-date fair value estimated in accordance with the provisions
of SFAS No. 123(R). The Company has not granted any stock-based compensation
awards during the first three quarters of fiscal year 2006. On May 23, 2006,
the
Company’s Board of Directors approved a restricted stock grant of 3,000 shares
to each of the outside directors with ten years of service, with such grants
vesting over a four year period. Two of the directors qualify for this
restricted stock grant.
The
fair
value of each option award is estimated on the date of grant using the
Black-Scholes-Merton option-pricing model, which uses the assumptions noted
in
the following table. Expected volatility is based on historical volatilities
from stock traded. The Company uses historical data to estimate option exercises
and employee terminations used in the model. In addition, separate groups of
employees that have similar historical exercise behavior are considered
separately. The expected term of options granted is derived using the
“simplified” method as allowed under the provisions of the Securities and
Exchange Commission’s Staff Accounting Bulletin No. 107 and represents the
period of time that options granted are expected to be outstanding. Management
has estimated a forfeiture rate of zero for these calculations. The risk-free
interest rate for periods within the contractual life of the option is based
on
the U.S. Treasury yield curve in effect at the time of grant.
|
|
13
Weeks Ended
|
|
|
|
10/1/06
|
|
10/2/05
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
N/A
|
|
|
4.05
|
%
|
Expected
life, in years
|
|
|
N/A
|
|
|
8.1
|
|
Expected
volatility
|
|
|
N/A
|
|
|
28.3
|
%
|
Dividend
yield
|
|
|
N/A
|
|
|
0
|
%
|
|
|
39
Weeks Ended
|
|
|
|
10/1/06
|
|
10/2/05
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
N/A
|
|
|
4.05
|
%
|
Expected
life, in years
|
|
|
N/A
|
|
|
8.1
|
|
Expected
volatility
|
|
|
N/A
|
|
|
28.3
|
%
|
Dividend
yield
|
|
|
N/A
|
|
|
0
|
%
|
As
a
result of adopting SFAS No. 123(R) on January 2, 2006, income before income
taxes, net income and diluted earnings per share for the 13 weeks ended October
1, 2006, were lower by $18,688, $11,779, and $0.00 per share, respectively,
and
for the 39 weeks ended October 1, 2006 were lower by $44,820, $28,250 and $0.01
per share, respectively, than if the Company had continued to account for
stock-based compensation under APB Opinion No. 25.
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 at
which
the options were sold over the exercise prices of the options. There were 44,625
and 81,497 stock options exercised in the 13-week periods ended October 1,
2006
and October 2, 2005, respectively. The Company received cash in the amount
of
$255,203 and $294,859, respectively, from the exercise of these
options.
The
following table illustrates the effect on net income and earnings per share
if
the Company had applied the fair value recognition provisions of SFAS No. 123(R)
to options granted under the Company’s stock option plans for the 13-week and
39-week periods ended October 2, 2005. For purposes of this pro forma
disclosure, the value of the options is estimated using the Black-Scholes-Merton
option-pricing model and amortized to expense over the options’ vesting
periods.
|
|
13
Weeks Ended
|
|
39
Weeks Ended
|
|
|
|
10/2/2005
|
|
10/2/2005
|
|
Net
income - as reported
|
|
$
|
31,195
|
|
$
|
1,208,516
|
|
Less:
Stock based compensation expense, determined under
fair value based method for all awards, net of taxes
|
|
|
21,367
|
|
|
64,101
|
|
Pro
forma net income
|
|
$
|
9,828
|
|
$
|
1,144,415
|
|
Net
income per share basic - as reported
|
|
$
|
0.01
|
|
$
|
0.35
|
|
Net
income per share diluted - as reported
|
|
$
|
0.01
|
|
$
|
0.32
|
|
Pro
forma net income per share basic
|
|
$
|
0.00
|
|
$
|
0.33
|
|
Pro
forma net income per share diluted
|
|
$
|
0.00
|
|
$
|
0.31
|
|
In
conjunction with the Company’s 1996 initial public offering, the Company entered
into warrant agreements with Louis P. Neeb and Tex-Mex Partners, a limited
liability company in which a former member of the Board of Directors is a
principal. The warrants to purchase 359,770 shares of common stock (179,885
each
to Louis P. Neeb and Tex-Mex Partners), which had a $10.90 exercise price,
were
all exchanged on April 24, 2006 under agreements with the warrant holders that
provided for the delivery of 11,638 shares of the Company’s common stock to each
of Mr. Neeb and Tex-Mex Partners. The exchange rate was determined by the
difference between a fifteen day simple trading average for the Common Stock
from March 27, 2006 through April 15, 2006 (which average the parties agreed
was
$12.52) and the exercise price, resulting in a spread of $1.62, then divided
by
two.
3.
Net
Income per Common Share
Basic
income per share is based on the weighted average shares outstanding without
any
dilutive effects considered. Diluted income per share reflects dilution from
all
contingently issuable shares, including options and warrants. As of October
1,
2006 and October 2, 2005, the Company had 643,916 and 848,048 options and
warrants outstanding, respectively. As of October 1, 2006 and October 2, 2005,
such stock options and warrants have the effect of increasing basic weighted
average shares outstanding by 232,924 and 273,604 for such 13-week periods
and
260,284 and 296,410 for such 39-week period ending on these dates, respectively.
4.
Hurricane
Rita Update
During
the second quarter of 2006, the Company finalized negotiations with its
insurance carrier for the Hurricane Rita insurance claim. For the 13-week period
ended October 1, 2006 the Company capitalized $71,194 in asset cost expenditures
related to damaged property in the consolidated balance sheets. For the 39-week
period ended October 1, 2006, the Company recognized in the consolidated
statement of income $366,808 as a gain and $59,621 as business interruption
revenue from the insurance claim, and recognized $511,236 in asset cost
expenditures related to damaged property in the consolidated balance sheets.
As
of October 1, 2006, the Company has a receivable due from its insurance carrier
for $426,822 and anticipates that it will collect this amount during the fourth
quarter 2006.
5. Long-term
Debt
On
March
31, 2006, the Company prepaid $2.5 million of the Beaumont-based franchise
restaurant seller notes by drawing $2.0 million on its Bank of America revolving
line of credit, with the balance paid from cash reserves. For the third quarter
of fiscal year 2006, the Company paid down $550,000 on its line of credit with
Bank of America. For the 39-weeks ended October 1, 2006 the Company borrowed
$2.0 million on its revolving line of credit, as stated above, and subsequently
has paid down $1,550,000 on its line of credit resulting in a net increase
of
$450,000 of bank indebtedness, and an aggregate total debt reduction of
$2,050,000. The Company is in full compliance with all debt covenants, as
amended as of October 1, 2006.
6. Property
Held for Sale
On
August 11, 2006, the Company
sold a building in Chubbock, ID to its tenants for a total consideration of
$550,000. The sale resulted in a gain of $13,773.
7. Acquisition
On
August 17, 2006, the Company completed its purchase of two Houston-area Mission
Burritos restaurants and related assets for a total consideration of
approximately $725,000, excluding acquisition costs.
The
acquisition was accounted for under Statement of Financial Accounting Standard
No. 141 and results of operations are included in the accompanying financial
statements from the date of acquisition. The assets acquired and liabilities
assumed of the acquisition were recorded at estimated fair values using
comparables, appraisals, and other supporting documentation. Some of the
acquisition amounts recorded are estimates and are subject to
change.
A
summary
of the assets acquired and liabilities assumed in the acquisition
follow:
Estimated
fair value of assets acquired:
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
19,355
|
|
Property and equipment
|
|
|
233,500
|
|
Goodwill
|
|
|
501,141
|
|
Total
assets
|
|
$
|
753,996
|
|
Less:
Liabilities assumed
|
|
|
(906
|
)
|
Cash acquired
|
|
|
(10,600
|
)
|
|
|
|
|
|
Net
assets acquired
|
|
$
|
742,490
|
|
Goodwill
represents the excess of costs over the fair value of the assets acquired.
The
goodwill recognized in the financial statements will be included in the annual
impairment testing in accordance with the provisions of Statement of Financial
Accounting Standard No. 142.
8. State
Sales Tax Examination
The
Company is currently undergoing an audit by the State of Texas for state sales
and use taxes for the period from January 1, 2003 through April 30, 2006. Based
on a preliminary report from the State, management anticipates a liability
of
approximately $63,000 (including interest and penalties) will result. The
financial statements for the quarter ended October 1, 2006 and year-to-date
through October 1, 2006 include an accrual of approximately $63,000. The effect
of this adjustment on diluted earnings per share for the 13-week and 39-week
periods ended October 1, 2006 is $0.02 per share. The audit is expected to
be
completed by the end of November 2006.
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 which 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: 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; national, regional or local economic and real estate
conditions; demographic trends; inclement weather; traffic patterns; the type,
number and location of competing restaurants; inflation; increased food, labor
and benefit costs; 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 and Form 10-K/A 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.
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 Burritos. At October 1, 2006 the Company
operated 63 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.
The
consolidated statements of income and cash flows for the 13-week and 39-week
periods ended October 2, 2005 have been adjusted to remove the operations of
restaurants closed prior to January 1, 2006, which have been reclassified as
discontinued operations. There were no discontinued operations through the
39
weeks ended October 1, 2006. Consequently, the consolidated statements of income
and cash flows for the 13-week and
39-week periods ended October 2, 2005 shown in the accompanying consolidated
financial statements have been reclassified to conform to the October 1, 2006
presentation. These reclassifications have no effect on total assets, total
liabilities, stockholders’ equity or net income.
Since
its
inception as a public company in 1996, the Company has primarily grown through
the acquisition of other Mexican food restaurant companies. In
1997,
the Company purchased all of the outstanding stock of Monterey’s Acquisition
Corp. (“MAC”). At the time of the acquisition, MAC owned and operated 26
restaurants in Texas and Oklahoma under the names “Monterey’s Tex-Mex Café,”
“Monterey’s Little Mexico” and “Tortuga Coastal Cantina.”
In
1999,
the Company purchased 100% of the outstanding stock of La Señorita Restaurants,
a Mexican restaurant chain operated in the State of Michigan. At the time of
the
acquisition, La Señorita operated five company-owned restaurants, and three
franchise restaurants.
On
January 7, 2004, the Company
completed its purchase of 13 restaurants and related assets from its
Beaumont-based franchisee and affiliates for a total consideration of
approximately $13.75 million. The financing for the acquisition was provided
by
Fleet National Bank, CNL and the sellers. The restaurants acquired include
eight
Casa Olé restaurants located in Southeast Texas, two Casa Olé restaurants
located in Southwest Louisiana, and three Crazy Jose’s restaurants located in
Southeast Texas.
On
October 14, 2004, the Company completed its purchase of one franchise restaurant
in Brenham, Texas for approximately $215,000. The restaurant was closed,
remodeled and re-opened on November 22, 2004.
On
August
17, 2006, the Company completed its purchase of two Mission Burritos restaurants
and related assets located in Houston, Texas for approximately $725,000.
Results
of Operations
Revenues.
The
Company’s revenues for the third quarter of fiscal year 2006 increased $1.3
million or 6.3% to $21.0 million compared with $19.8 million for the same
quarter in fiscal year 2005. Restaurant sales for third quarter 2006 increased
$1.2 million or 6.3% to $20.8 million compared with $19.6 million for the third
quarter of fiscal year 2005. The third quarter of fiscal year 2005 was impacted
by Hurricane Rita. The Company estimates that it lost $1.0 million in revenue
due to the hurricane. Therefore, quarterly comparisons of same-store sales
in
Texas and Louisiana for the third quarter of fiscal year 2006 required the
use
of actual 2005 sales up to September 22 and estimates for the final two weeks
based on fiscal year 2004. The increase in revenue reflects net new restaurant
additions less a decline in same-restaurant sales. For the third quarter ended
October 1, 2006, total system same-restaurant sales decreased approximately
0.8%, Company-owned same-restaurant sales decreased approximately 0.9% and
franchised-owned same restaurant sales decreased approximately 0.4%.
On
a
year-to-date basis, the Company’s revenue was up $4.1 million or 6.8% to $64.4
million compared with $60.3 million for the same 39-week period in fiscal year
2005. Restaurant sales for the 39-week period ended October 1, 2006 increased
$3.9 million or 6.6% to $63.7 million compared with $59.8 million for the same
39-week period of fiscal year 2005. Approximately $2.1 million of the increase
in restaurant sales reflects new restaurant additions, with the remainder of
the
increase reflecting positive same-restaurant sales growth. For the 39-week
period ended October 1, 2006, total system same-restaurant sales increased
approximately 0.9%, Company-owned same-restaurant sales increased approximately
1.7% and franchised-owned same-restaurant sales decreased approximately 1.9%.
For
the
quarter ended October 1, 2006, franchise fees, royalties and other increased
$16,121 or 9.0% to $195,503 compared with $179,382 for the same quarter a year
ago. On a year-to-date basis, franchise fees, royalties and other increased
$96,660 or 18.2% to $629,116 compared with $532,456 for the same 39-week period
of fiscal year 2005. The increase was due to the recognition of $80,000 in
royalties due to a correction of understated royalty income over the 16 previous
quarters. Also, during the third quarter of fiscal year 2006, the Company
recorded $59,621 of business interruption proceeds related to its Hurricane
Rita
insurance claim.
Costs
and Expenses.
Costs
of sales, consisting of food, beverage, liquor, supplies and paper costs,
increased as a percent of restaurant sales 10 basis points to 27.7% compared
with 27.6% in the third quarter of fiscal year 2005. The increase primarily
reflects slightly higher produce, meat and poultry costs partially offset by
lower tortilla costs. On a year-to-date basis, costs of sales held constant
as a
percent of restaurant sales at 27.6% compared with the same 39-week period
a
year ago.
Labor
and
other related expenses decreased as a percentage of restaurant sales 30 basis
points to 33.2% as compared with 33.5% in the third quarter of fiscal year
2005.
The improvement primarily reflects adjustments to labor related expenses. On
a
year-to-date basis, labor and other related expenses decreased as a percentage
of restaurant sales 50 basis points to 32.6% as compared with 33.1% for the
same
39-week period a year ago. These decreases primarily reflect labor efficiencies
relative to positive same-restaurant sales.
Restaurant
operating expenses, which primarily include rent, property taxes, utilities,
repair and maintenance, liquor taxes, property insurance, general liability
insurance and advertising, increased as a percentage of restaurant sales 40
basis points to 24.8% as compared with 24.4% in the third quarter of fiscal
year
2005. On a year-to-date basis, restaurant operating expenses increased as a
percentage of restaurant sales 30 basis points to 23.6% as compared with 23.3%
for the same 39-week period a year ago. These increases reflect higher
electricity, natural gas costs and property insurance premiums for these
periods.
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 40 basis points
to
8.1% for the third quarter of fiscal year 2006 as compared with 8.5% for the
third quarter of fiscal year 2005. In absolute dollars, general and
administrative costs were $32,573 higher in the third quarter of fiscal year
2006 compared with the third quarter of fiscal year 2005. On a year-to-date
basis, general and administrative expenses decreased as a percentage of total
revenues 20 basis points to 8.4% as compared with 8.6% in the same 39-week
period one year ago. In absolute dollars, general and administrative costs
were
$226,228 higher in the 39-week period of fiscal year 2006 compared with the
same
39-week period in fiscal year 2005. These increases primarily reflect planned
compensation increases compared with comparable periods in 2005, as well as
SFAS
No. 123 (Revised) Share-Based Payments expensing of options.
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 30 basis points to 3.9% as compared
with 3.6% the same quarter in fiscal year 2005. Such expense for the third
quarter of fiscal year 2006 was $125,925 higher than for the third quarter
in
fiscal year 2005. On a year-to-date basis, depreciation and amortization expense
increased 30 basis points to 3.7% of total sales as compared with 3.4% for
the
same 39-week period a year ago. The 39-week period of fiscal year 2006 was
$324,273 higher than the 39-week period in fiscal year 2005. These increases
for
the 2006 third quarter and 39-week periods reflect additional depreciation
expense for remodeled restaurants, new restaurants, and the replacement of
equipment and leasehold improvements in various existing
restaurants.
The
Company opened one new restaurant at the end of the first quarter of 2006 and
incurred $49,737 in pre-opening costs in the first quarter of 2006, $14,510
in
the second quarter of 2006 and no further costs in the third quarter of 2006.
There was one restaurant opened during the second quarter of 2005 incurring
$38,836 in pre-opening costs during that quarter, and for the 39-week period
of
fiscal year 2005 incurring $55,825 in pre-opening costs.
Restaurant
Closure Costs.
During
the third quarter of 2006, the Company recorded restaurant closure costs of
$17,458 primarily related to a sublease extension of its previously closed
restaurant in Idaho. During the 39-weeks ended October 1, 2006, the Company
recorded restaurant closure costs of $95,589 primarily related to the real
estate commission paid on the sale of the closed restaurant in Idaho. There
were
no restaurant closure costs for the 13-week and 39-week periods of fiscal year
2005.
Hurricane
Rita.
During
the second quarter of 2006, the Company finalized negotiations with its
insurance carrier for the Hurricane Rita insurance claim. During the third
quarter of 2006, the Company capitalized $71,194 in asset cost expenditures
related to damaged property in the consolidated balance sheets. For the 39-week
period of fiscal year 2006, the Company recognized in the consolidated statement
of income $366,808 as a gain and $59,621 as business interruption revenue from
the insurance claim, and capitalized $511,236 in asset cost expenditures related
to damaged property in the consolidated balance sheets. As of October 1, 2006,
the Company has a receivable due from its insurance carrier for $426,822 related
to its Hurricane Rita insurance claim and anticipates that it will collect
this
amount during the fourth quarter of 2006.
Gain/Loss
on Sale of Assets.
During
the third quarter of fiscal year 2006, the Company recorded a net gain of
$13,773 on the sale of a restaurant property located in Chubbuck, Idaho. Also
during the third quarter of fiscal year 2006, the Company recorded net losses
of
$21,502 on the disposition of miscellaneous restaurant assets. During the third
quarter of 2005, the Company recorded losses of $138,429 from the major remodels
of two Casa Ole restaurants and losses of $20,439 on the disposition of
miscellaneous restaurant assets.
On
a
year-to-date basis, the Company recorded a gain of $486 on sale of assets as
compared with a loss of $292,261 on the disposition of assets for the same
39-week period a year ago. In the 39-week period ended October 2, 2005, the
Company recorded losses of $105,972 from the sale of its Beaumont office
building, $25,322 from the sale of an interest in a restaurant, the losses
from
two remodels described above and $22,538 from the disposition of miscellaneous
restaurant assets.
Other
Income (Expense).
Net
expense decreased $19,923 to $83,637 in the third quarter of fiscal year 2006
compared with a net expense of $103,560 in the third quarter of fiscal year
2005. Interest expense decreased $27,207 to $109,230 in the third quarter of
fiscal year 2006 compared with interest expense of $136,437 in the third quarter
of fiscal year 2005. The Company paid down $550,000 in debt during the third
quarter of fiscal year 2006. The decrease in interest expense reflects declining
debt balances that have been partially offset by increasing interest
rates.
On
a
year-to-date basis, net expense decreased $95,975 to $233,927 as compared with
a
net expense of $329,902 in the 39-week period of fiscal year 2005. For the
39-week period of fiscal year 2006, interest expense decreased $114,930 to
$308,222 compared with interest expense of $423,152 for the same 39-week period
in fiscal year 2005. The decrease in interest expense reflects declining debt
balances that have been partially offset by increasing interest
rates.
Income
Tax Expense. The
Company’s effective tax rate from continuing operations for the third quarter of
fiscal year 2006 was 29.0% as compared to 26.8% for the third quarter of fiscal
year 2005. The 2.2% increase in the effective tax rate between the comparable
quarters resulted from marginal differences in the permanent tax
differences.
On
a
year-to-date basis, the Company’s effective tax rate from continuing operations
for the 39-week period of fiscal year 2006 was 33.0% as compared to 32.1% for
the 39-week period of fiscal year 2005. The 0.9% increase in the effective
tax
rate between the comparable 39-week periods resulted from marginal differences
in the permanent tax differences.
Restaurant
Closure Costs and Discontinued Operations.
No
losses from discontinued operations were recorded in the third quarter of fiscal
year 2006 or in the 39-week period of fiscal year 2006. In the corresponding
quarter and 39-week period of fiscal year 2005, the Company recorded losses
net
of tax from discontinued operations related to previously closed restaurants
of
$37,102 and $92,009, respectively.
Liquidity
and Capital Resources
The
Company met capital requirements for the 39-week period of fiscal year 2006
with
cash generated by operations and its cash reserves. In this 39-week period,
the
Company's operations generated $4.5 million in cash, as compared with $4.0
million in the 39-week period of fiscal year 2005. The change reflects the
increase in operating income less the timing difference of prepaid sales taxes.
As of October 1, 2006, the Company had a working capital deficit of $2.4
million, compared with a working capital deficit of approximately $1.6 million
at January 1, 2006. 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.
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 39-week period ended October 1, 2006, total cash used for
capital requirements and acquisitions was approximately $4.5 million, of which
$511,236 was spent to replace assets damaged by Hurricane Rita. In addition,
the
Company spent an additional $742,490 in connection with the acquisition of
two
Mission Burritos fast-casual restaurants and related assets. During the 2006
39-week period ended October 1, 2006, the Company received $765,000 from the
sale of a pad site in Port Arthur, Texas, the sale of furniture, fixtures and
equipment from a previously closed restaurant in Boise, Idaho and the sale
of
another previously closed restaurant in Chubbuck, Idaho. The Company opened
one
new restaurant in Owasso, Oklahoma near the end of the first quarter of fiscal
year 2006. The Company is building a new restaurant in Georgetown, Texas which
it plans to open during the fourth quarter of fiscal year 2006, and is currently
negotiating for two more restaurant sites it plans to open sometime during
the
first half of fiscal year 2007. The Company’s management anticipates that it
will spend approximately $1 million for capital expenditures during the
remainder of fiscal year 2006.
During
second quarter 2006, the Company finalized negotiations with its insurance
carrier for the Hurricane Rita insurance claim. For the 13-week period ended
October 1, 2006 the Company capitalized $71,194 in asset cost expenditures
related to damaged property in the consolidated balance sheets. For the 39-week
period ended October 1, 2006, the Company recognized in the consolidated
statement of income $366,808 as a gain and $59,621 as business interruption
revenue from the insurance claim, and recognized $511,236 in asset cost
expenditures related to damaged property in the consolidated balance sheets.
As
of October 1, 2006, the Company has a receivable due from its insurance carrier
related to its Hurricane Rita insurance claim for $426,822.
Prior
to
fiscal year 2006, the Company incurred additional debt to carry out
acquisitions, to develop new restaurants and to remodel existing restaurants,
as
well as to accommodate other working capital needs. During the first quarter
of
fiscal year 2006, the Company prepaid $2.5 million of the Beaumont-based
franchise restaurant seller notes by drawing $2.0 million on its Bank of America
revolving line of credit, with the balance paid from cash reserves. During
the
39-week period of fiscal year 2006, the Company paid down $1,550,000 on its
line
of credit, resulting in a net increase of $450,000 of bank indebtedness. The
combined debt reduction year to date is $2,050,000. During the remaining portion
of fiscal year 2006, the Company anticipates that it will use excess cash flow
to pay down $250,000 of additional indebtedness.
In
January 2004, the Company amended its $10.0 million credit facility with Bank
of
America to accommodate the acquisition of the Beaumont-based franchise
restaurants. The amended credit facility consists of a $5.0 million term note
that requires quarterly principal payments of $250,000 and matures on December
31, 2008. The credit facility also includes a $5.0 million revolving line of
credit that matures on January 7, 2007. The interest rate is either the prime
rate or LIBOR plus a stipulated percentage. Accordingly, the Company is impacted
by changes in the prime rate and LIBOR. The Company is subject to a non-use
fee
of 0.75% on the unused portion of the revolver from the date of the credit
agreement. As of October 1, 2006, the Company had $2,950,000 of debt outstanding
with Bank of America ($1.75 million on its term note and $1.2 million on its
revolving line of credit) and $500,000 outstanding under its franchise seller
note for its 2004 acquisition of the Beaumont-based franchise restaurants for
a
total indebtedness of $3,450,000.
On
April
1, 2005, the Company and Bank of America amended the $10.0 million credit
facility to accommodate the Company’s growth plans. The amendment allows for
additional capital expenditures, revised certain covenant ratios, increased
the
amount of allowable stock repurchases, and extended the maturity date of the
revolving line of credit to January 7, 2009. Also, the Company and Bank of
America further amended the $10.0 million credit facility to revise certain
ratios affected by Hurricane Rita and the Company’s stock repurchase program,
and to lower the applicable interest rate margins. This additional amendment
was
agreed to November 15, 2005 and was made effective June 30, 2005. The Company
is
in full compliance with all debt covenants as amended. The Company expects
to be
in compliance with all debt covenants throughout fiscal year 2006.
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
has 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 determines the time, amount, and price at which
purchases of common stock are made, subject to certain parameters established
in
advance by the Company. During the third quarter of fiscal year 2006, the
Company repurchased 11,290 shares of its common stock for a total price of
$116,970 and the Company’s employees exercised 44,625 options and the Company
received $255,203 in net proceeds. During the 39-week period ended October
1,
2006, the Company repurchased 25,290 shares of its common stock for a total
price of $261,730 and the Company’s employees exercised 80,362 options and the
Company received $502,425 in net proceeds. Under this program, the Company
has
no further authority to repurchase outstanding shares of its common stock.
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 with Bank of America, 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 an important debt covenant, the Company’s credit facility with
Bank of America 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.
The
Company does not have or participate in transactions involving derivative,
financial and commodity instruments. A portion of the Company’s long-term debt
bears interest at floating market rates. Based on the amount outstanding at
October 1, 2006, a 1% change in interest rates would change interest expense
by
$7,375 per quarter.
(a) |
Evaluation
of Disclosure Controls and
Procedures
|
The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the Company's reports under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms, and that such information is accumulated and
communicated to management, including the Company's Chief Executive Officer
and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. The Company periodically reviews the design and
effectiveness of its disclosure controls and internal control over financial
reporting. The Company makes modifications to improve the design and
effectiveness of its disclosure controls and internal control over financial
reporting, and may take other corrective action, if its reviews identify a
need
for such modifications or actions.
There
are
inherent limitations to the effectiveness of any system of disclosure controls
and internal control over financial reporting, including the possibility of
human error and the circumvention or overriding of the controls and procedures.
Accordingly, even effective disclosure controls and internal control over
financial reporting can only provide reasonable assurance of achieving their
control objectives.
As
of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company’s management,
including the Company’s President and Chief Executive Officer together with the
Company’s Chief Financial Officer, of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) under the Exchange Act. Based upon the evaluation,
the Company’s President and Chief Executive Officer and the Company’s Chief
Financial Officer concluded that the Company’s disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its subsidiaries) required to be included
in
the Company’s periodic filings with the Securities and Exchange Commission.
There have been no significant changes in the Company’s internal controls or in
other factors that could significantly affect internal controls subsequent
to
the date of the evaluation.
(b)
Change in Internal Control over Financial Reporting
No
change
in the Company’s internal control over financial reporting or in other factors
that could significantly affect this control occurred during the Company’s most
recent fiscal quarter that has materially affected, or is reasonably likely
to
materially affect, the Company’s internal control over financial
reporting.
PART
II - OTHER INFORMATION
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 January
1,
2006.
Items
2(a) and (b) are not applicable.
(c)
The
following table provides information about the Company’s purchases of shares of
its Common Stock:
Period
|
|
Total
Number of
Shares
Purchased
|
|
Average
Price Paid Per Share
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
|
Maximum
Number of Shares (or Approximate Dollar Value) That May Yet Be Purchased
Under the Plans or Programs (Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
1/2/2006--4/2/2006
|
|
|
0
|
|
$
|
0.00
|
|
|
0
|
|
$
|
261,733
|
|
4/3/2006--7/2/2006
|
|
|
14,000
|
|
$
|
10.34
|
|
|
14,000
|
|
$
|
116,973
|
|
7/3/2006--10/1/2006
|
|
|
11,290
|
|
$
|
10.36
|
|
|
11,290
|
|
$
|
0
|
|
(1) |
Under
a share repurchase program approved by the Board of Directors of
the
Company on May 2, 2005, and amended September 7, 2005, the Company
is
authorized to repurchase up to $2,000,000 in maximum aggregate amount
of
the Company’s Common Stock (not to exceed repurchases up to $500,000 in
any one quarter). The repurchase program is designed to comply with
Rules
10b-18 and Rule 10b5-1 under the Securities Exchange Act of 1934
under
which an agent appointed by the Company will determine the time,
amount,
and price at which purchases of common stock will be made, subject
to
certain parameters established in advance by the Company. As of October
1,
2006, the Company has no remaining repurchase authority remaining
under
this program.
|
Exhibit
Number
|
Document
Description
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
32.1
|
Certification
of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
32.2
|
Certification
of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
Items
1,
3, 4 and 5 of this Part II are not applicable and have been
omitted.
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.
Dated:
November 13, 2006
|
By:
/s/ Curt Glowacki
|
Curt
Glowacki
|
|
Chief
Executive Officer
|
|
(Principal
Executive Officer)
|
|
Dated:
November 13, 2006
|
By: /s/ Andrew J. Dennard
|
Andrew
J. Dennard
|
|
Executive
Vice President, Chief Financial Officer & Treasurer
|
|
(Principal
Financial Officer and Principal Accounting Officer)
|
|