SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
quarterly period ended March
27, 2006
Commission
File Number: 000-18668
MAIN
STREET RESTAURANT GROUP, INC.
(Exact
name of registrant as specified in its charter)
|
DELAWARE
|
|
11-2948370
|
|
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
5050
N. 40TH STREET, SUITE 200, PHOENIX, ARIZONA 85018
(Address
of principal executive offices) (Zip Code)
(602)
852-9000
(Registrant's
telephone number, including area code)
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.
Yesx
No
o
Indicated
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer ¨
|
|
Accelerated
Filer ¨
|
|
Non-Accelerated
filer 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 of common stock, $.001 par value, of the registrant outstanding at
May 5,
2006: 17,228,176
MAIN
STREET RESTAURANT GROUP, INC. AND
SUBSIDIARIES
INDEX
PART
I. FINANCIAL INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements - Main Street Restaurant Group, Inc. and
subsidiaries
|
|
|
|
|
|
|
3
|
|
|
|
|
|
4
|
|
|
|
|
|
5
|
|
|
|
|
|
6
|
|
|
|
Item
2.
|
|
10
|
|
|
|
Item
3.
|
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16
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|
|
|
Item
4.
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16
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|
|
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PART
II. OTHER INFORMATION
|
|
|
|
|
Item
1.
|
|
16
|
Item
1A.
|
|
17
|
Item
2.
|
|
17
|
Item
3.
|
|
17
|
Item
4.
|
|
17
|
Item
5.
|
|
17
|
Item
6.
|
|
17
|
|
|
|
18
|
MAIN
STREET RESTAURANT GROUP, INC. AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
Thousands, Except Par Value and Share Data)
|
|
March
27,
|
|
December
26,
|
|
|
|
2006
|
|
2005
|
|
|
|
(unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
14,549
|
|
$
|
10,124
|
|
Accounts
receivable, net
|
|
|
1,703
|
|
|
2,826
|
|
Inventories
|
|
|
2,754
|
|
|
2,796
|
|
Prepaid
expenses
|
|
|
583
|
|
|
341
|
|
Total
current assets
|
|
|
19,589
|
|
|
16,087
|
|
Property
and equipment, net
|
|
|
58,316
|
|
|
58,263
|
|
Other
assets, net
|
|
|
2,055
|
|
|
1,982
|
|
Notes
receivable, net
|
|
|
529
|
|
|
516
|
|
Goodwill
|
|
|
20,255
|
|
|
20,255
|
|
Franchise
fees, net
|
|
|
1,752
|
|
|
1,735
|
|
Purchased
franchise territories, net
|
|
|
562
|
|
|
571
|
|
Total
assets
|
|
$
|
103,058
|
|
$
|
99,409
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
3,461
|
|
$
|
3,383
|
|
Accounts
payable
|
|
|
6,454
|
|
|
7,194
|
|
Other
accrued liabilities
|
|
|
25,470
|
|
|
23,579
|
|
Total
current liabilities
|
|
|
35,385
|
|
|
34,156
|
|
Long-term
debt, net of current portion
|
|
|
34,003
|
|
|
34,902
|
|
Other
liabilities and deferred credits
|
|
|
1,029
|
|
|
1,402
|
|
Total
liabilities
|
|
|
70,417
|
|
|
70,460
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value, 2,000,000 shares authorized; no shares
issued and
outstanding in 2006 and 2005
|
|
|
--
|
|
|
--
|
|
Common
stock, $.001 par value, 25,000,000 shares authorized; 17,348,970
and
17,309,550 shares issued and outstanding in 2006 and 2005,
respectively
|
|
|
17
|
|
|
17
|
|
Additional
paid-in capital
|
|
|
61,080
|
|
|
60,854
|
|
Accumulated
deficit
|
|
|
(28,184
|
)
|
|
(31,608
|
)
|
Unearned
compensation-restricted stock
|
|
|
(272
|
)
|
|
(314
|
)
|
Accumulated
other comprehensive loss
|
|
|
-
|
|
|
-
|
|
Total
stockholders' equity
|
|
|
32,641
|
|
|
28,949
|
|
Total
liabilities and stockholders' equity
|
|
$
|
103,058
|
|
$
|
99,409
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
MAIN
STREET RESTAURANT GROUP, INC. AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
Thousands, Except Per Share Amounts)
|
|
Three
Months Ended
|
|
|
|
(unaudited)
|
|
|
|
March
27,
|
|
March
28,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
65,269
|
|
$
|
61,432
|
|
|
|
|
|
|
|
|
|
Restaurant
operating expenses
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
17,065
|
|
|
16,274
|
|
Payroll
and benefits
|
|
|
18,946
|
|
|
18,582
|
|
Depreciation
and amortization
|
|
|
2,121
|
|
|
2,101
|
|
Loss
on disposal of assets
|
|
|
38
|
|
|
259
|
|
Other
operating expenses
|
|
|
19,888
|
|
|
19,086
|
|
Total
restaurant operating expenses
|
|
|
58,058
|
|
|
56,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of intangible assets
|
|
|
269
|
|
|
218
|
|
Loss
on disposal of assets
|
|
|
1
|
|
|
16
|
|
General
and administrative expenses
|
|
|
2,783
|
|
|
2,403
|
|
Preopening
expenses
|
|
|
114
|
|
|
1
|
|
New
manager training expenses
|
|
|
11
|
|
|
7
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
4,033
|
|
|
2,485
|
|
|
|
|
|
|
|
|
|
Interest
expense and other, net
|
|
|
360
|
|
|
914
|
|
|
|
|
|
|
|
|
|
Net
income before income tax
|
|
|
3,673
|
|
|
1,571
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
250
|
|
|
110
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,423
|
|
$
|
1,461
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.20
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.19
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
--
Basic
|
|
|
17,248
|
|
|
14,652
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
--
Diluted
|
|
|
18,482
|
|
|
14,856
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
MAIN
STREET RESTAURANT GROUP, INC. AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
Thousands)
|
|
Three
Months Ended
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
March
27,
|
|
March
28,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net
income
|
|
$
|
3,423
|
|
$
|
1,461
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,389
|
|
|
2,319
|
|
Amortization
of note receivable discount
|
|
|
(13
|
)
|
|
(14
|
)
|
Equity
based compensation expense
|
|
|
89
|
|
|
-
|
|
Loss
on disposal of assets
|
|
|
39
|
|
|
259
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
1,123
|
|
|
(591
|
)
|
Inventories
|
|
|
42
|
|
|
(73
|
)
|
Prepaid
expenses
|
|
|
(242
|
)
|
|
(184
|
)
|
Other
assets, net
|
|
|
(138
|
)
|
|
23
|
|
Accounts
payable
|
|
|
(740
|
)
|
|
2,826
|
|
Other
accrued liabilities and deferred credits
|
|
|
1,553
|
|
|
1,171
|
|
Cash
provided by operating activities
|
|
|
7,525
|
|
|
7,197
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Additions
to property and equipment
|
|
|
(2,374
|
)
|
|
(1,365
|
)
|
Cash
received from the sale of assets
|
|
|
-
|
|
|
691
|
|
Cash
paid to acquire franchise rights
|
|
|
(50
|
)
|
|
-
|
|
Cash
received on note receivable
|
|
|
-
|
|
|
250
|
|
Cash
used in investing activities
|
|
|
(2,424
|
)
|
|
(424
|
)
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Proceeds
received from the exercise of stock options
|
|
|
145
|
|
|
-
|
|
Regular
principal payments on long-term debt
|
|
|
(821
|
)
|
|
(1,059
|
)
|
Cash
used in financing activities
|
|
|
(676
|
)
|
|
(1,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
4,425
|
|
|
5,714
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING
|
|
|
10,124
|
|
|
5,593
|
|
CASH
AND CASH EQUIVALENTS, ENDING
|
|
$
|
14,549
|
|
$
|
11,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
Cash
paid during the period for income taxes
|
|
$
|
177
|
|
$
|
2
|
|
Cash
paid during the period for interest
|
|
$
|
5,143
|
|
$
|
960
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
MAIN
STREET RESTAURANT GROUP, INC. AND
SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
March
27, 2006
(Unaudited)
1.
|
Interim
Financial Reporting
|
The
accompanying condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
The information furnished herein reflects all adjustments, consisting of
normal
recurring accruals and adjustments, which are, in our opinion, necessary
to
fairly state the operating results for the respective periods. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been omitted pursuant to such rules and regulations,
although we believe that the disclosures are adequate to make the information
presented not misleading. For a complete description of our accounting policies,
see our Annual Report on Form 10-K for the fiscal year ended December 26,
2005.
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires us to make a
number
of estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements. Such estimates and assumptions affect the reported
amounts of revenues and expenses during the reporting period. On an ongoing
basis, we evaluate our estimates and assumptions based upon historical
experience and various other factors and circumstances. We believe our estimates
and assumptions are reasonable in the circumstances; however, actual results
may
differ from these estimates under different future conditions.
We
operate on fiscal quarters of 13 weeks. The results of operations for the
three
months ended March 27, 2006, are not necessarily indicative of the results
to be
expected for a full year.
2.
|
Stock-Based
Compensation
|
For
the
fiscal year ended December 26, 2005 and prior, we accounted for stock option
grants in accordance with Accounting Principles Board Opinion No. 25 (APB
25),
Accounting
for Stock Issued to Employees,
and
related interpretations. Accordingly, we recognized no compensation expense
for
the stock option grants for those periods.
On
December 27, 2005, we adopted the provisions of Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standard No. 123 (revised
2004)
(SFAS 123R), Share-Based
Payment,
and SEC
Staff Accounting Bulletin No. 107 (SAB 107), Share-Based
Payment,
requiring the measurement and recognition of all share-based compensation
under
the fair value method. We implemented SFAS 123R using the modified prospective
transition method, which does not result in the restatement of previously
issued
financial statements.
The
effect of the change, from applying the original provisions of FAS123, to
the
adoption of SFAS 123R, on our results of operations for the three month period
ended March 27, 2006, was a charge of approximately $89,000 to income from
operations, income before income taxes, and net income. There was no tax
effect
on the income statement due to a full valuation allowance recorded against
the
deferred tax benefit. As a result of the valuation allowance, the adoption
of
SFAS 123R also had no effect on cash flows. The effect of the adoption of
SFAS
123(R) on basic and diluted earnings per share was less than $0.01.
As
share-based compensation expense recognized is based on awards ultimately
expected to vest, it should be reduced for estimated forfeitures. SFAS 123R
requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. For the three months ended March 27, 2006, our non-vested share-based
compensation was not reduced by forfeitures as we believe our historical
rate is
not representative of our current and expected future forfeiture rate based
on
remaining unvested outstanding options and that our forfeitures, if any,
are not
expected to be material.
The
following table represents the effect on net income and earnings per share
if we
had applied the fair value based method and recognition provision of SFAS
123R
to share-based compensation for the period ended March 28, 2005:
|
|
Three
Months Ended
|
|
|
|
March
28, 2005
|
|
Net
Income (loss):
|
|
|
|
As
reported
|
|
$
|
1,461
|
|
Add:
total share-based employee compensation expense determined under
fair
value method for all awards
|
|
|
--
|
|
Deduct:
total share-based employee compensation expense determined under
fair
value method for all awards
|
|
|
139
|
|
Pro
forma
|
|
$
|
1,322
|
|
Basic
Earnings Per Share:
|
|
|
|
|
As
reported
|
|
$
|
0.10
|
|
Pro
forma
|
|
$
|
0.09
|
|
Diluted
Earnings Per Share:
|
|
|
|
|
As
reported
|
|
$
|
0.10
|
|
Pro
forma
|
|
$
|
0.09
|
|
Weighted
Average Shares Used in Computation:
|
|
|
|
|
Basic
|
|
|
14,652
|
|
Diluted
|
|
|
14,856
|
|
No
stock
options were granted during the quarters ended March 28, 2005 or March 27,
2006.
On
January 1, 2005, our board of directors granted 82,500 restricted stock units
to
members of executive management. These restricted stock units vest ratably
over
two years, and the fair market value of these shares, which was $132,825,
will
be amortized as compensation expense. The fair market value of the restricted
stock units was based on the average of the year end and January 3, 2005
closing
prices. During the three months ended March 27, 2006, we recorded approximately
$12,000 in compensation expense related to these restricted stock
units.
In
September 2005, we granted an additional 50,000 restricted stock units to
our
Chief Financial Officer. These restricted stock units vest over three years.
The
fair market value of the restricted stock units was $270,000 based on the
stock
price on the grant date and will be amortized as compensation expense ratably
over three years. During the three months ended March 27, 2006, we recorded
approximately $23,000 in compensation expense related to these restricted
stock
units.
We
did
not record a federal income tax provision for the three-month period ended
March
27, 2006 due to the utilization of net operating loss and tax credit
carryforwards; however, we did record alternative minimum max (AMT) and state
taxes in the amount of $250,000. As a result of recording a full valuation
allowance, there was no impact on taxes related to the adoption of SFAS 123R.
We
have a
$45 million credit facility (“Credit Facility”) with Bank of America, N.A., as
administrative agent and letter of credit issuer, and for a syndicate of
lending
financial institutions including Bank of America, GE Franchise Finance and
Wells
Fargo. The proceeds available under the Credit Facility have been or will
be
used (i) to refinance certain existing long-term debt, (ii) to fund the
development of new TGI Friday’s restaurant locations and remodel existing TGI
Friday’s restaurants, and (iii) for capital expenditures and general corporate
working capital purposes.
The
Credit Facility consists of the following:
(1)
A $25
million term loan with principal to be amortized over a ten-year period with
a
five-year balloon payment of unpaid principal. The term loan bears interest
at a
Eurodollar rate (LIBOR) plus 250 basis points.
(2)
A $20
million revolving line of credit to be used for new restaurant construction
and
expansion and remodeling of existing TGI Friday’s restaurants.
(3)
A $4
million sublimit of the revolving line of credit for letters of credit issued
by
Bank of America for the benefit of our company. Letters of credit are limited
to
the sublimit so that the total aggregate lending commitment is not
exceeded.
On
March
27, 2006, we had no amounts outstanding under the revolving line of credit.
The
bank
has issued letters of credit (LOCs) totaling $2.9 million to provide security
under our 2004 and 2005 workers’ compensation insurance program. The amount
available for borrowing under the line of credit is reduced by the amount
of the
LOCs.
The
Credit Facility also contains customary financial covenants including (i)
Consolidated Debt Coverage, defined as Senior Debt to EBITDA (as modified
for
capital expenditures and lease expense), to be no greater than 3.00 to 1.00,
(ii) Fixed Charge Coverage Ratio of 1.15 to 1.00 through September 2006,
1.20 to
1.00 through September 2007, and 1.25 to 1.00 thereafter, and (iii) all capital
expenditures to be limited to $15 million per year.
Our
comprehensive income consists of net income and adjustments to derivative
financial instruments. The components of other comprehensive income are as
follows (in thousands):
|
|
Three
Months Ended March 28, 2005
|
|
|
|
|
|
Net
income
|
|
$
|
1,461
|
|
Change
in fair value of interest rate swaps
|
|
|
534
|
|
Comprehensive
income
|
|
$
|
1,995
|
|
As
a
result of our debt refinancing in 2005, hedge accounting no longer applies
after
the quarter ended September 26, 2005 although the swaps remain in place.
As a
result, we record market adjustments on these swaps, as income or expense,
directly in our statement of operations. On March 27, 2006, we recorded
approximately $352,000, as a reduction of interest expense related to the
reduction in our swap liability.
The
following table sets forth basic and diluted earnings per share, or EPS,
computations for the three months ended March 27, 2006, and March 28, 2005
(in
thousands, except per share amounts):
|
|
Three
Months Ended
|
|
|
|
March
27, 2006
|
|
March
28, 2005
|
|
|
|
Net
Income
|
|
Shares
|
|
Per
Share mount
|
|
Net
Income
|
|
Shares
|
|
Per
Share mount
|
|
Basic
|
|
$
|
3,423
|
|
|
17,248
|
|
$
|
0.20
|
|
$
|
1,461
|
|
|
14,652
|
|
$
|
0.10
|
|
Effect
of stock options and warrants.
|
|
|
--
|
|
|
1,234
|
|
|
(.01
|
)
|
|
--
|
|
|
204
|
|
|
--
|
|
Diluted
|
|
$
|
3,423
|
|
|
18,482
|
|
$
|
0.19
|
|
$
|
1,461
|
|
|
14,856
|
|
$
|
0.10
|
|
For
the
three months ended March 27, 2006 and March 28, 2005, there were approximately
929,000 and 2,214,167, respectively, of outstanding stock options and warrants
excluded from the calculation due to their anti-dilutive effect.
7.
|
Derivative
Financial Instruments
|
As
of
March 27, 2006, we were participating in two derivative financial instruments
for which fair value disclosure is required under Statement of Financial
Accounting Standards No. 133, as amended. The fair value liability of the
interest rate swap agreements decreased during the quarter ended March 27,
2006,
to $595,573.
As
a
result of our debt refinancing in 2005, hedge accounting no longer applies
after
the quarter ended September 26, 2005, although the swaps remain in place.
As a
result, we record market adjustments on these swaps, as income or expense,
directly in our statement of operations. On March 27, 2006, we recorded
approximately $352,000, as a reduction of interest expense related to the
reduction in our swap liability.
8.
|
Commitments
and Contingencies
|
We
are
obligated under separate development agreements with TGI Friday’s Inc. to open
13 additional new TGI Friday's restaurants through 2009. The development
agreements give TGI Friday’s Inc. certain remedies in the event we fail to
timely comply with the development agreements, including the right, under
certain circumstances, to terminate our exclusive rights to develop restaurants
in the related franchise territory. Our development territories include most
of
Arizona, Nevada, New Mexico, and Southern California, and the El Paso, Texas
metropolitan area. We did not open any additional new restaurants during
the
quarter ended March 27, 2006; however, subsequent to the end of the quarter,
on
April 10, 2006, we opened one new TGI Friday’s restaurant in the Orleans Hotel
in Las Vegas, Nevada. We plan to construct and open three to five additional
new
TGI Friday’s restaurants in 2006, two to three in California and one to two in
Arizona and we are currently negotiating leases on two new TGI Friday’s
restaurant sites for 2007.
We
have
been served with two lawsuits filed on behalf of current employees seeking
damages under California law, for both missed breaks and missed meal breaks
the
employees allege they did not receive. These lawsuits seek to establish a
class
action relating to our California operations. We have vigorously defended
these
lawsuits, both on the merits of the employees’ cases and the issues relating to
class action status. In July 2005, the court ruled to grant class action
status
in one of these cases. During the fourth quarter of 2005, the appellate court
in
California ruled on the same issues involved in our cases, which effectively
characterizes damages as a penalty and not wages, which shortens the period
for
which we could be liable to one year versus three and eliminates the exposure
for the employees’ attorney’s fees. Subsequent to that ruling, additional
appellate court rulings were made including one which ruled that the claim
was a
claim for wages. As a result of the overall developments in our cases and
the
appellate court rulings over similar facts in unrelated cases in the fourth
quarter of 2005, we recorded an estimated settlement reserve of $1.5 million.
We
continue to aggressively defend our company and we are unable to predict
the
ultimate amount, if any, of a settlement or the timing of any
payments.
The
state
of California initiated a sales tax audit of our restaurants and determined
that
the optional 15% gratuity added to checks for parties of eight or more should
have been subject to sales tax and, as such, has assessed taxes and related
penalties of approximately $500,000. We continue to contest vigorously this
assessment on the basis that the charge is an optional gratuity and is given
to
the server as are regular gratuities. During 2005, we made an offer of
settlement to avoid costly litigation. In February 2006, we were notified
by the
California Settlement Bureau that our offer was rejected. We plan to continue
to
see if an acceptable settlement can be reached and, failing that, we plan
to
appeal this decision and continue to contest this assessment. We are unable
to
predict the outcome of this proceeding.
Other
than these matters, we are not subject to any pending litigation that we
believe
will have a material adverse effect on our business, financial condition,
results of operations, or liquidity.
General
All
of
our restaurants operate in the casual dining sector of the restaurant industry.
However, because of each brand’s age and relative business maturity, and because
of differing levels of marketing and brand recognition, each brand currently
has
somewhat different economic results.
Restaurant
level operating profit (ROP) includes all restaurant-specific revenues and
direct costs of operations, including royalties and marketing costs paid
to
Carlson Restaurants Worldwide, Inc. related to the TGI Friday’s brand.
Restaurant level EBITDA (earnings before interest, taxes, depreciation, and
amortization) represents restaurant level cash flow, adding depreciation
and
amortization to ROP.
TGI
Friday’s Brand
The
following table represents TGI Friday’s brand information for the three months
ended March 27, 2006 and March 28, 2005, respectively (dollar amounts in
thousands):
|
|
Three
Months Ended
March
27, 2006
|
|
Three
Months Ended
March
28, 2005
|
|
Brand
revenues
|
|
$
|
56,382
|
|
$
|
51,960
|
|
Restaurant
operating profit
|
|
$
|
7,235
|
|
$
|
5,703
|
|
Restaurant
level cash flow (EBITDA)
|
|
$
|
8,940
|
|
$
|
7,277
|
|
|
|
|
|
|
|
|
|
Average
number of restaurants
|
|
|
55.0
|
|
|
53.0
|
|
Average
quarterly unit volumes
|
|
$
|
1,025
|
|
$
|
980
|
|
Bamboo
Club Brand
The
Bamboo Club brand is significantly less mature than our TGI Friday’s brand and
the marketing and advertising support is dramatically lower. Our original
expectation was that a restaurant achieved sales maturity within six to eight
months, but we have found that it takes much longer. We now believe two years
is
a more appropriate estimate of the period to achieve maturity. Additionally,
costs are higher, especially for labor, in the initial two-year period as
a
restaurant adjusts to its local market conditions and customer
expectations.
Because
of the relative maturity of the Bamboo Club brand, prior year comparisons
are
not meaningful. Therefore, we will only display Bamboo Club financial data
on a
current period basis.
|
|
Three
Months Ended March 27, 2006
|
|
|
|
Sales
|
|
ROP
|
|
EBITDA
|
|
#
of Locations
|
|
Closed
Location (a)
|
|
$
|
98,000
|
|
$
|
(84,000
|
)
|
$
|
(83,000
|
)
|
|
1
|
|
Arizona
and Florida
|
|
|
4,964,000
|
|
|
328,000
|
|
|
596,000
|
|
|
7
|
|
Other
Markets (b)
|
|
|
1,469,000
|
|
|
(182,000
|
)
|
|
(123,000
|
)
|
|
3
|
|
Bamboo
Brand Totals
|
|
$
|
6,531,000
|
|
$
|
62,000
|
|
$
|
390,000
|
|
|
|
|
(a)
Represents the 2006 operating activities of the restaurant closed in early
2006
(Fairfax, Virginia). Does not include any asset write-off or lease termination
payments for this location.
(b)
Other
markets represent restaurants located in Novi, Michigan, King of Prussia,
Pennsylvania, and Raleigh, North Carolina.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
This
report contains forward-looking statements, including statements regarding
our
business strategies, future capital needs, our business, and the industry
in
which we operate. These forward-looking statements are based primarily on
our
expectations and are subject to a number of risks and uncertainties, some
of
which are beyond our control. These forward-looking statements include those
regarding anticipated restaurant openings, anticipated costs and sizes of
future
restaurants, and the adequacy of anticipated sources of cash to fund our
future
capital requirements. Actual results could differ materially from the
forward-looking statements as a result of numerous factors, including those
set
forth in our Form 10-K for the year ended December 26, 2005, as filed with
the
Securities and Exchange Commission. Words such as “believes,” “anticipates,”
“expects,” “intends,” “plans,” and similar expressions are intended to identify
forward-looking statements, but are not the exclusive means of identifying
such
statements.
Overview
At
March
27, 2006, we owned 56 TGI Friday’s restaurants, 10 Bamboo Club-Asian Bistro
restaurants, and four Redfish Seafood Grill and Bar restaurants. In addition,
we
operate an Alice Cooper’stown restaurant in Cleveland, Ohio, pursuant to a
license agreement with Celebrity Restaurants, L.L.C., the owner of the exclusive
rights to operate Alice Cooper’stown restaurants that operates one such
restaurant in Phoenix, Arizona.
TGI
Friday’s restaurants are full-service, casual dining establishments featuring a
wide selection of freshly prepared, popular foods and beverages served by
well-trained, friendly employees in relaxed settings. Bamboo Club-Asian Bistro
restaurants are full-service, casual plus restaurants that feature an extensive
and diverse menu of innovative and tantalizing Pacific Rim cuisine. Redfish
Seafood Grill and Bar restaurants are full-service, casual dining restaurants
that feature a broad selection of New Orleans style fresh seafood, Creole
and
seafood cuisine, and traditional southern dishes, as well as a "Voodoo" style
lounge, all under one roof. Alice Cooper’stown restaurants are rock and roll and
sports themed restaurants and feature a connection to the music celebrity
Alice
Cooper.
Our
strategy is to capitalize on the brand name recognition and goodwill associated
with TGI Friday’s restaurants and expand our restaurant operations through
development of additional TGI Friday’s restaurants in our existing development
territories while reducing our level of long-term debt. We currently have
no
plans to develop any additional Bamboo Club-Asian Bistro or Redfish Bar and
Grill restaurants.
We
did
not open any new restaurants during the quarter ended March 27, 2006; however,
subsequent to the end of the quarter, on April 10, 2006, we opened one new
TGI
Friday’s restaurant in the Orleans Hotel and Casino in Las Vegas, Nevada. We
plan to construct and open three to five additional new TGI Friday’s restaurants
in 2006, two to three in California and one to two in Arizona and we are
currently negotiating leases on two new TGI Friday’s restaurant sites for
2007.
Critical
Accounting Policies
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires us to make a
number
of estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements. Such estimates and assumptions affect the reported
amounts of revenues and expenses during the reporting period. On an ongoing
basis, we evaluate our estimates and assumptions based upon historical
experience and various other factors and circumstances. We believe our estimates
and assumptions are reasonable in these circumstances; however, actual results
may differ from these estimates under different future conditions.
We
believe that the estimates and assumptions that are most important to the
portrayal of our financial condition and results of operations, in that they
require us to make our most difficult, subjective, or complex judgments,
form
the basis for the accounting policies deemed to be most critical to our
operations. These critical accounting policies relate to the valuation and
amortizable lives of long-lived assets, asset write-offs or asset impairments,
goodwill, and other identifiable intangible assets, valuation of deferred
tax
assets, reserves related to self-insurance for workers’ compensation and general
liability (included in other liabilities on the balance sheet), and recognition
of share-based employee compensation. For further information, refer to the
consolidated financial statements and notes thereto for the fiscal year ended
December 26, 2005, included in our Annual Report on Form 10-K. These policies
are summarized as follows:
(1)
We
periodically perform asset impairment analyses of long-lived assets related
to
our restaurant locations, goodwill, and other identifiable intangible assets.
We
perform these tests annually or whenever we experience a “triggering” event,
such as a decision to close a location, a major change in the location’s
operating environment, or another event that might impact our ability to
recover
our asset investment.
(2)
We
periodically record (or reduce) the valuation allowance against our deferred
tax
assets to the amount that is more likely than not to be realized, based upon
recent past financial performance, tax reporting positions, and expectations
of
future taxable income.
(3)
We
use an actuarial-based methodology utilizing our historical experience factors
to adjust periodically self-insurance reserves for workers’ compensation and
general liability claims and settlements. Estimated costs are accrued on
a
monthly basis and progress against this estimate is reevaluated based upon
actual claim data received each quarter.
(4)
For
the fiscal period ended December 26, 2005 and prior, we accounted for stock
option grants in accordance with Accounting Principles Board Opinion No.
25 (APB
25), Accounting
for Stock Issued to Employees,
and
related interpretations. Accordingly, we recognized no compensation expense
for
the stock option grants for those periods. On December 27, 2005, we adopted
the
provisions of Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standard No. 123 (revised 2004) (SFAS 123R), Share-Based
Payment,
and SEC
Staff Accounting Bulletin No. 107 (SAB 107), Share-Based
Payment,
requiring the measurement and recognition of all share-based compensation
under
the fair value method. We implemented SFAS 123R using the modified prospective
transition method, which does not result in the restatement of previously
issued
financial statements. The effects of the adoption of SFAS 123R are discussed
in
Note 2 to the consolidated financial statements.
We
believe our estimates and assumptions related to these critical accounting
policies are appropriate under the circumstances. However, should future
events
or occurrences result in unanticipated consequences, there could be a material
impact on our future financial condition or results of operations.
Recent
Accounting Pronouncements
On
October 6, 2005, the FASB issued Staff Position No. FAS 13-1,
Accounting
for Rental Costs Incurred During a Construction Period.
Generally, the staff position requires companies to expense rental costs
incurred during a construction period. We adopted FASB Staff Position
No. FAS 13-1 on December 27, 2005. The adoption of FAS 13-did not have
a material impact on our consolidated financial statements.
Results
of Operations
The
following table sets forth, for the periods indicated, the percentages that
certain items of income and expense bear to total revenue:
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
March
27, 2006
|
|
March
28, 2005
|
|
|
|
|
|
|
|
Revenue
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
Restaurant
Operating Expenses:
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
26.1
|
|
|
26.5
|
|
Payroll
and benefits
|
|
|
29.0
|
|
|
30.2
|
|
Depreciation
and amortization
|
|
|
3.2
|
|
|
3.4
|
|
Loss
on disposal of assets
|
|
|
0.1
|
|
|
0.4
|
|
Other
operating expenses
|
|
|
30.5
|
|
|
31.1
|
|
Total
restaurant operating expenses
|
|
|
89.0
|
|
|
91.6
|
|
|
|
|
|
|
|
|
|
Other
Operating Expenses:
|
|
|
|
|
|
|
|
Depreciation
and amortization of intangible assets
|
|
|
0.4
|
|
|
0.4
|
|
General
and administrative expenses
|
|
|
4.3
|
|
|
3.9
|
|
(Gain)/Loss
on disposal of assets
|
|
|
--
|
|
|
--
|
|
Pre-opening
expenses
|
|
|
0.2
|
|
|
--
|
|
New
manager training expenses
|
|
|
--
|
|
|
--
|
|
Operating
income
|
|
|
6.2
|
|
|
4.0
|
|
Interest
expense and other, net
|
|
|
0.6
|
|
|
1.5
|
|
Net
income before income taxes
|
|
|
5.6
|
|
|
2.6
|
|
Income
taxes
|
|
|
0.4
|
|
|
0.2
|
|
Net
income
|
|
|
5.2
|
%
|
|
2.4
|
%
|
Three
months ended March 27, 2006 compared with
three months ended March 28, 2005.
We
derive
revenues exclusively from the sales of food and beverages at our restaurants.
Revenues for the three months ended March 27, 2006 increased by 6.4% to $65.3
million compared with $61.4 million for the comparable quarter in 2005.
Same-store sales increased 3.3% for the quarter ended March 27, 2006.
Approximately 1% of the same-store sales increase was attributable to price
increases, with the balance resulting from higher customer traffic. Same-store
sales in the first quarter of 2005 increased 6.3%.
Cost
of
sales, which includes the cost of food and beverages, as a percentage of
revenue
was 26.1% for the three months ended March 27, 2006 compared with 26.5% for
the
comparable quarter in 2005. This decrease in cost of sales from the same
quarter
last year was the result of strong supply chain efforts and relatively stable
commodity
costs. Increases experienced from higher delivery and fuel surcharges were
effectively offset by our supply chain efforts combined with slight menu
pricing
increases.
Payroll
and benefit costs consist of restaurant management salaries, hourly payroll
expenses, and other payroll related benefits, including employee healthcare.
Payroll and benefits expenses decreased as a percentage of revenue to 29.0%
for
the three months ended March 27, 2006 from 30.2% for the comparable quarter
in
2005. This decrease was related to the implementation of labor reduction
programs in the form of labor scheduling standards beginning late in the
third
quarter of 2005 combined with a reduction in our group health insurance
costs.
Depreciation
and amortization expense included in income from restaurant operations consists
of depreciation of restaurant property and equipment and amortization of
franchise fees and liquor licenses. Depreciation and amortization expense
as a
percentage of revenue decreased to 3.2% for the three months ended March
27,
2006 from 3.4% for the comparable quarter in 2005. Although we continue to
incur
additional depreciation expense as a result of regular asset acquisitions,
the
increases were offset by reduced depreciation related to the disposition
of the
assets from closed stores and asset impairments since the comparable quarter
in
2005.
Other
operating expenses include various restaurant-level costs, such as occupancy
costs (rent, taxes and CAM), utilities, marketing costs, and general liability
and workers’ compensation costs. Other operating expenses decreased as a
percentage of revenue to 30.5% for the three months ended March 27, 2006,
from
31.1% for the comparable quarter in 2005. The decrease was primarily related
to
a reduction in credit card fees as a result of a change in our credit card
processing agreement. Additionally, we experienced a reduction in our general
liability claims costs.
Depreciation
and amortization of intangibles consist of depreciation of corporate property
and equipment and amortization of bank financing fees and purchased franchise
territories, as applicable. Depreciation and amortization of intangibles
remained consistent at 0.4% of revenue for the three months ended March 27,
2006
and for the comparable quarter in 2005.
General
and administrative expenses are costs associated with corporate and
administrative functions that support new restaurant development and restaurant
operations, and provide administrative infrastructure. These costs consist
primarily of management and staff salaries, employee benefits, travel, legal
and
accounting fees, and technology support. For the three months ended March
27,
2006, general and administrative expenses increased as a percentage of revenue
to 4.3% from 3.9% for the comparable quarter in 2005. The increase was primarily
the result of equity based compensation we recorded related to adopting SFAS
123R, higher bonuses, and additional compensation expense related to a new
executive deferred compensation program.
Preopening
expenses are costs incurred prior to opening a new restaurant and consist
primarily of manager salaries and relocation and training costs. Historically,
we have experienced variability in the amount and percentage of revenues
attributable to preopening expenses. We typically incur the most significant
portion of preopening expenses associated with a given restaurant in the
two
months immediately preceding opening and in the month the restaurant opens.
Preopening expenses as a percentage of revenue increased slightly to 0.2%
in the
quarter ended March 27, 2006 compared with less than 0.1% for the comparable
quarter in 2005 as a result of the timing of new store openings in each
year.
New
manager training expenses are those costs incurred in training newly hired
or
promoted managers for new restaurants. New manager training expenses were
insignificant for the three month period ended March 27, 2006 and for the
comparable period in 2005.
Interest
expense decreased to 0.6% of revenue for the three months ended March 27,
2006,
from 1.5% for the comparable quarter in 2005. For the three months ended
March
27, 2006, interest expense decreased as a result of a lower level of debt
compared with the same quarter last year. Additionally, in the quarter ended
March 27, 2006, we recorded approximately $352,000 in income as a result
of a
reduction in our swap liability and recorded interest income earned on
investment of our excess cash, both of which offset interest
expense.
We
did
not record a federal income tax provision for the three-month period ended
March
27, 2006 due to the utilization of net operating loss and tax credit
carryforwards; however, we did record alternative minimum tax (AMT) and state
taxes in the amount of $250,000.
Liquidity
and Capital Resources
Our
current liabilities exceed our current assets due in part to cash expended
on
our development requirements and because the restaurant business receives
substantially immediate payment for sales, while payables related to inventories
and other current liabilities normally carry longer payment terms, usually
15 to
30 days. At March 27, 2006, we had a working capital deficit of approximately
$15.8 million and a cash balance of approximately $14.5 million compared
with a
working capital deficit of $18.0 million and a cash balance of approximately
$10.1 million at December 26, 2005. We believe our cash flow is sufficient
to
pay our obligations as they come due in the ordinary course.
We
use
cash primarily to fund operations, pay debt principal and interest, and develop
and construct new restaurants. Net cash used in investing activities was
$2.4
million for the three months ended March 27, 2006 compared with $0.4 million
for
the same quarter in 2005. We used cash primarily to fund property and equipment
purchases for new restaurant development, and to fund our technology initiative
as well as our maintenance capital (monies invested to improve, upgrade,
or
replace restaurant equipment and facilities).
As
of
March 27, 2006, we had long-term debt of $37.4 million, including a current
portion of $3.5 million.
We
have a
$45 million credit facility (“Credit Facility”) with Bank of America, N.A., as
administrative agent and letter of credit issuer, and for a syndicate of
lending
financial institutions including Bank of America, GE Franchise Finance, and
Wells Fargo. The proceeds available under the Credit Facility have been and
will
be used (i) to refinance certain existing long term debt, (ii) to fund the
development of new TGI Friday’s restaurant locations and remodel existing TGI
Friday’s restaurants, and (iii) for capital expenditures and general corporate
working capital purposes.
The
Credit Facility consists of the following:
(1)
A $25
million term loan with principal to be amortized over a ten-year period with
a
five-year balloon payment of unpaid principal. The term loan bears interest
at a
Eurodollar rate (LIBOR) plus 250 basis points.
(2)
A $20
million revolving line of credit to be used for new restaurant construction
and
expansion and remodeling of existing TGI Friday’s restaurants.
(3)
A $4
million sublimit of the revolving line of credit for letters of credit issued
by
Bank of America for the benefit of our company. Letters of credit are limited
to
the sublimit so that the total aggregate lending commitment is not
exceeded.
On
March
27, 2006, we had no amounts outstanding under the revolving line of credit.
The
bank
has issued letters of credit (LOCs) totaling $2.9 million to provide security
under our 2004 and 2005 workers’ compensation insurance program. The
amount available for borrowing under the line of credit is reduced by the
amount
of the LOCs.
The
credit facility also contains customary financial covenants including (i)
Consolidated Debt Coverage, defined as Senior Debt to EBITDA (as modified
for
capital expenditures and lease expense), to be no greater than 3.00 to 1.00,
(ii) Fixed Charge Coverage Ratio of 1.15 to 1.00 through September 2006,
1.20 to
1.00 through September 2007, and 1.25 to 1.00 thereafter, and (iii) all capital
expenditures to be limited to $15 million per year.
As
of
March 27, 2006, we were in compliance with all of our debt covenants. We
believe
we will remain in compliance with our current debt agreements in 2006. We
believe that our current cash resources, additional debt available under
the
credit facility, sale of assets, and expected cash flows from operations
will be
sufficient to fund our general obligations, capital expenditures, planned
development, and remodels through 2006.
From
time
to time, we may enter into interest rate swap agreements with certain financial
institutions for the purpose of adjusting our ratio of fixed rate debt over
a
certain period of time at varying notional amounts. At March 27, 2006, there
were $18.2 million in net notional amounts of interest rate swap agreements
outstanding that carried a weighted average interest rate of 6.0%. The effective
amount of interest we pay on the notional amounts of these swap agreements
is
calculated using the interest rate of the swap against the notional amount
of
each swap. These swaps effectively adjust the ratio of fixed rate debt to
83.5%
of total outstanding debt.
As
a
result of our debt refinancing in 2005, hedge accounting no longer applies
after
the quarter ended September 26, 2005, although the swaps will remain in place.
As a result, we record quarterly market adjustments on these swaps, as
income or expense, directly in our statement of operations. At March 27,
2006,
we recorded approximately $352,000 to income, as a reduction in interest
expense, related to the reduction in the liability of these swaps.
We
lease
all of our restaurants with terms ranging from 10 to 20 years, with various
renewal options of 10 to 20 years. Our future debt, lease, and purchase
obligations are summarized by year as follows (in thousands):
Contractual
Obligations and Commitments:
|
|
Total
|
|
Less
than one year
|
|
One
to three years
|
|
Three
to five years
|
|
Greater
than five years
|
|
Debt
Maturities
|
|
$
|
37,464
|
|
$
|
3,461
|
|
$
|
7,813
|
|
$
|
22,943
|
|
$
|
3,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
Lease Commitments
|
|
|
120,867
|
|
|
12,998
|
|
|
26,663
|
|
|
25,991
|
|
|
55,215
|
|
Purchase
Commitments
|
|
|
14,000
|
|
|
14,000
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
172,331
|
|
$
|
30,459
|
|
$
|
34,476
|
|
$
|
48,934
|
|
$
|
58,462
|
|
Minimum
lease commitments represent operating leases on our restaurant locations.
We
have no other off-balance sheet financings. A default under a lease agreement
could result in damages or the acceleration of amounts due under the lease.
Total purchase commitments include estimated construction costs for the three
to
five new TGI Friday’s restaurants we have contracted to open in
2006.
The
above
amounts do not include new restaurant development capital commitments to
build
new TGI Friday’s restaurants through 2009 except for those referenced above as
we have signed leases for these locations. Although the cost to build can
vary
greatly depending on many factors and financing scenarios, including the
fact
that we have not built a restaurant in California for several years, we have
estimated the average cost to build a TGI Friday’s restaurant as approximately
$2.8 million.
TGI
Friday’s Inc. has developed specific plans and prototype examples of a
restaurant remodel and improvement program to enhance the restaurants’ and
brand’s overall appeal and position in the marketplace. TGI Friday’s Inc. has
required franchisees to remodel each location as soon as reasonably and
financially practicable with an indicated expectation that they will be
substantially completed by the end of 2007. The timetable and cost of remodeling
a location can vary greatly, from $150,000 to $750,000, depending on numerous
factors, including the age and state of repair of the restaurant, landlord
authorization and approval, local construction code requirements and changes,
the possibility of additional expansion of existing facilities, and compliance
with such laws as the Americans with Disabilities Act.
We
believe we have approximately 50 restaurants that will require remodeling
to one
degree or another and have scheduled to initially complete four in the first
half of 2006. The balance of the locations will be scheduled as the results
of
the initial four are known and our financial position and liquidity permit.
Our
total expected cost for the remodel campaign is estimated to be $20 to $30
million. This level of capital expenditure, coupled with the restaurant
development agreements through 2007, is very likely to exceed the allowable
capital expenditures under our credit agreement, which limits our capital
expenditures for all capital items to no more than $15 million per year.
We are
unable to predict the ramifications should we be unable to complete the remodel
program under the TGI Friday’s Inc. timetable.
We
believe that our current resources, bank financing, and expected cash flows
from
operations will be sufficient to fund our normal operations, capital needs,
and
debt maturities during the next 12 months.
We
are
self-insured for three major business risks with stop loss and other insurance
elements for our workers’ compensation, general liability, and health care. We
record our expenses based upon our estimated cost for the year derived from
past
experience and actuarial data. Amounts are paid as claims are adjudicated.
We
believe our estimated liabilities are adequately recorded and that sufficient
cash flow will be available to pay these claims when they become
due.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
As
of
March 27, 2006, we were participating in two derivative financial instruments
for which fair value disclosure is required under Statement of Financial
Accounting Standards No. 133, as amended. The fair value liability of the
interest rate swap agreements decreased to $575,573.
These
interest rate swap agreements were originally entered into to hedge the effects
of fluctuations in interest rates related to our long-term debt instruments.
As
a result of our debt refinancing referenced in Note 4 to the consolidated
financial statements, “hedge accounting” no longer applies after the third
quarter of 2005. We have elected to keep the interest rate swaps in place
as a
hedge against rising interest rates. As a result, adjustments on these swaps
are
recorded as income or expense directly in our statement of operations as
a
component of interest expense. For the quarter ended March 27, 2006, we recorded
approximately $352,000 as a reduction in interest expense related to the
decrease in our swap liability.
Our
market risk exposure is limited to interest rate risk associated with our
credit
instruments. We incur interest on loans made at variable interest rates of
2.5%
over "30-Day LIBOR” rates. On March 27, 2006, we had outstanding borrowings on
these loans of approximately $24 million. Our net interest expense for the
three-month period ended March 27, 2006 was $360,000, net of amounts recorded
as
a result of the reduction in our swap liability ($352,000). A one percent
variation in any of the variable rates would have increased or decreased
our
total interest expense by approximately $59,000 for the three-month period
ended
March 27, 2006.
As
of the
end of the period covered by this report, our Chief Executive Officer and
Chief
Financial Officer reviewed and evaluated the effectiveness of our disclosure
controls and procedures, which included inquiries made to certain other of
our
employees. Based on their evaluation, our Chief Executive Officer and Chief
Financial Officer have each concluded that our disclosure controls and
procedures are effective and sufficient to ensure that we record, process,
summarize, and report information required to be disclosed by us in our periodic
reports filed under the Securities Exchange Act within the time periods
specified by the Securities and Exchange Commission’s rules and forms.
During
the fiscal quarter covered by this report, there have not been any changes
in
our internal control over financial reporting that have materially affected,
or
are reasonably likely to materially affect, our internal control over financial
reporting.
PART
II. OTHER INFORMATION
We
have
been served with two lawsuits filed on behalf of current employees seeking
damages under California law, for both missed breaks and missed meal breaks
the
employees allege they did not receive. These lawsuits seek to establish a
class
action relating to our California operations. We have vigorously defended
these
lawsuits, both on the merits of the employees’ cases and the issues relating to
class action status. In July 2005, the court ruled to grant class action
status
in one of these cases. During the fourth quarter of 2005, the appellate court
in
California ruled on the same issues involved in our cases, which effectively
characterizes damages as a penalty and not wages, which shortens the period
for
which we could be liable to one year versus three and eliminates the exposure
for the employees’ attorney’s fees. Subsequent to that ruling, additional
appellate court rulings were made including one which ruled that the claim
was a
claim for wages. As a result of the overall developments in our cases and
the
appellate court rulings over similar facts in unrelated cases, we recorded,
in
the fourth quarter of 2005, an estimated settlement reserve of $1.5 million.
We
continue to aggressively defend our company and we are unable to predict
the
ultimate amount, if any, of a settlement or the timing of any
payments.
The
state
of California initiated a sales tax audit of our restaurants and determined
that
the optional 15% gratuity added to checks for parties of eight or more should
have been subject to sales tax and, as such, has assessed taxes and related
penalties of approximately $500,000. We continue to contest vigorously this
assessment on the basis that the charge is an optional gratuity and is given
to
the server as are regular gratuities. During 2005, we made an offer of
settlement to avoid costly litigation. In February 2006, we were notified
by the
California Settlement Bureau that our offer was rejected. We plan to continue
to
see if an acceptable settlement can be reached and, failing that, we plan
to
appeal this decision and continue to contest this assessment. We are unable
to
predict the outcome of this proceeding.
Not
Applicable
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
None
|
DEFAULTS
UPON SENIOR SECURITIES
|
None
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None
None
Exhibit
Number
|
Exhibit
|
|
|
|
|
|
Amendment
to 1990 Stock Option Plan
|
|
|
|
|
|
Amendment
to 1995 Stock Option Plan
|
|
|
|
|
|
Amendment
to 1999 Incentive Stock Plan
|
|
|
|
|
|
Amendment
to 2002 Incentive Stock Option Plan
|
|
|
|
|
|
Rule
13a-14 (a)/15d-14 (a) Certification of Chief Executive
Officer
|
|
|
|
|
|
Rule
13a-14 (a)/15d-14 (a) Certification of Chief Financial Officer
|
|
|
|
|
|
Section
1350 Certification of Chief Executive Officer
|
|
|
|
|
|
Section
1350 Certification of Chief Financial Officer
|
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.
|
Main
Street Restaurant Group, Inc.
|
|
|
|
|
|
|
|
Dated:
May 9, 2006
|
/s/
William G. Shrader
|
|
|
William
G. Shrader
|
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
|
|
Dated:
May 9, 2006
|
/s/
Michael Garnreiter
|
|
|
Michael
Garnreiter
|
|
|
Executive
Vice President, Chief Financial Officer, and Treasurer
|
|
|
|
|
18