UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
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[ X ]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the Fiscal Year Ended December 28,
2008
OR
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[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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Commission
file number: 0-28234
MEXICAN
RESTAURANTS, INC.
(Exact
name of registrant as specified in its charter)
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Texas
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76-0493269
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(State
or other jurisdiction of
incorporation
or organization)
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(IRS
Employer Identification Number)
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1135
Edgebrook, Houston, Texas
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77034-1899
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: 713-943-7574
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which
Registered
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Common
Stock
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Nasdaq
Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes ¨ No
þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
¨ No þ
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 þ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of "large accelerated filer”,
“accelerated filer" and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer ý Smaller
reporting company ¨
Indicate
by check mark whether the Registrant is a shell company (as defined by
Rule 12b-2 of the Act). Yes ¨No ý
The
aggregate market value of the Registrant’s Common Stock held by non-affiliates
of the Registrant, based on the sale trade price of the Common Stock as reported
by the Nasdaq Small Cap Market on June 27, 2008, the last business day of the
Registrant’s most recently completed second quarter, was $4,310,469. For
purposes of this computation, all officers, directors and 10% beneficial owners
of the registrant are deemed to be affiliates. Such determination
should not be deemed an admission that such officers, directors or 10%
beneficial owners are, in fact, affiliates of the Registrant.
Number of
shares outstanding of the Registrant’s Common Stock, as of December 28, 2008:
3,251,641 shares of Common Stock, par value $.01.
Documents
Incorporated By Reference
Specified
portions of the Registrant’s definitive proxy statement in connection with the
2009 Annual Meeting of Shareholders to be held May 27, 2009, to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A, are
incorporated by reference into Part III of this report.
Mexican
Restaurants, Inc.
Form
10-K
Table
of Contents
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Part
I
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Page
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3
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4
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Item 1A.
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11
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13
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13
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15
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15
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Part
II
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15
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17
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18
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27
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28
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28
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28
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29
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Part
III
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29
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29
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29
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30
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30
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Part
IV
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30
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32
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2
Certain statements in this Form 10-K
constitute “forward-looking statements” within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, of the Private Securities
Litigation Reform Act of 1995 (the “Reform Act”). Such
forward-looking statements involve known and unknown risks, uncertainties and
other facts that may cause the actual results, performance or achievements of
Mexican Restaurants, Inc. and its subsidiaries (the “Company”), its restaurants,
area developers and franchisees 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: general economic and business conditions; competition;
success of operating initiatives; development and operating costs; advertising
and promotional efforts; brand awareness; adverse publicity; acceptance of new
product offerings; availability, locations and terms of sites for store
development; changes in business strategy or development plans; quality of
management; availability and terms of capital; business abilities and judgment
of personnel; availability of qualified personnel; food, labor and employee
benefit costs; area developers’ adherence to development schedules; changes in,
or the failure to comply with government regulations; regional weather
conditions or weather-related events; construction schedules; and other factors
referenced in this Form 10-K. The use in this Form 10-K of such words
as “believes”, “anticipates”, “expects”, “intends”, “plans” and similar
expressions with respect to future activities or other future events or
conditions are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. The success of the
Company is dependent on the efforts of the Company, its employees, its area
developers, and franchisees and the manner in which they operate and develop
stores in light of various factors, including those set forth
above.
Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable at the time when made, any of the assumptions could be inaccurate,
and therefore, there can be no assurance that the forward-looking statements
included in this Form 10-K will prove to be accurate. In light
of the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded as a
representation by the Company that its objectives or plans will be
achieved. Accordingly, readers are cautioned not to place undue
reliance on these forward-looking statements. In addition, oral
statements made by the Company's directors, officers and employees to the
investment community, media representatives and others, depending upon their
nature, may also constitute forward-looking statements. As with the
forward-looking statements included in this report, these forward-looking
statements are by nature inherently uncertain, and actual results may differ
materially as a result of many factors. Further information regarding
the risk factors that could affect the Company's financial and other results are
included as Item 1A of this annual report on Form 10-K.
3
PART
I
General
Mexican Restaurants, Inc. (the
“Company”) operates and franchises full-service 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®, La Señorita® and Crazy Jose’s®. We also
operate a burrito fast casual concept under the name Mission
Burrito™. The Casa Olé, Monterey, Tortuga, La Señorita, Crazy
Jose’s and Mission Burrito concepts have been in business for 37, 54, 15, 30, 22
and 12 years, respectively. Today, we operate 61 restaurants,
franchise 18 restaurants and license one restaurant in various communities
across Texas, Louisiana, Oklahoma and Michigan. The Casa Olé,
Monterey, La Señorita and Crazy Jose’s restaurants are designed to appeal to a
broad range of customers, and are located primarily in small and medium-sized
communities and in middle-income areas of larger markets. The Tortuga Coastal
Cantina and Mission Burrito restaurants, which are also designed to appeal to a
broad range of customers, are located primarily in the Houston
market. The restaurants offer fresh, quality food, affordable prices,
friendly service and comfortable surroundings. The full-service menus
feature a variety of traditional Mexican and Tex-Mex selections, complemented by
our own original Mexican-based recipes, designed to have broad
appeal. The Mission Burrito restaurants offer freshly made burritos,
tacos, quesadillas, soups, salads, and chips with guacamole and/or chili con
queso. We believe that our established success in existing
markets, focus on middle-income customers, and the skills of our management team
provide significant opportunities to realize the value inherent in the
Mexican-theme and the burrito fast casual restaurant markets and increase
revenues in existing markets.
Our Company was incorporated under the
name “Casa Olé Restaurants, Inc.” under the laws of the State of Texas in
February 1996, and had its initial public offering of Common Stock in April
1996. In May 1999, we changed the corporate name to Mexican
Restaurants, Inc. The Company operates as a holding company and
conducts substantially all of its operations through its
subsidiaries. All references to the Company include the Company and
its subsidiaries, unless otherwise stated.
Strategy
and Concept
Our objective is to be perceived as a
regional, value leader in the Mexican theme segment of the casual dining
marketplace and as a regional player in the burrito fast casual
segment. To accomplish this objective, we have developed strategies
designed to achieve and maintain high levels of customer loyalty, frequent
patronage and profitability. The key strategic elements
are:
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Offering
consistent, high-quality, original recipe Mexican menu items that reflect
both national and local taste
preferences;
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Pricing
our menu offerings at levels below many family and casual-dining
restaurant concepts;
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Selecting,
training and motivating our employees to enhance customer dining
experiences and the friendly casual atmosphere of our
restaurants;
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Providing
customers with the friendly, attentive service typically associated with
more expensive casual-dining experiences;
and
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Reinforcing
the perceived value of the dining experience with a comfortable and
inviting Mexican decor.
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Menu. Our
restaurants offer high-quality products with a distinctive, yet mild taste
profile with mainstream appeal. Fresh ingredients are a critical
recipe component, and the majority of the menu items are prepared daily in the
kitchen of each restaurant from original recipes.
The casual dining menus feature a wide
variety of entrees including enchiladas, combination platters, burritos,
fajitas, coastal seafood and other house specialties. The menus also
include soup, salads, appetizers and desserts. From time to time we
also introduce new dishes designed to keep the menus fresh. Alcoholic
beverages are served as a complement to meals and
as a percentage of sales represent a range from less than 5% at our more
family-oriented locations to up to 21% in our more casual-oriented dining
locations. At Company-owned restaurants the dinner menu entrees
presently range in price from $4.99 to $15.99, with most items priced between
$6.95 and $10.99. Lunch prices at most Company-owned restaurants
presently range from $4.95 to $7.99.
4
The burrito fast casual menu features a
more limited variety of entrees including burritos (wrapped in a flour tortilla
or in a bowl), tacos, quesadillas, soups, salads, chips with guacamole and/or
chili con queso. The menu entrees presently range in price from $2.75
to $7.75. Alcoholic beverages are served as a complement to meals and
represent less than 3% of sales.
Atmosphere and
Layout. Our full-service restaurants emphasize an attractive
design for each of our restaurants. The typical restaurant has an
inviting and interesting Mexican exterior. The interior decor is
comfortable Mexican in appearance to reinforce the perceived value of the dining
experience. Stucco, tile floors, carpets, plants and a variety of
paint colors are integral features of each restaurant’s decor. These
decor features are incorporated in a floor plan designed to provide a
comfortable atmosphere. Our restaurant designs are sufficiently
flexible to accommodate a variety of available sites and development
opportunities, such as malls, end-caps of strip shopping centers and free
standing buildings, including conversions to our restaurant
design. The restaurant facility is also designed to serve a high
volume of customers in a relatively limited period of time. Our
restaurants typically range in size from approximately 4,000 to 5,600 square
feet, with an average of approximately 4,500 square feet and a seating capacity
of approximately 180 persons.
Our six fast-casual Mission Burrito
restaurants are between approximately 2,000 and 3,000 square
feet. Several of the restaurants have extensive patios that offer
additional outdoor seating. We have developed a prototype Mission
Burrito design that is approximately 2,750 square feet with an indoor seating
capacity of approximately 80 persons. The new prototype also includes
a patio that offers additional outdoor seating. The interior decor
has a casual dining atmosphere that distinguishes it from other burrito
concepts. The design is sufficiently flexible to accommodate a
variety of available sites and development opportunities; however, we will focus
mostly on end-caps of shopping centers, town centers and lifestyle centers
developments.
Growth
Strategy
Over the last five years, we have
focused our energies to assimilate two acquisitions (13 restaurants bought in
2004 from a franchisee and two Mission Burrito restaurants acquired in 2006), to
develop new prototypes for our Casa Olé, Monterey’s and Mission Burrito
restaurants and to initiate a program of remodeling several of our existing
restaurants each year.
In August 2006 we acquired two burrito
fast-casual Mission Burrito restaurants located in Houston,
Texas. The concept, established twelve years ago, has a very loyal
customer base. Since the Mission Burrito acquisition, we have spent
considerable time and attention planning for the future growth and positioning
of the concept. Beginning in fiscal year 2007, we hired a senior vice
president to lead the growth of Mission Burrito and a senior marketing
consultant to work exclusively on building the Mission Burrito
brand. During fiscal year 2008, we opened four Mission Burrito
restaurants in the Greater Houston Metropolitan Area. On January 24,
2009, we closed one of our Mission Burrito restaurants seven months after it
opened after concluding that the real estate was not conducive to the fast
casual burrito segment. The average net cost of building the four
Mission Burrito restaurants was $622,000, net of landlord
contributions.
For the foreseeable future, we have
decided to focus our growth primarily on Mission Burrito. The average
cost to build a Mission Burrito restaurant is approximately 65% of the cost of
building a new Casa Olé restaurant. Although it will be a few years
before we can measure the actual return on investment, based on the average cost
and the sales forecast, we believe the Mission Burrito concept will provide a
better return on investment than building either Casa Olé or Monterey’s
restaurants. Due to the combined effects of Hurricanes Gustav and Ike
and the current economic recession, we will focus on a slower rate of growth for
Mission Burrito to fine tune the concept and so that we can rebuild our cash
flow and pay down debt. In fiscal year 2009, we plan to open one
Mission Burrito restaurant and lay the groundwork for future restaurant
expansion in fiscal year 2010 and beyond.
We believe that the unit economics of
the various restaurant concepts, as well as their value orientation and focus on
middle income customers, provides significant potential opportunities for
growth. Our long-standing strategy to capitalize on these growth
opportunities has been comprised of three key elements:
5
Improve
Same-Restaurant Sales and Profits. Our goal is to improve the
sales and controllable income of existing restaurants (controllable income
consists of restaurant sales less food and beverage expenses, labor and
controllable expenses, such as utilities and repair and maintenance expenses,
but excludes advertising and occupancy expenses). This is
accomplished through an emphasis on restaurant operations, coupled with
improving marketing, purchasing and other organizational efficiencies (see
“Restaurant Operations” below). In fiscal year 2008, substantial
increases in commodity prices, utilities and group health insurance premiums had
a marked impact on our operating results to the extent such increases could not
be passed along to customers. There can be no assurance that we will
not experience the same inflationary impact in fiscal year 2009. If
operating expenses increase, our management intends to attempt to recover
increased costs by increasing prices to the extent deemed advisable in light of
competitive conditions.
During fiscal year 2009, our goal is to
improve sales and profitability so that we can maximize free cash flow, which we
will use to pay off debt, remodel one existing restaurant, and build one new
Mission Burrito restaurant. Although we do not anticipate the
following transactions in fiscal year 2009, we reserve the right to acquire
existing franchise restaurants and to make repurchases of our Common Stock when
we determine such repurchases are a prudent use of our capital.
Increased
Penetration of Existing Markets. Our second growth opportunity
is, when we believe market conditions warrant, to increase the number of
restaurants in existing Designated Market Areas (“DMAs”) and to expand into
contiguous new markets. The DMA concept is a mapping tool developed
by the A.C. Nielsen Co. that measures the size of a particular market by
reference to communities included within a common television
market. Our objective in increasing the density of Company-owned
restaurants within existing markets is to improve operating efficiencies in such
markets and to realize improved overhead absorption. In addition, we
believe that increasing the density of restaurants in both Company-owned and
franchised markets will assist us in achieving effective media penetration while
maintaining or reducing advertising costs as a percentage of revenues in the
relevant markets. We believe that careful and prudent site selection
within existing markets will avoid cannibalization of the sales bases of
existing restaurants.
In implementing our unit expansion
strategy, we may use a combination of franchised and Company-owned
restaurants. The number of such restaurants developed in any period
will vary. We believe that a mix of franchised and Company-owned
restaurants would enable us to realize accelerated expansion opportunities,
while maintaining majority or sole ownership of a significant number of
restaurants. Generally, we do not anticipate opening franchised and
Company-owned restaurants within the same market. In seeking
franchisees, we will continue to primarily target experienced multi-unit
restaurant operators with knowledge of a particular geographic market and
financial resources sufficient to execute our development strategy.
The restaurant industry is a
competitive and fragmented business. Moreover, the restaurant
industry is characterized by a high initial capital investment. Our
focus is not on new restaurant expansion just to generate additional sales, but
a balanced approach that emphasizes same-restaurant sales growth and selective
new restaurant development and acquisitions of existing franchise
restaurants. During fiscal year 2008, we opened four Mission Burrito
restaurants, modestly remodeled one existing restaurant and rebuilt two
restaurants that had been damaged by fire. We plan to build and open
one new Mission Burrito restaurant in fiscal year 2009, as well as significantly
remodel one existing restaurant.
Seek Strategic
Acquisitions. Since our inception as a public company,
we have primarily grown through the acquisition of other Mexican food restaurant
companies, making four acquisitions since 1996. We anticipate we will
continue to selectively acquire existing franchised restaurants from time to
time when such opportunities arise (see “Franchising”
below). Although we are focused primarily on growing the Mission
Burrito concept, we will continue to review potential strategic acquisitions
within the Mexican food restaurant industry that would complement our existing
corporate culture.
Site
Selection
When developing new restaurant sites,
our senior management devotes significant time and resources to analyzing
prospective sites for the Company’s restaurants. Senior management
has also created and utilizes a site selection committee, which reviews and
approves each site to be developed. In addition, we conduct customer
surveys to define precisely the demographic profile of the customer base of each
of our restaurant concepts. Our site selection criteria focus
on:
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1)
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matching
the customer profile of the respective restaurant concept to the profile
of the population of the target local
market;
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2)
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easy
site accessibility, adequate parking, and prominent visibility of each
site under consideration;
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3)
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the
site’s strategic location within the
marketplace;
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4)
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the
site’s proximity to the major concentration of shopping centers within the
market;
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5)
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the
site’s proximity to a large employment base to support the lunch segment;
and
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6)
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the
impact of competition from other restaurants in the
market.
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6
We believe that a sufficient number of
suitable sites are available for contemplated Company and franchise development
in existing markets. Based on our current planning and market
information, we plan to open one new Mission Burrito restaurant in fiscal year
2009. The anticipated investment for a 2,750 square foot restaurant
lease space, including equipment, signage, site work, furniture, fixtures and
decor ranges between $550,000 and $650,000, net of landlord
contributions. Additionally, training and other pre-opening costs are
anticipated to be approximately $25,000 to $35,000 per location. The
cost of developing and operating a Company restaurant can vary based upon
fluctuations in land acquisition and site improvement costs, construction costs
in various markets, the size of the particular restaurant and other
factors. Although we anticipate that development costs associated
with near-term restaurants will range between $550,000 and $650,000, there can
be no assurance of this.
Restaurant
Operations
Management and
Employees. The management staff of
each casual dining restaurant is responsible for managing the restaurant's
operations. Each Company-owned restaurant operates with a general
manager, one or more assistant managers and a kitchen manager or a
chef. Including managers, restaurants have an average of 40 full-time
and part-time employees.
The management staff of each Mission
Burrito restaurant is responsible for managing the restaurant's
operations. Each restaurant operates with a general manager and one
or more assistant managers. Including managers, restaurants have an
average of 20 full-time and part-time employees.
We historically have spent considerable
effort developing our employees, allowing us to promote from
within. As an additional incentive to our restaurant management
personnel, we have a bonus plan in which restaurant managers can receive monthly
bonuses based on a percentage of their restaurants’ controllable
profits.
Our regional supervisors, who report
directly to the Company’s Directors of Operations, offer support to the store
managers. Each supervisor is eligible for a monthly bonus based on a
percentage of controllable profits of the stores under their
control.
As of December 28, 2008, we employed
2,378 people, of whom 2,332 were restaurant personnel at the Company-owned
restaurants and 46 were corporate personnel. We consider our employee
relations to be good. Most employees, other than restaurant
management and corporate personnel, are paid on an hourly basis. Our
employees are not covered by a collective bargaining agreement.
Training and
Quality Control. We require our hourly employees to
participate in a formal training program carried out at the individual
restaurants, with the on-the-job training program varying from three days to two
weeks based upon the applicable position. Managers of both
Company-owned and franchised restaurants are trained at one of our specified
training stores by that store's general manager and are then certified upon
completion of a four to six week program that encompasses all aspects of
restaurant operations as well as personnel management and policy and procedures,
with special emphasis on quality control and customer relations. The
Company's franchise agreement requires each franchised restaurant to employ a
general manager who has completed our training program at one of our specified
training stores. Compliance with our operational standards is
monitored for both Company-owned and franchised restaurants by random, on-site
visits by corporate management, regular inspections by regional supervisors, the
ongoing direction of a corporate quality control manager and the mystery shopper
program.
Marketing and
Advertising. We believe that when media penetration is
achieved in a particular market, investments in radio and television advertising
can generate significant increases in revenues in a cost-effective
manner. During fiscal year 2008, we spent approximately 2.5% of
restaurant revenues on various forms of advertising and plan to spend 2.7% of
restaurant revenues in fiscal year 2009. Besides radio and
television, we make use of in-store promotions, involvement in community
activities, and customer word-of-mouth to maintain their
performance.
7
Purchasing. We strive to obtain
consistent quality products at competitive prices from reliable
sources. We work with our distributors and other purveyors to ensure
the integrity, quality, price and availability of the various raw
ingredients. We research and test various products in an effort to
maintain quality and to be responsive to changing customer tastes. We
operate a centralized purchasing system that is utilized by all of the
Company-owned restaurants and is available to our franchisees. Under
our franchise agreements, if franchisees wish to purchase from a supplier other
than a currently approved supplier, they must first submit the products and
supplier to us for approval. Regardless of the purchase source, all
purchases must comply with the Company's product specifications. Our
ability to maintain consistent product quality throughout our operations depends
upon acquiring specified food products and supplies from reliable
sources. Management believes that all essential food and beverage
products are available from other qualified sources at competitive
prices.
Franchising
We currently have eight Casa Olé
franchisees and one La Senorita franchisee operating a total of 18 restaurants
and one licensee operating one Monterey’s Little Mexico
restaurant. Most franchisees operate one or two
restaurants. No new franchise restaurants were opened during fiscal
2008. In 2007 one company-owned restaurant was sold to Larry
Forehand, a director and Vice Chairman of the Company’s Board of
Directors. See “Notes to Consolidated Financial Statements, Footnote
(10) ‘Related Party Transactions’”.
Franchising allows us to expand the
number of stores and penetrate markets more quickly and with less capital than
developing Company-owned stores. We have the first right of refusal
when a franchisee decides to sell its restaurant(s). Historically, we
have selectively acquired franchisee restaurants when reasonably
available. At the same time, we plan to expand our base of franchise
restaurants.
Franchisees are selected on the basis
of various factors, including business background, experience and financial
resources. In seeking new franchisees, we target experienced
multi-unit restaurant operators with knowledge of a particular geographic market
and financial resources sufficient to execute our development
schedule. Under the current franchise agreement, franchisees are
required to operate their stores in compliance with the Company's policies,
standards and specifications, including matters such as menu items, ingredients,
materials, supplies, services, fixtures, furnishings, decor and
signs. In addition, franchisees are required to purchase, directly
from the Company or our authorized agent, spice packages for use in the
preparation of certain menu items, and must purchase certain other items from
approved suppliers unless written consent is received from the
Company.
Franchise
Agreements. We enter into a
franchise agreement with each franchisee that grants the franchisee the right to
develop a single store within a specific territory at a site approved by
us. The franchisee then has limited exclusive rights within the
territory. Under our current standard franchise agreement, the
franchisee is required to pay a franchise fee of $25,000 per
restaurant. The current standard franchise agreement provides for an
initial term of 15 years (with a limited renewal option) and payment of a
royalty of 3% to 5% of gross sales. The termination dates of our
franchise agreements with its existing franchisees currently range from 2009 to
2019. We are updating our Franchise Agreement. Under the
new Franchise Agreements, the termination dates will range from 2009 to
2024. There are six franchises that are currently on a month-to-month
basis until we have approved the new Franchise Agreement.
Franchise agreements are not assignable
without our prior written consent. Also, we retain rights of first
refusal with respect to any proposed sales by the
franchisee. Franchisees are not permitted to compete with us during
the term of the franchise agreement and for a limited time, and in a limited
area, after the term of the franchise agreement. The enforceability
and permitted scope of such noncompetition provisions varies from state to
state. We have the right to terminate any franchise agreement for
certain specific reasons, including a franchisee's failure to make payments when
due or failure to adhere to our policies and standards. Many state
franchise laws, however, limit the ability of a franchisor to terminate or
refuse to renew a franchise. See "Item
1. Business—Government Regulation".
Prior forms of our franchise agreements
still in effect may contain terms that vary from those described above,
including with respect to the payment or nonpayment of advertising fees and
royalties, the term of the agreement, and assignability, noncompetition and
termination provisions.
8
Franchisee
Training and Support. Under the current
franchise agreement, each franchisee (or if the franchisee is a business
organization, a manager designated by the franchisee) is required to personally
participate in the operation of the franchise. Before opening the
franchisee's business to the public, we provide training at its approved
training facility for each franchisee's
general manager, assistant manager and kitchen manager or chef. We
recommend that the franchisee, if the franchisee is other than the general
manager, or if a business organization, its chief operating officer, attend such
training. We also provide a training team to assist the franchisee in
opening its restaurant. The team, supervised by the Director of
Training, will assist and advise the franchisee and/or its manager in all phases
of the opening operation for a seven to fourteen day period. The
formal training program required of hourly employees and management, along with
continued oversight by our quality control manager, is designed to promote
consistency of operations.
Area
Developers. The area development
agreement is an extension of the standard franchise agreement. The
area development agreement provides area developers with the right to execute
more than one franchise agreement in accordance with a fixed development
schedule. Restaurants established under these agreements must be
located in a specific territory in which the area developer will have limited
exclusive rights. Area developers pay an initial development fee
generally equal to the total initial franchise fee for the first franchise
agreement to be executed pursuant to the development schedule plus 10% of the
initial franchise fee for each additional franchise agreement to be executed
pursuant to the development schedule. Generally the initial
development fee is not refundable, but will be applied in the proportions
described above to the initial franchise fee payable for each franchise
agreement executed pursuant to the development schedule. New area
developers will pay
monthly royalties for all restaurants established under such franchise
agreements on a declining scale generally ranging from 5% of gross sales for the
initial restaurant to 3% of gross sales for the fourth restaurant and thereafter
as additional restaurants are developed. Area development agreements
are not assignable without our prior written consent. We will retain
rights of first refusal with respect to proposed sales of restaurants by the
area developers. Area developers are not permitted to compete with
us. As described above, the enforceability and permitted scope of
such noncompetition provisions may vary from state to state. If an area
developer fails to meet its development schedule obligations, the Company can,
among other things, terminate the area development agreement or modify the
territory in the agreement. These termination rights may be limited by
applicable state franchise laws. We currently have two area
developers and are seeking new area developers.
Competition
The restaurant industry is intensely
competitive. Competition is based upon a number of factors, including
concept, price, location, quality and service. We compete against a
broad range of other family dining concepts, including those focusing on various
other types of ethnic food, as well as local restaurants in its various
markets. We also compete against other quick service, fast casual and
casual dining concepts within the Mexican and Tex-Mex food
segment. Many of our competitors are well established and have
substantially greater financial and other resources than
us. Some of our competitors may be better established in
markets where our restaurants are, or may be, located. Also, we
compete for qualified franchisees with franchisors of other restaurants and
various other concepts.
The success of a particular restaurant
concept is also affected by many other factors, including national, regional or
local economic and real estate conditions, changes in consumer tastes and eating
habits, demographic trends, weather, traffic patterns, and the type, number and
location of competing restaurants. In addition, factors such as
inflation, increased food, labor and benefit costs, and the availability of
experienced management and hourly employees may adversely affect the restaurant
industry in general and our restaurants in particular.
Government
Regulation
Each restaurant is subject to
regulation by federal agencies and to licensing and regulation by state and
local health, sanitation, safety, fire and other departments relating to the
development and operation of restaurants. These include regulations
pertaining to the environmental, building and zoning requirements in the
preparation and sale of food. We are also subject to laws governing
the service of alcohol and our relationship with employees, including minimum
wage requirements, overtime, working conditions and immigration
requirements. If we fail to comply with existing or future laws and
regulations, we could be subject to governmental or judicial fines or
sanctions. We believe that we are operating in
substantial compliance with applicable laws and regulations that govern our
operations. Difficulties or failures in obtaining the required construction and
operating licenses, permits or approvals could delay or prevent the opening of a
specific new restaurant.
9
Alcoholic beverage control regulations
require each of our restaurants to apply to a state authority and, in certain
locations, county or municipal authorities, for a license or permit to sell
alcoholic beverages on the premises and to provide service
for extended hours. Typically, licenses must be renewed annually and
may be revoked or suspended for cause at any time. Alcoholic beverage
control regulations relate to numerous aspects of our restaurants, including
minimum age of patrons drinking alcoholic beverages and of employees serving
alcoholic beverages, training, hours of operation, advertising, wholesale
purchasing, inventory control and handling, storage and dispensing of alcoholic
beverages. We are also subject to "dramshop" statutes that generally
provide that a person injured by an intoxicated person may seek to recover
damages from an establishment determined to have wrongfully served alcoholic
beverages to the intoxicated person. We carry liquor liability
coverage as part of our existing comprehensive general liability
insurance. Additionally, within thirty days of employment by the
Company, each of our Texas employees who serves alcoholic beverages is required
to attend an alcoholic seller training program that has been approved by the
Texas Alcoholic Beverage Commission and endorsed by the Texas Restaurant
Association that endeavors to educate the server to detect and prevent
over-service, as well as underage service, of the customers at our
restaurants.
In connection with the sale of
franchises, we are subject to the United States Federal Trade Commission rules
and regulations and state laws that regulate the offer and sale of franchises
and business opportunities. We are also subject to laws that regulate certain
aspects of such relationships. To date, we have had no claims with
respect to its programs and, based on the nature of any potential compliance
issues identified, do not believe that compliance issues associated with our
historic franchising programs will have a material adverse effect on our results
of operations or financial condition. We believe that we are
operating in substantial compliance with applicable laws and regulations that
govern franchising programs.
The federal Americans with Disabilities
Act prohibits discrimination on the basis of disability in public accommodations
and employment. We are required to comply with the Americans with
Disabilities Act and regulations relating to accommodating the needs of the
disabled in connection with the construction of new facilities and with
significant renovations of existing facilities.
We are subject to various local, state
and federal laws regulating the discharge of pollutants into the
environment. We believe that we conduct our operations in substantial
compliance with applicable environmental laws and regulations. We
conduct environmental audits of each proposed restaurant site in order to
determine whether there is any evidence of contamination prior to purchasing or
entering into a lease with respect to such site. To date, our
operations have not been materially adversely affected by the cost of compliance
with applicable environmental laws.
Trademarks,
Service Marks and Trade Dress
We believe our trademarks, service
marks and trade dress have significant value and are important to our marketing
efforts. We have registered the trademarks for “Casa Olé”, “Casa Olé
Mexican Restaurant”, “Monterey’s Tex-Mex Café”, “Monterey’s Little Mexico”,
“Tortuga Cantina”, “La Señorita” and “Crazy Jose’s.” We have a federal
registration for Mission Burritos Fresh Food Fast & design and a pending
federal application for Mission Burrito More Choices. More Flavor. &
design. We also have a Texas state registration for the wordmark Mission
Burritos.
Available
Information
We are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and in
accordance therewith, we file reports, proxy and information statements and
other information with the Securities and Exchange Commission
("SEC"). Our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, proxy and information
statements and other information and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 are available through our Web site at
www.mexicanrestaurantsinc.com. Reports are available free of charge
as soon as reasonably practicable after we electronically file them with, or
furnish them to, the SEC. In addition, our officers and directors
file with the SEC initial statements of beneficial ownership and statements of
change in beneficial ownership of the Company's securities, which are available
on the SEC's Internet site at www.sec.gov. We are not including this
or any other information on our Web site as part of, nor incorporating it by
reference into, this Form 10-K or any of its other SEC
filings. In addition to our Web site, you may read and copy public
reports we file with or furnish to the SEC at the SEC's Public Reference Room at
450 Fifth Street, NW, Washington, DC 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an internet site that contains the
Company's reports, proxy and information statements, and other information that
we file electronically with the SEC at www.sec.gov.
10
You should carefully consider the
following risk factors as well as the other information contained or
incorporated by reference in this report, as these are important factors, among
others, that could cause our actual results to differ from our expected or
historical results. It is not possible to predict or identify all
such factors and these factors are based on management’s current knowledge and
estimates of factors affecting our operations, both known and
unknown. Consequently, you should not consider any such list to be a
complete statement of all of our potential risks or uncertainties.
Changes in
General Economic and Political Conditions Affect Consumer Spending and May Harm
Our Revenues and Operating Results. With a few exceptions,
most of the restaurant industry’s casual dining segment experienced a slow down
or negative same-store sales and tighter profit margins in 2008. The
forecast for 2009 continues to be cautious, calling for a continuation of the
current economic recession. A few economic conditions that could
impact the economy and our operating results are: rising unemployment, the
economic recession and the subsequent decline in household wealth could reduce
consumers’ level of discretionary spending; a decrease in discretionary spending
could impact the frequency with which our customers choose to dine out or the
amount they spend on meals while dining out, thereby decreasing our
revenues. A return to rising fuel and energy costs could reduce
consumers’ level of discretionary spending. Additionally, the
continued responses to the terrorist attacks on the United States, possible
future terrorist attacks and the conflict in Iraq and Afghanistan and its
aftermath may exacerbate current economic conditions and lead to a further
weakening in the economy. Adverse economic conditions and any related
decrease in discretionary spending by our customers could have an adverse effect
on our revenues and operating results.
Our Small
Restaurant Base and Geographic Concentration Make Our Operations More
Susceptible to Local Economic Conditions and the Economic Downturn May Adversely
Impact Our Results. The results achieved to date by our
relatively small restaurant base may not be indicative of the results of a
larger number of restaurants in a more geographically dispersed
area. Because of our relatively small restaurant base, an
unsuccessful new restaurant could have a more significant effect on its results
of operations than would be the case in a company owning more
restaurants. Additionally, given our present geographic concentration
(all of our company-owned units are currently in Texas, especially along the
Gulf Coast region, and in Oklahoma, Louisiana and Michigan), results of
operations may be adversely affected by economic or other conditions in the
region, such as hurricanes, and any adverse publicity in the region relating to
its restaurants could have a more pronounced adverse effect on its overall sales
than might be the case if its restaurants were more broadly
dispersed. Also, the ongoing financial crisis and economic downturn
could result in material decreases in discretionary spending by consumers, which
in turn could materially and adversely affect our business and results of
operations.
Cost Pressures
May Adversely Impact Our Net Income. We believe that certain
cost pressures impacted net income during fiscal year
2008. Substantial increases in food commodity prices, utilities and
group health insurance had a marked impact on our operating results to the
extent such increases could not be passed along to customers. There
can be no assurance that we will not experience similar cost pressures in
2009. If operating expenses increase, our management intends to
attempt to recover increased costs by increasing prices to the extent deemed
advisable in light of competitive conditions.
Increases in the
minimum wage may have a material adverse effect on our business and financial
results. Many of our employees are subject to various minimum
wage requirements. On July 24, 2008, the federal minimum wage
increased from $5.85 to $6.55 per hour. We estimated that the
increase in the federal minimum wage impacted our labor cost by approximately
$2,000 per week. Future federal minimum wage increases are scheduled
to increase to $7.25 per hour on July 24, 2009. The minimum wage
increases may have a material adverse effect on our business, financial
condition, results of operations and cash flows to the extent that we cannot
increase menu prices.
Changes in food
costs could negatively impact our revenues and results of
operations. Our profitability is dependent in part on our
ability to anticipate and react to changes in food costs. Other than for a
portion of our produce, which is purchased locally by each restaurant, we rely
on Ben E. Keith Company as the primary distributor of our
ingredients. Ben E. Keith Company is a privately held corporation
that is part of a cooperative of independent food distributors (Unipro) located
throughout the nation. We have an exclusive contract with Ben E. Keith Company
on terms and conditions which we believe are consistent with those made
available to similarly situated restaurant companies. Any increase in
distribution prices by Ben E. Keith Company could cause our food costs to
fluctuate. Additional factors beyond our control, including adverse
weather conditions and governmental regulation, may affect food
costs. We may not be able to anticipate and react to changing food
costs through our purchasing practices and menu price adjustments in the future,
and failure to do so could negatively impact our revenues and results of
operations.
11
Rising Insurance
Costs Could Negatively Impact Our Profitability. We are
insured against a variety of uncertainties. We also provided group
health insurance to certain of our employees and cover approximately 65% of the
cost. While the cost of certain insurance coverages increased in
2008, we were able to negotiate lower premium costs for other insurance
coverages, and in general, were able to minimize the overall increase and impact
of all total insurance costs to the Company. For example, a decrease
in property and casualty premiums did have a positive impact on our
profitability in fiscal year 2008. However, the increase in group
health insurance costs did have a negative impact on our profitability in fiscal
year 2008. Each year, we renew our insurance
coverages. Although we try to be proactive in our efforts to control
insurance costs, market forces beyond our control may thwart our ability to
manage these costs. We expect insurance premiums for property and
casualty insurance to increase in light of the impact of recent hurricanes on
the Texas and Louisiana Gulf Coast.
Seasonal
Fluctuations in Sales and Earnings Affect Our Quarterly
Results. Our sales and earnings fluctuate
seasonally. Historically, our highest sales and earnings have
occurred in the second and third calendar quarters, which we believe is typical
of the restaurant industry and consumer spending patterns in
general. In addition, quarterly results have been and, in the future
are likely to be, substantially affected by the timing of new restaurant
openings. Because of the seasonality of our business and the impact
of new restaurant openings, results for any calendar quarter are not necessarily
indicative of the results that may be achieved for a full fiscal year and cannot
be used to indicate financial performance for the entire year.
An
Increase In Our Interest Rates May Adversely Impact Net
Income. We are subject to interest rate fluctuations
under the terms of our outstanding bank debt with Wells Fargo Bank,
N.A. The interest rate is either the prime rate or LIBOR plus a
stipulated percentage. Accordingly, we are impacted by changes in the
prime rate and LIBOR. As of December 28, 2008, we had $7.5 million
outstanding on our credit facility with Wells Fargo.
Our Financial
Covenants Could Adversely Affect Our Ability to
Borrow. Under the Wells Fargo Agreement, we are required
to maintain certain minimum EBITDA levels, leverage ratios and fixed charge
coverage ratios. Due to the impact of Hurricanes Gustav and Ike in the
third quarter of fiscal year 2008, which resulted in approximately $1.15 million
in lost sales, we increased our debt by $1.0 million to $7.5 million. As a
result of the lost sales, we failed to satisfy our minimum EBITDA covenant for
the twelve month period as of the third quarter of fiscal year 2008. We
requested and received from Wells Fargo a waiver to this covenant for the third
quarter of fiscal year 2008, and as of December 28, 2008, received an amendment
to the covenant permanently removing the requirement to maintain certain minimum
EBITDA levels.
Although we are currently in compliance
with such financial covenants as amended, an erosion of our business could place
us out of compliance in future periods. Potential remedies for the
lender if we are not in compliance include declaring all outstanding amounts
immediately payable, terminating commitments and enforcing any
liens. See “Note 3, Long-term Debt, of Notes to Consolidated
Financial Statements”.
Competition May
Adversely Affect Our Operations and Financial Results. The
restaurant industry is highly competitive with respect to price, service,
restaurant location and food quality, and is often affected by changes in
consumer tastes, economic conditions, population and traffic
patterns. We compete within each market against other family
dining concepts, as well as quick service and casual dining concepts, for
customers, employees and franchisees. Several of our competitors
operate more restaurants and have significantly greater financial resources and
longer operating histories than we do. If we are unable to
successfully compete with the other restaurants in our markets, this could
prevent us from increasing or sustaining our revenues and profitability and
result in a material adverse effect on our business, financial condition,
results of operations or cash flows.
Implementing Our
Growth Strategy May Strain Our Resources. Our ability to
expand by adding Company-owned and franchised restaurants will depend on a
number of factors, including the availability of suitable locations, the ability
to hire, train and retain an adequate number of experienced management and
hourly employees, the availability of acceptable lease terms and adequate
financing, timely construction of restaurants, the ability to obtain various
government permits and licenses and other factors, some of which are beyond our
control.
We may
not be able to open our planned new operations on a timely basis, if at all,
and, if opened, these restaurants may not be operated profitably. We
have experienced, and expect to continue to experience, delays in restaurant
openings from time to time. Delays or failures in opening planned new
restaurants could have an adverse effect on our business, financial condition,
results of operations or cash flows.
12
Our Management
and Directors Hold a Majority of the Common
Stock. Approximately 64.8% of our Common Stock and rights to
acquire Common Stock are beneficially owned or held by Larry N. Forehand, The D3
Family Funds (with which Cara Denver, one of our directors, is affiliated),
Michael D. Domec and Louis P. Neeb, directors and/or executive officers or
affiliates thereof. As a result, these individuals have substantial
control over matters requiring shareholder approval, including the election of
directors.
Shares Eligible
for Future Sale Could Adversely Impact the Stock Price. Sales
of substantial amounts of shares in the public market could adversely affect the
market price of our Common Stock. In any event, the market price of
the Common Stock could be subject to significant fluctuations in response to our
operating results and other factors.
Litigation Could
Have a Material Adverse Effect on Our Business. From time to
time, we are the subject of complaints or litigation from guests alleging
food-borne illness, injury or other food quality, health or operational
concerns. We may be adversely affected by publicity resulting from
such allegations, regardless of whether such allegations are valid or whether
the Company is liable. We are also subject to complaints or
allegations from former or prospective employees from time to time. A
lawsuit or claim could result in an adverse decision against us that could have
a materially adverse effect on our business.
We are subject to state “dramshop” laws
and regulations, which generally provide that a person injured by an intoxicated
person may seek to recover damages from an establishment that wrongfully served
alcoholic beverages to such person. Although we carry liquor
liability coverage as part of our existing comprehensive general liability
insurance, we may still be subject to a judgment in excess of our insurance
coverage and we may not be able to obtain or continue to maintain such insurance
coverage at reasonable costs, or at all.
Compliance with
Changing Regulation of Corporate Governance and Public Disclosure May Result in
Additional Expenses. Keeping up-to-date and in compliance with changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and
Nasdaq Stock Market rules, has required an increased amount of management
attention and external resources. We remain committed to maintaining
high standards of corporate governance and public disclosure. As a
result, we intend to invest all reasonably necessary resources to comply with
evolving standards, and this investment may result in increased general and
administrative expenses and a diversion of management time and attention from
revenue-generating activities to compliance activities.
Future changes in
financial accounting standards may affect our reported results of
operations. Changes in accounting standards can have a
significant effect on our reported results and may affect our reporting of
transactions completed before the change is effective. New pronouncements and
varying interpretations of pronouncements have occurred and may occur in the
future.
Changes to existing rules or differing
interpretations with respect to our current practices may adversely affect our
reported financial results.
None.
In fiscal year 2008, our executive
offices were located in approximately 10,015 square feet of office space in
Houston, Texas. The offices are currently leased by us from Gillett
Properties, Ltd., under a gross lease (where the landlord pays utilities and
property taxes) expiring in December 2009, with rental payments of $11,000 per
month. We hired a commercial real estate broker to search for new
executive office space and anticipate finding and moving into new executive
offices sometime during fiscal year 2009. We believe that our
properties are generally well maintained, in good condition and adequate for our
operations. Further, we believe that suitable additional or
replacement space under comparable terms will be available if
required.
13
Real estate leased for Company-owned
restaurants is typically leased under triple net leases that require us to pay
real estate taxes and utilities, to maintain insurance with respect to the
premises and in certain cases to pay contingent rent based on sales in excess of
specified amounts. Generally the non-mall locations for the
Company-owned restaurants have initial terms of 10 to 20 years with
renewal options.
All of the Company-owned restaurant
sites are leased. During fiscal year 2007, we subleased a previously
closed restaurant and assigned one lease as part of the sale of one
company-owned restaurant to Larry Forehand, a Director and Vice Chairman of our
Board of Directors. See “Footnote (10) Related Party
Transactions”.
During
fiscal year 2008, we opened four new Mission Burrito restaurants and closed one
underperforming Mission Burrito restaurant subsequent to year-end. We
modestly remodeled one existing restaurant and rebuilt two restaurants that had
been damaged by fires.
Restaurant
Locations
At December 28, 2008, we had 61
Company-operated restaurants, 18 franchise restaurants and one licensed
restaurant. As of such date, we operated and franchised 42 Casa Olé
restaurants in the State of Texas and four in the State of Louisiana; operated
five Monterey’s Tex-Mex Café restaurants in the State of Oklahoma; operated and
licensed 11 Monterey’s Little Mexico restaurants in the State of Texas; operated
three Tortuga Coastal Cantina restaurants in the State of Texas; operated three
Crazy Jose’s in the State of Texas; operated six Mission Burritos in the State
of Texas; and operated and franchised six La Señorita restaurants in
the State of Michigan. Our portfolio of restaurants at December 28,
2008 is summarized below:
|
Casa Olé
|
||||||
|
Company-operated
|
29 |
Leased
|
||||
|
Franchisee-operated
|
17 | |||||
|
Concept
total
|
46 | |||||
|
Monterey’s Tex-Mex Café
|
||||||
|
Company-operated
|
5 |
Leased
|
||||
|
Concept
total
|
5 | |||||
|
Monterey’s Little Mexico
|
||||||
|
Company-operated
|
10 |
Leased
|
||||
|
Licensee-operated
|
1 | |||||
|
Concept
total
|
11 | |||||
|
Tortuga Coastal Cantina
|
||||||
|
Company-operated
|
3 |
Leased
|
||||
|
Concept
total
|
3 | |||||
|
La Señorita
|
||||||
|
Company-operated
|
5 |
Leased
|
||||
|
Franchisee-operated
|
1 | |||||
|
Concept
total
|
6 | |||||
|
Crazy Jose’s
|
||||||
|
Company-operated
|
3 |
Leased
|
||||
|
Concept
total
|
3 | |||||
|
Mission Burrito
|
||||||
|
Company-operated
|
6 |
Leased
|
||||
|
System
total
|
80 | |||||
14
We are involved from time to time in
litigation relating to claims arising from our operations in the normal course
of business. Management believes that the ultimate disposition of all
uninsured matters resulting from existing litigation will not have a material
adverse effect on our business or financial position.
No matter was submitted to a vote of
the shareholders of the Company during the fourth quarter of the fiscal year
ended December 28, 2008.
PART
II
Market
Information. Our Common Stock trades on the Nasdaq Small Cap Market tier
of The Nasdaq Stock Market under the symbol “CASA.” At March 23,
2009, the closing price of our Common Stock as reported on the Nasdaq Small Cap
Market was $2.54. The following table sets forth the range of
quarterly high and low reported sale prices of the Company’s Common Stock on the
Nasdaq Small Cap Market during each of our fiscal quarters since the end of our
2006 fiscal year.
|
HIGH
|
LOW
|
|||||||
|
Fiscal
Year 2009:
|
||||||||
|
First
Quarter (through March 23, 2009)
|
$ | 2.57 | $ | 1.75 | ||||
|
Fiscal
Year 2008:
|
||||||||
|
First
Quarter (ended March 30, 2008)
|
$ | 6.51 | $ | 5.11 | ||||
|
Second
Quarter (ended June 29, 2008)
|
$ | 5.88 | $ | 3.35 | ||||
|
Third
Quarter (ended September 28, 2008)
|
$ | 5.65 | $ | 3.75 | ||||
|
Fourth
Quarter (ended December 28, 2008)
|
$ | 5.39 | $ | 1.36 | ||||
|
Fiscal
Year 2007:
|
||||||||
|
First
Quarter (ended April 1, 2007)
|
$ | 11.70 | $ | 9.32 | ||||
|
Second
Quarter (ended July 1, 2007)
|
$ | 9.60 | $ | 7.60 | ||||
|
Third
Quarter (ended September 30, 2007)
|
$ | 8.37 | $ | 6.36 | ||||
|
Fourth
Quarter (ended December 30, 2007)
|
$ | 7.57 | $ | 4.75 | ||||
15
Performance
Graph
The
following Performance Graph and related information shall not be deemed
“soliciting material” or to be “filed” with the SEC, nor shall such information
be incorporated by reference into any future filing under the Securities Act of
1933 or Securities Exchange Act of 1934, each as amended, except to the extent
that the Company specifically incorporates it by reference into such
filing.
The
following performance
graph compares the cumulative return of the Common Stock with that of the Nasdaq
Composite Index and the Standard & Poors Small Cap Restaurants Index,
assuming in each case an initial investment of $100 at December 31,
2003.
Holders.
As of March 23, 2009, we estimate that there were approximately 600
beneficial owners of our Common Stock, represented by approximately 50 holders
of record, and 3,251,641 shares of Common Stock outstanding.
Issuer
Purchases. We did not
repurchase any shares of our Common Stock during 2008.
Dividends. Since
our 1996 initial public offering, we have not paid cash dividends on our Common
Stock. We intend to retain earnings of the Company to support
operations, to finance expansion and pay down our debt, and do not intend to pay
cash dividends on the Common Stock for the foreseeable future. In
addition, our current credit agreement prohibits the payment of any cash
dividends. Any payment of cash dividends in the future will be at the
discretion of the Board of Directors and will depend upon such factors as
earnings levels, capital requirements, our financial condition, the ability to
do so under then-existing credit agreements and other factors deemed relevant by
the Board of Directors. See Management’s Discussion and Analysis of
Financial Condition and Results of Operation—Liquidity and Capital Resources)
contained in Item 7 to this Report.
16
The selected financial data set forth
below should be read in conjunction with and are qualified by reference to the
Consolidated Financial Statements and the related Notes thereto included in Item
8, hereof and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in Item 7, hereof.
|
Fiscal Years
|
||||||||||||||||||||
|
(In
thousands, except share and per share amounts)
|
||||||||||||||||||||
|
2004
|
2005
|
2006
|
2007
|
2008
|
||||||||||||||||
|
Income
Statement Data:
|
||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||
|
Restaurant
sales
|
$ | 73,499 | $ | 76,356 | $ | 80,805 | $ | 81,380 | $ | 80,915 | ||||||||||
|
Franchise
fees, royalties and other
|
753 | 694 | 825 | 710 | 637 | |||||||||||||||
|
Business
interruption
|
-- | 534 | 60 | -- | 318 | |||||||||||||||
| 74,252 | 77,584 | 81,690 | 82,090 | 81,870 | ||||||||||||||||
|
Costs
and expenses:
|
||||||||||||||||||||
|
Cost
of sales
|
20,311 | 20,757 | 22,259 | 23,366 | 23,651 | |||||||||||||||
|
Restaurant
operating expenses
|
40,414 | 42,433 | 45,318 | 46,550 | 46,696 | |||||||||||||||
|
General
and administrative
|
6,587 | 6,942 | 7,717 | 7,472 | 7,640 | |||||||||||||||
|
Depreciation
and amortization
|
2,114 | 2,653 | 3,102 | 3,417 | 3,568 | |||||||||||||||
|
Goodwill
impairment
|
-- | -- | -- | -- | 5,130 | |||||||||||||||
|
Impairment
and restaurant closure costs
|
322 | -- | 448 | 100 | 774 | |||||||||||||||
|
Gain
on involuntary disposals
|
-- | (472 | ) | (367 | ) | -- | (685 | ) | ||||||||||||
|
Loss
on sale of other property and equipment
|
180 | 368 | 30 | 208 | 206 | |||||||||||||||
| 69,928 | 72,681 | 78,507 | 81,113 | 86,980 | ||||||||||||||||
|
Operating
income (loss)
|
4,324 | 4,903 | 3,183 | 977 | (5,110 | ) | ||||||||||||||
|
Other
expense, net
|
(459 | ) | (404 | ) | (303 | ) | (443 | ) | (388 | ) | ||||||||||
|
Income
(loss) before income taxes
|
3,865 | 4,499 | 2,880 | 534 | (5,498 | ) | ||||||||||||||
|
Income
tax (expense) benefit
|
(1,280 | ) | (1,486 | ) | (901 | ) | (79 | ) | 1,478 | |||||||||||
|
Income
(loss) from continuing operations
|
2,585 | 3,013 | 1,979 | 455 | (4,020 | ) | ||||||||||||||
|
Discontinued
Operations
|
||||||||||||||||||||
|
Income
(loss) from discontinued operations, net of
taxes
|
(824 | ) | (696 | ) | (841 | ) | (106 | ) | 33 | |||||||||||
|
Net
income (loss)
|
$ | 1,761 | $ | 2,317 | $ | 1,138 | $ | 349 | $ | (3,987 | ) | |||||||||
|
2004
|
2005
|
2006
|
2007
|
2008
|
||||||||||||||||
|
Basic
income (loss) per share:
|
||||||||||||||||||||
|
Income
(loss) from continuing operations
|
$ | 0.76 | $ | 0.88 | $ | 0.58 | $ | 0.13 | $ | (1.23 | ) | |||||||||
|
Income
(loss) from discontinued operations
|
(0.24 | ) | (0.20 | ) | (0.25 | ) | (0.03 | ) | 0.01 | |||||||||||
|
Net
income (loss)
|
$ | 0.52 | $ | 0.68 | $ | 0.33 | $ | 0.10 | $ | (1.22 | ) | |||||||||
|
Diluted
income (loss) per share:
|
||||||||||||||||||||
|
Income
(loss) from continuing operations
|
$ | 0.71 | $ | 0.82 | $ | 0.56 | $ | 0.13 | $ | (1.23 | ) | |||||||||
|
Income
(loss) from discontinued operations
|
(0.23 | ) | (0.19 | ) | ( 0.24 | ) | ( 0.03 | ) | 0.01 | |||||||||||
|
Net
income (loss)
|
$ | 0.48 | $ | 0.63 | $ | 0.32 | $ | 0.10 | $ | (1.22 | ) | |||||||||
|
Weighted
average shares – Basic
|
3,388,489 | 3,415,806 | 3,402,207 | 3,339,280 | 3,255,503 | |||||||||||||||
|
Weighted
average shares – Diluted
|
3,634,849 | 3,700,876 | 3,521,587 | 3,430,276 | 3,255,503 | |||||||||||||||
|
As of the End of Fiscal
Years
|
||||||||||||||||||||
|
2004
|
2005
|
2006
|
2007
|
2008
|
||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Working
capital deficit
|
$ | (1,359 | ) | $ | (1,632 | ) | $ | (1,928 | ) | $ | (911 | ) | $ | (847 | ) | |||||
|
Total
assets
|
$ | 32,326 | $ | 33,137 | $ | 33,276 | $ | 34,356 | $ | 31,503 | ||||||||||
|
Long-term
debt, less current portion
|
$ | 6,000 | $ | 4,500 | $ | 3,800 | $ | 6,400 | $ | 7,500 | ||||||||||
|
Total
stockholders’ equity
|
$ | 17,868 | $ | 18,884 | $ | 20,573 | $ | 19,265 | $ | 15,486 | ||||||||||
17
Certain statements set forth below
under this caption constitute “forward-looking statements” within the meaning of
the Reform Act. See “Special Note Regarding Forward-Looking
Statements” above for additional factors relating to such
statements. The following discussion and analysis should be read in
conjunction with the other sections of this Annual report on Form 10-K,
including the Company’s Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Report. Additional information concerning
factors that could cause results to differ materially from those in any
forward-looking statements is contained under “Item 1A. Risk
Factors”.
General
Overview
The Company was organized under the
laws of the State of Texas in February 1996. Through our
subsidiaries, we operate and franchise 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 and La Señorita. We also operate
fast casual burrito restaurants under the name Mission Burrito. At
December 28, 2008 we operated 61 restaurants, franchised 18 restaurants and
licensed one restaurant in various communities in Texas, Louisiana, Oklahoma and
Michigan.
Our primary source of revenues is the
sale of food and beverages at Company-owned restaurants. We also
derive revenues from franchise fees, royalties and other franchise-related
activities. 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 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
operations and cash flows for fiscal years 2007 and 2006 have been adjusted to
remove the operations of closed restaurants, which have been reclassified as
discontinued operations. There were no discontinued operations in
2008.
Fiscal
Year
We have a 52/53 week fiscal year ending
on the Sunday nearest December 31. References in this Report to
fiscal 2008, 2007 and 2006 relate to the periods ended December 28, 2008,
December 30, 2007, and December 31, 2006, respectively. Fiscal years
2008, 2007 and 2006, presented herein consisted of 52 weeks.
Results
of Operations
Fiscal
Year 2008 Compared to Fiscal Year 2007 as Adjusted for Discontinued
Operations
Revenues. Our
revenues for the fiscal year ended December 28, 2008 were down $221,131 or 0.3%
to $81.9 million compared with fiscal year 2007. Restaurant sales for
fiscal year 2008 decreased $465,227 or 0.6% to $80.9 million compared
with fiscal year 2007. We lost approximately $1.15 million in
restaurant sales from the impact of Hurricanes Gustav and
Ike. Restaurant sales were also impacted by approximately $900,000
due to restaurant fires at two stores. The decrease also reflects the
sale of the Stafford, Texas Casa Olé restaurant in July of 2007. An
increase in same-store sales partially offset the above mentioned decreases,
along with the addition of four Mission Burrito fast casual
restaurants. For the 52-week period ended December 28, 2008,
excluding the lost sales from the hurricanes and fires from the same-store sales
comparison (only stores open in both periods are included in same-store sales
amounts), Company-owned same-restaurant sales increased approximately
1.5%. The same-store sales trend prior to the two hurricanes was up
0.3%. Franchised-owned same-restaurant sales, as reported by
franchisees, and reflecting the lost hurricane sales, increased approximately
1.2% over the same 52-week period ended December 28, 2008.
18
Franchise
fees, royalties and other for the fiscal year ended December 28, 2008 was down
$73,621 or 10.4% to $636,773 compared with fiscal year 2007 because other
miscellaneous revenues of a nonrecurring nature were realized in fiscal year
2007.
In fiscal
year 2008, we recorded $317,717 of business interruption proceeds related to
claims for two restaurant fires and Hurricane Ike store closures.
Costs and
Expenses. Costs of sales,
consisting of food, beverage, liquor, supplies and paper costs, increased 50
basis points as a percent of restaurant sales to 29.2% compared with 28.7% in
fiscal year 2007. The increase primarily reflects higher commodity
prices, especially cheese, produce, tortillas, supplies and paper costs, and
higher food discounts to customers. In March and again in September
of 2008, we raised menu prices at most of the concepts in an effort to offset
some of the rise in commodity costs.
Labor and
other related expenses increased as a percentage of restaurant sales 20 basis
points to 32.7% compared with 32.5% for fiscal year 2007. Higher
group health insurance expense impacted restaurant labor 10 basis
points. Hourly back-of-house labor and management costs increased 60
basis points, primarily due to lost sales from Hurricanes Gustav and Ike, while
hourly front-of-house labor improved 50 basis points during fiscal year
2008.
Restaurant operating expenses, which
primarily includes rent, property taxes, utilities, repair and maintenance,
liquor taxes, property insurance, general liability insurance and advertising,
increased in fiscal year 2008 as a percentage of restaurant sales 10 basis
points to 24.8% as compared with 24.7% in fiscal year 2007. The
increase primarily reflects a lower level of sales due to Hurricanes Gustav and
Ike. Electricity and natural gas costs also
increased. Favorable electricity contracts on approximately 60% of
our restaurants expired in August of 2008, resulting in higher electric costs
per kilowatt hour thereafter. We have signed short-term, three-month
contracts until such time management believes that a lower, longer term contract
can be obtained. The price of electricity in Texas is primarily tied
to the price of natural gas, which has been on a downward trend over the last
three months. These increases were partially offset by lower
advertising expense, as we pulled commercial advertising immediately after
Hurricane Ike and during the 2008 presidential campaign season.
General
and administrative expenses consist of expenses associated with corporate and
administrative functions that support restaurant operations. General
and administrative expenses increased 20 basis points as a percentage of total
sales to 9.3% compared with 9.1% for fiscal year 2007. The increase,
as a percentage of total revenue, reflects, in part, a lower level of sales due
to Hurricanes Gustav and Ike. Actual general and administrative expenses
increased $167,908 in fiscal year 2008 compared with fiscal year
2007. The increase primarily reflects higher relocation expense,
banking fees, legal expenses, consulting fees related to marketing for Mission
Burrito concept development, and consulting fees related to Sarbanes-Oxley
compliance, all of which were partially offset by reductions in general and
administrative salaries and bonuses, and lower manager-in-training
expenses.
Depreciation
and amortization expenses include the depreciation of fixed assets and the
amortization of other assets. Depreciation and amortization expense
increased as a percentage of total revenues 20 basis points to 4.4% in fiscal
year 2008 as compared with 4.2% in fiscal year 2007. Actual
depreciation and amortization expense increased $150,405 in fiscal year 2008
compared with fiscal year 2007. The increase reflects additional
depreciation expense for remodeled restaurants, new restaurants, and the
replacement of equipment and leasehold improvements in various existing
restaurants.
19
During fiscal year 2008, we incurred
$166,655 in pre-opening expenses related to the opening of four new Mission
Burrito restaurants. In fiscal year 2007, we spent $23,947 in
pre-opening expenses related to the re-opening of remodeled
restaurants.
Goodwill
Impairment. Goodwill represents the excess of costs over fair
value of assets of businesses acquired. We adopted the provisions of
SFAS No. 142, “Goodwill and
Other Intangible Assets”, as of January 1, 2002. Goodwill and
intangible assets acquired in a purchase business combination and determined to
have an indefinite useful life are not amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No.
142. At year end 2008, management determined that the fair value did
not exceed the carrying amount of the reporting unit and recorded an impairment
of approximately $5.1 million.
Impairment and
Restaurant Closure Costs. In accordance with Statement of
Financial Accounting Standards No. 144, “Accounting for the Impairments or
Disposal of Long-Lived Assets”, long-lived assets, such as property, plant and
equipment, and purchased intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to estimated undiscounted future cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset.
During
fiscal year 2008, we expensed $773,789 to impair the assets of one closed
restaurant, one under-performing restaurant earmarked for closure once its lease
expires in fiscal year 2009 and two other under-performing restaurants, and for
broker commissions related to two subleased restaurant sites in
Idaho. During fiscal year 2007, we expensed $99,978 to impair the
assets of two under-performing restaurants.
Gain on
Involuntary Disposals The consolidated statements of
operations for the period ended December 28, 2008 includes a separate line item
for gain on involuntary disposals which includes a gain of $685,137 resulting
primarily from the write-off of assets damaged by two restaurant fires, offset
by insurance proceeds for the replacement of assets. The first fire
occurred on February 19, 2008 at our Casa Olé restaurant located in Vidor, Texas
which re-opened July 7, 2008. The second fire occurred July 28, 2008
at our Casa Olé restaurant located in Pasadena, Texas which re-opened October
25, 2008. The gain on involuntary disposals was partially offset by
losses from Hurricanes Gustav and Ike. We recorded net losses of
$60,991 resulting primarily from spoiled inventory caused by temporary
electricity outages at 35 Company-owned restaurants after Hurricane Ike made
landfall on September 13, 2008.
During
fiscal year 2008, our insurers have paid $739,969 and we have recorded a
receivable of $241,757 related to property damage. We have spent
$1,167,418 as of December 28, 2008 for the replacement of assets related to the
two fires and the two hurricanes.
The
consolidated statements of operations for period ended December 28, 2008
includes a separate line item for revenues for business interruption insurance
proceeds as follows: $248,717 related to the two restaurant fires and
$69,000 related to the hurricanes.
Loss on Sale of
Other Property and Equipment. During fiscal year ended
December 28, 2008, we recorded losses of $206,447 primarily related to the
disposal of restaurant assets during the conversion of an existing restaurant
into a Mission Burrito restaurant.
Other Income
(Expense). Net expense decreased $54,950 to $387,851 in
fiscal year 2008 compared with a net expense of $442,801 in fiscal year
2007. Interest expense decreased $72,109 to $427,742 in fiscal year
2008 compared with interest expense of $499,851 in fiscal year 2007, reflecting
a decrease in interest rates.
Income Tax
Expense. Our effective tax rate from continuing operations for fiscal
year 2008 was a benefit of 26.89% as compared to 14.8% of expense for fiscal
year 2007. In fiscal year 2008, we had a pretax net loss from
continuing operations compared to pretax net income in fiscal year
2007. We recorded a receivable of approximately $128,000 in 2008 for
an expected income tax refund for carrying back the 2008 net operating loss to
an amended 2006 income tax return. The permanent differences in 2008
were approximately $1.5 million higher as compared to the permanent differences
in 2007 because of the goodwill impairment. Since the tax deduction
for goodwill is limited to its net tax value, the difference between
the net tax value and net book value contributed to the decrease in the
effective tax rate. Certain other permanent differences result in tax
credits. In fiscal year 2008, we were not able to use any of our
current year tax credits, but tax credits of $291,383 can be carried forward for
a twenty year period to reduce future federal regular income taxes.
20
Discontinued
Operations. During the fiscal year ended December 28, 2008, we
recorded closure income of $46,226, all of which is included in discontinued
operations. The closure income related to the revision by management
of the estimated repair and maintenance costs, utility costs and property taxes
associated with restaurants closed in prior years and actual repairs performed
in third quarter 2008. No stores were permanently closed in fiscal
year 2008.
Fiscal
Year 2007 Compared to Fiscal Year 2006 as Adjusted for Discontinued
Operations
Revenues. Our
revenues for the fiscal year ended December 30, 2007 were up $400,537 or 0.5% to
$82.1 million compared with fiscal year 2006. Restaurant sales for
fiscal year 2007 increased $574,879 or 0.7% to $81.4 million compared with
fiscal year 2006. The increase in restaurant sales reflects the full
year impact of one restaurant opened in fiscal year 2006 and the acquisition of
Mission Burrito (two restaurants), offset in part by a 1.8% decline in
same-restaurant sales.
Franchise
fees, royalties and other for the fiscal year ended December 30, 2007 was down
$114,721 or 13.9% to $710,394 compared with fiscal year 2006. Fiscal
year 2006 included the recognition of $80,000 in royalties due to a correction
of understated royalty income over the 16 previous
quarters. For the fiscal year 2007, franchised-owned same-store
sales, as reported by franchisees, increased approximately 2.97%.
In fiscal
year 2006, we recorded $59,621 of business interruption proceeds related to our
Hurricane Rita insurance claim.
Costs and
Expenses. Costs of sales,
consisting of food, beverage, liquor, supplies and paper costs, increased 120
basis points as a percent of restaurant sales to 28.7% compared with 27.5% in
fiscal year 2006. The increase primarily reflects higher commodity
prices, especially produce, cheese and dry goods. The increase also
reflects a one time adjustment of $100,000 to cost of sales to correct for
rebates we mistakenly recorded as our own that should have been paid to
franchisees.
Labor and
other related expenses increased as a percentage of restaurant sales 20 basis
points to 32.5% compared with 32.3% for fiscal year 2006. The
increase primarily reflects the lingering impact of the first quarter of fiscal
year 2007, which had labor cost of 33.7%, reflecting hourly labor that wasn’t
scheduled in proportion to declining same-restaurant sales. Since the
first quarter of 2007, labor cost improved to 32.0% in the second quarter, 32.5%
in the third quarter and 31.7% in the fourth quarter. Since the first
quarter, labor utilization improvements were approximately the same for all
three quarters. The second quarter benefited from a one time
adjustment to worker’s compensation insurance and unemployment tax adjustments
related to a policy audit and a refund due to excess funding from the State of
Texas Workforce Commission.
Restaurant operating expenses, which
primarily includes rent, property taxes, utilities, repair and maintenance,
liquor taxes, property insurance, general liability insurance and advertising,
increased in fiscal year 2007 as a percentage of restaurant sales 110 basis
points to 24.7% as compared with 23.6% in fiscal year 2006. The
increase primarily reflects higher property and casualty insurance expense,
which is directly attributable to severe weather associated with the United
States’ Gulf Coast region, higher repair and maintenance expense, rents and
advertising.
General
and administrative expenses consist of expenses associated with corporate and
administrative functions that support restaurant operations. General
and administrative expenses decreased 30 basis points as a percentage of total
sales to 9.1% compared with 9.4% for fiscal year 2006. Actual general
and administrative expenses decreased $245,030. The decrease
primarily reflects lower vested option expense which was partially offset by
higher legal expenses, employee finder fees and consulting fees related to
Sarbanes-Oxley required internal control documentation and testing.
Depreciation
and amortization expenses include the depreciation of fixed assets and the
amortization of other assets. Depreciation and amortization expense
increased as a percentage of total revenues 40 basis points to 4.2% in fiscal
year 2007 as compared with 3.8% in fiscal year 2006. Actual
depreciation and amortization expense increased $315,720 in fiscal year 2007
compared with fiscal year 2006. The increase reflects additional
depreciation expense for remodeled restaurants, new restaurants, and the
replacement of equipment and leasehold improvements in various existing
restaurants.
21
During fiscal year 2007, we incurred
$23,947 in pre-opening expenses related to the reopening of a remodeled
restaurant. In fiscal year 2006, we spent $108,847 in pre-opening
expenses related to the opening of two new restaurants.
Impairment
costs. In accordance with Statement of Financial Accounting
Standards No. 144, “Accounting
for the Impairments or Disposal of Long-Lived Assets”, long-lived assets,
such as property, plant, and equipment, and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset.
During
fiscal year 2007, we expensed $99,978 to impair the assets of two
under-performing restaurants. During fiscal year 2006, we expensed
$447,903 to impair the assets of two under-performing restaurants. We
also expensed real estate broker commissions related to the sale of one
subleased restaurant and for future broker commissions related to two other
subleased restaurants.
Gain on Disposal
of Assets – Hurricane Rita. On September 24, 2005, Hurricane
Rita hit the Gulf Coast area, affecting a number of our restaurants in that
region. We subsequently hired an insurance consulting firm to assist
management with the filing of our insurance claim. During the second
quarter of 2006, we finalized negotiations with our insurance carrier for the
hurricane insurance claim. Also, during fiscal year 2006, we
capitalized $511,236 in asset cost expenditures related to damaged property in
the consolidated balance sheets, and recognized in the consolidated statement of
operations $366,808 as a gain and $59,621 as business interruption revenue from
the insurance claim. As of December 31, 2006, we have collected all
receivables related to our hurricane insurance claim.
Loss on
Sale of Other Property and Equipment. During fiscal year
2007, we recorded a loss on the sale of assets of $207,517, reflecting the loss
from two remodeled restaurants and from the sale of one under-performing
restaurant to Mr. Forehand, Vice Chairman of the Company, who purchased the
assets of our Casa Olé restaurant located in Stafford, Texas for an agreed price
of 26,806 shares of our common stock. The stock was valued at $8.14
per share, which was the ten-day weighted average stock price as of June 12,
2007, for a total value of $218,205. The Stafford restaurant operates
under our uniform franchise agreement and is subject to a monthly royalty
fee.
During fiscal year 2006, we recorded a loss of $29,591 due to the disposition of
miscellaneous assets.
Other
Expense. Net expense increased $139,487 to $442,801 in
fiscal year 2007 compared with a net expense of $303,314 in fiscal year
2006. Interest expense increased $109,312 to $499,851 in fiscal year
2007 compared with interest expense of $390,539 in fiscal year 2006, reflecting
an increase in outstanding debt.
Income Tax
Expense. Our effective tax rate from continuing operations for fiscal
year 2007 was 14.8% as compared to 31.3% for fiscal year 2006. In
fiscal year 2007, we had significantly lower pretax income from continuing
operations compared to fiscal year 2006. In both years, the permanent
differences were approximately the same, resulting in the lower effective tax
rate in fiscal year 2007. Certain permanent differences result in tax
credits. In fiscal year 2007, we were not able to use all of our
current year tax credits, but tax credits of $268,386 can be carried forward for
an indefinite period to reduce future federal regular income taxes.
Discontinued
Operations. In fiscal year 2007, we closed one
under-performing restaurant in February, 2007 after its lease expired incurring
losses from discontinued operations, net of taxes, of $106,622 pursuant to
Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated
with Exit or Disposal Activities”. In fiscal year 2006, we closed four
underperforming restaurants incurring losses from discontinued operations, net
of taxes, of $840,804.
The
circumstances and testing leading to an impairment charge were determined in
accordance with SFAS No. 144 which requires that property and equipment be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be
recoverable. See “Notes to Consolidated Financial Statements,
Footnotes (1) ‘Description of Business and Summary of Significant Accounting
Policies’ and (10) ‘Related Party Transactions’.”
22
Liquidity
and Capital Resources
We
financed our capital expenditure requirements for the fiscal year ended December
28, 2008 primarily by drawing on our revolving line of credit and drawing on our
cash reserves. In fiscal year 2008, we had cash flow provided by
operating activities of approximately $3.0 million, compared with cash flow
provided by operating activities of approximately $3.7 million in fiscal year
2007 and cash flow provided by operating activities of approximately $5.0
million in fiscal year 2006. The decrease in cash flows from
operating activities reflects the decrease in operating income, primarily due to
the impact of Hurricanes Gustav and Ike during the third quarter of fiscal year
2008. During fiscal year 2008, we made a net draw of $1.1 million on
our line of credit, $1 million of which related directly to the impact of
Hurricanes Gustav and Ike. During fiscal year 2007, financing
activities provided $1.0 million, in which $3.1 million was drawn from our lines
of credit with $1.6 million used for the July 2007 purchase of 200,000 shares of
our common stock and $0.5 million used for the prepayment of the Beaumont-based
franchise restaurant seller note. As of December 28, 2008, we had a
working capital deficit of $846,905 compared with a working capital deficit of
$911,023 at December 30, 2007 and $1.9 million at December 31,
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.
Our
principal capital requirements are the funding of routine capital expenditures,
new restaurant development or acquisitions and remodeling of older
units. During fiscal year 2008, total cash used for capital
requirements was approximately $5.3 million, which included approximately $1.8
million spent for routine capital expenditures, approximately $2.2 million for
new restaurant development, approximately $0.9 million spent to reconstruct two
restaurants damaged by fires, approximately $0.3 million to reconstruct from
hurricane damage, and approximately $0.1 million spent on
remodels. We opened four Mission Burrito restaurants during fiscal
year 2008, for a total of six Mission Burrito restaurants. We closed one Mission
Burrito restaurant on January 24, 2009 after seven months of
operations. We attribute the closure to a poor real estate
location. We expect to begin construction on our seventh Mission
Burrito restaurant in the second quarter of fiscal year 2009. Due to
the recent economic downturn and the impact of Hurricanes Gustav and Ike, we do
not expect to enter into any further lease obligations to develop Mission
Burrito restaurants for fiscal year 2009. We plan to resume our
development of Mission Burrito in fiscal year 2010 and beyond.
In June
2007, the Company entered into a Credit Agreement (the “Wells Fargo Agreement”)
with Wells Fargo Bank, N.A. (“Wells Fargo”) in order to increase the revolving
loan amount available to us from $7.5 million under our then-existing credit
facility with Bank of America to $10 million. In connection
with the execution of the Wells Fargo Agreement, we prepaid and terminated our
then-existing credit facility with Bank of America. The Wells Fargo
Agreement provides for a revolving loan of up to $10 million, with an option to
increase the revolving loan by an additional $5 million, for a total of $15
million. The Wells Fargo Agreement terminates on June 29,
2010. At our option, the revolving loan bears an interest rate equal
to the Wells Fargo Base Rate plus a stipulated percentage or LIBOR plus a
stipulated percentage. Accordingly, the Company is impacted by
changes in the Base Rate and LIBOR. We are subject to a non-use fee
of 0.50% on the unused portion of the revolver from the date of the Wells Fargo
Agreement. The Wells Fargo Agreement also allows up to $2.0 million
in annual stock repurchases. We have pledged the stock of our
subsidiaries, our leasehold interests, our patents and trademarks and our
furniture, fixtures and equipment as collateral for our credit facility with
Wells Fargo. As of December 28, 2008, total debt outstanding under
the Wells Fargo Agreement was $7.5 million.
Under the Wells Fargo Agreement, we are
required to maintain certain minimum EBITDA levels, leverage ratios and fixed
charge coverage ratios. Due to the impact of Hurricanes Gustav and Ike in
the third quarter of fiscal year 2008, which resulted in approximately $1.15
million in lost sales, we increased our debt by $1.0 million to $7.5
million. As a result of the lost sales, we failed to satisfy our
minimum EBITDA covenant under the Wells Fargo agreement for the twelve month
period as of the third quarter of fiscal year 2008. We requested and
received from Wells Fargo a waiver to this covenant. We received an
amendment to the agreement effective as of December 28, 2008, eliminating the
minimum EBITDA requirement and adding limits on our growth capital
expenditures.
Although
the Wells Fargo Agreement permits us to implement a share repurchase program
under certain conditions, we currently have no repurchase program in
effect. Shares previously acquired are being held for general
corporate purposes, including the offset of the dilutive effect on shareholders
from the exercise of stock options.
Our management believes that with our
operating cash flow and our revolving line of credit under the Wells Fargo
Agreement, funds will be sufficient to meet operating requirements and to
finance routine capital expenditures and new restaurant growth through the next
12 months. Unless we violate a debt covenant, our credit facility
with Wells Fargo, as amended, is not subject to triggering events that would
cause the credit facility to become due sooner than the maturity dates described
in the previous paragraphs. Our future cash requirements and the
adequacy of available funds will depend on many factors,
including the pace of expansion, real estate markets, site locations and the
nature of the arrangements negotiated with landlords. We believe that our
current cash balances, together with anticipated cash flows from operations and
funds anticipated to be available from our credit facility, will be sufficient
to satisfy our working capital and capital expenditure requirements on a
short-term and long-term basis. Changes in our operating plans, acceleration of
our expansion plans, lower than anticipated sales, increased expenses, failure
to maintain financial covenants under our credit facility, financial and
non-financial covenant requirements or other events may cause us to seek
additional financing sooner than anticipated. Additional financing may not be
available on acceptable terms, or at all. Failure to obtain additional financing
as needed could have a material adverse effect on our business and results of
operations.
23
Contractual
Obligations and Commercial Commitments.
The following table summarizes our
total contractual cash obligations and commercial commitments as of December 28,
2008, including leases (in excess of one year) signed that are effective in
2009:
|
Payments
Due By Period
|
||||||||||||||||||||
|
Contractual
Obligation
|
Total
|
Less
than
1
Year
|
1
to 3
Years
|
3
to 5
Years
|
More
Than
5
Years
|
|||||||||||||||
|
Long-Term
Debt (principal only)
|
$ | 7,500,000 | $ | -- | $ | 7,500,000 | $ | -- | $ | -- | ||||||||||
|
Operating
Leases
|
43,686,115 | 5,849,011 | 10,835,971 | 9,157,555 | 17,843,578 | |||||||||||||||
|
Total
Contractual Cash Obligations
|
$ | 51,186,115 | $ | 5,849,011 | $ | 18,335,971 | $ | 9,157,555 | $ | 17,843,578 | ||||||||||
The contractual obligation table does
not include interest payments on our long-term debt with Wells Fargo Bank due to
the variable interest rates under our credit facility and the varying debt
balance during the year. The contractual interest rate for our credit
facility is either the prime rate or LIBOR base rate plus a stipulated
margin. See “Notes to Consolidated Financial Statements, ‘Footnote
(3) Long-Term Debt’” for balances and terms of our credit facility at December
28, 2008.
Related Parties.
We provide accounting and
administrative services for the Casa Olé Media and Production
Funds. The Casa Olé Media and Production Funds are not-for-profit,
unconsolidated entities used to collect money from company-owned and
franchise-owned restaurants to pay for the marketing of Casa Olé
restaurants. Each restaurant contributes an agreed upon percentage of
sales to the funds.
Critical Accounting
Policies.
Our Management’s Discussion and
Analysis of Financial Condition and Results of Operations discusses our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of these consolidated financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements, and the
reported amounts of revenues and expenses during the reporting
period.
Critical accounting policies are those
that we believe are most important to the portrayal of our financial condition
and results of operations and also require our most difficult, subjective or
complex judgments. Judgments or uncertainties regarding the application of these
policies may result in materially different amounts being reported under various
conditions or using different assumptions. We consider the following policies to
be the most critical in understanding the judgment that is involved in preparing
the consolidated financial statements.
Property
and Equipment.
We record all property and equipment at
cost less accumulated depreciation and we select useful lives that reflect the
actual economic lives of the underlying assets. We amortize leasehold
improvements over the shorter of the useful life of the asset or the related
lease term. We calculate depreciation using the straight-line method for
consolidated financial statement purposes. We capitalize improvements and
expense repairs and maintenance costs as incurred. We are often required to
exercise judgment in our decision whether to capitalize an asset or expense an
expenditure that is for maintenance and repairs. Our judgments may produce
materially different amounts of repair and maintenance or depreciation expense
if different assumptions were used.
24
We
periodically perform asset impairment analysis of property and equipment related
to our restaurant locations. We perform these tests when we experience a
"triggering" event such as a major change in a location's operating environment,
or other event that might impact our ability to recover our asset investment.
This process requires the use of estimates and assumptions which are subject to
a high degree of judgment. If these assumptions change in the future, we may be
required to record impairment charges for these assets. Also, we have a policy
of reviewing the financial operations of our restaurant locations on at least a
quarterly basis. Locations that do not meet expectations are identified and
monitored closely throughout the year. Primarily in the fourth
quarter, we review actual results and analyze budgets for the ensuing
year. If we deem that a location's results will continue to be below
expectations, we will evaluate alternatives for its continued
operation. At that time, we will perform an asset impairment test. If
we determine that the asset's carrying value exceeds the future undiscounted
cash flows, we will record an impairment charge to reduce the asset to its fair
value. Calculation of fair value requires significant estimates and judgments
which could vary significantly based on our assumptions. Upon an event such as a
formal decision for abandonment (restaurant closure), we may record additional
impairment charges. Any carryover basis of assets will be depreciated over the
respective remaining useful lives.
Goodwill.
Goodwill and other indefinite lived
assets resulted from our acquisition of franchisee-owned and third-party owned
restaurants. Our most significant acquisitions were completed in
1997, 1999, 2004 and 2006. Goodwill and other intangible assets with
indefinite lives are not subject to amortization. However, such
assets must be tested for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable and at least
annually. We completed the most recent impairment test as of December
2008, and determined that there were impairment losses related to
goodwill. In assessing the recoverability of goodwill and other
indefinite lived assets, market values and projections regarding estimated
future cash flows and other factors are used to determine the fair value of the
respective assets. The estimated future cash flows were projected
using significant assumptions, including future revenues and
expenses. If these estimates or related projections change in the
future, we may be required to record additional impairment charges for these
assets.
Leasing Activities.
We lease all of our restaurant
properties. At the inception of the lease, we evaluate each property and
classify the lease as an operating or capital lease in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 13, “Accounting for
Leases”. We exercise significant judgment in determining the
estimated fair value of the restaurant as well as the discount rate used to
discount the minimum future lease payments. The term used for this evaluation
includes renewal option periods only in instances in which the exercise of the
renewal option can reasonably be assured and failure to exercise such option
would result in an economic penalty. All of our restaurant leases are classified
as operating leases.
Our lease term used for straight-line
rent expense is calculated from the date we take possession of the leased
premises through the lease termination date. There is potential for variability
in the "rent holiday" period which begins on the possession date and ends on the
store opening date. Factors that may affect the length of the rent holiday
period generally include construction related delays. Extension of the rent
holiday period due to delays in restaurant opening will result in greater rent
expense during the rent holiday period.
We record contingent rent expense based
on a percentage of restaurant sales, which exceeds minimum base rent, over the
periods the liability is incurred. The contingent rent expense is recorded prior
to achievement of specified sales levels if achievement of such amounts is
considered probable and estimable.
Income Taxes.
We provide for income taxes based on
our estimate of federal and state tax liabilities. These estimates consider,
among other items, effective rates for state and local income taxes, allowable
tax credits for items such as taxes paid on reported tip income, estimates
related to depreciation and amortization expense allowable for tax purposes, and
the tax deductibility of certain other items. Our estimates are based
on the information available to us at the time we prepare the income tax
provisions. We generally file our annual income tax returns several months after
our fiscal year end. Income tax returns are subject to audit by federal, state,
and local governments, generally years after the returns are filed. These
returns could be subject to material adjustments or differing interpretations of
the tax laws.
Deferred income tax assets and
liabilities are recognized for the expected future income tax consequences of
carryforwards and temporary differences between the book and tax basis of assets
and liabilities. Valuation allowances are established for deferred tax assets
that are deemed more likely than not to be realized in the near term. We must
assess the likelihood
that we will be able to recover our deferred tax assets. If recovery is not
likely, we establish valuation allowances to offset any deferred tax asset
recorded. The valuation allowance is based on our estimates of future taxable
income in each jurisdiction in which we operate, tax planning strategies, and
the period over which our deferred tax assets will be recoverable. In the event
that actual results differ from these estimates, we may be unable to implement
certain tax planning strategies or adjust these estimates in future periods. As
we update our estimates, we may need to establish an additional valuation
allowance, which could have a material negative impact on our results of
operations or financial position, or we could reduce our valuation allowances,
which would have a favorable impact on our results of operations or financial
position.
25
Effective January 1, 2007, we adopted
Financial Accounting Standards Board (“FASB”) Interpretation Number 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”), which is intended to clarify the accounting for
income taxes prescribing a minimum recognition threshold for a tax position
before being recognized in the consolidated financial statements. FIN 48 also
provides guidance on derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. In accordance with the requirements of FIN 48, we
evaluated all tax years still subject to potential audit under state and federal
income tax law in reaching our accounting conclusions. As a result, we concluded
we did not have any unrecognized tax benefits or any additional tax liabilities
after applying FIN 48 as of the January 1, 2007 adoption date or for the fiscal
year ended December 30, 2007. The adoption of FIN 48 therefore had no
impact on our consolidated financial statements. See Note (4) to our
consolidated financial statements for further discussion.
Stock-Based Compensation.
We account for stock-based compensation
in accordance with the fair value recognition provisions of SFAS 123 (revised
2004), “Share-Based
Payment” ("SFAS 123R"). The fair value of each option award is estimated
on the date of grant using the Black-Scholes option pricing model and is
affected by assumptions regarding a number of highly complex and subjective
variables. These variables include, but are not limited to the actual and
projected employee and director stock option exercise behavior. The use of an
option pricing model also requires the use of a number of complex assumptions
including expected volatility, risk-free interest rate, expected dividends and
expected term. Expected volatility is based on our historical
volatility. We utilize historical data to estimate option exercise
and employee termination behavior within the valuation model. The risk-free
interest rate is based on the U.S. Treasury yield curve in effect at the time of
grant for the expected term of the option. SFAS 123R also requires us to
estimate forfeitures at the time of grant and revise these estimates, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. We estimate forfeitures based on our expectation of future experience
while considering our historical experience. Changes in the subjective
assumptions can materially affect the estimate of fair value of stock-based
compensation and consequently, the related amount recognized on the consolidated
statements of operations. We are also required to establish deferred
tax assets for expense relating to options that would be expected to generate a
tax deduction under their original terms. The recoverability of such assets are
dependent upon the actual deduction that may be available at exercise and can
further be impaired by either the expiration of the option or an overall
valuation reserve on deferred tax assets.
We believe the 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.
Impact
of Recently Issued Standards.
In October 2008, the FASB issued FASB
Staff Position (“FSP”) No. 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not
Active” This FSP clarifies the application of FASB Statement
No. 157, “Fair Value
Measurements”, when the market for a financial asset is
inactive. Specifically, FSP 157-3 clarifies how (1) management’s
internal assumptions should be considered in measuring fair value when
observable data are not present, (2) observable market information from an
inactive market should be taken into account, and (3) the use of broker quotes
or pricing services should be considered in assessing the relevance of
observable and unobservable data to measure fair value. FSP 157-3
shall be effective upon issuance, including prior periods for which financial
statements have not been issued. The implementation of FSP 157-3 is
not expected to have a material impact on the Company’s consolidated statement
of financial position, results of operations or cash flows.
In
June 2008, the FASB issued FASB FSP Emerging Issues Task Force
(EITF) No. 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities.” Under the FSP, unvested share-based payment awards that
contain rights to receive nonforfeitable dividends (whether paid or unpaid) are
participating securities, and should be included in the two-class method of
computing EPS. The FSP is effective for fiscal years beginning after
December 15, 2008, and interim periods within those years, and is not
expected to have a material impact on our earnings per share.
26
In May 2008, the FASB issued Statements
of Financial Accounting Standards (“SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS No. 162 identifies
the sources of accounting principles and the framework for selecting the
principles used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with Generally Accepted Accounting
Principles (“GAAP”) in the United States. This statement became
effective on November 15, 2008 which was 60 days following the SEC’s approval of
the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles” in September
2008. We
believe SFAS No. 162 will not have a material impact on our results of
operations and financial condition.
In April 2008, the FASB issued FSP FAS
142-3, “Determination of the
Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142, “Goodwill
and Other Intangible Assets” (“SFAS 142”). This change is
intended to improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS 141(R) and other
GAAP. The requirement for determining the useful lives must be
applied prospectively to intangible assets acquired after the effective date and
the disclosure requirements must be applied prospectively to all intangible
assets recognized as of, and subsequent to, the effective date. FSP
142-3 is effective for financial statements issued for fiscal years beginning
after December 15, 2008. We believe FSP FAS 142-3 will not have a
material impact on our results of operations and financial
condition.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”
(“SFAS No. 141(R)”), which is a revision of SFAS 141 “Business Combinations”.
SFAS No. 141(R) significantly changes the accounting for business
combinations. Under this statement, an acquiring entity will be required to
recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. Additionally,
SFAS No. 141(R) includes a substantial number of new disclosure
requirements. SFAS No. 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008.
Earlier adoption is prohibited. The adoption of this statement may
have an impact on the accounting for any acquisition the Company may make after
December 28, 2008.
In
December 2007, the FASB issued FASB Statement No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — An Amendment of ARB No. 51”
(“SFAS No. 160”), which is an amendment to ARB No. 51
“Consolidated Financial Statements”. SFAS No. 160 establishes new
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. Specifically, this
statement requires the recognition of a noncontrolling interest (minority
interest) as equity in the consolidated financial statements and separate from
the parent’s equity. The amount of net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income
statement. SFAS No. 160 clarifies that changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation are equity
transactions if the parent retains a controlling financial interest. In
addition, this statement requires that a parent recognize a gain or loss in net
income when a subsidiary is deconsolidated. Such gain or loss will be measured
using the fair value of the noncontrolling equity investment on the
deconsolidation date. SFAS No. 160 also includes expanded disclosure
requirements regarding the interests of the parent and its noncontrolling
interest. SFAS No. 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
Earlier adoption is prohibited. We are in the process of evaluating the impact
the adoption of SFAS No. 160 will have on our results of operations
and financial condition. Presently, there are no significant noncontrolling
interests in any of our consolidated subsidiaries. Therefore, we
currently believe the impact of SFAS No. 160, if any, will primarily depend on
the materiality of noncontrolling interests arising in future transactions to
which the consolidated financial statement presentation and disclosure
provisions of SFAS No. 160 will apply.
ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Effects
of Inflation
Components
of our operations subject to inflation include food, beverage, lease and labor
costs. Our leases require us to pay taxes, maintenance, repairs, insurance and
utilities, all of which are subject to inflationary increases. We believe
inflation has had a material impact on our results of operations in recent
years.
27
Commodity
Price Risk
We are
exposed to market price fluctuations in beef, chicken, pork, dairy products,
produce, tortillas and other food product prices. Given the historical
volatility of these product prices, this exposure can impact our food and
beverage costs. Because we typically set our menu prices in advance of these
product purchases, we cannot quickly take into account changing
costs. To the extent that we are unable to pass the increased costs
on to our guests through price increases, our results of operations would be
adversely affected. We currently do not use financial instruments to hedge our
risk to market price fluctuations in food product prices.
Interest
Rates
We do not
have or participate in any transactions involving derivative, financial and
commodity instruments. Our long-term debt bears interest at floating
market rates, based upon either the prime rate or LIBOR plus a stipulated
percentage, and therefore we experience changes in interest expense when market
interest rates change. Based on amounts outstanding at 2008 fiscal
year-end, a 1% change in interest rates would change annual interest expense by
approximately $75,000.
The Consolidated Financial Statements
and Supplementary Data are set forth herein commencing on page F-1 of this
Annual Report.
ITEM
9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL
DISCLOSURE
None.
ITEM
9A(T). CONTROLS AND
PROCEDURES
Evaluation of Disclosure Controls
and Procedures. We have established and maintain disclosure
controls and procedures that are designed to ensure that material information
relating to us and our subsidiaries required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can only provide reasonable assurance of achieving the
desired control objectives, and in reaching a reasonable level of assurance,
management was required to apply judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
We
carried out an evaluation, under the supervision and with the participation of
our management, including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by this report.
Based on that evaluation, the chief executive officer and chief financial
officer concluded that our disclosure controls and procedures were effective as
of the date of such evaluation to provide reasonable assurance that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified by the SEC's rules and forms.
Management's
Report on Internal Control over Financial Reporting. Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is a
process designed by, or under the supervision of, our chief executive and chief
financial officers and effected by our board of directors, management and other
personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of consolidated financial statements for external
purposes in accordance with generally accepted accounting principles in the
United States and includes those policies and procedures
that:
|
·
|
pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our
assets;
|
|
·
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of consolidated financial statements in accordance with
generally accepted accounting principles in the United States, and that
our receipts and expenditures are being made only in accordance with the
authorizations of our management and directors;
and
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on our consolidated financial
statements.
|
28
Because
of inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with policies
or procedures may deteriorate. However, these inherent limitations are known
features of the financial reporting process. It is possible to implement into
the process safeguards to reduce, though not eliminate, the risk that
misstatements are not prevented or detected on a timely
basis. Management is responsible for establishing and maintaining
adequate internal control over financial reporting for the
Company.
Management assessed the effectiveness
of our internal control over financial reporting as of December 28, 2008. In
making this assessment, management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission in Internal
Control-Integrated Framework. Based on this assessment, our management concluded
that, as of December 28, 2008, our internal control over financial reporting was
effective to provide reasonable assurance regarding the reliability of financial
reporting and the preparation and presentation of consolidated financial
statements for external purposes in accordance with generally accepted
accounting principles in the United States.
Change in Internal Control Over
Financial Reporting. There were no changes in our internal
control over financial reporting that occurred during our last fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
ITEM
9B. OTHER
INFORMATION
None.
|
|
PART
III
|
The information called for by this Item
10 is incorporated herein by reference to our definitive proxy statement with
respect to our Annual Meeting of Shareholders to be held on May 27, 2009, to be
filed with the SEC pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
ITEM
11. EXECUTIVE
COMPENSATION
The information called for by this Item
11 is incorporated herein by reference to our definitive proxy statement with
respect to our Annual Meeting of Shareholders to be held on May 27, 2009, to be
filed with the SEC pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
|
ITEM
12.
|
The information called for by this Item
12 is incorporated herein by reference to our definitive proxy statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this
report.
29
The information called for by this Item
13 is incorporated herein by reference to our definitive proxy statement with
respect to our Annual Meeting of Shareholders to be held on May 27, 2009, to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this
report.
ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
The information called for by this Item
14 is incorporated herein by reference to our definitive proxy statement with
respect to our Annual Meeting of Shareholders to be held on May 27, 2009, to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this
report.
PART
IV
|
(a)
|
The
following documents are filed as part of this
Report:
|
|
1.
|
Consolidated
Financial Statements:
|
The
Consolidated Financial Statements are listed in the index to Consolidated
Financial Statements on page F-1 of this Report.
2. Consolidated
Financial Statement Schedules are omitted because they are either not applicable
or not
material.
|
|
3.
|
The
following exhibits are filed, furnished or incorporated by reference as
exhibits to this Report as required by Item 601 of
Regulation S-K. The exhibits designated with a cross are management
contracts and compensatory plans and arrangements required to be filed as
exhibits to this report.
|
Exhibits:
|
3.1
|
Articles
of Incorporation of the Company, as amended (incorporated by reference to
the corresponding Exhibit number of the Company’s Form 8-K filed on May
25, 1999 with the Securities and Exchange Commission).
|
|
‡3.2
|
Bylaws
of the Company.
|
|
‡4.1
|
Specimen
of Certificate of Common Stock of the Company.
|
|
4.2
|
Articles
of Incorporation of the Company (see 3.1 above).
|
|
‡4.3
|
Bylaws
of the Company (see 3.2 above).
|
|
10.2
|
Indemnity
Agreement by and between the Company and Louis P. Neeb dated as of
April 10, 1996 (incorporated by reference to Exhibit 10.4 of the
Company’s Form S-1 Registration Statement filed under the Securities Act
of 1933, dated April 24, 1996, with the Securities and Exchange Commission
(Registration Number 333-1678) (the “1996 Form
S-1”)).
|
30
|
10.3
|
Indemnity
Agreement by and between the Company and Larry N. Forehand dated as
of April 10, 1996 (incorporated by reference to Exhibit 10.5 of the
1996 Form S-1).
|
|
10.4
|
Indemnity
Agreement by and between the Company and Michael D. Domec dated as of
April 10, 1996 (incorporated by reference to Exhibit 10.8 of the 1996
Form S-1).
|
|
10.5
|
Indemnity
Agreement by and between the Company and J. J. Fitzsimmons dated as of
April 10, 1996 (incorporated by reference to Exhibit 10.10 of the
1996 Form S-1).
|
|
10.6
|
Form
of the Company's Multi-Unit Development Agreement (incorporated by
reference to Exhibit 10.14 of the 1996 Form S-1).
|
|
10.7
|
Form
of the Company's Franchise Agreement (incorporated by reference to Exhibit
10.15 of the 1996 Form S-1).
|
|
†10.8
|
1996
Long Term Incentive Plan (incorporated by reference to Exhibit 10.16 of
the 1996 Form S-1).
|
|
†10.9
|
Mexican
Restaurants, Inc. 2005 Long Term Incentive Plan (incorporated by reference
to Exhibit 99.1 of the Company’s Form S-8 filed December 1, 2005 with the
Securities and Exchange Commission).
|
|
†10.10
|
Stock
Option Plan for Non-Employee Directors (incorporated by reference to
Exhibit 10.17 of the 1996 Form S-1).
|
|
10.11
|
Indemnification
letter agreement by Larry N. Forehand dated April 10, 1996
(incorporated by reference to Exhibit 10.35 of the 1996 Form
S-1).
|
|
†10.12
|
1996
Manager’s Stock Option Plan (incorporated by reference to Exhibit 99.2 of
the Company’s Form S-8 Registration Statement filed on February 24, 1997
with the Securities and Exchange
Commission).
|
|
†10.13
|
Employment
Agreement by and between the Company and Andrew J. Dennard dated May 20,
1997 (incorporated by reference to Exhibit 10.45 of the Company’s Form
10-K Annual Report filed on March 30, 1998 with the Securities and
Exchange Commission).
|
|
†10.14
|
Performance
Unit Agreement by and between Mexican Restaurants, Inc. and Andrew Dennard
dated August 16, 2005 (incorporated by reference to Exhibit 10.25 to the
Company’s Form 10-K Annual Report filed on March 30, 2006 with the
Securities and Exchange Commission).
|
|
†10.15
|
Performance
Unit Agreement by and between Mexican Restaurants, Inc. and Louis P. Neeb
dated August 16, 2005 (incorporated by reference to Exhibit 10.27 to the
Company’s Form 10-K Annual Report filed on March 30, 2006 with the
Securities and Exchange Commission).
|
|
10.16
|
Credit
Agreement between Mexican Restaurants, Inc. and Wells Fargo Bank, N.A.
dated June 29, 2007 (incorporated by reference to Exhibit 10.1 to the
Company’s Form 8-K filed on July 6, 2007 with the Securities and Exchange
Commission).
|
|
10.17
|
Stock
Purchase Agreement between Mexican Restaurants, Inc. and Forehand Family
Partnership, Ltd. dated June 13, 2007 (incorporated by reference to
Exhibit 10.2 to the Company’s Form 10-Q filed on August 14, 2007 with the
Securities and Exchange Commission).
|
|
|
|
|
|
|
|
*24.1
|
Power
of Attorney (included on the signature page to this Form
10-K).
|
|
|
|
|
|
|
|
|
|
|
_____
|
|
|
*
|
Filed
herewith.
|
|
‡
|
Incorporated
by reference to corresponding exhibit number of the Company’s Form S-1
Registration Statement under the Securities Act of 1933, dated April 24,
1996, with the Securities and Exchange Commission (Registration Number
333-1678) (the “1996 Form S-1”).
|
|
†
|
Management
contract or compensatory plan or arrangement.
|
|
#
|
Furnished
herewith.
|
31
Pursuant to the requirements of Section
13 or 15(d) 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 on March 26, 2009.
|
MEXICAN
RESTAURANTS, INC.
|
|
By: /s/ Curt
Glowacki
|
|
Curt
Glowacki,
|
|
President
and Chief Executive Officer
|
POWER
OF ATTORNEY
KNOW ALL MEN AND WOMEN BY THESE
PRESENTS, that each person whose signature appears below constitutes and
appoints Louis P. Neeb and Andrew Dennard, and each of them, such individual’s
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, for such individual and in his or her name, place and stead,
in any and all capacities, to sign any and all amendments to this Form 10-K
under the Securities Exchange Act of 1934, and to file the same, with all
exhibits thereto, and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises as fully to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the
Securities Exchange Act of 1934, this Report has been signed by the following
persons in the capacities and on the dates indicated.
|
Signatures
|
Title
|
Date
|
|
/s/
Louis P. Neeb
|
Chairman
of the Board of Directors
|
March
26, 2009
|
|
Louis
P. Neeb
|
||
|
/s/
Larry N. Forehand
|
Founder
and Vice Chairman of the Board of Directors
|
March
26, 2009
|
|
Larry
N. Forehand
|
||
|
/s/
Curt Glowacki
|
President
and Chief Executive Officer and Director
|
March
26, 2009
|
|
Curt
Glowacki
|
(Principal
Executive Officer)
|
|
|
/s/
Andrew J. Dennard
|
Executive
Vice President and Chief Financial Officer
|
March
26, 2009
|
|
Andrew
J. Dennard
|
(Principal
Financial and Accounting Officer)
|
|
|
/s/
Cara Denver
|
Director
|
March
26, 2009
|
|
Cara
Denver
|
||
|
/s/
Michael D. Domec
|
Director
|
March
26, 2009
|
|
Michael
D. Domec
|
||
|
/s/
J. J. Fitzsimmons
|
Director
|
March
26, 2009
|
|
J.
J. Fitzsimmons
|
||
|
/s/
Lloyd Fritzmeier
|
Director
|
March
26, 2009
|
|
Lloyd
Fritzmeier
|
||
|
/s/
Thomas E. Martin
|
Director
|
March
26, 2009
|
|
Thomas
E. Martin
|
32
MEXICAN
RESTAURANTS, INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
|
F-2
|
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
|
|
F-6
|
|
|
F-7
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The Board
of Directors and Stockholders
Mexican
Restaurants, Inc. and Subsidiaries:
We have audited the accompanying
consolidated balance sheets of Mexican Restaurants, Inc. and subsidiaries (the
“Company”) as of December 28, 2008 and December 30, 2007, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 28, 2008. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
We were not engaged to examine
management’s assertion about the effectiveness of Mexican Restaurants, Inc.’s
internal control over financial reporting as of December 28, 2008 included in
the accompanying Form 10-K and, accordingly, we do not express an opinion
thereon.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Mexican
Restaurants, Inc. and subsidiaries as of December 28, 2008 and December 30,
2007, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 28, 2008, in conformity
with accounting principles generally accepted in the United States of
America.
/s/ UHY
LLP
Houston,
Texas
March 26,
2009
F-2
MEXICAN
RESTAURANTS, INC. AND SUBSIDIARIES
December
30, 2007 and December 28, 2008
|
Fiscal
Years
|
||||||||
|
ASSETS
|
2007
|
2008
|
||||||
|
Current
assets:
|
||||||||
|
Cash
|
$ | 1,154,629 | $ | 891,206 | ||||
|
Royalties
receivable
|
61,233 | 144,196 | ||||||
|
Other
receivables
|
832,790 | 1,229,907 | ||||||
|
Inventory
|
750,516 | 769,543 | ||||||
|
Income
taxes receivable
|
372,576 | 194,856 | ||||||
|
Prepaid
expenses and other current assets
|
975,195 | 979,268 | ||||||
|
Total
current assets
|
4,146,939 | 4,208,976 | ||||||
|
Property
and equipment, net
|
17,852,936 | 18,626,554 | ||||||
|
Goodwill
|
11,403,805 | 6,273,705 | ||||||
|
Deferred
tax assets
|
439,985 | 1,976,427 | ||||||
|
Other
assets
|
512,261 | 417,503 | ||||||
|
Total
Assets
|
$ | 34,355,926 | $ | 31,503,165 | ||||
|
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 2,181,873 | $ | 2,505,587 | ||||
|
Accrued
sales and liquor taxes
|
130,941 | 145,562 | ||||||
|
Accrued
payroll and taxes
|
1,135,326 | 1,032,934 | ||||||
|
Accrued
expenses
|
1,461,141 | 1,300,607 | ||||||
|
Current
portion of liabilities associated with leasing and exit
activities
|
148,681 | 71,191 | ||||||
|
Total
current liabilities
|
5,057,962 | 5,055,881 | ||||||
|
Long-term
debt
|
6,400,000 | 7,500,000 | ||||||
|
Liabilities
associated with leasing and exit activities, net of current
portion
|
577,582 | 533,487 | ||||||
|
Deferred
gain
|
1,144,785 | 936,642 | ||||||
|
Other
liabilities
|
1,910,270 | 1,990,879 | ||||||
|
Total
liabilities
|
15,090,599 | 16,016,889 | ||||||
|
Commitments
and Contingencies
|
||||||||
|
Stockholders'
equity:
|
||||||||
|
Preferred
stock, $0.01 par value, 1,000,000 shares authorized, none
issued
|
-- | -- | ||||||
|
Common
stock, $0.01 par value, 20,000,000 shares authorized, 4,732,705
shares issued,
3,247,016 and 3,251,641 shares outstanding at 12/30/07 and
12/28/08, respectively
|
47,327 | 47,327 | ||||||
|
Additional
paid-in capital
|
19,275,067 | 19,442,049 | ||||||
|
Retained
earnings
|
13,107,896 | 9,120,885 | ||||||
|
Treasury
stock at cost, 1,485,689 and 1,481,064 common shares, at
12/30/07 and
12/28/08, respectively
|
(13,164,963 | ) | (13,123,985 | ) | ||||
|
Total
stockholders’ equity
|
19,265,327 | 15,486,276 | ||||||
|
Total
Liabilities and Stockholders’ Equity
|
$ | 34,355,926 | $ | 31,503,165 | ||||
See accompanying notes to
consolidated financial statements.
F-3
MEXICAN
RESTAURANTS, INC. AND SUBSIDIARIES
For
the fiscal years ended December 31, 2006, December 30, 2007
and
December 28, 2008
|
Fiscal
Years
|
||||||||||||
|
2006
|
2007
|
2008
|
||||||||||
|
Revenues:
Restaurant
sales
|
$ | 80,804,886 | $ | 81,379,765 | $ | 80,914,538 | ||||||
|
Franchise
fees, royalties and other
|
825,115 | 710,394 | 636,773 | |||||||||
|
Business
interruption
|
59,621 | -- | 317,717 | |||||||||
| 81,689,622 | 82,090,159 | 81,869,028 | ||||||||||
|
Costs
and expenses:
|
||||||||||||
|
Cost
of sales
|
22,259,123 | 23,366,381 | 23,651,208 | |||||||||
|
Labor
|
26,133,108 | 26,428,606 | 26,482,900 | |||||||||
|
Restaurant
operating expenses
|
19,076,539 | 20,097,179 | 20,046,135 | |||||||||
|
General
and administrative
|
7,716,786 | 7,471,756 | 7,639,665 | |||||||||
|
Depreciation
and amortization
|
3,101,628 | 3,417,348 | 3,567,753 | |||||||||
|
Pre-opening
costs
|
108,847 | 23,947 | 166,655 | |||||||||
|
Goodwill
impairment
|
-- | -- | 5,130,100 | |||||||||
|
Other
impairment and restaurant closure costs
|
447,903 | 99,978 | 773,789 | |||||||||
|
Gain
on involuntary disposals
|
(366,808 | ) | -- | (685,137 | ) | |||||||
|
Loss
on sale of other property and equipment
|
29,591 | 207,517 | 206,447 | |||||||||
| 78,506,717 | 81,112,712 | 86,979,515 | ||||||||||
|
|
|
|
||||||||||
|
Operating
income (loss)
|
3,182,905 | 977,447 | (5,110,487 | ) | ||||||||
|
Other
income (expense):
|
||||||||||||
|
Interest
income
|
6,239 | 10,715 | 5,260 | |||||||||
|
Interest
expense
|
(390,539 | ) | (499,851 | ) | (427,742 | ) | ||||||
|
Other,
net
|
80,986 | 46,335 | 34,631 | |||||||||
| (303,314 | ) | (442,801 | ) | (387,851 | ) | |||||||
|
Income
(loss) from continuing operations before income taxes
|
2,879,591 | 534,646 | (5,498,338 | ) | ||||||||
|
Income
tax (expense) benefit
|
(900,453 | ) | (79,250 | ) | 1,478,367 | |||||||
|
Income
(loss) from continuing operations
|
1,979,138 | 455,396 | (4,019,971 | ) | ||||||||
|
Discontinued
operations:
|
||||||||||||
|
Income
(loss) from discontinued operations
|
(401,603 | ) | 3,090 | -- | ||||||||
|
Restaurant
closure income (expense)
|
(928,053 | ) | (175,796 | ) | 46,226 | |||||||
|
Gain
(loss) on sale of assets
|
(13,140 | ) | 3,412 | -- | ||||||||
|
Income
(loss) from discontinued operations before income taxes
|
(1,342,796 | ) | (169,294 | ) | 46,226 | |||||||
|
Income
tax (expense) benefit
|
501,992 | 62,672 | (13,266 | ) | ||||||||
|
Income
(loss) from discontinued operations
|
(840,804 | ) | (106,622 | ) | 32,960 | |||||||
|
Net
income (loss)
|
$ | 1,138,334 | $ | 348,774 | $ | (3,987,011 | ) | |||||
|
Basic
income (loss) per share:
|
||||||||||||
|
Income
(loss) from continuing operations
|
$ | 0.58 | $ | 0.13 | $ | (1.23 | ) | |||||
|
Income
(loss) from discontinued operations
|
(0.25 | ) | (0.03 | ) | 0.01 | |||||||
|
Net
income (loss)
|
$ | 0.33 | $ | 0.10 | $ | (1.22 | ) | |||||
|
Diluted
income (loss) per share:
|
||||||||||||
|
Income
(loss) from continuing operations
|
$ | 0.56 | $ | 0.13 | $ | (1.23 | ) | |||||
|
Income
(loss) from discontinued operations
|
(0.24 | ) | (0.03 | ) | 0.01 | |||||||
|
Net
income (loss)
|
$ | 0.32 | $ | 0.10 | $ | (1.22 | ) | |||||
|
Weighted
average number of shares (basic)
|
3,402,207 | 3,339,280 | 3,255,503 | |||||||||
|
Weighted
average number of shares (diluted)
|
3,521,587 | 3,430,276 | 3,255,503 | |||||||||
See accompanying notes to consolidated
financial statements.
F-4
MEXICAN
RESTAURANTS, INC. AND SUBSIDIARIES
For
the fiscal years ended
December
31, 2006, December 30, 2007
and
December 28, 2008
|
Common
Stock
|
Additional
Paid-in
Capital
|
Retained
Earnings
|
Treasury
Stock
|
Total
Stockholders’
Equity
|
||||||||||||||||
|
Balances
at January 1, 2006
|
$ | 47,327 | $ | 19,406,139 | $ | 11,620,788 | $ | (12,190,708 | ) | $ | 18,883,546 | |||||||||
|
Exercise
of Stock Options Through Issuance
of Treasury Shares
|
-- | (472,703 | ) | -- | 1,177,366 | 704,663 | ||||||||||||||
|
Repurchase
of shares
|
-- | -- | -- | (261,730 | ) | (261,730 | ) | |||||||||||||
|
Stock
based Compensation Expense
|
-- | 63,508 | -- | -- | 63,508 | |||||||||||||||
|
Excess
Tax Benefit-Options Exercised
|
-- | 44,923 | -- | -- | 44,923 | |||||||||||||||
|
Net
income
|
-- | -- | 1,138,334 | -- | 1,138,334 | |||||||||||||||
|
Balances
at December 31, 2006
|
47,327 | 19,041,867 | 12,759,122 | (11,275,072 | ) | 20,573,244 | ||||||||||||||
|
Exercise
of Stock Options Through Issuance
of Treasury Shares
|
-- | (65,785 | ) | -- | 119,610 | 53,825 | ||||||||||||||
|
Repurchase
of shares
|
-- | 163,296 | -- | (2,009,501 | ) | (1,846,205 | ) | |||||||||||||
|
Stock
based Compensation Expense
|
-- | 141,347 | -- | -- | 141,347 | |||||||||||||||
|
Tax
Shortfall-Options Exercised
|
-- | (5,658 | ) | -- | -- | (5,658 | ) | |||||||||||||
|
Net
income
|
-- | -- | 348,774 | -- | 348,774 | |||||||||||||||
|
Balances
at December 30, 2007
|
47,327 | 19,275,067 | 13,107,896 | (13,164,963 | ) | 19,265,327 | ||||||||||||||
|
Exercise
of Stock Options Through Issuance
of Treasury Shares
|
-- | (25,223 | ) | -- | 40,978 | 15,755 | ||||||||||||||
|
Stock
based Compensation Expense
|
-- | 191,720 | -- | -- | 191,720 | |||||||||||||||
|
Excess
Tax Benefit-Options Exercised
|
-- | 485 | -- | -- | 485 | |||||||||||||||
|
Net
loss
|
-- | -- | (3,987,011 | ) | -- | (3,987,011 | ) | |||||||||||||
|
Balances
at December 28, 2008
|
$ | 47,327 | $ | 19,442,049 | $ | 9,120,885 | $ | (13,123,985 | ) | $ | 15,486,276 | |||||||||
See
accompanying notes to consolidated financial statements.
F-5
MEXICAN
RESTAURANTS, INC. AND SUBSIDIARIES
For
the fiscal years ended December 31, 2006, December 30, 2007 and December 28,
2008
|
Fiscal
Years
|
||||||||||||
|
2006
|
2007
|
2008
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income (loss)
|
$ | 1,138,334 | $ | 348,774 | $ | (3,987,011 | ) | |||||
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
3,101,628 | 3,417,348 | 3,567,753 | |||||||||
|
Deferred
gain amortization
|
(208,143 | ) | (208,142 | ) | (208,143 | ) | ||||||
|
Income
(loss) from discontinued operations
|
840,804 | 106,622 | (32,960 | ) | ||||||||
|
Goodwill
impairment
|
-- | -- | 5,130,100 | |||||||||
|
Other
impairment and restaurant closure costs
|
447,903 | 99,978 | 773,789 | |||||||||
|
Gain
on involuntary disposals
|
(366,808 | ) | -- | (685,137 | ) | |||||||
|
Loss
on sale of other property and equipment
|
29,591 | 207,517 | 206,447 | |||||||||
|
Stock
based compensation expense
|
63,508 | 141,347 | 191,720 | |||||||||
|
Excess
tax expense (benefit)--stock based compensation expense
|
(44,923 | ) | 5,658 | (485 | ) | |||||||
|
Deferred
income tax expense (benefit)
|
19,931 | (233,546 | ) | (1,445,240 | ) | |||||||