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| CASA > SEC Filings for CASA > Form 10-Q on 12-Nov-2008 | All Recent SEC Filings |
12-Nov-2008
Quarterly Report
Special Note Regarding Forward-Looking Statements
This Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: national, regional or local economic and real estate conditions; inflation; increased food, labor and benefit costs; growth strategy; dependence on executive officers; geographic concentration; increasing susceptibility to adverse conditions in the region; changes in consumer tastes and eating and discretionary spending habits; the risk of food-borne illness; demographic trends; inclement weather; traffic patterns; the type, number and location of competing restaurants; the availability of experienced management and hourly employees; seasonality and the timing of new restaurant openings; changes in governmental regulations; dram shop exposure; and other factors not yet experienced by the Company. The use of words such as "believes", "anticipates", "expects", "intends" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company's most recently filed Annual Report and Form 10-K that attempt to advise readers of the risks and factors that may affect the Company's business. The Company undertakes no obligation to update any such statements or publicly announce any updates or revisions to any of the forward-looking statements contained herein, to reflect any change in its expectations with regard thereto or any change in events, conditions, circumstances or assumptions underlying such statements.
General
The Company operates and franchises Mexican-theme restaurants featuring various elements associated with the casual dining experience under the names Casa Olé, Monterey's Tex-Mex Café, Monterey's Little Mexico, Tortuga Coastal Cantina, Crazy Jose's and La Señorita. The Company also operates a burrito fast casual concept under the name Mission Burrito. At September 28, 2008 the Company operated 59 restaurants, franchised 18 restaurants and licensed one restaurant in various communities in Texas, Louisiana, Oklahoma and Michigan.
The Company's primary source of revenues is the sale of food and beverages at Company-owned restaurants. The Company also derives revenues from franchise fees, royalties and other franchise-related activities with respect to its franchised restaurants. Franchise fee revenue from an individual franchise sale is recognized when all services relating to the sale have been performed and the restaurant has commenced operation. Initial franchise fees relating to area franchise sales are recognized ratably in proportion to the services that are required to be performed pursuant to the area franchise or development agreements and proportionately as the restaurants within the area are opened.
Since its inception as a public company in 1996, the Company has primarily grown through the acquisition of other Mexican food restaurant companies.
Results of Operations
Revenues. During the third quarter ended September 28, 2008, the Company's operating results were impacted by two hurricanes and two restaurant fires; the total impact resulted in the temporary closure of 36 out of 59 restaurants during the third quarter. As a result, the Company experienced significant inventory, labor and operating costs without any corresponding revenue. The amount of recovery from insurance for these casualty losses cannot be estimated as of the Company's filing date for its form 10-Q quarterly report. As of October 25, 2008, all of the affected restaurants have been reopened.
The Company's revenues for the third quarter of fiscal year 2008 decreased $929,813 or 4.5% to $20.0 million compared with $20.9 million for the same quarter in fiscal year 2007. Restaurant sales for third quarter 2008 decreased by $1.0 million or 5.1% to $19.7 million compared with $20.7 million for the third quarter of fiscal year 2007. The decrease in restaurant revenues primarily reflects sales lost from the impact of Hurricanes Gustav and Ike. The Company estimates that it lost $750,000 in sales as a result of the two hurricanes. Further, restaurant sales were impacted approximately $300,000 by fires at the Vidor and Pasadena, Texas restaurant locations. For the third quarter ended September 28, 2008, excluding the lost hurricane and fire sales from same-store sales comparisons (only stores open in both periods are included in same-store sales amounts), Company-owned same-restaurant sales increased approximately 1.4%, the fifth straight quarter of positive same-store sales. Same-store sales prior to the hurricane were declining at a rate of 1.1%. Franchised-owned same-restaurant sales, as reported by franchisees, and reflecting the lost hurricane sales, decreased approximately 3.9% over the same quarter in fiscal 2007.
The consolidated statements of operations for the 13-week period ended September 28, 2008 includes revenues from business interruption insurance proceeds for $127,525 related to the fire at the Company's Casa Olé restaurant located in Pasadena, Texas.
The consolidated statements of operations for the 39-week periods ended September 28, 2008 includes revenues from business interruption insurance proceeds for $248,717 related to the fires at the Company's Vidor, Texas ($121,192) and Pasadena, Texas ($127,525) locations.
Costs and Expenses. Costs of sales, consisting of food, beverage, liquor, supplies and paper costs, increased as a percent of restaurant sales 80 basis points to 29.4% compared with 28.6% in the third quarter of fiscal year 2007. The increase primarily reflects higher commodity prices, especially cheese, produce, tortillas, supplies and paper costs, and higher food discounts to customers.
On a year-to-date basis, costs of sales increased as a percent of restaurant sales 60 basis points to 29.1% compared with 28.5% for the same 39-week period one year ago. 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, the Company 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 60 basis points to 33.1% as compared with 32.5% in the third quarter of fiscal year 2007. Due to the decline in sales caused by Hurricanes Gustav and Ike, the percent of fixed management costs to sales increased which was offset in part by a small improvement in hourly labor.
On a year-to-date basis, labor and other related expenses decreased as a percentage of restaurant sales 10 basis points to 32.6% compared with 32.7% for the 39-week period one year ago. The decrease reflects the efficiencies gained in managing front of the house hourly labor (especially in the first and second quarters) and reflects a net 12 basis point decrease in group health insurance cost (in the first quarter of fiscal year 2008, a one-time credit adjustment to group health insurance related to improved program coverage, partially offset by increased claims during the second quarter of fiscal year 2008), all partially offset by higher management and back of the house hourly cost.
Restaurant operating expenses, which primarily include rent, property taxes, utilities, repair and maintenance, liquor taxes, property insurance, general liability insurance and advertising, increased as a percentage of restaurant sales 190 basis points to 26.5% as compared with 24.6% in the third quarter of 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. Electricity contracts on approximately 60% of the Company's restaurants expired in August of 2008, resulting in higher electric costs per kilowatt hour thereafter. The Company has 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.
General and administrative expenses consist of expenses associated with corporate and administrative functions that support restaurant operations. As a percentage of total revenue, general and administrative expenses increased 40 basis points to 9.3% for the third quarter of fiscal year 2008 as compared with 8.9% for the third quarter of fiscal year 2007. In absolute dollars, general and administrative costs were $4,416 higher in the third quarter of fiscal year 2008 compared with the third quarter of fiscal year 2007. General and administrative expenses as a percentage of total revenues increased due to the decline in sales caused by Hurricanes Gustav and Ike.
On a year-to-date basis, general and administrative expenses increased 30 basis points to 9.4% compared with 9.1% for the 39-week period of fiscal 2007. In absolute dollars, general and administrative costs were $83,525 higher in the 39-week period of fiscal 2008 compared with the 39-week period of fiscal 2007. The increase primarily reflects higher relocation expense, banking fees, legal expenses, consulting fees related to marketing for Mission Burrito concept development, consulting fees related to Sarbanes-Oxley compliance, and from lost sales due to the two hurricanes, 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 intangible assets. Depreciation and amortization expense increased as a percentage of total sales 30 basis points to 4.4% for the third quarter of fiscal year 2008 as compared with 4.1% the same quarter in fiscal year 2007. Such expense for the third quarter of fiscal year 2008 was $20,030 higher than for the third quarter in fiscal year 2007. The increase reflects additional depreciation expense for remodeled restaurants, new restaurants, and the replacement of equipment and leasehold improvements in various existing restaurants. On a year-to-date basis, depreciation and amortization expenses increased as a percentage of total sales 20 basis points to 4.3% for the 39-week period of fiscal year 2008 as compared with 4.1% the same 39-week period in fiscal year 2007. The increase was due to the same reasons discussed above.
During the quarter ended September 28, 2008, the Company incurred $44,009 in pre-opening costs, of which $38,221 related to the July 7, 2008 reopening of the Casa Olé restaurant in Vidor, Texas that had suffered damages from a February 2008 fire ($10,427 recorded in the second quarter) and $5,788 related to the October 14, 2008 opening of a new Mission Burrito restaurant. The Company will record additional pre-opening costs related to the new Mission Burrito opening in the fourth quarter.
On a year-to-date basis, the Company incurred $116,557 in pre-opening costs, of which $36,884 related to the January 31, 2008 opening of a new Mission Burrito restaurant, $25,436 related to the May 28, 2008 opening of a second Mission Burrito restaurant, $48,648 related to the July 7, 2008 re-opening of the Casa Olé restaurant in Vidor, Texas that had suffered damages from a February 2008 fire, and $5,589 related to the October 14, 2008 opening of a new Mission Burrito restaurant. The Company will record additional pre-opening costs related to the new Mission Burrito opening in the fourth quarter.
Impairment Costs. In accordance with SFAS No. 144, "Accounting for the Impairments or Disposal of Long-Lived Assets", long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. For the 13-week and 39-week periods ended September 28, 2008, the Company recorded impairment costs of $22,826 and $77,655, respectively, related to two under-performing restaurants operating in the Houston area.
(Gain) Loss on Involuntary Disposals. The consolidated statements of operations for the 13-week and 39-week periods ended September 28, 2008 includes a separate line item for (gain) loss on involuntary disposals which includes a gain of $917 and $276,626, respectively, resulting from the write-off of assets damaged by the February 19, 2008 fire at the Company's Casa Olé restaurant located in Vidor, Texas, offset by insurance proceeds for the replacement of assets. The Company's insurers paid $200,000 in the first quarter of 2008 and $150,000 in the second quarter of 2008 and the Company has spent $573,711 as of September 28, 2008 for the replacement of assets at this location. The Company anticipates finalizing all claim amounts related to the property damage during the fourth quarter of 2008. The restaurant reopened on July 7, 2008.
Also included in this amount is a gain of $7,546 resulting from the write-off of assets damaged by the July 28, 2008 fire at the Company's Casa Olé restaurant located in Pasadena, Texas, offset by insurance proceeds for the replacement of assets at this location. The Company's insurers paid $35,770 in the third quarter of 2008 and the Company has spent $74,901 as of September 28, 2008 for the replacement of assets. The Company anticipates finalizing all claim amounts related to the property damage during the fourth quarter of 2008. The restaurant reopened on October 25, 2008.
The consolidated statements of operations for the 13-week and 39-week periods ended September 28, 2008 includes a separate line item for revenues for business interruption insurance proceeds of $127,525 related to the fire at this restaurant.
During the quarter, the Company recorded losses of $149,401 resulting from spoiled inventory caused by temporary electricity outages at 35 Company-owned restaurants after Hurricane Ike made landfall on September 13, 2008.
Loss on Sale of Other Property and Equipment. During the 13-week and 39-week periods ended September 28, 2008, the Company recorded losses of $131,509 and $175,254, respectively, primarily related to the disposal of restaurant assets during the conversion of an existing restaurant into a Mission Burrito restaurant. During the 13-week and 39-week periods ended September 30, 2007, the Company recorded losses of $107,819 and $199,501, respectively, primarily related to the sale of one under-performing restaurant to Mr. Forehand, Vice Chairman of the Company, who purchased the assets of the Company's Casa Ole restaurant located in Stafford Texas for an agreed price of 26,806 shares of the Company's common stock. The stock was valued at $8.14 per share, which was the ten-day weighted average stock price as of June 12, 2007, for a total value of $218,205. The Stafford restaurant operates under the Company's standard franchise agreement and is subject to a 2% royalty fee to be paid monthly.
Other Income (Expense). Net expense decreased $45,553 to $80,261 in the third quarter of fiscal year 2008 compared with a net expense of $125,814 in the third quarter of fiscal year 2007. Interest expense decreased $47,053 to $92,003 in the third quarter of fiscal year 2008 compared with interest expense of $139,056 in the third quarter of fiscal year 2007. The decrease reflects lower interest rates as compared to the third quarter of fiscal year 2007. On a year-to-date basis, net expense for the 39-week period of fiscal year 2008 decreased $25,384 to $294,687 as compared to $320,071 for the 39-week period of fiscal year 2007. Interest expense decreased $37,424 to $325,215 for the 39-week period of fiscal year 2008 compared to interest expense of $362,639 in the 39-week period of fiscal year 2007. The Company's outstanding debt increased by $1.0 million in the third quarter to $7.5 million. The additional debt was drawn on the Company's revolving line of credit as a result of Hurricane Ike.
Income Tax Expense. The Company's effective tax rate from continuing operations for the 13-week period ended September 28, 2008 was a benefit of 35.0% as compared to a benefit of 13.3% for the 13-week period ended September 30, 2007. The Company's effective tax rate from continuing operations for the 39-week period ended September 28, 2008 was a benefit of 67.2% as compared to an expense of 19.6% for the 39-week period ended September 30, 2007. The increase in the effective rate is attributed to new tax credits generated and calculated for the period and a positive correction to the total cumulative credit available. In determining the quarterly provision for income taxes, the Company uses an estimated annual effective tax rate based on forecasted annual income and permanent items, statutory tax rates and tax planning opportunities in the various jurisdictions in which the Company operates. The impact of significant discrete items is separately recognized in the quarter in which they occur.
Restaurant Closure Income (Expense). For the 13-week and 39-week periods ended September 28, 2008, the Company recorded closure expenses of $6,062 and closure income of $46,226, respectively, all of which is included in discontinued operations. This year-to-date 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. Also, for the 13-week period ended September 28, 2008, the Company recorded closure expenses of $44,771 all of which is included in continuing operations related to two sub-leased restaurants in Idaho. For the 13-week and 39-week periods ended September 30, 2007, the Company recorded closure expenses of $15,767 and $185,316, respectively, all of which is included in discontinued operations. These closure costs related primarily to one under-performing restaurant closed in February 2007 after its lease expired, and to two other restaurants, closed prior to 2007, that the Company sub-leased, one effective in February 2007 and one effective in May 2007.
The Company financed its capital expenditure requirements for the 39-week period of fiscal year 2008 ended September 28, 2008 primarily by drawing on its revolving line of credit and drawing on its cash reserves. In the initial 39-week period of fiscal year 2008, the Company had cash flow provided by operating activities of approximately $1.2 million, compared with cash flow provided by operating activities of approximately $1.9 million in the comparable 39-week period of fiscal year 2007. The decrease in cash flow 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 the 39-week period ended September 28, 2008, the Company made a net draw of $1.1 million on its line of credit, $1 million of which related directly to the impact of Hurricanes Gustav and Ike. During the 39-week period ended September 30, 2007, the Company drew $3.9 million on all debt primarily related to payment of capital expenditures and the repurchase of Company stock. As of September 28, 2008, the Company had a working capital deficit of $434,807 compared with a working capital deficit of $911,023 at December 30, 2007 and $827,528 million at September 30, 2007. A working capital deficit is common in the restaurant industry, since restaurant companies do not typically require a significant investment in either accounts receivable or inventory.
The Company's principal capital requirements are the funding of routine capital expenditures, new restaurant development or acquisitions and remodeling of older units. During the 39-week period ended September 28, 2008, total cash used for capital requirements was approximately $3.4 million, which included approximately $1.4 million spent for routine capital expenditures, approximately $1.4 million for new restaurant development, approximately $0.6 million spent to reconstruct two restaurants damaged by fires and approximately $52,000 spent on remodels. The Company opened its third and fourth Mission Burrito restaurants during the 39-week period ended September 28, 2008 and, early in the fourth quarter opened its fifth Mission Burrito restaurant on October 14, 2008. The Company also began construction on its sixth Mission Burrito restaurant in October 2008, which it expects to open before the end of fiscal year 2008 or early in next fiscal year 2009. Additionally, the lease for its seventh Mission Burrito restaurant is fully executed and construction is expected to begin on this restaurant during the second quarter of 2009. The Company also has a non-binding agreement with a partner to develop one Mission Burrito restaurant outside the State of Texas. Due to the recent economic downturn and the impact of Hurricanes Gustav and Ike, the Company does not expect to enter into any further lease obligations to develop Mission Burrito restaurants for fiscal year 2009. The Company plans to resume its development of Mission Burrito in fiscal year 2010 and beyond.
The Company's management anticipates that it will spend approximately $1.6 million for capital expenditures during the remainder of fiscal year 2008, exclusive of costs to rebuild the Vidor and Pasadena, Texas restaurants damaged by fire.
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 the Company from $7.5 million under its then-existing credit facility with Bank of America to $10 million. In connection with the execution of the Wells Fargo Agreement, the Company prepaid and terminated its then-existing credit facility 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 the Company's 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. The Company is subject to a non-use fee of 0.50% on the unused portion of the revolver from the date of the Wells Fargo Agreement. The Wells Fargo Agreement also allows up to $2.0 million in annual stock repurchases. The Company has pledged the stock of its subsidiaries, its leasehold interests, its patents and trademarks and its furniture, fixtures and equipment as collateral for its credit facility with Wells Fargo.
Under the Wells Fargo Agreement, the Company is 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, which resulted in approximately $750,000 in lost sales, the Company increased its debt by $1.0 million, and $7.5 million is currently drawn under the Wells Fargo Agreement. As a result of the lost sales, the Company failed to satisfy its minimum EBITDA covenant for the most recent twelve month period under the Wells Fargo agreement. The Company has requested and has received from Wells Fargo a waiver to this covenant and is currently working with Wells Fargo to amend the covenant going forward to ensure that the Company is in compliance with its covenants under the Wells Fargo Agreement.
The Company's management believes that with its operating cash flow and the Company's revolving line of credit under the Wells Fargo Agreement, funds will be sufficient to meet operating requirements and to finance routine capital expenditures and new restaurant growth through the next 12 months. Unless the Company violates a debt covenant, the Company's credit facility with Wells Fargo 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.
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