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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: July 2, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 0-24788
MACHEEZMO MOUSE RESTAURANTS, INC.
(Name of small business issuer in its charter)
Oregon 93-0929139
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1020 SW Taylor Street, Suite 685, 97205
Portland, Oregon (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 503-274-0001
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock
----------------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB.___
State issuer's revenues for its most recent fiscal year: $10,117,000
The index to exhibits appears on page 16 of this document.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the
average bid and asked prices of such stock, as of July 31, 1996: $7,124,164.
State the number of shares of Common Stock outstanding at August 15, 1996:
3,935,479.
----------------------------
DOCUMENTS INCORPORATED BY REFERENCE: The Proxy Statement for the 1996 Annual
Meeting of Shareholders is incorporated into Part III of this Form 10-KSB.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: Yes No X
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MACHEEZMO MOUSE RESTAURANTS, INC.
1996 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
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Item 1. Description of Business 2
Item 2. Description of Property 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 10
Item 6. Management's Discussion and Analysis or Plan of Operation 10
Item 7. Financial Statements 14
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 14
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 15
Item 10. Executive Compensation 15
Item 11. Security Ownership of Certain Beneficial Owners and Management 15
Item 12. Certain Relationships and Related Transactions 15
Item 13. Exhibits and Reports on Form 8-K 16
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Macheezmo Mouse operates a chain of 19 quick service restaurants that offer
fresh, high quality Mexican-style food and more. The Company's operating
philosophy is to provide customers with an alternative to typical fast food
restaurants by offering quick, made-to-order food that is "fresh, fit and
fast." Although not marketed as health food, many of the Company's menu
items meet or exceed the American Heart Association's guidelines for fat.
Macheezmo Mouse restaurants offer dine-in and take-out lunch and dinner
service in the Portland, Oregon and Seattle, Washington metropolitan areas.
The Company opened two restaurants and closed four in fiscal 1996.
Macheezmo Mouse restaurants feature an extensive selection of specialty and
traditional Mexican-style dishes, including burritos, salads, enchiladas,
quesadillas, tacos and grilled, skinless breast of chicken. Recently,
Macheezmo Mouse introduced " global wraps" and other non-Mexican style menu
offerings. Macheezmo Mouse uses fresh ingredients in its menu items and
prepares most food to order. The Company's variety of foods is designed to
appeal to a broad range of customers. The Company believes many customers
first dine at Macheezmo Mouse because the food is fresh and healthier, but
return because of the menu items' great taste, variety, consistency and high
quality.
From time to time, the Company may issue forward-looking statements that
involve a number of risks and uncertainties. The following are among the
factors that could cause actual results to differ materially from the
forward-looking statements: business conditions and growth in the restaurant
industry and general economic, both domestic and international; lower than
expected same restaurant sales; competitive factors, including increased
competition, new product offerings by competitors and price pressures; the
availability of labor, food ingredients and beverages at reasonable prices;
changes in menu offerings; and seasonal differences in sales volume. The
forward-looking statements contained in this document regarding industry
trends, menu offering development and introduction, sales and marketing
trends, litigation, liquidity and future business activities should be
considered in light of these factors.
BACKGROUND
Although the Company's commitment to serving great tasting, high quality,
fresh, fit and fast food has not changed since the Company was founded, the
Macheezmo Mouse concept has been developed and refined since the first
restaurant was opened in Portland, Oregon in 1981. The original concept for
Macheezmo Mouse was designed around a small storefront format and appealed
primarily to walk-in neighborhood lunch business. The Company has since
acquired more knowledge of its customer base and, simultaneously, consumer
awareness of the importance of fresh ingredients has broadened. The Company
now focuses primarily on suburban sites and has also introduced a new decor
that is warmer, more comfortable and more compatible with evening and weekend
dining in
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addition to lunch. The Company believes these changes have resulted in
greater customer appeal and increased evening and weekend business.
The Company's mission statement emphasizes customer service, people
development and shareholder value. In 1990 the Company reorganized its
operational systems and employee incentives and implemented an extensive
training program for restaurant-level employees and managers. This focus has
resulted in effective operational systems and motivated employees who are
committed to providing high levels of customer service.
CONCEPT AND OPERATING STRATEGY
Throughout fiscal 1996, the Company's strategy has evolved into that of
establishing a chain of restaurants specializing in authentic, fresh, fit and
fast Mexican food and more in a quick-service, casual environment. Macheezmo
Mouse has been an innovator in the Mexican food quick-service market by
emphasizing fresh Mexican food and more, including menu offerings which are
non-Mexican in origin, made from the highest quality, authentic ingredients,
offered at moderate prices in a dining niche situated between fast food and
casual dining restaurants. Management believes this dining niche has emerged
as one of the fastest growing niches in the restaurant industry and, as one
of the largest restaurant groups in the Mexican food segment of this niche,
Macheezmo Mouse is poised to take full advantage of this consumer trend.
Macheezmo Mouse is committed to achieving and maintaining market leadership
in the quick-service Mexican food segment by:
- realizing maximum operating profit in its existing restaurants;
- improving upon its competitive position, marketing potential and
overall restaurant profitability;
- prudently expanding into strategic markets; and
- increasing the Company's prominence within the quick-service, Mexican
food segment of the restaurant industry.
Macheezmo Mouse restaurants are a convenient and healthy alternative to more
common Mexican fare. Management believes that persons in the Company's
targeted age group, 25 to 55 years of age, prefer a healthier and tastier
dining alternative to fast food. Macheezmo Mouse restaurants provide that
dining alternative by offering a menu of authentic Mexican dishes to
customers more quickly and at lower prices than full service Mexican food
restaurants. Macheezmo Mouse restaurants use fresh ingredients and enhance
the flavors by using traditional Mexican spices. Management believes that
Macheezmo Mouse differs from other Mexican quick-service restaurants in its
ability to offer delicious tasting, healthier, higher quality food combined
with convenience, speed of service and accessibility in a casual dining
atmosphere. The Company refers to this concept as ""fresh, fit and fast.''
The Company's Vice President of Research and Menu Development oversees the
creation of recipes and the overall menu. One of the new strategies of the
Company is to focus on new menu items and recipes, which will be in constant
development. The Company intends to offer seasonal and calendar specials in
the future.
The Company spent approximately $47,000 on research and menu development
activities during fiscal 1996, primarily for the creation of the Company's
new "Global Wraps-TM-". The amount spent on such activities in fiscal 1995
was immaterial.
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QUALITY AND SUPPLY
The ability of Macheezmo Mouse to maintain a consistent quality of food
throughout its restaurants depends upon purchasing food products and related
items from reliable sources. Macheezmo Mouse approves its suppliers and
requires them to adhere to product specifications as to freshness and quality
for all food products sold in its restaurants. Macheezmo Mouse negotiates
directly with its suppliers to obtain competitive prices. Management believes
that all of the essential food and beverage products used in the Macheezmo
Mouse restaurants are available from alternative qualified suppliers for
comparable prices to what the Company currently pays. The Company has
multiple food supply sources and regularly obtains competitive bids for its
food products to help insure that it is receiving the best value. In
addition, Management makes regular visits to the restaurants to insure that
the Macheezmo Mouse standards of quality are being achieved in every area of
the restaurants' operations.
RESTAURANT LOCATION AND PROTOTYPES
Management believes that the location of a restaurant is important to its
success and devotes significant effort to the investigation and evaluation of
potential sites. The site-selection process focuses on a variety of factors
including target population density, area household income levels,
visibility, accessibility, traffic volume, proximity to activity centers such
as shopping malls, hotels and offices and potential competition at the
location. Management also performs regular analyses of each of its
restaurants for continuing viability and will close restaurants that no
longer meet the Company's objective criteria.
The Macheezmo Mouse standard restaurant prototype is an approximately 1,800
square foot space located in, or in close proximity to, a community shopping
or other high traffic area. A typical Macheezmo Mouse restaurant has a
minimum of 60 seats. Macheezmo Mouse has a distinctive design, with an
alternative design if local ordinances prohibit the original design. The
prototype for alternative distribution outlets, such as mall food courts,
airports, stadiums and other outlets is 500 to 800 square feet. Management
believes that alternative distribution outlets could become an integral part
of Macheezmo Mouse's future growth. The prototype represents Management's
current standard restaurant format; however, as Macheezmo Mouse expands,
different restaurant formats for different circumstances could be employed.
Macheezmo Mouse restaurants differentiate themselves from standard Mexican
restaurants by having designed an atmosphere that is clean, comfortable and
friendly and with its smoke-free environment, complements today's family
dining trends. Employees are eager to take each customers' order at the
register and ensure excellent customer service. Customers are encouraged to
make unlimited trips to the salsa bar and enjoy free beverage refills, which
substantially enhances the message of value.
Customers are invited into Macheezmo Mouse by the familiar Company logo and
sign announcing "Mexican and More." Newer restaurants have inviting
interiors featuring natural materials and bold colors. Turquoise, rose,
salmon and gold set against natural wood and terra cotta floors create a
warm, rich setting with a historical reference to the American Southwest. The
layout includes areas for ordering, food pick-up, self-service drinks and
utensils, salsa bar and dining. Each Macheezmo Mouse restaurant features a
custom
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designed cooking area that supports efficient food preparation and delivery
and allows customers to view the preparation of their meals. New restaurants
are built according to this design. The Company has updated the "high
tech" design of its older restaurants to the warmer, softer look of the
Company's new restaurants.
MENU
The Company's menu is designed to offer a wide variety of Mexican-style
dishes to appeal to a broad customer base. The menu offers items that meet
or exceed the guidelines of the American Heart Association for fat,
cholesterol and sodium content. Most ingredients are prepared fresh daily at
each location by baking, grilling or steaming. No animal fats or tropical
oils are added. Because consumers increasingly are looking for healthy
dining opportunities, but not necessarily "health food," the Company places
great importance on fresh taste. Items are prepared to retain natural
flavors and nutritional values, and recipes rely on herbs and spices instead
of salt and fat to attain great taste. The menu includes burritos, salads,
enchiladas, quesadillas, tacos, grilled, skinless breast of chicken and newly
introduced Global Wraps-TM- which come in three varieties, Greek, Italian and
Thai. The menu has a wide variety of vegetarian items, an Express Menu
section that includes Speedo Burritos and Speedo Salads and a section that
includes "Just Kids" items. Macheezmo Mouse restaurants generally are open
from lunch through dinner and customers can either dine-in or take-out. For
restaurants that serve both meals, lunch and dinner sales are approximately
equal. Most menu items are priced at $4.00 or less. In fiscal 1996, the
average customer check was $5.90.
EXPANSION
Macheezmo Mouse believes that, given the increasing desire for a healthier
and tastier dining alternative to fast food, the Company has substantial
opportunities to expand its customer and restaurant bases. The Company
opened two restaurants in fiscal 1996. The Company will continue to increase
management personnel and employee incentives, expand its training programs
and improve its operational and management systems to facilitate any future
growth. All of the Macheezmo Mouse restaurants are currently operated by the
Company.
The Company's expansion is dependent on a number of factors, including the
Company's ability to hire, train and assimilate management and
restaurant-level employees; the adequacy of the Company's financial
resources; and the Company's ability to identify new markets in which it can
successfully compete, to locate suitable restaurant sites, to negotiate
acceptable lease terms for those sites and to adapt its purchasing and other
systems to accommodate expanded operations. The Company's expansion is also
dependent on the timely fulfillment by landlords and others of their
contractual obligations to the Company, the maintenance of construction
schedules and the speed at which various local zoning and construction
permits can be obtained. There is no assurance the Company will be able to
implement its expansion plans or that new restaurants will be profitable.
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RESTAURANTS IN OPERATION
The Company operates 19 restaurants in Oregon and Washington. The following
tables provide certain information about those restaurants that are open.
<TABLE>
<CAPTION>
DATE SQUARE
NAME LOCATION OPENED FOOTAGE FORMAT
- ---- -------- ------ ------- ------
<S> <C> <C> <C> <C>
Hawthorne Portland, OR April 1982 1,000 Street Front
Salmon Portland, OR August 1983 3,587 Street Front
Holladay Portland, OR July 1987 1,562 Food Court
NW 23rd Portland, OR December 1987 1,500 Street Front
Beaverton Beaverton, OR July 1988 1,925 Strip Center
Clackamas Clackamas, OR April 1989 2,520 Strip Center
Pioneer Place Portland, OR March 1990 600 Food Court
Columbia Center Seattle, WA October 1992 867 Food Court
Queen Anne Seattle, WA November 1993 3,127 Free Standing
Macadam Portland, OR December 1993 2,200 Strip Center
Lynnwood Lynnwood, WA April 1994 2,880 Free Standing
Overlake Redmond, WA May 1994 1,800 Strip Center
Vancouver Vancouver, WA August 1994 2,500 Strip Center
Tanasbourne Hillsboro, OR October 1994 3,800 Strip Center
Capitol Salem, OR December 1994 2,325 Mall
Eugene Eugene, OR February 1995 2,583 Strip Center
Issaquah Seattle, WA June 1995 2,168 Strip Center
Washington Square Tigard, OR July 1995 550 Food Court
Portland Airport Portland, OR October 1995 566 Food Court
</TABLE>
Macheezmo Mouse restaurants have been opened both as freestanding structures
and within existing buildings, such as strip centers and downtown
street-front sites, and are located in both urban and suburban areas. The
interior layout of the Company's restaurants is flexible and can be adapted
to accommodate different types of locations. The Company anticipates that
the majority of future restaurants will be in strip centers or
non-traditional locations such as food courts, airports and stadiums.
RESTAURANT OPERATIONS
MANAGEMENT AND EMPLOYEES. The Company strives to maintain high quality
and consistency in its restaurants through the careful training and
supervision of personnel and the establishment of rigorous standards for food
purchasing and preparation. The Company also attempts to establish a strong
company identity and culture. Part of this culture is to empower all
restaurant employees to""do whatever it takes" to respond to customer
requests and concerns. The Regional Operations Directors oversee staffing and
restaurant operations and, with a director of training, oversees employee
development and training. The management of a typical restaurant consists of
a general manager and a first assistant manager. The general managers are
responsible for day-to-day operations of the restaurants and for the
maintenance of operating standards established by the Company. Both the
general and first assistant manager receive significant incentive
compensation based on customer service, personnel development and
profitability. In addition, each
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restaurant typically has one assistant manager, two hourly supervisors and 10
to 15 hourly employees.
REPORTING. The Company uses an in-store computerized point-of-sale
system to control cash, record sales and collect other restaurant sales data
that is compiled into a daily report. Financial controls are maintained
through a centralized, computerized accounting system. Period profit and
loss statements are prepared every four weeks and provided to district and
general managers for review.
TRAINING. The Company is highly committed to training and motivating
its employees to provide excellent customer service and prepare high quality
food. New employees participate in training courses that emphasize customer
service, technical skills, Company culture and policies and career
development. Managers also participate in additional training programs that
include courses on leadership, time management and motivating skills. The
Company generally promotes from within whenever possible.
HOURS OF RESTAURANT OPERATION. Most Macheezmo Mouse restaurants are
generally open seven days a week, from 11:00 a.m. to 10:00 p.m. The hours of
food court restaurants are limited by the hours of operation of the shopping
or office development in which the restaurants are located.
RECYCLING AND WASTE. The Company limits waste and emphasizes recycling
whenever practicable. Customers dine using stainless steel flatware and
paper plates, which are unbleached, uncoated and made from post-consumer
recycled products. Restaurants separate cans, bottles and cardboard for
recycling according to local regulations and capabilities. In addition,
menus, brochures and other printed materials are printed on unbleached or
recycled paper whenever possible.
MARKETING
The Company's marketing programs seek to increase awareness of the Macheezmo
Mouse concept and to encourage first time customers to return to the
Company's restaurants, thus increasing per restaurant sales. During fiscal
1996, the Company conducted a demographic study that enabled it to update its
customer profile in its evolving market niche. The Company has begun
redirecting its marketing efforts, creating more strategic and disciplined
marketing campaigns emphasizing its "Mexican and More" and "fresh, fit and
fast" themes. The Company has been using and testing the effectiveness of
several forms of media, including radio, busboards, billboards and other
forms of printed media. The Company intends to include as part of its
overall marketing efforts new seasonal and calendar menu offerings. The
future marketing campaigns will utilize the form or forms of media determined
to be the most effective in the particular situation. Word of mouth and
general press continue to provide the Company with highly effective
promotion. The Company participates in a variety of niche marketing
opportunities and community events.
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THE RESTAURANT INDUSTRY AND COMPETITION
The restaurant industry is highly competitive. The Company competes on the
basis of the taste, quality, healthfulness, value and price of food offered,
customer service, ambiance and overall dining experience. The Company's
competitors include a large and diverse group of restaurant chains and
individual restaurants. The number of restaurants with operations generally
similar to the Company's has grown considerably in the last several years,
and the Company believes that competition from these restaurants is
increasing. The Company currently faces direct competition in its markets and
may face increased direct competition from other restaurants in the future.
As the Company and its principal competitors expand operations, competition
can be expected to intensify. Competition could increase the Company's
operating costs or adversely affect its revenues. A number of competitors
have been in existence longer than the Company and have substantially greater
financial, marketing and other resources and wider geographical diversity
than does the Company. In addition, the restaurant industry has few
noneconomic barriers to entry and is affected by changes in consumer tastes,
national, regional and local economic conditions and market trends. The
performance of individual restaurants may be affected by factors such as
traffic patterns, demographic changes and the type, number and location of
competing restaurants.
GOVERNMENT REGULATION
The Company's business is subject to and affected by federal, state and local
laws. Each restaurant must comply with state, county and municipal licensing
and regulation requirements relating to health, safety, sanitation, building
construction, the sale of alcoholic beverages and fire prevention.
Difficulties in obtaining or the failure to obtain required licenses or
approvals could delay or prevent the development of additional restaurants.
The Company has not experienced significant difficulties in obtaining
licenses and approvals to date. The Company is subject to the Americans With
Disabilities Act of 1990, which requires certain accommodations to the
Company's restaurant designs to allow access for people with disabilities.
The Company does not believe that the requirements of this act will have a
material effect on its operations.
The Company may be subject in certain states to "dram shop" statutes, which
generally provide a person injured by an intoxicated person the right to
recover damages from an establishment that wrongfully served alcoholic
beverages to the intoxicated person. The Company carries liquor liability
coverage as part of its existing comprehensive general liability insurance
and has never been named as a defendant in a lawsuit involving "dram shop"
statutes.
The Company's restaurants are subject to federal and state laws governing
wages, working conditions, citizenship requirements and overtime. Several
legislative proposals are under consideration by governmental authorities
that could, if enacted, have a material effect on the Company's business. In
particular, Congress is considering a proposal that would increase federal
minimum wages. Although all of the Company's employees are paid at rates
above federal and state established minimum wage levels, an increase in
minimum wage levels could materially increase the Company's labor costs.
There is no assurance that the Company would be able to pass such increased
costs on to its customers or that, if it were able to do so, it could do so
in a short period of time.
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TRADEMARKS
The Company believes its rights in its trademarks and service marks are
important to its marketing efforts and a valuable part of its business. The
Company has registered the "MACHEEZMO MOUSE", "MOUSE" and "FRESH FIT
FAST'' marks for restaurant services and its logo on the Principal Register
of the United States Patent and Trademark Office The Company has applied for
registration of "GLOBAL WRAP". The registrations of each mark and the logo
will be renewed prior to their respective expiration dates and may continue
to be renewed in perpetuity. The Company may seek registration of certain
other marks for various food items and restaurant services.
EMPLOYEES
As of August 15, 1996, the Company employed approximately 284 persons, of
whom 228 were restaurant employees, 40 were restaurant management and
supervisory personnel and 16 were corporate personnel. Restaurant employees
include both full-time and part-time workers, and all are paid on an hourly
basis. Of the 284 total employees, 55 were full-time employees. No Company
employees are covered by collective bargaining agreements. The Company
believes its relations with its employees are generally excellent.
ITEM 2. DESCRIPTION OF PROPERTY
All of the Company's restaurants are located in leased space. The initial
term of most of the Company's leases is five years, with optional renewals
for at least one five-year period. The majority of the leases have a minimum
monthly lease payment and require an additional yearly payment based on a
percentage of restaurant revenues over a certain level. Generally the leases
are net leases that require the Company to pay its pro rata share of all
taxes, insurance and maintenance costs. A number of the leases provide the
Company with early termination options. If a restaurant does not meet
certain sales requirements, the Company may elect to terminate its lease
pursuant to the early termination option. In addition, upon the termination
of any other lease, the Company may elect not to renew its lease if the
restaurant does not meet certain sales requirements.
In September 1995, the Company's corporate offices were relocated into an
approximately 3,442 square foot leased facility in Portland, Oregon. The
lease expires in September 2000.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the Nasdaq National Market System
under the symbol ""MMRI.'' The following table sets forth the high and low
sale prices as reported on the Nasdaq National Market System for the periods
indicated in the last two fiscal years.
Quarter Ended: High Low
- -------------- ---- ---
Fourth quarter 1996 $4.125 $1.875
Third quarter 1996 3.25 2.25
Second quarter 1996 3.50 2.375
First quarter 1996 6.125 2.875
Fourth quarter 1995 7.625 5.00
Third quarter 1995 8.75 6.25
Second quarter 1995 11.00 8.00
First quarter 1995 11.25 8.50
The Company's Common Stock commenced trading on the Nasdaq National Market on
September 16, 1994 at a price of $6.00 per share.
The Company has not paid cash dividends on its common stock and presently
intends to continue this policy in order to retain its earnings for the
development of the Company's business. As of August 12, 1996, there were 330
shareholders of record.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
INTRODUCTION
The Company commenced operations in 1981 with the opening of its first
restaurant in Portland, Oregon. As of July 2, 1996 the Company owned and
operated 19 Macheezmo Mouse restaurants, two of which were opened in fiscal
1996. There were four restaurants closed in fiscal 1996; one in October 1995
and three in June 1996. The opening and closing of restaurants affect the
comparability of results of operations from period to period. Sales volume
for a new restaurant generally is higher in the first three four-week periods
after the restaurant is opened than in subsequent periods, in part as the
result of special promotional efforts in the opening periods. In addition,
new restaurants may have lower restaurant operating income as a percentage of
sales due to higher fixed costs of operations.
The Company prepares statements of operations for 13 four-week periods each
year. The first fiscal quarter, generally comprised of the months of July
through mid-October, includes four periods, and each of the following three
quarters includes three such periods. Because of the longer first fiscal
quarter and the seasonality of its business, the Company's sales and
operating income are typically highest in the first fiscal quarter. The
Company's fiscal year ends on the Tuesday closest to June 30. The Company's
fiscal years ended July 2,
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1996 ("fiscal 1996") and June 27, 1995 ("fiscal 1995") were 53 week and
52 week periods, respectively.
RESULTS OF OPERATIONS
The following is a discussion of the results of operations for the 53 weeks
ended July 2, 1996 compared to the 52 week period ended June 27, 1995. The
table sets forth the percentage relationship to total revenues, unless
otherwise indicated, of certain income statement data. The table also sets
forth certain restaurant data for the periods indicated.
INCOME STATEMENT DATA FOR THE FISCAL YEAR ENDED
-------------------------------
July 2, 1996 June 27, 1995
------------ -------------
Sales 100.0% 100.0%
Costs and expenses
Food, beverage and packaging 27.5 26.9
Restaurant labor 32.7 28.7
Other restaurant operating expenses 23.4 16.5
Depreciation and amortization 6.9 5.2
General and administrative expenses 21.2 15.2
Restructuring expense 28.6 --
------------ -------------
Total operating costs and expenses 140.3 92.5
Operating (loss) income (40.3) 7.5
Other income (expense)
Interest income 2.4 2.1
Interest expense -- (0.1)
Loss on disposal of equipment (0.4) --
------------ -------------
(Loss) income before income taxes (38.3) 9.5
Provision for (benefit from) income taxes 0.3 (0.2)
------------ -------------
Net (loss) income (38.6) 9.7
------------ -------------
------------ -------------
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1996 1995
------ ------
RESTAURANT OPERATING DATA
Number of Restaurants:
Open at beginning of period 21 13
Opened during period 2 8
Closed during period (4) --
------ ------
Open at end of period 19 21
------ ------
------ ------
FISCAL 1996 COMPARED TO FISCAL 1995
SALES. Restaurant sales decreased slightly in fiscal 1996 to $10.1
million from $10.4 million in fiscal 1995. This decrease was primarily
attributable to lower than anticipated sales volumes for restaurants opened
during fiscal 1995 and a decline in same restaurant sales of 24 percent.
Such decreases were partially offset by a 53 week year in fiscal 1996
compared to a 52 week year in fiscal 1995 and the opening of two restaurants
in fiscal 1996. The Company closed one restaurant in October 1995 and three
restaurants in June 1996. At the end of fiscal year 1996, the Company
operated 19 restaurants.
COSTS AND EXPENSES. Food, beverage and packaging increased as a
percentage of sales to 27.5 percent in fiscal 1996 from 26.9 percent in
fiscal 1995, primarily as a result of increases in the costs for paper
products, the introduction of new menu items and recipe changes.
Restaurant labor expense, which consists primarily of restaurant management
and hourly employee wages, payroll taxes, worker's compensation and group
insurance, increased as a percentage of sales to 32.7 percent in fiscal 1996
from 28.7 percent in fiscal 1995. This increase was primarily attributable
to decreased sales, an increase in the average hourly pay rate and a new
employee benefit package implemented in the third quarter of fiscal 1996.
Other restaurant operating expenses increased as a percentage of sales to
23.4 percent in fiscal 1996 from 16.5 percent in fiscal 1995. This increase
as a percentage of sales was primarily due to higher occupancy costs
associated with restaurants opened at the end of fiscal 1995 and during
fiscal 1996 and to the effect of the decline in same restaurant sales. A
majority of these expenses, such as rent, utilities and miscellaneous
supplies and services are substantially fixed in nature. As same restaurant
sales decline, these expenses increase as a percentage of revenue.
Depreciation and amortization expense increased as a percentage of sales to
6.9 percent in fiscal 1996 from 5.2 percent in fiscal year 1995, due to
higher fixed asset costs associated with new restaurants and the effect of
the decline in same restaurant sales. The increase was partially offset by
the adoption of Statement of Financial Accounting Standard No. 121,
"ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF" (SFAS No. 121) in the fourth quarter of fiscal
1996.
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General and administrative expenses increased as a percentage of sales to
21.2 percent in fiscal 1996 from 15.2 percent in fiscal 1995. This increase
was primarily attributable to increased marketing research and advertising
programs and management severance payments. This increase was partially
offset by decreases in other corporate overhead expenses.
Restructuring expense was incurred in fiscal 1996 as a result of declining
profitability and operating losses in each quarter of fiscal 1996 and the
decision by the Company to develop a restructuring plan to help restore
profitability. This decision resulted in the recording of restructuring
expense of $2.9 million in fiscal 1996. The restructuring included the
closing of three restaurants and the partial write-down of fixed assets at
existing restaurants to their estimated fair market value. The Company based
its analysis on SFAS No. 121 which establishes standards to identify and
measure impairment of long-lived assets.
OTHER INCOME (EXPENSE). Other income (expense) in fiscal 1996 included
a loss of $40,000 related to the disposal of obsolete equipment.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. Income tax expense of
$29,000 (0.7 percent of pre-tax loss) for fiscal 1996 differs from the
statutory federal rate of 34 percent due primarily to the generation of net
operating loss carryforwards and the establishment of a 100 percent valuation
reserve on the Company's deferred tax assets. As of July 2, 1996, the
Company had remaining net operating loss carryforwards of approximately
$1,080,000 which expire in the years through 2011. Additionally, the Company
has available an alternative minimum tax credit carryforward of $14,507 which
is available to reduce future federal income taxes.
VARIABILITY OF QUARTERS
The Company's restaurants have historically experienced higher average weekly
sales in the first and fourth fiscal quarters. Accordingly, operating income
margins and net income margins have been and are expected to continue to be
higher in each of those quarters than in the second and third quarters.
Furthermore, quarterly results have been, and are expected to be,
substantially affected by the timing of new restaurant openings, in part
because of the Company's policy of expensing pre-opening costs. In addition,
the first quarter includes 16 weeks of operations, compared with 12 weeks for
each of the last three quarters. Consequently, consecutive
quarter-to-quarter comparisons of the Company's results of operations may not
be meaningful, and results for any quarter are not necessarily indicative of
the actual results for a full year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirement is for any future expansion of its
restaurant operations. Over the past two fiscal years, Macheezmo Mouse has
financed its capital requirements through cash flow from operations and the
proceeds from its initial public offering in September 1994.
Working capital at July 2, 1996 was $2.7 million, including $1.5 million of
cash and cash equivalents and $1.7 million of short-term investments.
13
<PAGE>
Cash used by operating activities in fiscal 1996 totaled $362,000. Cash in
excess of operating requirements was invested in readily marketable U.S.
government securities. During fiscal 1996, the Company added two new
restaurants for a total cost of $487,000, including pre-opening expenses,
with total capital expenditures for fiscal 1996 totaling $561,000. Proceeds
from the sale of government securities, net of purchases was $1.9 million
during fiscal 1996.
The restructuring reserve of $337,000 at July 2, 1996 represents the
estimated costs associated with restaurant closures and the settlement of
lease obligations for those restaurants closed as part of the Company's
restructuring plan. The remainder of the Company's restructuring charge
consisted of $669,000 and $1,889,000 of non-cash charges for the write-down
of closed and existing restaurant assets, respectively, to their estimated
fair market values.
In addition to the $337,000 restructuring charge, future capital requirements
could consist of costs for opening new restaurants, marketing campaigns and
menu and signage changes.
The Company expects that current cash and short-term investment balances,
along with amounts available under its $600,000 unsecured, revolving
line-of-credit, will be adequate to support the Company's capital
requirements over the next fiscal year. Amounts outstanding under the line
of credit bear interest at rates ranging from the bank's prime rate to the
bank's prime rate plus 1/2 percent. The line of credit requires the Company
to maintain certain cash balances and expires on October 31, 1996. As of
July 2, 1996, there were no borrowings under the line of credit.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this item are included on pages F-1 to
F-15 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
14
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information with respect to directors, executive officers, promoters and
control persons is included under "Election of Directors" and "Executive
Officers of the Registrant" in the Company's definitive proxy statement for
its 1996 annual meeting of shareholders to be filed not later than 120 days
after the end of the fiscal year covered by this Report and is incorporated
herein by reference.
Information with respect to compliance with Section 16(a) of the Securities
Exchange Act of 1934 is included under "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive proxy statement for its
1996 annual meeting of shareholders to be filed not later than 120 days after
the end of the fiscal year covered by this Report and is incorporated herein
by reference.
ITEM 10. EXECUTIVE COMPENSATION
Information with respect to executive compensation is included under
"Executive Compensation" in the Company's definitive proxy statement for
its 1996 annual meeting of shareholders to be filed not later than 120 days
after the end of the fiscal year covered by this Report and is incorporated
herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information with respect to security ownership of certain beneficial owners
and management is included under "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive proxy statement for its
1996 annual meeting of shareholders to be filed not later than 120 days after
the end of the fiscal year covered by this Report and is incorporated herein
by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions
with management is included under "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for its 1996
annual meeting of shareholders to be filed not later than 120 days after the
end of the fiscal year covered by this Report and is incorporated herein by
reference.
15
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
3.1 Third Restated Articles of Incorporation (3)
3.2 Bylaws (2)
4 See Article II of Exhibit 3.1 and Articles I and IV of Exhibit 3.2
10.1 Amended and Restated 1986 Stock Incentive Plan (2)
10.2 Form of Incentive Stock Option Agreement (2)
10.3 Form of Nonqualified Stock Option Agreement (2)
11 Statement re:computation of per share earnings (1)
23 Consent of Price Waterhouse LLP (1)
27 Financial Data Schedule (1)
</TABLE>
(1) Filed herewith.
(2) Incorporated by reference to Exhibits to Registrant's Registration Statement
of Form SB-2, as amended, effective September 15, 1994 (Commission
Registration No. 33-82566).
(3) Incorporated by reference to Exhibits to Registrant's Form 10-KSB for the
fiscal year ended June 27, 1995.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the Company during the quarter ended
July 2, 1996.
16
<PAGE>
SIGNATURES
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.
Date: August 22, 1996 MACHEEZMO MOUSE RESTAURANTS, INC.
By /s/ DAVID M. BENNETT
--------------------
David M. Bennett
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the registrant and in the following capacities on August 22, 1996:
Signature Title
- --------- -----
/s/ DAVID M. BENNETT President, Chief Executive Officer and Director
- ------------------------- (Principal Executive Officer)
David M. Bennett
/s/ ALICE E. PRICE Vice President, Finance and Controller
- ------------------------- (Principal Financial and Accounting Officer)
Alice E. Price
/s/ WILLIAM S. WARREN Chairman of the Board and Secretary
- -------------------------
William S. Warren
/s/ JOSEPH ANGEL Director
- -------------------------
Joseph Angel
/s/ DIANE G. HALL Vice President of Research and Menu
- ------------------------- Development, Assistant Secretary and Director
Diane G. Hall
/s/ JOSEPH P. MICATROTTO Director
- -------------------------
Joseph P. Micatrotto
/s/ JACK B. SCHWARTZ Director
- -------------------------
Jack B. Schwartz
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Macheezmo Mouse Restaurants, Inc.
In our opinion, the accompanying balance sheet and related statements of
operations, of shareholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of Macheezmo Mouse
Restaurants, Inc. at July 2, 1996 and June 27, 1995, and the results of its
operations and its cash flows for each of the years ended July 2, 1996 and
June 27, 1995, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements
in accordance with generally accepted auditing standards which require that
we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Portland, Oregon
August 9, 1996
F-1
<PAGE>
MACHEEZMO MOUSE RESTAURANTS, INC.
BALANCE SHEET (In thousands)
<TABLE>
<CAPTION>
July 2, June 27,
1996 1995
------------ ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $1,488 $ 489
Short term investments in government securities (Note 2) 1,741 2,442
Inventories 142 110
Non-trade receivables 26 95
Current deferred tax asset (Note 6) -- 9
Other current assets 138 95
------------ ----------
Total current assets 3,535 3,240
Property and equipment, net (Note 3) 1,694 4,431
Long term investments in government securities (Note 2) 250 1,474
Long term deferred tax asset (Note 6) -- 154
Other assets 45 69
------------ ----------
$5,524 $9,368
------------ ----------
------------ ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 340 $ 463
Accrued payroll and payroll related expenses 131 200
Accrued expenses and other current liabilities 58 50
Restructuring reserve 337 --
------------ ----------
Total current liabilities 866 713
Other deferred liabilities
Deferred rent expense 157 172
Other liabilities (Note 11) -- 40
------------ ----------
Total liabilities 1,023 925
------------ ----------
Commitments (Notes 4 and 5)
Shareholders' equity (Note 10)
Preferred stock, undesignated, 5,000 shares authorized,
none issued -- --
Common stock, no par value, 10,000 shares authorized,
3,920 shares issued and outstanding at July 2, 1996 and
3,913 shares issued and outstanding at June 27, 1995 10,145 10,130
Paid-in-capital -- 55
Accumulated deficit (5,644) (1,742)
------------ ----------
Total shareholders' equity 4,501 8,443
------------ ----------
$5,524 $9,368
------------ ----------
------------ ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
MACHEEZMO MOUSE RESTAURANTS, INC.
STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the year ended
---------------------------
July 2, June 27,
1996 1995
------------ ----------
<S> <C> <C>
Sales $10,117 $10,380
------------ ----------
Costs and expenses
Food, beverage and packaging costs 2,784 2,790
Restaurant labor 3,310 2,982
Other restaurant operating expenses 2,357 1,710
Depreciation and amortization 700 538
General and administrative expenses 2,148 1,580
Restructuring expense 2,895 --
------------ ----------
Total operating costs and expenses 14,194 9,600
------------ ----------
Operating (loss) income (4,077) 780
Other income (expenses)
Interest income 244 223
Interest expense -- (6)
Loss on disposal of equipment (40) (3)
------------ ----------
(Loss) income before income taxes (3,873) 994
Provision (benefit) for income taxes (Note 6) 29 (16)
------------ ----------
Net (loss) income $(3,902) $1,010
------------ ----------
------------ ----------
Net (loss) income per share (Note 1) $(1.00) $ 0.27
------------ ----------
------------ ----------
Shares used in computing
per share amounts 3,918 3,697
------------ ----------
------------ ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
MACHEEZMO MOUSE RESTAURANTS, INC.
STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the year ended
---------------------------
July 2, June 27,
1996 1995
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(3,902) $1,010
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
Restructuring expense 2,558 --
Depreciation and amortization 700 538
Loss on disposal of equipment 40 3
Discount amortization on investments (13) --
Deferred taxes 163 (163)
Net changes in operating assets and liabilities:
Inventories (32) 2
Non-trade receivables 69 (52)
Other current assets (43) (77)
Accounts payable, accrued expenses,
and deferred liabilities (239) 178
Restructuring reserve 337 --
------------ ----------
Net cash provided (used) by operating activities (362) 1,439
------------ ----------
Cash flows from investing activities:
Acquisition of property and equipment (561) (2,829)
Purchase of government securities (993) (5,286)
Proceeds from maturity of government securities 2,931 1,370
Increase in other assets 24 (5)
------------ ----------
Net cash provided (used) by investing activities 1,401 (6,750)
------------ ----------
Cash flows from financing activities:
Net cash proceeds from sale of common stock -- 5,871
Proceeds from exercise of stock options 15 68
Payments on line of credit -- (281)
Tax benefit from exercise of stock options (55) 55
------------ ----------
Net cash provided (used) by financing activities (40) 5,713
------------ ----------
Net increase in cash and cash equivalents 999 402
Cash and cash equivalents at beginning of period 489 87
------------ ----------
Cash and cash equivalents at end of period $1,488 $ 489
------------ ----------
------------ ----------
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- 8
Income taxes $ 25 166
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
MACHEEZMO MOUSE RESTAURANTS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
Series A
Common stock preferred stock
---------------- --------------- Paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
------ ------ ------ ------ ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 28, 1994 1,872 $ 1,386 650 $ 295 $ -- $(2,752) $(1,071)
Stock options exercised 129 68 -- -- -- -- 68
Initial public offering, net
of expenses (Note 12) 1,150 5,871 -- -- -- -- 5,871
Conversion of preferred stock
to common stock (Note 9) 325 295 (650) (295) -- -- --
Termination of repurchase
obligation on mandatorily
redeemable common stock (Note 8) 437 2,510 -- -- -- -- 2,510
Income tax benefit from
employee stock option
transaction (Note 6) -- -- -- -- 55 -- 55
Net income -- -- -- -- -- 1,010 1,010
------ ------ ------ ------ ------- ----------- -------
Balance, June 27, 1995 3,913 10,130 -- -- 55 (1,742) 8,443
------ ------ ------ ------ ------- ----------- -------
Stock options exercised 7 15 -- -- -- -- 15
Reversal of income tax benefit
of employee stock option
transaction (Note 6) (55) (55)
Net loss -- -- -- -- -- (3,902) (3,902)
------ ------ ------ ------ ------- ----------- -------
Balance, July 2, 1996 3,920 $10,145 -- $ -- $ -- $(5,644) $4,501
------ ------ ------ ------ ------- ----------- -------
------ ------ ------ ------ ------- ----------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
MACHEEZMO MOUSE RESTAURANTS, INC.
Notes to Financial Statements
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Macheezmo Mouse Restaurants, Inc. (the Company) operates a quick service
restaurant chain with operations in Oregon and Washington. The Company's
fiscal year ends on the Tuesday nearest June 30th and is comprised of
fifty-two or fifty-three week periods. The fiscal years ended June 27, 1995
and July 2, 1996 were fifty-two week and fifty-three week periods,
respectively.
CASH AND CASH EQUIVALENT
Cash and cash equivalents consist of cash on hand and on deposit and highly
liquid investments purchased with an original maturity of three months or
less.
INVESTMENTS
Effective June 29, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115 "Accounting for Certain Investments in
Debt and Equity Securities." SFAS No. 115 addresses the accounting and
reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt securities. In
accordance with the provisions of SFAS No. 115, the Company designates
investments as securities available for sale, trading securities or
securities held to maturity. As of July 2, 1996, all of the Company's
investments were designated as held to maturity and are therefore recorded
at amortized cost. The adoption of SFAS 115 had no impact on the Company's
financial position or results of operations.
INVENTORIES
Inventories consist of food, beverages and paper supplies and are stated at
the lower of cost or market, cost being determined using the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is being provided on
the straight-line basis over the estimated useful lives of the assets,
generally five to seven years. The cost of leasehold improvements is being
amortized using the straight-line method over the shorter of the length of
the lease terms, including option periods, or the estimated useful lives of
the improvements.
DEFERRED RENT
Rent expense on operating leases with scheduled rent increases is expensed
on the straight-line basis over the lease terms. Deferred rent represents
the difference between rent charged to expense and the rent payable under
the lease agreements.
F-6
<PAGE>
MACHEEZMO MOUSE RESTAURANTS, INC.
Notes to Financial Statements
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109).
Under SFAS 109, the Company recognizes deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between
the book and tax basis of the Company's assets and liabilities. Under
SFAS 109, valuation allowances are recorded to reduce deferred tax assets
when it is more likely than not that a tax benefit will not be realized.
PRE-OPENING EXPENSES
Costs incurred in connection with the opening of new restaurants are
expensed as incurred.
NET INCOME (LOSS) PER SHARE
Net income (loss) per common share is based upon the weighted average number
of outstanding shares of common stock and from common stock equivalent
shares from the exercise of stock options (using the treasury stock method).
Common equivalent shares from stock options are excluded from the
computation if their effect is antidilutive.
ADVERTISING EXPENSE
Advertising costs are deferred and expensed the first time the advertisement
takes place.
CERTAIN RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company plans to adopt Statement of Financial Accounting Standards
Number 123 (SFAS 123) "Accounting for Stock-Based Compensation", in 1996.
SFAS 123 was issued by the Financial Accounting Standards Board in October
1995, and allows companies to choose whether to account for stock-based
compensation under the current method as prescribed in Accounting Principles
Board Opinion Number 25 (APB 25) or use the fair value method described in
SFAS 123. The Company plans to continue to follow the provisions of APB 25.
Therefore, management believes that the impact of adoption will not have a
significant affect on the Company's financial position or results of
operations.
F-7
<PAGE>
MACHEEZMO MOUSE RESTAURANTS, INC.
Notes to Financial Statements
2. INVESTMENTS
The amortized costs, including accrued interest, and estimated market values of
the securities classified as held to maturity at July 2, 1996 are as follows:
<TABLE>
<CAPTION>
Amortized
costs including Gross Gross
accrued unrealized unrealized Market
Investments held to maturity interest gains losses value
- ---------------------------- -------- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government obligations
with an average interest of
5.42% and maturities
ranging from 1996 to 1997 $2,014,042 -- $(17,947) $1,996,095
</TABLE>
At July 2, 1996, the amortized costs, excluding accrued interest, of U.S.
Government obligations classified as held to maturity, of $1,741,667 mature
within one year and of $249,819 mature within one to two years.
The amortized costs, including accrued interest, and estimated market values
of the securities classified as held to maturity at June 27, 1995 are as
follows:
<TABLE>
<CAPTION>
Amortized
costs including Gross Gross
accrued unrealized unrealized Market
Investments held to maturity interest gains losses value
- --------------------------- -------- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government obligations
with an average interest rate
of 5.92% and maturities
ranging from 1995 to 1997 $3,981,648 $1,932 -- $3,983,580
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of (in thousands):
<TABLE>
<CAPTION>
July 2, June 27,
1996 1995
-------- ----------
<S> <C> <C>
Leasehold improvements $1,115 $3,913
Equipment 1,814 1,877
Construction in progress - 268
-------- ----------
2,929 6,058
Less accumulated depreciation and amortization (1,235) (1,627)
-------- ----------
$1,694 $4,431
-------- ----------
-------- ----------
</TABLE>
F-8
<PAGE>
MACHEEZMO MOUSE RESTAURANTS, INC.
Notes to Financial Statements
4. LINE OF CREDIT
In December 1995, the Company obtained an unsecured revolving line of
credit for $600,000. The agreement requires the Company to maintain
certain financial ratios and covenants. Borrowings bear interest at rates
ranging from the bank's prime rate to the bank's prime rate plus 1/2%.
The agreement expires October 31, 1996. As of July 2, 1996, there were no
borrowings under the line of credit.
5. COMMITMENTS
The Company leases restaurant and office facilities under several operating
leases expiring through 2006. Most leases contain renewal options of five
years.
As of July 2, 1996, future minimum payments under non-cancelable operating
leases with terms in excess of one year are:
Fiscal Year
Ending
-----------------
1997 $ 988,125
1998 849,297
1999 719,015
2000 626,004
2001 435,613
Thereafter 1,440,022
----------
$5,058,166
----------
Minimum rent expense under operating leases aggregated $848,438 and $617,484
in fiscal 1996 and 1995, respectively. Total minimum rentals do not include
contingent rentals determined as a percentage of food and beverage sales
approximating $126,598 and $86,495 for the years ended July 2, 1996 and June
27, 1995, respectively. Total rent expense is included in other restaurant
operating expenses in the accompanying statement of operations.
As of July 2, 1996, the Company has an unused letter of credit for $39,500.
This letter of credit expires in January 1997.
F-9
<PAGE>
MACHEEZMO MOUSE RESTAURANTS, INC.
Notes to Financial Statements
6. INCOME TAXES
The (benefit) provision for income taxes consists of:
<TABLE>
<CAPTION>
For the year ended
July 2, June 27,
1996 1995
-------------- -------------
<S> <C> <C>
Current:
Federal $ (134,263) $ 147,247
State - -
-------------- -------------
(134,263) 147,247
-------------- -------------
Deferred:
Federal 163,073 (163,073)
State - -
-------------- -------------
- (163,073)
-------------- -------------
Total provision (benefit) for
income taxes $ 28,810 $ (15,826)
-------------- -------------
-------------- -------------
</TABLE>
Deferred tax assets consist of:
<TABLE>
<CAPTION>
July 2, June 27,
1996 1995
-------------- --------------
<S> <C> <C>
Net operating loss carryforward $ 414,212 $ 8,851
Deferred rent 60,172 66,049
Store closure reserve 129,137 -
Other expenses not currently
deductible 23,481 27,796
Alternative minimum tax credit
carryforward 14,507 17,939
Depreciation 833,362 42,438
Tax credits 8,800 -
-------------- --------------
Net deferred tax assets 1,483,671 163,073
Deferred tax asset valuation allowance (1,483,671) -
-------------- --------------
Net deferred taxes $ - $163,073
-------------- --------------
-------------- --------------
</TABLE>
During 1995, the deferred tax asset valuation allowance was reduced to zero
based on management's assessment that the deferred assets would be realized
in fiscal 1996. However, the Company's profitability unexpectedly declined in
fiscal 1996 and the Company provided a valuation allowance for its deferred
tax assets. The Company will continue to provide a valuation allowance for
its deferred assets until it becomes more likely than not, in management's
assessment, that the Company's deferred tax assets will be realized.
F-10
<PAGE>
MACHEEZMO MOUSE RESTAURANTS, INC.
Notes to Financial Statements
6. INCOME TAXES (Continued)
At July 2, 1996, the Company had available net operating loss carryforwards
of approximately $1,079,803, which will expire in the years through 2011.
Additionally,the Company has available an alternative minimum tax credit
carryforward of $14,507 which is available to reduce future federal income
taxes.
During fiscal 1995, certain employee stock options were exercised which
resulted in a reduction in the income taxes to be paid by the Company. For
financial reporting purposes, any reduction in income tax obligations as a
result of these tax benefits is credited to paid in capital. During 1996,
the Company recorded a net operating loss, which was carried back to fiscal
1995. As a result, the tax benefits credited to paid in capital in the
prior year could not be utilized. For financial reporting purposes, this
decreased the provision for income taxes and paid in capital. The Company
has carryforward tax benefits related to these option exercises of $93,000.
The provision (benefit) for income taxes differs from the amount of income
taxes determined by applying the U.S. statutory federal rate due to the
following:
<TABLE>
<CAPTION>
For the year ended
July 2, June 27,
1996 1995
--------- -----------
<S> <C> <C>
Statutory federal tax rate (34.0%) 34.0%
Sales taxes, net of federal benefit (3.9%) 4.4%
Net operating losses 10.7% (31.5%)
Effect of reserving temporary differences 23.5% -
Valuation reserve 4.2% (6.2%)
Other 0.2% (2.3%)
--------- -----------
0.7% (1.6%)
--------- -----------
--------- -----------
</TABLE>
7. RESTRUCTURING PLAN
The Company's profitability began to decline in fiscal 1996, and the Company
reported operating losses for each quarter of fiscal 1996. After an analysis
of the sales potential and operating economics of every Macheezmo Mouse
restaurant, the Company developed a restructuring plan to help restore
profitability. Under the plan, the Company closed three of its restaurants
and recorded a partial write-down of operating restaurant assets to their
estimated fair market value. The Company based its analysis on Statement of
Financial Accounting Standards No. 121, (SFAS 121) "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of'
which establishes standards to identify and measure impairment of long-lived
assets.
F-11
<PAGE>
MACHEEZMO MOUSE RESTAURANTS, INC.
Notes to Financial Statements
7. RESTRUCTURING PLAN (CONTINUED)
Total costs expected to be expended in connection with the restructuring
includes $337,000 associated with restaurant closures and settlement of
lease obligations.
Amounts utilized in 1996 consist of a $2,558,000 non-cash charge for the
write-down of restaurant assets to fair market value. Fair market value
for the write-down of assets was estimated based on the appraised value of
impaired long-lived assets and the present value of expected future cash
flows.
The following sets forth the components of the Company's 1996 restructuring
expenses:
1996
Restructuring
(In thousands) Expense
-------------
Restaurant Closures:
Write-down of restaurant assets to estimated
fair market value $ 669
Estimated costs associated with restaurant
closures and settlement of lease obligations 337
-------------
1,006
Operating Stores:
Write-down of assets to estimated fair market
value at other restaurants 1,889
-------------
Total $2,895
-------------
-------------
The following presents the results of operations for the three closed
restaurants for fiscal years ended July 2, 1996 and June 27, 1995:
(In thousands) 1996 1995
-------- --------
Net sales $ 882 $521
Total costs and expenses 999 507
-------- --------
Operating (loss) income $( 117) $ 14
-------- --------
-------- --------
8. MANDATORILY REDEEMABLE COMMON STOCK
As of June 28, 1994, holders of approximately 437,000 shares of the
Company's common stock were entitled to certain rights with respect to the
repurchase of such shares by the Company. The repurchase obligations of
the Company terminated upon the consummation of the initial public offering
of the Company's common stock in September 1994. Accordingly, the
mandatorily redeemable common stock has been reclassified as common stock
as of September 15, 1994.
F-12
<PAGE>
MACHEEZMO MOUSE RESTAURANTS, INC.
Notes to Financial Statements
9. SHAREHOLDERS' EQUITY
PREFERRED STOCK
All issued and outstanding Series A preferred stock ("preferred stock")
shares were converted to common stock upon the consummation of the initial
public offering of the Company's common stock in September 1994. Each
share of preferred stock was converted into one half of a share of common
stock resulting in the conversion of 650,000 shares of preferred stock to
325,000 shares of common stock. The Company has also authorized 5,000,000
shares of undesignated preferred stock.
Common Stock
On September 12, 1994, the shareholders approved a one-for-two reverse
stock split for shares of common stock outstanding on that date. All share
and per share amounts in the financial statements reflect the reverse stock
split.
10. STOCK INCENTIVE PLAN
The Company has a stock incentive plan (the Plan) which provides for the
award of incentive stock options to key employees and the award of
non-qualified stock options, stock appreciation rights (SAR's), bonus
rights and other incentive grants to employees, independent contractors and
consultants. On September 12, 1994 shareholders approved the Company's
Amended Plan to increase the number of shares reserved under the Plan to
826,427 from 576,427 shares.
The exercise price of incentive stock options shall not be less than the
fair market value of the Company's stock at the date of grant or, in the
case of incentive stock options issued to holders of more than 10% of the
Company's outstanding common stock, 110% of fair market value, and the
exercise period shall not exceed ten years, or five years in the case of
10% shareholders, from the date of grant. The exercise price and term for
non-statutory stock options may be established by the Board of Directors at
the date of grant but in no case will the exercise price be less than 85%
of the fair market value. Stock awarded as a bonus shall be subject to the
terms, conditions, and restrictions determined by the Board of Directors at
the time the stock is awarded as a bonus. Shares of common stock subject to
restrictions, which may include those concerning transferability,
repurchase by the Company and forfeiture of the shares issued, may be
granted by the Board of Directors, subject to such rules, terms, and
conditions as prescribed provided, however, that stock appreciation
rights may only be granted in connection with an option grant or in
connection with an outstanding option previously granted under the Plan. A
stock appreciation right shall entitle the holder, upon exercise, to
receive an amount of cash equal to the excess of the fair market value of
the Company's common stock at exercise date over its fair market value at
the date of grant. The Board of Directors may withdraw any stock
appreciation right at any time. Cash bonus rights may be issued in
conjunction with other awards granted under the Plan.
F-13
<PAGE>
MACHEEZMO MOUSE RESTAURANTS, INC.
Notes to Financial Statements
10. STOCK INCENTIVE PLAN (Continued)
The Plan will continue in effect until the earlier of (i) the date on
which, in the aggregate, options have been granted and exercised and stock
has been awarded as bonuses or sold and the restrictions on any such stock
shall have lapsed with respect to all shares available under the Plan, (ii)
termination of the Plan by the Board of Directors or (iii) June 30, 1996.
As of July 2, 1996, no SAR's, stock bonus awards, cash bonus rights or
restricted stock awards had been granted by the Company under the Plan.
A summary of stock option activity follows:
Shares
under option Price range
-------------- -------------------
Balance at June 28, 1994 228,661 $.50 - $2.00
Granted -
Exercised (128,841) .50 - 2.00
--------------
Balance at June 27, 1995 99,820 .50 - 2.00
--------------
Granted 118,000 2.50 - 3.50
Exercised (7,482) 2.00
Canceled (7,985) 2.00
--------------
Balance at July 2, 1996 202,353 $.50 - $3.50
-------------- -------------------
-------------- -------------------
Available for grant at July 2, 1996 -
Certain provisions restrict the timing of exercise of the options. There
were 93,882 options exercisable as of July 2, 1996.
11. MANAGING PARTNER PLAN
During fiscal 1995, the Company approved the Managing Partner Plan (the
Plan). Under the Plan, selected key restaurant managers are invited to
purchase up to a 20% participation in the future operating profits or
losses of the restaurant he or she is employed to manage. As of June 27,
1995, two agreements with restaurant managers were outstanding under the
Plan. The balance of the participation account is returnable to the
managers at the end of their agreement and accordingly, a deferred
liability for $40,000 was established at June 27, 1995. The two agreements
entered into during fiscal 1995 were terminated during fiscal 1996 and
resulted in no expense to the Company.
F-14
<PAGE>
MACHEEZMO MOUSE RESTAURANTS, INC.
Notes to Financial Statements
12. INITIAL PUBLIC OFFERING
During 1994, the Company made an initial public offering (IPO) of its
common stock. A registration statement covering that offer was filed with
the SEC on August 8, 1994, which became effective on September 15, 1994.
The Company issued 1,150,000 shares at a price of $6.00 per share.
F-15
<PAGE>
EXHIBIT 11
MACHEEZMO MOUSE RESTAURANTS, INC.
CALCULATION OF NET INCOME PER SHARE
FISCAL YEARS ENDED JULY 2, 1996 AND JUNE 27, 1995
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
Primary Fully Diluted Primary Fully Diluted
------- ------------- ------- -------------
<S> <C> <C> <C> <C>
Actual weighted average shares
outstanding 3,918 3,918 3,609 3,609
Dilutive common stock options
using the treasury stock method -- -- 88 88
------- ------------- ------- -------------
Total shares used in per share
calculations 3,918 3,918 3,697 3,697
------- ------------- ------- -------------
------- ------------- ------- -------------
Net (loss) income $(3,902) $(3,902) $1,010 $1,010
Net (loss) income per share $ (1.00) $ (1.00) $ 0.27 $ 0.27
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement of Form S-8 (No. 33-99930) of Macheezmo Mouse Restaurants, Inc. of
our report dated August 9, 1996 appearing of page F-1 of this Form 10-KSB.
PRICE WATERHOUSE LLP
Portland, Oregon
August 28, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-02-1996
<PERIOD-END> JUL-02-1996
<CASH> 1,488
<SECURITIES> 1,741
<RECEIVABLES> 26
<ALLOWANCES> 0
<INVENTORY> 142
<CURRENT-ASSETS> 3,535
<PP&E> 1,694
<DEPRECIATION> 1,235
<TOTAL-ASSETS> 5,524
<CURRENT-LIABILITIES> 866
<BONDS> 0
0
0
<COMMON> 10,145
<OTHER-SE> (5,644)
<TOTAL-LIABILITY-AND-EQUITY> 5,524
<SALES> 10,117
<TOTAL-REVENUES> 10,117
<CGS> 2,784
<TOTAL-COSTS> 14,194
<OTHER-EXPENSES> 40
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,873)
<INCOME-TAX> 29
<INCOME-CONTINUING> (3,902)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,902)
<EPS-PRIMARY> (1.00)
<EPS-DILUTED> (1.00)
</TABLE>
