UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 27, 2004
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: 0-28234
MEXICAN RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0493269
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1135 EDGEBROOK, HOUSTON, TEXAS 77034-1899
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 713-943-7574
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Number of shares outstanding of each of the issuer's classes of common stock, as
of August 3, 2004: 3,384,605 SHARES OF COMMON STOCK, PAR VALUE $.01.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (AUDITED)
6/27/2004 12/28/2003
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 455,176 $ 366,042
Royalties receivable 222,823 179,517
Other receivables 854,013 423,670
Inventory 646,550 555,064
Taxes receivable 181,992 345,006
Prepaid expenses and other current assets 790,936 717,899
------------ ------------
Total current assets 3,151,490 2,587,198
------------ ------------
Property, plant and equipment 29,129,754 24,484,571
Less accumulated depreciation (13,078,398) (11,502,668)
------------ ------------
Net property, plant and equipment 16,051,356 12,981,903
Goodwill, net 10,450,189 7,196,265
Deferred tax assets 1,095,879 1,272,173
Property held for resale 505,118 884,118
Other assets 834,005 939,579
------------ ------------
$ 32,088,037 $ 25,861,236
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 1,000,000 $ 1,000,000
Accounts payable 1,698,344 1,516,217
Accrued sales and liquor taxes 652,118 469,817
Accrued payroll and taxes 1,200,997 976,146
Accrued expenses 1,062,651 1,294,486
------------ ------------
Total current liabilities 5,614,110 5,256,666
------------ ------------
Long-term debt, net of current portion 6,500,000 1,775,000
Other liabilities 972,311 898,115
Deferred gain 1,873,284 1,977,355
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized - -
Capital stock, $0.01 par value, 20,000,000 shares
authorized, 4,732,705 shares issued 47,327 47,327
Additional paid-in capital 20,121,076 20,121,076
Retained earnings 8,696,397 7,542,817
Deferred compensation (26,955) (47,607)
Treasury stock, cost of 1,348,100 common shares (11,709,513) (11,709,513)
------------ ------------
Total stockholders' equity 17,128,332 15,954,100
------------ ------------
$ 32,088,037 $ 25,861,236
============ ============
2
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
13-WEEK 13-WEEK 26-WEEK 26-WEEK
PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
6/27/2004 6/29/03 6/27/2004 6/29/03
------------ ------------ ------------ ------------
Revenues:
Restaurant sales 19,920,745 $ 14,559,479 $ 39,217,681 $ 28,958,591
Franchise fees and royalties and Other 205,601 274,316 397,381 569,647
------------ ------------ ------------ ------------
20,126,346 14,833,795 39,615,062 29,528,238
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 5,660,470 4,093,740 11,055,100 7,996,186
Labor 6,639,614 4,882,235 12,970,722 9,700,106
Restaurant operating expenses 4,544,819 3,753,768 9,146,363 7,333,328
General and administrative 1,676,292 1,251,272 3,178,575 2,634,980
Depreciation and amortization 508,514 592,184 1,147,848 1,172,710
Pre-opening costs 10,529 91,941 10,529 93,669
Restaurant closure costs 49,906 - 167,304 -
------------ ------------ ------------ ------------
19,090,144 14,665,140 37,676,441 28,930,979
------------ ------------ ------------ ------------
Operating income 1,036,202 168,655 1,938,621 597,259
------------ ------------ ------------ ------------
Other income (expense):
Interest income 1,609 6,770 8,980 13,653
Interest expense (131,755) (65,410) (271,020) (135,892)
Other, net 17,634 181,658 23,632 516,185
------------ ------------ ------------ ------------
(112,512) 123,018 (238,408) 393,946
------------ ------------ ------------ ------------
Income before income tax expense 923,690 291,673 1,700,213 991,205
Income tax expense (benefit) 300,902 77,829 546,633 308,251
------------ ------------ ------------ ------------
Net income $ 622,788 $ 213,844 $ 1,153,580 $ 682,954
============ ============ ============ ============
Basic income per share $ 0.18 $ 0.06 $ 0.34 $ 0.20
============ ============ ============ ============
Diluted income per share $ 0.17 $ 0.06 $ 0.32 $ 0.20
============ ============ ============ ============
Weighted average number of shares (basic) 3,384,605 3,384,605 3,384,605 3,384,605
============ ============ ============ ============
Weighted average number of shares (diluted) 3,602,278 3,421,061 3,563,857 3,426,129
============ ============ ============ ============
3
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
26-WEEK PERIODS ENDED
6/27/2004 6/29/2003
----------- -----------
Cash flows from operating activities:
Net income $ 1,153,580 $ 682,954
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,147,848 1,172,710
Deferred gain amortization (104,071) (104,072)
Asset impairments and restaurant closure costs 167,304 -
Loss (gain) on sale of property, plant & equipment 21,942 (476,627)
Deferred compensation 20,652 20,652
Deferred taxes 176,294 151,496
Changes in assets and liabilities:
Royalties receivable (43,306) (4,161)
Other receivables (440,343) 25,391
Income tax receivable/payable 163,014 26,278
Inventory 57,965 54,544
Prepaid and other current assets (73,037) 108,594
Other assets 210,858 (36,583)
Accounts payable 139,050 (210,952)
Accrued expenses and other liabilites 41,961 (425,652)
Other liabilities 74,196 19,630
----------- -----------
Total adjustments 1,560,327 321,248
----------- -----------
Net cash provided by operating activities 2,713,907 1,004,202
----------- -----------
Cash flows from investing activities:
Insurance proceeds from fire loss on building - 488,629
Purchase of property, plant and equipment (1,230,784) (1,113,253)
Proceeds from sale of property, plant and equipment 405,751 -
Business Acquisition (6,524,740) -
----------- -----------
Net cash used in investing activities (7,349,773) (624,624)
----------- -----------
Cash flows from financing activities:
Net borrowings (payments) under line of credit 1,725,000 (600,000)
Additions to Long term Notes Payable 3,000,000 -
----------- -----------
Net cash provided by (used) in financing activities 4,725,000 (600,000)
----------- -----------
Increase (decrease) in cash and cash equivalents 89,134 (220,422)
----------- -----------
Cash and cash equivalents at beginning of period 366,042 526,536
----------- -----------
Cash and cash equivalents at end of period $ 455,176 $ 306,114
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest $ 210,823 $ 139,067
Income Taxes $ 264,935 $ 172,600
Non-cash investing and financing activity:
CNL real estate transaction $ 8,325,000 $ -
4
MEXICAN RESTAURANTS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of Mexican Restaurants, Inc. (the "Company"),
the accompanying consolidated financial statements contain all
adjustments (consisting only of normal recurring accruals and
adjustments) necessary for a fair presentation of the consolidated
financial position as of June 27, 2004, and the consolidated statements
of income for the 13-week and 26-week periods and cash flows for the
26-week period ended June 27, 2004 and June 29, 2003. The consolidated
statements of income for the 13-week and 26-week periods ended June 27,
2004 are not necessarily indicative of the results to be expected for
the full year.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2002, the FASB issued Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others, and
interpretation of FASB Statements No. 5, 57 and 107 and a rescission of
FASB Interpretation No. 34. This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value
of the obligation undertaken. The initial recognition and measurement
provisions of the Interpretation are applicable to guarantees issued or
modified after December 31, 2002 and did not have a material effect on
the Company's financial statements.
2. ACCOUNTING POLICIES
During the interim periods the Company follows the accounting
policies set forth in its consolidated financial statements in its
Annual Report and Form 10-K (file number 0-28234). Reference should be
made to such financial statements for information on such accounting
policies and further financial details.
3. NET INCOME PER COMMON SHARE
Basic income per share is based on the weighted average shares
outstanding without any dilutive effects considered. Diluted income per
share reflects dilution from all contingently issuable shares,
including options and warrants. As of June 27, 2004 and June 29, 2003,
the Company had 1,014,970 and 1,036,970 options and warrants
outstanding, respectively. As of June 27, 2004 and June 29, 2003, such
stock options and warrants have the effect of increasing basic weighted
average shares outstanding by 217,673 and 36,456 for the 13-week
periods and 179,252 and 41,524 for the 26-week periods, respectively.
4. SFAS NO. 148. "ACCOUNTING FOR STOCK-BASED COMPENSATION"
The Company has adopted the disclosure-only provisions of the
FASB-issued SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure, an amendment of FASB Statement No. 123,
which amends SFAS No. 123, Accounting for Stock-Based Compensation and
has accounted for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and related interpretations.
Accordingly, no compensation cost has been recognized for stock options
or warrants. Had compensation cost for the Company's outstanding stock
options and warrants been determined based on
5
the fair value at the grant date for awards consistent with the
provisions of SFAS No. 123, the Company's net income and net income per
share would have been changed to the pro forma amounts indicated below
for the 13-week periods and 26-week periods ended June 27, 2004 and
June 29, 2003:
13 WEEKS ENDED
6/27/04 6/29/03
Net income - as reported .................................................. $ 622,788 $ 213,844
Pro forma net income - pro forma for SFAS No. 123 ......................... 605,823 206,830
Net income per share diluted - as reported ................................ 0.17 0.06
Pro forma net income per share diluted - pro forma for SFAS No. 123 ...... 0.17 0.06
26 WEEKS ENDED
6/27/04 6/29/03
Net income - as reported .................................................. $ 1,153,580 $ 682,954
Pro forma net income - pro forma for SFAS No. 123 ......................... 1,143,661 673,999
Net income per share diluted - as reported ................................ 0.32 0.20
Pro forma net income per share diluted - pro forma for SFAS No. 123 ...... 0.32 0.20
5. ACQUISITION
On January 7, 2004, the Company completed its purchase of 13
restaurants and related assets from its Beaumont-based franchisee for a
total consideration of approximately $13.75 million. The financing for
the acquisition was provided by Fleet National Bank, CNL Franchise
Network, LP ("CNL") and the sellers of the Beaumont-based franchise
restaurants. Fleet National Bank provided $2.5 million of the
acquisition financing by amending its existing credit facility with
Mexican Restaurants, Inc. Six of the acquired restaurants were
concurrently sold to CNL for $8.325 million in a sale-leaseback
transaction. The sellers accepted $3.0 million in notes from Mexican
Restaurants, Inc. for the balance of the purchase price. The seller
notes require the payment of interest only for five years, with $1.5
million in principal due on January 7, 2009 and $1.5 million in
principal amortizing over an additional five years.
The table below presents pro forma income statement
information as if the Company had purchased the Beaumont-based
restaurants at the beginning of fiscal year 2003. Pro forma adjustments
are to remove royalty income and expense, reflect net interest expense
on the debt resulting from the acquisition and record additional income
tax at an effective rate of 32.6% and 32.2% for the second quarter and
year to date, respectively, of fiscal 2004 and 26.7% and 31.1% for the
second quarter and year to date, respectively, of fiscal 2003. The
26-weeks ended June 29, 2003 included a gain of $477,508 for insurance
proceeds received from fire damage at a restaurant. The pro forma
information does not purport to be indicative of results of operations
which would have occurred had the acquisition been consummated on the
date indicated or future results of operations.
13 WEEKS ENDED
6/27/04 6/29/03
Revenues ..................... $ 20,126,346 $ 19,819,013
Net income ................... 622,788 258,136
Diluted income per share ..... 0.17 0.08
26 WEEKS ENDED
6/27/04 6/29/03
Revenues ..................... $ 40,078,670 $ 39,345,864
Net income ................... 1,199,815 765,925
Diluted income per share ..... 0.34 0.22
The acquisition was accounted for under SFAS 141 and results
of operations are included in the accompanying financial statements
from the date of acquisition. The assets acquired and liabilities
assumed of the acquisition were recorded at estimated fair values using
comparables, appraisals, and records. Some of the acquisition amounts
recorded are estimates and are subject to change.
6
A summary of the assets acquired and liabilities assumed in the
acquisition follow:
Estimated fair value of assets acquired:
Current assets 184,601
Property and equipment 2,946,365
Other assets 175,000
Goodwill 3,253,924
---------
Total assets 6,559,890
Less: Cash acquired (35,150)
---------
Net assets acquired 6,524,740
=========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among
others, the following: growth strategy; dependence on executive
officers; geographic concentration; increasing susceptibility to
adverse conditions in the region; changes in consumer tastes and eating
habits; national, regional or local economic and real estate
conditions; demographic trends; inclement weather; traffic patterns;
the type, number and location of competing restaurants; inflation;
increased food, labor and benefit costs; the availability of
experienced management and hourly employees; seasonality and the timing
of new restaurant openings; changes in governmental regulations; dram
shop exposure; and other factors not yet experienced by the Company.
The use of words such as "believes", "anticipates", "expects",
"intends" and similar expressions are intended to identify
forward-looking statements, but are not the exclusive means of
identifying such statements. Readers are urged to carefully review and
consider the various disclosures made by the Company in this report and
in the Company's Annual Report and Form 10-K most recently filed by the
Company, that attempt to advise interested parties of the risks and
factors that may affect the Company's business.
RESULTS OF OPERATIONS
Revenues. The Company's revenues for the second quarter of
fiscal 2004 were up $5.3 million or 35.9% to $20.1 million compared
with the same quarter one year ago. Restaurant sales for the second
quarter of fiscal 2004 increased $5.4 million or 37.0% to $19.9 million
compared with the same quarter one year ago. The increase reflects the
January 2004 acquisition of 13 restaurants and related assets from the
Company's Beaumont-based franchisee. The increase also reflects
positive same-restaurant sales. Total system sales at restaurants
operating in both fiscal quarters ("same-stores") increased 4.0%,
Company-owned same-store sales for the quarter increased 4.5% and
franchise-owned same-store sales for the quarter increased 2.5% from
the same quarter in fiscal 2003. Franchise fees and royalties decreased
$78,907 or 29.4%, reflecting lost royalty income from the
Beaumont-based franchise restaurants acquired by the Company.
On a year-to-date basis, the Company's revenues were up $10.1
million or 34.4% to $39.6 million compared with the same 26-week period
one year ago. Restaurant sales for the 26-week period of fiscal year
2004 ending June 27, 2004 increased $10.3 million or 35.6% to $39.2
million compared with the same 26-week period one year ago. The
increase reflects the January 2004 acquisition of the 13 restaurants
and related assets from the Company's Beaumont-based franchisee. The
increase also reflects positive same-restaurant sales. Total system
sales at restaurants operating in both 26-week periods ("same-stores")
increased 3.3%, Company-owned same-store sales for the 26-week period
7
increased 3.5% and franchise-owned same-store sales for the 26-week
period increased 2.7% from the same 26-week period in fiscal 2003.
Franchise fees and royalties decreased $182,284 or 32.6%, reflecting
lost royalty income from the Beaumont-based franchise restaurants.
Costs and Expenses. Cost of sales, consisting primarily of
food and beverage costs, but also including paper and supplies,
increased 20 basis points as a percentage of restaurant sales in the
second quarter of fiscal 2004 to 28.4% from 28.2% for the same quarter
in fiscal 2003. The increase reflects higher cheese and meat commodity
prices.
On a year-to-date basis, cost of sales increased 50 basis
points as a percentage of restaurant sales to 28.2% from 27.7% from the
comparable 26-week period in fiscal 2003. The increase reflects higher
cheese and meat commodity prices.
Labor and other related expenses decreased as a percentage of
restaurant sales 30 basis points to 33.3% compared with 33.6% for the
same quarter in fiscal 2003. The improvement reflects labor
efficiencies gained from positive same-store sales.
On a year-to-date basis, labor and other related expenses
decreased as a percentage of restaurant sales 50 basis points to 33.1%
from 33.6% from the comparable 26-week period in fiscal 2003. The
improvement reflects labor efficiencies gained from positive same-store
sales.
Restaurant operating expenses, which primarily includes rent,
property taxes, utilities, repair and maintenance, liquor taxes and
advertising, as a percentage of restaurant sales decreased 290 basis
points to 22.8% in the second quarter of fiscal 2004 from 25.7% in the
same quarter in fiscal 2003. The decrease reflects advertising
efficiencies gained with the acquisition of the Beaumont-based
franchise restaurants, lower liquor taxes due to lower liquor sales
volume in the Beaumont-based restaurants, as partially offset by higher
utility expenses.
On a year-to-date basis, restaurant operating expenses
decreased 190 basis points as a percentage of restaurant sales to 23.3%
from 25.2% from the comparable 26-week period in fiscal 2003. The
improvement was due to the same factors discussed in the preceding
paragraph.
General and administrative expenses consist of expenses
associated with corporate and administrative functions that support
restaurant operations. General and administrative expense decreased as
a percentage of total sales 10 basis points to 8.3% in the second
quarter of fiscal 2004 compared with 8.4% the same quarter one year
ago. The improvement reflects efficiencies gained with the acquisition
of the Beaumont-based restaurants, offset in part by executive and
non-executive bonus accruals.
On a year-to-date basis, general and administrative expenses
decreased as a percentage of total sales 90 basis points to 8.0% from
8.9% from the comparable 26-week period in fiscal 2003. The improvement
was due to the same factors discussed in the preceding paragraph.
Depreciation and amortization expense as a percentage of total
sales decreased 150 basis points to 2.5% in the second quarter of
fiscal 2004 from 4.0% for the same quarter in fiscal 2003. The
improvement reflects efficiencies gained with the acquisition of the
Beaumont-based restaurants and the closure of under-performing
restaurants.
On a year-to-date basis, depreciation and amortization expense
as a percentage of total sales decreased 110 basis points to 2.9% from
4.0% from the comparable period in fiscal 2003. The improvement was due
to the same factors discussed in the preceding paragraph.
The Company remodeled two restaurants in the second quarter of
fiscal 2004, incurring pre-open costs of $10,529 compared with $91,941
for the second quarter in fiscal 2003 in which one new restaurant was
opened.
8
Restaurant closure costs of $49,906 were incurred in the
second quarter of fiscal 2004 related to one of the restaurants
impaired in the fourth quarter of fiscal 2003 but not closed until the
first quarter of fiscal 2004. The costs incurred in the second quarter
of fiscal 2004 were due to delays in a lease assignment.
Other Income (Expense). Other income, net decreased $235,530
from income of $123,018 in the second quarter of fiscal 2003 to an
expense of $112,512 in the second quarter of fiscal 2004. Interest
expense increased $66,345 to $131,755 in the second quarter of fiscal
2004 compared with the same quarter one year ago, reflecting the
increase in outstanding debt incurred for the acquisition of the
Beaumont-based restaurants. The second quarter of fiscal 2003 reflected
a partial gain of $161,442 for insurance proceeds received as a result
of fire damage at the Humble, Texas restaurant location. There were no
gains recorded in the second quarter of fiscal 2004; however, the
Company did incur approximately $4,870 in losses from the disposition
of assets during this period.
On a year-to-date basis, other income, net decreased $632,354
from income of $393,946 in fiscal 2003 to an expense of $238,408 in
fiscal 2004. Interest expense increased $135,892 to $271,020 for the
26-week period of fiscal 2004 compared with the same period one year
ago, reflecting the increase in outstanding debt incurred for the
acquisition of the Beaumont-based restaurants. The 26-week period of
fiscal 2003 reflected a partial gain of $477,508 for insurance proceeds
received as a result of the fire damage at the Humble, Texas restaurant
location. There were no gains recorded in the 26-week period of fiscal
2004; however, the Company did incur approximately $21,942 in losses
from the disposition of assets during this period.
Income Tax Expense. For the second quarter of fiscal 2004, the
Company's effective tax rate was 32.6% as compared with 26.7% in the
same quarter in fiscal 2003. The effective tax rate is a function of
year-to-date annualizing, the effects of permanent and temporary
differences, the alternative minimum tax and the utilization of tax
credits.
LIQUIDITY AND CAPITAL RESOURCES
The Company met its capital requirements for the 26-weeks
ended June 27, 2004 with cash generated by operations. As of June 27,
2004, the Company's operations generated approximately $2.7 million in
cash, as compared with $1.0 million in the same period one year ago. As
of June 27, 2004, the Company had a working capital deficit of
approximately $2.5 million, of which $1.0 million reflects the current
portion of principal ($250,000 per quarter) due to Fleet National Bank
under the terms of its credit agreement. 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 first 26 weeks
of fiscal 2004, capital expenditures on property, plant and equipment
were approximately $1.2 million as compared to $1.1 million for the
first 26 weeks of fiscal 2003. The capital expenditures were for
necessary replacement of equipment and leasehold improvements in
various older units. The Company remodeled two restaurants during the
second quarter, one of which re-opened May 28, 2004, with the second
restaurant re-opening just after the second quarter ended. The Company
sold one previously closed restaurant property located in Plainview,
Texas for $442,000. The Company estimates its capital expenditures for
the remainder of the fiscal year will be approximately $1.3 million.
On January 7, 2004, the Company completed its purchase of 13
restaurants and related assets from its Beaumont-based franchisee for a
total consideration of approximately $13.75 million. The financing for
the acquisition was provided by Fleet National Bank, CNL Franchise
Network, LP ("CNL") and the sellers of the Beaumont-based restaurants.
Fleet National Bank provided $2.5 million of the acquisition financing
by amending its existing credit facility with Mexican Restaurants, Inc.
Six of the acquired restaurants were concurrently sold to CNL for
$8.325 million in a sale-leaseback transaction. The sellers accepted
$3.0 million in notes from the Company for the balance of the purchase
price. The seller notes require the payment of interest only for five
years, with $1.5 million in principal due on January 7, 2009 and $1.5
million in principal amortizing over an additional five years.
9
On January 7, 2004, Fleet National Bank amended its credit
facility to accommodate the acquisition of the Beaumont-based
restaurants. The amended credit facility consists of a $5.0 million
term note that requires quarterly principal payments of $250,000 and
matures on December 31, 2008. The credit facility also includes a $5.0
million revolving line of credit that matures on January 7, 2007. The
interest rate is either the prime rate or LIBOR plus a stipulated
percentage. Accordingly, the Company is impacted by changes in the
prime rate and LIBOR. The Company is subject to a non-use fee of 0.5%
on the unused portion of the revolver from the date of the credit
agreement. As of June 27, 2004, the Company had $4.5 million
outstanding on its term note. There is currently no debt drawn on the
revolver. The Company paid down $1,350,000 of indebtedness during the
26-week period of fiscal 2004. As of June 27, 2004, the Company was in
compliance with all debt covenants. The Company expects to be in
compliance with the covenants in the loan agreement for the next twelve
months.
The Company's management believes that with its operating cash
flow and the Company's revolving line of credit with Fleet National
Bank, funds will be sufficient to meet operating requirements and to
finance routine capital expenditures and remodels through the end of
the 2004 fiscal year. Unless the Company violates an important debt
covenant, the Company's credit facility with Fleet National Bank is not
subject to triggering events that would cause the credit facility to
become due sooner than the maturity dates described above.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have or participate in transactions
involving derivative, financial and commodity instruments. The
Company's long-term debt bears interest at floating market rates. Based
on the amount outstanding at June 27, 2004, a 1% change in interest
rates would change interest expense by $11,250.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's
President and Chief Executive Officer together with the Company's Chief
Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) under the Securities Exchange Act of 1934.
Based upon the evaluation, the Company's President and Chief Executive
Officer and the Company's Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company
(including its subsidiaries) required to be included in the Company's
periodic filings with the Securities and Exchange Commission. There
have been no significant changes in the Company's internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of the evaluation.
(b) Change in Internal Control over Financial Reporting
No change in the Company's internal control over financial
reporting or in other factors occurred during the Company's most recent
fiscal quarter covered by this report that has materially affected, or
is reasonably likely to materially affect, the Company's internal
control over financial reporting.
10
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its 2004 annual meeting of shareholders on Tuesday,
May 4, 2004. At the annual meeting, the Company's shareholders took the
following actions:
1) By a vote of 3,235,813 for, 8,492 against or withheld, 0
abstaining and 0 broker non-votes, the shareholders elected
Michael D. Domec as Class II Director for a term expiring at
the annual meeting to be held in 2007 and until his successor
is elected and qualified.
2) By a vote of 3,234,613 for 9,692 against or withheld, 0
abstaining and 0 broker non-votes, the shareholders elected
Curt Glowacki as Class II Director for a term expiring at the
annual meeting to be held in 2007 and until this successor is
elected and qualified.
3) By a vote of 3,235,813 for 8,492 against or withheld, 0
abstaining and 0 broker non-votes, the shareholders elected
Louis P. Neeb as Class II Director for a term expiring at the
annual meeting to be held in 2007 and until his successor is
elected and qualified.
Additionally, the following current directors of the Company continued
to serve as directors as of and following the 2004 annual meeting: Larry N.
Forehand, Thomas E. Martin, David Nierenberg, J. Joseph Fitzsimmons and J.
Stuart Sargent.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Exhibit
Number Document Description
-------------- -----------------------------------------------------------------------
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) REPORTS ON FORM 8-K
There was one report on Form 8-K filed
during the Company's fiscal quarter ended
June 27, 2004. The filing was made on May 5,
2004 reporting, under items 7 and 12
thereto, the Company's filing of a press
release to announce the Company's earnings
for the 2004 first quarter ended March 28,
2004.
11
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEXICAN RESTAURANTS, INC.
Dated: August 9, 2004 By: /s/ Curt Glowacki
Curt Glowacki -----------------------
Chief Executive Officer
(Principal Executive Officer)
Dated: August 9, 2004 By: /s/ Andrew J. Dennard
Andrew J. Dennard -----------------------
Senior Vice President, Chief Financial
Officer & Treasurer
(Principal Financial Officer and
(Principal Accounting Officer)
12
EXHIBIT INDEX
Exhibit
Number Document Description
-------------- -----------------------------------------------------------------------
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002