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 SEPTEMBER 28, 2003
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 October 15, 2003: 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)
ASSETS 9/28/2003 12/29/2002
-------------- --------------
Current assets:
Cash and cash equivalents $ 271,288 $ 526,536
Royalties receivable 169,961 142,031
Other receivables 500,164 659,901
Inventory 513,373 557,555
Taxes receivable 359,714 382,882
Prepaid expenses and other current assets 545,971 592,075
-------------- --------------
Total current assets 2,360,471 2,860,980
-------------- --------------
Property, plant and equipment 28,879,862 27,347,171
Less accumulated depreciation (12,360,976) (10,706,035)
-------------- --------------
Net property, plant and equipment 16,518,886 16,641,136
Deferred tax assets 252,025 454,453
Property held for resale 963,605 963,605
Other assets 8,077,276 8,062,605
-------------- --------------
$ 28,172,263 $ 28,982,779
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 1,500,000 $ 1,000,000
Accounts payable 1,700,587 1,879,171
Accrued sales and liquor taxes 460,884 441,264
Accrued payroll and taxes 945,466 999,403
Accrued expenses 792,854 1,277,525
-------------- --------------
Total current liabilities 5,399,791 5,597,363
-------------- --------------
Long-term debt, net of current portion 2,000,000 3,400,000
Other liabilities 884,781 852,214
Deferred gain 2,029,391 2,185,498
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 9,457,343 8,577,725
Deferred compensation (57,933) (88,911)
Treasury stock, cost of 1,348,100 common shares (11,709,513) (11,709,513)
-------------- --------------
Total stockholders' equity 17,858,300 16,947,704
-------------- --------------
$ 28,172,263 $ 28,982,779
============== ==============
2
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
13-WEEK 13-WEEK 39-WEEK 39-WEEK
PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
09/28/03 09/29/03 9/28/03 09/29/02
-------------- -------------- -------------- --------------
Revenues:
Restaurant sales $ 14,857,758 $ 14,758,163 $ 43,769,906 $ 44,995,194
Franchise fees and royalties 296,362 331,690 855,878 954,533
Other 2,934 26,872 13,066 44,530
-------------- -------------- -------------- --------------
15,157,054 15,116,725 44,638,850 45,994,257
-------------- -------------- -------------- --------------
Costs and expenses:
Cost of sales 4,131,939 3,961,890 12,128,125 12,206,950
Labor 4,944,326 4,916,765 14,644,431 14,799,075
Restaurant operating expenses 3,827,094 3,776,927 11,113,980 11,091,564
General and administrative 1,333,358 1,282,531 3,968,340 3,905,510
Depreciation and amortization 600,290 562,967 1,773,000 1,660,018
Pre-opening costs 1,857 -- 95,526 --
Restaurant closure costs 52,648 -- 52,648 --
-------------- -------------- -------------- --------------
14,891,512 14,501,080 43,776,050 43,663,117
-------------- -------------- -------------- --------------
Operating income 265,542 615,645 862,800 2,331,140
-------------- -------------- -------------- --------------
Other income (expense):
Interest income 6,512 71,617 20,165 98,789
Interest expense (60,821) (97,339) (196,713) (301,288)
Other, net 51,256 70,674 567,441 100,053
-------------- -------------- -------------- --------------
(3,053) 44,952 390,893 (102,446)
-------------- -------------- -------------- --------------
Income before income tax expense 262,489 660,597 1,253,693 2,228,694
Income tax expense 65,822 202,803 374,073 679,025
-------------- -------------- -------------- --------------
Net income $ 196,667 $ 457,794 $ 879,620 $ 1,549,669
============== ============== ============== ==============
Basic income per share $ 0.06 $ 0.13 $ 0.26 $ 0.45
============== ============== ============== ==============
Diluted income per share $ 0.06 $ 0.13 $ 0.26 $ 0.44
============== ============== ============== ==============
Weighted average number of shares (basic) 3,384,605 3,417,748 3,384,605 3,464,295
============== ============== ============== ==============
Weighted average number of shares (diluted) 3,422,013 3,489,274 3,424,879 3,540,345
============== ============== ============== ==============
3
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
39-WEEK PERIODS ENDED
-------------------------------
09/28/03 09/29/02
----------- -----------
Cash flows from operating activities:
Net income $ 879,620 $ 1,549,669
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred compensation 30,978 30,978
Depreciation and amortization 1,773,000 1,660,018
Deferred gain amortization (156,107) (156,106)
Asset impairments and restaurant closure costs 33,498 --
Deferred taxes 202,428 327,815
Loss (gain) on sale of property, plant & equipment (476,627) 12,998
Changes in assets and liabilities:
Royalties receivable (27,930) (32,674)
Other receivables 159,737 (21,514)
Income tax receivable/payable 23,168 200,704
Inventory 44,182 46,160
Prepaid and other current assets 46,104 56,466
Other assets (79,954) 5,318
Accounts payable (178,584) (77,271)
Accrued expenses and other liabilites (518,991) (623,239)
Other liabilities 32,567 218,394
----------- -----------
Total adjustments 907,469 1,648,047
----------- -----------
Net cash provided by operating activities 1,787,089 3,197,716
----------- -----------
Cash flows from investing activities:
Insurance proceeds from fire loss on building 488,629 --
Purchase of property, plant and equipment (1,630,966) (1,298,355)
Proceeds from sale of property, plant and equipment -- 78,000
Payment received on note for sale of property -- 17,891
----------- -----------
Net cash used in investing activities (1,142,337) (1,202,464)
----------- -----------
Cash flows from financing activities:
Net borrowings (payments) under line of credit (900,000) (1,600,000)
Purchase of treasury stock -- (423,521)
----------- -----------
Net cash used in financing activities (900,000) (2,023,521)
----------- -----------
----------- -----------
Decrease in cash and cash equivalents (255,248) (28,269)
----------- -----------
Cash and cash equivalents at beginning of period 526,536 311,423
----------- -----------
Cash and cash equivalents at end of period $ 271,288 $ 283,154
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest $ 197,736 $ 269,665
Income Taxes $ 240,600 $ 401,459
Non-cash investing and financing activity:
Sale of property for note receivable $ -- $ 398,047
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 September 28, 2003, and the consolidated
statements of income for the 13-week and 39-week periods and cash flows
for the 39-week period ended September 28, 2003 and September 29, 2002.
The consolidated statements of income for the 13-week and 39-week
periods ended September 28, 2003 are not necessarily indicative of the
results to be expected for the full year.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires the Company to record the
fair value of an asset retirement obligation as a liability in the
period in which it incurs a legal obligation associated with the
retirement of tangible long-lived assets that result from the
acquisition, construction, development, and/or normal use of the
assets. The Company also records a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial
measurement of the asset retirement obligation, the obligation will be
adjusted at the end of each period to reflect the passage of time and
changes in the estimated future cash flows underlying the obligation.
The Company adopted SFAS No. 143 on January 1, 2003. The adoption of
SFAS No. 143 did not have a material effect on the Company's financial
statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections. SFAS No. 145 amends existing guidance on
reporting gains and losses on the extinguishment of debt to prohibit
the classification of the gain or loss as extraordinary, as the use of
such extinguishments have become part of the risk management strategy
of many companies. SFAS No. 145 also amends SFAS No. 13 to require
sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The Company
adopted SFAS No. 145 on January 1, 2003. The adoption of SFAS No. 145
did not have a material effect on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. SFAS No. 146
addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force
(EITF) Issue 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity. The Company
adopted SFAS No. 146 on January 1, 2003. The adoption of SFAS No. 146
did not have a material effect on the Company's financial statements.
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 were applicable to guarantees issued
or modified after December 31, 2002 and did not have a material effect
on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of
FASB Statement No. 123. This Statement amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement No. 123 to
require prominent disclosures in both annual and interim financial
statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the
notes to these consolidated financial statements.
5
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 September 28, 2003 and September
29, 2002, the Company had 1,036,470 and 1,048,470 options and warrants
outstanding, respectively. As of September 28, 2003 and September 29,
2002, such stock options and warrants have the effect of increasing
basic weighted average shares outstanding by 37,408 and 71,526 for the
13-week periods and 40,274 and 76,050 for the 39-week periods,
respectively.
4. SFAS NO. 148. "ACCOUNTING FOR STOCK-BASED COMPENSATION"
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of
FASB Statement No. 123. This Statement amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement No. 123 to
require prominent disclosures in both annual and interim financial
statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the
notes to these consolidated financial statements.
The Company has adopted the disclosure-only provisions of 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 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
reduced to the pro forma amounts indicated below for the 13 week
periods and 39 week periods ended September 29, 2003 and September 30,
2002, respectively:
13 WEEKS ENDED
-----------------------
9/29/03 9/28/02
------- -------
Net income - as reported........................................................... $ 196,667 $ 457,794
Proforma net income - pro forma for SFAS No. 123................................... 173,397 455,927
Net income per share basic and diluted - as reported.............................. 0.06 0.13
Pro forma net income per share basic and diluted- pro forma for SFAS No. 123....... 0.05 0.13
39 WEEKS ENDED
-----------------------
9/29/03 9/28/02
------- -------
Net income - as reported........................................................... $ 879,620 $1,549,669
reported...........................................................................
Proforma net income - pro forma for SFAS No. 123................................... 847,395 1,544,067
Net income per share basic and diluted - as reported.............................. 0.26 0.44
Pro forma net income per share basic and diluted- pro forma for SFAS No. 123....... 0.25 0.44
6
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 for the fiscal year ended
December 29, 2002, 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 third quarter of
fiscal 2003 were up $40,329 or 0.3% to $15.2 million compared with the
same quarter one year ago. Restaurant sales for the third quarter of
fiscal 2003 were up $99,595 or 0.7% compared with the same quarter one
year ago, to $14.9 million. Total system sales at restaurants operating
in both fiscal quarters ("same-stores") decreased 2.8%. Company-owned
same-store sales for the quarter decreased 3.3%. Franchise-owned
same-store sales for the quarter decreased 2.2%. The Company believes
the decline in same-store sales is due primarily to the weak economy in
the regions where the Company's stores are concentrated.
On a year-to-date basis, the Company's revenues were down $1.4
million or 2.9% to $44.6 million compared with the same 39-week period
in fiscal 2002. Restaurant sales were down $1.2 million or 2.7% to
$43.8 million compared with the same 39-week period in fiscal 2002. The
decrease reflects a decline in same-store sales, partially offset by
one new restaurant opening. Year-to-date total system same-store sales
decreased 2.6% from the comparable period in fiscal 2002. Company-owned
same-store sales for the 39-week period decreased 3.9% and
franchise-owned same-store sales for the 39-week period decreased 0.8%
from the comparable period in fiscal 2002.
Costs and Expenses. Cost of sales, consisting primarily of
food and beverage costs, but also including paper and supplies,
increased 100 basis points as a percentage of restaurant sales in the
third quarter of fiscal 2003 to 27.8% from 26.8% for the same quarter
in fiscal 2002. The increase reflects higher cheese and produce
expenses.
On a year-to-date basis, cost of sales increased 60 basis
points as a percentage of restaurant sales to 27.7% from 27.1% from the
comparable period in fiscal 2002. The increase reflects higher cheese,
produce, liquor and paper and supply expenses.
As a percentage of restaurant sales, labor and other related
expenses did not change from the comparable period in fiscal 2002,
remaining at 33.3% for the third quarter. Declining same-store sales
has put pressure on labor costs given the semi-fixed nature of
management, workers compensation and health insurance expenses;
however, reduced over-time expense offset most of that pressure in the
third quarter.
7
On a year-to-date basis, labor and other related expenses as a
percentage of restaurant sales increased 60 basis points to 33.5% from
32.9% for the comparable period in fiscal 2002. The increase was due to
the same factors discussed above.
Restaurant operating expenses, which primarily includes rent,
property taxes, utilities, repair and maintenance, liquor taxes and
advertising, as a percentage of restaurant sales increased 20 basis
points to 25.8% in the third quarter of fiscal 2003 from 25.6% in the
same quarter in fiscal 2002. The increase reflects higher utility
expenses, higher insurance premiums, and fixed restaurant expenses
relative to declining same-store sales.
On a year-to-date basis, restaurant operating expenses
increased 70 basis points to 25.4% from 24.7% for the comparable period
in fiscal 2002. The increase was due to the same factors discussed
above.
As a percentage of total sales, general and administrative
expenses increased 30 basis points to 8.8% in the third quarter of
fiscal 2003 from 8.5% in the same quarter in fiscal 2002, reflecting a
reclass of Texas franchise taxes that were based on capital from income
tax expense to general and administrative expense.
On a year-to-date basis, general and administrative expenses
increased as a percentage of total sales 40 basis points to 8.9% in
fiscal 2003 compared with 8.5% for the comparable period in fiscal
2002. The increase, as a percentage of sales, reflects declining
same-store sales and the reclass of Texas franchise taxes as stated
above.
Depreciation and amortization expense as a percentage of total
sales increased 30 basis points to 4.0% in the third quarter of fiscal
2003 from 3.7% for the same quarter in fiscal 2002. The increase, in
part, reflects declining same-store sales. In absolute dollars,
depreciation and amortization increased $38,901 to $600,290 for the
third quarter of fiscal 2003 due to new asset additions and restaurant
remodels.
On a year-to-date basis, depreciation and amortization expense
as a percentage of total sales increased 40 basis points to 4.0% from
3.6% for the comparable period in fiscal 2002. The increase, in part,
reflects declining same-store sales. In absolute dollars, depreciation
and amortization increased $112,982 to $1,773,000 for the comparable
39-week period due to new asset additions and restaurant remodels.
The Company did not open new restaurants in the first or third
quarters of fiscal 2003, and opened one new restaurant in the second
quarter of 2003, incurring $95,526 in pre-opening expenses
year-to-date. No new restaurants were opened during the 39-week period
in fiscal year 2002.
Other Income (Expense). Net other income (expense) decreased
from income to an expense by $48,005 compared with the third quarter
one year ago. Interest income and other, net, decreased $65,105 to
$6,512 and $19,418 to $51,256, respectively, compared with the third
quarter one year ago. Last year the Company received $53,935 of
interest income from the IRS for tax refunds previously recorded in the
third quarter of fiscal 2002. Also in the third quarter of fiscal 2002,
the Company recorded $60,103 of business interruption insurance due to
fire damage at the Company's Humble, Texas location. For the third
quarter of fiscal 2003, interest expense decreased by $36,518 to
$60,821 compared with the third quarter in fiscal 2002, reflecting a
lower average debt balance in the third quarter of fiscal 2003. Total
debt as of September 28, 2003 was $3.5 million compared with $5.0
million as of September 29, 2002.
On a year-to-date basis, interest expense decreased by
$104,575 to $196,713, reflecting a lower average debt balance. Other,
net, increased $467,388 to $567,441, reflecting a gain of $477,508 for
insurance proceeds received from fire damage at the Humble, Texas
restaurant location.
Income Tax Expense. For the third quarter of fiscal 2003, the
Company's effective tax rate was 25.1% as compared with 30.7% in the
same quarter in fiscal 2002. The effective tax rate is a
8
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 39-weeks
ended September 28, 2003 with cash generated by operations and cash
reserves from the previous year. As of September 28, 2003, the
Company's operations generated approximately $1.8 million in cash, as
compared with $3.2 million in the same period one year ago. As of
September 28, 2003, the Company had a working capital deficit of
approximately $3.0 million, of which $1.5 million is due to Fleet
National Bank under the terms of its credit agreement ($250,000 payment
per quarter on the term note and $500,000 due on the revolver by June
29, 2004). 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 39 weeks
of fiscal 2003, capital expenditures on property, plant and equipment
were approximately $1.6 million as compared to $1.3 million for the
first 39 weeks of fiscal 2002. The capital expenditures were for
necessary replacement of equipment and leasehold improvements in
various older units. On April 17, 2003, the Company acquired an
existing franchise restaurant in a sale-leaseback transaction. The
Company closed, remodeled and reopened the restaurant on May 19, 2003,
spending $380,747 on the remodel. The Company completed the remodel of
one additional restaurant during the third quarter of fiscal year 2003.
The Company estimates its capital expenditures for the remainder of the
fiscal year will be approximately $250,000.
On June 29, 2001, the Company re-financed $7.8 million of its
debt with Fleet National Bank. The credit facility with Fleet is for
$10.0 million and consists of a $5.0 million term note that requires
quarterly principal payments of $250,000 and matures on June 29, 2006
and a $5.0 million revolving line of credit that matures on June 29,
2004. 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. The Company paid down $900,000 of its indebtedness during
the 39 weeks of fiscal year 2003. As of September 28, 2003, the Company
had $3.5 million outstanding on the credit facility. In August 2003,
the Fleet approved an amendment of the existing credit facility,
effective June 29, 2003 that amended the minimum rolling twelve-month
EBITDA and the cash flow coverage covenants. As of September 28, 2003,
the Company was in compliance with covenants as amended. The Company
expects to be in compliance with the covenants in the credit facility,
as amended, for the next twelve months.
Over the last several years, the Company's debt was incurred
to carry out acquisitions, to develop new restaurants, and to remodel
existing restaurants, as well as to accommodate other working capital
needs. The Company anticipates that it will use excess cash flow during
the remainder of fiscal year 2003 to pay down debt by approximately
$400,000 (approximately $300,000 less than what was estimated as of
June 29, 2003, reflecting fees and other expenses that will be paid in
the fourth quarter relating to the Company's acquisition of franchisee
restaurants as described below).
On September 25, 2003, the Company signed an agreement to
acquire 13 restaurants and related assets from its Beaumont-based
franchisee, Thomas Harken, and Mr. Harken's operating partner, Victor
Gonzalez, for a total consideration of approximately $13.75 million.
The restaurants to be acquired include eight Casa Ole restaurants
located in Southeast Texas, two Casa Ole restaurants located in
Southwest Louisiana, and three Crazy Jose's restaurants located in
Southeast Texas. In fiscal
9
year 2002, these restaurants had combined sales of over $20.0 million.
The transaction is expected to close by the end of this fiscal year.
On August 12, 2003, the Company decided to apply for listing
on the Nasdaq SmallCap Market after receiving notice from the Nasdaq
Listing Qualifications Staff that the minimum market value of its
publicly held shares of its common stock did not comply with the
requirements for continued listing on the Nasdaq National Market. The
Company was accepted on to the Nasdaq SmallCap Market in mid-September.
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 2003 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 amount outstanding at September 28, 2003, a 1% change in interest
rates would change interest expense by $8,750.
ITEM 4. 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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Exhibit
Number Document Description
------ --------------------
10.1 Asset Purchase Agreement by and among Casa Ole East, Ltd.
as Buyer, and Mexican Restaurants, Inc., as Guarantor,
Casa Ole of Beaumont, Inc., Casa Ole of Lake Charles,
Inc., Harken Real Estate Company, Inc., Crazy Jose's
Restaurant Group, Inc. and Crazy Jose's Franchising,
Inc., as Seller, and Thomas L. and Melba Harken and
Victor M. and Dolores Gonzalez, as Shareholders dated
September 25, 2003
31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
10
Exhibit
Number Document Description
------ --------------------
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 were four reports on Form 8-K filed during the
Company's fiscal quarter ended September 28, 2003.
On August 4, 2003, the Company filed a report on Form
8-K under Item 5 - Other Events, and under Item 7 -
Financial Statements and Exhibits, including its
August 1, 2003 press release announcing that it
received notice from the Nasdaq Listing
Qualifications Staff that it failed to comply with
the minimum market value of publicly held shares
required for continued listing on the Nasdaq National
Market. On August 13, 2003, the Company filed a
report on Form 8-K under Item 5 - Other Events, and
Item 7 - Financial Statements and Exhibits, which
included its August 12, 2003 press release announcing
that it had decided to apply for listing on the
Nasdaq SmallCap Market.
On August 19, 2003, the Company filed a report on
Form 8-K which furnished information under Item 12 -
Results of Operations and Financial Condition, and
under Item 7 - Financial Statements and Exhibits, and
which attached its August 18, 2003 press release
announcing its financial results for the second
quarter ended June 29, 2003. On September 26, 2003,
the Company filed a report on Form 8-K under Item 5 -
Other Events, and under Item 7 - Financial Statements
and Exhibits, including its September 25, 2003 press
release announcing its agreement to acquire 13
restaurants and related assets from its
Beaumont-based franchisee.
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: November 6, 2003 By: /s/ Curt Glowacki
----------------------
Curt Glowacki
Chief Executive Officer
(Principal Executive Officer)
Dated: November 6, 2003 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
------ --------------------
10.1 Asset Purchase Agreement by and among Casa Ole East, Ltd.
as Buyer, and Mexican Restaurants, Inc., as Guarantor,
Casa Ole of Beaumont, Inc., Casa Ole of Lake Charles,
Inc., Harken Real Estate Company, Inc., Crazy Jose's
Restaurant Group, Inc. and Crazy Jose's Franchising,
Inc., as Seller, and Thomas L. and Melba Harken and
Victor M. and Dolores Gonzalez, as Shareholders dated
September 25, 2003
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