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 26, 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 October 27, 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)
ASSETS 09/26/2004 12/28/2003
------------ ------------
Current assets:
Cash and cash equivalents $ 552,685 $ 366,042
Royalties receivable 154,231 179,517
Other receivables 757,239 423,670
Inventory 622,821 555,064
Taxes receivable 304,321 345,006
Prepaid expenses and other current assets 829,332 717,899
------------ ------------
Total current assets 3,220,629 2,587,198
------------ ------------
Property, plant and equipment 29,842,682 24,484,571
Less accumulated depreciation (13,623,950) (11,502,668)
------------ ------------
Net property, plant and equipment 16,218,732 12,981,903
Goodwill, net 10,480,181 7,196,265
Deferred tax assets 888,483 1,272,173
Property held for resale 505,118 884,118
Other assets 798,367 939,579
------------ ------------
$ 32,111,510 $ 25,861,236
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 1,000,000 $ 1,000,000
Accounts payable 1,729,707 1,516,217
Accrued sales and liquor taxes 588,024 469,817
Accrued payroll and taxes 1,014,252 976,146
Accrued expenses 971,669 1,294,486
------------ ------------
Total current liabilities 5,303,652 5,256,666
------------ ------------
Long-term debt, net of current portion 6,250,000 1,775,000
Other liabilities 1,014,693 898,115
Deferred gain 1,821,248 1,977,355
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized -- 0
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 9,279,656 7,542,817
Deferred compensation (16,629) (47,607)
Treasury stock, cost of 1,348,100 common shares (11,709,513) (11,709,513)
------------ ------------
Total stockholders' equity 17,721,917 15,954,100
------------ ------------
$ 32,111,510 $ 25,861,236
============ ============
2
Mexican Restaurants, Inc.
Page 3.
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
9/26/2004 9/28/2003 9/26/2004 9/28/2003
------------ ------------ ------------ ------------
Revenues:
Restaurant sales 19,870,299 $ 14,857,758 $ 59,087,980 $ 43,769,906
Franchise fees, royalties and other 191,479 299,296 588,860 868,944
------------ ------------ ------------ ------------
20,061,778 15,157,054 59,676,840 44,638,850
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 5,589,602 4,131,939 16,644,702 12,128,125
Labor 6,598,550 4,944,326 19,569,271 14,644,431
Restaurant operating expenses 4,621,862 3,827,094 13,793,226 11,113,980
General and administrative 1,658,041 1,333,358 4,811,615 3,968,340
Depreciation and amortization 589,060 600,290 1,736,909 1,773,000
Pre-opening costs 16,961 1,857 27,489 95,526
Restaurant closure costs 247 52,648 167,552 52,648
------------ ------------ ------------ ------------
19,074,323 14,891,512 56,750,764 43,776,050
------------ ------------ ------------ ------------
Operating income 987,455 265,542 2,926,076 862,800
------------ ------------ ------------ ------------
Other income (expense):
Interest income 311 6,512 9,291 20,165
Interest expense (138,238) (60,821) (409,258) (196,713)
Other, net 12,394 51,256 36,027 567,441
------------ ------------ ------------ ------------
(125,533) (3,053) (363,940) 390,893
------------ ------------ ------------ ------------
Income before income tax expense 861,922 262,489 2,562,136 1,253,693
Income tax expense (benefit) 278,664 65,822 825,297 374,073
------------ ------------ ------------ ------------
Net income $ 583,258 $ 196,667 $ 1,736,839 $ 879,620
============ ============ ============ ============
Basic income per share $ 0.17 $ 0.06 $ 0.51 $ 0.26
============ ============ ============ ============
Diluted income per share $ 0.16 $ 0.06 $ 0.48 $ 0.26
============ ============ ============ ============
Weighted average number of shares (basic) 3,384,605 3,384,605 3,384,605 3,384,605
============ ============ ============ ============
Weighted average number of shares (diluted) 3,656,723 3,422,013 3,602,265 3,424,879
============ ============ ============ ============
3
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
39-WEEK PERIODS ENDED
----------------------------
9/26/2004 9/28/2003
----------- -----------
Cash flows from operating activities:
Net income $ 1,736,839 $ 879,620
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,736,909 1,773,000
Deferred gain amortization (156,107) (156,107)
Asset impairments and restaurant closure costs 167,552 33,498
Loss (gain) on sale of property, plant & equipment 27,921 (476,627)
Deferred compensation 30,978 30,978
Deferred taxes 383,690 202,428
Changes in assets and liabilities:
Royalties receivable 25,286 (27,930)
Other receivables (343,569) 159,737
Income tax receivable/payable 40,685 23,168
Inventory 81,694 44,182
Prepaid and other current assets (111,433) 46,104
Other assets 214,637 (79,954)
Accounts payable 164,491 (178,584)
Accrued expenses and other liabilities (299,860) (518,991)
Other liabilities 116,578 32,567
----------- -----------
Total adjustments 2,079,452 907,469
----------- -----------
Net cash provided by operating activities 3,816,291 1,787,089
----------- -----------
Cash flows from investing activities:
Insurance proceeds from fire loss on building -- 488,629
Purchase of property, plant and equipment (1,955,667) (1,630,966)
Proceeds from sale of property, plant and equipment 405,751 --
Business Acquisition, net of cash acquired (6,554,732) --
----------- -----------
Net cash used in investing activities (8,104,648) (1,142,337)
----------- -----------
Cash flows from financing activities:
Net borrowings (payments) under line of credit 1,475,000 (900,000)
Additions to Long term Notes Payable 3,000,000
----------- -----------
Net cash provided by (used) in financing activities 4,475,000 (900,000)
----------- -----------
----------- -----------
Increase (decrease) in cash and cash equivalents 186,643 (255,248)
----------- -----------
Cash and cash equivalents at beginning of period 366,042 526,536
----------- -----------
Cash and cash equivalents at end of period $ 552,685 $ 271,288
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest $ 359,384 $ 197,736
Income Taxes $ 455,883 $ 240,600
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 September 26, 2004, and the consolidated
statements of income for the 13-week and 39-week periods and cash flows
for the 39-week period ended September 26, 2004 and September 28, 2003.
The consolidated statements of income for the 13-week and 39-week
periods ended September 26, 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, an
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 September 26, 2004 and September
28, 2003, the Company had 1,012,470 and 1,036,470 options and warrants
outstanding, respectively. As of September 26, 2004 and September 28,
2003, such stock options and warrants have the effect of increasing
basic weighted average shares outstanding by 272,118 and 37,408 for the
13-week periods and 217,660 and 40,274 for the 39-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 39-week periods ended September 26, 2004
and September 28, 2003:
13 WEEKS ENDED
-------------------
9/26/04 9/28/03
-------- --------
Net income - as reported .............................................. $583,258 $196,667
Pro forma net income - pro forma for SFAS No. 123 ..................... 566,240 173,397
Net income per share diluted - as reported ............................ 0.16 0.06
Pro forma net income per share diluted- pro forma for SFAS No. 123 .... 0.16 0.05
39 WEEKS ENDED
---------------------
9/26/04 9/28/03
---------- --------
Net income - as reported ............................................. $1,736,839 $879,620
Pro forma net income - pro forma for SFAS No. 123 .................... 1,709,902 847,395
Net income per share diluted - as reported ........................... 0.48 0.26
Pro forma net income per share diluted- pro forma for SFAS No. 123 ... 0.48 0.25
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 32.3% and 32.2% for the third quarter and
year to date, respectively, of fiscal 2004 and 25.1% and 29.5% for the
third quarter and year to date, respectively, of fiscal 2003. The
39-weeks ended September 28, 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
-------------------------
9/26/04 9/28/03
----------- -----------
Revenues ..................... $20,061,778 $20,188,848
Net income ................... 583,258 247,115
Diluted income per share ..... 0.16 0.07
39 WEEKS ENDED
-------------------------
9/26/04 9/28/03
----------- -----------
Revenues ..................... $59,676,840 $59,534,713
Net income ................... 1,736,839 1,013,040
Diluted income per share ..... 0.48 0.30
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 3,283,916
---------
Total assets 6,589,882
Less: Cash acquired (35,150)
---------
Net assets acquired 6,554,732
=========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q relate to future events
and expectations and as such constitute 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 28, 2003 and subsequent quarterly and other reports, 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 2004 increased $4.9 million or 32.4% to $20.1 million, compared
with the same quarter one year ago. Restaurant sales for the third
quarter of fiscal 2004 increased $5.0 million or 33.7% to $19.9
million, compared with the same quarter in fiscal 2003. The increase
reflects the acquisition of 13 restaurants and related assets from the
Company's Beaumont-based franchisee, which was closed on January 7,
2004. The increase also reflects positive same-restaurant sales: Total
system sales at restaurants operating in both fiscal quarters
("same-stores") increased 2.8%, Company-owned same-store sales for the
quarter increased 2.9% and franchise-owned same-store sales for the
quarter increased 2.6% from the same quarter in fiscal 2003. Franchise
fees, royalties and other decreased $107,817 or 36.0%, reflecting lost
royalty income from the Beaumont-based franchise restaurants acquired
by the Company in January 2004.
On a year-to-date basis, the Company's revenues were up $15.0
million or 33.7% to $59.7 million compared with $44.6 million for the
same 39-week period one year ago. Restaurant sales for the 39-week
period of fiscal year 2004 increased $15.3 million or 35.0% to $59.1
million compared with the same 39-week period in fiscal 2003. The
increase reflects the acquisition of 13 restaurants and the 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 39-week periods ("same-
7
stores") increased 3.1%, Company-owned same-store sales for the 39-week
period increased 3.2% and franchise-owned same-store sales for the
39-week period increased 2.7% from the same 39-week period in fiscal
2003. Franchise fees, royalties and other decreased $280,084 or 32.2%,
reflecting lost royalty income from the Beaumont-based franchise
restaurants acquired by the Company.
Costs and Expenses. Cost of sales, consisting primarily of food
and beverage costs, but also including paper and supplies, increased 30
basis points as a percentage of restaurant sales in the third quarter
of fiscal 2004 to 28.1% from 27.8% for the same quarter in fiscal 2003.
The increase reflects higher cheese, protein and produce 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 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 10 basis points to 33.2% compared with 33.3% for the
same quarter in fiscal 2003. On a year-to-date basis, labor and other
related expenses decreased as a percentage of restaurant sales 40 basis
points to 33.1% from 33.5% from the comparable 39-week period in fiscal
2003. The improvements in each of the periods reflect 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 decreased 250 basis points as a percentage of restaurant
sales to 23.3% in the third quarter of fiscal 2004 from 25.8% 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, and lower rent and other semi-fixed expenses
due to the closure of under-performing restaurants.
On a year-to-date basis, restaurant operating expenses
decreased 210 basis points as a percentage of restaurant sales to 23.3%
from 25.4% from the comparable period in fiscal 2003. The improvement
was due to the same factors discussed above.
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 50 basis points to 8.3% in the third
quarter of fiscal 2004 compared with 8.8% the same quarter one year
ago. On a year-to-date basis, general and administrative expense
decreased as a percentage of total sales 80 basis points to 8.1% from
8.9% from the comparable period in fiscal 2003. The improvements in
these periods reflect efficiencies gained with the acquisition of the
Beaumont-based restaurants, offset in part by executive and
non-executive bonus accruals and higher professional and legal
expenses.
Depreciation and amortization expense as a percentage of total
sales decreased 110 basis points to 2.9% in the third quarter of fiscal
2004 from 4.0% for the same quarter in fiscal 2003. 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 decreases in these periods reflect the
acquisition of the Beaumont-based restaurants, which had a smaller asset
base relative to the restaurant sales added. The decrease also reflects
the closure of under-performing restaurants.
Year-to-date, the Company has remodeled two restaurants in
fiscal 2004, incurring pre-open costs of $27,489 compared with $95,526
for the 39-week period in fiscal 2003, in which one new restaurant was
opened.
Year-to-date restaurant closure costs of $167,552 were
incurred primarily in the first and second quarters of fiscal 2004 and
related to one of the restaurants impaired in the 2003 fourth quarter
but not closed until the first quarter of fiscal 2004. Most of the costs
incurred during fiscal 2004 were due to delays in a lease assignment.
8
Other Income (Expense). Other income (expense), net increased
$122,480 from an expense of $3,053 in the third quarter of fiscal 2003
to an expense of $125,533 in the third quarter of fiscal 2004. Interest
expense increased $77,417 to $138,238 in the third 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 third quarter of fiscal 2003 included a
$27,127 sales tax refund. No refunds were received in the third quarter
of fiscal 2004. There were no gains recorded in the third quarter of
fiscal 2004; however, the Company did incur $5,979 in losses from the
disposition of assets during the third quarter.
On a year-to-date basis, other income (expense), net decreased
$754,833 from income of $390,893 in fiscal 2003 to an expense of
$363,940 in fiscal 2004. Interest expense increased $212,545 to
$409,258 for the 39-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
39-week period of fiscal 2003 reflected a partial gain of $477,508 for
insurance proceeds received as a result of fire damage at the Humble,
Texas restaurant location. There were no gains recorded in the 39-week
period of fiscal 2004; however, the Company did incur $27,921 in losses
from the disposition of assets.
Income Tax Expense. For the third quarter of fiscal 2004, the
Company's effective tax rate was 32.3% as compared with 25.1% 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 39-weeks
ended September 26, 2004 with cash generated by operations. As of
September 26, 2004, the Company's operations had generated
approximately $3.8 million in cash, as compared with $1.8 million in
the same period in fiscal 2003. As of September 26, 2004, the Company
had a working capital deficit of approximately $2.1 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. Further, the Company's Other Receivables account balance
increased $333,569 to $757,239, reflecting the increase in credit card
sales, primarily due to the acquisition of the Beaumont-based
restaurants. 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 2004, capital expenditures on property, plant and equipment
were approximately $2.0 million as compared to $1.6 million for the
first 39 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
39-week period, and these restaurants re-opened May 28, 2004 and June
28, 2004. Also during the 39-week period of fiscal 2004, the Company
sold one previously closed restaurant property located in Plainview,
Texas for a total purchase price of $442,000. Just after the third
quarter of fiscal 2004 ended, the Company purchased the Casa Ole
franchise restaurant located in Brenham, Texas for the forgiveness of
$78,000 in past due royalties plus $120,000 in cash. The restaurant
will be closed for remodeling and is expected to reopen in mid-November
of 2004. The Company estimates its capital expenditures for the
remainder of the fiscal year will be approximately $0.8 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 September 26, 2004, the Company had $4.25 million
outstanding on its term note. There is currently no debt drawn on the
revolver. The Company paid down $1.6 million of indebtedness during the
39-week period of fiscal 2004. As of September 26, 2004, the Company
was in compliance with all debt covenants. The Company expects to be in
compliance with the loan agreement in the credit facility 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 and fiscal year 2005. 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. A portion of
the Company's long-term debt bears interest at floating market rates.
Based on the amount outstanding at September 26, 2004, a 1% change in
interest rates would change interest expense by $10,625.
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 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 6. EXHIBITS.
(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
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 2, 2004 By: /s/ Curt Glowacki
------------------------
Curt Glowacki
Chief Executive Officer
(Principal Executive Officer)
Dated: November 2, 2004 By: /s/ Andrew J. Dennard
------------------------
Andrew J. Dennard
Senior Vice President, Chief Financial Officer & Treasurer
(Principal Financial Officer and
(Principal Accounting Officer)
12
Index to 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