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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 April 3, 2005
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 March 23, 2005: 3,414,805 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 04/03/2005 01/02/2005
----------- ----------
Current assets:
Cash and cash equivalents $ 1,282,619 $ 1,293,836
Royalties receivable 84,357 85,377
Other receivables 799,914 701,413
Inventory 668,998 658,687
Taxes receivable 322,315 573,840
Prepaid expenses and other current assets 1,028,995 1,007,928
----------- -----------
Total current assets 4,187,198 4,321,081
----------- -----------
Property, plant and equipment 29,530,468 28,929,887
Less accumulated depreciation (14,069,207) (13,464,153)
----------- -----------
Net property, plant and equipment 15,461,261 15,465,734
Goodwill, net 10,644,690 10,644,690
Deferred tax assets 547,193 619,087
Property held for resale 505,118 505,118
Other assets 723,645 770,476
----------- -----------
$32,069,105 $32,326,186
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 1,000,000 $ 1,000,000
Accounts payable 1,469,690 1,623,859
Accrued sales and liquor taxes 660,417 740,898
Accrued payroll and taxes 1,034,749 1,043,182
Accrued expenses 641,550 1,097,640
----------- -----------
Total current liabilities 4,806,406 5,505,579
----------- -----------
Long-term debt, net of current portion 5,750,000 6,000,000
Other liabilities 1,246,103 1,183,426
Deferred gain 1,717,177 1,769,212
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized - -
Capital stock, $0.01 par value, 20,000,000 shares authorized,
3,414,805 shares issued 47,327 47,327
Additional paid-in capital 20,121,076 20,121,076
Retained earnings 9,978,938 9,303,791
Deferred compensation - (6,303)
Treasury stock, cost of 1,317,900 common shares in 2004 (11,597,922) (11,597,922)
----------- -----------
Total stockholders' equity 18,549,419 17,867,969
----------- -----------
$32,069,105 $32,326,186
=========== ===========
2
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
13-WEEK 13-WEEK
PERIOD ENDED PERIOD ENDED
04/03/2005 03/28/2004
------------ ------------
Revenues:
Restaurant sales $20,101,992 $18,676,120
Franchise fees, royalties and other 175,690 191,780
----------- -----------
20,277,682 18,867,900
----------- -----------
Costs and expenses:
Cost of sales 5,430,155 5,206,688
Labor 6,603,855 6,097,546
Restaurant operating expenses 4,684,289 4,316,090
General and administrative 1,789,735 1,502,283
Depreciation and amortization 652,278 607,712
Pre-opening costs 989 -
(Gain) loss on sale of assets 2,192 17,072
----------- -----------
19,163,493 17,747,391
----------- -----------
Operating income 1,114,189 1,120,509
----------- -----------
Other income (expense):
Interest income 630 7,371
Interest expense (150,578) (139,265)
Other, net 42,190 23,071
----------- -----------
(107,758) (108,823)
----------- -----------
Income from continuing operations before income taxes: 1,006,431 1,011,686
Income tax expense (benefit) 329,667 333,705
----------- -----------
Income from continuing operations 676,764 677,981
Discontinued Operations:
Loss from discontinued operations (2,565) (117,764)
Impairments and restaurant closure costs - (117,398)
----------- -----------
Loss from discontinued operations before income taxes (2,565) (235,162)
----------- -----------
Income tax benefit 948 87,974
----------- -----------
Loss from discontinued operations (1,617) (147,188)
Net income $ 675,147 $ 530,793
=========== ===========
Basic income per share:
Income from continuing operations $ 0.20 $ 0.20
Loss from discontinued operations (0.00) (0.04)
----------- -----------
Net income (loss) $ 0.20 $ 0.16
=========== ===========
Diluted income per share:
Income from continuing operations $ 0.18 $ 0.19
Loss from discontinued operations (0.00) (0.04)
----------- -----------
Net income (loss) $ 0.18 $ 0.15
=========== ===========
Weighted average number of shares (basic) 3,414,805 3,384,605
=========== ===========
Weighted average number of shares (diluted) 3,732,401 3,516,467
=========== ===========
3
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
13-WEEKS ENDED 13-WEEKS ENDED
4/03/2005 3/28/2004
-------------- --------------
Cash flows from operating activities:
Net income from continuing operations $ 676,764 $ 677,981
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 652,278 607,712
Deferred gain amortization (52,035) (52,036)
Loss (gain) on sale of property, plant & equipment 2,192 17,072
Deferred compensation 6,303 10,326
Deferred taxes 71,894 (4,116)
Changes in assets and liabilities:
Royalties receivable 1,020 12,220
Other receivables (96,401) (256,611)
Income tax receivable/payable 251,525 204,507
Inventory (10,311) 59,527
Prepaid and other current assets (23,560) (163,729)
Other assets 17,466 671,789
Accounts payable (154,713) 169,383
Accrued expenses and other liabilities (523,089) 264,529
Other liabilities 62,677 55,659
---------- -----------
Total adjustments 205,246 1,596,232
---------- -----------
Net cash provided by continuing operations 882,010 2,274,213
---------- -----------
Net cash provided (used) by discontinued operations (23,532) 79,066
---------- -----------
Net cash provided by operating activities 858,478 2,353,279
Cash flows from investing activities:
Purchase of property, plant and equipment (619,695) (347,452)
Business Acquisition, net of cash acquired - (7,003,248)
---------- -----------
Net cash used in continuing operations (619,695) (7,350,700)
---------- -----------
Net cash used in discontinued operations - (1,460)
---------- -----------
Net cash used in investing activities (619,695) (7,352,160)
Cash flows from financing activities:
Net borrowings (payments) under line of credit (250,000) 2,475,000
Additions to Long term Notes Payable - 3,000,000
---------- -----------
Net cash provided by (used) in financing activities (250,000) 5,475,000
---------- -----------
Increase (decrease) in cash and cash equivalents (11,217) 476,119
---------- -----------
Cash and cash equivalents at beginning of period 1,293,836 366,042
---------- -----------
Cash and cash equivalents at end of period $1,282,619 $ 842,161
---------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest $ 145,478 $ 74,153
Income Taxes $ 5,645 $ 6,825
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
(UNAUDITED)
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 April 3, 2005, and the consolidated statements
of income and cash flows for the 13-week periods ended April 3, 2005
and March 28, 2004. The consolidated statements of income for the
13-week period ended April 3, 2005 are not necessarily indicative of
the results to be expected for the full year.
The consolidated statements of income and cash flows for the
13-week periods ended April 3, 2005 and March 28, 2004 have been
adjusted to remove the operations of closed restaurants, which have
been reclassified as discontinued operations. Consequently, the
consolidated statements of income and cash flows for the 13-week period
ended March 28, 2004 shown in the accompanying consolidated financial
statements have been reclassified to conform to the April 3, 2005
presentation. These reclassifications have no effect on total assets,
total liabilities, stockholders equity or net income.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of
FASB Statement No. 123, Accounting for Stock-Based Compensation. 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.
In December 2004, the FASB issued SFAS No. 153, Exchanges of
Nonmonetary Assets -- an amendment of APB Opinion No. 29, Accounting
for Nonmonetary Transactions. This Statement amends APB Opinion No. 29
Accounting for Nonmonetary Transactions, based on the principle that
exchanges of nonmonetary assets should be measured based on the fair
value of the assets exchanged. Certain of the disclosure modifications
are required for fiscal periods beginning after June 15, 2005. The
adoption of SFAS No. 153 will 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.
At year end 2004, management performed a detailed analysis
of leasehold improvement amortization. The purpose of the analysis was
to verify that leasehold improvements were amortized over the shorter
of the lease term plus options or estimated useful life of the assets.
The analysis resulted in differences that were immaterial to the
financial statements for all periods presented, therefore restatement
of the financial statements was determined by management to be
unnecessary. In the first quarter of 2005, the Company revised the
estimated useful life for certain leasehold
5
improvements so that they are amortized over the shorter of the lease
term plus options or estimated useful life of the assets. The net
impact of this change of estimate was a decrease of net income of
$9,000 for the 13 weeks ended April 3, 2005. There was no effect on
basic and diluted earnings per share.
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 April 3, 2005 and March 28, 2004,
the Company had 976,270 and 1,018,470 options and warrants outstanding,
respectively. As of April 3, 2005 and March 28, 2004, such stock
options and warrants have the effect of increasing basic weighted
average shares outstanding by 317,596 and 131,862 for such 13-week
periods, respectively.
4. SFAS NO. 148. "ACCOUNTING FOR STOCK-BASED COMPENSATION"
In December 2004, the FASB issued SFAS 123 (Revised),
Share-Based Payment, a revision of SFAS 123, Accounting for Stock-Based
Compensation. SFAS 123R required the fair value measurement of all
stock-based payments to employees, including grants of employee stock
options, and recognition of those expenses in the statement of
operations. SFAS 123R is effective for reporting periods beginning
after December 15, 2005. We will continue to account for stock-based
compensation using the intrinsic value method until adoption of SFAS
123R on January 2, 2006. Historically, the compensation expense
recognized related to stock options under this method has been minimal.
As a result, adoption of the provisions of SFAS 123R is expected to
have an impact to reported net income and earnings per share. We have
not yet determined the method of adoption or the effect of adopting
SFAS 123R and have not determined whether the adoption will result in
amounts that are similar to the current pro forma disclosures under
SFAS 123.
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 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 ended April 3, 2005 and March 28, 2004:
13 WEEKS ENDED
----------------------
4/3/05 3/28/04
--------- ----------
Net income - as reported............................................... $ 675,147 $ 530,793
Pro forma net income - pro forma for SFAS No. 123...................... 658,729 530,793
Net income per share diluted - as reported............................. 0.18 0.15
Pro forma net income per share diluted - pro forma for SFAS No. 123... 0.18 0.15
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 Bank of America (formerly Fleet
National Bank), CNL Franchise Network, LP ("CNL") and the sellers of
Beaumont-based franchise restaurants. Bank of America (formerly Fleet
National Bank) provided $3.1 million of the acquisition financing by
amending its 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.
6
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. The Company acquired net assets
of $6,554,732 including goodwill of $3,283,916.
On October 14, 2004, the Company completed its purchase of one
franchise restaurant in Brenham, Texas for approximately $215,000,
which included $164,509 classified as goodwill. The restaurant was
closed, remodeled and re-opened on November 22, 2004.
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; the risk of food borne illness; 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 most recently filed Annual
Report and Form 10-K that attempt to advise interested parties of the
risks and factors that may affect the Company's business. The Company
undertakes no obligation to update any such statements or publicly
announce any updates or revisions to any of the forward-looking
statements contained herein, to reflect any change in its expectations
with regard thereto or any change in events, conditions, circumstances
or assumptions underlying such statements.
The Company operates and franchises Mexican-theme restaurants
featuring various elements associated with the casual dining experience
under the names Casa Ole, Monterey's Tex-Mex Cafe, Monterey's Little
Mexico, Tortuga Coastal Cantina and La Senorita. At April 3, 2005 the
Company operated 60 restaurants, franchised 19 restaurants and licensed
one restaurant in various communities in Texas, Louisiana, Oklahoma and
Michigan.
The Company's primary source of revenues is the sale of food
and beverages at Company-owned restaurants. The company also derives
revenues from franchise fees, royalties and other franchise-related
activities. Franchise fee revenue from an individual franchise sale is
recognized when all services relating to the sale have been performed
and the restaurant has commenced operation. Initial franchise fees
relating to area franchise sales are recognized ratably in proportion
to the services that are required to be performed pursuant to the area
franchise or development agreements and proportionately as the
restaurants within the area are opened.
The consolidated statements of income and cash flows for the
13-week periods ended April 3, 2005 and March 28, 2004 have been
adjusted to remove the operations of closed restaurants, which have
been reclassified as discontinued operations. Consequently, the
consolidated statements of income and cash flows for the 13-week period
ended March 28, 2004 shown in the accompanying consolidated financial
statements have been reclassified to conform to the April 3, 2005
presentation. These reclassifications have no effect on total assets,
total liabilities, stockholders equity or net income.
7
RESULTS OF OPERATIONS
REVENUES. The Company's revenues for the first quarter of
fiscal 2005 increased $1.4 million or 7.5% to $20.3 million compared
with $18.9 million for the same quarter in fiscal 2004. Restaurant
sales for first quarter of fiscal 2005 increased $1.4 million or 7.6%
to $20.1 million compared with $18.7 million for the first quarter of
fiscal 2004. Approximately one half of the increase reflects positive
same-restaurant sales. For the first quarter ended April 3, 2005, total
system same-restaurant sales increased 3.1%, Company-owned same
restaurant sales increased 3.4% and franchised-owned same restaurant
sales increased 2.0%. The other half of the increase reflects 91 days
of sales related to the Beaumont-based franchisee stores and related
assets acquired in January 2004 in the first quarter of fiscal 2005
compared with 82 days of sales in the first quarter of fiscal 2004.
Franchise fees, royalties and other decreased $16,090 or 8.4%
to $175,690, reflecting lost royalty income from the acquisition of the
Brenham, Texas franchise restaurant, and the closure of a Houston-based
franchise restaurant.
COSTS AND EXPENSES. Costs of sales, consisting of food,
beverage, liquor, supplies and paper costs, decreased as a percent of
restaurant sales 90 basis points to 27.0% compared with 27.9% in the
first quarter of fiscal 2004. The decrease reflects lower beef and
chicken contracts that went into effect in January 2005.
Labor and other related expenses increased as a percentage of
restaurant sales 30 basis points to 32.9% as compared with 32.6% in the
first quarter of fiscal 2004. The increase in labor as a percentage of
restaurant sales reflects an increase of group health insurance and
workers compensation insurance premiums.
Restaurant operating expenses, which primarily includes rent,
property taxes, utilities, repair and maintenance, liquor taxes,
property insurance, general liability insurance and advertising,
increased as a percentage of restaurant sales 20 basis points to 23.3%
as compared with 23.1% in the first quarter of fiscal 2004. The
increase reflects higher natural gas and water and sewer costs.
General and administrative expenses consist of expenses
associated with corporate and administrative functions that support
restaurant operations. General and administrative expenses increased as
a percentage of total sales 80 basis points to 8.8% in the first
quarter of fiscal 2005 as compared with 8.0% in same quarter one year
ago. The increase reflects an increase of group health insurance
premiums, legal, audit fees and bonus accruals.
Depreciation and amortization expenses include the
depreciation of fixed assets and the amortization of intangible assets.
As a percentage of total sales, depreciation and amortization expense
did not change compared with the first quarter of fiscal 2004,
remaining at 3.2% of total sales. Actual depreciation and amortization
expense increased $44,566 in the first quarter of fiscal 2005 compared
with the same quarter one year ago, primarily due to net depreciable
assets added.
(GAIN) LOSS ON SALE OF ASSETS. During the first quarters of
fiscal 2005 and 2004, the Company recorded losses of $2,192 and
$17,072, respectively, on the disposition of miscellaneous assets.
OTHER INCOME (EXPENSE). Net expense decreased $1,065 to
$107,758 in the first quarter of fiscal 2005 compared with a net
expense of $108,823 in the first quarter of fiscal year 2004. Interest
expense increased $11,313 to $150,578 in the first quarter of fiscal
year 2005 compared with interest expense of $139,265 in the first
quarter of fiscal year 2004, reflecting an increase in interest rates
despite a decrease in debt outstanding. The increase in interest
expense was offset by an increase in higher income, net.
INCOME TAX EXPENSE. The Company's effective tax rate from
continuing operations for the first quarter of fiscal 2005 was 32.8% as
compared to 33.0% for the first quarter of fiscal 2004. In the first
quarter of fiscal 2005, the Company had approximately the same pretax
income compared to the first quarter of fiscal 2004. In both quarters,
the permanent differences were approximately the same, resulting in
approximately the same effective tax rate.
RESTAURANT CLOSURE COSTS AND DISCONTINUED OPERATIONS. In the
first quarters of fiscal years 2005 and 2004, the Company recorded
losses from discontinued operations related to the 2004 closure of
three restaurants and the 2003 closure of one restaurant of $1,617 and
$147,188, respectively.
8
LIQUIDITY AND CAPITAL RESOURCES
The Company met the first quarter of fiscal 2005 capital
requirements with cash generated by operations and its cash reserve. In
the first quarter of fiscal 2005, the Company's operations generated
$858,478 in cash, as compared with $2.4 million in the first quarter of
fiscal 2004. As of April 3, 2005, the Company had a working capital
deficit of $619,208, compared with a working capital deficit of
approximately $1.2 million at January 2, 2005. 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 quarter of
fiscal 2005, total cash used for capital requirements was $619,695. The
capital expenditures were for necessary replacement of equipment and
leasehold improvements in various older units and the moderate remodel
of one restaurant.
For fiscal year 2005, the Company plans to develop two new
restaurants, extensively remodel one restaurant and moderately remodel
five other restaurants. The presently estimated capital needed for
fiscal year 2005 for general corporate purposes, including remodeling
and new restaurant expansion, is approximately $4.1 million. The
Company has identified several sites for new restaurant expansion, and
is currently negotiating a lease for one of the sites, which it plans
to open during the third quarter of fiscal 2005.
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. During the first quarter of fiscal 2005, the Company paid down
$250,000 of its indebtedness. The Company anticipates that it will use
excess cash flow during fiscal year 2005 to pay down approximately
$750,000 of additional indebtedness for the remainder of the fiscal
year.
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 Bank of America (formerly Fleet
National Bank), CNL Franchise Network, LP ("CNL') and the sellers of
Beaumont-based franchise restaurants. Bank of America provided $3.1
million of the acquisition by amending its 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 pay 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.
On January 7, 2004, the Company amended its $10.0 million
credit facility with Bank of America to accommodate the acquisition of
the Beaumont-based franchise 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 0.75% on the unused portion of the revolver from
the date of the credit agreement. On January 7, 2004, the Company drew
$3.1 million on its facility to complete the Beaumont-based
acquisition. As of April 3, 2005, the Company had $3.75 million
outstanding on the credit facility and $3.0 million in notes for a
total indebtedness of $6.75 million. The Company is in full compliance
with all debt covenants as amended. The Company expects to be in
compliance with all debt covenants throughout fiscal year 2005.
On April 1, 2005, the Company and Bank of America further
amended the $10.0 million credit facility to accommodate the Company's
growth plans. The amendment allows for additional capital expenditures,
revised certain covenant ratios, increased the amount of allowable
stock repurchases and extended the maturity date of the revolving line
of credit to January 7, 2009.
9
The Company's management believes that with its operating cash
flow and the Company's revolving line of credit with Bank of America,
funds will be sufficient to meet operating requirements and to finance
routine capital expenditures and new restaurant growth through the end
of the 2005 fiscal year. Unless the Company violates an important debt
covenant, the Company's credit facility with Bank of America is not
subject to triggering events that would cause the credit facility to
become due sooner than the maturity dates described in the previous
paragraphs.
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 April 3, 2005, a 1% change in
interest rates would change interest expense by $9,375.
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 control over financial
reporting or in other factors that could significantly affect
this control occurred during the Company's most recent fiscal
quarter 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
------ --------------------
10.1 Amendment No. 1 to Amended and Restated Revolving
Credit and Term Loan Agreement and Certain Related
Loan Documents
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: May 9, 2005 By: /s/ Curt Glowacki
Curt Glowacki ---------------------
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Andrew J. Dennard
Dated: May 9, 2005 ---------------------
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
------ --------------------
10.1 Amendment No. 1 to Amended and Restated Revolving
Credit and Term Loan Agreement and Certain Related
Loan Documents
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
13