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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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[ ] Soliciting Material Pursuant to Section 240.14a-12
Mexican Restaurants Inc.
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(Name of Registrant as Specified In Its Charter)
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SEC 1913 (02-02)
MEXICAN RESTAURANTS, INC.
1135 EDGEBROOK DRIVE
HOUSTON, TEXAS 77034
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 24, 2005
DEAR SHAREHOLDER:
You are cordially invited to attend the 2005 Annual Meeting of
Shareholders of Mexican Restaurants, Inc. (the "Company") at the Monterey's
Little Mexico restaurant located at 270 W. 1st Street, Humble, Texas 77338 on
Tuesday, May 24, 2005 at 9:30 a.m., Houston, Texas time, for the following
purposes:
1. To elect two Class III directors, each to serve for a term of
three years, or until their respective successors shall have been
duly elected and shall have qualified;
2. To transact such other business as may properly come before the
meeting.
Shareholders of record of the Company's Common Stock at the close of
business on April 5, 2005 are entitled to vote at the Annual Meeting or any
adjournment thereof. Any shareholder attending the meeting may vote in person
even if he or she previously returned a proxy. Each share of the Company's
Common Stock entitles the holder to one vote.
By Order of the Board of Directors,
Louis P. Neeb
Chairman of the Board
April 18, 2005
YOUR VOTE IS IMPORTANT
YOU ARE URGED TO SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD, SO THAT
IF YOU ARE UNABLE TO ATTEND THE MEETING YOUR SHARES MAY NEVERTHELESS BE VOTED.
EVEN IF YOU HAVE GIVEN YOUR PROXY, THE PROXY MAY BE REVOKED AT ANY TIME PRIOR TO
EXERCISE BY FILING WITH THE SECRETARY OF THE COMPANY A WRITTEN REVOCATION, BY
EXECUTING A PROXY WITH A LATER DATE, OR BY ATTENDING AND VOTING AT THE MEETING.
MEXICAN RESTAURANTS, INC.
1135 EDGEBROOK DRIVE
HOUSTON, TEXAS 77034
PROXY STATEMENT FOR
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 24, 2005
This proxy statement and the accompanying form of proxy are being
furnished to shareholders in connection with the solicitation of proxies on
behalf of the Board of Directors (the "Board") of Mexican Restaurants, Inc., a
Texas corporation (the "Company"), for use at the Company's 2005 Annual Meeting
of Shareholders, to be held on Tuesday, May 24, 2005 at 9:30 a.m., Houston,
Texas time, at the Monterey's Little Mexico restaurant located at 270 W. 1st
Street, Humble, Texas 77338, and at any adjournment, continuation or
postponement thereof. The Notice of Annual Meeting, this Proxy Statement and the
accompanying proxy, together with the Company's Annual Report to Shareholders
for the year ended January 2, 2005, are first being sent to shareholders on or
about April 18, 2005.
At the Annual Meeting, the Company's shareholders will be asked to
consider and vote upon (i) the election of two Class III directors, and (ii)
such other business as may properly come before the annual meeting.
SOLICITATION
The solicitation of proxies is made by and on behalf of the Board. The
cost of the solicitation will be borne by the Company, including the reasonable
expenses of brokerage firms or other nominees for forwarding proxy materials to
beneficial owners. In addition to solicitation by mail, proxies may be solicited
by telephone, telecopy or personally. Proxies may be solicited by directors,
officers and employees of the Company without additional compensation.
RECORD DATE, OUTSTANDING SHARES AND VOTING RIGHTS
The close of business on April 5, 2005, has been fixed as the record date
for the determination of shareholders entitled to notice of and to vote at the
meeting (the "Record Date"). On the Record Date, the Company had outstanding
3,414,805 shares of Common Stock, $.01 par value ("Common Stock"), each of which
will be entitled to one vote.
In order to transact business at the Annual Meeting, a quorum consisting
of a majority of all outstanding shares entitled to vote must be present.
Abstentions and proxies returned by brokerage firms for which no voting
instructions have been received from their principals will be counted for the
purpose of determining whether a quorum is present. Once a share is represented
for any purpose at the Annual Meeting, it will be deemed present for quorum
purposes for the entirety of the meeting. A plurality of the votes cast is
required for the election of directors. A majority of the outstanding shares
entitled to vote that are represented at the meeting in person or by proxy is
required for approval of any other matters that may be presented at the meeting.
If the enclosed proxy is executed and returned, the shares represented
thereby will be voted in accordance with any specifications made by the
shareholder. In the absence of any such specification, they will be voted to
elect the directors as set forth under "Election of Directors" and in the
transaction of any other business which properly comes before the meeting or any
adjournment thereof. Pursuant to applicable law, broker nonvotes and abstaining
votes will not be counted in favor of or against the election of any nominee for
director or any other proposal to be presented at the meeting.
The presence of a shareholder at the meeting will not operate to revoke
his proxy. A proxy may be revoked at any time insofar as it has not been
exercised by giving written notice of revocation to the Company, executing and
returning a proxy with a later date, or by attending the Annual Meeting and
voting in person.
If any other matters come before the meeting, the persons named in the
proxy, or their substitutes, will vote thereon in accordance with their best
judgment. The Board does not know of any matters other than the election of
directors as described below that will be presented for action at the meeting.
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS, DIRECTORS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of April 11, 2005 by each
person known to the Company to own beneficially more than 5% of the Company's
Common Stock, each director, each executive officer and all executive officers
and directors as a group.
Shares Percent
Beneficially of
Name of Beneficial Owner Owned (1) Class
------------------------ ------------ -------
Larry N. Forehand and Forehand
Family Partnership, Ltd. (2)(3)(6)......................... 712,739 20.9%
David Nierenberg, The D3 Family Funds (4)(8).................... 1,020,200 29.7%
19605 N.E. 8th Street
Camas, Washington 98607
Michael D. Domec (2)(9)......................................... 203,555 5.9%
Louis P. Neeb (2)(5)(6)(10)..................................... 469,737 11.5%
John C. Textor (5)(6)(7)........................................ 351,487 9.8%
Wyndcrest Partners
11450 S.E. Dixie Hwy, Suite 204
Hobe Sound, Florida 33455
Osmium Capital, LP (12)......................................... 221,329 6.5%
388 Market Street, Suite 920
San Francisco, California 94111
J.J. Fitzsimmons (11)........................................... 34,442 1.0%
Wal-Mart Stores, Inc.
702 Southwest 8th Street
Bentonville, Arkansas 72716
Curt Glowacki (2)(13)........................................... 182,000 5.1%
Thomas E. Martin (2)(14)........................................ 16,000 *
Andrew J. Dennard (2)(15)....................................... 41,250 1.2%
All executive officers and directors as
a group (ten persons) (17)................................. 2,481,321 61.0%
---------------
* Less than 1%
(1) The named shareholders have sole voting and dispositive power with respect
to all shares shown as being beneficially owned by them, except as
otherwise indicated.
(2) The business address is 1135 Edgebrook Drive, Houston, Texas 77034.
(3) Includes 406,273 shares held directly by Mr. Forehand and 306,466 held by
Forehand Family Partnership, Ltd., a limited partnership of which Mr.
Forehand is the sole managing general partner and of which Mr. Forehand
and his spouse are the sole limited partners.
(4) Based on Form 4's filed on May 10, 2004 and September 7, 2004, Schedule
13D/A filed on June, 9, 2004 and Schedule 13D filed September 7, 2004,
filed by David Nierenberg, and The D3 Family Funds with the Securities and
Exchange Commission. The form discloses that Mr. Nierenberg has sole
voting and sole dispositive power over 1,002,700 shares of Common Stock.
(5) Mr. Neeb and Tex-Mex Partners, L.C. have warrants to purchase, at a per
share price of $10.90, up to 179,885 and 179,885 shares, respectively,
from the Company. Under the terms of the warrants, that portion of each of
the warrants allocable to the membership interest in Tex-Mex Partners,
L.C. (currently 54%) of Mr. Textor, a former director of the Company,
became exercisable on April 25, 1998.
(6) Mr. Neeb and Tex-Mex Partners, L.C. have warrants to purchase, at a per
share price of $10.90, up to 196,602 and 171,602 shares, respectively,
from Larry N. Forehand. Under the terms of the warrants, that portion of
each of the warrants allocable to the membership interest in Tex-Mex
Partners, L.C. (currently 54%) of Mr. Textor, a former director of the
Company, became exercisable on April 25, 1998.
(7) Mr. Textor, a former director of the Company, is a principal of Tex-Mex
Partners, L.C., of which he presently has a 54% membership interest. Mr.
Textor has sole voting power and sole dispositive power of the warrants
2
held by Tex-Mex Partners, L.C. Mr. Textor has no ownership rights in the
balance of the membership interests of Tex-Mex Partners, L.C. and he
disclaims beneficial ownership of the warrants to acquire shares held by
Tex-Mex Partners, L.C. and allocable to such other membership interests.
(8) Includes 17,500 shares issuable pursuant to the exercise of stock options
exercisable within 60 days of the Record Date.
(9) Includes 23,000 shares issuable pursuant to the exercise of stock options
exercisable within 60 days of the Record Date.
(10) Includes 26,250 shares issuable pursuant to the exercise of stock options
exercisable within 60 days of the Record Date.
(11) Includes 33,000 shares issuable pursuant to the exercise of stock options
exercisable within 60 days of the Record Date.
(12) Based on Schedule 13G filed February 9, 2005, filed by John Lewis, and
Osmium Capital, LP with the Securities and Exchange Commission. The form
discloses that Mr. Lewis has sole voting and sole dispositive power over
221,329 shares of Common Stock.
(13) Includes 154,000 shares issuable pursuant to the exercise of stock options
exercisable within 60 days of the Record Date.
(14) Includes 16,000 shares issuable pursuant to the exercise of stock options
exercisable within 60 days of the Record Date.
(15) Includes 31,250 shares issuable pursuant to the exercise of stock options
exercisable within 60 days of the Record Date.
(16) Includes an aggregate of 477,885 shares issuable pursuant to the exercise
of stock options and warrants exercisable within 60 days of the Record
Date.
ELECTION OF DIRECTORS
(PROPOSAL 1)
The Company's Articles of Incorporation provide for the Board to be
divided into three approximately equal classes, designated as Class I, Class II
and Class III, with staggered terms of three years. The persons listed on the
table below have been nominated by the Board of Directors for election as Class
III directors. At the meeting, Common Stock, represented by proxies, will be
voted for the election of the two Class III nominees hereinafter named, unless
otherwise specified, to serve for a term of three years or until their
successors are duly elected and qualified.
The following information is set forth with respect to the persons
nominated for election as a director and each director of the Company whose term
of office will continue after the meeting.
NOMINEES FOR ELECTION AT THE 2005 ANNUAL MEETING
Present
Director Term
Name Age Since Expires
---- --- -------- -------
Joseph J. Fitzsimmons (Class III)............... 57 1996 2005
J. Stuart Sargent (Class III)................... 55 1997 2005
Joseph J. Fitzsimmons is Senior Vice President of Finance of Wal-Mart
Stores, Inc., a position held since November 1995. From September 1994 to
November 1995, Mr. Fitzsimmons served as Vice President of Finance of Wal-Mart
Stores, Inc. From November 1993 to September 1994, Mr. Fitzsimmons served as
Senior Vice President and as a securities analyst for Rauscher Pierce Refsnes,
Inc. From January 1993 to November 1993, Mr. Fitzsimmons served as Senior Vice
President and Chief Financial Officer of S&A Restaurant Corp. From August 1985
to January 1993, Mr. Fitzsimmons served as Senior Vice President, Director and
Chief Financial Officer of National Pizza Company.
J. Stuart Sargent is the President and Founder of Truluck's Steak & Stone
Crab Restaurants, a position held since June 1991. He served as President of
Monterey's Acquisition Corp. from May 1994 to July 1997. He conceived and opened
the first Studebaker's in 1981, and later formed Studebaker's of America, where
he opened or franchised 22 Studebaker's throughout the United States. He also
served as President and CEO of Entertainment One, Inc., a Houston-based company
providing management and support services for 18 food and beverage operations
including
3
Houston Intercontinental Airport, several Studebaker's and Chili's, and
theme-oriented restaurants from St. Louis, Missouri (Big Kahuna) to Waikoloa,
Hawaii (Big Island Steak House).
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE ELECTION
OF EACH OF THE NOMINEES ABOVE.
DIRECTORS WHOSE TERMS WILL CONTINUE AFTER THE 2005 ANNUAL MEETING
Present
Director Term
Name Age Since Expires
---- --- -------- -------
Larry N. Forehand (Class I).................. 60 1995 2006
Thomas E. Martin (Class I)................... 63 2002 2006
David Nierenberg (Class I)................... 51 2000 2006
Michael D. Domec (Class II).................. 59 1995 2007
Curt Glowacki (Class II)..................... 52 2000 2007
Louis P. Neeb (Class II)..................... 66 1995 2007
Larry N. Forehand is the founder of the Company and has served as Vice
Chairman of the Company's Board since October 1995 and as Franchise Director
since September 1997. From December 1973 to March 1995, Mr. Forehand served as
President of the Company. In 1997, Mr. Forehand served as the President of the
Texas Restaurant Associations, a state trade association for the restaurant
industry.
Thomas E. Martin is the Chairman of the Board of Best Friends Pet Care,
Inc., a private animal boarding company, and he has held this position since
April 1999. He was also Chief Executive Officer of that company from April 1999
until December 2001. Since January 1997, Mr. Martin has also been a
self-employed financial consultant. From February 1990 through March 1997 Mr.
Martin held various positions with the Elsinore Corporation, a gaming company,
including President from January 1993 to May 1996 and Chief Executive Officer
from May 1995 to August 1996. Mr. Martin is also a past member of the Board of
Directors for Ramada, Inc. where he was a corporate Executive Vice President,
and President of its Marie Callender restaurant chain.
David Nierenberg is the President of Nierenberg Investment Management
Company, which manages The D3 Family Funds, a private investment partnership
which seeks long-term capital gain through investment in undervalued micro-cap
domestic public equities, a position he has held since 1996. From 1986 to 1995,
Mr. Nierenberg served as General Partner of Trinity Ventures, Ltd., a venture
capital partnership, which invested in special situations (e.g., turnarounds,
restructurings), financial services and healthcare. Mr. Nierenberg was appointed
to the Board in February 2000. Mr. Nierenberg is also a Director of Natus
Medical, Inc. and AmNet Mortgage, Inc.
Michael D. Domec has served as President of Magnum Development, Inc., a
residential real estate development company, since 1991. From June 1996 to
December 2000 he was President of Ole Restaurants, Inc., a franchisee of the
Company. From December 1977 until April 1996, Mr. Domec was Vice President of
Casa Ole Franchise Services, Inc. and the majority owner of seven Casa Ole
restaurants.
Curt Glowacki has served as Chief Operating Officer of the Company since
August 1997, as President since May 1998, and as Chief Executive Officer since
May 2000. From May 1994 to August 1997, he served as Senior Vice President of
Operations of Monterey's Acquisition Corp., which was acquired by the Company in
July 1997. From June 1989 to May 1994, he served as Vice President and Director
of Operations for Monterey's Tex-Mex Cafe, a subsidiary of CEC Entertainment,
Inc. Previously, Mr. Glowacki's experience included 12 years with Steak & Ale
Restaurants, where he held various operating positions.
Louis P. Neeb has served as Chairman of the Board of the Company since
October 1995, as Chief Executive Officer of the Company from April 1996 to May
2000, and as interim President from August 1997 to April 1998. Since 1982 Mr.
Neeb has also served as President of Neeb Enterprises, Inc., a restaurant
consulting company. From July 1991 to January 1994, Mr. Neeb served as President
of Spaghetti Warehouse, Inc. From September 1989 to June 1991, Mr. Neeb served
as President of Geest Foods USA. From 1982 to 1987, Mr. Neeb served as President
and Chief Executive Officer of Taco Villa, Inc. and its predecessors, a publicly
held corporation controlled by W.R. Grace & Co., where he oversaw the
development of the Applebee's restaurant chain, and the operation of the Del
Taco
4
restaurant chain. From 1980 to 1982, Mr. Neeb served as Chairman of the Board
and Chief Executive Officer of Burger King Corporation. From 1973 to 1980, Mr.
Neeb served in various positions, including President and Chief Operating
Officer of Steak & Ale Restaurants. During that time, Mr. Neeb directed the
development of the Bennigan's restaurant concept. Mr. Neeb serves as a director
of CEC Entertainment, Inc. and of the privately held Silver Diner, Inc. Mr. Neeb
was also a director of Franchise Finance Corp. of America, an entity that
provides financing for real estate, until its sale to GE Capital in 2001.
EXECUTIVE OFFICERS OTHER THAN DIRECTORS
Set forth below is the name, age, current positions with the Company, the
principal occupation, and the year of becoming an executive officer of the
Company for the executive officer who is not a director of the Company.
Andrew J. Dennard, age 46, has served as Vice President, Controller &
Treasurer of the Company since July 1997 and Chief Financial Officer and Senior
Vice President since September 1998. From September 1994 to July 1997 he served
as Vice President of Finance for Monterey's Acquisition Corp. From July 1989 to
September 1994, Mr. Dennard held various positions with Rosewood Property
Company. Previously, he served as an auditor with KPMG LLP for approximately two
years. Mr. Dennard's early career was on the operations side of restaurants, and
he spent five years with Steak & Ale Restaurants and four years with Houston's
Restaurants.
BOARD MEETINGS AND COMMITTEES
Four meetings of the Board were held during 2004. All of the directors
attended all meetings of the Board. All directors attended each of their
respective committee meetings.
The Board has an Audit Committee, the members of which are Messrs. Martin,
Fitzsimmons and Neeb; Mr. Martin serves as Chairman. The members of the Audit
Committee are all independent directors under the NASD's listing standards
applicable to members of audit committees. The Audit Committee held four
meetings during 2004. The Board of Directors has reviewed the qualifications of
the members of the Board of Directors and determined that Mr. Martin is the
"audit committee financial expert" as defined by applicable SEC rules. In
accordance with the written charter adopted by the Board, the Audit Committee is
responsible for the oversight of (i) the integrity of the Company's disclosure
controls and procedures; (ii) the integrity of the Company's internal controls
over financial reporting; and (iii) the qualifications, independence,
appointment, compensation and performance of the Company's independent
registered public accounting firm. It is also responsible for administering the
Company's Code of Ethics and Code of Conduct, applicable to the Company's
principal executive officer, principal financial officer and other members of
the Company's management, the establishment of "whistle-blowing" procedures; and
oversight of certain other compliance matters.
The Board has a Compensation/Stock Option Committee, the members of which
are Messrs. Nierenberg, Domec and Sargent; Mr. Nierenberg serves as Chairman.
The Compensation/Stock Option Committee held two meetings during 2004. The
Compensation/Stock Option Committee is responsible for determining the
compensation of the officers of the Company and granting options under the
Company's 1996 Casa Ole Long Term Incentive Plan and the 1996 Managers Stock
Option Plan as well as granting restricted stock awards under the 1999
Restricted Stock Plan.
The Board has an Executive Committee, the members of which are Messrs.
Neeb, Forehand and Glowacki; Mr. Neeb serves as Chairman. There were four
meetings of the Executive Committee during 2004. The Executive Committee has the
authority, between meetings of the Board, to take all actions with respect to
the management of the Company's business that require action by the Board,
except with respect to certain specified matters that by law must be approved by
the entire Board.
The Board does not have a nominating committee or any committee performing
a similar function. All matters that would be considered by such a committee are
acted upon by the independent members of the full Board. The Board will consider
recommendations by shareholders of the Company with respect to the election of
directors if such recommendations are submitted in writing to the secretary of
the Company and received not later than the end of the Company's preceding
fiscal year. Such recommendations should be accompanied by a full statement of
qualifications and confirmation of the nominee's willingness to serve.
5
Copies of the Company's Audit Committee Charter and Code of Ethics and
Code of Conduct are available free of charge to any shareholder who submits a
request to the Company's Corporate Secretary or at the Company's executive
office set forth on the Notice of Annual Meeting and at the end of this proxy
statement.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation
paid by the Company and its subsidiaries to the Chief Executive Officer, and to
the other most highly paid executive officers for the fiscal year ended January
2, 2005 and whose total annual salary and bonus exceeded $100,000 (collectively
the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
RESTRICTED
STOCK ALL OTHER
NAME & PRINCIPAL POSITION YEAR SALARY BONUS(1) OTHER(2) OPTIONS (#) AWARDS COMPENSATION
------------------------- -------- -------- -------- -------- ----------- --------- ------------
Curt Glowacki 2004 $238,506 $ 18,717 $12,000 - - -
President, Chief 2003 (3) $216,058 $137,481 $ 9,000 - - -
Executive Officer and 2002 $209,621 $ 87,808 $ 9,000 - - -
Chief Operating Officer
Andrew J. Dennard 2004 $134,555 $ 19,451 $ 9,000 - - -
Senior Vice President 2003 (3) $118,317 $ 57,269 $ 9,000 - - -
and Chief Financial Officer 2002 $114,423 $ 52,554 $ 9,000 5,000 - -
(1) Bonus includes $18,717 for Mr. Glowacki and $9,451 for Mr. Dennard in
2004, $34,841 for Mr. Glowacki and $17,377 for Mr. Dennard in 2003 and
$21,539 for Mr. Glowacki and $10,769 for Mr. Dennard in 2002 for the
payment of interest expense and principal amounts of the loans to purchase
stock under the executive and key employee stock purchase plan adopted May
1998.
(2) Other annual compensation consists primarily of a car allowance.
(3) Bonus other than amount described in note (1) was paid in fiscal year 2003
for performance earned in fiscal year 2002.
In fiscal year 2004, the Company did not grant stock options to
either of its Named Executive Officers.
No stock options were exercised during 2004 by the Named Executive
Officers. The following table shows information concerning the stock options
exercisable and unexercisable during 2004 that have been granted to the Named
Executive Officers and the estimated value of unexercised options held by such
individuals at year end.
6
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF
SHARES UNEXERCISED UNEXERCISED IN-THE-MONEY
ACQUIRED ON VALUE OPTIONS AT FY-END OPTIONS AT FY-END ($) (1)
EXERCISE REALIZED ------------------------------- ---------------------------
NAME # $ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------------- ----------- -------- ----------- --------------- ----------- -------------
Curt Glowacki (2) - - 145,000 105,000 568,668 539,300
Andrew J. Dennard (3) - - 31,250 8,750 89,445 51,400
---------------
(1) Based on the closing price per share of Common Stock on December 31, 2004
(the last day the stock traded in fiscal year 2004), of $8.96 as reported
by the NASDAQ SmallCap Market.
(2) Options to acquire 190,000 shares of common stock were granted to Mr.
Glowacki from 1997 to 2001 under the Company's 1996 Long Term Incentive
Plan, of which 100,000 options vest in accordance with note (3) and 90,000
options vest at the rate of 10%, 20%, 30% and 40% respectively over the
four-year period. An additional 60,000 options were granted in fiscal year
2000 that vest in ten years, and are discussed below under the
Compensation Stock Option Committee report.
(3) These options to acquire common stock were granted from 1997 to 2002 under
the Company's 1996 Long Term Incentive Plan. The options vest and become
exercisable 10% on the first anniversary of the date of grant, 15% on the
second anniversary of the date of grant and 25% on each of the third
through fifth anniversaries of the date of grant.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides the indicated information as of January 2,
2005, regarding the Company's equity compensation plans.
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES FUTURE ISSUANCE UNDER
TO BE ISSUED UPON EXERCISE WEIGHTED-AVERAGE EXERCISE EQUITY COMPENSATION PLANS
OF OUTSTANDING OPTIONS, PRICE OF OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN FIRST COLUMN)
------------------------ -------------------------- ----------------------------- --------------------------
Equity compensation
plans approved by
security holders 549,000 (1) $4.38 151,000
Equity compensation
plans not approved by
security holders 247,385 (2) $9.80 132,500
Total 796,385 $6.07 283,500
------------------
(1) Represents 549,000 shares of underlying options.
(2) Represents 67,500 shares of underlying options and 179,885 shares of
underlying warrants. Such warrants, when issued, have been issued outside
of the Company's Incentive Plan, contemporaneously with the Company's
initial public offering in 1996, as described in footnote (5) of the table
entitled "Security Ownership of Principal Shareholders, Directors and
Management."
DIRECTOR COMPENSATION
As approved by the Company's shareholders at the 2002 Annual Meeting of
Shareholders, the Stock Option Plan for Non-Employee Directors ("Directors
Option Plan") was amended to allow the grant of up to 200,000 shares in total
options to the Company's outside directors. Through the first two quarters of
fiscal year 2002, outside directors were compensated with quarterly option
grants to acquire 1,500 shares. In addition, each director received one option
7
grant for 100 shares of Common Stock for each committee meeting attended which
was not held in conjunction with a Board meeting. Approximately 80,000 shares
are presently available for issuance under the Directors Option Plan.
Effective with the third quarter of fiscal year 2002, upon recommendation
of the Company's Audit and Compensation/Stock Option Committees, the Company
changed its director compensation plan to a cash-based compensation plan. Each
director who is not an employee of the Company receives a retainer of $2,000 per
fiscal quarter, plus $1,000 per meeting attended. Effective with fiscal year
2005 each director who is not an employee of the Company will receive a retainer
of $2,500 per fiscal quarter, plus $1,250 per meeting attended. The Chairman of
the Audit Committee received a quarterly retainer of $5,000 and is not paid any
other meeting fees. Effective with fiscal year 2005 the Audit Chairman retainer
was set at $6,250 per quarter. The Chairman of the Board of Directors is
compensated at the rate of $60,000 per year and is not paid any other meeting
fees.
REPORT BY THE COMPENSATION/STOCK OPTION COMMITTEE
ON EXECUTIVE COMPENSATION
The Board has a Compensation/Stock Option Committee (the "Committee") to
administer all aspects of the compensation program for the executive officers of
the Company, including the review and approval of the compensation levels, the
evaluation of performance and the granting of options under the Company's 1996
Long Term Incentive Plan (the "Incentive Plan"). The Committee consists of the
three directors whose names are listed at the end of this report.
Compensation Philosophy
The primary objective of the Company's compensation program is to attract,
retain and reward executives whose contributions will enhance the Company's
ability to execute its business strategy. The Company's strategy is to build
shareholder value by growing the restaurant system through both same-store sales
increases and careful new unit openings, and to grow earnings per share by
carefully managing costs and by opportunistically repurchasing shares.
General
The Company's executive compensation program includes base salary, a cash
bonus program, stock options, restricted stock grants, and other forms of
compensation as determined by the Committee. Performance of the Company, the
level of each executive's responsibility and his or her ability to contribute to
the Company's success is considered in determining total compensation. Stock
price performance is only one measure of success and may not be the best current
measure of executive performance. Base salaries are determined by the Committee
after considering compensation levels of similar positions within industry
peers.
Mr. Neeb is presently the Company's non-executive Chairman of the Board.
As non-executive Chairman of the Board, Mr. Neeb is compensated $60,000
annually. If terminated as Chairman of the Board, the Company will pay Mr.
Neeb's compensation until the first to occur of one year after termination, or
the securing of an alternative position by Mr. Neeb. Messrs. Glowacki and
Dennard have similar agreements that commenced with the Company's acquisition of
Monterey's Acquisition Corp. in July 1997. Under the agreements, annual base
salaries as of January 3, 2005 for Messrs. Glowacki and Dennard were $236,900
and $150,000, respectively.
As incentive compensation, Company executives are eligible to receive
annual cash bonus awards based in part on a formula of profits, same-store sales
growth and cash flow relative to financial plan. For fiscal year 2004
performance, Messrs. Glowacki and Dennard were paid $45,000 and $15,000,
respectively, in fiscal 2005.
The Company's Incentive Plan authorizes the granting of incentive stock
options, and non-qualified stock options to purchase Common Stock, stock
appreciation rights, restricted stock, and performance units to key executives
and other key employees of the Company, including officers of the Company and
its subsidiaries, and is administered by the Committee. The purpose of the
Incentive Plan is to attract and retain key employees, to motivate key employees
to achieve long-range goals and to further align the interests of key employees
with those of the other shareholders of the Company.
8
The Incentive Plan authorizes the reservation of 500,000 shares of Common
Stock to be used for stock options, stock appreciation rights or restricted
stock, of which 429,000 shares are subject to presently outstanding awards. The
Incentive Plan will terminate on December 31, 2005.
During fiscal year 1999, the Company granted 24,000 shares, valued at
$4.38 per share, of restricted stock to Mr. Glowacki. On February 28, 2000,
these restricted shares were issued. The restricted stock will vest in 20%
increments over a five-year period from the date of the grant. Additionally on
that date, 10,000 shares were granted and issued to Mr. Dennard and 30,000
shares were granted and issued to other key employees. The latter awards were
valued at $3.50 per share.
In fiscal year 2000 the Company granted to Mr. Glowacki
performance-related options covering 60,000 shares at an exercise price of $3.00
per share. These options vest ten years from grant and were subject to earlier
vesting if the Company met certain financial and operational targets with
respect to fiscal years 2000 and 2001, which targets were not attained. In
fiscal year 2001 the Company granted to Mr. Glowacki performance related options
covering 90,000 shares at an exercise price of $2.70 per share and which vest at
the rate of 10%, 20%, 30% and 40% over the four-year period.
In fiscal year 2002, the Company granted to Mr. Dennard
performance-related options covering 5,000 shares at an exercise price of $3.64
per share and vesting over five years from the date of grant. Also in fiscal
year 2001, the Company granted to Mr. Dennard performance-related options
covering 10,000 shares at an exercise price of $2.70 per share and vesting over
five years from date of grant. These options vest at the rate of 10%, 15%, and
25% each year thereafter over the five-year period.
Although not part of the compensation program for the Company's executive
officers, the Committee also administers the 1996 Managers Stock Option Plan
(the "Managers Plan"). The purpose of the Managers Plan is to attract and retain
key employees, to motivate key employees to achieve long-range goals, to provide
incentive compensation opportunities that are competitive with those of other
corporations and further align the interest of eligible employees with the
Company's other shareholders. The Managers Plan authorizes the granting of
non-qualified stock options to purchase Common Stock to employees of the Company
and its subsidiaries who are managers or assistant managers of or hold key
managerial positions in or for the Company or any subsidiary ("Managers") and
who are at the time of grant neither officers, directors nor 10% shareholders of
the Company.
The Managers Plan authorizes the award of an aggregate of 200,000 shares
of Common Stock to be used for non-qualified stock options, of which 67,500
shares are subject to presently outstanding awards. The Managers Plan will
terminate on December 31, 2005.
Under the Managers Plan, non-qualified stock options may be granted to
Managers at the price determined by the Committee, which shall be 100% of the
fair market value at the date the option is granted unless the Committee
expressly determines otherwise. The Managers Plan provides that an option
granted thereunder may be exercised at any time during the exercise period
established by the Committee, except that: (i) no option may be exercised more
than ninety days after employment with the Company and its subsidiaries has
terminated by reason other than death, disability or authorized leave of absence
for military or government service; and (ii) no option may be exercised more
than 12 months after employment has terminated by reason of death or disability.
The term of each option is determined by the Committee, but in no event may such
term exceed ten years from the date of grant.
In fiscal year 2004, the Company did not grant any non-qualified stock
options under its Incentive Plan and its Managers Plan.
Chief Executive Officer Compensation
The Compensation Committee's general approach in reviewing the annual
compensation of Mr. Glowacki, the Company's Chief Executive Officer, is to seek
to be competitive with other companies of a similar size in the Company's
industry, to recognize and reward initiative, overall corporate performance and
managerial ability, and to provide long-term incentive to increase shareholder
value.
The Committee believes that the compensation of the Company's Chief
Executive Officer and its other executives during fiscal 2004 was consistent
with the objectives of the Company's executive compensation program.
9
COMPENSATION/STOCK OPTION COMMITTEE
David Nierenberg
Michael D. Domec
J. Stuart Sargent
COMPENSATION/STOCK OPTION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
The Compensation/Stock Option Committee consists of David Nierenberg,
Michael D. Domec and J. Stuart Sargent. Mr. Nierenberg serves as Chairman of the
Committee.
No member of the Company's Compensation/Stock Option Committee: (i) was,
during the last fiscal year, an officer or employee of the Company or any of its
subsidiaries or (ii) was formerly an officer of the Company or any of its
subsidiaries. The Company has engaged in a related party transaction related to
Messrs. Forehand and Domec. For a complete description of this transaction see
"Certain Relationships and Related Transactions."
Pursuant to Item 402 of the SEC's Regulation S-K, no executive officer of
the Company served as a member of the Compensation/Stock Option Committee (or
other board committee performing similar functions or, in the absence of any
such committee, the entire Board of Directors) of another corporation, one of
whose executive officers served on the Company's Compensation/Stock Option
Committee. No executive officer of the Company served as a director of another
corporation, one of whose executive officers served on the Compensation/Stock
Option Committee. No executive officer of the Company served as a member of the
Compensation/Stock Option Committee (or other board committee performing
equivalent functions or, in the absence of any such committee, the entire Board
of Directors) of another corporation, one of whose executive officers served as
a director of the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To the Company's knowledge, based solely on our review of such forms
received by us with respect to fiscal 2004, as written representations from
certain reporting persons, all statements of beneficial ownership required to be
filed with the Securities and Exchange Commission for the fiscal year ended
January 2, 2005 have been timely filed.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Related party transactions are subject to the review and approval of the
Company's Audit Committee, which is comprised exclusively of independent
directors who are not otherwise involved in the day-to-day management of the
Company or officers of the Company, and who do not have a personal financial
interest in the matter in which they are acting.
LEASE OF HEADQUARTERS BUILDING
Prior to February 20, 2004, the Company leased its executive offices in
Houston, Texas from CO Properties No. 3, a Texas partnership owned by Larry N.
Forehand and Michael D. Domec. The lease, which was originally set to expire in
December 2006, was a gross lease (where the landlord pays utilities and property
taxes) with monthly rental payments of $10,416 per month in 2004. In 2004 the
Company leased 10,015 square feet under the lease for aggregate rental payments
of $10,416. The Company believes that this lease is on terms at least as
favorable as could be obtained from an unrelated third party.
On February 20, 2004, CO Properties No. 3 sold the executive offices to a
third party. In exchange for two months of free rent, the Company exercised one
of its options, extending the office lease through December 2009. In 2005 the
Company's monthly rental payments will be $10,615.90 per month.
10
PERFORMANCE GRAPH
The following performance graph compares the cumulative return of the
Common Stock with that of the Nasdaq Composite Index and the Standard & Poors
500 Restaurants Index assuming in each case an initial investment of $100 since
December 31, 1999. The Standard & Poors 500 Restaurants Index replaces the
Standard & Poors Midcap Restaurants Index that was used in previous proxy
reports.
GRAPH APPEARS HERE
TOTAL RETURN ANALYSIS 12/31/1999 12/31/2000 12/31/2001 12/31/2002 12/31/2003 12/31/2004
------------------------- ---------- ---------- ---------- ---------- ---------- ----------
MEXICAN RESTAURANTS, INC. $ 100.00 $ 58.06 $ 83.35 $ 93.94 $ 100.39 $ 231.23
S&P SMALL CAP RESTAURANTS $ 100.00 $ 122.16 $ 143.77 $ 147.03 $ 210.16 $ 253.49
NASDAQ COMPOSITE $ 100.00 $ 60.71 $ 47.93 $ 32.82 $ 49.23 $ 53.46
Source: CTA Public Relations www.ctapr.com (303) 665-4200. Data from BRIDGE
Information Systems, Inc.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee of the Board is composed of three directors, Thomas E.
Martin, Joseph J. Fitzsimmons and Louis P. Neeb, all of whom are independent
within the meaning of applicable NASD listing standards and the applicable
independence standards of the SEC. The Audit Committee is responsible for
overseeing the Company's financial reporting process on behalf of the Board and
operates under a written charter adopted by the Board. The Audit Committee
annually recommends to the Board the selection of the Company's independent
registered public accounting firm. For the fiscal year 2004, KPMG LLP was the
Company's independent registered public accounting firm.
Management is responsible for the Company's financial statements and the
financial reporting process, including the systems of internal controls. The
independent registered public accounting firm is responsible for performing an
independent audit of the Company's consolidated financial statements in
accordance with generally accepted auditing standards and expressing an opinion
on the conformity of those audited financial statements with generally accepted
accounting principles, their judgments as to the quality, not just the
acceptability, of the accounting principles, the reasonableness of significant
judgments and the clarity of disclosure in the financial statements.
The Audit Committee reviewed with the independent registered public
accounting firm the Company's accounting principles and such other matters as
are required to be discussed with the Audit Committee under generally accepted
auditing standards, as required by Statement on Auditing Standards No. 61,
Communication with Audit Committees. In addition, the Audit Committee has
discussed with the independent registered public accounting firm the auditors'
independence from management and the Company and has received the written
disclosures and the letter from the independent registered public accounting
firm required by the Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees). The Audit Committee further considered
whether the provision
11
by KPMG LLP of the non-audit services described elsewhere in this proxy
statement is compatible with maintaining the auditors' independence.
Based upon (i) the Audit Committee's review and discussion of the audited
financial statements with management and the independent registered public
accounting firm, (ii) the Audit Committee's review of the representation of
management, and (iii) the disclosures by the independent registered public
accounting firm to the Audit Committee, the Audit Committee recommended to the
Board that the Company's audited consolidated financial statements be included
in the Company's Annual Report on Form 10-K for the year ended January 2, 2005,
for filing with the SEC. The Company's Audit Committee periodically considers
the selection of the Company's independent registered public accounting firm. At
present, it is conducting an evaluation process that includes the receipt of
proposals from several independent registered public accounting firms. However,
KPMG, the Company's current auditors, will conduct the Company's fiscal 2005
first quarter review until the engagement by the Company of a new independent
registered public accounting firm.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The Audit Committee requires that each engagement of the Company's
independent auditor to perform auditing services and permitted non-audit
services must be approved by the Audit Committee in advance, including the fees
and principal terms thereof.
AUDIT COMMITTEE
Thomas E. Martin
Joseph J. Fitzsimmons
Louis P. Neeb
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S FEES AND SERVICES
The following table sets forth the aggregate fees billed by KPMG LLP for
2004 and 2003 for audit and non-audit services (as well as all "out-of-pocket"
costs incurred in connection with these services) and are categorized as Audit
Fees, Audit-Related Fees, Tax Fees and All Other Fees. The nature of the
services provided in each such category is described following the table:
FY 2004 FY 2003
-------- --------
Audit fees $138,000 96.8% $115,000 41.1%
Audit-related fees 4,500 3.2% 8,550 3.1%
Tax fees - - - -
All other fees - - 156,370 55.9%
-------- ------ -------- ------
Total $142,500 100.00% $279,290 100.00%
======== ========
The Audit fees for the years ended January 2, 2005 and December 28, 2003,
respectively, were for professional services rendered for the audits of the
consolidated financial statements of the Company and statutory audits, income
tax provision procedures, and assistance with review of documents filed with the
SEC.
The other fees for the year ended December 28, 2003 was for professional
services for the audit of 13 restaurants and related assets acquired by the
Company on January 7, 2004.
The Audit Committee of the Board has considered whether provision of other
services is compatible with maintaining the independent registered public
accounting firm's independence and discussed these services with the independent
registered public accounting firm and with the Company's management, and has
determined that such services have not adversely affected KPMG LLP's
independence and are permitted under the rules and regulations concerning
auditor independence promulgated by the SEC to implement the Sarbanes-Oxley Act
of 2002, as well as the rules and regulations of the American Institute of
Certified Public Accountants.
12
KPMG LLP has served as the Company's independent public accountants since
the Company's 1996 initial public offering. Representatives of KPMG LLP are
expected to be present at the Annual Meeting to respond to appropriate
questions. Consistent with the Company's policy, the auditors for each fiscal
year are selected annually by the Board.
ANNUAL REPORT
A copy of the Company's Annual Report on the Company Form 10-K for the
fiscal year ended January 2, 2005 is enclosed with this proxy statement. The
Company will also send you, at no charge, any other document which it refers to
in this proxy statement, if requested in writing by a person who was a
shareholder (of record or beneficially) at the close of business on April 22,
2005. You should send your request to the Company's Corporate Secretary at the
address listed below.
INFORMATION
If you have questions or need more information about the Annual Meeting,
you may write to or call the Company at:
Corporate Secretary
Mexican Restaurants, Inc.
1135 Edgebrook Drive
Houston, Texas 77034
(713) 943-7574
Attn: Mr. Andrew J. Dennard
HOUSEHOLDING INFORMATION
Unless the Company has received contrary instructions, the Company may
send a single copy of this proxy statement, notice of annual meeting and the
Annual Report to any household at which two or more shareholders reside if the
Company believes the shareholders are members of the same family. Each
shareholder in the household will continue to receive a separate proxy card.
This process, known as "householding," reduces the volume of duplicate
information received at any one household and helps to reduce the Company's
expenses. The Company will deliver promptly upon request a separate copy of the
proxy statement or Annual Report to a shareholder at a shared address to which a
single copy of the documents was delivered. Such requests should be delivered to
the Company's address or made by telephone, as set forth below. In addition, if
shareholders prefer to receive multiple sets of the Company's disclosure
documents at the same address this year or in future years, the shareholders
should follow the instructions described below. Similarly, if an address is
shared with another shareholder and together both of the shareholders would like
to receive only a single set of the Company's disclosure documents, the
shareholders should follow these instructions:
If the shares are registered in the name of the shareholder, the
shareholder should contact the Company at its offices at 1135 Edgebrook Drive,
Houston, Texas 77034, Attention: Andrew J. Dennard, telephone number:
713/943-7574, to inform the Company of their request. If a bank, broker or other
nominee holds the shares, the shareholder should contact the bank, broker or
other nominee directly.
SHAREHOLDER PROPOSALS
Any shareholder who intends to present a proposal at the 2006 Annual
Meeting of Shareholders for inclusion in the proxy statement and form of proxy
relating to that meeting is advised that the proposal must be received by the
13
Company at its principal executive offices not later than January 1, 2006. The
Company will not be required to include in its proxy statement or form of proxy
a shareholder proposal which is received after that date or which otherwise
fails to meet requirements for shareholder proposals established by regulations
of the Securities and Exchange Commission.
By Order of the Board of Directors,
Louis P. Neeb
Chairman
April 18, 2005
ALL SHAREHOLDERS ARE URGED TO DATE, SIGN AND RETURN THE ENCLOSED PROXY OR VOTING
INSTRUCTION FORM.
14
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PROXY - MEXICAN RESTAURANTS, INC.
--------------------------------------------------------------------------------
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS - MAY 24, 2005
The undersigned hereby appoints LOUIS P. NEEB, CURT GLOWACKI and ANDREW J.
DENNARD, and each or any of them, as attorneys, agents and proxies of the
undersigned with full power of substitution, for and in the name, place and
stead of the undersigned to attend the Annual Meeting of shareholders of Mexican
Restaurants, Inc. (the "Company") to be held in the Monterey's Little Mexico
restaurant located 270 W. 1st Street, Humble, Texas 77338 on Tuesday, May 24,
2005, at 9:30 a.m., Houston time, and any adjournment(s) thereof, and to vote
there the number of shares of Common Stock of the Company which the undersigned
would be entitled to vote if personally present as indicated on the reverse side
hereof and, in their discretion, upon any other business which may properly come
before said meeting. This Proxy when properly executed will be voted in
accordance with your indicated directions. If no direction is made, this proxy
will be voted FOR the election of directors.
PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
(Continued and to be signed on reverse side.)
[ ] Mark this box with an X if you have made
changes to your name or address details above.
--------------------------------------------------------------------------------
ANNUAL MEETING PROXY CARD
--------------------------------------------------------------------------------
A ELECTION OF DIRECTORS
1. The Board of Directors recommends a vote FOR the listed nominees.
FOR WITHHOLD
01 - Joseph J. Fitzsimmons [ ] [ ]
02 - J. Stuart Sargent [ ] [ ]
B ISSUE
The Board of Directors recommends a vote FOR the following proposal.
FOR AGAINST ABSTAIN
2. To transact such other business as may properly come
before the meeting. [ ] [ ] [ ]
Mark this box with an X if you plan to attend
The Annual Meeting of Shareholders. [ ]
C AUTHORIZED SIGNATURES - SIGN HERE - THIS SECTION MUST BE COMPLETED FOR YOUR
INSTRUCTIONS TO BE EXECUTED.
The undersigned acknowledges receipt of the Notice of the Company's Annual
Meeting of Shareholders and of the Proxy Statement.
Please sign exactly as your name appears. Joint owners should each sign
personally. Where applicable, indicate your official position or representation
capacity. Please date, sign and return this Proxy in the enclosed business
envelope.
Signature 1-Please keep signature within the box Signature 2-Please keep signature within the box Date (mm/dd/yyyy)
[ ][ ]/[ ][ ]/[ ][ ][ ][ ]
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