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 July 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 July 3, 2005: 3,422,280 SHARES OF COMMON STOCK, PAR VALUE $.01.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
07/03/2005 01/02/2005
------------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,917,770 $ 1,293,836
Royalties receivable 120,319 85,377
Other receivables 846,758 701,413
Inventory 705,792 658,687
Taxes receivable 194,128 573,840
Prepaid expenses and other current assets 806,413 1,007,928
------------------- ------------------
Total current assets 4,591,180 4,321,081
------------------- ------------------
Property, plant and equipment 30,163,074 28,929,887
Less accumulated depreciation (14,707,621) (13,464,153)
------------------- ------------------
Net property, plant and equipment 15,455,453 15,465,734
Goodwill 10,644,690 10,644,690
Deferred tax assets 520,505 619,087
Property held for sale 505,118 505,118
Other assets 645,096 770,476
------------------- ------------------
Total assets $ 32,362,042 $ 32,326,186
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,431,244 $ 1,623,859
Accrued sales and liquor taxes 662,276 740,898
Accrued payroll and taxes 1,087,219 1,043,182
Accrued expenses 823,896 1,097,640
Current installments of long-term debt 1,000,000 1,000,000
------------------- ------------------
Total current liabilities 5,004,635 5,505,579
------------------- ------------------
Long-term debt, net of current portion 5,500,000 6,000,000
Other liabilities 1,269,316 1,183,426
Deferred gain 1,665,141 1,769,212
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued - -
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 10,481,112 9,303,791
Deferred compensation - (6,303)
Treasury stock, cost of 1,310,425 common shares (11,726,565) (11,597,922)
------------------- ------------------
Total stockholders' equity 18,922,950 17,867,969
------------------- ------------------
Total liabilities and stockholders' equity $ 32,362,042 $ 32,326,186
=================== ==================
2
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
13-WEEK 13-WEEK 26-WEEK 26-WEEK
PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
07/03/2005 06/27/2004 07/03/2005 06/27/2004
------------- -------------- -------------- -------------
Revenues:
Restaurant sales $ 20,481,737 $ 19,521,405 $ 40,583,730 $ 38,197,525
Franchise fees, royalties and other 177,384 205,601 353,074 397,381
------------- -------------- -------------- -------------
20,659,121 19,727,006 40,936,804 38,594,906
------------- -------------- -------------- -------------
Costs and expenses:
Cost of sales 5,792,087 5,482,659 11,222,242 10,613,147
Labor 6,771,028 6,482,052 13,374,883 12,579,599
Restaurant operating expenses 4,661,237 4,447,508 9,345,525 8,839,798
General and administrative 1,716,278 1,676,292 3,506,013 3,178,575
Depreciation and amortization 699,021 480,722 1,351,300 1,088,434
Pre-opening costs 38,836 10,529 39,826 10,529
Loss on sale of assets 131,201 7,158 133,393 24,230
------------- -------------- -------------- -------------
19,809,688 18,586,920 38,973,182 36,334,312
------------- -------------- -------------- -------------
Operating income 849,433 1,140,086 1,963,622 2,260,594
------------- -------------- -------------- -------------
Other income (expense):
Interest income 634 1,609 1,264 8,980
Interest expense (136,137) (131,755) (286,715) (271,020)
Other, net 16,919 22,504 59,109 45,575
------------- -------------- -------------- -------------
(118,584) (107,642) (226,342) (216,465)
------------- -------------- -------------- -------------
Income from continuing operations before income taxes 730,849 1,032,444 1,737,280 2,044,129
Income tax expense 228,675 341,587 558,342 675,292
------------- -------------- -------------- -------------
Income from continuing operations 502,174 690,857 1,178,938 1,368,837
Discontinued Operations:
Loss from discontinued operations - (61,136) (2,565) (178,900)
Impairments and restaurant closure costs - (49,906) - (167,304)
Gain on sale of assets - 2,288 - 2,288
------------- -------------- -------------- -------------
Loss from discontinued operations before income taxes - (108,754) (2,565) (343,916)
------------- -------------- -------------- -------------
Income tax benefit - 40,685 948 128,659
------------- -------------- -------------- -------------
Loss from discontinued operations - (68,069) (1,617) (215,257)
Net income $ 502,174 $ 622,788 $ 1,177,321 $ 1,153,580
============= ============== ============== =============
Basic income per share
Income from continuing operations $ 0.15 $ 0.20 $ 0.35 $ 0.40
Loss from discontinued operations - (0.02) - (0.06)
------------- -------------- -------------- -------------
Net income $ 0.15 $ 0.18 $ 0.35 $ 0.34
============= ============== ============== =============
Diluted income per share
Income from continuing operations $ 0.14 $ 0.19 $ 0.32 $ 0.38
Loss from discontinued operations - (0.02) - (0.06)
------------- -------------- -------------- -------------
Net income $ 0.14 $ 0.17 $ 0.32 $ 0.32
============= ============== ============== =============
Weighted average number of shares (basic) 3,417,831 3,384,605 3,416,326 3,384,605
============= ============== ============== =============
Weighted average number of shares (diluted) 3,717,559 3,602,278 3,722,874 3,563,857
============= ============== ============== =============
3
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
26-WEEKS ENDED 26-WEEKS ENDED
7/03/2005 6/27/2004
-------------- --------------
Cash flows from operating activities:
Net income from continuing operations $ 1,178,938 $ 1,368,837
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,351,300 1,088,434
Deferred gain amortization (104,071) (104,071)
Loss on sale of assets 133,393 24,230
Deferred compensation 6,303 20,652
Deferred taxes 98,582 99,263
Changes in operating assets and liabilities:
Royalties receivable (34,942) (43,306)
Other receivables (135,265) (444,182)
Income tax receivable 379,712 163,014
Inventory (47,105) 28,650
Prepaid and other current assets 201,515 (90,506)
Other assets 28,136 210,858
Accounts payable (198,851) 136,527
Accrued expenses and other liabilites (283,085) 40,403
Other liabilities 85,890 71,742
-------------- --------------
Total adjustments 1,481,512 1,201,708
-------------- --------------
Net cash provided by continuing operations 2,660,450 2,570,545
-------------- --------------
Net cash provided (used) by discontinued operations (23,532) 143,362
-------------- --------------
Net cash provided by operating activities 2,636,918 2,713,907
Cash flows from investing activities:
Purchase of property, plant and equipment (1,744,911) (1,229,001)
Proceeds from sale of property, plant and equipment 360,570 405,751
Business Acquisition, net of cash acquired - (6,524,740)
-------------- --------------
Net cash used in continuing operations (1,384,341) (7,347,990)
-------------- --------------
Net cash used in discontinued operations - (1,783)
-------------- --------------
Net cash used in investing activities (1,384,341) (7,349,773)
Cash flows from financing activities:
Net borrowings (payments) under line of credit (500,000) 1,725,000
Additions to Long Term Notes Payable - 3,000,000
Purchase of treasury stock (250,803) -
Exercise of employee stock options 122,160 -
-------------- --------------
Net cash provided by (used in) financing activities (628,643) 4,725,000
-------------- --------------
Increase in cash and cash equivalents 623,934 89,134
-------------- --------------
Cash and cash equivalents at beginning of period 1,293,836 366,042
-------------- --------------
Cash and cash equivalents at end of period $ 1,917,770 $ 455,176
============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest $ 281,853 $ 210,823
Income Taxes $ 79,645 $ 264,935
Non-cash investing and financing activity:
CNL real estate transaction $ - $ 8,325,000
4
MEXICAN RESTAURANTS, INC. AND 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 July
3, 2005, and the consolidated statements of income for the 13-week and
26-week periods and cash flows for the 26-week periods ended July 3, 2005
and June 27, 2004. The consolidated statements of income for the 13-week
and 26-week periods ended July 3, 2005 are not necessarily indicative of
the results to be expected for the full year. 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.
The consolidated statements of income and cash flows for the 13-week
and 26-week periods ended July 3, 2005 and June 27, 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 June 27,
2004 shown in the accompanying consolidated financial statements have been
reclassified to conform to the July 3, 2005 presentation. These
reclassifications have no effect on total assets, total liabilities,
stockholders equity or net income.
The consolidated statements of income for the 13-week and 26-week
periods of fiscal 2004 have been adjusted to conform with the 2005
presentation of coupon expenses for the 13 Beaumont-area restaurants
acquired in January 2004. For the 13-week and 26-week periods of fiscal
2004, the reclassifications were $59,700 and $135,900, respectively. These
reclassifications only affect the cost of sales and restaurant operating
expenses and have no effect on net income.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No.123
(Revised), Share-Based Payment, a revision of SFAS No.123, Accounting for
Stock-Based Compensation. SFAS No.123R requires 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 No.123R is effective for the first annual reporting
period beginning after December 15, 2005. We will continue to account for
stock-based compensation using the intrinsic value method until adoption
of SFAS No.123R on January 2, 2006. Historically, the compensation expense
recognized related to stock options under the intrinsic value method has
been minimal. As a result, adoption of the provisions of SFAS No.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 No.123R and have not determined whether the adoption will
result in amounts that are similar to the current pro forma disclosures
under SFAS No.123.
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.
5
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.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and
Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement
No. 3. This statement replaces APB Opinion No. 20, Accounting Changes, and
FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and
reporting of a change in accounting principle. This Statement applies to
all voluntary changes in accounting principle and is required for
accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005.
2. ACCOUNTING POLICIES
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 the estimated useful life of the assets. The
analysis resulted in differences that were immaterial to the financial
statements for all periods presented, and 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 improvements so that they are amortized over the
shorter of the lease term plus options or the estimated useful life of the
assets. The net impact of this change excluding additions after June 27,
2004 was a decrease of pre-tax income of approximately $43,400 and $59,600
for the 13 and 26 weeks ended July 3, 2005, respectively.
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 July 3, 2005 and June 27, 2004, the Company
had 929,795 and 1,014,970 options and warrants outstanding, respectively.
As of July 3, 2005 and June 27, 2004, such stock options and warrants have
the effect of increasing basic weighted average shares outstanding by
299,728 and 217,673 for such 13-week periods and 306,548 and 179,252 for
the 26-week periods, respectively.
4. STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No.
148, Accounting for Stock-Based Compensation - Transition and Disclosure,
an amendment of FASB Statement No. 123, Accounting for Stock-Based
Compensation, and has accounted for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, no compensation cost has been recognized for
stock options or warrants. Had compensation cost for the Company's
outstanding stock options and warrants been determined based on the fair
value at the grant date for awards consistent with the provisions of SFAS
No. 123, the Company's net income and net income per share would have been
reduced to the pro forma amounts indicated below for the 13-week periods
and 26-week periods ended July 3, 2005 and June 27, 2004:
13 WEEKS ENDED
7/3/05 6/27/04
---------- ------------
Net income - as reported..................................................... $ 502,174 $ 622,788
Less: Stock based compensation expense, determined under fair value
based method for all awards, net of tax.................................. 18,498 16,965
---------- ------------
Pro forma net income......................................................... 483,676 605,823
Net income per share diluted - as reported................................... 0.14 0.17
Pro forma net income per share diluted....................................... 0.13 0.17
6
26 WEEKS ENDED
7/3/05 6/27/04
---------- ------------
Net income - as reported .................................................... $1,177,321 $ 1,153,580
Less: Stock based compensation expense, determined under fair value
based method for all awards, net of tax.................................. 34,916 9,919
---------- ------------
Pro forma net income ........................................................ 1,142,405 1,143,661
Net income per share diluted - as reported................................... 0.32 0.32
Pro forma net income per share diluted........................................ 0.31 0.32
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 the
Beaumont-based franchise restaurants. Bank of America provided $3.1
million of the acquisition financing by amending its credit facility with
Mexican Restaurants, Inc. The real estate of six of the acquired
restaurants was 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 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 in 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 in goodwill. The restaurant was closed, remodeled and
re-opened on November 22, 2004.
6. SALE OF PROPERTY
On June 23, 2005, the Company sold the corporate office building in
Beaumont which was acquired in the 2004 acquisition of 13 restaurants. The
sale resulted in a loss of $106,000, which is included in the total loss
on sale of assets of $131,201 for the second quarter of fiscal 2005.
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
foodborne 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
7
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.
GENERAL
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, Crazy Jose's and La Senorita. At July 3,
2005 the Company operated 61 restaurants, franchised 18 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
and 26-week periods ended July 3, 2005 and June 27, 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 June 27,
2004 shown in the accompanying consolidated financial statements have been
reclassified to conform to the July 3, 2005 presentation. These
reclassifications have no effect on total assets, total liabilities,
stockholders equity or net income.
RESULTS OF OPERATIONS
REVENUES. The Company's revenues for the second quarter of fiscal
2005 increased $932,115 or 4.7% to $20.7 million compared with $19.7
million for the same quarter in fiscal 2004. Restaurant sales for second
quarter 2005 increased $960,332 or 4.9% to $20.5 million compared with
$19.5 million for the second quarter of fiscal 2004. Approximately 50.5%
of the increase reflects positive same-restaurant sales. For the second
quarter ended July 3, 2005, total system same-restaurant sales increased
2.6%, Company-owned same-restaurant sales increased 2.4% and
franchised-owned same restaurant sales increased 3.4%. The remaining
comparable increase in restaurant sales reflects new restaurant additions.
On a year-to-date basis, the Company's revenue was up $2.3 million
or 6.1% to $40.9 million compared with $38.6 million for the same 26-week
period in fiscal 2004. Restaurant sales for the 26-week period ended July
3, 2005 increased $2.4 million or 6.2% to $40.6 million compared with
$38.2 million for the same 26-week period of fiscal 2004. Approximately
46.5% of the increase reflects positive same-restaurant sales. For the
26-week period ended July 3, 2005, total system same-restaurant sales
increased 2.8%, Company-owned same-restaurant sales increased 2.8% and
franchised-owned same-restaurant sales increased 2.9%. The increase in
restaurant sales also reflects 181 days of sales in the 26-week period of
fiscal 2005 related to the Beaumont-based franchisee stores and related
assets acquired in January 2004, compared with 172 days of sales in the
26-week period of fiscal 2004. The remaining comparable increase in
restaurant sales reflects new restaurant additions.
For the quarter ended July 3, 2005, franchise fees, royalties and
other decreased $28,217 or 13.7% to $177,384 compared with $205,601 for
the same quarter a year ago. On a year-to-date basis, franchise fees,
royalties and other decreased $44,307 or 11.1% to $353,074 compared with
$397,381 for the same 26-week period of fiscal 2004, reflecting lost
royalty income from the Company's October
8
2004 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, increased as a percent of restaurant
sales 20 basis points to 28.3% compared with 28.1% in the second quarter
of fiscal 2004. The increase primarily reflects higher produce, paper and
supplies, beverage costs and liquor costs, which was partially offset by
lower cheese costs, and to a lesser extent, lower beef and chicken costs.
Beverage costs were higher reflecting the increased sale of bottled
products, and liquor costs were higher due to various Company promotions.
On a year-to-date basis, costs of sales decreased as a percent of
restaurant sales 10 basis points to 27.7% compared with 27.8% in the same
26-week period a year ago. The decrease primarily reflects lower cheese
and dry good costs, and to a lesser extent, lower beef and chicken costs,
which was partially offset by higher produce, paper and supplies, beverage
and liquor costs.
Labor and other related expenses decreased in the 2005 second
quarter as a percentage of restaurant sales 10 basis points to 33.1% as
compared with 33.2% in the second quarter of fiscal 2004. The decrease was
primarily due to labor efficiencies made by Casa Ole restaurants in
Beaumont (the 13 franchise restaurants acquired January 2004), which was
partially offset by higher health insurance expense and the higher labor
expense of a new restaurant opening.
On a year-to-date basis, labor and other related expenses increased
as a percentage of restaurant sales 10 basis points to 33.0% as compared
with 32.9% for the same 26-week period a year ago. As a percentage of
total restaurant sales, comparable restaurant labor decreased slightly as
a percentage of sales but was more than offset by increases in health
insurance expense and the higher labor expense of new restaurant openings,
conversions, and remodels.
Restaurant operating expenses, which primarily includes rent,
property taxes, utilities, repair and maintenance, liquor taxes, property
insurance, general liability insurance and advertising, remained constant
at 22.8% as a percentage of restaurant sales as compared with the second
quarter of fiscal 2004.
On a year-to-date basis, restaurant operating expense decreased as a
percentage of restaurant sales 10 basis points to 23.0% as compared with
23.1% for the same 26-week period a year ago. The decrease reflects
efficiencies on positive same-restaurant sales.
General and administrative expenses consist of expenses associated
with corporate and administrative functions that support restaurant
operations. General and administrative expenses decreased as a percentage
of total sales 20 basis points to 8.3% in the second quarter of fiscal
2005 as compared with 8.5% in same quarter one year ago. In absolute
dollars, general and administrative costs were $39,986 higher in the
second quarter of fiscal 2005 compared with the second quarter of fiscal
2004. The increase was primarily due to an unusually high level of
litigation expense as the Company successfully defended an employee
lawsuit.
On a year-to-date basis, general and administrative expenses
increased as a percentage of total sales 40 basis points to 8.6% as
compared with 8.2% in the same 26-week period one year ago. In absolute
dollars, general and administrative costs were $327,438 higher in the
26-week period of fiscal 2005 compared with the same 26-week period in
fiscal 2004. The increase reflects an increase of health insurance
expense, legal, audit fees and bonus accruals.
Depreciation and amortization expenses include the depreciation of
fixed assets and the amortization of intangible assets. Depreciation and
amortization expense increased as a percentage of total sales 100 basis
points to 3.4% as compared with 2.4% the same quarter in fiscal 2004. Such
expense for the second quarter of fiscal 2005 was $218,299 higher than for
the second quarter in fiscal 2004. The increase reflects a prospective
adjustment to leasehold amortization (see Accounting Policies in Notes to
Consolidated Financial Statements), additional depreciation expense for
remodeled
9
restaurants, new restaurants, and the replacement of equipment and
leasehold improvements in various existing restaurants.
On a year-to-date basis, depreciation and amortization expense
increased 50 basis points to 3.3% of total sales as compared with 2.8% for
the same 26-week period a year ago. The 26-week period of fiscal 2005 was
$262,866 higher than the 26-week period in fiscal 2004. The increase
reflects the prospective adjustment to leasehold amortization described in
the preceding paragraph, additional depreciation expense for remodeled
restaurants, new restaurants, and the replacement of equipment and
leasehold improvements in various existing restaurants.
LOSS ON SALE OF ASSETS. During the second quarter of fiscal 2005,
the Company recorded losses of $131,201 related to the disposition of an
office building that was acquired last year with the Beaumont-based
franchisee stores and related assets, the sale of a joint ventured
restaurant and miscellaneous dispositions of assets. During the second
quarter of fiscal 2004, the Company recorded losses of $7,158 related to
miscellaneous dispositions of assets.
On a year-to-date basis, the Company recorded losses on sale of
assets of $133,393 as compared with $24,230 for the same 26-week period a
year ago, as explained in the preceding paragraph.
OTHER INCOME (EXPENSE). Net expense increased $10,942 to $118,584 in
the second quarter of fiscal 2005 compared with a net expense of $107,642
in the second quarter of fiscal year 2004. Interest expense increased
$4,382 to $136,137 in the second quarter of fiscal year 2005 compared with
interest expense of $131,755 in the second quarter of fiscal year 2004,
reflecting an increase in interest rates despite a decrease in the
Company's outstanding debt.
On a year-to-date basis, net expense increased $9,877 to $226,342 as
compared with a net expense of $216,465 in the 26-week period of fiscal
2004. For the 26-week period of fiscal 2005, interest expense increased
$15,695 to $286,715 compared with interest expense of $271,020 for the
same 26-week period in fiscal 2004, reflecting an increase in interest
rates despite a decrease in the Company's outstanding debt.
INCOME TAX EXPENSE. The Company's effective tax rate from continuing
operations for the second quarter of fiscal 2005 was 31.3% as compared to
33.1% for the second quarter of fiscal 2004. In the second quarter of
fiscal 2005, the Company had lower pretax income from continuing
operations compared to the second quarter of fiscal 2004. In both
quarters, the permanent differences were approximately the same, resulting
in a lower effective tax rate in the second quarter of fiscal 2005.
On a year-to-date basis, the Company's effective tax rate from
continuing operations for the 26-week period of fiscal 2005 was 32.1% as
compared to 33.0% for the 26-week period of fiscal 2004. In the 26-week
period of fiscal 2005, the Company had lower pretax income from continuing
operations compared to the 26-week period of fiscal 2004. In both periods,
the permanent differences were approximately the same, resulting in a
lower effective tax rate in the 26-week period of fiscal 2005.
RESTAURANT CLOSURE COSTS AND DISCONTINUED OPERATIONS. No losses from
discontinued operations were recorded in the second quarter of fiscal
2005. In the corresponding quarter of fiscal year 2004, the Company
recorded losses from discontinued operations related to the 2004 closure
or sale of four restaurants and the 2003 closure of one restaurant of
$68,069. On a year-to-date basis, the Company recorded losses from
discontinued operations of $1,617 for the 26-week period of fiscal 2005
and $215,257 for the 26-week period for fiscal 2004.
LIQUIDITY AND CAPITAL RESOURCES
The Company met capital requirements for the 26-week period of
fiscal 2005 with cash generated by operations. In this 26-week period, the
Company's operations generated $2.6 million in cash, as compared with $2.7
million in the 26-week period of fiscal 2004. As of July 3, 2005, the
Company had a working capital deficit of $413,455, compared with a working
capital deficit of
10
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 26-week period of fiscal 2005,
total cash used for capital requirements was approximately $1.7 million.
The Company also received approximately $360,000 from the sale of an
office building that was acquired last year with the January 2004
acquisition of the Beaumont-based franchisee stores and related assets.
The Company opened one new restaurant in Humble, Texas near the end of the
second quarter of fiscal 2005. The balance of capital expenditures was for
necessary replacement of equipment and leasehold improvements in various
older restaurants and certain remodels.
During the quarter ended July 3, 2005, the Company opened one new
restaurant and plans to open one additional new restaurant during the
balance of this fiscal year or early in fiscal 2006. The Company also
plans to extensively remodel one restaurant and moderately remodel several
existing restaurants during the balance of fiscal 2005. 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.
Over the last several years, the Company incurred additional debt to
carry out acquisitions, to develop new restaurants, and to remodel
existing restaurants, as well as to accommodate other working capital
needs. During the 26-week period of fiscal 2005, the Company paid down
$500,000 of its indebtedness. During the balance of fiscal year 2005, the
Company anticipates that it will use excess cash flow to pay down
approximately $500,000 of additional indebtedness.
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, CNL Franchise Network, LP
("CNL') and the sellers of the Beaumont-based franchise restaurants. Bank
of America provided $3.1 million of the acquisition by amending its credit
facility with Mexican Restaurants, Inc. The real estate of six of the
acquired restaurants was 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. As of July 3, 2005, the Company had $3.5 million outstanding on
the credit facility and $3.0 million in notes for a total indebtedness of
$6.5 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.
On May 9, 2005, the Company announced its plan to implement a
limited stock repurchase program in a manner permitted under its bank
financing agreement. Under this program, the Company could spend up to
$1.0 million over the next 12 months (not to exceed $500,000 in any one
quarter) to
11
repurchase outstanding shares of its common stock. The Company has entered
into a repurchase plan designed to comply with Rules 10b5-1 and 10b-18
under the Securities and Exchange Act of 1934 under which an agent
appointed by the Company will determine the time, amount, and price at
which purchases of common stock will be made, subject to certain
parameters established in advance by the Company. As of July 3, 2005, the
Company repurchased 28,500 of its common stock for a total price of
$250,803. During this same period, Company employees exercised 35,975
options and the Company received $122,160 in net proceeds. The shares
acquired are being held for general corporate purposes, including the
offset of the dilutive effect on shareholders from the exercise of stock
options.
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 July 3, 2005, a 1% change in interest rates
would change interest expense by $8,750 per quarter.
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.
12
\
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information about the Company's purchases of shares
of its Common Stock in the open market during the quarter ended July 3, 2005:
Maximum Number of
Total Number of Shares Shares that May yet
Purchased as Part of be Purchased Under
Total Number of Average Price Paid Publicly Announced the Plans or
Period Shares Purchased Per Share Plans or Programs Programs
5/2/2005 - 5/29/2005 28,500 $8.70 28,500 (1)
====== ===== ======
(1) Under a share repurchase program approved by the Board of Directors of the
Company on May 2, 2005, the Company is authorized to repurchase up to
$1,000,000 in maximum aggregate amount of the Company's Common Stock. The
repurchase program is designed to comply with Rules 10b-18 and Rule 10b5-1
under the Securities Exchange Act of 1934 under which an agent appointed
by the Company will determine the time, amount, and price at which
purchases of common stock will be made, subject to certain parameters
established in advance by the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 2005 annual meeting of shareholders on Tuesday,
May 24, 2005. At the annual meeting, the Company's shareholders took the
following actions:
1) By a vote of 3,343,415 for, 2,312 withheld, the shareholders
elected Joseph J. Fitzsimmons as Class III Director for a term
expiring at the annual meeting to be held in 2008 and until
his successor is elected and qualified.
2) By a vote of 3,343,415 for, 2,312 withheld, the shareholders
elected J. Stuart Sargent as Class III director for a term
expiring at the annual meeting to be held in 2008 and until
this successor is elected and qualified.
Additionally the following current directors of the Company
continued to serve as directors as of and following the 2005 annual
meeting: Larry N. Forehand, Thomas E. Martin, David Nierenberg, Michael D.
Domec, Curt Glowacki and Louis P. Neeb.
ITEM 6. 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
Items 1, 3 and 5 are not applicable and have been omitted.
13
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEXICAN RESTAURANTS, INC.
Dated: August 16, 2005
Curt Glowacki By: /s/ Curt Glowacki
Chief Executive Officer ------------------------------
(Principal Executive Officer)
Dated: August 16, 2005
Andrew J. Dennard By: /s/ Andrew J. Dennard
Executive Vice President, Chief Financial -------------------------------
Officer & Treasurer
(Principal Financial Officer and
(Principal Accounting Officer)
14
EXHIBIT INDEX
Exhibit
Number Document Description
------- ----------------------------------------------------
31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002