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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 28, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes No X
--- ---
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant, based on the sale trade price of the Common
Stock as reported by the Nasdaq Small Cap Market on the last business day of the
second quarter ended June 29, 2003 was $4,671,846. For purposes of this
computation, all officers, directors and 10% beneficial owners of the registrant
are deemed to be affiliates. Such determination should not be deemed an
admission that such officers, directors or 10% beneficial owners are, in fact,
affiliates of the Registrant.
Number of shares outstanding of the Registrant's Common Stock, as of March 24,
2004: 3,384,605 shares of common stock, par value $.01.
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the Company's definitive proxy statement in connection
with the Annual Meeting of Shareholders to be held May 4, 2004, to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A, are
incorporated by reference into Part III of this report.
TABLE OF CONTENTS
PART I PAGE
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures about Market Risks 16
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 16
Item 9A. Controls and Procedures 16
PART III
Item 10. Directors and Executive Officers of the Registrant 16
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial Owners and Management 16
Item 13. Certain Relationships and Related Transactions 17
Item 14. Principal Accounting Fees and Services 17
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 17
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K under "Business", "Legal
Proceedings". "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other facts which may cause the actual results,
performance or achievements of Mexican Restaurants, Inc. and its subsidiaries
(the "Company"), its restaurants, area developers and franchisees 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: general economic and business conditions;
competition; success of operating initiatives; development and operating costs;
advertising and promotional efforts; brand awareness; adverse publicity;
acceptance of new product offerings; availability, locations and terms of sites
for store development; changes in business strategy or development plans;
quality of management; availability, terms and development of capital; business
abilities and judgment of personnel; availability of qualified personnel; food,
labor and employee benefit costs; area developers' adherence to development
schedules; changes in, or the failure to comply with government regulations;
regional weather conditions; construction schedules; and other factors
referenced in the Form 10-K. The use in this Form 10-K of such words as
"believes", "anticipates", "expects", "intends" and similar expressions with
respect to future activities or other future events or conditions are intended
to identify forward-looking statements, but are not the exclusive means of
identifying such statements. The success of the Company is dependent on the
efforts of the Company, its employees, its area developers, and franchisees and
the manner in which they operate and develop stores in light of various factors,
including those set forth above.
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this Form 10-K will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company that its objectives or
plans will be achieved.
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PART I
ITEM 1. BUSINESS
GENERAL
Mexican Restaurants, Inc. (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, La Senorita and Crazy Jose. The Casa
Ole, Monterey, Tortuga, La Senorita and Crazy Jose concepts have been in
business for 32, 49, 10, 25 and 17 years, respectively. Today the Company
operates 64 restaurants, franchises 22 restaurants and licenses one restaurant
in various communities across Texas, Louisiana, Oklahoma and Michigan. The Casa
Ole, Monterey, La Senorita and Crazy Jose restaurants are designed to appeal to
a broad range of customers, and are located primarily in small and in
medium-sized communities and middle-income areas of larger markets. The Tortuga
Coastal Cantina restaurants also are designed to appeal to a broad range of
customers and are located primarily in Houston suburban markets. The restaurants
offer fresh, quality food, affordable prices, friendly service and comfortable
surroundings. Menus feature a variety of traditional Mexican and Tex-Mex
selections, complemented by the Company's own original Mexican-based recipes
designed to have broad appeal. The Company believes that the established success
of the Company in existing markets, its focus on middle-income customers, and
the skills of its management team provide significant opportunities to realize
the value inherent in the Mexican restaurant market and increase revenues in
existing markets.
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 restaurants acquired include
8 Casa Ole restaurants located in Southeast Texas, 2 Casa Ole restaurants
located in Southwest Louisiana, and 3 Crazy Jose's restaurants located in
Southeast Texas. In the past year these restaurants had combined sales of over
$20 million.
The Company was incorporated under the name "Casa Ole Restaurants,
Inc." under the laws of the State of Texas in February 1996, and had its initial
public offering in April 1996. On May 24, 1999, the Company changed its
corporate name to Mexican Restaurants, Inc. The Company operates as a holding
company and conducts substantially all of its operations through its
subsidiaries. All references to the Company include the Company and its
subsidiaries, unless otherwise stated.
STRATEGY AND CONCEPT
The Company's objective is to be perceived as a value leader in the
Mexican theme segment of the full-service casual dining marketplace. To
accomplish this objective, the Company has developed strategies designed to
achieve and maintain high levels of customer loyalty, frequent patronage and
profitability. The key strategic elements are:
o Offering consistent, high-quality, original recipe Mexican menu
items that reflect both national and local taste preferences;
o Pricing menu offerings at levels below many family and
casual-dining restaurant concepts;
o Selecting, training and motivating its employees to enhance
customer dining experiences and the friendly casual atmosphere of
its restaurants;
o Providing customers with the friendly, attentive service typically
associated with more expensive casual-dining experiences; and
o Reinforcing the perceived value of the dining experience with a
comfortable and inviting Mexican decor.
MENU. The Company's restaurants offer high-quality products with a
distinctive, yet mild taste profile with mainstream appeal. Fresh ingredients
are a critical recipe component, and the majority of menu items are prepared
daily in the kitchen of each restaurant from original recipes.
The menus feature a wide variety of entrees including enchiladas,
combination platters, burritos, fajitas, coastal seafood and other house
specialties. The menu also includes soup, salads, appetizers and desserts. From
time to time the Company also introduces new dishes designed to keep the menus
fresh. Alcoholic beverages are served as a complement to meals and represent a
range of less than 5% of sales at its more family-oriented locations, and up to
20% in its more casual dining locations. At Company-owned restaurants the dinner
menu entrees presently range in price from $4.99 to $15.95, with most items
priced between $5.95 and $9.95. Lunch prices at most Company-owned restaurants
presently range from $4.99 to $8.95.
ATMOSPHERE AND LAYOUT. The Company emphasizes an attractive interior
and exterior design for each of its restaurants. The typical restaurant has an
inviting and interesting Mexican exterior. The interior decor is comfortable
Mexican in appearance to reinforce the perceived value of the dining experience.
Stucco, tile floors, carpets, plants and a variety of paint colors are integral
features of each restaurant's decor. These decor features are incorporated in a
floor plan
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designed to provide a comfortable atmosphere. The Company's restaurant designs
are sufficiently flexible to accommodate a variety of available sites and
development opportunities, such as malls, end-caps of strip shopping centers and
free standing buildings, including conversions to the Company's restaurant
design. The restaurant facility is also designed to serve a high volume of
customers in a relatively limited period of time. The Company's restaurants
typically range in size from approximately 4,000 to 5,600 square feet, with an
average of approximately 4,500 square feet and a seating capacity of
approximately 180.
GROWTH STRATEGY
The Company believes that the unit economics of the various restaurant
concepts of the Company, as well as their value orientation and focus on middle
income customers, provide significant potential opportunities for growth. The
Company's long-standing strategy to capitalize on these growth opportunities has
been comprised of two key elements:
IMPROVE SAME RESTAURANT SALES AND PROFITS. The Company's first growth
opportunity is to improve the sales and controllable income of existing
restaurants (controllable income consists of restaurant sales less food and
beverage expenses, labor and controllable expenses, such as utilities and repair
and maintenance expenses, but excludes advertising and occupancy expenses). This
is accomplished through an emphasis on restaurant operations, coupled with
improving marketing, purchasing and other organizational efficiencies (see
"Restaurant Operations" below). During fiscal year 2004, the Company expects to
focus on improving sales and profitability so that it can maximize free cash
flow, which it will use to pay off debt and to make opportunistic purchases of
its common stock.
INCREASED PENETRATION OF EXISTING MARKETS. The Company's second growth
opportunity is, when it believes market auditions warrant, to increase the
number of restaurants in existing Designated Market Areas ("DMAs") and to expand
into contiguous new markets. The DMA concept is a mapping tool developed by the
A.C. Nielsen Co. that measures the size of a particular market by reference to
communities included within a common television market. The Company's objective
in increasing the density of Company-owned restaurants within existing markets
is to improve operating efficiencies in such markets and to realize improved
overhead absorption. In addition, the Company believes that increasing the
density of restaurants in both Company-owned and franchised markets will assist
it in achieving effective media penetration while maintaining or reducing
advertising costs as a percentage of revenues in the relevant markets. The
Company believes that careful and prudent site selection within existing markets
will avoid cannibalization of the sales base of existing restaurants.
In implementing its unit expansion strategy, the Company may use a
combination of franchised and Company-owned restaurants. The number of such
restaurants developed in any period will vary. The Company believes that a mix
of franchised and Company-owned restaurants would enable it to realize
accelerated expansion opportunities, while maintaining majority or sole
ownership of a significant number of restaurants. Generally the Company does not
anticipate opening franchised and Company-owned restaurants within the same
market. In seeking franchisees, the Company will continue to primarily target
experienced multi-unit restaurant operators with knowledge of a particular
geographic market and financial resources sufficient to execute the Company's
development strategy.
The Company did not build any new restaurants in fiscal year 2003. The
Company does not currently anticipate building any new restaurants in fiscal
year 2004 but plans to significantly remodel two restaurants and moderately
remodel seven other restaurants. In adding to its Company-owned restaurants, the
Company anticipates it will continue to selectively acquire existing franchised
restaurants. The Company acquired one existing franchised restaurant in fiscal
year 2003 as well as completed the acquisition of 13 restaurants and related
assets from its Beaumont-based franchisee on January 7, 2004.
SITE SELECTION
When developing new restaurant sites, senior management of the Company
devotes significant time and resources to analyzing prospective sites for the
Company's restaurants. Senior management has also created and utilizes a site
selection committee, which reviews and approves each site to be developed. In
addition, the Company conducts customer surveys to define precisely the
demographic profile of the customer base of each of the Company's restaurant
concepts. The Company's site selection criteria focus on:
1) matching the customer profile of the respective restaurant
concept to the profile of the population of the target
local market;
2) easy site accessibility, adequate parking, and prominent
visibility of each site under consideration;
3) the site's strategic location within the marketplace;
4) the site's proximity to the major concentration of shopping
centers within the market;
5) the site's proximity to a large employment base to support
the lunch segment; and
6) the impact of competition from other restaurants in the
market.
The Company believes that a sufficient number of suitable sites are
available for contemplated Company and franchise development in existing
markets. Based on its current planning and market information, the Company does
not plan to open additional restaurants in fiscal year 2004. The anticipated
total investment for a 4,200 to 5,600 square foot restaurant, including land,
building, equipment, signage, site work, furniture, fixtures and decor ranges
between $1.4 and $2.1
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million (including capitalized lease value). Additionally, training and other
pre-opening costs are anticipated to approximate $50,000 to $100,000 per
location. The cost of developing and operating a Company restaurant can vary
based upon fluctuations in land acquisition and site improvement costs,
construction costs in various markets, the size of the particular restaurant and
other factors. Although the Company anticipates that development costs
associated with near-term restaurants will range between $1.4 and $2.1 million,
there can be no assurance of this. Where possible, the Company uses build to
suit, lease conversion or sale and leaseback transactions to limit its cash
investment to approximately $500,000 per location.
RESTAURANT OPERATIONS
MANAGEMENT AND EMPLOYEES. The management staff of each restaurant is
responsible for managing the restaurant's operations. Each Company-owned
restaurant operates with a general manager, one or more assistant managers and a
kitchen manager or a chef. Including managers, restaurants have an average of 50
full-time and part-time employees. The Company historically has spent
considerable effort developing its employees, allowing it to promote from
within. As an additional incentive to its restaurant management personnel, the
Company has a bonus plan in which restaurant managers can receive monthly
bonuses based on a percentage of their restaurants' controllable profits.
The Company's regional supervisors, who report directly to the
Company's Directors of Operation, offer support to the store managers. Each
supervisor is eligible for a monthly bonus based on a percentage of controllable
profits of the stores under their control.
As of December 28, 2003, the Company employed approximately 2,300
people, of whom approximately 2,250 were restaurant personnel at the
Company-owned restaurants and 50 were corporate personnel. The Company considers
its employee relations to be good. Most employees, other than restaurant
management and corporate personnel, are paid on an hourly basis. The Company's
employees are not covered by a collective bargaining agreement.
TRAINING AND QUALITY CONTROL. The Company requires its hourly employees
to participate in a formal training program carried out at the individual
restaurants, with the on-the-job training program varying from three days to two
weeks based upon the applicable position. Managers of both Company-owned and
franchised restaurants are trained at one of the Company's specified training
stores by that store's general manager and are then certified upon completion of
a four to six week program that encompasses all aspects of restaurant operations
as well as personnel management and policy and procedures, with special emphasis
on quality control and customer relations. To evaluate ongoing employee service
and provide rewards to employees, the Company employs a "mystery shopper"
program that consists of two anonymous visits per month per restaurant. The
Company's franchise agreement requires each franchised restaurant to employ a
general manager who has completed the Company's training program at one of the
Company's specified training stores. Compliance with the Company's operational
standards is monitored for both Company-owned and franchised restaurants by
random, on-site visits by corporate management, regular inspections by regional
supervisors, the ongoing direction of a corporate quality control manager and
the mystery shopper program.
MARKETING AND ADVERTISING. The Company believes that when media
penetration is achieved in a particular market, investments in radio and
television advertising can generate significant increases in revenues in a
cost-effective manner. During fiscal 2003, the Company spent approximately 3.7%
of restaurant revenues on various forms of advertising and plans to spend a
comparable amount in fiscal 2004. Besides radio and television, the Company
makes use of in-store promotions, involvement in community activities, and
customer word-of-mouth to maintain their performance.
PURCHASING. The Company strives to obtain consistent quality products
at competitive prices from reliable sources. The Company works with its
distributors and other purveyors to ensure the integrity, quality, price and
availability of the various raw ingredients. The Company researches and tests
various products in an effort to maintain quality and to be responsive to
changing customer tastes. The Company operates a centralized purchasing system
that is utilized by all of the Company-owned restaurants and is available to the
Company's franchisees. Under the Company's franchise agreement, if a franchisee
wishes to purchase from a supplier other than a currently approved supplier, it
must first submit the products and supplier to the Company for approval.
Regardless of the purchase source, all purchases must comply with the Company's
product specifications. The Company's ability to maintain consistent product
quality throughout its operations depends upon acquiring specified food products
and supplies from reliable sources. Management believes that all essential food
and beverage products are available from other qualified sources at competitive
prices.
FRANCHISING
The Company currently has 13 franchisees operating a total of 21
restaurants and one licensee operating one restaurant. In fiscal year 2003, no
new franchise restaurants were opened and one franchise restaurant was sold to
the Company. Another franchise restaurant that was temporarily closed during the
fourth quarter of fiscal year 2002 remained closed during fiscal year 2003 but
is scheduled to reopen sometime during the second quarter of fiscal year 2004.
The Company's largest franchisee, a Beaumont-based franchisee, sold its 13
restaurants and related assets to the Company on January 7, 2004. Franchising
allows the Company to expand the number of stores and penetrate markets more
quickly and with less capital than developing Company-owned stores. Franchisees
are selected on the basis of various factors, including business background,
experience and financial resources. In seeking new franchisees, the Company
targets experienced multi-unit restaurant operators with knowledge of a
particular geographic market and financial resources sufficient to execute the
Company's development schedule. Under the current franchise agreement,
franchisees are required to operate their stores in compliance with the
Company's policies, standards and specifications, including matters such as menu
items, ingredients, materials, supplies, services, fixtures, furnishings, decor
and signs. In addition, franchisees are required to purchase, directly
5
from the Company or its authorized agent, spice packages for use in the
preparation of certain menu items, and must purchase certain other items from
approved suppliers unless written consent is received from the Company.
FRANCHISE AGREEMENTS. The Company enters into a franchise agreement
with each franchisee that grants the franchisee the right to develop a single
store within a specific territory at a site approved by the Company. The
franchisee then has limited exclusive rights within the territory. Under the
Company's current standard franchise agreement, the franchisee is required to
pay a franchise fee of $25,000 per restaurant. The current standard franchise
agreement provides for an initial term of 15 years (with a limited renewal
option) and payment of a royalty of 3% to 5% of gross sales. The termination
dates of the Company's franchise agreements with its existing franchisees
currently range from 2004 to 2015.
Franchise agreements are not assignable without the prior written
consent of the Company. Also, the Company retains rights of first refusal with
respect to any proposed sales by the franchisee. Franchisees are not permitted
to compete with the Company during the term of the franchise agreement and for a
limited time, and in a limited area, after the term of the franchise agreement.
The enforceability and permitted scope of such noncompetition provisions varies
from state to state. The Company has the right to terminate any franchise
agreement for certain specific reasons, including a franchisee's failure to make
payments when due or failure to adhere to the Company's policies and standards.
Many state franchise laws, however, limit the ability of a franchisor to
terminate or refuse to renew a franchise. See "Item 1. Business--Government
Regulation."
Prior forms of the Company's franchise agreements may contain terms
that vary from those described above, including with respect to the payment or
nonpayment of advertising fees and royalties, the term of the agreement, and
assignability, noncompetition and termination provisions.
FRANCHISEE TRAINING AND SUPPORT. Under the current franchise agreement,
each franchisee (or if the franchisee is a business organization, a manager
designated by the franchisee) is required to personally participate in the
operation of the franchise. Before opening the franchisee's business to the
public, the Company provides training at its approved training facility for each
franchisee's general manager, assistant manager and kitchen manager or chef. The
Company recommends that the franchisee, if the franchisee is other than the
general manager, or if a business organization, its chief operating officer,
attend such training. The Company also provides a training team to assist the
franchisee in opening its restaurant. The team, supervised by the Director of
Training, will assist and advise the franchisee and/or its manager in all phases
of the opening operation for a seven to fourteen day period. The formal training
program required of hourly employees and management, along with continued
oversight by the Company's quality control manager, is designed to promote
consistency of operations.
AREA DEVELOPERS. The area development agreement is an extension of the
standard franchise agreement. The area development agreement provides area
developers with the right to execute more than one franchise agreement in
accordance with a fixed development schedule. Restaurants established under
these agreements must be located in a specific territory in which the area
developer will have limited exclusive rights. Area developers pay an initial
development fee generally equal to the total initial franchise fee for the first
franchise agreement to be executed pursuant to the development schedule plus 10%
of the initial franchise fee for each additional franchise agreement to be
executed pursuant to the development schedule. Generally the initial development
fee is not refundable, but will be applied in the proportions described above to
the initial franchise fee payable for each franchise agreement executed pursuant
to the development schedule. New area developers will pay monthly royalties for
all restaurants established under such franchise agreements on a declining scale
generally ranging from 5% of gross sales for the initial restaurant to 3% of
gross sales for the fourth restaurant and thereafter as additional restaurants
are developed. Area development agreements are not assignable without the prior
written consent of the Company. The Company will retain rights of first refusal
with respect to proposed sales of restaurants by the area developers. Area
developers are not permitted to compete with the Company. As described above,
the enforceability and permitted scope of such noncompetition provisions may
vary from state to state. If an area developer fails to meet its development
schedule obligations, the Company can, among other things, terminate the area
development agreement or modify the territory in the agreement. These
termination rights may be limited by applicable state franchise laws. The
Company is not currently seeking new area developers. One area developer, a
Beaumont-based franchisee, sold its 10 Casa Ole franchise restaurants and
related assets to the Company on January 7, 2004 (the Company also purchased
three Crazy Jose restaurants in the same transaction). The Company currently has
two area developers operating a total of four and three restaurants,
respectively.
COMPETITION
The restaurant industry is intensely competitive. Competition is based
upon a number of factors, including concept, price, location, quality and
service. The Company competes against a broad range of other family dining
concepts, including those focusing on various other types of ethnic food, as
well as local restaurants in its various markets. The Company also competes
against other quick service and casual dining concepts within the Mexican and
Tex-Mex food segment. Many of the Company's competitors are well established and
have substantially greater financial and other resources than the Company. Some
of the Company's competitors may be better established in markets where the
Company's restaurants are or may be located. Also, the Company competes for
qualified franchisees with franchisors of other restaurants and various other
concepts.
The success of a particular restaurant concept is also affected by many
other factors, including national, regional or local economic and real estate
conditions, changes in consumer tastes and eating habits, demographic trends,
weather, traffic patterns, and the type, number and location of competing
restaurants. In addition, factors such as inflation, increased food,
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labor and benefit costs, and the availability of experienced management and
hourly employees may adversely affect the restaurant industry in general and the
Company's restaurants in particular.
GOVERNMENT REGULATION
Each restaurant is subject to regulation by federal agencies and to
licensing and regulation by state and local health, sanitation, safety, fire and
other departments relating to the development and operation of restaurants.
These include regulations pertaining to the environmental, building and zoning
requirements in the preparation and sale of food. The Company is also subject to
laws governing the service of alcohol and its relationship with employees,
including minimum wage requirements, overtime, working conditions and
immigration requirements. Difficulties or failures in obtaining the required
construction and operating licenses, permits or approvals could delay or prevent
the opening of a specific new restaurant. The Company believes that it is
operating in substantial compliance with applicable laws and regulations that
govern its operations.
Alcoholic beverage control regulations require each of the Company's
restaurants to apply to a state authority and, in certain locations, county or
municipal authorities, for a license or permit to sell alcoholic beverages on
the premises and to provide service for extended hours. Typically, licenses must
be renewed annually and may be revoked or suspended for cause at any time.
Alcoholic beverage control regulations relate to numerous aspects of the
Company's restaurants, including minimum age of patrons drinking alcoholic
beverages and of employees serving alcoholic beverages, hours of operation,
advertising, wholesale purchasing, inventory control and handling, storage and
dispensing of alcoholic beverages. The Company is also subject to "dramshop"
statutes that generally provide a person injured by an intoxicated person may
seek to recover damages from an establishment determined to have wrongfully
served alcoholic beverages to the intoxicated person. The Company carries liquor
liability coverage as part of its existing comprehensive general liability
insurance. Additionally, within thirty days of employment by the Company, each
Texas employee of the Company who serves alcoholic beverages is required to
attend an alcoholic seller training program that has been approved by the Texas
Alcoholic Beverage Commission and endorsed by the Texas Restaurant Association
and that endeavors to educate the server to detect and prevent overservice of
the Company's customers. This program strives to educate the server to detect
and prevent over-service, or underage- service, of alcoholic beverages to the
Company's customers.
In connection with the sale of franchises, the Company is subject to
the United States Federal Trade Commission rules and regulations and state laws
that regulate the offer and sale of franchises and business opportunities. The
Company is also subject to laws that regulate certain aspects of such
relationships. The Company has had no claims with respect to its programs and,
based on the nature of any potential compliance issues identified, does not
believe that compliance issues associated with its historic franchising programs
will have a material adverse effect on its results of operations or financial
condition. The Company believes that it is operating in substantial compliance
with applicable laws and regulations that govern franchising programs.
The federal Americans With Disabilities Act prohibits discrimination on
the basis of disability in public accommodations and employment. The Company is
required to comply with the Americans With Disabilities Act and regulations
relating to accommodating the needs of the disabled in connection with the
construction of new facilities and with significant renovations of existing
facilities.
The Company is subject to various local, state and federal laws
regulating the discharge of pollutants into the environment. The Company
believes that it conducts its operations in substantial compliance with
applicable environmental laws and regulations. The Company conducts
environmental audits of each proposed restaurant site in order to determine
whether there is any evidence of contamination prior to purchasing or entering
into a lease with respect to such site. To date the Company's operations have
not been materially adversely affected by the cost of compliance with applicable
environmental laws.
TRADEMARKS, SERVICE MARKS AND TRADE DRESS
The Company believes its trademarks, service marks and trade dress have
significant value and are important to its marketing efforts. It has registered
the trademarks for "Casa Ole", "Casa Ole Mexican Restaurant", "Monterey's
Tex-Mex Cafe", "Monterey's Little Mexico", "Tortuga Cantina", "La Senorita" and
as of January 7, 2004 "Crazy Jose" with the U.S. Patent Office.
RISK FACTORS
The Company cautions readers that its business is subject to a number
of risks, any of which could cause the actual results of the Company to differ
materially from those indicated by forward-looking statements made from time to
time in releases, including this Form 10-K, and oral statements. Certain risk
factors are presented throughout this document, including, among others,
business strategy; site selection; attracting and retaining franchisees,
managers and other employees; availability of food products; competition and
government regulation. Certain other risks to which the Company is subject
include:
SEASONAL FLUCTUATIONS IN SALES AND EARNINGS AFFECT THE COMPANY'S
QUARTERLY RESULTS. The Company's sales and earnings fluctuate seasonally.
Historically the Company's highest sales and earnings have occurred in the
second and third calendar quarters, which the Company believes is typical of the
restaurant industry and consumer spending patterns in general. In addition,
quarterly results have been and, in the future are likely to be, substantially
affected by the timing of new
7
restaurant openings. Because of the seasonality of the Company's business and
the impact of new restaurant openings, results for any calendar quarter are not
necessarily indicative of the results that may be achieved for a full fiscal
year and cannot be used to indicate financial performance for the entire year.
INFLATION MAY ADVERSELY IMPACT NET INCOME. The Company believes that
inflation has impacted net income during fiscal year 2003. Substantial increases
in utility expenses and certain food costs items had a marked impact on the
Company's operating results to the extent such increases could not be passed
along to customers. There can be no assurance that the Company will not
experience the same inflationary impact in the future. If operating expenses
increase, management intends to attempt to recover increased costs by increasing
prices to the extent deemed advisable in light of competitive conditions. The
Company does not have or participate in transactions involving derivative,
financial and commodity instruments.
THE COMPANY'S SMALL RESTAURANT BASE AND GEOGRAPHIC CONCENTRATION MAKES
ITS OPERATIONS MORE SUSCEPTIBLE TO LOCAL ECONOMIC CONDITIONS. The results
achieved to date by the Company's relatively small restaurant base may not be
indicative of the results of a larger number of restaurants in a more
geographically dispersed area. Because of the Company's relatively small
restaurant base, an unsuccessful new restaurant could have a more significant
effect on the Company's results of operations than would be the case in a
company owning more restaurants. Additionally, given the Company's present
geographic concentration (all Company-owned units are currently in Texas,
Oklahoma and Michigan), results of operations may be adversely affected by
economic or other conditions in the region and adverse publicity relating to the
Company's restaurants could have a more pronounced adverse effect on the
Company's overall sales than might be the case if the Company's restaurants were
more broadly dispersed.
THE COMPANY'S FINANCIAL COVENANTS COULD ADVERSELY AFFECT THE COMPANY'S
ABILITY TO BORROW. Under the Company's current credit agreement, it is subject
to certain reporting requirements and financial covenants, including
requirements that it maintain minimum levels of net worth and various financial
ratios. Although it is currently in compliance with such financial covenants, an
erosion of the Company's business could place the Company out of compliance in
future periods. Potential remedies for the lender include declaring all
outstanding amounts immediately payable, terminating commitments and enforcing
any liens; however, in the event of any future noncompliance the Company may
seek a waiver from such lender. See Note 3, Long-term Debt, of Notes to
Consolidated Financial Statements.
THE COMPANY'S MANAGEMENT AND DIRECTORS HOLD A MAJORITY OF THE COMMON
STOCK. Approximately 59.8% of the Common Stock and rights to acquire Common
Stock of the Company are beneficially owned or held by Larry N. Forehand, David
Nierenberg, Michael D. Domec and Louis P. Neeb, directors and/or executive
officers of the Company. As a result, these individuals have substantial control
over matters requiring shareholder approval, including the election of
directors.
COMPETITION MAY ADVERSELY AFFECT THE COMPANY'S OPERATIONS AND FINANCIAL
RESULTS. The restaurant industry is highly competitive with respect to price,
service, restaurant location and food quality, and is often affected by changes
in consumer tastes, economic conditions, population and traffic patterns. The
Company competes within each market against other family dining concepts, as
well as quick service and casual dining concepts, for customers, employees and
franchisees. Several of the Company's competitors operate more restaurants and
have significantly greater financial resources and longer operating histories
than the Company. The Company's inability to successfully compete with the other
restaurants in its markets could prevent it from increasing or sustaining its
revenues and profitability and result in a material adverse effect on its
business, financial condition, results of operations or cash flows.
CHANGES IN GENERAL ECONOMIC AND POLITICAL CONDITIONS AFFECT CONSUMER
SPENDING AND MAY HARM THE COMPANY'S REVENUES AND OPERATING RESULTS. The United
States was in a recession throughout most of 2003, and although the economy
appears to be improving during the first quarter of 2004, generally weak
economic conditions may persist through 2004. Customers may continue to be
apprehensive about the economy and reduce their level of discretionary spending
until the economy exhibits sustained improvement. A decrease in discretionary
spending could impact the frequency with which the Company's customers choose to
dine out or the amount they spend on meals while dining out, thereby decreasing
the Company's revenues. Additionally, the continued responses to the terrorist
attacks on the United States, possible future terrorist attacks and the conflict
in Iraq and its aftermath may exacerbate current economic conditions and lead to
further weakening in the economy. Adverse economic conditions and any related
decrease in discretionary spending by the Company's customers could have an
adverse effect on the Company's revenues and operating results.
RISING INSURANCE COSTS COULD NEGATIVELY IMPACT PROFITABILITY. The cost
of insurance (workers compensation insurance, general liability insurance,
health insurance and directors and officers liability) has risen significantly
in the past year and is expected to continue to increase in 2004. These
increases could have a negative impact on the Company's profitability if it is
not able to negate the effect of such increases by continuing to improve its
operating efficiencies.
IMPLEMENTING THE COMPANY'S GROWTH STRATEGY MAY STRAIN ITS RESOURCES.
The Company's ability to expand by adding Company-owned and franchised
restaurants will depend on a number of factors, including the availability of
suitable locations, the ability to hire, train and retain an adequate number of
experienced management and hourly employees, the availability of acceptable
lease terms and adequate financing, timely construction of restaurants, the
ability to obtain various government permits and licenses and other factors,
some of which are beyond the control of the Company and its franchisees. The
opening of additional franchised restaurants will depend, in part, upon the
ability of existing and future franchisees to obtain financing or investment
capital adequate to meet their market development obligations. Based on the
Company's experience in attempting to grow outside its existing markets, the
Company has found there can be limited consumer acceptance and that the cost of
such efforts can have a material adverse impact on the Company's financial
results.
8
SHARES ELIGIBLE FOR FUTURE SALE COULD ADVERSELY IMPACT THE STOCK PRICE.
Sales of substantial amounts of shares in the public market could adversely
affect the market price of the Common Stock. In connection with its 1996 initial
public offering, the Company granted limited registration rights to holders of
warrants granted by the Company and Larry N. Forehand to Louis P. Neeb, Tex-Mex
Partners, L.C. and a former officer of the Company to register the 757,465
underlying shares of Common Stock subject to such warrants in connection with
registrations otherwise undertaken by the Company. If the Company registers
these shares and these shareholders sell a large portion of their holdings on
the open market at one time, the market price of the Common Stock will likely
decline. In any event, the market price of the Common Stock could be subject to
significant fluctuations in response to the Company's operating results and
other factors.
LITIGATION COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S
BUSINESS. The Company is from time to time the subject of complaints or
litigation from guests alleging food-borne illness, injury or other food
quality, health or operational concerns. The Company may be adversely affected
by publicity resulting from such allegations, regardless of whether such
allegations are valid or whether it is liable. The Company is also subject to
complaints or allegations from former or prospective employees from time to
time. A lawsuit or claim could result in an adverse decision against the Company
that could have a materially adverse effect on its business.
The Company is subject to state "dramshop" laws and regulations, which
generally provide that a person injured by an intoxicated person may seek to
recover damages from an establishment that wrongfully served alcoholic beverages
to such person. While the Company carries liquor liability coverage as part of
its existing comprehensive general liability insurance, it may still be subject
to a judgment in excess of its insurance coverage and it may not be able to
obtain or continue to maintain such insurance coverage at reasonable costs, or
at all.
COMPLIANCE WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC
DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSES. Keeping up to date and in
compliance with changing laws, regulations and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new
SEC regulations and Nasdaq Stock Market rules, has required an increased amount
of management attention and external resources. The Company remains committed to
maintaining high standards of corporate governance and public disclosure. As a
result, the Company intends to invest all reasonably necessary resources to
comply with evolving standards, and this investment may result in increased
general and administrative expenses and a diversion of management time and
attention from revenue-generating activities to compliance activities.
OTHER RISKS, UNKNOWN OR IMMATERIAL TODAY, MAY BECOME KNOWN OR MATERIAL
IN THE FUTURE. The Company has attempted to identify certain material risks
currently affecting it. However, additional risks that the Company does not yet
know of, that are not described herein, or that it currently believes are
immaterial, may occur or become material. These risks could impair the Company's
business operations or adversely affect its results of operations.
ITEM 2. PROPERTIES
In fiscal year 2003, the Company's executive offices were located in
approximately 10,015 square feet of office space in Houston, Texas. The offices
are currently leased by the Company from CO Properties No. 3, a Texas
partnership owned by Larry N. Forehand and Michael D. Domec, under a gross lease
(where the landlord pays utilities and property taxes) expiring in December
2006, with rental payments of $10,215 per month. See "Notes to Consolidated
Financial Statements--Related Party Transactions." The Company believes that its
properties are generally well maintained, in good condition and adequate for its
operations. Further, the Company believes that suitable additional or
replacement space will be available if required.
The Company owns the land and buildings of two restaurant locations,
and the building and improvements of two restaurant locations that are situated
on ground leases with the balance of locations being on leased sites. In fiscal
year 2003, the Company sold its pad site in Phoenix, Arizona for $512,500 in
cash. On December 30, 2001 the Company closed three under-performing leased
restaurants and in fiscal year 2002 the Company subleased those restaurants to
other local operators. Real estate leased for Company-owned restaurants is
typically leased under triple net leases that require the Company to pay real
estate taxes and utilities, to maintain insurance with respect to the premises
and in certain cases to pay contingent rent based on sales in excess of
specified amounts. Generally the non-mall locations for the Company-owned
restaurants have initial terms of 10 to 20 years with renewal options.
RESTAURANT LOCATIONS
At December 28, 2003, the Company had 50 Company-operated restaurants,
31 franchise restaurants and one licensed restaurant. As of such date, the
Company operated and franchised Casa Ole restaurants in the States of Texas and
Louisiana; operated Monterey's Tex-Mex Cafe restaurants in the State of
Oklahoma; operated and licensed Monterey's Little Mexico restaurants in the
State of Texas; operated Tortuga Coastal Cantina restaurants in the State of
Texas; and also operated and franchised La Senorita restaurants in the State of
Michigan. The Company's portfolio of restaurants is summarized below:
9
CASA OLE
Company-operated 18 Leased
Franchisee-operated 29
---
CONCEPT TOTAL 47
===
MONTEREY'S TEX-MEX CAFE
Company-operated 4 Leased
---
CONCEPT TOTAL 4
===
MONTEREY'S LITTLE MEXICO
Company-operated 14 Leased
Licensee-operated 1
---
CONCEPT TOTAL 15
===
TORTUGA COASTAL CANTINA
Company-operated 9 Leased
---
CONCEPT TOTAL 9
===
LA SENORITA
Company-operated 5 Leased
Franchisee-operated 2
---
CONCEPT TOTAL 7
===
SYSTEM TOTAL 82
===
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in litigation relating to
claims arising from its operations in the normal course of business. Management
believes that the ultimate disposition of all uninsured matters resulting from
existing litigation will not have a material adverse effect on the Company's
business or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the shareholders of the Company
during the fourth quarter of the fiscal year ended December 28, 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information. The Company's Common Stock trades on the Nasdaq
Small Cap Market tier of The Nasdaq Stock Market under the symbol "CASA." The
following table sets forth the range of quarterly high and low closing sale
prices of the Company's Common Stock on the Nasdaq Small Cap Market during each
of the Company's fiscal quarters since December 31, 2001.
HIGH LOW
---- ----
FISCAL YEAR 2002:
First Quarter (ended March 31, 2002) ............... 3.80 2.75
Second Quarter (ended June 30, 2002) ............... 4.70 3.42
Third Quarter (ended September 29, 2002) ........... 4.10 2.85
Fourth Quarter (ended December 29, 2002) ........... 3.64 3.20
10
HIGH LOW
---- ----
FISCAL YEAR 2003:
First Quarter (ended March 30, 2003) ...................... 3.68 3.01
Second Quarter (ended June 29, 2003) ...................... 3.53 3.01
Third Quarter (ended September 28, 2003) .................. 3.71 3.00
Fourth Quarter (ended December 28, 2003) .................. 4.08 3.32
FISCAL YEAR 2004:
First Quarter (as of March 24, 2004) ..................... 4.80 3.65
Holders. As of March 24, 2004, the Company estimates that there were
approximately 800 beneficial owners of the Company's Common Stock, represented
by approximately 63 holders of record, and 3,384,605 shares of Common Stock
outstanding.
Dividends. Since its 1996 initial public offering, the Company has not
paid cash dividends on its Common Stock. The Company intends to retain earnings
of the Company to support operations, to finance expansion and pay down its debt
and does not intend to pay cash dividends on the Common Stock for the
foreseeable future. The payment of cash dividends in the future will be at the
discretion of the Board of Directors and will depend upon such factors as
earnings levels, capital requirements, the Company's financial condition and
other factors deemed relevant by the Board of Directors. In addition, the
Company's current credit agreement prohibits the payment of any cash dividends.
ITEM 6. SELECTED FINANCIAL DATA
Balance sheet data as of January 2, 2000, December 31, 2000, December
30, 2001, December 29, 2002 and December 28, 2003 and income statement data for
the fiscal years then ended have been derived from consolidated financial
statements audited by KPMG LLP, independent public accountants. The selected
financial data set forth below should be read in conjunction with and are
qualified by reference to the Consolidated Financial Statements and the related
Notes thereto included in Item 8. hereof and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Item 7.
hereof.
FISCAL YEARS
------------
1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ----------
(In thousand, except per share amounts
Revenues:
Restaurant sales ...................... $ 55,997 $ 61,834 $ 61,852 $ 58,806 $ 57,660
Franchise fees, royalties and other ... 1,469 1,362 1,393 1,286 1,139
---------- ---------- ---------- ---------- ----------
Total revenues ......... 57,466 63,196 63,245 60,092 58,799
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales ......................... 15,774 17,402 17,107 16,059 16,045
Restaurant operating expenses ......... 31,448 35,796 36,013 34,022 33,925
General and administrative ............ 5,191 5,548 5,457 5,198 5,306
Depreciation and amortization ......... 2,003 2,227 2,408 2,256 2,484
Restaurant closure costs .............. 1,493 -- 972 -- 2,908
---------- ---------- ---------- ---------- ----------
Total costs and expenses 55,909 60,973 61,958 57,535 60,668
---------- ---------- ---------- ---------- ----------
Infrequently occurring income
items, net ............................ 437 -- -- -- --
---------- ---------- ---------- ---------- ----------
Operating income (loss) ................. 1,994 2,223 1,287 2,557 (1,869)
Other income (expense) .................. (534) (885) (302) (57) 167
---------- ---------- ---------- ---------- ----------
Income (loss) before income tax expense . $ 1,460 $ 1,338 $ 985 $ 2,500 $ (1,702)
========== ========== ========== ========== ==========
Extraordinary item ...................... $ -- $ -- $ -- $ -- $ --
========== ========== ========== ========== ==========
Net income (loss) ....................... $ 833 $ 867 $ 849 $ 1,704 $ (1,035)
========== ========== ========== ========== ==========
Net income (loss) per share (basic) ..... $ 0.23 $ 0.24 $ 0.24 $ 0.49 $ (0.31)
========== ========== ========== ========== ==========
Net income (loss) per share (diluted) ... $ 0.23 $ 0.24 $ 0.24 $ 0.48 $ (0.31)
========== ========== ========== ========== ==========
11
AS OF THE END OF FISCAL YEARS
-----------------------------
1999 2000 2001 2002 2003
--------- --------- --------- --------- ---------
(In thousands)
BALANCE SHEET DATA:
Working capital (deficit) .... $ (1,484) $ (1,920) $ (3,154) $ (2,736) $ (2,669)
Total assets ................. $ 31,043 $ 31,509 $ 30,067 $ 28,983 $ 25,861
Long-term debt, less
Current portion ........... $ 8,963 $ 8,300 $ 5,573 $ 3,400 $ 1,775
Total stockholders' equity ... $ 14,392 $ 14,889 $ 15,717 $ 16,948 $ 15,954
----------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Reform Act. See "Special
Note Regarding Forward-Looking Statements" above for additional factors relating
to such statements. The following discussion and analysis should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Report. Additional information concerning
factors that could cause results to differ materially from those in the
forward-looking statements is contained under "Item 1. Business-Rick Factors."
GENERAL OVERVIEW
The Company was organized under the laws of the State of Texas on
February 16, 1996. Pursuant to the reorganization of the Company in preparation
for the initial public offering, the shareholders of the prior corporations
contributed to the Company all outstanding shares of capital stock of each
corporation, and the Company issued to such shareholders in exchange therefor an
aggregate of 2,732,705 shares of its Common Stock. The exchange transaction was
completed April 24, 1996, and, as a result, the corporations became wholly-owned
subsidiaries of the Company, and each shareholder of the Company received a
number of shares of Common Stock in the Company.
The Company operates and franchises Mexican-theme restaurants featuring
various elements associated with the casual dining experience under the names
Casa Ole, Monterey's Tex-Mex Cafe, Monterey's Little Mexico, Tortuga Coastal
Cantina and La Senorita. At December 28, 2003 the Company operated 50
restaurants, franchised 31 restaurants and licensed one restaurant in various
communities in Texas, Louisiana, Oklahoma and Michigan.
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 restaurants acquired include
8 Casa Ole restaurants located in Southeast Texas, 2 Casa Ole restaurants
located in Southwest Louisiana, and 3 Crazy Jose's restaurants located in
Southeast Texas. In the past year these restaurants had combined sales of over
$20 million.
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 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.
FISCAL YEAR
The Company has a 52/53 week fiscal year ending on the Sunday nearest
December 31. References in this Report to fiscal 2001 2002 and 2003 relate to
the periods ended December 30, 2001, December 29, 2002 and December 28, 2003
respectively. Fiscal years 2001, 2002 and 2003 presented herein consisted of 52
weeks.
RESULTS OF OPERATIONS
FISCAL 2003 COMPARED TO FISCAL 2002
REVENUES. The Company's revenues for the fiscal year ended December 28,
2003 were down $1,293,304 or 2.2% to $58.8 million compared with fiscal year
2002. Restaurant sales for fiscal year 2003 decreased $1,146,941 or 2.0% to
$57.7 million compared with fiscal year 2002. The decrease in revenues reflects
a decline in same-restaurant sales, especially in the Houston market, where
approximately 51% of all restaurant sales are generated. Total system
same-restaurant sales decreased 2.4%. Company-owned same restaurant sales
decreased 3.6% and franchise-owned same-restaurant sales decreased 0.7%.
Franchise fees, royalties and other decreased 11.4% or $146,363 to $1.1
million. The decrease reflects the decline in franchise-owned same-restaurant
sales and the sale of one franchise restaurant.
12
COSTS AND EXPENSES. Costs of sales, consisting of food, beverage,
liquor, supplies and paper costs, increased as a percent of restaurant sales 50
basis points to 27.8% compared with 27.3% in fiscal 2002. The increase reflects
higher cheese, produce, liquor and paper and supply expenses.
Labor and other related expenses increased as a percentage of
restaurant sales 40 basis points to 33.3% compared with 32.9% in fiscal 2002.
The increase in labor as a percentage of restaurant sales reflects the
semi-fixed nature of management costs, worker's compensation and health
insurance expenses relative to declining same-restaurant sales.
Restaurant operating expenses, which primarily includes rent, property
taxes, utilities, repair and maintenance, liquor taxes, property insurance,
general liability insurance and advertising, increased as a percentage of
restaurant sales 50 basis points to 25.5% in fiscal year 2003 as compared with
25.0% in fiscal year 2002. The increase reflects higher utility expenses, higher
insurance premiums, and fixed restaurant expenses relative to declining
same-restaurant sales.
General and administrative expenses consist of expenses associated with
corporate and administrative functions that support restaurant operations.
General and administrative expenses increased as a percentage of total sales 40
basis points to 9.0% in fiscal year 2003 as compared with 8.6% in fiscal year
2002. Actual general and administrative expenses increased $108,335 in fiscal
year 2003 compared with fiscal year 2002. The increase in general and
administrative expenses reflects higher legal, officers and directors insurance
and research and development expenses.
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 restaurant sales 40 basis
points to 4.1% in fiscal year 2003 as compared with 3.7% in fiscal year 2002.
Actual depreciation and amortization expense increased $148,135 in fiscal year
2003 compared with fiscal year 2002. The increase, in part, reflects declining
same-restaurant sales. It also reflects the addition of new assets (routine
replacements for kitchen equipment, HVAC, etc. and restaurant remodels).
During fiscal year 2003, the Company incurred $95,891 in pre-opening
expenses related to the purchase of one franchise restaurant that the Company
remodeled for a new grand opening. In fiscal year 2002, the Company spent
$15,837 in pre-opening expenses to re-open a restaurant that had been closed for
six months due to fire damage.
RESTAURANT CLOSURE COSTS. During the fourth quarter of fiscal year
2003, the Company expensed $2,855,758 related to restaurant closure and asset
impairment costs. These costs were determined in accordance with SFAS No. 144
which requires that property, plant and equipment be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. There were no impairments recorded in fiscal
year 2002.
OTHER INCOME (EXPENSE). Other income, net increased $224,645 to
$167,265 in fiscal year 2003 compared with a net expense of $57,380 in fiscal
year 2002. The improvement reflects a decrease in interest expense of $128,410
as debt decreased during fiscal year 2003 from $4.4 million to $2.8 million, or
$1.6 million for the fiscal year. Other income, net increased in fiscal year
2003 principally because of a gain of $478,032 for insurance proceeds received
from fire damage at the Humble, Texas restaurant location.
INCOME TAX EXPENSE. The Company's effective tax benefit rate for fiscal
year 2003 was 39.2% as compared to an effective tax rate for fiscal year 2002 of
31.8%. In fiscal year 2003, the Company impaired the value of assets in
accordance with SFAS No. 144, which resulted in a GAAP to federal and state tax
timing difference. In fiscal year 2002, there were no restaurant impairments,
resulting in an effective tax rate closer to the normal corporate federal tax
rate reduced by the effect of higher tax credits.
FISCAL 2002 COMPARED TO FISCAL 2001
REVENUES. The Company's revenues for the fiscal year ended December 29,
2002 were down $3,152,573 or 5.0% to $60.0 million compared with fiscal year
2001. Restaurant sales for fiscal year 2002 decreased $3,045,047 or 4.9% to
$58.8 million compared with fiscal year 2001. The decline, in part, reflects the
December 30, 2001 closure of three under-performing restaurants located in
Boise, Idaho. Those restaurants accounted for $1.6 million of restaurant sales
in fiscal year 2001. In addition, another restaurant was closed for six months
during fiscal year 2002 due to fire damage, resulting in approximately $620,000
in lost revenues. The full year impact of a franchise restaurant that was
purchased by the Company in July of fiscal year 2001 increased comparable
revenues approximately $450,000. The remaining decrease in revenues reflects a
decline in same-restaurant sales. Total system same-restaurant sales decreased
0.1%. Company-owned same restaurant sales decreased 2.4% and franchise-owned
same-restaurant sales increased 2.9%.
Franchise fees, royalties and other decreased 7.7% or $107,526 to $1.2
million. The decrease reflects the closure of one franchise restaurant on March
31, 2002 and the temporary closure of a second franchise restaurant during the
fourth quarter of fiscal year 2002.
COSTS AND EXPENSES. Costs of sales, consisting of food, beverage,
liquor, supplies and paper costs, decreased as a percent of restaurant sales 30
basis points to 27.4% compared with 27.7% in fiscal 2001. Although a small
portion of the improvement was due to the closure of under-performing
restaurants, most of the improvement reflects buying efficiencies.
13
Labor and other related expenses increased as a percentage of
restaurant sales 10 basis points to 33.0% compared with 32.9% in fiscal 2001.
The increase in labor as a percentage of restaurant sales reflects the
semi-fixed nature of management costs relative to declining same-restaurant
sales.
Restaurant operating expenses, which primarily includes rent, property
taxes, utilities, repair and maintenance, liquor taxes, property insurance,
general liability insurance and advertising, decreased as a percentage of
restaurant sales 60 basis points to 24.8% in fiscal year 2002 as compared with
25.4% in fiscal year 2001. The improvement reflects lower utility and occupancy
expenses, offset by higher property and general liability insurance premiums.
General and administrative expenses consist of expenses associated with
corporate and administrative functions that support restaurant operations.
General and administrative expenses increased as a percentage of total sales 10
basis points to 8.7% in fiscal year 2002 as compared with 8.6% in fiscal year
2001. Actual general and administrative expenses decreased $259,356 in fiscal
year 2002 compared with fiscal year 2001. The improvement in general and
administrative expenses reflects lower manager-in-training, accounting and legal
expenses, offset by a change in compensation for the Company's board of
directors from stock options to monetary compensation and other compensation
expense to purchase vested options of terminated employees and a former director
of the Company.
Depreciation and amortization expenses include the depreciation of
fixed assets and the amortization of intangible assets. In fiscal 2002,
depreciation and amortization did not change as a percentage of total sales,
remaining at 3.7% for fiscal years 2002 and 2001. In fiscal year 2002, the
Company adopted SFAS 142, "Goodwill and Other Intangible Assets," which requires
goodwill and other intangible assets with indefinite lives no longer be
amortized. For fiscal year 2001, amortization expense was $329,468. Actual
depreciation and amortization expense decreased $168,315 in fiscal year 2002
compared with fiscal year 2001. The increase, after adjusting for the adoption
of SFAS 142, reflects the addition of new assets (routine replacements for
kitchen equipment, HVAC, etc. and remodels).
During the fourth quarter of fiscal year 2002, the Company spent
$15,837 in pre-opening expenses to re-open a restaurant that had been closed for
six months due to fire damage.
OTHER INCOME (EXPENSE). Net other expense decreased $245,039 to $57,380
in fiscal year 2002 compared with $302,419 in fiscal year 2001. The improvement
reflects a decrease in interest expense of $322,240 as debt decreased during
fiscal year 2002 from $6.6 million to $4.4 million, or $2.2 million for the
fiscal year. The average effective interest rate declined 240 basis points to
6.9% in fiscal year 2002 compared with an average interest rate of 9.3% in
fiscal year 2001. During the second half of fiscal year 2002, the Company
received $105,000 of business interruption insurance proceeds and recorded a
partial gain of $46,268 for insurance proceeds received from fire damage at the
Humble, Texas restaurant location. Also during the second half of fiscal year
2002, the Company received $53,935 of interest income from the IRS for tax
refunds previously recorded. In fiscal year 2001, other income included a
$285,779 gain due to the sale of one restaurant.
INCOME TAX EXPENSE. The Company's effective tax rate for fiscal year
2002 was 31.8% as compared with 13.8% in fiscal year 2001. The increase in the
effective tax rate reflects the utilization of favorable tax treatment in fiscal
year 2001 related to the closure of the Boise, Idaho restaurants. In fiscal year
2002, there were no restaurant closures, resulting in an effective tax rate
closer to the normal corporate federal tax rate reduced by the effect of higher
tax credits.
LIQUIDITY AND CAPITAL RESOURCES
The Company met fiscal 2003 capital requirements with cash generated by
operations and cash reserves from the previous year. In fiscal 2003, the
Company's operations generated approximately $2.4 million in cash, as compared
with $4.4 million in fiscal 2002 and $3.2 million in fiscal 2001. As of December
28, 2003, the Company had a working capital deficit of approximately $2.7
million, compared with a working capital deficit of approximately $2.7 million
at December 29, 2002. 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 fiscal 2003, capital expenditures on property, plant and
equipment were approximately $1.9 million as compared to approximately $2.3
million for fiscal 2002. On April 17, 2003, the Company acquired an existing
franchise restaurant in a sale-leaseback transaction. The Company closed,
remodeled and reopened the acquired restaurant on May 19, 2003, spending
$380,747 on the remodel. Capital expenditures also included the remodeling of
two existing restaurants and the rebuilding of one restaurant that had been
damaged by fire. Additionally, the Company had cash outlays for necessary
replacement of equipment and leasehold improvements in various older units. In
fiscal year 2003, the Company sold a pad site for $512,500 in cash, less
transaction costs. For fiscal year 2004, the Company plans to extensively
remodel two restaurants and moderately remodel seven other restaurants. The
estimated capital needed for fiscal year 2004 for general corporate purposes,
including remodeling, is approximately $2.5 million.
Over the last several years, the Company's debt was incurred to carry
out acquisitions, to develop new restaurants, and to remodel existing
restaurants, as well as to accommodate other working capital needs. The Company
anticipates that it will use excess cash flow during fiscal year 2004 to pay
down debt approximately $2.2 million.
On June 29, 2001, the Company re-financed $7.8 million of its debt with
Fleet National Bank. The credit facility is for $10.0 million. The credit
facility consists of a $5.0 million term note that requires quarterly principal
payments of $250,000 and matures on June 29, 2006. The credit facility also
includes a $5.0 million revolving line of credit that matures on June 29, 2004.
14
The interest rate is either the prime rate or LIBOR plus a stipulated
percentage. Accordingly, the Company is impacted by changes in the prime rate
and LIBOR. The Company is subject to a non-use fee of 0.5% on the unused portion
of the revolver from the date of the credit agreement. The Company paid down
$1.6 million of its indebtedness during the 52-weeks of fiscal year 2003. As of
December 28, 2003, the Company had $2.8 million outstanding on the credit
facility and is in full compliance with all debt covenants. The Company expects
to be in compliance with all debt covenants in fiscal year 2004.
On January 7, 2004, the Company completed its purchase of 13
restaurants and related assets from its Beaumont-based franchisee for a total
consideration of approximately $13.75 million. The financing for the acquisition
was provided by Fleet National Bank, CNL Franchise Network, LP ("CNL') and the
sellers of Beaumont-based franchise restaurants. Fleet National Bank provided
$2.5 million of the acquisition by amending its credit facility with Mexican
Restaurants, Inc. Six of the acquired restaurants were concurrently sold to CNL
for $8.25 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 pay interest only for five years, with $1.5 million in
principal due on January 7, 2009 and $3.5 million in principal amortizing over
an additional five years.
On January 7, 2004, Fleet National Bank amended its credit facility 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 0.5% on the
unused portion of the revolver from the date of the credit agreement. As of
January 7, 2004, the Company had $5.0 million outstanding on its term note and
$823,745 outstanding on its revolving line of credit.
During fiscal year 2002, the Company's Board of Directors authorized
management to implement a limited stock repurchase program in the amount of
$500,000. As of December 29, 2002, the Company had bought back 119,500 common
shares for $485,601, or an average cost of $4.06 per share. The Company also
purchased 12,425 vested options for $13,838 and 9,400 common shares for $29,140
from former employees and a former director of the Company. 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
did not repurchase any of its common shares in fiscal year 2003.
The Company's management believes that with its operating cash flow and
the Company's revolving line of credit with Fleet National Bank, funds will be
sufficient to meet operating requirements and to finance routine capital
expenditures and remodel nine existing restaurants through the end of the 2004
fiscal year. Unless the Company violates an important debt covenant, the
Company's credit facility with Fleet National Bank is not subject to triggering
events that would cause the credit facility to become due sooner than the
maturity dates described in the previous paragraphs.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS.
The following table summarizes the Company's total contractual cash obligations
as of December 28, 2003 (in thousands);
LESS THAN 1 TO 3 4 TO 5 AFTER 5
CONTRACTUAL OBLIGATION TOTAL 1 YEAR YEARS YEARS YEARS
----------- ----------- ----------- ----------- -----------
Long-Term Debt $ 2,775,000 $ 1,000,000 $ 1,025,000 $ 750,000 $ --
Operating Leases 37,303,976 4,153,211 11,453,854 6,149,466 15,547,445
----------- ----------- ----------- ----------- -----------
Total Contractual Cash Obligations $40,078,976 $ 5,153,211 $12,478,854 $ 6,899,466 $15,547,445
=========== =========== =========== =========== ===========
RELATED PARTIES. The Company leases its executive offices from a
company owned by two shareholders of Mexican Restaurants, Inc. Net lease expense
related to these facilities in fiscal 2001, 2002 and 2003 was $94,416, $122,584
and $125,188, respectively.
In May 1998 the Board of Directors of the Company adopted a program to
assist executives and five key employees of the Company in their purchasing of
shares of the Company. As of December 29, 2002, only two executives and one key
employee remained in the program. As adopted, the program provided for the
Company to assist the executives and key employees in obtaining third party
loans to finance such purchases. As of February 1, 2003, the maturity date of
the employee third party loans, the Company no longer guarantees employee third
party loans. The Company does provide for annual cash bonuses to such executives
to provide for payment of interest expense and principal amounts to amortize
these loans in not more than five years. The bonus payments are based on
attainment of earnings per share targets established by the Company's Board of
Directors.
The Company provides accounting and administrative services for the
Casa Ole Media and Production Funds. The Casa Ole Media and Production Funds are
not-for-profit, unconsolidated entities used to collect money from company
-owned and franchise-owned restaurants to pay for the marketing of Casa Ole
restaurants. Each restaurant contributes an agreed upon percentage of its sales
to the funds.
15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have or participate in transactions involving
derivative, financial and commodity instruments. The Company's long-term debt
bears interest at floating market rates. Based on amounts outstanding at year-
end, a 1% change in interest rates would change interest expense by
approximately $27,750.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data are set forth herein
commencing on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Company maintains disclosure controls and procedures, which it has
designed to ensure that material information related to the Company, including
its consolidated subsidiaries, is made known to a group comprised of designated
members of the Company's senior management and/or the certifying officer (i.e.,
Chief Executive Officer and Chief Financial Officer) (collectively, the
"Disclosure Committee"), on a timely basis. In response to recent legislation
and proposed regulations, the Company reviewed its internal control structure
and its disclosure controls and procedures. Although the Company believes its
pre-existing disclosure controls and procedures were adequate to enable the
Company to comply with its disclosure obligations, as a result of such review,
the Company implemented minor changes, primarily to formalize and document the
procedures already in place. As of December 28, 2003, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Securities Exchange Act of 1934,
as amended, Rule 13a-15 and 15d-15. Based upon that evaluation, the Chief
Executive Officer and 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 consolidated
subsidiaries) required to be included in the Company's periodic filings with the
Securities and Exchange Commission.
(b) Changes in internal controls
There were no significant changes in the Company's internal controls or in other
factors, including any corrective actions with regard to significant
deficiencies and material weaknesses, that could significantly affect these
controls subsequent to the date of their evaluation.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this Item 10 will be set forth in the
Company's proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report, and which is incorporated herein by this
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this Item 11 the Company's proxy
statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this report, and which is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this Item 12 will be set forth in the
Company's proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report, and which is incorporated herein by this
reference.
16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this Item 13 will be set forth in the
Company's proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report, and which is incorporated herein by this
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information called for by this Item 14 will be set forth in the
Company's proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than one hundred twenty (120)
days after the end of the fiscal year covered by this report, and which is
incorporated herein by this reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements:
The Financial Statements are listed in the index to Consolidated
Financial Statements on page F-1 of this Report.
2. The following exhibits are filed as part of this report. The
exhibits designated with a cross are management contracts and compensatory plans
and arrangements required to be filed as exhibits to this report.
3. Exhibits:
3.1 Articles of Incorporation of the Company (as amended and
incorporated by reference to the corresponding Exhibit number
of the Company's Form 8-K filed on May 25, 1999 with the
Securities and Exchange Commission).
++3.2 Bylaws of the Company.
++4.1 Specimen of Certificate of Common Stock of the Company.
++4.2 Articles of Incorporation of the Company (see 3.1 above).
++4.3 Bylaws of the Company (see 3.2 above).
++10.1 Employment Agreement by and between the Company and Louis P.
Neeb dated February 28, 1996.
10.2 Indemnity Agreement by and between the Company and Louis P.
Neeb dated as of April 10, 1996 (incorporated by reference to
Exhibit 10.4 of the Company's Form S-1 Registration Statement
filed under the Securities Act of 1933, dated April 24, 1996,
with the Securities and Exchange Commission (Registration
Number 333-1678)).
10.3 Indemnity Agreement by and between the Company and Larry N.
Forehand dated as of April 10, 1996 (incorporated by reference
to Exhibit 10.5 of the Company's Form S-1 Registration
Statement filed under the Securities Act of 1933, dated April
24, 1996, with the Securities and Exchange Commission
(Registration Number 333-1678)).
10.4 Indemnity Agreement by and between the Company and John C.
Textor dated as of April 10, 1996 (incorporated by reference
to Exhibit 10.6 of the Company's Form S-1 Registration
Statement filed under the Securities Act of 1933, dated April
24, 1996, with the Securities and Exchange Commission
(Registration Number 333-1678)).
10.5 Indemnity Agreement by and between the Company and Michael D.
Domec dated as of April 10, 1996 (incorporated by reference to
Exhibit 10.8 of the Company's Form S-1 Registration Statement
filed under the Securities Act of 1933, dated April 24, 1996,
with the Securities and Exchange Commission (Registration
Number 333-1678)).
10.6 Indemnity Agreement by and between the Company and J.J.
Fitzsimmons dated as of April 10, 1996 (incorporated by
reference to Exhibit 10.10 of the Company's Form S-1
Registration Statement filed under the Securities Act of 1933,
dated April 24, 1996, with the Securities and Exchange
Commission (Registration Number 333-1678)).
17
10.7 Indemnity Agreement by and between the Company and Richard E.
Rivera dated as of April 10, 1996 (incorporated by reference
to Exhibit 10.11 of the Company's Form S-1 Registration
Statement filed under the Securities Act of 1933, dated April
24, 1996, with the Securities and Exchange Commission
(Registration Number 333-1678)).
10.8 Corrected Warrant Agreement by and between the Company and
Louis P. Neeb dated as of February 26, 1996 (incorporated by
reference to Exhibit 10.12 of the Company's Form S-1
Registration Statement filed under the Securities Act of 1933,
dated April 24, 1996, with the Securities and Exchange
Commission (Registration Number 333-1678)).
10.9 Corrected Warrant Agreement by and between the Company and
Tex-Mex Partners, L.C. dated as of February 26, 1996
(incorporated by reference to Exhibit 10.13 of the Company's
Form S-1 Registration Statement filed under the Securities Act
of 1933, dated April 24, 1996, with the Securities and
Exchange Commission (Registration Number 333-1678)).
10.10 Form of the Company's Multi-Unit Development Agreement
(incorporated by reference to Exhibit 10.14 of the Company's
Form S-1 Registration Statement filed under the Securities Act
of 1933, dated April 24, 1996, with the Securities and
Exchange Commission (Registration Number 333-1678)).
10.11 Form of the Company's Franchise Agreement (incorporated by
reference to Exhibit 10.15 of the Company's Form S-1
Registration Statement filed under the Securities Act of 1933,
dated April 24, 1996, with the Securities and Exchange
Commission (Registration Number 333-1678)).
+10.12 1996 Long Term Incentive Plan (incorporated by reference to
Exhibit 10.16 of the Company's Form S-1 Registration Statement
filed under the Securities Act of 1933, dated April 24, 1996,
with the Securities and Exchange Commission (Registration
Number 333-1678)).
+10.13 Stock Option Plan for Non-Employee Directors (incorporated by
reference to Exhibit 10.17 of the Company's Form S-1
Registration Statement filed under the Securities Act of 1933,
dated April 24, 1996, with the Securities and Exchange
Commission (Registration Number 333-1678)).
10.14 Corrected Warrant Agreement by and between Larry N. Forehand
and Louis P. Neeb dated as of February 26, 1996 (incorporated
by reference to Exhibit 10.31 of the Company's Form S-1
Registration Statement filed under the Securities Act of 1933,
dated April 24, 1996, with the Securities and Exchange
Commission (Registration Number 333-1678)).
10.15 Corrected Warrant Agreement by and between Larry N. Forehand
and Tex-Mex Partners, L.C. dated as of February 26, 1996
(incorporated by reference to Exhibit 10.32 of the Company's
Form S-1 Registration Statement filed under the Securities Act
of 1933, dated April 24, 1996, with the Securities and
Exchange Commission (Registration Number 333-1678)).
10.16 Corrected Warrant Agreement by and between Larry N. Forehand
and Patrick A. Morris dated as of February 26, 1996
(incorporated by reference to Exhibit 10.33 of the Company's
Form S-1 Registration Statement filed under the Securities Act
of 1933, dated April 24, 1996, with the Securities and
Exchange Commission (Registration Number 333-1678)).
10.17 Corrected Warrant Agreement by and between Larry N. Forehand
and Stacy M. Riffe dated as of February 26, 1996 (incorporated
by reference to Exhibit 10.34 of the Company's Form S-1
Registration Statement filed under the Securities Act of 1933,
dated April 24, 1996, with the Securities and Exchange
Commission (Registration Number 333-1678)).
10.18 Indemnification letter agreement by Larry N. Forehand dated
April 10, 1996 (incorporated by reference to Exhibit 10.35 of
the Company's Form S-1 Registration Statement filed under the
Securities Act of 1933, dated April 24, 1996, with the
Securities and Exchange Commission (Registration Number
333-1678)).
+10.19 1996 Manager's Stock Option Plan (incorporated by reference to
Exhibit 99.2 of the Company's Form S-8 Registration Statement
Under the Securities Act of 1933, dated February 24, 1997,
filed with the Securities and Exchange Commission).
+10.20 Employment Agreement by and between the Company and Curt
Glowacki dated May 15, 1997 (incorporated by reference to
Exhibit 10.44 of the Company's Form 10-K Annual Report filed
on March 30, 1998 with the Securities and Exchange
Commission).
+10.21 Employment Agreement by and between the Company and Andrew J.
Dennard dated May 20, 1997 (incorporated by reference to
Exhibit 10.45 of the Company's Form 10-K Annual Report filed
on March 30, 1998 with the Securities and Exchange
Commission).
*10.22 Fleet Revolving Credit and Term Loan Agreement between Mexican
Restaurants, Inc., as the Borrower, and Fleet National Bank,
as the Bank, for $10,000,000 dated June 29, 2001.
18
21.1 List of subsidiaries of the Company (incorporated by reference
to Exhibit 22.1 of the Company's Form S-1 Registration
Statement Under the Securities Act of 1933, dated April
24,1996, filed by the Company with the Securities and Exchange
Commission).
*23.1 Consent of KPMG LLP.
*24.1 Power of Attorney (included on the signature page to this Form
10-K).
*31.1 Certification filed pursuant to Rule 13a-14(a) or Rule
15d-14(a).
*31.2 Certification filed pursuant to Rule 13a-14(a) or Rule
15d-14(a).
*32.1 Certification of Chief Executive Officer furnished pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
*32.2 Certification of Chief Financial Officer furnished pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
----------
* Filed herewith.
++ Incorporated by reference to corresponding Exhibit number of the
Company's Form S-1 Registration Statement under the Securities Act of
1933, dated April 24, 1996, with the Securities and Exchange Commission
(Registration number 333-1678).
+ Management contract or compensatory plan or arrangement.
b) Reports on Form 8-K
On November 3, 2003, the Company filed a current report on Form 8-K
reporting under Item 7 and Item 12 thereto the filing of a press release to
announce its financial results for the third quarter ended September 28,
2003.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 26, 2004.
MEXICAN RESTAURANTS, INC.
By:/s/ Louis P. Neeb
--------------------------------------
Louis P. Neeb,
Chairman of the Board of Directors
POWER OF ATTORNEY
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Louis P. Neeb, Curt Glowacki
and Andrew Dennard, and each of them, such individual's true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for such individual and in his or her name, place and stead, in
any and all capacities, to sign any and all amendments to this Form 10-K under
the Securities Exchange Act of 1934, and to file the same, with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Louis P. Neeb Chairman of the Board of
------------------------------------
Louis P. Neeb Directors March 26, 2004
/s/ Larry N. Forehand Founder and Vice Chairman of the
------------------------------------ Board of Directors March 26, 2004
Larry N. Forehand
/s/ Curt Glowacki President and
------------------------------------ Chief Executive Officer March 26, 2004
Curt Glowacki (Principal Executive Officer)
/s/ Andrew J. Dennard Vice President and
------------------------------------ Chief Financial Officer
Andrew J. Dennard (Principal Financial and Accounting Officer) March 26, 2004
/s/ David Nierenberg Director March 26, 2004
------------------------------------
David Nierenberg
/s/ Michael D. Domec Director March 26, 2004
------------------------------------
Michael D. Domec
/s/ J. J. Fitzsimmons Director March 26, 2004
------------------------------------
J. J. Fitzsimmons
/s/ Thomas E. Martin Director March 26, 2004
------------------------------------
Thomas E. Martin
/s/ J. Stuart Sargent Director March 26, 2004
------------------------------------
J. Stuart Sargent
20
MEXICAN RESTAURANTS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors......................................................... F-2
Consolidated Balance Sheets as of December 29, 2002 and December 28, 2003.............. F-3
Consolidated Statements of Income for each of the years in the three fiscal-year
period ended December 28, 2003....................................................... F-4
Consolidated Statements of Stockholders' Equity for each of the years in
the three fiscal-year period ended December 28, 2003................................. F-5
Consolidated Statements of Cash Flows for each of the years in the three
fiscal-year period ended December 28, 2003........................................... F-6
Notes to Consolidated Financial Statements............................................. F-7
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Mexican Restaurants, Inc.:
We have audited the accompanying consolidated balance sheets of Mexican
Restaurants, Inc. and subsidiaries (the Company) as of December 29, 2002 and
December 28, 2003, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 28, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mexican
Restaurants, Inc. and subsidiaries as of December 29, 2002 and December 28,
2003, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 28, 2003, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in note 1 to the consolidated financial statements,
effective July 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and other Intangible
Assets.
KPMG LLP
Houston, Texas
March 19, 2004
F-2
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 29, 2002 AND DECEMBER 28, 2003
FISCAL YEARS
2002 2003
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 526,536 $ 366,042
Royalties receivable ................................................ 142,031 179,517
Other receivables ................................................... 659,901 423,670
Inventory ........................................................... 557,555 555,064
Taxes receivable .................................................... 382,882 345,006
Prepaid expenses and other current assets ........................... 592,075 717,899
------------ ------------
Total current assets ...................................... 2,860,980 2,587,198
------------ ------------
Property, plant and equipment ......................................... 27,347,171 24,484,571
Less accumulated depreciation ....................................... (10,706,035) (11,502,668)
------------ ------------
Net property, plant and equipment ......................... 16,641,136 12,981,903
Goodwill, net ......................................................... 7,196,265 7,196,265
Deferred tax assets ................................................... 454,453 1,272,173
Property held for resale .............................................. 963,605 884,118
Other assets .......................................................... 866,340 939,579
------------ ------------
$ 28,982,779 $ 25,861,236
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt ................................ $ 1,000,000 $ 1,000,000
Accounts payable ...................................................... 1,879,171 1,516,217
Accrued sales and liquor taxes ........................................ 441,264 469,817
Accrued payroll and taxes ............................................. 999,403 976,146
Accrued expenses ...................................................... 1,277,525 1,294,486
------------ ------------
Total current liabilities ................................. 5,597,363 5,256,666
------------ ------------
Long-term debt ........................................................ 3,400,000 1,775,000
Other liabilities ..................................................... 852,214 898,115
Deferred gain ......................................................... 2,185,498 1,977,355
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 ................................................... 8,577,725 7,542,817
Deferred Compensation ............................................... (88,911) (47,607)
Treasury stock, cost of 1,348,100 common shares in 2002 and 1,348,100
common shares in 2003 ............................................. (11,709,513) (11,709,513)
------------ ------------
Total stockholders' equity ................................ 16,947,704 15,954,100
------------ ------------
$ 28,982,779 $ 25,861,236
============ ============
See accompanying notes to consolidated financial statements.
F-3
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE FISCAL YEARS ENDED DECEMBER 30, 2001,
DECEMBER 29, 2002 AND DECEMBER 28, 2003
FISCAL YEARS
2001 2002 2003
------------ ------------ ------------
Revenues:
Restaurant sales ............................. $ 61,851,469 $ 58,806,422 $ 57,659,481
Franchise fees, royalties and other .......... 1,393,157 1,285,631 1,139,268
------------ ------------ ------------
63,244,626 60,092,053 58,798,749
Costs and expenses:
Cost of sales ................................ 17,107,319 16,059,396 16,045,344
Labor ........................................ 20,327,514 19,345,618 19,195,786
Restaurant operating expenses ................ 15,685,679 14,676,015 14,728,705
General and administrative ................... 5,457,232 5,197,876 5,306,211
Depreciation and amortization ................ 2,408,121 2,239,806 2,387,941
Pre-opening costs ............................ 254 15,837 95,891
Asset impairments and restaurant closure costs 971,885 -- 2,908,406
------------ ------------ ------------
61,958,004 57,534,548 60,668,284
Operating income (loss) ............... 1,286,622 2,557,505 (1,869,535)
------------ ------------ ------------
Other income (expense):
Interest income .............................. 51,182 113,128 28,736
Interest expense ............................. (692,939) (370,699) (242,289)
Other, net ................................... 339,338 200,191 380,818
------------ ------------ ------------
(302,419) (57,380) 167,265
------------ ------------ ------------
Income (loss) before income tax expense ........ 984,203 2,500,125 (1,702,270)
Income tax expense (benefit) ................... 135,527 796,197 (667,362)
------------ ------------ ------------
Net income (loss) ..................... $ 848,676 $ 1,703,928 $ (1,034,908)
============ ============ ============
Basic income (loss) per share .................. $ .24 $ .49 $ (.31)
============ ============ ============
Diluted income (loss) per share ................ $ .24 $ .48 $ (.31)
============ ============ ============
Weighted average number of shares (basic) ...... 3,520,687 3,447,957 3,384,605
============ ============ ============
Weighted average number of shares (diluted) .... 3,527,291 3,520,769 3,430,380
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED
DECEMBER 30, 2001, DECEMBER 29, 2002
AND DECEMBER 28, 2003
ADDITIONAL TOTAL
CAPITAL PAID-IN RETAINED TREASURY DEFERRED STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK COMPENSATION EQUITY
------------ ------------ ------------ ------------ ------------ ------------
Balances at December 31, 2000 $ 47,327 $ 20,121,076 $ 6,025,121 $(11,133,343) $ (171,519) $ 14,888,662
Net income -- -- 848,676 -- -- 848,676
Repurchase of shares -- -- -- (61,429) -- (61,429)
Amortization of Deferred
Compensation -- -- -- -- 41,304 41,304
------------ ------------ ------------ ------------ ------------ ------------
Balances at December 30, 2001 $ 47,327 $ 20,121,076 $ 6,873,797 $(11,194,772) $ (130,215) $ 15,717,213
Net income -- -- 1,703,928 -- -- 1,703,928
Repurchase of shares -- -- -- (514,741) -- (514,741)
Amortization of Deferred
Compensation -- -- -- -- 41,304 41,304
------------ ------------ ------------ ------------ ------------ ------------
Balances at December 29, 2002 $ 47,327 $ 20,121,076 $ 8,577,725 $(11,709,513) $ (88,911) $ 16,947,704
============ ============ ============ ============ ============ ============
Net income -- -- (1,034,908) -- -- (1,034,908)
Amortization of Deferred
Compensation -- -- -- -- 41,304 41,304
------------ ------------ ------------ ------------ ------------ ------------
Balances at December 28, 2003 $ 47,327 $ 20,121,076 $ 7,542,817 $(11,709,513) $ (47,607) $ 15,954,100
============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-5
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED DECEMBER 30, 2001,
DECEMBER 29, 2002, AND DECEMBER 28, 2003
FISCAL YEARS
2001 2002 2003
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................................... $ 848,676 $ 1,703,928 $(1,034,908)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................................ 2,408,121 2,239,806 2,387,941
Deferred gain amortization ................................... (226,437) (208,141) (208,143)
Asset impairments and restaurant closure costs ............... 971,885 -- 2,908,406
Impairment of Notes Receivable ............................... -- -- 196,109
Gain on sale of fixed assets ................................. (285,779) (27,727) 28,624
Deferred compensation expense ................................ 41,304 41,304 41,304
Gain from insurance proceeds ................................. -- -- (488,629)
Deferred income taxes ........................................ 22,301 690,907 (817,720)
Changes in assets and liabilities, net of effects of acquisitions:
Royalties receivable ......................................... (46,531) (28,702) (37,486)
Other receivables ............................................ (99,455) (105,690) 236,231
Taxes receivable/payable ..................................... (75,958) (49,844) 37,876
Inventory .................................................... 64,392 96,682 1,022
Prepaids and other current assets ............................ (222,246) 22,431 (125,824)
Other assets ................................................. (224,088) 28,282 (371,976)
Accounts payable ............................................. (1,005,676) (68,802) (419,916)
Accrued expenses and other liabilities ....................... 1,067,900 (136,172) 26,101
Deferred franchise fees and other long-term liabilities ...... (38,563) 234,548 45,901
----------- ----------- -----------
Total adjustments ...................................... 2,351,170 2,728,882 3,439,821
----------- ----------- -----------
Net cash provided by operating activities .............. 3,199,846 4,432,810 2,404,913
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Insurance proceeds from fire loss on building .................... -- 255,844 488,629
Purchase of property, plant and equipment ........................ (1,844,795) (2,264,071) (1,905,536)
Proceeds from sale of property, plant and equipment .............. 108,738 478,000 476,500
----------- ----------- -----------
Net cash used in investing activities ............................ (1,736,057) (1,530,227) (940,407)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayment under line of credit agreement ..................... (1,727,271) (2,172,729) (1,625,000)
Purchase of treasury stock ....................................... (61,429) (514,741) --
----------- ----------- -----------
Net cash used in financing activities .................. (1,788,700) (2,687,470) (1,625,000)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents ....... (324,911) 215,113 (160,494)
Cash and cash equivalents at beginning of year ................... 636,334 311,423 526,536
----------- ----------- -----------
Cash and cash equivalents at end of year ......................... $ 311,423 $ 526,536 $ 366,042
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year:
Interest .................................................... $ 671,749 $ 341,330 $ 265,262
Income taxes ................................................ 280,154 408,339 304,453
Non-cash financing activities:
Sale of property for notes receivable ....................... 244,109 -- --
Purchase of property for notes receivable ................... 207,800 -- --
See accompanying notes to consolidated financial statements.
F-6
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 2001, DECEMBER 29, 2002 AND DECEMBER 28, 2003
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
On February 16, 1996, Mexican Restaurants, Inc. (formerly Casa Ole
Restaurants, Inc.) was incorporated in the State of Texas, and on April 24,
1996, its initial public offering of 2,000,000 shares of Common Stock became
effective. Mexican Restaurants, Inc. is the holding company for Casa Ole
Franchise Services, Inc. and several subsidiary restaurant operating
corporations (collectively the "Company"). Casa Ole Franchise Services, Inc. was
incorporated in 1977, and derives its revenues from the collection of franchise
fees under a series of protected location franchise agreements and from the sale
of restaurant accessories to the franchisees of those protected location
franchise agreements. The restaurants feature moderately priced Mexican and
Tex-Mex food served in a casual atmosphere. The first Casa Ole restaurant was
opened in 1973.
On July 2, 1997, the Company purchased 100% of the outstanding stock of
Monterey's Acquisition Corp. ("MAC"). The Company purchased the shares of common
stock for $4.0 million, paid off outstanding debt and accrued interest totaling
$7.1 million and funded various other agreed upon items approximating $500,000.
Approximately $4.8 million of goodwill was recorded as a result of this
purchase. At the time of the acquisition, MAC owned and operated 26 restaurants
in Texas and Oklahoma under the names "Monterey's Tex-Mex Cafe," "Monterey's
Little Mexico" and "Tortuga Coastal Cantina."
On April 30, 1999, the Company purchased 100% of the outstanding stock
of La Senorita Restaurants, a Mexican restaurant chain operated in the State of
Michigan. The Company purchased the shares of common stock of La Senorita for
$4.0 million. The transaction was funded with the Company's revolving line of
credit with Bank of America. La Senorita operated five company-owned
restaurants, and has three franchise restaurants. One of the franchise
restaurants is owned by a partnership in which the parent company has a 16.5%
limited interest.
On January 7, 2004, the Company completed its purchase of 13
restaurants and related assets from its Beaumont-based franchisee, Thomas
Harken, and Mr. Harken's operating partner, Victor Gonzalez, for a total
consideration of approximately $13.75 million. The financing for the acquisition
was provided by Fleet National Bank, CNL and the sellers. The restaurants
acquired include 8 Casa Ole restaurants located in Southeast Texas, 2 Casa Ole
restaurants located in Southwest Louisiana, and 3 Crazy Jose's restaurants
located in Southeast Texas. In the past year these restaurants had combined
sales of over $20 million.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of Mexican
Restaurants, Inc. and its wholly owned subsidiaries, after elimination of all
significant inter-company transactions. The Company owns and operates various
Mexican restaurant concepts principally in Texas, Oklahoma and Michigan. The
Company's three Idaho restaurants were closed on December 30, 2001 and the
restaurants are either subleased or leased to third parties. The Company also
franchises the Casa Ole concept principally in Texas and Louisiana and the La
Senorita concept principally in the State of Michigan.
(c) Fiscal Year
The Company maintains its accounting records on a 52/53 week fiscal
year ending on the Sunday nearest December 31. Fiscal years 2001, 2002 and 2003
consisted of 52 weeks.
(d) Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to be
cash equivalents.
(e) Inventory
Inventory, which is comprised of food and beverages, is stated at the
lower of cost or market. Cost is determined using the first-in, first-out
method. Miscellaneous restaurant supplies are included in inventory and valued
on a specific identification basis.
(f) Pre-opening Costs
Pre-opening costs primarily consists of hiring and training employees
associated with the opening of a new restaurant and are expensed upon the
opening of the restaurant.
F-7
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(g) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation on
equipment and on buildings and improvements is calculated on the straight-line
method over the estimated useful lives of the assets. Leasehold improvements are
amortized straight-line over the shorter of the lease term plus options or
estimated useful life of the assets.
Buildings and improvements.......................................... 20-40 years
Vehicles............................................................ 5 years
Equipment........................................................... 3-15 years
Leasehold improvements.............................................. 3-20 years
Significant expenditures that add materially to the utility or useful
lives of property, plant and equipment are capitalized. All other maintenance
and repair costs are charged to current operations. The cost and related
accumulated depreciation of assets replaced, retired or otherwise disposed of
are eliminated from the property accounts and any gain or loss is reflected as
other income and expense. Recoverability of assets to be held and used is
measured by comparing the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount the carrying
value exceeds the fair value of the asset. In fiscal year 2003, the Company
recorded asset impairment and restaurant closure costs of $2,908,406. These
costs related to the closure of three restaurants, two located in the Houston,
Texas and one located in San Marcos, Texas. There were no such impairment costs
in fiscal year 2002. In fiscal year 2001, the Company recorded asset impairment
and restaurant closure costs of $971,885. These costs related to the closure of
three restaurants located in Boise, Idaho and to the impairment of the carrying
value of previously closed restaurants due to their sale or sublease.
Property held for resale is separately aggregated in the consolidated
balance sheet and is recorded at the estimated fair market value of $884,118 and
$963,605 for fiscal years 2003 and 2002, respectively.
(h) Goodwill and Other Intangible Assets
Goodwill represents the excess of costs over fair value of assets of
businesses acquired. The Company adopted the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets, as of January 1, 2002. Goodwill and
intangible assets acquired in a purchase business combination and determined to
have an indefinite useful life are not amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets.
At December 28, 2003, other assets included $7.2 million of goodwill
primarily resulting from the MAC and La Senorita acquisitions. In connection
with SFAS No. 142's transitional goodwill impairment evaluation, the Statement
required the Company to perform an assessment of whether there was an indication
that goodwill is impaired as of the date of adoption. To accomplish this, the
Company was required to identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of
January 1, 2002. The Company was required to determine the fair value of each
reporting unit and compare it to the carrying amount of the reporting unit
within six months of January 1, 2002. To the extent the carrying amount of a
reporting unit exceeded the fair value of the reporting unit, the Company would
be required to perform the second step of the transitional impairment test, as
this is an indication that the reporting unit goodwill may be impaired.
Management evaluated goodwill as required by SFAS 142 both upon its adoption and
as of December 28, 2003 and has determined that the fair value exceeded the
carrying amount of the reporting unit and no impairment of goodwill exists.
Prior to the adoption of SFAS No. 142, goodwill was amortized on a
straight-line basis over the expected periods to be benefited (40 years for MAC
and 15 years for La Senorita) and assessed for recoverability by determining
whether the amortization of the goodwill balance over its remaining life could
be recovered through undiscounted future operating cash flows of the acquired
operation. The amount of goodwill and other intangible asset impairment, if any,
was measured based on projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds.
F-8
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(i) Impairment of Long-Lived Assets
SFAS No. 144 provides a single accounting model for long-lived assets
to be disposed of. SFAS No. 144 also changes the criteria for classifying an
asset as held for sale; and broadens the scope of businesses to be disposed of
that qualify for reporting as discontinued operations and changes the timing of
recognizing losses on such operations. The Company adopted SFAS No. 144 on
January 1, 2002. The adoption of SFAS No. 144 did not affect the Company's
financial statements.
In accordance with SFAS No. 144, long-lived assets, such as property,
plant, and equipment, and purchased intangibles subject to amortization, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to estimated undiscounted future cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of would be separately presented in the balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held
for sale would be presented separately in the appropriate asset and liability
sections of the balance sheet.
Goodwill and intangible assets not subject to amortization are tested
annually for impairment, and are tested for impairment more frequently if events
and circumstances indicate that the asset might be impaired. An impairment loss
is recognized to the extent that the carrying amount exceeds the asset's fair
value.
Prior to the adoption of SFAS No. 144, the Company accounted for
long-lived assets in accordance with SFAS No. 121, Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
(j) Income Taxes
Income taxes are provided based on the asset and liability method of
accounting pursuant to Statement of Financial Accounting Standards (SFAS) No.
109, Accounting for Income Taxes.
(k) Franchise Fees
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 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.
(l) Stock Options
The Company has adopted the disclosure-only provisions of the FASB
issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of FASB Statement No. 123, which amends SFAS No. 123,
"Accounting for Stock-Based Compensation," and has accounted for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. Accordingly, no compensation cost has been recognized
for stock options or warrants. Had compensation cost for the Company's
outstanding stock options and warrants been determined based on the fair value
at the grant date for awards consistent with the provisions of SFAS No. 123, the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below for fiscal years 2001, 2002 and 2003:
2001 2002 2003
------------- ------------- ------------
Net income - as reported ......................................... $ 848,676 $ 1,703,928 $ (1,034,908)
Proforma net income - pro forma for SFAS No. 123 ................. 805,333 1,696,458 (1,079,476)
Net income per share - as reported ............................... 0.24 0.49 (0.31)
Pro forma net income per share - pro forma for SFAS No. 123 ...... 0.23 0.49 (0.32)
(m) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-9
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(n) Insurance proceeds
During the first half of fiscal year 2003, the Company recorded a gain
of $478,032 for insurance proceeds received from fire damage at the Humble,
Texas restaurant location. During the second half of fiscal year 2002, the
Company received $105,000 of business interruption insurance proceeds and
recorded a partial gain of $46,268 for insurance proceeds received from the
previously mentioned fire damage at the Humble, Texas restaurant location. These
amounts were recorded in other income (expense) during fiscal years 2003 and
2002.
(o) Recently Issued Accounting Standards
In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the Company to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development, and/or normal use
of the assets. The Company also records a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The Company adopted SFAS No. 143 on
January 1, 2003. The adoption of SFAS No. 143 did not have a material effect on
the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 amends existing guidance on reporting gains and losses
on the extinguishment of debt to prohibit the classification of the gain or loss
as extraordinary, as the use of such extinguishments have become part of the
risk management strategy of many companies. SFAS No. 145 also amends SFAS No. 13
to require sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The adoption of SFAS
No. 145 did not have a material effect on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity. The adoption of SFAS No. 146 did not have a material effect on the
Company's financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, and interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and did not have a material effect on the Company's financial
statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.
(2) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 29, 2002 and December 28,
2003 were as follows:
FISCAL YEARS
2002 2003
------------- -------------
Land ........................... $ 129,591 $ 6,000
Buildings and improvements ..... 1,191,228 465,141
Vehicles ....................... 54,989 50,953
Equipment and smallwares ....... 14,656,386 14,499,748
Leasehold improvements ......... 11,314,977 9,462,729
------------- -------------
Total ................ $ 27,347,171 $ 24,484,571
============= =============
F-10
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) LONG-TERM DEBT
Long-term debt consists of the following at December 29, 2002 and
December 28, 2003:
FISCAL YEARS
2002 2003
-------------- --------------
Revolving Line of Credit ............................... 900,000 750,000
Term Note .............................................. 3,500,000 2,025,000
-------------- --------------
Long-term debt ....................................... 4,400,000 2,775,000
Less current installments due in 2003 ................ (1,000,000) (1,000,000)
-------------- --------------
Long-term debt, excluding current installments ....... $ 3,400,000 $ 1,775,000
============== ==============
On June 29, 2001, the Company re-financed $7.8 million of its debt with
Fleet National Bank. The new credit facility is for $10.0 million. The credit
facility consists of a $5.0 million term note that requires principal payments
quarterly and matures in five years from the closing date of June 29, 2001 and a
$5.0 million revolving line of credit that matures in three years from the
closing date of June 29, 2001. On January 7, 2004, the credit facility was
amended to accommodate the acquisition of 13-restaurants form the Beaumont-based
franchisee. As part of that amendment, the $5.0 million revolving line of credit
maturity was extended to January 7, 2007. The interest rate is either the prime
rate or LIBOR plus a stipulated percentage. Accordingly, the Company is impacted
by changes in the prime rate and LIBOR. The Company is subject to a non-use fee
of 0.5% on the unused portion of the revolver from the date of the credit
agreement. As of December 28, 2003, the Company had $2.8 million outstanding on
the credit facility and is in full compliance with all debt covenants.
Maturities on long-term debt are as follows:
2004 ..................................... 1,000,000
2005 ..................................... 1,000,000
2006 ..................................... 25,000
2007 ..................................... 750,000
2008 ..................................... --
--------------
$ 2,775,000
==============
(4) INCOME TAXES
The provision for income tax expense (benefit) is summarized as follows
for fiscal years 2001, 2002 and 2003:
2001 2002 2003
------------ ------------ ------------
Current:
Federal ........... $ 117,925 $ 50,630 $ 56,590
State and local ... (4,699) 54,660 93,768
Deferred ............. 22,301 690,907 (817,720)
------------ ------------ ------------
$ 135,527 $ 796,197 $ (667,362)
============ ============ ============
The actual income tax expense differs from expected income tax expense
calculated by applying the U.S. federal corporate tax rate to income before
income tax expense as follows:
2001 2002 2003
------------ ------------ ------------
Expected tax expense .................... $ 334,629 $ 850,042 $ (546,471)
State tax expense, net .................. 28,213 74,718 34,708
Non-deductible amortization ............. 30,609 3,391 3,391
Tax credits ............................. (215,656) (133,886) (137,783)
Other ................................... (42,268) 1,932 (21,207)
------------ ------------ ------------
$ 135,527 $ 796,197 $ (667,362)
============ ============ ============
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 29, 2002 and
December 28, 2003 are as follows:
F-11
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 29, DECEMBER 28,
2002 2003
------------- -------------
Deferred tax assets:
Sale-leaseback .................................. $ 807,978 $ 731,028
Tax credit carryforwards and AMT credit ......... 309,896 433,791
Asset impairments ............................... 153,660 999,013
Accrued expenses ................................ 67,617 155,133
Other ........................................... 11,804 --
------------- -------------
$ 1,350,955 $ 2,318,965
------------- -------------
Deferred tax liabilities:
Deferred gain .................................... (17,105) --
Other ............................................ -- (5,556)
Depreciation differences ......................... $ (879,397) $ (1,041,236)
------------- -------------
$ (896,502) $ (1,046,792)
------------- -------------
Net deferred taxes ................................. $ 454,453 $ 1,272,173
============= =============
At December 28, 2003, the Company determined that it was more likely
than not that the deferred tax assets would be realized based on the level of
historical taxable income and projections of future taxable income over the
periods in which the deferred tax assets are deductible. At December 28, 2003,
the Company has tax credit carryforwards of $433,791 which are available to
reduce future Federal regular income taxes, if any, over an indefinite period.
(5) COMMON STOCK, OPTIONS AND WARRANTS
(a) 1996 Long Term Incentive Plan
The Board of Directors and shareholders of the Company have approved
the Mexican Restaurants, Inc. 1996 Long Term Incentive Plan (the "Incentive
Plan"). The Incentive Plan, as amended, authorizes the granting of up to 500,000
shares of Common Stock in the form of incentive stock options and non-qualified
stock options to key executives and other key employees of the Company,
including officers of the Company and its subsidiaries. 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. Options granted under the
Incentive Plan will generally vest and become exercisable at the rate of 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. All stock options granted pursuant to the 1996 Long Term
Incentive Plan will be nonqualified stock options and will remain exercisable
until the earlier of ten years from the date of grant or no more than 90 days
after the optionee ceases to be an employee of the Company.
(b) Stock Option Plan for Non-Employee Directors
The Company has adopted the Mexican Restaurants, Inc. Stock Option Plan
for Non-Employee Directors (the "Directors Plan") for its outside directors and
has reserved 200,000 shares of Common Stock for issuance thereunder. The
Directors Plan provides that each outside director will automatically be granted
an option to purchase 10,000 shares of Common Stock at the time of becoming a
director. These options will be exercisable in 20% increments and will vest
equally over the five-year period from the date of grant. Such options are
priced at the fair market value at the time an individual is elected as a
director. Until the third quarter of fiscal year 2002, each outside director
received options to purchase 1,500 shares of Common Stock quarterly, plus
additional options for attendance at committee meetings, exercisable at the fair
market value of the Common Stock at the close of business on the date
immediately preceding the date of grant. Such annual options will vest at the
conclusion of one year, so long as the individual remains a director of the
Company. All stock options granted pursuant to the Directors Plan will be
nonqualified stock options and will remain exercisable until the earlier of ten
years from the date of grant or six months after the optionee ceases to be a
director of the Company.
As of the third quarter of fiscal year 2002, compensation for each
outside director was changed from quarterly options to cash payments of $2,000
per quarter and $1,000 per board meeting attended. The chairman of the audit
committee receives compensation of $5,000 per quarter.
F-12
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(c) 1996 Manager's Stock Option Plan
The Company has adopted the 1996 Manager's Stock Option Plan (the
"Manager's Plan") specifically for its store-level managers. The Manager's Plan
authorizes the granting of up to 200,000 shares of Common Stock in the form of
non-qualified stock options to store-level managers of the Company. The purpose
of the Manager's Plan is to attract, retain and motivate restaurant managers to
achieve long-range goals and to further align the interests of those employees
with those of the other shareholders of the Company. Options granted under the
Manager's Plan will generally vest and become exercisable at the rate of 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. All stock options granted pursuant to the 1996 Manager's Stock
Option Plan will be nonqualified stock options and will remain exercisable until
the earlier of ten years from the date of grant or no more than 90 days after
the optionee ceases to be an employee of the Company.
(d) Warrants
In conjunction with the initial public offering, the Company entered
into warrant agreements with Louis P. Neeb and Tex-Mex, a limited liability
company in which a member of the Board of Directors prior to February 14, 2000
is a principal, pursuant to which Mr. Neeb and Tex-Mex acquired warrants to
purchase shares of Common Stock at the initial public offering ($11.00 per
share) price less the amount paid for the warrant ($.10 per share) for an
aggregate amount of Common Stock equal to ten percent (10%) of the shares of
Common Stock of the Company outstanding upon consummation of the initial public
offering, such shares to be allocated 5%, or 179,885 shares, to Mr. Neeb and 5%,
or 179,885 shares, to Tex-Mex. The Company's warrants to Mr. Neeb became
exercisable on the second anniversary of the initial public offering, and the
Company's warrants to Tex-Mex became exercisable on the first anniversary of the
initial public offering. The warrants expire on April 24, 2006.
In late fiscal 1998 the Company exchanged a note valued in the amount
of $148,534 (principal and accrued interest) for 98,301 warrants to purchase
Common Stock previously held by a former officer of the Company. The warrants,
which were granted by Larry N. Forehand with an exercise price of $10.90 per
share, became exercisable in April 1998. Upon an exercise by Mr. Neeb or Tex-Mex
of the warrants granted to them by the Company, the Company plans to exercise
these newly acquired warrants simultaneously and use the warrant shares acquired
from Mr. Forehand to satisfy a portion of its obligations under its warrant
agreements with Mr. Neeb and Tex-Mex.
(e) Stock Transactions
During 1999 and 2000 the Company authorized the granting of 64,000
shares of restricted stock to key executives. The awards were valued at an
average of $3.50 per share and will vest in 20% increments over a five year
period from the date of the grant. Compensation expense of $41,304 was
recognized in both fiscal years 2002 and 2003, respectively.
During fiscal year 2003, the Company did not repurchase any of its
common shares. During fiscal year 2002, the Company repurchased 119,500 shares
of common stock for $485,601, and also purchased 12,425 vested options for
$13,838 and 9,400 common shares for $29,140 from former employees and a former
director of the Company. During fiscal year 2001, the Company repurchased 18,800
shares from two former employees for $61,429.
(f) Option and Warrant Summary
Weighted Average
Shares Exercise Price
--------------- ----------------
Balance at December 30, 2001
Granted .............................. 252,025 $ 2.79
Exercised ............................ -- --
Canceled ............................. (115,000) $ 5.97
--------------- ---------------
1,040,970 $ 7.06
Balance at December 29, 2002
Granted .............................. 76,800 $ 3.46
Exercised ............................ -- --
Canceled ............................. (77,300) $ 5.61
--------------- ---------------
1,040,470 $ 6.90
Balance at December 28, 2003
Granted .............................. 24,500 $ 3.31
Exercised ............................ -- --
Canceled ............................. (36,000) $ 4.67
--------------- ---------------
1,028,970 $ 6.87
The options (669,200) and warrants (359,770) outstanding at December
28, 2003 had exercise prices ranging between $2.50 to $11.00, of which 150,000
of the options had exercise prices ranging from $8.63 to $11.00, and 359,770 of
the warrants had a exercise price of $10.90. As of December 28, 2003, 744,525
options and warrants were exercisable at an average price of $8.22.
F-13
The weighted average fair value of the options and warrants granted
during 2001, 2002 and 2003 is estimated at $1.40, $1.41 and $1.40 per share,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: volatilty of 54% for 2001, 40% for 2002 and 44%
for 2003, risk-free interest rate of 4.6% for 2001, 3.8% for 2002 and 3.0% for
2003 an expected life of 5 years for options and 4 years for warrants and 0%
dividend yield.
(g) Income Per 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. For fiscal years 2001, 2002 and 2003, the effect of dilutive stock
options increase the weighted average shares outstanding by approximately 6,607,
72,855 and 45,775 shares respectively. For fiscal years 2001 and 2003, the
effect of dilutive stock options did not affect the determination of diluted
income per share. For fiscal year 2002, such stock options and warrants did
affect the determination of diluted income approximately $0.01 per share.
Approximately 835,570, 659,470 and 731,370 options and warrants were considered
antidilutive for fiscal years 2001, 2002 and 2003 respectively.
(6) LEASES
The Company leases restaurant operating space and equipment under
non-cancelable operating leases which expire at various dates through April 30,
2019.
The restaurant operating space base agreements typically provide for a
minimum lease rent plus common area maintenance, insurance, and real estate
taxes, plus additional percentage rent based upon revenues of the restaurant
(generally 2% to 7%) and may be renewed for periods ranging from five to
twenty-five years.
Future minimum lease payments (which includes the three closed
restaurants scheduled below) under non-cancelable operating leases with initial
or remaining lease terms in excess of one year as of December 28, 2003 are
approximately:
2004 ........................... 4,153,211
2005 ........................... 3,984,603
2006 ........................... 3,877,733
2007 ........................... 3,591,518
2008 ........................... 3,441,718
Thereafter ..................... 18,255,193
------------
$ 37,303,976
============
F-14
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The three Idaho restaurants (which are included in the table above)
have been subleased to third party restaurant operators for five year terms. Two
of the subtenants have two five year options to extend their leases, and one of
the subtenants has one five year option to extend its lease. Future minimum
lease receipts under non-cancelable operating leases with initial or remaining
lease terms in excess of one year as of December 28, 2003 are approximately:
2004 ................................ 267,500
2005 ................................ 285,500
2006 ................................ 303,500
2007 ................................ 233,500
2008 ................................ 145,221
Thereafter .......................... --
---------------
$ 1,235,221
===============
Rent expense for restaurant operating space and equipment amounted to
approximately $4,848,538, $4,424,641 and $4,478,663 for the fiscal years 2001,
2002 and 2003, respectively.
(7) 401(k) PLAN
Beginning in fiscal year 1998, the Company established a defined
contribution 401(k) plan that covers substantially all full-time employees
meeting certain age and service requirements. Participating employees may elect
to defer a percentage of their qualifying compensation as voluntary employee
contributions. The Company may contribute additional amounts at the discretion
of management. The Company did not make any contributions to the plan in fiscal
years 2002 and 2003.
(8) RELATED PARTY TRANSACTIONS
The Company leases its executive offices from a company owned by two
shareholders of Mexican Restaurants, Inc. Net lease expense related to these
facilities in fiscal 2001, 2002 and 2003 was $94,416, $122,584 and $125,188,
respectively.
In May 1998 the Board of Directors of the Company adopted a program to
assist executives and five key employees of the Company in their purchasing of
shares of the Company. As of December 28, 2003, only two executives and one key
employee remained in the program. As adopted, the program provided for the
Company to assist the executives and key employees in obtaining third party
loans to finance such purchases. As of February 1, 2003, the maturity date of
the employee third party loans, the Company no longer guarantees employee third
party loans. The Company does provide for annual cash bonuses to such executives
to provide for payment of interest expense and principal amounts to amortize
these loans in not more than five years. The bonus payments are based on
attainment of cash flow targets established by the Company's Board of Directors.
The Company provides accounting and administrative services for the
Casa Ole Media and Production Funds. The Casa Ole Media and Production Funds are
not-for-profit, unconsolidated entities used to collect money from company
-owned and franchise-owned restaurants to pay for the marketing of Casa Ole
restaurants. Each restaurant contributes an agreed upon percentage of its sales
to the funds.
F-15
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) CONTINGENCIES
The Company has litigation, claims and assessments that arise in the
normal course of business. Management believes that the Company's financial
position or results of operations will not be materially affected by such
matters.
(10) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The unaudited quarterly results for the fiscal year ended December 28,
2003 were as follows (in thousands, except per share data):
FISCAL YEAR 2002 QUARTER ENDED
DECEMBER 29 SEPTEMBER 29 JUNE 30 MARCH 31
----------- ------------ ---------- ----------
Revenues ........................................ $ 14,098 $ 15,117 $ 15,571 $ 15,306
Operating income ................................ $ 226 $ 616 $ 885 $ 831
Net income ...................................... $ 154 $ 458 $ 594 $ 498
Earnings per common share ....................... $ 0.05 $ 0.13 $ 0.17 $ 0.14
Earnings per common share-diluted ............... $ 0.04 $ 0.13 $ 0.17 $ 0.14
FISCAL YEAR 2003 QUARTER ENDED
DECEMBER 28 SEPTEMBER 28 JUNE 29 MARCH 30
----------- ------------ ---------- ----------
Revenues ........................................ $ 14,160 $ 15,157 $ 14,811 $ 14,671
Operating income (loss) ......................... $ (2,732) $ 266 $ 168 $ 429
Net income (loss) ............................... $ (1,915) $ 197 $ 214 $ 469
Earnings (loss) per common share ................ $ (0.57) $ 0.06 $ 0.06 $ 0.14
Earnings (loss) per common share-diluted ........ $ (0.57) $ 0.06 $ 0.06 $ 0.14
F-16
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Articles of Incorporation of the Company (as amended and
incorporated by reference to the corresponding Exhibit number
of the Company's Form 8-K filed on May 25, 1999 with the
Securities and Exchange Commission).
++3.2 Bylaws of the Company.
++4.1 Specimen of Certificate of Common Stock of the Company.
++4.2 Articles of Incorporation of the Company (see 3.1 above).
++4.3 Bylaws of the Company (see 3.2 above).
++10.1 Employment Agreement by and between the Company and Louis P.
Neeb dated February 28, 1996.
10.2 Indemnity Agreement by and between the Company and Louis P.
Neeb dated as of April 10, 1996 (incorporated by reference to
Exhibit 10.4 of the Company's Form S-1 Registration Statement
filed under the Securities Act of 1933, dated April 24, 1996,
with the Securities and Exchange Commission (Registration
Number 333-1678)).
10.3 Indemnity Agreement by and between the Company and Larry N.
Forehand dated as of April 10, 1996 (incorporated by reference
to Exhibit 10.5 of the Company's Form S-1 Registration
Statement filed under the Securities Act of 1933, dated April
24, 1996, with the Securities and Exchange Commission
(Registration Number 333-1678)).
10.4 Indemnity Agreement by and between the Company and John C.
Textor dated as of April 10, 1996 (incorporated by reference
to Exhibit 10.6 of the Company's Form S-1 Registration
Statement filed under the Securities Act of 1933, dated April
24, 1996, with the Securities and Exchange Commission
(Registration Number 333-1678)).
10.5 Indemnity Agreement by and between the Company and Michael D.
Domec dated as of April 10, 1996 (incorporated by reference to
Exhibit 10.8 of the Company's Form S-1 Registration Statement
filed under the Securities Act of 1933, dated April 24, 1996,
with the Securities and Exchange Commission (Registration
Number 333-1678)).
10.6 Indemnity Agreement by and between the Company and J.J.
Fitzsimmons dated as of April 10, 1996 (incorporated by
reference to Exhibit 10.10 of the Company's Form S-1
Registration Statement filed under the Securities Act of 1933,
dated April 24, 1996, with the Securities and Exchange
Commission (Registration Number 333-1678)).
10.7 Indemnity Agreement by and between the Company and Richard E.
Rivera dated as of April 10, 1996 (incorporated by reference
to Exhibit 10.11 of the Company's Form S-1 Registration
Statement filed under the Securities Act of 1933, dated April
24, 1996, with the Securities and Exchange Commission
(Registration Number 333-1678)).
10.8 Corrected Warrant Agreement by and between the Company and
Louis P. Neeb dated as of February 26, 1996 (incorporated by
reference to Exhibit 10.12 of the Company's Form S-1
Registration Statement filed under the Securities Act of 1933,
dated April 24, 1996, with the Securities and Exchange
Commission (Registration Number 333-1678)).
10.9 Corrected Warrant Agreement by and between the Company and
Tex-Mex Partners, L.C. dated as of February 26, 1996
(incorporated by reference to Exhibit 10.13 of the Company's
Form S-1 Registration Statement filed under the Securities Act
of 1933, dated April 24, 1996, with the Securities and
Exchange Commission (Registration Number 333-1678)).
10.10 Form of the Company's Multi-Unit Development Agreement
(incorporated by reference to Exhibit 10.14 of the Company's
Form S-1 Registration Statement filed under the Securities Act
of 1933, dated April 24, 1996, with the Securities and
Exchange Commission (Registration Number 333-1678)).
10.11 Form of the Company's Franchise Agreement (incorporated by
reference to Exhibit 10.15 of the Company's Form S-1
Registration Statement filed under the Securities Act of 1933,
dated April 24, 1996, with the Securities and Exchange
Commission (Registration Number 333-1678)).
+10.12 1996 Long Term Incentive Plan (incorporated by reference to
Exhibit 10.16 of the Company's Form S-1 Registration Statement
filed under the Securities Act of 1933, dated April 24, 1996,
with the Securities and Exchange Commission (Registration
Number 333-1678)).
+10.13 Stock Option Plan for Non-Employee Directors (incorporated by
reference to Exhibit 10.17 of the Company's Form S-1
Registration Statement filed under the Securities Act of 1933,
dated April 24, 1996, with the Securities and Exchange
Commission (Registration Number 333-1678)).
10.14 Corrected Warrant Agreement by and between Larry N. Forehand
and Louis P. Neeb dated as of February 26, 1996 (incorporated
by reference to Exhibit 10.31 of the Company's Form S-1
Registration Statement filed under the Securities Act of 1933,
dated April 24, 1996, with the Securities and Exchange
Commission (Registration Number 333-1678)).
10.15 Corrected Warrant Agreement by and between Larry N. Forehand
and Tex-Mex Partners, L.C. dated as of February 26, 1996
(incorporated by reference to Exhibit 10.32 of the Company's
Form S-1 Registration Statement filed under the Securities Act
of 1933, dated April 24, 1996, with the Securities and
Exchange Commission (Registration Number 333-1678)).
10.16 Corrected Warrant Agreement by and between Larry N. Forehand
and Patrick A. Morris dated as of February 26, 1996
(incorporated by reference to Exhibit 10.33 of the Company's
Form S-1 Registration Statement filed under the Securities Act
of 1933, dated April 24, 1996, with the Securities and
Exchange Commission (Registration Number 333-1678)).
10.17 Corrected Warrant Agreement by and between Larry N. Forehand
and Stacy M. Riffe dated as of February 26, 1996 (incorporated
by reference to Exhibit 10.34 of the Company's Form S-1
Registration Statement filed under the Securities Act of 1933,
dated April 24, 1996, with the Securities and Exchange
Commission (Registration Number 333-1678)).
10.18 Indemnification letter agreement by Larry N. Forehand dated
April 10, 1996 (incorporated by reference to Exhibit 10.35 of
the Company's Form S-1 Registration Statement filed under the
Securities Act of 1933, dated April 24, 1996, with the
Securities and Exchange Commission (Registration Number
333-1678)).
+10.19 1996 Manager's Stock Option Plan (incorporated by reference to
Exhibit 99.2 of the Company's Form S-8 Registration Statement
Under the Securities Act of 1933, dated February 24, 1997,
filed with the Securities and Exchange Commission).
+10.20 Employment Agreement by and between the Company and Curt
Glowacki dated May 15, 1997 (incorporated by reference to
Exhibit 10.44 of the Company's Form 10-K Annual Report filed
on March 30, 1998 with the Securities and Exchange
Commission).
+10.21 Employment Agreement by and between the Company and Andrew J.
Dennard dated May 20, 1997 (incorporated by reference to
Exhibit 10.45 of the Company's Form 10-K Annual Report filed
on March 30, 1998 with the Securities and Exchange
Commission).
*10.22 Fleet Revolving Credit and Term Loan Agreement between Mexican
Restaurants, Inc., as the Borrower, and Fleet National Bank,
as the Bank, for $10,000,000 dated June 29, 2001.
21.1 List of subsidiaries of the Company (incorporated by reference
to Exhibit 22.1 of the Company's Form S-1 Registration
Statement Under the Securities Act of 1933, dated April
24,1996, filed by the Company with the Securities and Exchange
Commission).
*23.1 Consent of KPMG LLP.
*24.1 Power of Attorney (included on the signature page to this Form
10-K).
*31.1 Certification filed pursuant to Rule 13a-14(a) or Rule
15d-14(a).
*31.2 Certification filed pursuant to Rule 13a-14(a) or Rule
15d-14(a).
*32.1 Certification of Chief Executive Officer furnished pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
*32.2 Certification of Chief Financial Officer furnished pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
----------
* Filed herewith.
++ Incorporated by reference to corresponding Exhibit number of the
Company's Form S-1 Registration Statement under the Securities Act of
1933, dated April 24, 1996, with the Securities and Exchange Commission
(Registration number 333-1678).
+ Management contract or compensatory plan or arrangement.