UNITED STATES SECURITIES & EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 27, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ______________ Commission file number: 0-28234 MEXICAN RESTAURANTS, INC. (Exact name of registrant as specified in its charter) TEXAS 76-0493269 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 1135 EDGEBROOK, HOUSTON, TEXAS 77034-1899 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: 713-943-7574 Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Number of shares outstanding of each of the issuer's classes of common stock, as of August 3, 2004: 3,384,605 SHARES OF COMMON STOCK, PAR VALUE $.01. PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (AUDITED) 6/27/2004 12/28/2003 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 455,176 $ 366,042 Royalties receivable 222,823 179,517 Other receivables 854,013 423,670 Inventory 646,550 555,064 Taxes receivable 181,992 345,006 Prepaid expenses and other current assets 790,936 717,899 ------------ ------------ Total current assets 3,151,490 2,587,198 ------------ ------------ Property, plant and equipment 29,129,754 24,484,571 Less accumulated depreciation (13,078,398) (11,502,668) ------------ ------------ Net property, plant and equipment 16,051,356 12,981,903 Goodwill, net 10,450,189 7,196,265 Deferred tax assets 1,095,879 1,272,173 Property held for resale 505,118 884,118 Other assets 834,005 939,579 ------------ ------------ $ 32,088,037 $ 25,861,236 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 1,000,000 $ 1,000,000 Accounts payable 1,698,344 1,516,217 Accrued sales and liquor taxes 652,118 469,817 Accrued payroll and taxes 1,200,997 976,146 Accrued expenses 1,062,651 1,294,486 ------------ ------------ Total current liabilities 5,614,110 5,256,666 ------------ ------------ Long-term debt, net of current portion 6,500,000 1,775,000 Other liabilities 972,311 898,115 Deferred gain 1,873,284 1,977,355 Stockholders' equity: Preferred stock, $.01 par value, 1,000,000 shares authorized - - 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 8,696,397 7,542,817 Deferred compensation (26,955) (47,607) Treasury stock, cost of 1,348,100 common shares (11,709,513) (11,709,513) ------------ ------------ Total stockholders' equity 17,128,332 15,954,100 ------------ ------------ $ 32,088,037 $ 25,861,236 ============ ============ 2 MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) 13-WEEK 13-WEEK 26-WEEK 26-WEEK PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED 6/27/2004 6/29/03 6/27/2004 6/29/03 ------------ ------------ ------------ ------------ Revenues: Restaurant sales 19,920,745 $ 14,559,479 $ 39,217,681 $ 28,958,591 Franchise fees and royalties and Other 205,601 274,316 397,381 569,647 ------------ ------------ ------------ ------------ 20,126,346 14,833,795 39,615,062 29,528,238 ------------ ------------ ------------ ------------ Costs and expenses: Cost of sales 5,660,470 4,093,740 11,055,100 7,996,186 Labor 6,639,614 4,882,235 12,970,722 9,700,106 Restaurant operating expenses 4,544,819 3,753,768 9,146,363 7,333,328 General and administrative 1,676,292 1,251,272 3,178,575 2,634,980 Depreciation and amortization 508,514 592,184 1,147,848 1,172,710 Pre-opening costs 10,529 91,941 10,529 93,669 Restaurant closure costs 49,906 - 167,304 - ------------ ------------ ------------ ------------ 19,090,144 14,665,140 37,676,441 28,930,979 ------------ ------------ ------------ ------------ Operating income 1,036,202 168,655 1,938,621 597,259 ------------ ------------ ------------ ------------ Other income (expense): Interest income 1,609 6,770 8,980 13,653 Interest expense (131,755) (65,410) (271,020) (135,892) Other, net 17,634 181,658 23,632 516,185 ------------ ------------ ------------ ------------ (112,512) 123,018 (238,408) 393,946 ------------ ------------ ------------ ------------ Income before income tax expense 923,690 291,673 1,700,213 991,205 Income tax expense (benefit) 300,902 77,829 546,633 308,251 ------------ ------------ ------------ ------------ Net income $ 622,788 $ 213,844 $ 1,153,580 $ 682,954 ============ ============ ============ ============ Basic income per share $ 0.18 $ 0.06 $ 0.34 $ 0.20 ============ ============ ============ ============ Diluted income per share $ 0.17 $ 0.06 $ 0.32 $ 0.20 ============ ============ ============ ============ Weighted average number of shares (basic) 3,384,605 3,384,605 3,384,605 3,384,605 ============ ============ ============ ============ Weighted average number of shares (diluted) 3,602,278 3,421,061 3,563,857 3,426,129 ============ ============ ============ ============ 3 MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 26-WEEK PERIODS ENDED 6/27/2004 6/29/2003 ----------- ----------- Cash flows from operating activities: Net income $ 1,153,580 $ 682,954 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,147,848 1,172,710 Deferred gain amortization (104,071) (104,072) Asset impairments and restaurant closure costs 167,304 - Loss (gain) on sale of property, plant & equipment 21,942 (476,627) Deferred compensation 20,652 20,652 Deferred taxes 176,294 151,496 Changes in assets and liabilities: Royalties receivable (43,306) (4,161) Other receivables (440,343) 25,391 Income tax receivable/payable 163,014 26,278 Inventory 57,965 54,544 Prepaid and other current assets (73,037) 108,594 Other assets 210,858 (36,583) Accounts payable 139,050 (210,952) Accrued expenses and other liabilites 41,961 (425,652) Other liabilities 74,196 19,630 ----------- ----------- Total adjustments 1,560,327 321,248 ----------- ----------- Net cash provided by operating activities 2,713,907 1,004,202 ----------- ----------- Cash flows from investing activities: Insurance proceeds from fire loss on building - 488,629 Purchase of property, plant and equipment (1,230,784) (1,113,253) Proceeds from sale of property, plant and equipment 405,751 - Business Acquisition (6,524,740) - ----------- ----------- Net cash used in investing activities (7,349,773) (624,624) ----------- ----------- Cash flows from financing activities: Net borrowings (payments) under line of credit 1,725,000 (600,000) Additions to Long term Notes Payable 3,000,000 - ----------- ----------- Net cash provided by (used) in financing activities 4,725,000 (600,000) ----------- ----------- Increase (decrease) in cash and cash equivalents 89,134 (220,422) ----------- ----------- Cash and cash equivalents at beginning of period 366,042 526,536 ----------- ----------- Cash and cash equivalents at end of period $ 455,176 $ 306,114 =========== =========== Supplemental disclosure of cash flow information: Cash paid during the period: Interest $ 210,823 $ 139,067 Income Taxes $ 264,935 $ 172,600 Non-cash investing and financing activity: CNL real estate transaction $ 8,325,000 $ - 4 MEXICAN RESTAURANTS, INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION In the opinion of Mexican Restaurants, Inc. (the "Company"), the accompanying consolidated financial statements contain all adjustments (consisting only of normal recurring accruals and adjustments) necessary for a fair presentation of the consolidated financial position as of June 27, 2004, and the consolidated statements of income for the 13-week and 26-week periods and cash flows for the 26-week period ended June 27, 2004 and June 29, 2003. The consolidated statements of income for the 13-week and 26-week periods ended June 27, 2004 are not necessarily indicative of the results to be expected for the full year. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, 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. 2. ACCOUNTING POLICIES During the interim periods the Company follows the accounting policies set forth in its consolidated financial statements in its Annual Report and Form 10-K (file number 0-28234). Reference should be made to such financial statements for information on such accounting policies and further financial details. 3. NET INCOME PER COMMON SHARE Basic income per share is based on the weighted average shares outstanding without any dilutive effects considered. Diluted income per share reflects dilution from all contingently issuable shares, including options and warrants. As of June 27, 2004 and June 29, 2003, the Company had 1,014,970 and 1,036,970 options and warrants outstanding, respectively. As of June 27, 2004 and June 29, 2003, such stock options and warrants have the effect of increasing basic weighted average shares outstanding by 217,673 and 36,456 for the 13-week periods and 179,252 and 41,524 for the 26-week periods, respectively. 4. SFAS NO. 148. "ACCOUNTING FOR STOCK-BASED COMPENSATION" The Company has adopted the disclosure-only provisions of the FASB-issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123, which amends SFAS No. 123, Accounting for Stock-Based Compensation and has accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations. Accordingly, no compensation cost has been recognized for stock options or warrants. Had compensation cost for the Company's outstanding stock options and warrants been determined based on 5 the fair value at the grant date for awards consistent with the provisions of SFAS No. 123, the Company's net income and net income per share would have been changed to the pro forma amounts indicated below for the 13-week periods and 26-week periods ended June 27, 2004 and June 29, 2003: 13 WEEKS ENDED 6/27/04 6/29/03 Net income - as reported .................................................. $ 622,788 $ 213,844 Pro forma net income - pro forma for SFAS No. 123 ......................... 605,823 206,830 Net income per share diluted - as reported ................................ 0.17 0.06 Pro forma net income per share diluted - pro forma for SFAS No. 123 ...... 0.17 0.06 26 WEEKS ENDED 6/27/04 6/29/03 Net income - as reported .................................................. $ 1,153,580 $ 682,954 Pro forma net income - pro forma for SFAS No. 123 ......................... 1,143,661 673,999 Net income per share diluted - as reported ................................ 0.32 0.20 Pro forma net income per share diluted - pro forma for SFAS No. 123 ...... 0.32 0.20 5. ACQUISITION On January 7, 2004, the Company completed its purchase of 13 restaurants and related assets from its Beaumont-based franchisee for a total consideration of approximately $13.75 million. The financing for the acquisition was provided by Fleet National Bank, CNL Franchise Network, LP ("CNL") and the sellers of the Beaumont-based franchise restaurants. Fleet National Bank provided $2.5 million of the acquisition financing by amending its existing credit facility with Mexican Restaurants, Inc. Six of the acquired restaurants were concurrently sold to CNL for $8.325 million in a sale-leaseback transaction. The sellers accepted $3.0 million in notes from Mexican Restaurants, Inc. for the balance of the purchase price. The seller notes require the payment of interest only for five years, with $1.5 million in principal due on January 7, 2009 and $1.5 million in principal amortizing over an additional five years. The table below presents pro forma income statement information as if the Company had purchased the Beaumont-based restaurants at the beginning of fiscal year 2003. Pro forma adjustments are to remove royalty income and expense, reflect net interest expense on the debt resulting from the acquisition and record additional income tax at an effective rate of 32.6% and 32.2% for the second quarter and year to date, respectively, of fiscal 2004 and 26.7% and 31.1% for the second quarter and year to date, respectively, of fiscal 2003. The 26-weeks ended June 29, 2003 included a gain of $477,508 for insurance proceeds received from fire damage at a restaurant. The pro forma information does not purport to be indicative of results of operations which would have occurred had the acquisition been consummated on the date indicated or future results of operations. 13 WEEKS ENDED 6/27/04 6/29/03 Revenues ..................... $ 20,126,346 $ 19,819,013 Net income ................... 622,788 258,136 Diluted income per share ..... 0.17 0.08 26 WEEKS ENDED 6/27/04 6/29/03 Revenues ..................... $ 40,078,670 $ 39,345,864 Net income ................... 1,199,815 765,925 Diluted income per share ..... 0.34 0.22 The acquisition was accounted for under SFAS 141 and results of operations are included in the accompanying financial statements from the date of acquisition. The assets acquired and liabilities assumed of the acquisition were recorded at estimated fair values using comparables, appraisals, and records. Some of the acquisition amounts recorded are estimates and are subject to change. 6 A summary of the assets acquired and liabilities assumed in the acquisition follow: Estimated fair value of assets acquired: Current assets 184,601 Property and equipment 2,946,365 Other assets 175,000 Goodwill 3,253,924 --------- Total assets 6,559,890 Less: Cash acquired (35,150) --------- Net assets acquired 6,524,740 ========= ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: growth strategy; dependence on executive officers; geographic concentration; increasing susceptibility to adverse conditions in the region; changes in consumer tastes and eating habits; national, regional or local economic and real estate conditions; demographic trends; inclement weather; traffic patterns; the type, number and location of competing restaurants; inflation; increased food, labor and benefit costs; the availability of experienced management and hourly employees; seasonality and the timing of new restaurant openings; changes in governmental regulations; dram shop exposure; and other factors not yet experienced by the Company. The use of words such as "believes", "anticipates", "expects", "intends" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company's Annual Report and Form 10-K most recently filed by the Company, that attempt to advise interested parties of the risks and factors that may affect the Company's business. RESULTS OF OPERATIONS Revenues. The Company's revenues for the second quarter of fiscal 2004 were up $5.3 million or 35.9% to $20.1 million compared with the same quarter one year ago. Restaurant sales for the second quarter of fiscal 2004 increased $5.4 million or 37.0% to $19.9 million compared with the same quarter one year ago. The increase reflects the January 2004 acquisition of 13 restaurants and related assets from the Company's Beaumont-based franchisee. The increase also reflects positive same-restaurant sales. Total system sales at restaurants operating in both fiscal quarters ("same-stores") increased 4.0%, Company-owned same-store sales for the quarter increased 4.5% and franchise-owned same-store sales for the quarter increased 2.5% from the same quarter in fiscal 2003. Franchise fees and royalties decreased $78,907 or 29.4%, reflecting lost royalty income from the Beaumont-based franchise restaurants acquired by the Company. On a year-to-date basis, the Company's revenues were up $10.1 million or 34.4% to $39.6 million compared with the same 26-week period one year ago. Restaurant sales for the 26-week period of fiscal year 2004 ending June 27, 2004 increased $10.3 million or 35.6% to $39.2 million compared with the same 26-week period one year ago. The increase reflects the January 2004 acquisition of the 13 restaurants and related assets from the Company's Beaumont-based franchisee. The increase also reflects positive same-restaurant sales. Total system sales at restaurants operating in both 26-week periods ("same-stores") increased 3.3%, Company-owned same-store sales for the 26-week period 7 increased 3.5% and franchise-owned same-store sales for the 26-week period increased 2.7% from the same 26-week period in fiscal 2003. Franchise fees and royalties decreased $182,284 or 32.6%, reflecting lost royalty income from the Beaumont-based franchise restaurants. Costs and Expenses. Cost of sales, consisting primarily of food and beverage costs, but also including paper and supplies, increased 20 basis points as a percentage of restaurant sales in the second quarter of fiscal 2004 to 28.4% from 28.2% for the same quarter in fiscal 2003. The increase reflects higher cheese and meat commodity prices. On a year-to-date basis, cost of sales increased 50 basis points as a percentage of restaurant sales to 28.2% from 27.7% from the comparable 26-week period in fiscal 2003. The increase reflects higher cheese and meat commodity prices. Labor and other related expenses decreased as a percentage of restaurant sales 30 basis points to 33.3% compared with 33.6% for the same quarter in fiscal 2003. The improvement reflects labor efficiencies gained from positive same-store sales. On a year-to-date basis, labor and other related expenses decreased as a percentage of restaurant sales 50 basis points to 33.1% from 33.6% from the comparable 26-week period in fiscal 2003. The improvement reflects labor efficiencies gained from positive same-store sales. Restaurant operating expenses, which primarily includes rent, property taxes, utilities, repair and maintenance, liquor taxes and advertising, as a percentage of restaurant sales decreased 290 basis points to 22.8% in the second quarter of fiscal 2004 from 25.7% in the same quarter in fiscal 2003. The decrease reflects advertising efficiencies gained with the acquisition of the Beaumont-based franchise restaurants, lower liquor taxes due to lower liquor sales volume in the Beaumont-based restaurants, as partially offset by higher utility expenses. On a year-to-date basis, restaurant operating expenses decreased 190 basis points as a percentage of restaurant sales to 23.3% from 25.2% from the comparable 26-week period in fiscal 2003. The improvement was due to the same factors discussed in the preceding paragraph. General and administrative expenses consist of expenses associated with corporate and administrative functions that support restaurant operations. General and administrative expense decreased as a percentage of total sales 10 basis points to 8.3% in the second quarter of fiscal 2004 compared with 8.4% the same quarter one year ago. The improvement reflects efficiencies gained with the acquisition of the Beaumont-based restaurants, offset in part by executive and non-executive bonus accruals. On a year-to-date basis, general and administrative expenses decreased as a percentage of total sales 90 basis points to 8.0% from 8.9% from the comparable 26-week period in fiscal 2003. The improvement was due to the same factors discussed in the preceding paragraph. Depreciation and amortization expense as a percentage of total sales decreased 150 basis points to 2.5% in the second quarter of fiscal 2004 from 4.0% for the same quarter in fiscal 2003. The improvement reflects efficiencies gained with the acquisition of the Beaumont-based restaurants and the closure of under-performing restaurants. On a year-to-date basis, depreciation and amortization expense as a percentage of total sales decreased 110 basis points to 2.9% from 4.0% from the comparable period in fiscal 2003. The improvement was due to the same factors discussed in the preceding paragraph. The Company remodeled two restaurants in the second quarter of fiscal 2004, incurring pre-open costs of $10,529 compared with $91,941 for the second quarter in fiscal 2003 in which one new restaurant was opened. 8 Restaurant closure costs of $49,906 were incurred in the second quarter of fiscal 2004 related to one of the restaurants impaired in the fourth quarter of fiscal 2003 but not closed until the first quarter of fiscal 2004. The costs incurred in the second quarter of fiscal 2004 were due to delays in a lease assignment. Other Income (Expense). Other income, net decreased $235,530 from income of $123,018 in the second quarter of fiscal 2003 to an expense of $112,512 in the second quarter of fiscal 2004. Interest expense increased $66,345 to $131,755 in the second quarter of fiscal 2004 compared with the same quarter one year ago, reflecting the increase in outstanding debt incurred for the acquisition of the Beaumont-based restaurants. The second quarter of fiscal 2003 reflected a partial gain of $161,442 for insurance proceeds received as a result of fire damage at the Humble, Texas restaurant location. There were no gains recorded in the second quarter of fiscal 2004; however, the Company did incur approximately $4,870 in losses from the disposition of assets during this period. On a year-to-date basis, other income, net decreased $632,354 from income of $393,946 in fiscal 2003 to an expense of $238,408 in fiscal 2004. Interest expense increased $135,892 to $271,020 for the 26-week period of fiscal 2004 compared with the same period one year ago, reflecting the increase in outstanding debt incurred for the acquisition of the Beaumont-based restaurants. The 26-week period of fiscal 2003 reflected a partial gain of $477,508 for insurance proceeds received as a result of the fire damage at the Humble, Texas restaurant location. There were no gains recorded in the 26-week period of fiscal 2004; however, the Company did incur approximately $21,942 in losses from the disposition of assets during this period. Income Tax Expense. For the second quarter of fiscal 2004, the Company's effective tax rate was 32.6% as compared with 26.7% in the same quarter in fiscal 2003. The effective tax rate is a function of year-to-date annualizing, the effects of permanent and temporary differences, the alternative minimum tax and the utilization of tax credits. LIQUIDITY AND CAPITAL RESOURCES The Company met its capital requirements for the 26-weeks ended June 27, 2004 with cash generated by operations. As of June 27, 2004, the Company's operations generated approximately $2.7 million in cash, as compared with $1.0 million in the same period one year ago. As of June 27, 2004, the Company had a working capital deficit of approximately $2.5 million, of which $1.0 million reflects the current portion of principal ($250,000 per quarter) due to Fleet National Bank under the terms of its credit agreement. A working capital deficit is common in the restaurant industry, since restaurant companies do not typically require a significant investment in either accounts receivable or inventory. The Company's principal capital requirements are the funding of routine capital expenditures, new restaurant development or acquisitions and remodeling of older units. During the first 26 weeks of fiscal 2004, capital expenditures on property, plant and equipment were approximately $1.2 million as compared to $1.1 million for the first 26 weeks of fiscal 2003. The capital expenditures were for necessary replacement of equipment and leasehold improvements in various older units. The Company remodeled two restaurants during the second quarter, one of which re-opened May 28, 2004, with the second restaurant re-opening just after the second quarter ended. The Company sold one previously closed restaurant property located in Plainview, Texas for $442,000. The Company estimates its capital expenditures for the remainder of the fiscal year will be approximately $1.3 million. On January 7, 2004, the Company completed its purchase of 13 restaurants and related assets from its Beaumont-based franchisee for a total consideration of approximately $13.75 million. The financing for the acquisition was provided by Fleet National Bank, CNL Franchise Network, LP ("CNL") and the sellers of the Beaumont-based restaurants. Fleet National Bank provided $2.5 million of the acquisition financing by amending its existing credit facility with Mexican Restaurants, Inc. Six of the acquired restaurants were concurrently sold to CNL for $8.325 million in a sale-leaseback transaction. The sellers accepted $3.0 million in notes from the Company for the balance of the purchase price. The seller notes require the payment of interest only for five years, with $1.5 million in principal due on January 7, 2009 and $1.5 million in principal amortizing over an additional five years. 9 On January 7, 2004, Fleet National Bank amended its credit facility to accommodate the acquisition of the Beaumont-based restaurants. The amended credit facility consists of a $5.0 million term note that requires quarterly principal payments of $250,000 and matures on December 31, 2008. The credit facility also includes a $5.0 million revolving line of credit that matures on January 7, 2007. The interest rate is either the prime rate or LIBOR plus a stipulated percentage. Accordingly, the Company is impacted by changes in the prime rate and LIBOR. The Company is subject to a non-use fee of 0.5% on the unused portion of the revolver from the date of the credit agreement. As of June 27, 2004, the Company had $4.5 million outstanding on its term note. There is currently no debt drawn on the revolver. The Company paid down $1,350,000 of indebtedness during the 26-week period of fiscal 2004. As of June 27, 2004, the Company was in compliance with all debt covenants. The Company expects to be in compliance with the covenants in the loan agreement for the next twelve months. The Company's management believes that with its operating cash flow and the Company's revolving line of credit with Fleet National Bank, funds will be sufficient to meet operating requirements and to finance routine capital expenditures and remodels through the end of the 2004 fiscal year. Unless the Company violates an important debt covenant, the Company's credit facility with Fleet National Bank is not subject to triggering events that would cause the credit facility to become due sooner than the maturity dates described above. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not have or participate in transactions involving derivative, financial and commodity instruments. The Company's long-term debt bears interest at floating market rates. Based on the amount outstanding at June 27, 2004, a 1% change in interest rates would change interest expense by $11,250. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's President and Chief Executive Officer together with the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures, as such term is defined under Rule 13a-15(e) under the Securities Exchange Act of 1934. Based upon the evaluation, the Company's President and Chief Executive Officer and the Company's Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its subsidiaries) required to be included in the Company's periodic filings with the Securities and Exchange Commission. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of the evaluation. (b) Change in Internal Control over Financial Reporting No change in the Company's internal control over financial reporting or in other factors occurred during the Company's most recent fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 10 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company held its 2004 annual meeting of shareholders on Tuesday, May 4, 2004. At the annual meeting, the Company's shareholders took the following actions: 1) By a vote of 3,235,813 for, 8,492 against or withheld, 0 abstaining and 0 broker non-votes, the shareholders elected Michael D. Domec as Class II Director for a term expiring at the annual meeting to be held in 2007 and until his successor is elected and qualified. 2) By a vote of 3,234,613 for 9,692 against or withheld, 0 abstaining and 0 broker non-votes, the shareholders elected Curt Glowacki as Class II Director for a term expiring at the annual meeting to be held in 2007 and until this successor is elected and qualified. 3) By a vote of 3,235,813 for 8,492 against or withheld, 0 abstaining and 0 broker non-votes, the shareholders elected Louis P. Neeb as Class II Director for a term expiring at the annual meeting to be held in 2007 and until his successor is elected and qualified. Additionally, the following current directors of the Company continued to serve as directors as of and following the 2004 annual meeting: Larry N. Forehand, Thomas E. Martin, David Nierenberg, J. Joseph Fitzsimmons and J. Stuart Sargent. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS Exhibit Number Document Description -------------- ----------------------------------------------------------------------- 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) REPORTS ON FORM 8-K There was one report on Form 8-K filed during the Company's fiscal quarter ended June 27, 2004. The filing was made on May 5, 2004 reporting, under items 7 and 12 thereto, the Company's filing of a press release to announce the Company's earnings for the 2004 first quarter ended March 28, 2004. 11 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MEXICAN RESTAURANTS, INC. Dated: August 9, 2004 By: /s/ Curt Glowacki Curt Glowacki ----------------------- Chief Executive Officer (Principal Executive Officer) Dated: August 9, 2004 By: /s/ Andrew J. Dennard Andrew J. Dennard ----------------------- Senior Vice President, Chief Financial Officer & Treasurer (Principal Financial Officer and (Principal Accounting Officer) 12 EXHIBIT INDEX Exhibit Number Document Description -------------- ----------------------------------------------------------------------- 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002