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 SEPTEMBER 30, 2001
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
incorporation or organization) Identification Number)
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
--- ---
Number of shares outstanding of each of the issuer's classes of common stock, as
of November 1, 2001: 3,513,505 SHARES OF COMMON STOCK, PAR VALUE $.01.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
9/30/01 12/31/00
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 371,090 $ 636,334
Royalties receivable 65,072 66,798
Other receivables 563,537 611,603
Inventory 637,956 718,629
Taxes receivable 0 257,080
Prepaid expenses and other current assets 1,030,994 529,830
------------ ------------
Total current assets 2,668,649 2,820,274
------------ ------------
Property, plant and equipment 26,735,511 25,550,871
Less accumulated depreciation (8,589,728) (7,339,223)
------------ ------------
Net property, plant and equipment 18,145,783 18,211,648
Deferred tax assets 986,432 1,167,661
Property held for resale 1,100,000 1,100,000
Other assets 8,161,028 8,209,243
------------ ------------
$ 31,061,892 $ 31,508,826
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 1,000,000 $ --
Accounts payable 2,204,296 2,953,649
Accrued sales and liquor taxes 468,147 452,617
Accrued payroll and taxes 1,354,873 1,006,457
Accrued expenses 804,402 327,390
------------ ------------
Total current liabilities 5,831,718 4,740,113
------------ ------------
Long-term debt, net of current portion 6,022,729 8,300,000
Other liabilities 648,147 537,219
Deferred gain 2,567,231 3,042,832
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 7,158,977 6,025,121
Deferred compensation (140,541) (171,519)
Treasury stock, cost of 1,181,600 and 1,200,400
shares, respectively (11,194,772) (11,133,343)
------------ ------------
Total stockholders' equity 15,992,067 14,888,662
$ 31,061,892 $ 31,508,826
============ ============
2
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
13-WEEK 13-WEEK 39-WEEK 39-WEEK
PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
09/30/01 10/01/00 09/30/01 10/01/00
------------ ------------ ------------ ------------
Revenues:
Restaurant sales $ 16,147,855 $ 15,787,434 $ 47,119,290 $ 47,066,587
Franchise fees and royalties 353,661 314,974 960,147 972,550
Other 26,019 25,338 111,501 51,006
------------ ------------ ------------ ------------
16,527,535 16,127,746 48,190,938 48,090,143
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 4,540,844 4,389,553 13,090,479 13,238,103
Labor 5,252,917 5,265,303 15,469,390 15,723,887
Restaurant operating expenses 4,067,795 3,818,364 11,834,513 11,063,969
General and administrative 1,425,416 1,385,869 4,084,011 4,163,595
Depreciation and amortization 632,675 526,984 1,782,685 1,545,441
Pre-opening costs -- 42,432 254 93,464
Asset impairments and restaurant
closing costs -- -- -- --
------------ ------------ ------------ ------------
15,919,647 15,428,505 46,261,332 45,828,459
------------ ------------ ------------ ------------
Operating income (loss) 607,888 699,241 1,929,606 2,261,684
------------ ------------ ------------ ------------
Other income (expense):
Interest income 30,300 -- 44,346 4,416
Interest expense (156,856) (223,588) (567,724) (637,226)
Other, net 83,357 5,969 338,165 11,312
------------ ------------ ------------ ------------
(43,199) (217,619) (185,213) (621,498)
------------ ------------ ------------ ------------
Income before income tax expense 564,689 481,622 1,744,393 1,640,186
Income tax expense 197,711 168,568 610,537 554,568
------------ ------------ ------------ ------------
Net income $ 366,978 $ 313,054 $ 1,133,856 $ 1,085,618
============ ============ ============ ============
Basic and diluted income per share $ 0.10 $ 0.09 $ 0.32 $ 0.30
------------ ------------ ------------ ------------
Weighted average number of shares
(basic and diluted) 3,532,427 3,542,380 3,533,971 3,594,646
============ ============ ============ ============
3
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
39-WEEK PERIODS ENDED
9/30/01 10/1/00
----------- -----------
Cash flows from operating activities:
Net income $ 1,133,856 $ 1,085,618
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred compensation 30,978 26,131
Depreciation and amortization 1,782,685 1,545,441
Deferred gain amortization (172,179) (184,800)
Deferred taxes 181,229 184,000
Loss (gain) on sale of property, plant & equipment (284,302) 20,789
Changes in assets and liabilities:
Royalties receivable 1,726 (122,222)
Other receivables (108,781) (147,741)
Income tax receivable/payable 575,393 (34,563)
Inventory 80,673 (47,168)
Prepaid and other current assets (554,704) (35,280)
Other assets (176,214) (17,888)
Accounts payable (749,353) (633,984)
Accrued expenses and other liabilites 522,645 387,684
Other liabilities 140,597 138,573
----------- -----------
Total adjustments 1,270,393 1,078,972
----------- -----------
Net cash provided by operating activities 2,404,249 2,164,590
----------- -----------
Cash flows from investing activities:
Payment for purchase of acquisition, net of
cash acquired -- --
Purchase of property, plant and equipment (1,439,531) (2,390,921)
Proceeds from sale of property, plant and equipment 108,738 202,399
----------- -----------
Net cash used in investing activities (1,330,793) (2,188,522)
----------- -----------
Cash flows from financing activities:
Net borrowings under line of credit (1,277,271) (153,320)
Purchase of treasury stock (61,429) (375,000)
----------- -----------
Net cash provided by (used in) financing activities (1,338,700) (528,320)
----------- -----------
----------- -----------
Increase (decrease) in cash and cash equivalents (265,244) (552,252)
----------- -----------
Cash and cash equivalents at beginning of period 636,334 743,935
----------- -----------
Cash and cash equivalents at end of period $ 371,090 $ 191,683
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest $ 550,708 $ 625,689
Income Taxes $ 152,597 $ 414,960
Non-cash investing and financing activity:
Sale of property for note receivable $ 244,109 $ --
Issuance of restricted stock $ -- $ 224,000
Purchase of property for note receivable $ 207,800 $ --
4
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of Mexican Restaurants, Inc. and subsidiaries
(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 September 30, 2001, and the consolidated
statements of income and cash flows for the 39-week and 13-week periods
ended September 30, 2001 and October 1, 2000. The consolidated
statements of income for the 39-week and 13-week period ended September
30, 2001 is not necessarily indicative of the results to be expected
for the full year.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS
133"), was issued by the Financial Accounting Standards Board in June
1998. SFAS 133 standardizes the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts.
Under the standard, entities are required to carry all derivative
instruments in the statement of financial position at fair value. The
Company adopted SFAS 133 beginning in fiscal year 2001. The adoption of
SFAS 133 did not have a material effect on the Company's financial
condition or results of operation because the Company does not enter
into derivative or other financial instruments for trading or
speculative purposes nor does the Company use or intend to use
derivative financial instruments or derivative commodity instruments.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement on Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets,"
(SFAS 142) which will be effective for our Company as of the beginning
of fiscal 2002. SFAS 142 requires goodwill and other intangible assets
with indefinite lives no longer be amortized. SFAS 142 further requires
the fair value of goodwill and other intangible assets with indefinite
lives be tested for impairment upon adoption of this statement,
annually and upon the occurrence of certain events, and be written down
to fair value if considered impaired. Our management estimates the
adoption of SFAS 142 will result in the elimination of annual
amortization expense related to goodwill and other intangible assets,
including trademarks, in the amount of approximately $329,468, of
$214,154 net of tax; however, due to the extensive effort required to
comply with SFAS 142, the impact of related impairment, if any, on our
financial position or results of operations has not yet been
determined.
In August, 2001, the FASB issued Statement on Financial
Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," (SFAS 144) which will be effective for
our Company as of the beginning of fiscal 2002. SFAS 144 requires that
long-lived assets to be disposed of by sale be measured at the lower of
carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. SFAS 144 broadens
the reporting of discontinued operations to include all components of
an entity with operations that can be distinguished from the rest of
the entity and that will be eliminated from the ongoing operations of
the entity in a disposal transaction. The impact, if any, of SFAS 144,
on our financial position or results of operations has not yet been
determined.
5
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 (LOSS) 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. Stock options and warrants outstanding
at September 30, 2001 and October 1, 2000 of 902,270 and 889,695
shares, respectively, were not considered in the computation of net
income per common share because the effect of their inclusion would
have been antidilutive.
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: accelerating 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 for the fiscal year ended
December 31, 2000, that attempt to advise interested parties of the
risks and factors that may affect the Company's business.
6
RESULTS OF OPERATIONS
Revenues. The Company's revenues for the third quarter of
fiscal 2001 were up $399,789 or 2.5% to $16.5 million compared with the
same quarter a year ago. Restaurant sales for the third quarter of 2001
were up $360,421 compared with the same quarter a year ago, to $16.1
million. The increase was due to increasing same-restaurant sales that
offset the impact of 26 fewer restaurant week sales than the same
quarter a year ago. Company-owned same-store sales for the quarter
increased 4.3%. Franchise-owned same-store sales for the quarter
increased 4.2%.
On a year-to-date basis, the Company's revenues were up
$100,795 or 0.2% to $48.2 million compared with the same 39-week period
a year ago. Restaurant sales were up $52,703 or 0.1% compared with the
same 39-week period a year ago. The increase was due to increasing
same-store sales that off set the impact of 97 fewer restaurant week
sales. Year-to-date company-owned same-store sales increased 3.1%.
Year-to-date franchise-owned same-store sales increased 3.0%.
Costs and Expenses. Cost of sales, consisting primarily of
food and beverage costs, but also including paper and supplies,
increased as a percentage of restaurant sales in the third quarter of
2001 to 28.1% as compared with 27.8% in the same quarter in fiscal
2000. Cost of sales worsened by 30 basis points primarily due to higher
cheese costs and due to promotions (discounting).
On a year-to-date basis, cost of sales decreased as a
percentage of restaurant sales to 27.8% as compared with 28.1% in the
same 39-week period a year ago. The higher cost of cheese and promotion
discounting were a factor in the third quarter, but on a year-to-date
basis, the improvement was primarily due to menu price increases that
were initiated in the first quarter.
Labor and other related expenses decreased as a percentage of
restaurant sales to 32.5% in the third quarter of 2001 as compared with
33.4% in the same quarter in fiscal year 2000. The decrease was
primarily due to hourly labor efficiencies. The improvement was also
due to last year's closure of under performing restaurants. Offsetting
these improvements were workers' compensation insurance increases of
40.0%.
On a year-to-date basis, labor and other related expenses
decreased as a percentage of restaurant sales 60 basis points to 32.8%
as compared with 33.4% in the same 39-week period a year ago. The
decrease was primarily due to the same factors discussed above.
Restaurant operating expenses, which primarily includes rent,
property taxes, utilities, repair and maintenance, liquor taxes and
advertising, increased as a percentage of restaurant sales to 25.2% in
the third quarter of 2001 as compared with 24.2% in the same quarter in
fiscal 2000. The increase was primarily due to higher utility and
advertising costs.
On a year-to-date basis, restaurant operating expenses
increased as a percentage of restaurant sales 160 basis points to 25.1%
compared with 23.5% for the same 39-week period a year ago. The increase
was primarily due to the same factors discussed above.
General and administrative expenses increased by 2.9%, or
$39,547 from the same quarter in fiscal 2000. The Company accrued
$100,000 in legal expenses during the third quarter. The lawsuit that
gave rise to the legal expenses was settled just after the third
quarter ended. General and administrative expenses were 8.6% of total
revenues for the third quarter and the same quarter a year ago.
On a year-to-date basis, general and administrative expenses
decreased as a percentage of total revenue by 20 basis points to 8.5%
compared with 8.7% the same 39-week period a year ago. The improvement
was primarily due to a reduction in corporate staffing, resulting in a
decrease in compensation costs.
Depreciation and amortization expense increased by $105,691
compared to the same quarter a year ago. This was due to the addition
of a new store in October 2000, four remodels during fiscal 2000
7
and six remodels during fiscal 2001, as well as other fixed asset
additions in the last four quarters. The closed restaurants mentioned
above had relatively low book values of fixed assets so their closure
did not significantly reduce depreciation.
On a year-to-date basis, depreciation and amortization
increased by $237,244 compared to the same 39-week period a year ago.
The increase was primarily due to the same factors discussed above.
Pre-opening costs decreased $42,432 as no new restaurants were
opened during the third quarter. One new restaurant was opened just
after the third quarter ended the same period a year ago.
On a year-to-date basis, pre-opening costs decreased $93,210
as no new restaurants were opened in the first three quarters of 2001.
One new restaurant was opened in the first quarter of fiscal 2000 and
another restaurant was opened just after the third quarter closed.
Other Income (Expense). Net other income (expense) decreased
by $174,420 compared to the same quarter in the last fiscal year. The
decrease was due, in part, to lower interest rates and due to lower
outstanding debt. Long-term debt as of September 30, 2001 was $7.0
million compared with $9.0 million the same quarter a year ago. The
decrease was also due to a $48,000 gain from an insurance settlement
and $13,170 interest income from a tax refund.
On a year-to-date basis, net other income (expense) decreased
in expense by $436,285 compare to the same 39-week period a year ago.
The decrease was due primarily to a $226,000 gain on the sale of one
restaurant. The restaurant, which in 1998 had been sold and leased back
from Franchise Finance of America ("FFCA), was purchased back from FFCA
and then sold to a third party. The restaurant was purchased with
insurance proceeds after it was destroyed by fire. The gain was
primarily the realization of a deferred gain from the 1998 sale-lease
back transaction. The decrease is also due to the same factors
discussed above.
Income Tax Expense. The Company's effective tax rate was 35.0%
in both the third quarter of 2001 and the comparable quarter last year.
The effective tax rate is the same on a year-to-date basis.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $2,404,249 for
the 39-week period ended September 30, 2001, compared to $2,164,590 for
the same period last year. As of September 30, 2001, the Company had a
working capital deficit of $3.2 million, which is common in the
restaurant industry, since restaurant companies do not typically
require a significant investment in either accounts receivable or
inventory.
During the first 39 weeks of 2001, capital expenditures on
property, plant and equipment were approximately $1.4 million as
compared to $2.4 million for the same period in 2000. Capital
expenditures included the remodeling of six restaurants. Additionally,
the Company had cash outlays for necessary replacement of equipment and
leasehold improvements in various older units. The Company estimates
its capital expenditures for the remainder of the fiscal year will be
approximately $250,000.
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. 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 September 30, 2001, the Company had $7.0 million
outstanding on the credit facility and is in full compliance with all
debt covenants. The Company incurred the debt to acquire La Senorita
Restaurants, which closed on April 30, 1999 ($4.2 million), to develop
new restaurants, to remodel existing restaurants, as well as to
accommodate other working capital needs. Excluding two properties
8
listed for sale, the Company anticipates that it will use excess cash
flow to pay down approximately $400,000 of outstanding indebtedness
during the last quarter of the fiscal year.
The Company also has a $9.8 million forward commitment
agreement with Franchise Finance Corporation of America ("FFCA"). At
July 1, 2001, the Company had approximately $9.8 million available
under the FFCA forward commitments.
The Company's management believes that with its forward
commitments with Franchise Finance Corporation of America, along with
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 through the
end of the 2001 fiscal year.
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 amount outstanding at September 30, 2001, a 100 basis point change
in interest rates would change interest expense by $70,000 per annum.
PART II - OTHER INFORMATION
Not Applicable
9
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: November 8, 2001 By: /s/ Curt Glowacki
Curt Glowacki -------------------------
Chief Executive Officer
(Principal Executive Officer)
Dated: November 8, 2001 By: /s/ Andrew J. Dennard
Andrew J. Dennard -------------------------
Vice President, Chief Financial Officer & Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
10