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UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended JULY 1, 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 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
--- ---
Number of shares outstanding of each of the issuer's classes of common stock, as
of August 1, 2001: 3,522,905 SHARES OF COMMON STOCK, PAR VALUE $.01.
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS 7/1/01 12/31/00
------------ ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 517,287 $ 636,334
Royalties receivable 43,757 66,798
Other receivables 863,975 611,603
Inventory 649,532 718,629
Taxes receivable 0 257,080
Prepaid expenses and other current assets 1,088,516 529,830
------------ ------------
Total current assets 3,163,067 2,820,274
------------ ------------
Property, plant and equipment 25,988,030 25,550,871
Less accumulated depreciation (8,051,984) (7,339,223)
------------ ------------
Net property, plant and equipment 17,936,046 18,211,648
Deferred tax assets 986,432 1,167,661
Property held for resale 1,100,000 1,100,000
Other assets 8,471,211 8,209,243
------------ ------------
$ 31,656,756 $ 31,508,826
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 1,000,000 $ --
Accounts payable 2,781,392 2,953,649
Income taxes payable 101,321
Accrued sales and liquor taxes 490,767 452,617
Accrued payroll and taxes 1,037,546 1,006,457
Accrued expenses 599,409 327,390
------------ ------------
Total current liabilities 6,010,435 4,740,113
------------ ------------
Long-term debt, net of current portion 6,772,729 8,300,000
Other liabilities 604,922 537,219
Deferred gain 2,621,853 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 6,791,999 6,025,121
Deferred compensation (150,867) (171,519)
Treasury stock, cost of 1,191,000 and 1,135,000 shares, respectively (11,162,718) (11,133,343)
------------ ------------
Total stockholders' equity 15,646,817 14,888,662
------------ ------------
$ 31,656,756 $ 31,508,826
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MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
13-WEEK 13-WEEK 26-WEEK 26-WEEK
PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
07/01/01 7/02/00 07/01/01 07/02/00
------------ ------------ ------------ ------------
Revenues:
Restaurant sales $ 15,520,414 $ 15,733,686 $ 30,971,435 $ 31,279,153
Franchise fees and royalties 299,995 315,737 606,486 657,576
Other 64,993 20,266 85,482 25,668
------------ ------------ ------------ ------------
15,885,402 16,069,689 31,663,403 31,962,397
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 4,300,098 4,438,103 8,549,635 8,848,550
Labor 5,104,894 5,244,525 10,216,473 10,458,584
Restaurant operating expenses 3,981,999 3,689,235 7,766,718 7,245,605
General and administrative 1,363,345 1,403,133 2,658,595 2,777,726
Depreciation and amortization 576,417 522,457 1,150,010 1,018,457
Pre-opening costs -- 131 254 51,032
------------ ------------ ------------ ------------
15,326,753 15,297,584 30,341,685 30,399,954
------------ ------------ ------------ ------------
Operating income 558,649 772,105 1,321,718 1,562,443
------------ ------------ ------------ ------------
Other income (expense):
Interest income 3,372 -- 14,046 4,416
Interest expense (219,116) (208,740) (410,868) (413,638)
Other, net 245,040 6,614 254,808 5,343
------------ ------------ ------------ ------------
29,296 (202,126) (142,014) (403,879)
------------ ------------ ------------ ------------
Income before income tax expense 587,945 569,979 1,179,704 1,158,564
Income tax expense 205,710 180,000 412,826 386,000
------------ ------------ ------------ ------------
Net income $ 382,235 $ 389,979 $ 766,878 $ 772,564
============ ============ ============ ============
Basic and diluted income per share $ 0.11 $ 0.11 $ 0.22 $ 0.21
============ ============ ============ ============
Weighted average number of shares (basic and diluted) 3,530,718 3,620,041 3,529,024 3,620,881
============ ============ ============ ============
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MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
26-WEEK PERIODS ENDED
7/1/01 7/2/00
------------ ------------
Cash flows from operating activities:
Net income $ 766,878 $ 772,564
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred compensation 20,652 14,932
Depreciation and amortization 1,150,010 1,018,457
Deferred gain amortization (117,557) (125,746)
Deferred taxes 181,229 123,000
Loss (gain) on sale of property, plant & equipment (224,656) 9,671
Changes in assets and liabilities:
Royalties receivable 23,041 (127,942)
Other receivables (252,372) (237,679)
Income tax receivable/payable 358,401 (100,266)
Inventory 69,097 (55,292)
Prepaid and other current assets (601,273) (66,141)
Other assets (191,973) (26,652)
Accounts payable (172,257) (765,889)
Accrued expenses and other liabilities 341,258 348,463
Other liabilities 95,657 105,518
------------ ------------
Total adjustments 679,257 114,434
------------ ------------
Net cash provided by operating activities 1,446,135 886,998
------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment (1,117,274) (1,493,527)
Proceeds from sale of property, plant and equipment 108,738 176,399
------------ ------------
Net cash used in investing activities (1,008,536) (1,317,128)
------------ ------------
Cash flows from financing activities:
Net activity under line of credit (527,271) 346,680
Purchase of treasury stock (29,375) (375,000)
------------ ------------
Net cash used in financing activities (556,646) (28,320)
------------ ------------
------------ ------------
Increase (decrease) in cash and cash equivalents (119,047) (458,450)
------------ ------------
Cash and cash equivalents at beginning of period 636,334 743,935
------------ ------------
Cash and cash equivalents at end of period $ 517,287 $ 285,485
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest $ 396,621 $ 404,695
Income Taxes $ 97,597 $ 364,960
Non-cash investing and financing activity:
Sale of property for note receivable $ 244,109 $ --
Issuance of restricted stock $ -- $ 224,000
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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 July 1, 2001, and the consolidated statements
of income and cash flows for the 26-week and 13-week periods ended July
1, 2001 and July 2, 2000. The consolidated statements of income for the
26-week and 13-week period ended July 1, 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 No. 141, Business
Combinations, and Statement No. 142, Goodwill and Other Intangible
Assets. Statement 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001 as
well as all purchase method business combinations completed after June
30, 2001. Statement 141 also specifies criteria intangible assets
acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill, noting that any purchase
price allocable to an assembled workforce may not be accounted for
separately. Statement 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead
tested for impairment at least annually in accordance with the
provisions of Statement 142. Statement 142 will also require that
intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of.
The Company is required to adopt the provisions of Statement
141 immediately, except with regard to business combinations initiated
prior to July 1, 2001, which it expects to account for using the
pooling-of-interests method, and Statement 142 effective January 1,
2002.
As of the date of adoption, the Company expects to have
unamortized goodwill in the amount of $7.4 million, no unamortized
identifiable intangible assets and no unamortized negative goodwill,
all of which will be subject to the transition provisions of Statements
141 and 142. Amortization expense related to goodwill was $313,507 and
$155,884 for the year ended December 31, 2000 and the six months ended
July 1, 2001, respectively. Because of the extensive effort needed to
comply with adopting Statements 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these Statements on the
Company's financial statements at the date of this report, including
whether any transitional impairment losses will be required to be
recognized as the cumulative effect of a change in accounting
principle.
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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 July 1, 2001 and July 2, 2000 of 900,170 and 909,270 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.
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RESULTS OF OPERATIONS
Revenues. The Company's revenues for the second quarter of
fiscal 2001 were down $184,287 or 1.1% to $15.9 million compared with
the same quarter a year ago. Restaurant sales for the second quarter of
2001 were down $213,272 compared with the same quarter a year ago, to
$15.5 million. Restaurant sales declined due to three net store
closures and the temporary closure of another store due to tropical
storm damage. Company-owned same-store sales for the quarter increased
2.0%. Franchise-owned same-store sales for the quarter increased 3.1%.
On a year-to-date basis, the Company's revenues were down
$298,994 or 0.9% to $31.66 million compared with the same 26-week
period a year ago. Restaurant sales were down $307,718 or 1.0% compared
with the same 26-week period a year ago. Restaurant sales declined due
to three net store closures and the temporary closure of another store
due to tropical storm damage. Year-to-date company-owned same-store
sales increased 2.4%. Year-to-date franchise-owned same-store sales
increased 2.2%.
Costs and Expenses. Cost of sales, consisting primarily of
food and beverage costs, but also including paper and supplies,
decreased as a percentage of restaurant sales in the second quarter of
2001 to 27.7% as compared with 28.2% in the same quarter in fiscal
2000. The improvement was primarily due to a menu price increase across
all concepts. This was partly offset by small increases in cheese
prices.
On a year-to-date basis, cost of sales decreased as a
percentage of restaurant sales to 27.6% as compared with 28.3% in the
same 26-week period a year ago. The decrease was primarily due to the
same factors discussed above.
Labor and other related expenses decreased as a percentage of
restaurant sales to 32.9% in the second quarter of 2001 as compared
with 33.3% in the same quarter in fiscal year 2000. The decrease was
primarily due to hourly labor efficiencies, especially at the Tortuga
Coastal Cantina restaurants. The improvement was also partly due to
last year's closure of under performing restaurants. Offsetting these
improvements were workers' compensation insurance increases of 140.0%.
On a year-to-date basis, labor and other related expenses
decreased as a percentage of restaurant sales 40 basis points to 33.0%
as compared with 33.4% in the same 26-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 25.7% in
the second quarter of 2001 as compared with 23.4% 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 190 basis points to 25.1%
compared with 23.2% for the same 26-week period a year ago. The increase
was primarily due to the same factors discussed above.
General and administrative expenses decreased by 2.8%, or
$39,788 from the same quarter in fiscal 2000. The decrease was due
primarily to a reduction in corporate staffing, resulting in a decrease
in compensation costs. In the second quarter the Company made
additional corporate staff cuts and accrued $100,000 in severance.
General and administrative expenses were 8.6% of total revenues in the
second quarter of fiscal 2001 compared to 8.7% in the first quarter of
fiscal 2000.
On a year-to-date basis, general and administrative expenses
decreased as a percentage of total revenue by 30 basis points to 8.4%
compared with 8.7% the same 26-week period a year ago. The decrease was
primarily due to the same factors discussed above.
Depreciation and amortization expense increased by $53,960
compared to the same quarter in the last fiscal year. This was due to
the addition of two new stores in February and October 2000, four
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remodels during fiscal 2000 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 $131,553 compared to the same 26-week period a year ago.
The increase was primarily due to the same factors discussed above.
On a year-to-date basis, pre-opening costs decreased $50,778
as no new restaurants were opened in the first half of 2001. One new
restaurant was opened in the first quarter of fiscal 2000.
Other Income (Expense). Net other income (expense) increased
from an expense to income by $231,422 compared to the same quarter in
the last fiscal year. The increase 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 average debt balance was 10.7% lower than the balance in
the comparable quarter last year. However, interest expense was
comparable with the same quarter a year ago due to $40,500 of Bank of
America covenant waiver fees.
On a year-to-date basis, net other income (expense) decreased
in expense by $261,865 compare to the same 26-week period a year ago
due to the same factors discussed above.
Income Tax Expense. The Company's effective tax rate was 35.0%
in both the second 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 $1,446,135 for
the 26-week period ended July 1, 2001, compared to $886,998 for the
same period last year. As of July 1, 2001, the Company had a working
capital deficit of $2.8 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 26 weeks of 2001, capital expenditures on
property, plant and equipment were approximately $1.1 million as
compared to $1.5 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 $550,000.
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 July 1, 2001, the Company had $7.8 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
listed for sale, the Company anticipates that it will use excess cash
flow to pay down approximately $1.0 million of outstanding indebtedness
during the second half of the fiscal year.
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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 July 1, 2001, a 100 basis point change in
interest rates would change interest expense by $78,000 per annum.
PART II - OTHER INFORMATION
Not Applicable
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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 15, 2001 By: /s/ Curt Glowacki
--------------------------
Curt Glowacki
Chief Executive Officer
(Principal Executive Officer)
Dated: August 15, 2001 By: /s/ Andrew J. Dennard
--------------------------
Andrew J. Dennard
Vice President, Chief Financial Officer & Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
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