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 MARCH 31, 2002
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 April 22, 2002: 3,504,105 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)
ASSETS 3/31/2002 12/30/2001
------------- -------------
Current assets:
Cash and cash equivalents $ 304,486 $ 311,423
Royalties receivable 113,505 113,329
Other receivables 695,043 554,211
Inventory 610,226 654,237
Taxes receivable 310,016 333,038
Prepaid expenses and other current assets 1,014,409 682,058
------------- -------------
Total current assets 3,047,685 2,648,296
------------- -------------
Property, plant and equipment 25,845,820 25,500,483
Less accumulated depreciation (9,232,564) (8,749,475)
------------- -------------
Net property, plant and equipment 16,613,256 16,751,008
Deferred tax assets 911,144 1,145,360
Property held for resale 968,487 1,399,672
Other assets 8,519,765 8,122,278
------------- -------------
$ 30,060,337 $ 30,066,614
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 1,000,000 $ 1,000,000
Accounts payable 2,539,674 1,947,973
Accrued sales and liquor taxes 487,617 464,495
Accrued payroll and taxes 745,463 1,123,083
Accrued expenses 666,930 1,266,786
------------- -------------
Total current liabilities 5,439,684 5,802,337
------------- -------------
Long-term debt, net of current portion 5,272,729 5,572,729
Other liabilities 810,042 580,696
Deferred gain 2,341,604 2,393,639
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 7,371,677 6,873,797
Deferred compensation (119,889) (130,215)
Treasury stock, cost of 1,181,600 and 1,200,400 shares, respectively (11,223,913) (11,194,772)
------------- -------------
Total stockholders' equity 16,196,278 15,717,213
------------- -------------
$ 30,060,337 $ 30,066,614
============= =============
2
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
13-WEEK 13-WEEK
PERIOD ENDED PERIOD ENDED
03/31/02 04/01/01
------------- -------------
Revenues:
Restaurant sales $ 14,984,897 $ 15,451,021
Franchise fees and royalties 314,931 306,491
Other 6,426 20,489
------------- -------------
15,306,254 15,778,001
------------- -------------
Costs and expenses:
Cost of sales 4,046,195 4,249,537
Labor 4,881,552 5,111,579
Restaurant operating expenses 3,657,718 3,784,719
General and administrative 1,347,757 1,295,250
Depreciation and amortization 542,417 573,593
Pre-opening costs -- 254
------------- -------------
14,475,639 15,014,932
------------- -------------
Operating income 830,615 763,069
------------- -------------
Other income (expense):
Interest income 9,842 10,674
Interest expense (119,324) (191,752)
Other, net 21,971 9,768
------------- -------------
(87,511) (171,310)
------------- -------------
Income before income tax expense 743,104 591,759
Income tax expense 245,224 207,116
------------- -------------
Net income $ 497,880 $ 384,643
============= =============
Basic and diluted income per share $ 0.14 $ 0.11
============= =============
Weighted average number of shares (basic and diluted) 3,556,285 3,530,718
============= =============
3
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
13-WEEK PERIODS ENDED
3/31/2002 4/1/2001
------------- -------------
Cash flows from operating activities:
Net income $ 497,880 $ 384,643
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred compensation 10,326 10,326
Depreciation and amortization 542,417 573,593
Deferred gain amortization (52,035) (60,857)
Deferred taxes 234,216 59,205
Loss (gain) on sale of property, plant & equipment -- 1,368
Changes in assets and liabilities:
Royalties receivable (176) (2,544)
Other receivables (118,248) (61,915)
Income tax receivable/payable 23,022 166,797
Inventory 44,011 127,410
Prepaid and other current assets (326,528) (182,010)
Other assets (50,984) (9,886)
Accounts payable 591,701 (667,731)
Accrued expenses and other liabilites (997,318) 814,362
Other liabilities 230,266 49,150
------------- -------------
Total adjustments 130,670 817,268
------------- -------------
Net cash provided by operating activities 628,550 1,201,911
------------- -------------
Cash flows from investing activities:
Purchase of property, plant and equipment (386,299) (492,640)
Proceeds from sale of property, plant and equipment 78,000 --
Payment received on note for sale of property 1,953 --
------------- -------------
Net cash used in investing activities (306,346) (492,640)
------------- -------------
Cash flows from financing activities:
Net borrowings (payments) under line of credit (300,000) (200,000)
Purchase of treasury stock (29,141) (29,375)
------------- -------------
Net cash used in financing activities (329,141) (229,375)
------------- -------------
Increase (decrease) in cash and cash equivalents (6,937) 479,896
------------- -------------
Cash and cash equivalents at beginning of period 311,423 636,334
------------- -------------
Cash and cash equivalents at end of period $ 304,486 $ 1,116,230
============= =============
Supplemental disclosure of cash flow information: Cash paid during the period:
Interest $ 85,213 $ 93,161
Income Taxes $ -- $ 7,375
Non-cash investing and financing activity:
Sale of property for note receivable $ 398,047 $ 244,109
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 March 31, 2002, and the consolidated
statements of income and cash flows for the 13-week periods ended March
31, 2002 and April 1, 2001. The consolidated statements of income for
the 13-week period ended March 31, 2002 is not necessarily indicative
of the results to be expected for the full year.
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 became effective for the Company at 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. The adoption of SFAS 142 resulted
in the elimination of annual amortization expense related to goodwill
in the amount of approximately $329,468. If SFAS had been adopted the
first quarter one year ago, adjusted net income would have been
$438,182 or $0.12 per share. Our management has begun the process of
evaluating goodwill as required by SFAS 142. Although preliminary
indications are that no impairment of goodwill exists, further
evaluation will be conducted over the balance of the second quarter of
fiscal year 2002.
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 became effective for
the Company at 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. There has been no impact on our
financial position or results of operations due to the adoption of SFAS
144.
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. As of March 31, 2002 and April 1, 2001,
the Company had 1,066,770 and 949,570 options and warrants outstanding,
respectively. Such stock options and warrants have the effect of
increasing basic weighted average shares outstanding by 51,457 and
4,611 for the 13-weeks ended March 31, 2002 and April 1, 2001,
respectively.
5
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: change in 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 30, 2001, 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 first quarter of
fiscal 2002 were down $471,747 or 3.0% to $15.3 million compared with
the same quarter one year ago. Restaurant sales for the first quarter
of fiscal 2002 were down $466,124 to $15.0 million compared with the
same quarter in fiscal 2001. The decline was primarily due to the
December 30, 2001 closure of three under-performing restaurants in
Boise, Idaho. In the fiscal quarter ended April 1, 2001, the three
restaurants located in Boise, Idaho accounted for $430,216 in
restaurant sales. After the end of the first quarter of fiscal year
2001, in addition to the three restaurants that were closed, one
restaurant was acquired from a franchisee. Total system sales at
restaurants operating in both fiscal quarters ("same-stores") increased
1.4%. Company-owned same-store sales for the quarter decreased 1.4%.
The decrease was due to the timing of Easter weekend, which typically
features soft sales, and bad weather in our northern restaurants.
Easter occurred in the second quarter one year ago but fell in the
first quarter in fiscal 2002. Franchise-owned same-store sales for the
quarter increased 5.0%.
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 first quarter of
fiscal 2002 to 27.0% as compared with 27.5% in the same quarter in
fiscal 2001. The improvement was due in part to the closure of
under-performing restaurants and also due to improved buying
efficiencies.
Labor and other related expenses decreased as a percentage of
restaurant sales to 32.6% in the first quarter of fiscal 2002 as
compared with 33.1% in the same quarter in fiscal 2001. The improvement
was partly due to the closure of under-performing restaurants. The
improvement was also due to labor efficiencies gained through increased
same-store sales at Casa Ole and La Senorita.
Restaurant operating expenses, which primarily includes rent,
property taxes, utilities, repair and maintenance, liquor taxes and
advertising, decreased as a percentage of restaurant sales to 24.4% in
the first quarter of fiscal 2002 as compared with 24.5% in the same
quarter in fiscal 2001. The improvement was due to lower utility and
rent expenses, offset by higher advertising expenses.
General and administrative expenses increased as a percentage
of total sales to 8.8% in the first quarter of fiscal 2002 as compared
with 8.2% in the same quarter in fiscal year 2001. The increase was
due, in part, to a lower revenue base as the Company closed
under-performing restaurants. The increase was also due to higher bonus
and legal and professional expenses.
Depreciation and amortization expense decreased as a
percentage of total sales to 3.5% in the first quarter of fiscal 2002
compared with 3.6% the same quarter in fiscal 2001. The decrease was
due to the adoption of SFAS 142, "Goodwill and Other Intangible
Assets," which requires goodwill and other intangible assets with
indefinite lives no longer be amortized. During the first quarter of
fiscal year 2001, amortization expense was $82,367.
The Company did not open any new restaurants in the first
quarter of 2002; consequently, there were no pre-opening costs.
Other Income (Expense). For the first quarter of fiscal 2002,
interest expense decreased by $72,428 compared with the first quarter
in fiscal 2001. The decrease was due to a decline in debt outstanding
and a decline in interest rates. Total debt as of March 31, 2002 was
$6.3 million compared with $8.1 million as of April 1, 2001.
Income Tax Expense. For the first quarter of fiscal 2002, the
Company's effective tax rate was 33.0% as compared with 35.0% in the
same quarter in fiscal 2001. The decrease was due to the utilization of
tax credit carryforwards and the reversal of timing differences
associated with restaurant closures in fiscal year 2001.
7
LIQUIDITY AND CAPITAL RESOURCES
The Company met its first quarter of fiscal 2002 capital
requirements with cash generated by operations. As of March 31, 2002,
the Company's operations generated approximately $628,550 in cash, as
compared with $1,201,911 in the first quarter one year ago. Cash flow
generated from operations in the first quarter one year ago was
unusually high due to an insurance settlement from a restaurant
destroyed by fire. As of March 31, 2002, the Company had a working
capital deficit of approximately $2.4 million. 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 new restaurant developments or acquisitions and remodeling of older
units. During the first quarter of fiscal 2002, capital expenditures on
property, plant and equipment were approximately $386,299 as compared
to $492,640 for the first quarter of fiscal 2001. Capital expenditures
included the remodeling of two restaurants. The Company also sold a
previously closed restaurant for $78,000 in cash and a note for
$400,000, for a total of $478,000. Additionally, the Company had cash
outlays for necessary replacement of equipment and leasehold
improvements in various older units. There are no new restaurants
planned for fiscal year 2002. The Company does plan to modestly remodel
three more restaurants during the balance of fiscal year 2002. The
Company estimates its capital expenditures for the remainder of the
fiscal year will be approximately $1.2 million.
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 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. 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
March 31, 2002, the Company had $6.3 million outstanding on the credit
facility and is in full compliance with all debt covenants. Over the
last several years, the Company's debt was incurred to acquire
Monterey's Acquisition Corp, which was acquired in July 1997, La
Senorita Restaurants, which was acquired in April 30, 1999, to develop
new restaurants, to remodel existing restaurants, as well as to
accommodate other working capital needs. The Company paid down debt
$300,000 during the first quarter of fiscal 2002, and presently
anticipates that it will use excess cash flow during the remainder of
fiscal 2002 to pay down debt approximately $1.7 million more (for a
total of $2.0 million for fiscal year 2002).
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 2002 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
paragraph.
At its April meeting, the Company's Board of Directors
authorized management to implement a limited stock repurchase program
in a manner permitted under its bank financing agreement. Initially,
the Company may purchase from time to time up to a total of $350,000 of
its outstanding common stock. Any shares acquired would be held for
general corporate purposes, especially to offset the dilution effect on
shareholders from the exercise of stock options.
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 March 31, 2002, a 1% change in interest rates
would change interest expense by $15,750.
8
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Document Description
------ --------------------
99.1 Press release dated April 29, 2002,
announced the Board of Directors
authorization of a limited stock repurchase
program.
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: May 3, 2002 By: /s/ Curt Glowacki
Curt Glowacki -------------------------
Chief Executive Officer
(Principal Executive Officer)
Dated: May 3, 2002 By: /s/ Andrew J. Dennard
Andrew J. Dennard -------------------------
Senior Vice President,
Chief Financial Officer & Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
10
EXHIBIT INDEX
Exhibit
Number Document Description
------- --------------------
99.1 Press release dated April 29, 2002, announced the Board of
Directors authorization of a limited stock repurchase program.