<PAGE> 1
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 OCTOBER 1, 2000
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 October 30, 2000: 3,532,305 SHARES OF COMMON STOCK, PAR VALUE $.01.
<PAGE> 2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS 10/1/00 1/2/00
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 191,683 $ 743,935
Royalties receivable 164,882 42,660
Other receivables 596,209 448,468
Inventory 748,363 701,195
Taxes receivable 154,990 120,427
Prepaid expenses and other current assets 540,275 522,379
------------ ------------
Total current assets 2,396,402 2,579,064
------------ ------------
Property, plant and equipment 25,342,829 23,360,615
Less accumulated depreciation (6,966,307) (5,879,908)
------------ ------------
Net property, plant and equipment 18,376,522 17,480,707
Deferred tax assets 1,206,873 1,390,873
Property held for resale 1,100,000 1,100,000
Other assets 8,251,111 8,492,657
------------ ------------
$ 31,330,908 $ 31,043,301
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ -- $ --
Accounts payable 1,788,519 2,422,503
Accrued sales and liquor taxes 160,528 175,932
Accrued payroll and taxes 1,254,010 877,085
Accrued expenses 613,279 587,116
------------ ------------
Total current liabilities 3,816,336 4,062,636
------------ ------------
Long-term debt, net of current portion 8,810,000 8,963,320
Other liabilities 471,800 372,571
Deferred gain 3,103,689 3,252,440
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 20,537,076
Retained earnings 6,243,549 5,157,931
Deferred compensation (197,869) --
Treasury stock, cost of 1,191,000 and 1,135,000
shares, respectively (11,085,000) (11,350,000)
------------ ------------
Total stockholders' equity 15,129,083 14,392,334
------------ ------------
$ 31,330,908 $ 31,043,301
============ ============
</TABLE>
2
<PAGE> 3
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
13-WEEK 13-WEEK 39-WEEK 39-WEEK
PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
10/01/00 10/03/99 10/01/00 10/03/99
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales $ 15,787,434 $ 15,408,110 $ 47,066,587 $ 41,468,895
Franchise fees and royalties 314,974 343,592 972,550 965,521
Other 25,338 31,041 51,006 149,652
------------ ------------ ------------ ------------
16,127,746 15,782,743 48,090,143 42,584,068
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 4,389,553 4,406,606 13,238,103 11,656,877
Labor 5,265,303 5,174,144 15,723,887 13,986,950
Restaurant operating expenses 3,818,364 3,468,365 11,063,969 9,175,114
General and administrative 1,385,869 1,199,055 4,163,595 3,710,933
Depreciation and amortization 526,984 443,538 1,545,441 1,125,301
Pre-opening costs 42,432 107,571 93,464 244,772
Asset impairments and restaurant closing costs -- -- -- --
------------ ------------ ------------ ------------
15,428,505 14,799,279 45,828,459 39,899,947
Infrequently occuring income (expense) items, net -- -- -- 295,289
------------ ------------ ------------ ------------
Operating income 699,241 983,464 2,261,684 2,979,410
============ ============ ============ ============
Other income (expense):
Interest income -- 3,121 4,416 14,580
Interest expense (223,588) (128,529) (637,226) (334,656)
Other, net 5,969 7,800 11,312 79,416
------------ ------------ ------------ ------------
(217,619) (117,608) (621,498) (240,660)
============ ============ ============ ============
Income before income tax expense 481,622 865,856 1,640,186 2,738,750
Income tax expense 168,568 333,355 554,568 1,053,319
------------ ------------ ------------ ------------
Net income $ 313,054 $ 532,501 $ 1,085,618 $ 1,685,431
============ ============ ============ ============
Basic and diluted income per share $ 0.09 $ 0.15 $ 0.30 $ 0.47
============ ============ ============ ============
Weighted average number of shares (basic and diluted) 3,542,380 3,609,293 3,594,646 3,602,213
============ ============ ============ ============
</TABLE>
3
<PAGE> 4
MEXICAN RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
39-WEEK PERIODS ENDED
10/1/00 10/3/99
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,085,618 $ 1,685,431
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred compensation 26,131 --
Depreciation and amortization 1,545,441 1,125,301
Deferred gain amortization (184,800) (189,709)
Deferred taxes 184,000 --
(Gain) loss on sale of fixed assets 20,789 (519,685)
Asset impairments -- 142,396
Changes in assets and liabilities:
Royalties receivable (122,222) (22,356)
Other receivables (147,741) (277,067)
Income tax receivable/payable (34,563) 540,679
Inventory (47,168) (213,146)
Prepaid and other current assets (35,280) (125,800)
Other assets (17,888) (137,835)
Accounts payable (633,984) 502,061
Accrued expenses and other liabilities 387,684 248,561
Other liabilities 138,573 --
----------- -----------
Total adjustments 1,078,972 1,073,400
----------- -----------
Net cash provided by operating activities 2,164,590 2,758,831
----------- -----------
Cash flows from investing activities:
Payment for purchase of acquisition, net of cash acquired -- (4,132,945)
Purchase of property, plant and equipment (2,390,921) (5,286,273)
Proceeds from sale of property, plant and equipment 202,399 1,186,609
----------- -----------
Net cash used in investing activities (2,188,522) (8,232,609)
----------- -----------
Cash flows from financing activities:
Net borrowings under line of credit (153,320) 5,200,000
Purchase of treasury stock (375,000) --
----------- -----------
Net cash provided by (used in) financing activities (528,320) 5,200,000
----------- -----------
Decrease in cash and cash equivalents (552,252) (273,778)
----------- -----------
Cash and cash equivalents at beginning of period 743,935 462,847
----------- -----------
Cash and cash equivalents at end of period $ 191,683 $ 189,069
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest $ 625,689 $ 345,655
Income Taxes $ 414,960 $ 679,463
Non-cash investing and financing activity:
Issuance of restricted stock $ 224,000 $ --
</TABLE>
4
<PAGE> 5
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 October 1, 2000, and the consolidated
statements of income and cash flows for the 39-week and 13-week
periods ended October 1, 2000 and October 3, 1999. The consolidated
statements of income for the 39-week and 13-week periods ended October
1, 2000 is not necessarily indicative of the results to be expected
for the full year.
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. ACQUISITION OF LA SENORITA RESTAURANTS
On April 30, 1999, the Company closed on its acquisition of
La Senorita Restaurants. The Company acquired the operations of five
company-owned restaurants, a partnership interest in a sixth
restaurant, and the rights to the La Senorita franchise system. The
purchase price was approximately $4.1 million in cash which was
financed under the Company's credit facility.
The table below presents pro forma income statement
information for 1999 as if the Company had purchased La Senorita at
the beginning of the 1999 fiscal year. Pro forma adjustments are to
remove compensation that is non-continuing, amortize the resulting
goodwill over 15 years, reflect net interest expense on the debt
resulting from the acquisition and record additional income tax at an
effective rate of 38.5% on the combined income of the Company and La
Senorita. This acquisition was accounted for as a purchase.
<TABLE>
<CAPTION>
39-WEEKS
ENDED
10/03/99
<S> <C>
Revenues.................................. $44,947,471
Net Income................................ $ 1,750,982
Diluted income per share.................. $ 0.49
</TABLE>
The pro forma information does not purport to be indicative
of results of operations that would have occurred had the acquisition
been consummated on the date indicated or future results of
operations.
Allocation of purchase price for La Senorita is as follows:
<TABLE>
<S> <C>
Working Capital...................................... $ 37,000
Furniture, Fixtures & Equipment...................... $ 1,216,000
Goodwill............................................. $ 2,830,000
Other................................................ $ 50,000
-----------
$ 4,133,000
</TABLE>
5
<PAGE> 6
4. 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 October 1, 2000 and October 3, 1999 of 889,695 and
930,270 shares, respectively, were not considered in the computation
of net income per common share because the effect of their inclusion
would have been antidilutive.
5. ACQUISITION OF TREASURY STOCK
On June 1, 2000 the Company repurchased 120,000 of its common
shares in negotiated transactions with non-affiliated shareholders for
an aggregate consideration of $375,000. The repurchased shares were
placed in the treasury for general corporate purposes.
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 January 2, 2000, 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 third quarter of
fiscal 2000 were up $345,004 or 2.2% to $16.1 million compared with
the same quarter a year ago. Restaurant sales for the third quarter of
2000 were up $379,325 compared with the same quarter a year ago, to
$15.8 million. One new restaurant was opened, one restaurant was
converted from a Casa Ole to a Tortuga Coastal Cantina and two
restaurants were closed since the end of the third quarter of fiscal
1999. Total system sales at restaurants operating in both fiscal
quarters (same-stores) increased 2.9% over last year's same quarter.
Company-owned same-store sales for the quarter increased 2.7%.
Franchise-owned same-stores sales for the quarter increased 3.1%.
Company-owned average weekly unit sales decreased 0.2%.
On a year-to-date basis, the Company's revenues were up $5.5
million or 12.9% to $48.1 million compared with the same quarter a
year ago. Year-to-date restaurant sales were up $5.6 million compared
with the same period a year ago, to $47.1 million. Year-to-date total
system same-store sales were up 2.5%. Company-owned same-store sales
for the year-to-date period were up 2.9%. Franchised-owned same-store
sales for the year-to-date period were up 2.1%. Year-to-date
company-owned average weekly unit sales increased 4.9%.
6
<PAGE> 7
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 third quarter of
2000 to 27.8% as compared with 28.6% in the same quarter in 1999. The
improvement was primarily due to a menu price increase of
approximately 2.0% (across all concepts). The improvement was also due
to the maturing of Tortuga Coastal Cantina restaurants that were
opened last year. All food cost components were down compared with the
same period a year ago except for meat and poultry, which increased 50
basis points. Paper and supply cost increased 20 basis points on a
comparable basis.
On a year-to-date basis, cost of sales remained at 28.1% of
restaurant sales compared with the same period a year ago.
Labor and other related expenses decreased as a percentage of
restaurant sales by 20 basis points to 33.4% in the third quarter of
2000 as compared with 33.6% in the same quarter in 1999. The decrease
was primarily due to La Senorita restaurants, improving 180 basis
points, and the new Tortuga Coastal Cantina restaurants (that opened
during 1999), improving 350 basis points. The improvement was also due
to last year's closure of under performing restaurants. Offsetting
these improvements were workers compensation and group insurance
expenses, which increased on a comparable basis.
On a year-to-date basis, labor and other related expenses
decreased 30 basis points to 33.4% as compared with 33.7% in the same
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 by 170 basis
points to 24.2% in the third quarter of 2000 as compared with 22.5% in
the same quarter in 1999. The increase was primarily due to increased
advertising, utilities, property taxes, insurance and repair and
maintenance expenses.
On a year-to-date basis, restaurant operating expenses
increased 140 basis points to 23.5% as compared with 22.1% in the same
period a year ago. The increase was primarily due to the same factors
discussed above.
General and administrative expenses increased as a percentage
of total revenues by 100 basis points to 8.6% in the third quarter of
2000 as compared with 7.6% in the same quarter in 1999. The third
quarter a year ago included an adjustment to accrued bonuses.
Exclusive of that adjustment, general and administrative expenses
would have been 8.5% the third quarter a year ago.
On a year-to date basis, general and administrative expenses
remained at 8.7% of total revenues compared with the same period a
year ago.
Depreciation and amortization expense increased as a
percentage of total revenues by 50 basis points to 3.3% in the third
quarter of 2000 as compared with 2.8% in the same quarter in 1999. The
increase was primarily due to the La Senorita acquisition. Further,
one new restaurant and three remodeling of restaurants were opened
since the end of the third quarter of fiscal 1999.
On a year-to-date basis, depreciation and amortization
increased as a percentage of total revenue by 60 basis points to 3.2 %
compared with 2.6% in the same period a year ago. The increase was
primarily due to the same factors discussed above.
Pre-opening costs decreased as a percentage of total revenue
by 40 basis points to 0.3% in the third quarter of 2000 compared with
0.7% in the same quarter in 1999. One restaurant was opened just after
the third quarter but pre-opening costs were incurred in the third
quarter.
The Company recorded no asset impairments during the third
quarter of fiscal year 2000. During the second quarter a year ago, the
Company recorded an impairment provision in the amount of $142,396
relating to the impairment of assets at closed restaurants.
7
<PAGE> 8
There were no infrequently occuring (income) and expense
items during the current fiscal year. Last year's infrequently
occuring (income) and expense consist of two items that increase
operating income in the aggregate by $437,684. The Company sold one
restaurant to the State of Texas (by eminent domain) for $1,150,000,
resulting in a gain of $519,685. As part of the Company's decision to
consolidate with a single outsourcing firm its accounting process, the
Company settled its old outsourcing accounting contract for $82,000.
Other Income (Expense). Net other income (expense) increased
as a percentage of total revenue by 60 basis points to 1.3% in the
third quarter of 2000 as compared with 0.7% in the same quarter in
1999. The increase was primarily due to interest expense, which
increased $95,209 on a comparable basis. Additional interest expense
has been incurred due to the debt associated with new restaurant
development and the acquisition of La Senorita.
On a year-to-date basis, net other income (expense) increased
as a percentage of total revenue by 70 basis points to 1.3% compared
with 0.6% in the same period a year ago. The increase was primarily
due to the same factors discussed above.
Income Tax Expense. The Company's effective tax rate for the
third quarter 2000 was 35.0% compared with 38.5% the same quarter a
year ago. The decrease in the effective tax rate is primarily due to
the Company's utilization of the Workers Opportunity Tax Credit.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $2.2 million
for the 39-week period ended October 1, 2000, compared to $2.8 million
for the same period last year. As of October 1, 2000, the Company had
a working capital deficit of $1.5 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 2000, capital expenditures on
property, plant and equipment were approximately $2.4 million as
compared to $5.2 million for the same period in 1999. Capital
expenditures included the remodeling of three restaurants. During the
third quarter, the Company began remodeling certain of the La Senorita
restaurants. One previously closed restaurant was reopened after a
concept conversion from a Casa Ole to a Tortuga Coastal Cantina. One
new restaurant was opened just after the third quarter ended and no
new construction is currently underway. 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 $0.6 million.
The Company has a $10.0 million credit facility with Bank of
America. The interest rate is either the prime rate or LIBOR plus a
range of stipulated percentages. Accordingly, the Company is impacted
by changes in the prime rate and LIBOR. The Company is subject to a
non-use fee (ranging from 0.25% to 0.5%) on the unused portion of the
revolver from the date of the credit agreement. As of October 1, 2000,
the Company had $8.8 million outstanding on the revolving line of
credit. The acquisition of La Senorita, which closed on April 30,
1999, used approximately $4.0 million of the revolving line. The
balance was used for new restaurant construction, remodeling and other
working capital needs. The Company anticipates that debt will decline
approximately $0.5 million by the end of this fiscal year. The
maturity date of the credit facility is July 15, 2002; however, the
credit facility will be reduced by $500,000 on December 31, 2000 and
$1.0 million on December 31, 2001.
The Company also has a $9.8 million forward commitment
agreement with Franchise Finance Corporation of America ("FFCA"). At
October 1, 2000, the Company had approximately $9.8 million available
under the FFCA forward commitments.
The Company's management believes that the forward
commitments with FFCA, along with operating cash flow and the
Company's revolving line of credit with Bank of America, will be
8
<PAGE> 9
sufficient to meet its operating requirements and to finance its
expansion plans (exclusive of any acquisitions) through the end of the
2000 fiscal 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 will adopt SFAS 133 beginning in fiscal year 2001. The Company
does not expect the adoption of SFAS 133 to have a material effect on
its 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.
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 October 1, 2000, a 1% change in
interest rates would change interest expense by $22,000.
9
<PAGE> 10
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit
Number Document Description
------- --------------------
27.1 Financial Data Schedule
10
<PAGE> 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: October 27, 2000 By: /s/ Curt Glowacki
--------------------
Curt Glowacki
Chief Executive Officer
(Principal Executive Officer)
Dated: October 27, 2000 By: /s/ Andrew J. Dennard
---------------------
Andrew J. Dennard
Vice President, Chief Financial Officer & Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
11
<PAGE> 12
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: October 27, 2000 By:
Curt Glowacki ---------------------
Chief Executive Officer
(Principal Executive Officer)
Dated: October 27, 2000 By:
Andrew J. Dennard ---------------------
Vice President, Chief Financial Officer & Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
12
<PAGE> 13
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
