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UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JANUARY 2, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates of the
registrant, based on the sale trade price of the Common Stock as reported by the
Nasdaq National Market on March 20, 2000 was $6,489,372. For purposes of this
computation, all officers, directors and 10% beneficial owners of the registrant
are deemed to be affiliates. Such determination should not be deemed an
admission that such officers, directors or 10% beneficial owners are, in fact,
affiliates of the registrant. Number of shares outstanding of each of the
issuer's classes of common stock, as of March 20, 2000: 3,597,705 shares of
common stock, par value $.01.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive proxy statement in connection with the Annual Meeting
of Shareholders to be held May 23, 2000, to be filed with the Commission
pursuant to Regulation 14A, is incorporated by reference into Part III of this
report.
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PART 1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K under "Item 1. Business", "Item 3.
Legal Proceedings", "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other facts which may cause the actual results,
performance or achievements of Mexican Restaurants, Inc. (the "Company"), its
area developers, market partners, franchisees and restaurants 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: general economic and business conditions; competition; success of
operating initiatives; development and operating costs; area developers'
adherence to development schedules; advertising and promotional efforts; brand
awareness; adverse publicity; acceptance of new product offerings; availability,
locations and terms of sites for store development; changes in business strategy
or development plans; quality of management; availability, terms and development
of capital; business abilities and judgment of personnel; availability of
qualified personnel; food, labor and employee benefit costs; changes in, or the
failure to comply with government regulations; regional weather conditions;
construction schedules; and other factors referenced in the Form 10-K. The use
in this Form 10-K of such words 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. The
success of the Company is dependent on the efforts of the Company, its employees
and its area developers, market partners and franchisees and the manner in which
they operate and develop stores.
ITEM 1. BUSINESS
GENERAL
Mexican Restaurants, Inc. (formerly Casa Ole Restaurants, Inc., the
"Company") was incorporated under the laws of the State of Texas in February
1996, and had its initial public offering in April 1996. The Company operates as
a holding company for 16 corporations and conducts substantially all of its
operations through its subsidiaries. All references to the Company include the
Company and its subsidiaries, unless otherwise stated.
The Company operates and franchises Mexican-theme restaurants featuring
various elements associated with the casual dining experience, under the names
Casa Ole, Monterey's Tex-Mex Cafe, Monterey's Little Mexico, Tortuga Coastal
Cantina and La Senorita. The Casa Ole, Monterey, Tortuga and La Senorita
concepts have been in business for 28, 45, 6 and 21 years, respectively. Today
the Company operates 56 restaurants and franchises 35 restaurants in various
communities across Texas, Louisiana, Oklahoma, Idaho and Michigan. The Casa
Ole', Monterey and La Senorita restaurants are designed to appeal to a broad
range of customers, and are located primarily in small and medium-sized
communities and middle-income areas of larger markets. The Tortuga Coastal
Cantina restaurants also appeal to a broad range of customers and are primarily
located in Houston suburban markets. The restaurants offer fresh, quality food,
affordable prices, friendly service and comfortable surroundings. Menus feature
a variety of traditional Mexican and Tex-Mex selections; complemented by the
Company's own original Mexican-based recipes designed to have broad appeal. The
Company believes that the established success of the Company in existing
markets, its focus on middle-income customers, and the skills of its management
team provide significant opportunities to realize the value inherent in the
Mexican restaurant market, increase revenues in existing markets, and through
opportunistic acquisitions, penetrate new markets.
On April 30, 1999, the Company purchased for $4.0 million in cash and
the assumption of certain liabilities 100% of the outstanding stock of La
Senorita Restaurants, a Mexican restaurant chain operated in the State of
Michigan. La Senorita operates five company-owned restaurants, and has four
franchise restaurants.
STRATEGY AND CONCEPT
The Company's objective is to be perceived as the national value leader
in the Mexican segment of the full-service casual dining marketplace. To
accomplish this objective, the Company has developed strategies designed to
achieve and maintain high levels of customer loyalty, frequent patronage and
profitability. The key strategic elements are:
o Offering consistent, high-quality, original recipe Mexican menu
items that reflect both national and local taste preferences;
o Pricing menu offerings at levels below many family and
casual-dining restaurant concepts;
o Selecting, training and motivating its employees to enhance
customer dining experiences and the friendly casual atmosphere of
its restaurants;
o Providing customers with the friendly, attentive service
typically associated with more expensive casual-dining
experiences; and
o Reinforcing the perceived value of the dining experience with a
comfortable and inviting Mexican decor.
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MENU. The Company's restaurants offer high-quality products with a
distinctive, yet mild taste profile with mainstream appeal. Fresh ingredients
are a critical recipe component, and the majority of menu items are prepared
daily in the kitchen of each restaurant from original recipes.
The menus feature a wide variety of entrees including enchiladas,
combination platters, burritos, fajitas, coastal seafood and other house
specialties. The menu also includes soup, salads, appetizers and desserts. From
time to time the Company also introduces new dishes designed to keep the menus
fresh. Alcoholic beverages are served as a complement to meals and represent a
range of less than 5% of sales at its more family oriented locations, and up to
20% in its more casual dining locations. At Company-owned restaurants the dinner
menu entrees presently range in price from $3.95 to $13.95, with most items
priced between $4.95 and $6.95. Lunch prices at most Company-owned restaurants
presently range from $3.95 to $7.95.
ATMOSPHERE AND LAYOUT. The Company emphasizes an attractive interior
and exterior design for each of its restaurants. The typical restaurant has an
inviting and interesting Mexican exterior. The interior decor is comfortable
Mexican in appearance to reinforce the perceived value of the dining experience.
Stucco, tile floors, carpets, plants and a variety of paint colors are integral
features of each restaurant's decor. These decor features are incorporated in a
floor plan designed to provide a comfortable atmosphere. The Company's
restaurant designs are sufficiently flexible to accommodate a variety of
available sites and development opportunities, such as malls, end-caps of strip
shopping centers and free standing buildings, including conversions. The
physical facility is also designed to serve a high volume of customers in a
relatively limited period of time. The Company's restaurants typically range in
size from approximately 4,000 to 5,600 square feet, with an average of
approximately 4,500 square feet and a seating capacity of approximately 180.
GROWTH STRATEGY
The Company believes that the unit economics of the various restaurant
concepts of the Company, as well as their value orientation and focus on middle
income customers, provide significant opportunities for expansion. The Company's
strategy to capitalize on these expansion opportunities is comprised of three
key elements:
IMPROVE SAME RESTAURANT SALES AND PROFITS. The Company's first growth
objective is to improve the sales and controllable income of existing
restaurants. This is accomplished through an emphasis on restaurant operations,
coupled with marketing, purchasing and other organizational efficiencies (see
"Restaurant Operations" below).
INCREASED PENETRATION OF EXISTING MARKETS. The Company's second growth
objective is to increase the number of restaurants in existing Designated Market
Areas ("DMAs") and expansion into contiguous new markets. The DMA concept is a
mapping tool developed by the A.C. Nielsen Co. that measures the size of a
particular market by reference to communities included within a common
television market. The Company's objective in increasing the density of
Company-owned restaurants within existing markets is to improve operating
efficiencies in such markets and to realize improved overhead absorption. In
addition, the Company believes that increasing the density of restaurants in
both Company-owned and franchised markets will assist it in achieving effective
media penetration while maintaining or reducing advertising costs as a
percentage of revenues in the relevant markets. The Company believes that
careful and prudent site selection within existing markets will avoid
cannibalization of the sales base of existing restaurants.
In implementing its new unit expansion strategy, the Company may use a
combination of franchised and Company-owned restaurants. The number of such
restaurants developed in any period will vary. The Company believes that a mix
of franchised and Company-owned restaurants would enable it to realize
accelerated expansion opportunities, while maintaining majority or sole
ownership of a significant number of restaurants. Generally the Company does not
anticipate opening franchised and Company-owned restaurants within the same
market. In seeking franchisees, the Company will continue to primarily target
experienced multi-unit restaurant operators with knowledge of a particular
geographic market and financial resources sufficient to execute the Company's
development strategy.
During 1999 the Company ended its market partner relationship in Idaho,
and no new market partner relationships are planned for fiscal year 2000.
In adding to its Company-owned restaurants, the Company anticipates it
will continue to selectively acquire existing franchised restaurants. During
fiscal 1999, the Company acquired a franchised restaurant in San Marcos, Texas
and converted that restaurant into a Tortuga Coastal Cantina.
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SELECTIVE ACQUISITIONS. The Company's third growth objective is to seek
selective acquisitions that meet its growth goals of increasing penetration in
existing markets and/or entering new markets. Following this strategic approach
to growth the Company purchased 100% of the outstanding stock of Monterey's
Acquisition Corp. ("MAC") on July 2, 1997. The Company purchased the shares of
common stock of MAC for $4.0 million, paid off outstanding debt and accrued
interest totaling $7.1 million and funded various other agreed-upon items
approximating $500,000. At the time of the acquisition, MAC owned and operated
26 restaurants in Texas and Oklahoma.
On April 30, 1999, the Company purchased 100% of the outstanding stock
of La Senorita Restaurants, a Mexican restaurant chain operated in the State of
Michigan. The Company purchased the shares of common stock of La Senorita for
$4.0 million. The transaction was funded with the Company's revolving line of
credit with Bank of America. La Senorita operates five company-owned
restaurants, and has four franchise restaurants. One of the franchise
restaurants is owned by a general partnership in which the parent company has a
17.5% limited interest.
The Company does not currently anticipate making any acquisitions
during fiscal year 2000.
SITE SELECTION
Execution of the expansion strategy requires locating, evaluating and
securing adequate sites. Senior management devotes significant time and
resources to analyzing each prospective site. Senior management has also created
and utilizes a site selection committee, which reviews and approves each site to
be developed. In addition, the Company conducts customer surveys to precisely
define the demographic profile of the customer base of each of the Company's
restaurant concepts. The Company's site selection criteria focus on:
1) matching the customer profile of the respective restaurant
concept to the profile of the population of the target local
market;
2) easy site accessibility, adequate parking, and prominent
visibility of each site under consideration;
3) the site's strategic location within the marketplace;
4) the site's proximity to the major concentration of shopping
centers within the market;
5) the site's proximity to a large employment base to support the
lunch segment; and
6) the impact of competition from other restaurants in the market.
The Company believes that a sufficient number of suitable sites are
available for Company and franchise development in existing markets. Based on
its current planning and market information, the Company has already opened one
new restaurant and plans to open one more restaurant in fiscal year 2000 and
believes that its franchisees will open one to two additional restaurants. The
anticipated total investment for a 4,200 to 5,600 square foot restaurant,
including land, building, equipment, signage, site work, furniture, fixtures and
decor ranges between $1.4 and $2.1 million (including capitalized lease value).
Additionally, training and other pre-opening costs are anticipated to
approximate $50,000 per location. The cost of developing and operating a Company
restaurant can vary based upon fluctuations in land acquisition and site
improvement costs, construction costs in various markets, the size of the
particular restaurant and other factors. Although the Company anticipates that
development costs associated with near-term restaurants will range between $1.4
and $2.1 million, there can be no assurance of this. Where possible, the Company
uses build to suit, lease conversion or sale and leaseback transactions to limit
its cash investment to approximately $500,000 per location.
The Company's ability to open the number of restaurants contemplated by
its expansion plans is subject to certain risks. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--Risk
Factors."
RESTAURANT OPERATIONS
MANAGEMENT AND EMPLOYEES. The management staff of each restaurant is
responsible for managing the restaurant's operations. Each Company-owned
restaurant operates with a general manager, one or more assistant managers and a
kitchen manager or a chef. Including managers, restaurants have an average of 50
full-time and part-time employees. The Company historically has spent
considerable effort developing its employees, allowing it to promote from
within. As an additional incentive to its restaurant management personnel, the
Company has a bonus plan in which restaurant managers can receive monthly
bonuses based on a percentage of their restaurants' controllable profits.
The Company's regional supervisors, who report directly to the
Company's Directors of Operation, offer support to the store managers. Each
supervisor is eligible for a monthly bonus based on a percentage of controllable
profits of the stores under their control.
As of January 2, 2000, the Company employed approximately 2,500 people,
of whom 2,460 were restaurant personnel at the Company-owned restaurants and 40
were corporate personnel. The Company considers its employee
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relations to be good. Most employees, other than restaurant management and
corporate personnel, are paid on an hourly basis. The Company's employees are
not covered by a collective bargaining agreement.
TRAINING AND QUALITY CONTROL. The Company requires its hourly employees
to participate in a formal training program carried out at the individual
restaurants, with the on-the-job training program varying from three days to two
weeks based upon the applicable position. Managers of both Company-owned and
franchised restaurants are trained at one of the Company's specified training
stores by that store's general manager and then certified upon completion of a
four to six week program that encompasses all aspects of restaurant operations
as well as personnel management and policy and procedures, with special emphasis
on quality control and customer relations. To evaluate ongoing employee service
and provide rewards to employees, the Company employs a "mystery shopper"
program which consists of two anonymous visits per month per restaurant. The
Company's franchise agreement requires each franchised restaurant to employ a
general manager who has completed the Company's training program at one of the
Company's specified training stores. Compliance with the Company's operational
standards is monitored for both Company-owned and franchised restaurants by
random, on-site visits by corporate management, regular inspections by regional
supervisors, the ongoing direction of a corporate quality control manager and
the mystery shopper program.
MARKETING AND ADVERTISING. The Company believes that when media
penetration is achieved in a particular market, investments in radio and
television advertising can generate significant increases in revenues in a
cost-effective manner. During fiscal 1999, the Company spent approximately 3.2%
of restaurant revenues on various forms of advertising. For fiscal 2000, the
Company expects to spend approximately 3.5% of restaurant revenues on
advertising. Besides radio and television, the Company makes use of in-store
promotions, involvement in community activities, and customer word-of-mouth to
maintain their performance. Achieving effective media penetration in each market
which it enters is a key component of the Company's expansion strategy.
PURCHASING. The Company strives to obtain consistent quality products
at competitive prices from reliable sources. The Company works with its
distributors and other purveyors to ensure the integrity, quality, price and
availability of the various raw ingredients. The Company researches and tests
various products in an effort to maintain quality and to be responsive to
changing customer tastes. The Company operates a centralized purchasing system
that is utilized by all of the Company-owned restaurants and is available to the
Company's franchisees. Under the Company's franchise agreement, if a franchisee
wishes to purchase from a supplier other than a currently approved supplier, it
must first submit the products and supplier to the Company for approval.
Regardless of the purchase source, all purchases must comply with the Company's
product specifications. The Company's ability to maintain consistent product
quality throughout its operations depends upon acquiring specified food products
and supplies from reliable sources. Management believes that all essential food
and beverage products are available from other qualified sources at competitive
prices.
FRANCHISING
The Company currently has 17 franchisees operating a total of 35
restaurants. In 1999 the Company's franchisees opened one restaurant and closed
one restaurant. The Company also purchased one franchise restaurant, located in
San Marcos, Texas, and converted it into a Tortuga Coastal Cantina. As of March
20, 2000, two franchise restaurant locations are under consideration.
Franchising allows the Company to expand the number of stores and penetrate
markets more quickly and with less capital than developing Company-owned stores.
Franchisees are selected on the basis of various factors, including business
background, experience and financial resources. In seeking new franchisees, the
Company targets experienced multi-unit restaurant operators with knowledge of a
particular geographic market and financial resources sufficient to execute the
Company's development schedule. Under the current franchise agreement,
franchisees are required to operate their stores in compliance with the
Company's policies, standards and specifications, including matters such as menu
items, ingredients, materials, supplies, services, fixtures, furnishings, decor
and signs. In addition, franchisees are required to purchase, directly from the
Company or its authorized agent, spice packages for use in the preparation of
certain menu items, and must purchase certain other items from approved
suppliers unless written consent is received from the Company.
FRANCHISE AGREEMENTS. The Company enters into a franchise agreement
with each franchisee which grants the franchisee the right to develop a single
store within a specific territory at a site approved by the Company. The
franchisee then has limited exclusive rights within the territory. Under the
Company's current standard franchise agreement, the franchisee is required to
pay a franchise fee of $25,000 per restaurant. The current standard franchise
agreement provides for an initial term of 15 years (with a limited renewal
option) and payment of a royalty of 3% to 5% of gross sales. The termination
dates of the Company's franchise agreements with its existing franchisees
currently range from 2000 to 2015. The Company is considering modifying its
franchise agreement to accommodate the Tortuga Coastal Cantina concept.
Franchise agreements are not assignable without the prior written
consent of the Company. Also, the Company retains rights of first refusal with
respect to any proposed sales by the franchisee. Franchisees are not permitted
to compete with the Company during the term of the franchise agreement and for a
limited time, and in a limited area, after the term of the franchise agreement.
The enforceability and permitted scope of such noncompetition provisions varies
from state to state. The Company has the right to terminate any franchise
agreement for certain specific reasons, including a franchisee's failure to make
payments when due or failure to adhere to the Company's policies and standards.
Many state franchise laws, however, limit the ability of a franchisor to
terminate or refuse to renew a franchise. See "Item 1. Business--Government
Regulation."
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Prior forms of the Company's franchise agreements may contain terms
that vary from those described above, including with respect to the payment or
nonpayment of advertising fees and royalties, the term of the agreement, and
assignability, noncompetition and termination provisions.
FRANCHISEE TRAINING AND SUPPORT. Under the current franchise agreement,
each franchisee (or if the franchisee is a corporation, a manager designated by
the franchisee) is required to personally participate in the operation of the
franchise. Before opening the franchisee's business to the public, the Company
provides training at its approved training facility for each franchisee's
general manager, assistant manager and chef. The Company recommends that the
franchisee, if the franchisee is other than the general manager, or if a
corporation, its chief operating officer, attend such training. The Company also
provides a training team to assist the franchisee in opening its restaurant. The
team, supervised by the Director of Training, will assist and advise the
franchisee and/or its manager in all phases of the opening operation for a seven
to fourteen day period. The formal training program required of hourly employees
and management, along with continued oversight by the Company's quality control
manager, promotes consistency of operations.
AREA DEVELOPERS. The area development agreement is an extension of the
standard franchise agreement. The area development agreement provides area
developers with the right to execute more than one franchise agreement in
accordance with a fixed development schedule. Restaurants established under
these agreements must be located in a specific territory in which the area
developer will have limited exclusive rights. Area developers pay an initial
development fee generally equal to the total initial franchise fee for the first
franchise agreement to be executed pursuant to the development schedule plus 10%
of the initial franchise fee for each additional franchise agreement to be
executed pursuant to the development schedule. Generally the initial development
fee is not refundable, but will be applied in the proportions described above to
the initial franchise fee payable for each franchise agreement executed pursuant
to the development schedule. New area developers will pay monthly royalties for
all restaurants established under such franchise agreements on a declining scale
generally ranging from 5% of gross sales for the initial restaurant to 3% of
gross sales for the fourth restaurant and thereafter as additional restaurants
are developed. Area development agreements are not assignable without the prior
written consent of the Company. The Company will retain rights of first refusal
with respect to proposed sales of restaurants by the area developers. Area
developers are not permitted to compete with the Company. If an area developer
fails to meet its development schedule obligations, the Company can, among other
things, terminate the area development agreement or modify the territory in the
agreement. The Company is not currently seeking new area developers. The Company
currently has two area developers operating a total of twelve restaurants.
MARKET PARTNER PROGRAM
The Company ended its only market partner agreement with its market
partner in Idaho. That agreement, which was entered into in fiscal year 1997,
resulted in four restaurants in the State of Idaho. One restaurant, developed by
this market partner, in Pocatello, Idaho, was closed in fiscal year 1997 and is
currently for sale. The remaining three restaurants, which are 100% owned by the
Company, are considered by the Company to be non-core restaurants. The Company
does not plan to enter into any market partner agreements in fiscal year 2000.
COMPETITION
The restaurant industry is intensely competitive. Competition is based
upon a number of factors, including concept, price, location, quality and
service. The Company competes against a broad range of other family dining
concepts, including those focusing on various other types of ethnic food, as
well as local restaurants in its various markets. The Company also competes
against other quick service and casual dining concepts within the Mexican and
Tex-Mex food segment. Many of the Company's competitors are well established and
have substantially greater financial and other resources than the Company. Some
of the Company's competitors may be better established in markets where the
Company's restaurants are or may be located. The Company believes that it
competes with franchisors of other restaurants and various other concepts for
franchisees.
The restaurant business is affected by many factors, including changes
in consumer tastes and eating habits, national, regional or local economic and
real estate conditions, demographic trends, weather, traffic patterns, and the
type, number and location of competing restaurants. In addition, factors such as
inflation, increased food, labor and benefit costs, and the availability of
experienced management and hourly employees may adversely affect the restaurant
industry in general and the Company's restaurants in particular.
GOVERNMENT REGULATION
Each Company restaurant is subject to regulation by federal agencies
and to licensing and regulation by state and local health, sanitation, safety,
fire and other departments relating to the development and operation of
restaurants. These include regulations pertaining to the environmental, building
and zoning requirements in the preparation and sale of food. The Company is also
subject to laws governing the service of alcohol and its relationship with
employees, including minimum wage requirements, overtime, working conditions and
immigration requirements. Difficulties or failures in obtaining the required
construction and operating licenses, permits or approvals could delay or prevent
the opening of a specific new restaurant. The Company believes that it is
operating in substantial compliance with applicable laws and regulations that
govern its operations.
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Alcoholic beverage control regulations require each of the Company's
restaurants to apply to a state authority and, in certain locations, county or
municipal authorities, for a license or permit to sell alcoholic beverages on
the premises and to provide service for extended hours. Typically licenses must
be renewed annually and may be revoked or suspended for cause at any time.
Alcoholic beverage control regulations relate to numerous aspects of the
Company's restaurants, including minimum age of patrons drinking alcoholic
beverages and employees serving alcoholic beverages, hours of operation,
advertising, wholesale purchasing, inventory control and handling, storage and
dispensing of alcoholic beverages. The Company is also subject to "dramshop"
statutes which generally provide a person injured by an intoxicated person the
right to recover damages from an establishment that wrongfully served alcoholic
beverages to the intoxicated person. The Company carries liquor liability
coverage as part of its existing comprehensive general liability insurance.
Additionally, within thirty days of employment by the Company, each Texas
employee of the Company who serves alcoholic beverages is required to attend an
alcoholic seller training program that has been approved by the Texas Alcoholic
Beverage Commission and endorsed by the Texas Restaurant Association and which
endeavors to educate the server to detect and prevent overservice of the
Company's customers.
In connection with the sale of franchises, the Company is subject to
the United States Federal Trade Commission rules and regulations and state laws
that regulate the offer and sale of franchises and business opportunities. The
Company is also subject to laws that regulate certain aspects of such
relationships. Although certain potential compliance issues were historically
identified, the Company has had no claims with respect to its programs and,
based on the nature of the potential compliance issues identified, does not
believe that compliance issues associated with its historical franchising
programs will have a material adverse effect on its results of operations or
financial condition. The Company believes that it is operating in substantial
compliance with applicable laws and regulations that govern franchising
programs.
The Company is subject to various local, state and federal laws
regulating the discharge of pollutants into the environment. The Company
believes that it conducts its operations in substantial compliance with
applicable environmental laws and regulations. The Company conducts
environmental audits of each proposed restaurant site in order to determine
whether there is any evidence of contamination prior to purchasing or entering
into a lease with respect to such site. To date the Company's operations have
not been materially adversely affected by the cost of compliance with applicable
environmental laws.
TRADEMARKS, SERVICE MARKS AND TRADE DRESS
The Company believes its trademark, service marks and trade dress have
significant value and are important to its marketing efforts. It has registered
the trademarks for "Casa Ole", "Casa Ole Mexican Restaurant", "Monterey's
Tex-Mex Cafe", "Monterey's Little Mexico", "Tortuga Cantina" and "La Senorita"
with the U.S. Patent Office.
ITEM 2. PROPERTIES
The Company's executive offices are located in approximately 6,200
square feet of office space in Houston, Texas. The offices are currently leased
by the Company from CO Properties No. 3, a Texas partnership owned by Larry N.
Forehand and Michael D. Domec, under a gross lease (where the landlord pays
utilities and property taxes) expiring in May 2000, with rental payments of
$1.00 per square foot per month. The Company is planning on exercising a one
year renewal option. See "Notes to Consolidated Financial Statements--Related
Party Transactions." The Company believes that its properties are suitable and
adequate for its operations.
The Company owns the land and buildings on three restaurant locations
with the balance of locations on leased sites. Two of the owned restaurants are
closed and for sale. One restaurant was closed in fiscal year 1997 and the other
was closed during the first quarter of fiscal year 2000. Another previously
owned restaurant site was sold for approximately $1.1 million to the State of
Texas in 1999. The Company will continue to operate the restaurant at the site
on a short-term basis until the land is required by the state. Real estate
leased for Company-owned restaurants is typically leased under triple net leases
that require the Company to pay real estate taxes and utilities, to maintain
insurance with respect to the premises and in certain cases to pay contingent
rent based on sales in excess of specified amounts. Generally the non-mall
locations for the Company-owned restaurants have initial terms of 10 to 20 years
with renewal options.
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RESTAURANT LOCATIONS
At January 2, 2000, the Company's system of Company-operated and
franchised restaurants included 91 restaurants. As of such date, the Company
operated and franchised Casa Ole restaurants in the States of Texas,
Louisiana and Tennessee. As of such date, the Company operated Monterey's
Tex-Mex Cafe and Monterey's Little Mexico restaurants in the States of Texas,
Oklahoma and Idaho, and Tortuga Coastal Cantina restaurants in the State of
Texas. The Company also operated and franchised La Senorita restaurants in the
State of Michigan. The Company's portfolio of restaurants is summarized below:
CASA OLE
Company-operated 17 Leased
Franchised 31
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TOTAL 48
==
MONTEREY'S TEX-MEX CAFE
Company-operated 8 Leased
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TOTAL 8
==
MONTEREY'S LITTLE MEXICO
Company-operated 1 Owned
16 Leased
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TOTAL 17
==
TORTUGA COASTAL CANTINA
Company-operated 9 Leased
--
TOTAL 9
==
LA SENORITA
Company-operated 5 Leased
Franchised 4
--
TOTAL 9
==
GRAND TOTAL 91
==
ITEM 3. LEGAL PROCEEDINGS
Special Note: Certain statements set forth below under this caption
constitute "forward-looking statements" within the meaning of the Reform Act.
See "Special Note Regarding Forward-Looking Statements" for additional factors
relating to such statements.
From time to time the Company is party to certain legal proceedings
arising in the ordinary course of business. Although the amount of any liability
that could arise with respect to these proceedings cannot be predicted
accurately, in the opinion of the Company, any liability that might result from
existing claims will not have a material adverse effect on the Company or its
business. Nevertheless, a future lawsuit or claim could result in a material
adverse effect on the Company or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the shareholders of the Company
during the fourth quarter of the fiscal year ended January 2, 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq National Market tier of
The Nasdaq Stock Market under the symbol "CASA." The following table sets forth
the range of quarterly high and low closing sale prices of the Company's Common
Stock on the Nasdaq National Market during each of the Company's fiscal quarters
since December 29, 1997.
HIGH LOW
---------- ----------
FISCAL YEAR 1998:
First Quarter (ended March 29, 1998) ............................ 4 7/8 3 3/4
Second Quarter (ended June 28, 1998) ............................ 5 7/8 4 3/4
Third Quarter (ended September 27, 1998) ........................ 5 3/8 4
Fourth Quarter (ended January 3, 1998) .......................... 5 1/16 4
FISCAL YEAR 1999:
First Quarter (through April 4, 1999) ........................... 4 1/2 3 7/16
Second Quarter (ended July 4, 1999) ............................. 4 9/16 3 1/4
Third Quarter (ended October 3, 1999) ........................... 4 15/16 3 3/4
Fourth Quarter (ended January 2, 2000) .......................... 4 7/16 3 1/4
FISCAL YEAR 2000:
First Quarter (through March 20, 2000) .......................... 3 13/16 3 3/8
As of March 20, 2000, the Company estimates that there were
approximately 900 beneficial owners of the Company's Common Stock, represented
by approximately 33 holders of record.
Since its 1996 initial public offering, the Company has not paid cash
dividends on its Common Stock. The Company intends to retain earnings of the
Company to support operations and to finance expansion and does not intend to
pay cash dividends on the Common Stock for the foreseeable future. The payment
of cash dividends in the future will be at the discretion of the Board of
Directors and will depend upon such factors as earnings levels, capital
requirements, the Company's financial condition and other factors deemed
relevant by the Board of Directors. In addition, the Company's current credit
agreement prohibits the payment of any cash dividends.
ITEM 6. SELECTED FINANCIAL DATA
Balance sheet data as of December 29, 1995, December 27, 1996, December
28, 1997, January 3, 1999 and January 2, 2000, and income statement data for the
fiscal years then ended have been derived from combined and consolidated
financial statements audited by KPMG LLP, independent certified public
accountants. The selected unaudited pro forma financial information presented
below is for informational purposes only and may not necessarily be indicative
of the results of operations and financial position of the Company as they may
be in the future. The selected financial data set forth below should be read in
conjunction with and are qualified by reference to the Consolidated Financial
Statements and the Notes thereto included in Item 8. hereof and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in Item 7. hereof.
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FISCAL YEARS
------------
1995 1996 1997 1998(1) 1999
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
INCOME STATEMENT DATA(2):
Revenues:
Restaurant sales .......................... $ 16,691 $ 17,574 $ 34,301 $ 47,000 $ 55,997
Franchise fees and royalties .............. 999 891 1,029 1,120 1,469
---------- ---------- ---------- ---------- ----------
Total revenues ..................... 17,690 18,465 35,330 48,120 57,466
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales ............................. 4,199 4,208 8,954 12,899 15,774
Restaurant operating expenses ............. 9,791 9,609 19,231 25,611 31,448
General and administrative ................ 1,987 2,081 3,632 4,429 5,191
Depreciation and amortization ............. 266 208 1,245 1,654 2,003
Restaurant closure costs .................. -- -- 432 -- 1,493
---------- ---------- ---------- ---------- ----------
Total costs and expenses ........... 16,243 16,106 33,494 44,593 55,909
---------- ---------- ---------- ---------- ----------
Infrequently occurring income (expense)
Items, net ................................ -- -- -- -- 437
---------- ---------- ---------- ---------- ----------
Operating income ............................ 1,447 2,359 1,836 3,527 1,994
Other income (expense) ...................... 32 367 (171) (385) (534)
---------- ---------- ---------- ---------- ----------
Income before income tax expense ............ $ 1,479 $ 2,726 $ 1,665 $ 3,142 $ 1,460
========== ========== ========== ========== ==========
Extraordinary item .......................... $ -- $ -- $ -- $ 40 $ --
========== ========== ========== ========== ==========
Net income .................................. $ 1,404 $ 1,868 $ 1,015 $ 1,973 $ 833
========== ========== ========== ========== ==========
Pro forma net income (3) .................... $ 1,449 $ 1,819
========== ==========
Net income per share (diluted) (4) .......... $ 0.52 $ 0.53 $ 0.28 $ 0.55 $ 0.23
========== ========== ========== ========== ==========
FISCAL YEARS
------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
BALANCE SHEET DATA:
Working capital ............................. $ 618 $ 6,857 $ (2,023) $ (1,047) $ (1,484)
Total assets ................................ $ 2,858 $ 12,146 $ 26,508 $ 23,421 $ 31,043
Long-term debt, less
current portion ........................... $ 62 $ -- $ 10,107 $ 2,870 $ 8,963
Total stockholders' equity .................. $ 1,934 $ 10,720 $ 11,735 $ 13,559 $ 14,392
- ---------------
(1) The fiscal year 1998 consisted of 53 weeks. All other fiscal years
presented consisted of 52 weeks.
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(2) The Company's audited financial statements for fiscal year 1995 include the
results of operations of four restaurants that were closed prior to the
Company's public offering. These restaurants did not conform to the
Company's operating model at the time of the offering in one or more
important respects (such as location demographics, exterior identification
or menu format) or were operated by persons other than shareholders of the
Company (the "Non-contributed Restaurants"). Although the operations of the
Non-contributed Restaurants affected the Company's results of operations in
fiscal year 1995, the majority of the costs associated with the closure of
these restaurants impacted fiscal 1993 and fiscal 1994. Two Non-contributed
Restaurants were closed during each of fiscal 1994 and fiscal 1995. The
Non-contributed Restaurants located in Abilene and Midland were managed by
persons other than the shareholders of the prior corporations, and the
Midland restaurant lacked the signage and other elements of the exterior
decor associated with the Casa Ole concept. The other Non-contributed
Restaurants, located in Lubbock and The Woodlands, were in-line shopping
center locations. The Midland restaurant also featured an upscale menu,
while The Woodlands restaurant was located in an affluent suburb of
Houston. Summarized operating results of the Non-contributed Restaurants
included in the above combined financial data are as follows:
FISCAL YEARS
------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
Revenues ....................... $ 432 $ -- $ -- $ -- $ --
Restaurant closure costs ....... -- -- -- -- --
Net loss ....................... (194) -- -- -- --
(3) For fiscal 1995, the unaudited pro forma income statement data reflect
adjustments to eliminate historical executive compensation for Larry N. and
Robert L. Forehand ($470,000) and related party expense arrangements
($679,000), and to add salaries of new management ($329,000) to conform to
compensation arrangements applicable subsequent to the Company's initial
public offering. For fiscal 1996, the unaudited pro forma income statement
data reflect adjustments to eliminate executive compensation for Larry N.
and Robert L. Forehand ($126,500) and related party expense arrangements
($35,200) through the date of the Company's initial public offering.
Elimination of costs related to executive compensation and other related
party arrangements are necessary adjustments as these costs were primarily
income distribution techniques used by the S corporation owners. Also, an
adjustment has been made to reflect federal and state income taxes (at an
assumed rate of 37%) that would have been paid had the Company been taxed
as a C corporation. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--General."
(4) For fiscal 1995, the computation of unaudited pro forma net income per
share is based upon 2,732,705 weighted average shares of Common Stock
outstanding issued to the shareholders of the 13 corporations that were
party to the reorganization and 60,411 shares assumed to be issued at an
initial public offering price of $11.00 per share (after deducting the
estimated underwriting discount), to fund S corporation distributions of
approximately $618,000. For fiscal 1996, it was assumed that the number of
shares up to the date of the public offering were the same as weighted
average shares outstanding for fiscal 1995. Basic income per share for
fiscal 1996 is $0.54.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Special Note: Certain statements set forth below under this caption
constitute "forward-looking statements" within the meaning of the Reform Act.
See "Special Note Regarding Forward-Looking Statements" above for additional
factors relating to such statements.
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Report.
GENERAL
The Company was organized under the laws of the State of Texas on
February 16, 1996. Pursuant to the reorganization of the Company in preparation
for the initial public offering, the shareholders of the prior corporations
contributed to the Company all outstanding shares of capital stock of each
corporation, and the Company issued to such shareholders in exchange therefor an
aggregate of 2,732,705 shares of its Common Stock. The exchange transaction was
completed April 24, 1996, and, as a result, the corporations became wholly-owned
subsidiaries of the Company, and each shareholder of the Company received a
number of shares of Common Stock in the Company.
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The Company's primary source of revenues is the sale of food and
beverages at Company-owned restaurants. The Company also derives revenues from
franchise fees, royalties and other franchise-related activities. Under the
terms of the Company's current franchise agreement, franchisees are generally
required to pay a franchise fee of $25,000 per restaurant and royalty fees of up
to 5% of gross sales. The royalty fees vary from franchise to franchise. Area
developers (franchisees who plan to develop more that one restaurant) will be
required to pay an initial development fee equal to the total initial franchise
fee for the first franchise agreement to be executed pursuant to the development
schedule specified in the agreement, plus 10% of the initial franchise fee
payable for each additional franchise agreement. The development fee will be
non-refundable, but will be applied proportionately to the franchise fees
associated with additional restaurants. New area developers will be required to
pay monthly royalties for all restaurants developed pursuant to such franchise
agreements on a declining scale ranging from 5% to 3% of gross sales. Franchise
fee revenue from an individual franchise sale is recognized when all services
relating to the sale have been performed and the restaurant has commenced
operation. Initial franchise fees relating to area franchise sales are
recognized ratably in proportion to services that are required to be performed
pursuant to the area franchise or development agreements and proportionately as
the restaurants within the area are opened.
Prior to the Company's initial public offering in April 1996, a
significant portion of the Company's operating expenses was attributable to the
compensation of Larry N. Forehand and Michael D. Domec, the original principals
of the Company, and payment of compensation and fees to certain of their
respective affiliates. Subsequent to the offering, Mr. Domec has continued to
serve as a director of the Company, but is no longer an employee and has instead
focused on development of additional Casa Ole restaurants in his capacity as a
franchisee. In fiscal 1997, Mr. Forehand became Director of Franchise Services
and remains as a member of the Board of Directors. In addition, certain
transactions and compensation arrangements between the Company and affiliates of
Messrs. Forehand and Domec were terminated subsequent to the offering. The
Company has employment agreements with each of Louis P. Neeb, Curt Glowacki and
Andrew Dennard. The pro forma effect of the elimination of Mr. Domec's
compensation and payments to certain entities related to Messrs. Domec and
Forehand, the reduction in Mr. Forehand's compensation and the compensation
arrangements for the new executive officers is reflected in the Financial
Statements and Supplementary Data--Consolidated Statements of Income found
elsewhere in this Report.
Concurrent with the initial public offering and the reorganization, the
Company terminated the S corporation status of the prior corporations that had
elected to be taxed as S corporations under the Code, and such corporations
became taxable as C corporations, adopting the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Accordingly, a pro forma provision for federal and state income taxes,
using a combined 37% effective rate, is presented for fiscal 1995 and the first
quarter of fiscal 1996, as if the Company was taxed in its entirety as a C
corporation. Income taxes for the restaurants originally structured as C
corporations have historically been calculated in accordance with SFAS 109.
FISCAL YEAR
The Company has a 52/53 week fiscal year ending on a Sunday nearest
December 31. References in this Report to fiscal 1997, 1998 and 1999 relate to
the periods ended December 28, 1997, January 3, 1999 and January 2, 2000,
respectively. Fiscal years 1997 and 1999 presented herein consisted of 52 weeks.
Fiscal year 1998 consisted of 53 weeks.
RESULTS OF OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998
REVENUES. Fiscal 1999 revenues increased $9.3 million or 19.4% to $57.5
million. Restaurant sales increased $9.0 million or 19.1% to $56.0 million. La
Senorita, which was acquired on April 30, 1999, contributed $5.3 million in
restaurant sales. Five new restaurants were opened, one restaurant was reopened,
and two restaurant were closed (leases expired) during the year. Total system
same-store sales (including La Senorita) were down 1%. Company-owned same store
sales were down 2.1% and franchise-owned same-store sales were up 0.5%. Due to
new store development of higher volume Tortuga Coastal Cantina and La Senorita
restaurants, company-owned average weekly sales increased 5.5%.
Franchise fees and royalties increased 19.2% or $205,000 to $1.3
million. Two franchise restaurants were closed (one of which was acquired by the
Company and converted into a Tortuga Coastal Cantina), one franchise restaurant
was opened and four franchise restaurants were acquired through the La Senorita
acquisition.
COSTS AND EXPENSES. Costs of sales, consisting of food, beverage,
liquor, supplies and paper costs, increased 80 basis points to 28.2% compared
with 27.4% in fiscal 1998. The increase was primarily due to higher costs of
sales associated with new store development, the acquisition of La Senorita and
the non-core stores located in Idaho and Tennessee. Cheese prices were also
higher during fiscal year 1999.
Labor and other related expenses increased 50 basis points to 33.5%
compared with 33.0% in fiscal 1998. Again, the increase was primarily due to
higher labor costs associated with new store development, the acquisition of La
Senorita and the non-core stores located in Idaho and Tennessee.
Restaurant operating expenses increased 110 basis points to 22.6%
compared with 21.5% in fiscal 1998. The increase was primarily due to last
year's $11.5 million sale and leaseback transaction (closed on June 25, 1998)
which increased rent expense.
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General and administrative expenses (G&A) decreased 20 basis points to
9.0% compared with 9.2% in fiscal year 1998. The decrease was primarily due to
the absorption of general and administrative expenses over a larger revenue
base. Fiscal year 1999 included $62,000 in write-offs of site development costs
and fiscal year 1998 included a $60,000 recovery of a previously taken special
charge.
Depreciation and amortization increased 30 basis points to 3.0%
compared with 2.7% in fiscal 1998. This increase is primarily due to the La
Senorita acquisition. Further, five new restaurants were opened and nine
restaurants were remodeled.
Pre-opening costs decreased 30 basis points to 0.5% compared with 0.8%
in fiscal 1998. The prior year was impacted by the adoption of AICPA Statement
of Position 98-5, "Reporting on the costs of Start-up Activities" ("SOP 98-5"),
which requires that costs of start-up activities be expensed as incurred.
During fiscal year 1999, the Company evaluated certain properties and
restaurants to determine if continued operation was consistent with the
Company's strategy. As a result of this exercise, it was determined that certain
assets were impaired and the Company expensed $1.5 million related to restaurant
closure and asset impairment costs.
Infrequently occurring (income) and expense consisted of two items that
increased 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 contract for $82,000.
OTHER INCOME (EXPENSE). Net other expense increased 10 basis points to
0.9% compared with 0.8% in fiscal 1998.
INCOME TAX EXPENSE. The Company's effective tax rate for fiscal 1999
was 42.9% compared with 38.5% in fiscal 1998. The higher rate is due to the
effect of permanent tax differences on lower income before taxes.
FISCAL 1998 COMPARED TO FISCAL 1997
REVENUES. Fiscal 1998 revenues increased $12.8 million or 36.2% to
$48.1 million. Restaurant sales increased $12.7 million or 37.0% to $47.0
million, reflecting the full year results of MAC. On a comparable basis, total
system sales at restaurants operating in both fiscal years ("same-stores") were
up 2.44%. Franchise-owned same-stores sales were up 4.76%. Company-owned
same-store sales were up 0.6%. Restaurant sales were adversely impacted by the
opening and operation of a Texas Casa Ole franchise restaurant by a director and
franchisee of the Company. Fiscal 1998 sales at two nearby Company-owned stores
decreased by approximately $700,000 from fiscal 1997. The Company estimates that
the Company's after tax net income was reduced by $193,000 (after offsetting
franchise income) or $0.05 on a per share basis.
Franchise fees and royalties increased 8.9% despite two fewer franchise
restaurants compared with fiscal 1997. The increase was attributable to greater
same-store sales.
COSTS AND EXPENSES. Costs of sales, consisting of food, beverage,
liquor, supplies and paper costs, increased 130 basis points to 27.4% compared
with 26.1% in fiscal 1997. The increase is attributable in part to an increase
in the proportion of MAC restaurants, which have a higher average cost of sales
than the Casa Ole restaurants. Also contributing to the increase is the new
emphasis placed on value perception within the Casa Ole concept, achieved
primarily by increasing portion sizes. And finally, the cost of cheese and
poultry impacted food cost approximately 100 basis points during fiscal year
1998.
Labor and other related expenses decreased 70 basis points to 33.0%
compared with 33.7% in fiscal 1997. This decrease is due in part to the closure
of three under-performing restaurants and the sale of two other restaurants.
Further, the Company improved employee utilization in most operating
restaurants.
Restaurant operating expenses decreased 90 basis points to 21.5%
compared with 22.4% in fiscal 1997. The improvements in restaurant operating
expenses are primarily due to cost cutting measures made throughout the store
system, especially in restaurants opened since the initial public offering. Rent
expense increased on a comparable basis due to the sale leaseback transaction.
The increase in rent expense was offset by a reduction in interest and
depreciation expense. Again, the closure of three under-performing restaurants
and the sale of two other restaurants helped to improve overall operating
margins.
General and administrative expenses (G&A) decreased 110 basis points to
9.2% compared with 10.3% in fiscal 1997. Fiscal 1997 included $241,000 in
special charges related to severance agreements and acquisitions, $60,000 of
which was recovered in fiscal 1998. On an adjusted basis, fiscal 1998 would have
been 9.3% versus 9.6% for fiscal 1997.
Depreciation and amortization decreased 40 basis points to 2.7%
compared with 3.1% in fiscal 1997. This decrease is the primary result of the
sale-leaseback transaction involving the sale and leaseback of land, building
and improvements of 13 company-owned restaurants. The leases are classified as
operating leases. Also, effective the beginning of fiscal 1998, the Company
changed its estimate of useful lives of certain recently acquired fixed assets ,
primarily those belonging to MAC. The purpose of the change was to bring the
asset lives of Casa Ole and MAC into conformity with each other and with
industry norms.
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Pre-opening costs increased 40 basis points to 0.8% compared with 0.4%
in fiscal 1997. Approximately half the increase is due to the adoption of AICPA
Statement of Position 98-5, "Reporting on the costs of Start-up Activities"
("SOP 98-5"), which requires that costs of start-up activities be expensed as
incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998. In fiscal 1997, pre-opening costs were
deferred and amortized over one-year. Pre-opening costs consists primarily of
hiring and training employees associated with the opening of a new restaurant.
OTHER INCOME (EXPENSE). Net other expense increased 30 basis points to
0.8% compared with 0.5% in fiscal 1997. Interest income decreased $99,906 to
$41,817. The decrease was due to the constant reduction in interest income as
the proceeds from the 1996 initial public offering were used for construction
projects and debt was incurred related to the acquisition of MAC. Interest
expense increased $72,545 to $524,413. Although debt was substantially reduced
on June 25, 1998 from the $11.5 million sale-leaseback proceeds, the average
debt balance in fiscal 1998 was higher than the average debt balance in fiscal
1997.
INCOME TAX EXPENSE. The Company's effective tax rate for fiscal 1998
was 38.5%, which is approximately the expected federal and state rates of 34%
and 4.5%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company met fiscal 1999 capital requirements with cash generated by
operations, with draws on its credit facilities and with sale and leaseback
financing. In fiscal 1999, the Company's operations generated approximately $3.6
million in cash, as compared with $2.1 million in fiscal 1998 and $2.6 million
in fiscal 1997. As of January 2, 2000, the Company had a working capital deficit
of approximately $1.5 million, compared with a working capital deficit of
approximately $1.0 million at January 3, 1999. 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 development or acquisitions and remodeling of older units. During
fiscal 1999, capital expenditures on property, plant and equipment were
approximately $7.3 million as compared to approximately $5.7 million for fiscal
1998. The Company opened five new restaurants, reopened an existing restaurant
and remodeled nine restaurants. The Company re-opened one restaurant (a
conversion from a Casa Ole to a Tortuga Coastal Cantina) in the first quarter of
fiscal year 2000 and plans to open at least one more restaurant in fiscal year
2000. The Company also plans to remodel seven restaurants in fiscal year 2000.
As of the date of this filing, the Company has no restaurants under
construction. The estimated capital needed for such 2000 openings, along with
preparing for 2001 openings and for general corporate purposes, including the
remodeling of an estimated seven restaurants, is approximately $3.3 million.
This estimate is based upon an anticipated range of new restaurant investments,
from as low as $1.4 million up to $2.1 million per restaurant. Approximately
$450,000 is anticipated to represent furniture, fixtures and equipment and
approximately $50,000 represents training and pre-opening expenses, and is
inclusive of the capitalized cost of leasing or acquiring real estate. This
estimate also includes remodel and conversion investments, ranging from as low
as $50,000 up to $550,000 per restaurant. This estimate, however, does not
include any amounts related to any significant acquisitions.
During fiscal 1999, the Company amended its credit facility with Bank
of America. The terms of the amended credit facility are similar to those in the
original facility; however, the facility was increased from a $9.0 revolving
credit facility to a $10.0 million revolving line of credit. 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 0.35% on the unused portion of the revolver from the
date of the credit agreement. As of January 2, 2000, the Company had $9.0
million outstanding on the revolving line of credit. The acquisition of La
Senorita, which closed on April 30, 1999, used $4.0 million of the revolving
line. The balance was used for new restaurant construction, remodeling and other
working capital needs.
Within the terms of the credit agreement, the Company must meet certain
financial covenants. During the fourth quarter of fiscal year 1999, the Company
was not in compliance with a debt covenant under the debt agreement. The bank
waived the lack of compliance and amended certain future covenant ratios under
the debt agreement. The amendment also extended the maturity date of the
facility to July 15, 2002 and reduced the facility by $500,000 at
December 31, 2000 and $1.0 million at December 31, 2001.
On April 30, 1999, the Company acquired La Senorita Restaurants, which
consisted of five company-owned restaurants, a general partnership interest in a
sixth restaurant, and all the rights to the La Senorita franchise system. The
purchase price for La Senorita was approximately $4.0 million in cash was funded
with the Company's revolving line of credit with Bank of America.
The Company's management believes that with its sale leaseback forward
commitments with Franchise Finance Corporation of America, along with operating
cash flow and the Company's revolving line of credit with Bank of America, cash
flow will be sufficient to meet operating requirements and to finance expansion
plans (exclusive of any significant acquisitions) through the end of the 2000
fiscal year.
RISK FACTORS
The Company cautions readers that its business is subject to a number
of risks, any of which could cause the actual results of the Company to differ
materially from those indicated by forward-looking statements made from time to
time in releases, including this Form 10-K, and oral statements. Certain risk
factors have been presented throughout this document, including, among others,
expansion strategy; site selection; attracting and retaining franchisees,
managers and other
14
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employees; availability of food products; competition and government regulation.
Certain other risks to which the Company is subject include:
SEASONALITY. The Company's sales and earnings fluctuate seasonally.
Historically the Company's highest sales and earnings have occurred in the third
and fourth calendar quarters, which the Company believes is typical of the
restaurant industry and consumer spending patterns in general with respect to
the third quarter and is due to increased holiday traffic at the Company's mall
restaurants for the fourth quarter. In addition, quarterly results have been
and, in the future are likely to be, substantially affected by the timing of new
restaurant openings. Because of the seasonality of the Company's business and
the impact of new restaurant openings, results for any calendar quarter are not
necessarily indicative of the results that may be achieved for a full fiscal
year and cannot be used to indicate financial performance for the entire year.
IMPACT OF INFLATION & MARKET RISKS. The Company does not believe that
inflation has materially impacted net income during the past three years.
Substantial increases in costs and expenses, particularly food, supplies, labor
and operating expenses, could have a significant impact on the Company's
operating results to the extent such increases cannot be passed along to
customers. If operating expenses increase, management intends to attempt to
recover increased costs by increasing prices to the extent deemed advisable
considering competitive conditions. The Company does not have or participate in
transactions involving derivative, financial and commodity instruments.
ACCELERATING GROWTH STRATEGY. The Company's ability to expand by adding
Company-owned and franchised restaurants and acquisitions will depend on a
number of factors, including the availability of suitable locations, the ability
to hire, train and retain an adequate number of experienced management and
hourly employees, the availability of acceptable lease terms and adequate
financing, timely construction of restaurants, the ability to obtain various
government permits and licenses and other factors, some of which are beyond the
control of the Company and its franchisees. The opening of additional franchised
restaurants will depend, in part, upon the ability of existing and future
franchisees to obtain financing or investment capital adequate to meet their
market development obligations. There can be no assurance that the Company will
be able to open the number of restaurants it currently plans to open or that new
restaurants can be operated profitably. Expansion into new geographic markets in
which the Company has no operating experiences and in which Mexican and Tex-Mex
food restaurants are less prevalent than in Texas has an inherent risk. Consumer
tastes vary from region to region in the United States, and there can be no
assurance that customers located in the regions of the United States into which
the Company intends to expand will be as receptive to Mexican and Tex-Mex food
as those customers in its existing markets. There can be no assurance as to the
success of the Company's efforts to expand into other geographic regions or that
the cost of such efforts will not have a material adverse effect on the
Company's results of operations or financial condition.
SMALL RESTAURANT BASE AND GEOGRAPHIC CONCENTRATION. The results
achieved to date by the Company's relatively small restaurant base may not be
indicative of the results of a larger number of restaurants in a more
geographically dispersed area. Because of the Company's relatively small
restaurant base, an unsuccessful new restaurant could have a more significant
effect on the Company's results of operations than would be the case in a
company owning more restaurants. Additionally, given the Company's present
geographic concentration (all Company-owned units are currently in Texas,
Oklahoma, Tennessee, Michigan and Idaho), results of operations may be adversely
affected by economic or other conditions in the region and adverse publicity
relating to the Company's restaurants could have a more pronounced adverse
effect on the Company's overall sales than might be the case if the Company's
restaurants were more broadly dispersed.
CONTROL OF THE COMPANY BY MANAGEMENT AND DIRECTORS. Approximately 46%
of the Common Stock and rights to acquire Common Stock of the Company are
beneficially owned or held by Larry N. Forehand, David Nierenberg, Michael D.
Domec and Louis P. Neeb, directors and/or executive officers of the Company.
SHARES ELIGIBLE FOR FUTURE SALE AND STOCK PRICE. Sales of substantial
amounts of shares in the public market could adversely affect the market price
of the Common Stock. The Company currently has 3,597,705 shares of Common Stock
outstanding. The Company has granted limited registration rights to holders of
warrants granted by the Company and Larry N. Forehand to Louis P. Neeb, Tex-Mex
Partners, L.C. and a former officer of the Company to register the 880,766
underlying shares of Common Stock covered by such warrants in connection with
registrations otherwise undertaken by the Company. In any event, the market
price of the Common Stock could be subject to significant fluctuations in
response to the Company's operating results and other factors.
COMPETITION. The restaurant industry is intensely competitive. The
Company competes against other family dining concepts, as well as quick service
and casual dining concepts, for customers, employees, franchisees and market
partners. See "Item 1. Business--Competition."
YEAR 2000. During 1999 the Company reviewed Year 2000 compliance and
attempted to determine the Year 2000 readiness of third parties such as
government agencies, utility companies, telecommunication companies, suppliers
and other "non-technology" third party vendors. The Company implemented a plan
to minimize the impact of its exposure to Year 2000 problems. The Company
expensed costs associated with its Year 2000 compliance program as the costs
were incurred except for costs that the Company would otherwise capitalize (new
software or hardware costs). The Company's costs associated with its Year 2000
compliance program did not exceed $50,000. The Company did not encounter any
critical system application or hardware failures during the date rollover to the
Year 2000, and has not experienced any disruptions of business activities as a
result of Year 2000 failures encountered by customers, suppliers and service
providers.
15
16
ITEM 7A. 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 amounts outstanding at year-
end, a 1% change in interest rates would change interest expense by
approximately $90,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data are set forth herein
commencing on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this Item is incorporated
herein by reference to the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this Item is incorporated
herein by reference to the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this Item is incorporated
herein by reference to the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this Item is incorporated
herein by reference to the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of the fiscal year covered by this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of Report.
1. Financial Statements:
The Financial Statements are listed in the index to Consolidated
Financial Statements on page F-1 of this Report.
2. Exhibits:
+/-2.1 Stock Purchase Agreement with Purchase of Designated Assets,
dated as of January 12, 1999, by and among the Company, La
Senorita Restaurants Acquisition Corp., a Delaware corporation
and wholly owned subsidiary of the Company, La Senorita
Traverse City, Inc., Kleinrichert Bros., Inc., La Senorita Mt.
Pleasant, Inc., KMANCO, Inc., La Senorita Lansing, Inc.,
Kenneth Kleinrichert, Donald Kleinrichert, Joseph
Kleinrichert, The Joseph Kleinrichert Trust and Steve Arnot.
[]3.1 Articles of Incorporation of the Company (as amended).
++3.2 Bylaws of the Company.
++4.1 Specimen of Certificate of Common Stock of the Company.
16
17
++4.2 Articles of Incorporation of the Company (see 3.1 above).
++4.3 Bylaws of the Company (see 3.2 above).
++10.1 Employment Agreement by and between the Company and Louis P.
Neeb dated February 28, 1996.
++10.2 Employment Agreement by and between the Company and Patrick A.
Morris dated February 28, 1996.
++10.3 Employment Agreement by and between the Company and Stacy M.
Riffe dated February 28, 1996.
++10.4 Indemnity Agreement by and between the Company and Louis P.
Neeb dated as of April 10, 1996.
++10.5 Indemnity Agreement by and between the Company and Larry N.
Forehand dated as of April 10, 1996.
++10.6 Indemnity Agreement by and between the Company and John C.
Textor dated as of April 10, 1996.
++10.7 Indemnity Agreement by and between the Company and Patrick A.
Morris dated as of April 10, 1996.
++10.8 Indemnity Agreement by and between the Company and Michael D.
Domec dated as of April 10, 1996.
++10.9 Indemnity Agreement by and between the Company and Stacy M.
Riffe dated as of April 10, 1996.
++10.10 Indemnity Agreement by and between the Company and J.J.
Fitzsimmons dated as of April 10, 1996.
++10.11 Indemnity Agreement by and between the Company and Richard E.
Rivera dated as of April 10, 1996.
++10.12 Corrected Warrant Agreement by and between the Company and
Louis P. Neeb dated as of February 26, 1996.
++10.13 Corrected Warrant Agreement by and between the Company and
Tex-Mex Partners, L.C. dated as of February 26, 1996.
++10.14 Form of the Company's Multi-Unit Development Agreement.
++10.15 Form of the Company's Franchise Agreement.
+++10.16 1996 Long Term Incentive Plan.
+++10.17 Stock Option Plan for Non-Employee Directors.
++10.18 Lease Agreement, dated July 15, 1977, between Weingarten
Realty, Inc. and Fiesta Restaurants, Inc., for property
located at 1020 Federal Road, Houston, Texas (Casa Ole No. 4).
++10.19 Lease Agreement, dated July 12, 1978, between W & W
Investments, a Texas partnership, and Fiesta Restaurants,
Inc., for property located at 2727 John Ben Shepperd Pkwy,
Odessa, Texas (Casa Ole No. 8).
++10.20 Lease Agreement, dated August 11, 1986, between
Hartford-Lubbock Limited Partnership, a Texas limited
partnership, and Casa Ole No. 10, Inc., for property located
at 4413 South Loop 289, Lubbock, Texas (Casa Ole No. 10).
++10.21 Lease Agreement, dated July 29, 1983, between Phil R.
Kensinger, Trustee, and Quality Mexican Restaurants, Inc., for
property located at 12203 Murphy Rd., Stafford, Texas (Casa
Ole No. 13).
++10.22 Lease Agreement, dated July 17, 1987, between Leroy Melcher
and Fiesta Restaurants, Inc., for property located at 3121
Palmer Hwy, Texas City, Texas (Casa Ole No. 14).
++10.23 Lease Agreement, dated February 17, 1981, between Eldred Doty,
wife Joyce C. Doty and Fiesta Restaurants, Inc., for property
located at 3121 Palmer Hwy, Texas City, Texas (Casa Ole No.
14).
++10.24 Lease Agreement, dated May 16, 1983, between CBL Management,
Inc., a Tennessee corporation, and Fiesta Restaurants, Inc.,
d/b/a Casa Ole, for property located at Post Oak Mall #3026,
College Station, Texas (Casa Ole No. 22).
++10.25 Lease Agreement, dated June 5, 1985, between David Z. Mafrige
Interests and Fiesta Restaurants, Inc., for property located
at 12350 Gulf Freeway, Houston, Texas (Casa Ole No. 28).
17
18
++10.26 Lease Agreement, dated March 13, 1985, between Plantation
Village Plaza Joint Venture and Fiesta Restaurants, Inc., for
property located at 415 This Way, Lake Jackson, Texas (Casa
Ole No. 29).
++10.27 Lease Agreement, dated August 6, 1985, between Dalsan
Properties--Waco II, Service Life and Casualty Insurance Co.
and Casa Ole No 34, Inc., for property located at 414 N.
Valley Mills Dr., Waco, Texas (Casa Ole No. 34).
++10.28 Lease Agreement, dated May 6, 1976, between Federated Store
Realty, Inc., Prudential Insurance Company of America and
Fiesta Restaurants, Inc., for property located at 263
Greenspoint Mall, Houston, Texas (Casa Ole No. 35).
++10.29 Lease Agreement, dated May 30, 1989, between Temple Mall
Company, a Texas General Partnership, and Casa Ole Franchise
Services, Inc., for property located at 3049 S. 31st Street,
Temple, Texas (Casa Ole No. 37).
++10.30 Lease Agreement, dated May 3, 1995, between CO Properties No.
3, a Texas general partnership, and Casa Ole Franchise
Services, Inc., for property located at 1135 Edgebrook,
Houston, Texas.
++10.31 Corrected Warrant Agreement by and between Larry N. Forehand
and Louis P. Neeb dated as of February 26, 1996.
++10.32 Corrected Warrant Agreement by and between Larry N. Forehand
and Tex-Mex Partners, L.C. dated as of February 26, 1996.
++10.33 Corrected Warrant Agreement by and between Larry N. Forehand
and Patrick A. Morris dated as of February 26, 1996.
++10.34 Corrected Warrant Agreement by and between Larry N. Forehand
and Stacy M. Riffe dated as of February 26, 1996.
++10.35 Indemnification letter agreement by Larry N. Forehand dated
April 10, 1996.
+10.36 1996 Manager's Stock Option Plan (incorporated by reference to
Exhibit 99.2 of the Company's Form S-8 Registration Statement
Under the Securities Act of 1933, dated February 24, 1997,
filed by the Company with the Securities and Exchange
Commission).
**10.37 Lease Agreement, dated June 21, 1996, between Sam Jack
McGlasson and Casa Ole Restaurants, Inc., for property located
at 725 North Loop 340, Bellmead, Texas (Casa Ole No. 51).
**10.38 Amended Lease Agreement, dated November 7,1996, between The
Prudential Insurance Company of America, by and through its
Agent, Terranomics Retail Services, Inc. and Casa Ole
Restaurants, Inc., for property located at 263 Greenspoint
Mall, Houston, Texas (Casa Ole No. 35).
**10.39 Assignment of Lease and Consent to Assign, dated October 11,
1996, between Roy M. Smith and W.M. Bevly d/b/a Padre Staples
Mall (landlord) and Pepe, Inc. d/b/a Casa Ole Restaurant and
Cantina (tenant/assignor) and Jack Goodwin (guarantor) and
Casa Ole No. 29, Inc., for property located at 1184 Padre
Staples Mall, Corpus Christi, Texas (Casa Ole No. 36).
**10.40 Option Contract and Agreement dated January 11, 1997, between
Casa Ole of Beaumont, Inc., a Texas corporation, and Casa Ole
Restaurants, Inc.
**10.41 $750,000 Promissory Note, dated December 30, 1996, between
Casa Ole No. 29, Inc. and Rainbolt, Inc. for the purchase of
Victoria, Texas restaurant (Casa Ole No. 15).
10.42 Credit Agreement Between Casa Ole Restaurants, Inc., as the
Borrower, and NationsBank of Texas, N.A., as the Bank, for
$10,000,000, dated July 10, 1996 (incorporated by reference to
Exhibit 10.1 of the Company's Form 10-Q Quarterly Report Under
the Securities Exchange Act of 1934, dated August 22, 1996,
filed by the Company with the Securities and Exchange
Commission).
**10.43 Amendment No. 1, dated January 13, 1997, to the Credit
Agreement Between Casa Ole Restaurants, Inc., as the Borrower,
and NationsBank of Texas, N.A., as the Bank, for $10,000,000,
dated July 10, 1996.
**10.44 Employment Agreement by and between the Company and Curt
Glowacki dated May 15, 1997.
**10.45 Employment Agreement by and between the Company and Andrew J.
Dennard dated May 20, 1997.
+10.46 Form of Executive Officer Stock Purchase Letters.
18
19
++21.1 List of subsidiaries of the Company (incorporated by reference
to Exhibit 22.1 of the Company's Form S-1 Registration
Statement Under the Securities Act of 1933, dated April
24,1996, filed by the Company with the Securities and Exchange
Commission).
*23.1 Consent of KPMG LLP.
*24.1 Power of Attorney (included on the signature page to this Form
10-K).
*27.1 Financial Data Schedule.
------------
* Filed herewith.
** Incorporated by reference to corresponding Exhibit number of
the Company's (then known as Casa Ole Restaurants, Inc.) Form
10-K Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, dated March 24, 1997, filed
by the Company with the Securities and Exchange Commission.
+/- Incorporated by reference to corresponding Exhibit 2.1 of the
Company's (then known as Casa Ole Restaurants, Inc.) Form 8-K
filed by the Company on May 14, 1999 with the Securities and
Exchange Commission.
[] Incorporated by reference to corresponding Exhibit number of
the Company's Form 8K filed by the Company on May 25, 1999
with the Securities and Exchange Commission.
++ Incorporated by reference to corresponding Exhibit number of
the Company's (then known as Casa Ole Restaurants, Inc.) Form
S-1 Registration Statement Under the Securities Act of 1933,
dated April 24, 1996, filed by the Company with the Securities
and Exchange Commission.
+ Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
There were no reports on Form 8-K during the last quarter of the period
covered by this report.
19
20
MEXICAN RESTAURANTS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors ........................................................... F-2
Consolidated Balance Sheets as of January 3, 1999 and January 2, 2000 .................... F-3
Consolidated Statements of Income for each of the years in the three fiscal-year
period ended January 2,2000 ............................................................ F-4
Consolidated Statements of Stockholders' Equity for each of the years in
the three fiscal-year period ended January 2, 2000 ..................................... F-5
Consolidated Statements of Cash Flows for each of the years in the three
fiscal-year period ended January 2, 2000 ............................................... F-6
Notes to Consolidated Financial Statements ............................................... F-8
F-1
21
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Mexican Restaurants, Inc.:
We have audited the accompanying consolidated balance sheets of Mexican
Restaurants, Inc. (the Company) as of January 3, 1999 and January 2, 2000, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three fiscal-year period ended January 2,
2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mexican
Restaurants, Inc. as of January 3, 1999 and January 2, 2000, and the results of
their operations and their cash flows for each of the years in the three
fiscal-year period ended January 2, 2000, in conformity with generally accepted
accounting principles.
KPMG LLP
Houston, Texas
March 10, 2000
F-2
22
MEXICAN RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 3, 1999 AND JANUARY 2, 2000
FISCAL YEARS
1998 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 462,847 $ 743,935
Royalties receivable ................................. 70,711 42,660
Other receivables .................................... 280,335 448,468
Inventory ............................................ 459,260 701,195
Taxes receivable ..................................... 547,272 120,427
Prepaid expenses ..................................... 383,365 522,379
------------ ------------
Total current assets .......................... 2,203,790 2,579,064
------------ ------------
Property, plant and equipment .......................... 17,937,201 23,360,615
Less accumulated depreciation ........................ (4,526,005) (5,879,908)
------------ ------------
Net property, plant and equipment ............. 13,411,196 17,480,707
Deferred tax assets .................................... 938,601 1,390,873
Property held for resale ............................... 631,431 1,100,000
Other assets ........................................... 6,235,960 8,492,657
------------ ------------
$ 23,420,978 $ 31,043,301
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................... $ 1,454,794 $ 2,422,503
Accrued sales and liquor taxes ......................... 293,743 175,932
Accrued payroll and taxes .............................. 803,256 877,085
Accrued expenses ....................................... 699,437 587,116
------------ ------------
Total current liabilities ..................... 3,251,230 4,062,636
------------ ------------
Long-term debt ......................................... 2,870,000 8,963,320
Other liabilities ...................................... 234,864 372,571
Deferred gain .......................................... 3,505,674 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 ........................... 20,537,076 20,537,076
Retained earnings .................................... 4,324,807 5,157,931
Treasury stock, cost of 1,135,000 shares ............... (11,350,000) (11,350,000)
------------ ------------
Total stockholders' equity .................... 13,559,210 14,392,334
------------ ------------
$ 23,420,978 $ 31,043,301
============ ============
See accompanying notes to consolidated financial statements.
F-3
23
MEXICAN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE FISCAL YEARS ENDED DECEMBER 28, 1997
JANUARY 3, 1999 AND JANUARY 2, 2000
FISCAL YEARS
1997 1998 1999
------------ ------------ ------------
Revenues:
Restaurant sales .............................................. $ 34,301,030 $ 46,999,835 $ 55,997,170
Franchise fees and royalties .................................. 1,029,268 1,120,619 1,468,596
------------ ------------ ------------
35,330,298 48,120,454 57,465,766
Costs and expenses:
Cost of sales ................................................. 8,953,517 12,898,673 15,773,922
Labor ......................................................... 11,555,208 15,503,584 18,785,669
Restaurant operating expenses ................................. 7,675,536 10,106,957 12,662,395
General and administrative .................................... 3,632,405 4,429,375 5,191,043
Depreciation and amortization ................................. 1,101,273 1,292,394 1,708,965
Pre-opening costs ............................................. 143,430 362,189 293,931
Asset impairments and restaurant closure costs ................ 433,173 -- 1,493,449
------------ ------------ ------------
33,494,542 44,593,172 55,909,374
Infrequently occurring income (expense) items, net .............. -- -- 437,684
------------ ------------ ------------
Operating income ....................................... 1,835,756 3,527,282 1,994,076
------------ ------------ ------------
Other income (expense):
Interest income ............................................... 141,723 41,817 21,304
Interest expense .............................................. (451,868) (524,413) (491,494)
Other, net .................................................... 139,588 97,718 (63,730)
------------ ------------ ------------
(170,557) (384,878) (533,920)
------------ ------------ ------------
Income before income tax expense and extraordinary item ......... 1,665,199 3,142,404 1,460,156
Income tax expense .............................................. 650,398 1,209,825 627,032
------------ ------------ ------------
Income before extraordinary item ................................ 1,014,801 1,932,579 833,124
Extraordinary item (net of tax of $25,025) ...................... -- 39,975 --
------------ ------------ ------------
Net income ............................................. $ 1,014,801 $ 1,972,554 $ 833,124
============ ============ ============
Basic income per share (before extraordinary item) .............. $ .28 $ .54 $ .23
============ ============ ============
Basic income per share (extraordinary item) ..................... $ -- $ .01 $ --
============ ============ ============
Basic income per share .......................................... $ .28 $ .55 $ .23
============ ============ ============
Diluted income per share (before extraordinary item) ............ $ .28 $ .54 $ .23
============ ============ ============
Diluted income per share (extraordinary item) ................... $ -- $ .01 $ --
============ ============ ============
Diluted income per share ........................................ $ .28 $ .55 $ .23
============ ============ ============
Weighted average number of shares (diluted) ..................... 3,601,902 3,600,429 3,603,712
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
24
MEXICAN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED
DECEMBER 28, 1997, JANUARY 3, 1999
AND JANUARY 2, 2000
ADDITIONAL TOTAL
CAPITAL PAID-IN RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
------------ ------------ ------------ ------------ ------------
Balances at December 27, 1996 ..... $ 47,327 $ 20,685,610 $ 1,337,452 $(11,350,000) $ 10,720,389
Net income ...................... -- -- 1,014,801 -- 1,014,801
------------ ------------ ------------ ------------ ------------
Balances at December 28, 1997 ..... $ 47,327 $ 20,685,610 $ 2,352,253 $(11,350,000) $ 11,735,190
Warrants purchased ............... -- (148,534) -- -- (148,534)
Net income ...................... -- -- 1,972,554 -- 1,972,554
------------ ------------ ------------ ------------ ------------
Balances at January 3, 1999 ....... $ 47,327 $ 20,537,076 $ 4,324,807 $(11,350,000) $ 13,559,210
Net income ..................... -- -- 833,124 -- 833,124
------------ ------------ ------------ ------------ ------------
Balances at January 2, 2000 ....... $ 47,327 $ 20,537,076 $ 5,157,931 $(11,350,000) $ 14,392,334
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-5
25
MEXICAN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED DECEMBER 28, 1997,
JANUARY 3, 1999 AND JANUARY 2, 2000
FISCAL YEARS
1997 1998 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................................... $ 1,014,801 $ 1,972,554 $ 833,124
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................................ 1,244,703 1,654,583 1,708,965
Deferred gain amortization ................................... -- (116,634) (253,234)
Asset impairments and restaurant closure costs ............... 433,173 -- 1,493,449
Gain on early extinguishment of debt ......................... -- (39,975) --
Gain on sale of fixed assets ................................. -- (7,188) (457,243)
Reserve for bad debts and note receivable write-offs ......... 112,500 -- --
Deferred income taxes ........................................ 62,755 (639,065) (452,272)
Changes in assets and liabilities, net of effects of acquisitions:
Royalties receivable ......................................... (31,710) 41,253 28,051
Receivable from affiliates ................................... 1,000 13,000 --
Other receivables ............................................ 11,689 (90,270) (168,133)
Taxes receivable/payable ..................................... (102,409) (469,888) 426,845
Inventory .................................................... (33,169) (43,819) (241,935)
Prepaids and other current assets ............................ (240,579) (134,502) (152,282)
Other assets ................................................. (204,831) (6,448) (93,056)
Accounts payable ............................................. (8,064) 357,556 967,709
Accrued expenses and other liabilities ....................... 302,369 (501,328) (156,303)
Deferred franchise fees and other long-term liabilities ...... 21,235 93,789 137,707
------------ ------------ ------------
Total adjustments ...................................... 1,568,662 111,064 2,788,268
------------ ------------ ------------
Net cash provided by operating activities .............. 2,583,463 2,083,618 3,621,392
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchase of acquisition, net of cash acquired ........ (11,613,741) -- (4,132,945)
Issuance of notes receivable ..................................... (115,000) -- --
Purchase of property, plant and equipment ........................ (8,338,660) (5,665,556) (7,297,411)
Sale of marketable securities .................................... 1,007,255 -- --
Proceeds from sale of property, plant and equipment .............. 530,000 11,360,632 1,996,732
------------ ------------ ------------
Net cash provided by (used in) investing activities .............. (18,530,146) 5,695,076 (9,433,624)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from minority partners' contributions ................... 41,000 20,000 --
Net borrowings under line of credit agreement .................... 4,990,204 2,247,153 6,093,320
Proceeds from issuance of long-term debt ......................... 6,000,000 -- --
Payments of notes payable ........................................ (517,802) (10,569,024) --
------------ ------------ ------------
Net cash provided by (used in) financing activities ... 10,513,402 (8,301,871) 6,093,320
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ....... (5,433,281) (523,177) 281,088
Cash and cash equivalents at beginning of year ................... 6,419,305 986,024 462,847
------------ ------------ ------------
Cash and cash equivalents at end of year ......................... $ 986,024 $ 462,847 $ 743,935
============ ============ ============
F-6
26
MEXICAN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year:
Interest .............................................................. $ 327,933 $ 692,763 $ 493,845
Income taxes .......................................................... 1,039,812 2,178,856 807,882
Non-cash financing activities:
Exchange of equipment for note balance ................................ 32,500 200,004 --
Note issued for purchase of restaurant ................................ 750,000 -- --
Undeveloped site exchanged for purchase of restaurant ................. -- 277,771 --
Exchange of note for warrants ......................................... -- 148,534 --
See accompanying notes to consolidated financial statements.
F-7
27
MEXICAN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997, JANUARY 3, 1999 AND JANUARY 2, 2000
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
On February 16, 1996, Mexican Restaurants, Inc. (formerly Casa Ole
Restaurants, Inc.) was incorporated in the state of Texas, and on April 24,
1996, its initial public offering of 2,000,000 shares of Common Stock became
effective. Mexican Restaurants, Inc. is the holding company for Casa Ole
Franchise Services, Inc. and fifteen subsidiary restaurant operating
corporations (collectively the "Company"). Casa Ole Franchise Services, Inc. was
incorporated in 1977, and derives its revenues from the collection of franchise
fees under a series of protected location franchise agreements and from the sale
of restaurant accessories to the franchisees of those protected location
franchise agreements. The restaurants feature moderately priced Mexican and
Tex-Mex food served in a casual atmosphere. The first Casa Ole restaurant was
opened in 1973.
On July 2, 1997, the Company purchased 100% of the outstanding stock of
Monterey's Acquisition Corp. ("MAC"). The Company purchased the shares of common
stock for $4.0 million, paid off outstanding debt and accrued interest totaling
$7.1 million and funded various other agreed upon items approximating $500,000.
Approximately $4.8 million of goodwill was recorded as a result of this
purchase. At the time of the acquisition, MAC owned and operated 26 restaurants
in Texas and Oklahoma under the names "Monterey's Tex-Mex Cafe," "Monterey's
Little Mexico" and "Tortuga Coastal Cantina."
On April 30, 1999, the Company purchased 100% of the outstanding stock
of La Senorita Restaurants, a Mexican restaurant chain operated in the state of
Michigan. The Company purchased the shares of common stock of La Senorita for
$4.0 million. The transaction was funded with the Company's revolving line of
credit with Bank of America. La Senorita operates five company-owned
restaurants, and has four franchise restaurants. One of the franchise
restaurants is owned by a partnership in which the parent company has a 17.5%
limited interest which is accounted for under the cost method.
The table below presents pro forma income statement information as if
the Company had purchased La Senorita at the beginning of the applicable 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.
FISCAL YEAR
1998 1999
Revenues .............................................................. $56,211,940 $59,829,169
Net Income ............................................................ 2,311,910 898,674
Diluted income per share .............................................. 0.64 0.25
The pro forma information does not purport to be indicative of
results of operations which would have occurred had the acquisition
been consummated on the date indicated or future results of operations.
Allocation of purchase price for La Senorita is approximately
as follows:
Working Capital .................... $ 37,000
Furniture, Fixtures & Equipment .... 1,216,000
Goodwill ........................... 2,830,000
Other .............................. 50,000
----------
$4,133,000
(b) Principles of Consolidation
The consolidated financial statements include the accounts of Mexican
Restaurants, Inc. and its wholly owned subsidiaries, after elimination of all
significant inter-company transactions. The Company owns and operates various
Mexican restaurant concepts principally in Texas, Oklahoma, Idaho, Tennessee and
Michigan. The Company also franchises the Casa Ole concept principally in Texas
and Louisiana and the La Senorita concept principally in the state of Michigan.
(c) Fiscal Year
The Company maintains its accounting records on a 52/53 week fiscal
year ending on the Sunday nearest December 31st. Fiscal years 1997 and 1999
consisted of 52 weeks. Fiscal year 1998 consisted of 53 weeks.
F-8
28
MEXICAN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(d) Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to be
cash equivalents.
(e) Inventory
Inventory, which is comprised of food and beverages, is stated at the
lower of cost or market. Cost is determined using the first-in, first-out
method. Miscellaneous restaurant supplies are included in inventory and valued
on a specific identification basis.
(f) Pre-opening Costs
AICPA Statement of Position 98-5, "Reporting on the costs of Start-up
Activities" ("SOP 98-5"), requires that costs of start-up activities be expensed
as incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998. Pre-opening costs primarily consists of
hiring and training employees associated with the opening of a new restaurant.
(g) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation on
buildings and improvements is calculated on the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized
straight-line over the shorter of the lease term plus options or estimated
useful life of the assets, and depreciation on equipment is calculated on the
straight-line method over the estimated useful lives of the assets.
Buildings and improvements.......................................... 20-40 years
Vehicles............................................................ 5 years
Equipment........................................................... 3-15 years
Leasehold improvements.............................................. 3-20 years
Significant expenditures that add materially to the utility or useful
lives of property, plant and equipment are capitalized. All other maintenance
and repair costs are charged to current operations. The cost and related
accumulated depreciation of assets replaced, retired or otherwise disposed of
are eliminated from the property accounts and any gain or loss is reflected as
other income and expense. Recoverability of assets to be held is measurable by
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount the carrying value exceeds
the fair value of the asset. The Company recorded an impairment provision at
January 2, 2000 of approximately $1,493,449 relating to the impairment of assets
at restaurants that have or may be closed. Property held for resale is
separately aggregated in the consolidated balance sheet and is recorded at
estimate fair market value ($631,000 and $1,100,000 for fiscal years 1998 and
1999, respectively). There were no such impairment costs during fiscal 1998 and
approximately $430,000 of such costs in fiscal 1997. Fiscal 1999 also included a
gain on sale of $519,685 on a restaurant sold to the state of Texas (by eminent
domain) for $1,150,000.
(h) Other Assets
At January 2, 2000, other assets included $8.2 million of goodwill,
primarily resulting from the MAC and La Senorita acquisitions. Goodwill is being
amortized over 40 years for MAC and over 15 years for La Senorita. Accumulated
amortization as of January 2, 2000 was $506,000. The Company assesses the
recoverability of intangible assets by determining whether amortization of the
asset balance over its remaining life can be recovered through undiscounted
operating cash flows of the acquired operation. The Company believes that no
impairment of goodwill exists.
(i) Income Taxes
Income taxes are provided based on the asset and liability method of
accounting pursuant to Statement of Financial Accounting Standards (SFAS) No.
109, Accounting for Income Taxes.
(j) Franchise Fees
Franchise fee revenue from an individual franchise sale is recognized
when all services relating to the sale have been performed and the restaurant
has commenced operation. Initial franchise fees relating to area franchise sales
are recognized ratably in proportion to services that are required to be
performed pursuant to the area franchise or development agreements and
proportionately as the restaurants within the area are opened.
F-9
29
MEXICAN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(k) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Effective the first quarter of fiscal 1998, the Company changed its
estimate of the useful lives of certain recently acquired fixed assets,
primarily those belonging to MAC. The purpose of the change was to bring the
asset lives of Casa Ole and MAC into conformity with each other and with
industry norms. As a result of this change, net income in fiscal 1998 was
increased approximately $324,720 and basic and diluted earnings per share were
increased approximately $0.09 from amounts that would have been reported had the
change in lives not been made.
(l) Reclassifications
Certain reclassifications have been made to the 1997 and 1998 amounts
to conform to the 1999 presentation.
(2) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at January 3, 1999 and January 2, 2000
were as follows:
FISCAL YEARS
1998 1999
----------- -----------
Land................................................................ $ 2,298,755 $ 804,035
Buildings and improvements .......................................... 476,063 1,194,652
Vehicles ............................................................ 31,178 31,178
Equipment and smallwares ............................................ 9,248,457 12,585,832
Leasehold improvements .............................................. 4,755,219 8,584,314
Construction in progress ............................................ 1,127,529 160,604
----------- -----------
Total ...................................................... $17,937,201 $23,360,615
=========== ===========
(3) LONG-TERM DEBT
Long-term debt consists of the following at January 3, 1999 and January
2, 2000:
FISCAL YEARS
1998 1999
---------- ----------
Bank of America, Revolving Line of Credit ............................ 2,870,000 8,963,320
---------- ----------
Less current installments ............................................ -- --
---------- ----------
Long-term debt, excluding current installments .............. $2,870,000 $8,963,320
========== ==========
In fiscal 1997, the Company purchased a franchise location in exchange
for a $750,000 note. During the first quarter of fiscal 1998, the Company
accepted an offer from the former franchisee to prepay the remaining $450,000
note balance for a discounted sum of $385,000, resulting in an extraordinary
gain, net of taxes, of $39,975.
On June 25, 1998, the Company completed an $11.5 million sale-leaseback
transaction with Franchise Finance Corporation of America ("FFCA"). The proceeds
from the sale-leaseback transaction were used to pay down most of the Company's
outstanding debt with Bank of America. In fiscal year 1998, the Company amended
its credit facility with Bank of America. The terms of the amended credit
facility are similar to those in the original facility; however, the facility
was reduced from a $13.0 million term and revolving credit facility to a $5.0
million revolving line of credit. In fiscal year 1999, the Company amended its
credit facility with Bank of America, increasing the facility to $10.0 million.
The interest rate is either the prime rate (8.5% as of January 2, 2000) or LIBOR
plus a stipulated percentage. The Company is subject to a non-use fee of 0.35%
on the unused portion of the revolver from the date of the credit agreement. The
debt is unsecured except for the stock of subsidiaries. The terms of the
agreement require the Company to meet certain financial covenants. During the
fourth quarter of fiscal year 1999, the Company was not in compliance with a
debt covenant under the debt agreement. The bank waived the lack of compliance
and amended certain future covenant ratios under the debt agreement. The
amendment also extended the maturity date of the facility to July 15, 2002 and
reduced the facility by $500,000 at December 31, 2000 and $1.0 million at
December 31, 2001.
F-10
30
MEXICAN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Maturities on long-term debt are as follows:
2000 ......................................... --
2001 ......................................... 463,320
2002 ......................................... 8,500,000
----------
$8,963,320
==========
(4) INCOME TAXES
The provision for income tax expense is summarized as follows for
fiscal years 1997, 1998 and 1999:
1997 1998 1999
----------- ----------- -----------
Current:
Federal......................................... $ 526,092 $ 1,361,780 $ 1,004,217
State and local ................................ 61,551 241,544 75,087
Deferred ........................................... 62,755 (393,499) (452,272)
----------- ----------- -----------
$ 650,398 $ 1,209,825 $ 627,032
=========== =========== ===========
The actual income tax expense differs from expected income tax expense
by applying the U.S. federal corporate tax rate to income before income tax
expense as follows:
1997 1998 1999
----------- ----------- -----------
Expected tax expense ............................................... $ 566,168 $ 1,068,417 $ 496,453
State tax expense, net ............................................. 40,624 159,419 49,557
Non-deductible amortization ........................................ 26,884 46,288 38,181
Other .............................................................. 16,722 (64,299) 42,841
----------- ----------- -----------
$ 650,398 $ 1,209,825 $ 627,032
=========== =========== ===========
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at January 3, 1999 and January
2, 2000 are as follows:
JANUARY 3, JANUARY 2,
1999 2000
----------- -----------
Deferred tax assets:
Sale-leaseback ........................ $ 1,297,099 $ 1,203,403
Net operating loss carryforward ....... 143,372 --
Asset impairments ..................... 98,996 488,772
Accrued expenses ...................... 72,155 32,929
Other ................................. 23,903 20,157
----------- -----------
$ 1,635,525 $ 1,745,261
=========== ===========
Deferred tax liabilities:
Depreciation differences ......................... $ (553,552) $ (354,388)
=========== ===========
Net deferred taxes .................... $ 1,081,973 $ 1,390,873
Valuation allowance ................... (143,372) --
----------- -----------
$ 938,601 $ 1,390,873
=========== ===========
The valuation allowance was established during fiscal 1997 as a result
of the MAC acquisition by the Company. To the extent that future tax benefits
are realized that are currently allowed for, goodwill associated with the MAC
acquisition was correspondingly reduced.
F-11
31
MEXICAN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) COMMON STOCK, OPTIONS AND WARRANTS
In April 1996, the Company completed an initial public offering of
2,000,000 shares of Common Stock.
(a) 1996 Long Term Incentive Plan
The Board of Directors and shareholders of the Company have approved
the Mexican Restaurants, Inc. 1996 Long Term Incentive Plan (the "Incentive
Plan"). The Incentive Plan, as amended, authorizes the granting of up to 500,000
shares of Common Stock in the form of incentive stock options and non-qualified
stock options to key executives and other key employees of the Company,
including officers of the Company and its subsidiaries. The purpose of the
Incentive Plan is to attract and retain key employees, to motivate key employees
to achieve long-range goals and to further align the interests of key employees
with those of the other shareholders of the Company. Options granted under the
Incentive Plan will vest and become exercisable at the rate of 10% on the first
anniversary of the date of grant, 15% on the second anniversary of the date of
grant, and 25% on each of the third through fifth anniversaries of the date of
grant.
(b) Stock Option Plan for Non-Employee Directors
The Company has adopted the Mexican Restaurants, Inc. Stock Option Plan
for Non-Employee Directors (the "Directors Plan") for its outside directors and
has reserved 100,000 shares of Common Stock for issuance thereunder. The
Directors Plan provides that each outside director will automatically be granted
an option to purchase 10,000 shares of Common Stock at the time of becoming a
director. These options will be exercisable in 20% increments and will vest
equally over the five-year period from the date of grant. Such options are
priced at the fair market value at the time an individual is elected as a
director. After his or her second annual meeting of the Company, each outside
director automatically receives options to purchase 3,000 shares of Common Stock
annually, exercisable at the fair market value of the Common Stock at the close
of business on the date immediately preceding the date of grant. Such annual
options will vest at the conclusion of one year, so long as the individual
remains a director of the Company. All stock options granted pursuant to the
Directors Plan will be nonqualified stock options and will remain exercisable
until the earlier of ten years from the date of grant or six months after the
optionee ceases to be a director of the Company.
(c) 1996 Manager's Stock Option Plan
The Company has adopted the 1996 Manager's Stock Option Plan (the
"Manager's Plan") specifically for its store-level managers. The Manager's Plan
authorizes the granting of up to 200,000 shares of Common Stock in the form of
non-qualified stock options to store-level managers of the Company. The purpose
of the Manager's Plan is to attract, retain and motivate restaurant managers to
achieve long-range goals and to further align the interests of those employees
with those of the other shareholders of the Company. Options granted under the
Manager's Plan will generally vest and become exercisable at the rate of 10% on
the first anniversary of the date of grant, 15% on the second anniversary of the
date of grant, and 25% on each of the third through fifth anniversaries of the
date of grant.
(d) Warrants
In conjunction with the initial public offering, the Company entered
into warrant agreements with Louis P. Neeb and Tex-Mex, a limited liability
company of which John C. Textor (a member of the Board of Directors prior to
February 14, 2000) is a principal, pursuant to which Mr. Neeb and Tex-Mex
acquired warrants to purchase shares of Common Stock at the initial public
offering ($11.00 per share) price less the amount paid for the warrant ($.10 per
share) for an aggregate amount of Common Stock equal to ten percent (10%) of the
shares of Common Stock of the Company outstanding upon consummation of the
initial public offering, such shares to be allocated 5%, or 179,885 shares, to
Mr. Neeb and 5%, or 179,885 shares, to Tex-Mex. The Company's warrants to Mr.
Neeb became exercisable on the second anniversary of the initial public
offering, and the Company's warrants to Tex-Mex became exercisable on the first
anniversary of the initial public offering.
In late fiscal 1998 the Company exchanged a note valued in the amount
of $148,534 (principal and accrued interest) for 98,301 warrants to purchase
Common Stock previously held by a former officer of the Company. The warrants,
which were granted by Larry N. Forehand with an exercise price of $10.90 per
share, became exercisable in April 1998. Upon an exercise by Mr. Neeb or Tex-Mex
of the warrants granted to them by the Company, the Company plans to exercise
these newly acquired warrants simultaneously and use the warrant shares acquired
from Mr. Forehand to satisfy its obligations under its warrant agreements with
Mr. Neeb and Tex-Mex.
F-12
32
MEXICAN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(e) Restricted Stock
During 1999 the Company authorized the granting of 24,000 shares of
restricted stock to a key executive. The award was valued at $4.38 per share and
will vest in 20% increments over a five year period from the date of the grant.
(f) Option and Warrant Summary
Weighted Average
Shares Exercise Price
-------- ---------------
Balance at December 27, 1996 ..................... 668,678 $ 11.00
Granted ........................................ 416,500 $ 7.98
Exercised ...................................... -- --
Canceled ....................................... (246,908) $ 10.58
-------- ---------------
Balance at December 28, 1997 ..................... 838,270 $ 9.66
Granted ....................................... 69,000 $ 4.80
Exercised ..................................... -- --
Canceled ...................................... (43,000) $ 10.91
-------- ---------------
Balance at January 3, 1999 ....................... 864,270 $ 9.28
Granted ....................................... 122,500 $ 4.18
Exercised ..................................... -- --
Canceled ...................................... (80,675) $ 7.96
-------- ---------------
Balance at January 2, 2000 ....................... 906,095 $ 8.71
The options (546,325) and warrants (359,770) outstanding at January 2,
2000 had exercise prices ranging between $3.50 to $13.25, of which
306,125 of the options had exercise prices ranging from $8.63 to
$11.00, and 359,770 of the warrants had a exercise price of $10.90. As
of January 2, 2000, 485,120 options and warrants were exercisable at an
average price of $10.35.
(g) SFAS No. 123. "Accounting for Stock-Based Compensation"
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," and has accounted for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. Accordingly, no compensation cost has been recognized
for stock options or warrants. Had compensation cost for the Company's
outstanding stock options and warrants been determined based on the fair value
at the grant date for awards consistent with the provisions of SFAS No. 123, the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below for fiscal years 1997, 1998 and 1999:
1997 1998 1999
---- ---- ----
Net income - as reported ............................................. $ 1,014,801 $ 1,972,554 $ 833,124
Pro forma net income - pro forma for SFAS No. 123 .................... 475,007 1,693,517 670,960
Net income per share - as reported ................................... 0.28 0.55 0.23
Pro forma net income per share - pro forma for SFAS No. 123 .......... 0.13 0.47 0.19
The weighted average fair value of the options and warrants granted
during 1997, 1998 and 1999 is estimated at $3.61, $1.99 and $2.16 per share,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: volatility of 41% for 1997, 34% for 1998 and 52%
for 1999, risk-free interest rate of 6.5% for 1997 and 1998 and 5.8% for 1999,
an expected life of 5 years for options and 4 years for warrants and 0% dividend
yield.
F-13
33
MEXICAN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(h) Income Per 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. For fiscal years 1997, 1998 and 1999, the effect of dilutive stock
options increase the weighted average shares outstanding by approximately 4,000,
2,724 and 6,007 shares respectively, which does not affect the determination of
diluted income per share. Approximately 800,000, 835,000 and 860,000 options and
warrants were considered antidilutive for 1997, 1998 and 1999, respectively.
(6) LEASES
The Company leases restaurant operating space and equipment under
non-cancelable operating leases which expire at various dates through July 2017.
The restaurant operating space base agreements typically provide for a
minimum lease rent plus common area maintenance, insurance, and real estate
taxes, plus additional percentage rent based upon revenues of the restaurant
(generally 2% to 7%) and may be renewed for periods ranging from five to
twenty-five years.
On June 25, 1998, the Company completed a sale-leaseback transaction
involving the sale and leaseback of land, building and improvements of 13
company-owned restaurants. The properties were sold for $11.5 million and
resulted in a gain of approximately $3.5 million that was deferred and is
amortized over the terms of the leases, which are 15 years each. The leases are
classified as operating leases in accordance with SFAS No. 13 "Accounting for
Leases". The 13 leases have a total future minimum lease obligation of
$17,056,679.
Future minimum lease payments under non-cancelable operating leases
with initial or remaining lease terms in excess of one year as of January 2,
2000 are:
2000.................................................................... $ 3,724,385
2001.................................................................... 3,631,760
2002.................................................................... 3,527,838
2003.................................................................... 3,333,778
2004.................................................................... 3,017,685
Thereafter.............................................................. 26,712,234
------------
$ 43,947,680
============
Rent expense for restaurant operating space and equipment amounted to
$1,853,054, $2,751,094 and $3,932,538 for the fiscal years 1997, 1998 and 1999,
respectively.
(7) 401(k) PLAN
Beginning in fiscal year 1998, the Company established a defined
contribution 401(k) plan that covers substantially all full-time employees
meeting certain age and service requirements. Participating employees may elect
to defer a percentage of their qualifying compensation as voluntary employee
contributions. The Company may contribute additional amounts at the discretion
of management. The Company did not make any contributions to the plan in 1998 or
1999.
F-14
34
MEXICAN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) RELATED PARTY TRANSACTIONS
Bay Area Management, Inc., owned entirely by the brother of a Company
shareholder and director, provided accounting and administrative services on a
fee basis, to all of the Company-owned Casa Ole restaurants and some franchise
entities. The Company paid a termination fee of $82,000 and cancelled the
contract during 1999. Total amounts paid to Bay Area Management, Inc. in fiscal
1997, 1998 and 1999 were $231,095, $244,304 and $216,369, respectively.
The Company leases its executive offices from a company owned by two
shareholders of Mexican Restaurants, Inc. Net lease expense related to these
facilities in fiscal 1997, 1998 and 1999 was $57,755, $60,000 and $60,000
respectively.
The Company paid a success fee of $105,000 in 1997 to an entity that
benefits one of the Company's former directors, related to the MAC acquisition.
Also in fiscal 1997, the Company paid $275,000 to another director for real
estate that had been recently acquired by that director for the convenience of
the Company. The Company paid the same amount to the director that the Company
had previously committed to pay a perspective developer for a smaller parcel of
land. Subsequently, the Company constructed a restaurant on this site.
In May 1998 the Board of Directors of the Company adopted a program to
assist executives and five key employees of the Company in their purchasing of
shares of the Company. The program provides for the Company to assist the
executives and key employees in obtaining third party loans to finance such
purchases. It also provides for annual cash bonuses to such executives to
provide for payment of interest expense and principal amounts to amortize these
loans in not more than five years. The bonus payments are based on attainment of
earnings per share targets established by the Company's Board of Directors.
(9) CONTINGENCIES
The Company has litigation, claims and assessments that arise in the
normal course of business. Management believes that the Company's financial
position or results of operations will not be materially affected by such
matters.
F-15
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
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.
By: /s/ Louis P. Neeb
-------------------------------
Louis P. Neeb,
Chairman of the Board of Directors
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Louis P. Neeb, Curt Glowacki
and Andrew Dennard, and each of them, such individual's true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for such individual and in his or her name, place and stead, in
any and all capacities, to sign any and all amendments to this Form 10-K under
the Securities Exchange Act of 1934, and to file the same, with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Louis P. Neeb Chairman of the Board of
- --------------------------- Directors and
Louis P. Neeb Chief Executive Officer
(Principal Executive Officer) March 31, 2000
/s/ Larry N. Forehand Founder and Vice Chairman of the
- --------------------------- Board of Directors March 31, 2000
Larry N. Forehand
March 31, 2000
/s/ Curt Glowacki President and
- --------------------------- Chief Operating Officer March 31, 2000
Curt Glowacki
March 31, 2000
/s/ Andrew J. Dennard Vice President and
- --------------------------- Chief Financial Officer
Andrew J. Dennard (Principal Financial and Accounting Officer) March 31, 2000
/s/ David Nierenberg Director March 31, 2000
- ---------------------------
David Nierenberg
/s/ Michael D. Domec Director March 31, 2000
- ---------------------------
Michael D. Domec
/s/ J. J. Fitzsimmons Director March 31, 2000
- ---------------------------
J. J. Fitzsimmons
/s/ Richard E. Rivera Director March 31, 2000
- ---------------------------
Richard E. Rivera
/s/ J. Stuart Sargent Director March 31, 2000
- ---------------------------
J. Stuart Sargent
F-16
36
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -------------
23.1 Consent of KPMG LLP
27 Financial Data Schedule