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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 3, 1999
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
CASA OLE 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 17, 1999 was $7,895,044. 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 17, 1999: 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 18, 1999, 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 Casa Ole Restaurants, Inc. (the "Company"), its
area developers, market partners, franchisees and Casa Ole 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; consumer trial and frequency; 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
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 and Tortuga Cantina.
The first Casa Ole restaurant was opened in Pasadena, Texas in 1973. Today the
Company operates 47 restaurants and franchises 32 Casa Ole restaurants in
various communities across Texas, Louisiana, Oklahoma, Idaho and Tennessee. The
Company's restaurants are designed to appeal to a broad range of middle-income
customers, and are located primarily in small and medium-sized communities and
middle-income areas of larger 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.
Upon approval of the stockholders at its May 1999 Annual Meeting, the
Company will change its name to Mexican Restaurants, Inc."
On January 14, 1999, the Company signed a definitive purchase agreement
with the principals 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. The acquisition is expected to
be completed in the second quarter of fiscal 1999.
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.
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
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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 $3.99 to $9.95, with most items priced between
$4.99 and $6.95. Lunch prices at most Company-owned restaurants presently range
from $3.99 to $6.95.
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's 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. During 1999 the
Company intends to open at least four restaurants in the Houston Consolidated
Metropolitan Area, with one of these restaurants to be located in Galveston,
Texas.
In targeting contiguous new markets for expansion in the future, the
Company intends to concentrate initially on three to five major and middle
markets located within its existing markets in Texas and Oklahoma. The Company
will concentrate on smaller and medium sized regional trade center cities. Such
cities, while not necessarily large in population, are the primary retail and
service centers within their respective regions. Such cities typically have a
large concentration of retail activity, often including a regional mall and
several large discount and specialty retailers. Such cities are also typically
the entertainment and cultural center for their regions. As a result of their
smaller size, these regional markets are frequently underserved by restaurant
chains, and the Company believes that they offer opportunities for significant
growth. In addition, the Company believes that the ability to achieve
cost-effective media penetration with relatively few restaurants, as well as the
value orientation of these concepts, and the nature of the Company's customer
base enhance the attractiveness of these markets. Areas identified by the
Company as a "market" generally coincide with the DMA's established for those
areas.
In implementing its new unit expansion strategy, the Company may use a
combination of franchised, market partner and Company-owned restaurants. (See
"Item 1. Business--Market Partner Program.") The number of such restaurants
developed in any period will vary. The Company believes that a mix of
franchised, market partner 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, market partner and Company-owned restaurants
within the same market. In seeking franchisees and market partners, 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 1998 the
Company opened two market partner restaurants in Idaho. No new market partner
openings are planned for 1999.
In adding to its Company-owned restaurants, the Company anticipates it
will continue to selectively acquire existing franchised restaurants. During
fiscal 1998, the Company acquired the franchised restaurant in Kingsport,
Tennessee.
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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. The transaction was funded using cash on hand of
approximately $3.0 million and funds available to the Company under its amended
credit facility. At the time of 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 Cantina." The acquisition increased the
Company's penetration in existing Texas markets and gave the Company effective
penetration of the Tulsa, Oklahoma DMA. It also increased the number of Mexican
dining formats for use at specific geographic locations.
On January 14, 1999, the Company signed a definitive purchase agreement
with the principals 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. One of the franchise
restaurants is owned by a general partnership in which the parent company has a
17.5% interest. In fiscal year 1998, the La Senorita chain had company-owned
revenue of $7.5 million and total system revenue of $11.3 million. The Company
expects to close on the purchase of La Senorita in the second quarter of fiscal
1999. The Company will use its existing line of credit with NationsBank of Texas
to fund the La Senorita acquisition.
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, market partner and franchise development in existing
markets. Based on its current planning and market information, the Company
expects to open approximately five Company-owned restaurants in 1999 and
believes that its franchisees will open approximately one to two additional
restaurants. In addition, the Company will acquire five company-own restaurants
and four franchise restaurants when the La Senorita transaction is completed in
the second quarter of fiscal 1999. The Company has purchased or otherwise
secured real estate for three of its targeted 1999 openings. The Company is also
in the process of negotiating three letters of intent for properties to be
developed in Texas and Oklahoma markets. 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 $950,000 and
$1,700,000 (includes capitalized lease value). Additionally, training and other
pre-opening costs are anticipated to approximate $35,000. 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 $950,000 and $1,700,000, there can be no assurance of this. Where
possible, the Company uses build to suit or sale and leaseback transactions to
reduce its cash investment to less than $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
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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 3, 1999, the Company employed approximately 1,900 people,
of whom 1,867 were restaurant personnel at the Company-owned restaurants and 33
were corporate personnel. The Company considers its employee 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, and at least one other manager. 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 1998, the Company spent approximately 3.1%
of restaurant revenues on various forms of advertising. For fiscal 1999, the
Company expects to spend approximately 3.0% 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 14 franchisees operating a total of 32
restaurants. In 1998 the Company's franchisees opened two restaurants and closed
two restaurants. The Company also purchased one franchise restaurant and sold
one restaurant to a franchisee. As of March 17, 1999, one franchise restaurant
is under construction, and another site is owned and approved for development.
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 will have 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 1999 to 2015.
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 franchising agreement and for
a limited time, and in a limited area, after the term of
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the franchise agreement. The enforceability of such noncompete 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."
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, noncompete 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. It is intended that area development agreements will not be
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 restautants.
MARKET PARTNER PROGRAM
The Company has developed a market partner program whereby the Company
will form a partnership agreement with an individual to build a number of
Company-owned restaurants. In return for site selection work, training,
supervising and other operational activities, the market partner will receive
10% of the cash flow of each restaurant that it opens. The Company, as a 90%
partner, will fund the majority of the costs associated with constructing and
opening each restaurant and will provide administrative and accounting support.
The Company has entered into agreements with one market partner in Idaho. This
market partner has opened four restaurants. One restaurant developed by this
market partner, in Pocatello, Idaho, has been closed. As with franchising, the
market partner program will allow the Company to expand the number of stores and
penetrate markets more quickly than it could with only 100% Company-owned units.
The partnership entity will be required to sign the Company's standard franchise
agreement. Other than the payment of royalties, which will be at a rate less
than stipulated in the standard franchise agreement, the partnership entity will
be subject to all criteria contained within the franchise agreement.
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
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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.
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 a 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" and "Tortuga Cantina" with the U.S.
Patent Office.
ITEM 2. PROPERTIES
Casa Ole's executive offices are located in approximately 5,000 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 1999, with rental payments of $5,000 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 four restaurant locations
with the balance of locations on leased sites. Two of the owned restaurants are
currently being processed with Franchise Finance Corporation of America ("FFCA")
for sale and lease back. Another owned restaurant and site are under contract
for sale for approximately $1.1 million to the State of Texas. This sale is
expected to close in the second quarter of 1999, and the Company will continue
to operate the restaurant at the site through the end of fiscal year 1999. The
fourth owned restaurant was closed in fiscal 1997 and is currently for sale.
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 3, 1999, the Company's system of company-operated,
franchised and joint venture (market partner) restaurants included 79
restaurants. As of such date, the Company operated, franchised and had market
partner arrangements with respect to Casa Ole restaurants in the States of
Texas, Louisiana and Idaho. As of such date, the Company operated Monterey's
Tex-Mex Cafe and Monterey's Little Mexico restaurants in the States of Texas and
Oklahoma, and Tortuga Cantina restaurants in the State of Texas. The Company's
portfolio of restaurants is summarized below:
CASA OLE
--------
Company-operated 1 Owned
17 Leased
Franchised 32
Market Partner 3 Leased
--
TOTAL 53
==
MONTEREY'S TEX-MEX CAFE
-----------------------
Company-operated 12 Leased
--
TOTAL 12
==
MONTEREY'S LITTLE MEXICO
------------------------
Company-operated 9 Leased
--
TOTAL 9
==
TORTUGA CANTINA
---------------
Company-operated 1 Owned
4 Leased
--
TOTAL 5
==
GRAND TOTAL 79
==
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
such 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 3, 1999.
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9
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 the inception of trading on April 25, 1996.
HIGH LOW
---- ---
FISCAL YEAR 1996:
First Quarter (ended April 19, 1996)....................... N/A N/A
Second Quarter (ended July 12, 1996)....................... 15 1/4 13 3/8
Third Quarter (ended October 4, 1996)...................... 14 1/8 12 7/8
Fourth Quarter (ended December 27, 1996)................... 13 1/2 8 3/4
FISCAL YEAR 1997:
First Quarter (ended April 18, 1997)....................... 9 8 7/8
Second Quarter (ended July 11, 1997)....................... 9 8 5/8
Third Quarter (ended October 3, 1997)...................... 6 13/16 6 3/4
Fourth Quarter (ended December 26, 1997)................... 3 3/4 3 1/2
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 March 17, 1999)..................... 4 1/2 3 7/16
As of March 17, 1999, the Company estimates that there were
approximately 600 beneficial owners of the Company's Common Stock, represented
by approximately 27 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.
During certain periods prior to the Company's initial public offering
in 1996, substantially all of the corporations were treated for federal and
state income tax purposes as S corporations under Subchapter S of the Code, and
accordingly, such corporations made S corporation distributions to its
shareholders to pay federal income taxes on the earnings taxed directly to the
shareholders thereof and to provide a return on the shareholders' investment.
During fiscal years 1994 and 1995, such corporations declared aggregate
distributions of $1.8 million and $1.5 million, respectively, to its
shareholders. During fiscal 1996, distributions of $1.5 million, representing a
combination of the 1995 working capital balance of approximately $618,000 and
earnings of the prior corporations through the date of the initial public
offering of approximately $866,000, were paid to the then existing shareholders.
No distributions to shareholders were made in fiscal 1997.
ITEM 6. SELECTED FINANCIAL DATA
Balance sheet data as of December 30, 1994, December 29, 1995, December
27, 1996, December 28, 1997 and January 3, 1999, 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
-----------------------------------------------------------------------------
1994 1995 1996 1997 1998(1)
-------- ------- ------- ------- -------
(Dollars in thousands, except per share amounts)
INCOME STATEMENT DATA(2):
Revenues:
Restaurant sales........................ $17,420 $16,691 $17,574 $34,301 $47,000
Franchise fees and royalties............ 952 999 891 1,029 1,120
-------- ------- ------- ------- -------
Total revenues................... 18,372 17,690 18,465 35,330 48,120
-------- ------- ------- ------- -------
Costs and expenses:
Cost of sales........................... 4,427 4,199 4,208 8,954 12,899
Restaurant operating expenses........... 10,264 9,791 9,609 19,231 25,611
General and administrative.............. 2,222 1,987 2,081 3,632 4,429
Depreciation and amortization........... 342 266 208 1,245 1,654
Restaurant closure costs................ 265 -- -- 433 --
-------- ------- ------- ------- -------
Total costs and expenses......... 17,520 16,243 16,106 33,495 44,593
-------- ------- ------- ------- -------
Operating income.......................... 852 1,447 2,359 1,836 3,527
Other income (expense).................... 143 32 367 (171) (385)
-------- ------- ------- ------- -------
Income before income tax expense.......... $ 995 $ 1,479 $ 2,726 $ 1,665 $ 3,142
======== ======= ======= ======= =======
Extraordinary item........................ $ -- $ -- $ -- $ -- $ 40
======== ======= ======= ======= =======
Net income................................ $ 927 $ 1,404 $ 1,868 $ 1,015 $ 1,973
======== ======= ======= ======= =======
Pro forma net income (3).................. $ 1,449 $ 1,819
======= =======
Net income per share (diluted) (4)........ $ 0.52 $ 0.53 $ 0.28 $ 0.55
======= ======= ======= =======
FISCAL YEARS
-----------------------------------------------------
1994 1995 1996 1997 1998(1)
-------- ------- ------- ------- --------
(Dollars in thousands, except per share amounts)
BALANCE SHEET DATA:
Working capital ............... $ 134 $ 618 $ 6,857 $ (2,023) $ (1,047)
Total assets .................. $ 2,890 $ 2,858 $ 12,146 $ 26,508 $ 23,421
Long-term debt, less
current portion ............. $ 82 $ 62 $ -- $ 10,107 $ 2,870
Total stockholders' equity .... $ 1,614 $ 1,934 $ 10,720 $ 11,735 $ 13,559
- ---------------
(1) The fiscal year 1998 consisted of 53 weeks. All other fiscal years
presented consisted of 52 weeks.
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(2) Includes the results of operations of the Non-contributed Restaurants
(except where otherwise indicated). The Non-contributed Restaurants
were closed during the periods presented. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations--General." Summarized operating results of the
Non-contributed Restaurants included in the above combined financial
data are as follows:
FISCAL YEARS
----------------------------------------------------
1994 1995 1996 1997 1998
------- ------- -------- -------- --------
Revenues ...................... $ 1,199 $ 432 $ -- $ -- $ --
Restaurant closure costs ...... (265) -- -- -- --
Net loss ...................... (511) (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" 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. In addition, subsequent to the
completion of the offering, the Company purchased 1,135,000 shares of Common
Stock owned by Michael D. Domec, an original principal of the Company, at an
aggregate purchase price of $11.35 million, or $10.00 per share.
The Company's audited financial statements for each of the 1994 and
1995 fiscal years 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 each
of those prior fiscal years, 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.
11
12
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, 1998. References in this Report to fiscal 1996, 1997 and 1998
relate to the periods ended December 27, 1996 and December 28, 1997 and January
3, 1999, respectively. Fiscal years 1996 and 1997 presented herein consisted of
52 weeks. Fiscal year 1998 consisted of 53 weeks.
RESULTS OF OPERATIONS
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.
12
13
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.
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.
FISCAL 1997 COMPARED TO FISCAL 1996
REVENUES. Fiscal 1997 revenues increased $16.8 million or 91.3% to
$35.3 million. Restaurant sales increased $16.7 million or 95.2% to $34.3
million. The increase was primarily due to the acquisition of MAC, which added
$11.2 million in restaurant sales, and to new store development, which added
approximately $5.4 million. Pro forma total system sales at restaurants
operating in both fiscal years ("same-stores") were up 1.6%. Franchise-owned
same-stores sales were up 2.9%. And pro forma company-owned same-store sales
were up 0.5%.
Franchise fees and royalties increased $138,443 or 15.5% to $1.0
million. The increase is due to the addition of three new franchise restaurants
along with increased revenues of marketing materials (primarily menus and
promotional items) to the franchise sytem.
COSTS AND EXPENSES. Cost of sales, which consists of food, beverage,
liquor, paper and supplies, increased 220 basis points to 26.1% compared with
23.9% in fiscal 1996. This increase is attributable to an increase in the
proportion of MAC units, which have a higher average cost of sales than Casa Ole
units.
Labor and other related expenses increased 70 basis points to 33.7%
compared with 33.0% in fiscal 1996. Much of the increase resulted from an
increase in the statutory minimum wage rate. Further, several of the new
restaurants developed since the initial public offering have experienced higher
than average labor expenses.
Restaurant operating expenses, which includes rent, utilities, repair
and maintenance and advertising, increased 70 basis points to 22.4% compared
with 21.72% in fiscal 1996. Again, several of the new restaurants developed
since the initial public offering have experienced higher than average
restaurant operating expenses.
General and administrative expenses (G&A) decreased 100 basis points to
10.3% compared with 11.3% in fiscal 1996. Excluding the impact of MAC, general
and administrative expenses increased $830,000 over fiscal 1996. $241,000 of the
increase was related to special charges for severance packages, costs incurred
in an unsuccessful acquisition attempt and the write down of the Company's
investment in a franchise restaurant. Relocation, training, and recruitment
expenses accounted for an additional $200,000 of the increase. Additionally,
increases in professional and legal expenses accounted for $162,000 of the
increase.
Depreciation and amortization expense increased 200 basis points to
3.1% compared with 1.1% fiscal 1996. This increase was primarily due to the MAC
acquisition. Further, eight new Casa Ole restaurants have been added since the
initial public offering in 1996, the first opening in October of 1996. With the
exception of one long-term land lease, all new stores are owned by the Company.
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Pre-opening costs increased 40 basis points to 0.4% compared with a
negligible cost in fiscal 1996.
In the fourth quarter of fiscal 1997, 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 $433,173 related to
restaurant closure costs.
OTHER INCOME (EXPENSE). Net other income (expense) decreased from
income to an expense for fiscal 1997, a change of $538,000. The net 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. Total interest expense for fiscal
1997 was $451,000. The Company earned $141,000 in interest income and $73,000 in
miscellaneous income, which was primarily due to vender rebates.
INCOME TAX EXPENSE. The Company's effective tax rate for fiscal 1997
was 39.1% which is higher than the expected rate of 34% due to state tax (4.5%)
and non-deductible expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company met fiscal 1998 capital requirements with cash generated by
operations and with draws on its credit facilities. In fiscal 1998, the
Company's operations generated approximately $2.1 million in cash, as compared
with $2.6 million in fiscal 1997 and $2.4 million in fiscal 1996. Due to a gain
on the sale-leaseback transaction, approximately $1.0 million was paid in
federal taxes in the third quarter of fiscal 1998. As of January 3, 1999, the
Company had a working capital deficit of approximately $1.0 million, compared
with a working capital deficit of approximately $2.0 million at December 28,
1997. 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 1998, capital expenditures on property, plant and equipment were
approximately $5.7 million as compared to approximately $8.3 million for fiscal
1997. The Company constructed and opened three new restaurants, purchased or
otherwise secured three real estate sites, acquired a franchise restaurant and
remodeled sixteen of the older restaurants. Opening additional Company-owned
restaurants is a key component of its expansion strategy, and management plans
to open a combination of five Company-owned restaurants during the balance of
fiscal 1999. Currently the Company has three restaurants under construction and
two sites close to contract. The estimated capital needed for such 1999
openings, along with preparing for 2000 openings and for general corporate
purposes, including the remodel of an estimated seven restaurants, is
approximately $8.2 million. This estimate is based upon an anticipated range of
investments, from as low as $950,000 up to $1.7 million per restaurant.
Approximately $350,000 is anticipated to represent furniture, fixtures and
equipment and approximately $35,000 represents training and pre-opening
expenses, and is inclusive of the capitalized cost of leasing or acquiring real
estate. This estimate, however, does not include any amounts related to any
significant acquisitions.
On June 25, 1998, the Company completed an $11.5 million sale-leaseback
transaction with Franchise Finance Corporation of America ("FFCA"). The
transaction resulted in a gain of approximately $3.5 million, which will be
deferred and amortized over 15 years. The 13 properties sold will be leased-back
from FFCA for a minimum of 15 years with five 5-year options to renew. The
proceeds from the sale-leaseback transaction were used to pay down most of the
Company's outstanding debt with NationsBank of Texas ($5.2 million term note and
$5.4 million revolving line of note). Separately, the Company negotiated with
FFCA a $14.5 million forward commitment to finance up to 12 new restaurants.
During fiscal 1998, the Company amended its credit facility with
NationsBank of Texas, NA. 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 $9.0 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. Within the
terms of the credit agreement, the Company must meet certain financial
covenants. The revolving line may be used for the pending acquisition of La
Senorita, construction of new units and other working capital needs. At January
3, 1999, the Company had $ 2.9 million outstanding under the revolver.
On January 14, 1999, the Company signed a definitive agreement with the
owners of La Senorita Restaurants to acquire the operations of the 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 to be
paid is approximately $4.0 million in cash to be funded with the Company's
revolving line of credit with NationsBank. The Company expects the transaction
to close in the second quarter of fiscal year 1999 pending the transfer of
liquor licenses.
In addition to developing new restaurants, the Company intends to
search for selective acquisitions of existing Mexican restaurant chains.
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The Company's management believes that with its sale leaseback forward
commitments with FFCA, along with operating cash flow and the Company's
revolving line of credit with NationsBank, 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. Such risks were
presented in the Company's Form S-1 registration statement, which was declared
effective on April 24, 1996, and the related prospectus, and are being presented
again in this Form 10-K. Certain risk factors have been presented throughout
this document, including, among others, expansion strategy; site selection;
attracting and retaining franchisees, managers and other 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, market partner 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, its franchisees and market partners. 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. In
addition, the Company intends to expand into new geographic markets in which it
has no operating experience and in which Mexican and Tex-Mex food restaurants
are less prevalent than in Texas. 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 or the Casa Ole concept 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 and Tennessee; market partner restaurants in 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. Approximately 35.8% of the Common
Stock and rights to acquire Common Stock of the Company are beneficially owned
or held by Larry N. Forehand, Michael D. Domec, Louis P. Neeb and John C.
Textor, 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 Stacy M. Riffe (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.
15
16
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. The term "Year 2000" is a general term used to describe the
various problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery and equipment as
the year 2000 is approached and thereafter. These problems generally arise from
the fact that much of the world's computer hardware and software historically
used only two digits to identify the year in a date, often meaning that the
computer will fail to distinguish dates in the "2000's" from dates in the
"1900's."
Risks Presented by Year 2000 Problems. To operate its businesses, the
Company relies upon government agencies, utility companies, telecommunications
companies, suppliers and other third party service providers over which it can
assert little control. The Company's ability to conduct its business is
dependent upon the ability of these third parties to avoid Year 2000 related
disruption. If they do not adequately address their Year 2000 issues, the
Company's business may be materially affected which could result in a materially
adverse effect on the Company's results of operations and financial condition.
As a result of the Company's ongoing assessment, the Company may identify
additional areas of its business that are at risk of Year 2000 disruption. The
Company is currently assessing the extent to which its operations are vulnerable
should these third parties fail to remediate their systems properly.
The Company's State of Readiness. The Company has reviewed Year 2000
compliance and has 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.
In fiscal year 1998, the Company reached a decision to continue to
outsource its accounting processes. The new outsourcing group has set up an
accounting department on the premises of the Company and has installed new
computer hardware and software that is Year 2000 compliant. Further, the Company
has reviewed its information and other systems and is currently in the process
of modifying those systems that are not Year 2000 compliant. The Company
believes that all of its internal systems will be Year 2000 compliant on or
before December 31, 1999.
Costs to Address the Company's Year 2000 Issues. The Company expenses
costs associated with its Year 2000 compliance program as the costs are incurred
except for costs that the Company would otherwise capitalize (new software or
hardware costs). The Company does not expect the costs associated with its Year
2000 compliance program to exceed $50,000 or to have a material adverse effect
on its financial position or results of operations. The Company is unable to
estimate the costs it may incur as a result of Year 2000 problems suffered by
third parties with which it deals. The Company has surveyed its critical
vendors, other than utilities and government agencies, and believes that each
vendor will either be Year 2000 compliant by June, 1999 or, if not, suitable
alternative suppliers that are Year 2000 compliant will be available. The
Company believes that the most likely "worst case" scenario would be that the
Company may not be able to process credit card transactions and/or experience
delays in food and supply orders. Prior to resolution of such a problem, there
are other manual procedures the Company could utilize in the event of a "worst
case" scenario.
The Company's Contingency Plans. The Company has not yet developed
formal contingency plans specific to Year 2000 events for any specific area of
business. The Company will develop specific Year 2000 contingency plans for such
areas of business it determines are especially vulnerable to the Year 2000
problem by September 1999.
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
$28,700.
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
16
17
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:
++3.1 Articles of Incorporation of the Company.
++3.2 Bylaws of the Company.
++4.1 Specimen of Certificate of Common Stock of the
Company.
++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.
17
18
++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).
++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.
18
19
++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 Letter.
++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 Form 10K 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 number 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.
+ 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
CASA OLE RESTAURANTS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors............................................................... F-2
Consolidated Balance Sheets as of December 28, 1997 and January 3, 1999...................... F-3
Consolidated Statements of Income for each of the years in the three fiscal-year
period ended January 3, 1999............................................................... F-4
Consolidated Statements of Stockholders' Equity for each of the years in
the three fiscal-year period ended January 3, 1999......................................... F-5
Consolidated Statements of Cash Flows for each of the years in the three
fiscal-year period ended January 3, 1999................................................... F-6
Notes to Consolidated Financial Statements................................................... F-7
F-1
21
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Casa Ole Restaurants, Inc.:
We have audited the accompanying consolidated balance sheets of Casa
Ole Restaurants, Inc. (the Company) as of December 28, 1997 and January 3, 1999,
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 3,
1999. 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 Casa Ole
Restaurants, Inc. as of December 28, 1997 and January 3, 1999, and the results
of their operations and their cash flows for each of the years in the three
fiscal-year period ended January 3, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
Houston, Texas
March 8, 1999
F-2
22
CASA OLE RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1997 AND JANUARY 3, 1999
FISCAL YEARS
1997 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 986,024 $ 462,847
Royalties receivable ............................................. 111,964 70,711
Receivables from affiliates ...................................... 13,000 --
Other receivables ................................................ 338,599 280,335
Inventory ........................................................ 423,237 459,260
Taxes receivable ................................................. 102,409 547,272
Prepaid expenses ................................................. 546,287 383,365
------------ ------------
Total current assets ...................................... 2,521,520 2,203,790
------------ ------------
Property, plant and equipment ...................................... 21,748,741 18,568,632
Less accumulated depreciation .................................... 4,450,221 4,526,005
------------ ------------
Net property, plant and equipment ......................... 17,298,520 14,042,627
Deferred tax assets ................................................ 156,164 795,229
Other assets ....................................................... 6,531,934 6,379,332
------------ ------------
$ 26,508,138 $ 23,420,978
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt.............................. $ 1,150,000 $ --
Accounts payable ................................................... 1,097,238 1,454,794
Accrued sales and liquor taxes ..................................... 348,397 293,743
Accrued payroll and taxes .......................................... 1,121,011 803,256
Accrued expenses ................................................... 828,356 699,437
------------ ------------
Total current liabilities ................................. 4,545,002 3,251,230
------------ ------------
Long-term debt ..................................................... 10,106,871 2,870,000
Other liabilities .................................................. 121,075 234,864
Deferred gain ...................................................... -- 3,505,674
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 ....................................... 20,685,610 20,537,076
Retained earnings ................................................ 2,352,253 4,324,807
Treasury stock, cost of 1,135,000 shares ........................... (11,350,000) (11,350,000)
------------ ------------
Total stockholders' equity ................................ 11,735,190 13,559,210
------------ ------------
$ 26,508,138 $ 23,420,978
============ ============
See accompanying notes to consolidated financial statements.
F-3
23
CASA OLE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE FISCAL YEARS ENDED DECEMBER 27, 1996
DECEMBER 28, 1997 AND JANUARY 3, 1999
FISCAL YEARS
1996 1997 1998
------------ ------------ ------------
Revenues:
Restaurant sales ..................................... $ 17,573,911 $ 34,301,030 $ 46,999,835
Franchise fees and royalties ......................... 890,825 1,029,268 1,120,619
------------ ------------ ------------
18,464,736 35,330,298 48,120,454
Costs and expenses (see note 8 for related party costs):
Cost of sales ........................................ 4,208,157 8,953,517 12,898,673
Labor ................................................ 5,802,352 11,555,208 15,503,584
Restaurant operating expenses ........................ 3,806,482 7,675,536 10,106,957
General and administrative ........................... 2,081,161 3,632,405 4,429,375
Depreciation and amortization ........................ 201,778 1,101,273 1,292,394
Pre-opening costs .................................... 6,354 143,430 362,189
Restaurant closure costs ............................. -- 433,173 --
------------ ------------ ------------
16,106,284 33,494,542 44,593,172
------------ ------------ ------------
Operating income .............................. 2,358,452 1,835,756 3,527,282
------------ ------------ ------------
Other income (expense):
Interest income ...................................... 271,057 141,723 41,817
Interest expense ..................................... (17,402) (451,868) (524,413)
Other, net ........................................... 114,232 139,588 97,718
------------ ------------ ------------
367,887 (170,557) (384,878)
------------ ------------ ------------
Income before income tax expense and extraordinary item 2,726,339 1,665,199 3,142,404
Income tax expense ..................................... 858,153 650,398 1,209,825
------------ ------------ ------------
Income before extraordinary item ....................... 1,868,186 1,014,801 1,932,579
Extraordinary item (net of tax of $25,025) ............. -- -- 39,975
------------ ------------ ------------
Net income .................................... $ 1,868,186 $ 1,014,801 $ 1,972,554
============ ============ ============
Pro forma income statement data:
Net income as reported ............................... $ 1,868,186 $ 1,014,801 $ 1,972,554
Pro forma adjustments:
Compensation and related party
expense arrangements ............................. 161,700 -- --
Provision for income taxes ......................... (210,422) -- --
------------ ------------ ------------
Pro forma net income ................................. $ 1,819,464 $ 1,014,801 $ 1,972,554
------------ ------------ ------------
Basic income per share (before extraordinary item) ..... $ .54 $ .28 $ .54
============ ============ ============
Basic income per share (extraordinary item) ............ $ -- $ -- $ .01
============ ============ ============
Basic income per share ................................. $ .54 $ .28 $ .55
============ ============ ============
Diluted income per share (before extraordinary item) ... $ .53 $ .28 $ .54
============ ============ ============
Diluted income per share (extraordinary item) .......... $ -- $ -- $ .01
============ ============ ============
Diluted income per share ............................... $ .53 $ .28 $ .55
============ ============ ============
Weighted average number of shares (diluted) ............ 3,403,906 3,601,902 3,600,429
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
24
CASA OLE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED
DECEMBER 27, 1996, DECEMBER 28, 1997
AND JANUARY 3, 1999
ADDITIONAL RETAINED TOTAL
CAPITAL PAID-IN EARNINGS TREASURY STOCKHOLDERS'
STOCK CAPITAL (DEFICIT) STOCK EQUITY
------------ ------------ ------------ ------------ -------------
Balances at December 29, 1995 ..... $ 141,660 $ 2,069,922 $ (77,342) $ (200,000) $ 1,934,240
Net income ...................... -- -- 1,868,186 -- 1,868,186
Issuance of common stock ........ 20,000 21,980,000 -- -- 22,000,000
Offering costs and adjustments .. (114,333) (1,916,250) (453,392) 200,000 (2,283,975)
Warrants issued ................. -- 35,977 -- -- 35,977
Treasury stock purchased ........ -- -- -- (11,350,000) (11,350,000)
Distributions paid .............. -- (1,484,039) -- -- (1,484,039)
------------ ------------ ------------ ------------ ------------
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
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-5
25
CASA OLE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED DECEMBER 27, 1996,
DECEMBER 28, 1997 AND JANUARY 3, 1999
FISCAL YEARS
1996 1997 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................ $ 1,868,186 $ 1,014,801 $ 1,972,554
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ........................................... 208,132 1,244,703 1,654,583
Deferred gain amortization .............................................. -- -- (116,634)
Restaurant closure costs ................................................ -- 433,173 --
Gain on early extinguishment of debt .................................... -- -- (39,975)
Gain on sale of fixed assets ............................................ 28,068 -- (7,188)
Reserve for bad debts and note receivable write-offs .................... -- 112,500 --
Deferred income taxes ................................................... 35,577 62,755 (639,065)
Changes in assets and liabilities, net of effects of acquisitions:
Royalties receivable .................................................... 15,729 (31,710) 41,253
Receivable from affiliates .............................................. 18,701 1,000 13,000
Other receivables ....................................................... (161,733) 11,689 (90,270)
Taxes receivable/payable ................................................ -- (102,409) (469,888)
Inventory ............................................................... (37,033) (33,169) (43,819)
Prepaids and other current assets ....................................... (176,122) (240,579) (134,502)
Other assets ............................................................ (95,022) (204,831) (6,448)
Accounts payable ........................................................ 264,083 (8,064) 357,556
Accrued expenses and other liabilities .................................. 370,113 302,369 (501,328)
Deferred franchise fees and other long-term liabilities ................. 42,500 21,235 93,789
------------ ------------ ------------
Total adjustments ................................................ 512,993 1,568,662 111,064
------------ ------------ ------------
Net cash provided by operating activities ........................ 2,381,179 2,583,463 2,083,618
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchase of acquisition, net of
cash acquired .................................................... -- (11,613,741) --
Collection (issuance) of notes receivable ................................. 38,964 (115,000) --
Purchase of property, plant and equipment ................................. (2,764,152) (8,338,660) (5,665,556)
Sale (purchase) of marketable securities .................................. (1,007,255) 1,007,255 --
Proceeds from sale of property, plant
and equipment ......................................................... 6,100 530,000 11,360,632
------------ ------------ ------------
Net cash used in investing activities ............................ (3,726,343) (18,530,146) 5,695,076
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of distributions .................................................. (1,484,039) -- --
Proceeds from minority partners' contributions ............................ -- 41,000 20,000
Net borrowings under line of credit agreement ............................. -- 4,990,204 2,247,153
Proceeds from issuance of long-term debt .................................. -- 6,000,000 --
Payments of notes payable ................................................. (157,079) (517,802) (10,569,024)
Proceeds from issuance of common stock .................................... 19,752,002 -- --
Purchase of treasury stock ................................................ (11,350,000) -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities ............. 6,760,884 10,513,402 (8,301,871)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ................. 5,415,720 (5,433,281) (523,177)
Cash and cash equivalents at beginning of year ............................ 1,003,585 6,419,305 986,024
------------ ------------ ------------
Cash and cash equivalents at end of year .................................. $ 6,419,305 $ 986,024 $ 462,847
============ ============ ============
F-6
26
CASA OLE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year:
Interest .................................................... $ 24,051 $ 327,933 $ 692,763
Income taxes ................................................ 390,000 1,039,812 2,178,856
Non-cash financing activities:
Exchange of equipment for note balance ...................... 53,897 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
CASA OLE RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
On February 16, 1996, 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. Casa Ole Restaurants, Inc. is
the holding company for Casa Ole Franchise Services, Inc. and sixteen 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 $6.0 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 Cantina."
The table below presents unaudited pro forma income statement
information as if the Company had purchased MAC at the beginning of fiscal 1996.
Pro forma adjustments are to remove consulting fees that are non-continuing,
amortize the resulting goodwill over 40 years and remove the pre-acquisition
goodwill amortization, reflect net interest expense on the debt resulting from
the acquisition and record additional income tax at an effective rate of 39% on
the combined income of the Company and MAC. The acquisition was accounted for as
a purchase.
1996 1997
----------- -----------
Revenues ...................................... $39,288,909 $45,951,299
Net income .................................... $ 2,044,464 $ 1,257,838
Diluted income per share ...................... $ 0.60 $ 0.34
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.
On January 14, 1999, the Company signed a definitive agreement with the
owners of La Senorita Restaurants to acquire the operations of the 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 to be
paid is approximately $4.0 million in cash. The Company expects the transaction
to close in the second quarter of fiscal year 1999 pending the transfer of
liquor licenses.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of Casa Ole
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 and Tennessee.
The Company also franchises the Casa Ole concept principally in Texas and
Louisiana.
(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 1996 and 1997
consisted of 52 weeks. Fiscal year 1998 consisted of 53 weeks.
(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-8
28
CASA OLE RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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.
At January 3, 1999, the Company has no deferred start-up costs.
(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
December 28, 1997, in the amount of $433,173 relating to the impairment of
assets at restaurants that have been closed. There were no such impairment costs
during fiscal 1998.
(h) Other Assets
At January 3, 1999, other assets included $6.3 million of goodwill,
primarily resulting from the MAC acquisition. Goodwill is being amortized over
40 years, and accumulated amortization as of January 3, 1999 was $257,437. 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. At the end
of fiscal year 1998, the Company closed one location that had been previously
purchased from a franchisee and wrote off approximately $50,000 in goodwill. The
Company believes that no additional impairment of goodwill exists.
(i) Income Taxes
Prior to the Company's reorganization, substantially all the companies
had elected to be taxed under the provisions of Subchapter S of the Internal
Revenue Code. Accordingly, no provision for federal income taxes has been
provided for these entities prior to the reorganization, as the shareholders of
these entities have included the income on their personal income tax returns.
Federal income taxes for the companies that are C corporations 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.
State income taxes have been provided for all entities.
The S corporation elections terminated on the effective date of the
Company's initial public offering, April 24, 1996. Accordingly, a pro forma
provision for federal and state income taxes, using a 37% effective tax rate, is
presented as if the Company was taxed as a C corporation. Subsequent to the
reorganization, federal income taxes are provided based on the asset and
liability method of accounting pursuant to SFAS No. 109.
(j) Pro Forma Data
The pro forma income statement data reflects adjustments to
compensation and related party expense arrangements and reflects an adjustment
to the provision for income taxes as discussed above.
(k) 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
CASA OLE RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(l) 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 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.
(m) Reclassifications
Certain reclassifications have been made to the 1997 and 1996 amounts
to conform to the 1998 presentation.
(2) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 28, 1997 and January 3, 1999
were as follows:
1997 1998
----------- -----------
Land ........................................ $ 4,303,341 $ 2,298,755
Buildings and improvements .................. 5,034,043 1,107,494
Vehicles .................................... 31,178 31,178
Equipment and smallwares .................... 8,081,413 9,248,457
Leasehold improvements ...................... 3,886,569 4,755,219
Construction in progress .................... 412,197 1,127,529
----------- -----------
Total .............................. $21,748,741 $18,568,632
=========== ===========
(3) LONG-TERM DEBT
Long-term debt consists of the following at December 28, 1997 and
January 3, 1999:
1997 1998
----------- -----------
NationsBank, Advised Guidance Loan Commitment .................................. $ 5,666,666 $ --
NationsBank, Revolving Line of Credit .......................................... 4,990,205 2,870,000
Note payable to individual, interest at 6%, principal of $150,000 due each
January 2nd through 2001 .................................................... 600,000 --
----------- -----------
Total long-term debt .................................................. 11,256,871 2,870,000
Less current installments ...................................................... 1,150,000 --
----------- -----------
Long-term debt, excluding current installments ........................ $10,106,871 $ 2,870,000
=========== ===========
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 a 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 Nationsbank of Texas ($5.2 million term note and $5.4
million revolving line note). The Company amended its credit facility with
NationsBank of Texas. 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 $9.0 million revolving line of
credit that matures May 31, 2001 (unsecured except for the stock of
subsidiaries). The interest rate is either the prime rate or LIBOR plus a
stipulated percentage (7.75% as of January 3, 1999). 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 terms of the agreement require the Company to meet certain
financial covenants.
F-10
30
CASA OLE RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Maturities on long-term debt are as follows:
1999.................................................................... $ --
2000.................................................................... --
2001.................................................................... 2,870,000
----------
$2,870,000
==========
(4) INCOME TAXES
The provision for income tax expense is summarized as follows for
fiscal years 1996, 1997 and 1998:
1996 1997 1998
----------- ----------- -----------
Current:
Federal ................................. $ 659,303 $ 526,092 $ 1,607,346
State and local ......................... 163,273 61,551 241,544
Deferred .................................... 35,577 62,755 (639,065)
----------- ----------- -----------
$ 858,153 $ 650,398 $ 1,209,825
=========== =========== ===========
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:
1996 1997 1998
---------- ---------- ----------
Expected tax expense ........................ $ 927,000 $ 566,168 $1,068,417
State tax expense, net ...................... 107,773 40,624 100,036
Non-deductible amortization ................. -- 26,884 46,288
Subchapter S corporation status ............. (205,156) -- --
Other ....................................... 28,536 16,722 (4,916)
---------- ---------- ----------
$ 858,153 $ 650,398 $1,209,825
========== ========== ==========
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 28, 1997 and January
3, 1999 are as follows:
1997 1998
----------- -----------
Deferred tax assets:
Sale-leaseback ............................ $ -- $ 1,297,099
Depreciation differences .................. 339,147 38,705
Asset impairments ......................... 166,722 --
Net operating loss carry forward .......... 157,758 --
Accrued expenses .......................... 140,835 72,155
Other ..................................... 17,563 16,879
----------- -----------
$ 822,075 $ 1,424,838
=========== ===========
Deferred tax liabilities:
Depreciation differences .................. $ -- $ --
Pre-opening costs ......................... (70,692) --
Prepaid expenses .......................... (31,262) --
Other ..................................... (31,647) --
----------- -----------
$ (133,601) $ --
=========== ===========
Net deferred taxes ........................ 688,474 1,424,838
Valuation allowance ....................... (532,311) (629,609)
----------- -----------
$ 156,164 $ 795,229
=========== ===========
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 will be correspondingly reduced.
F-11
31
CASA OLE 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. Immediately prior to the effectiveness of the
Registration Statement, there was an exchange of shares by the shareholders of
the prior corporations for proportional shares of the Company. Immediately
following the closing of the initial public offering, the Company redeemed
1,135,000 shares held by Michael D. Domec for an aggregate $11.35 million.
(a) 1996 Long Term Incentive Plan
The Board of Directors and shareholders of the Company have approved
the Casa Ole 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 Casa Ole 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) 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
CASA OLE RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(e) Option and Warrant Summary
Weighted Average
Shares Exercise Price
-------- ----------------
Balance at December 29, 1995 ..................... -- --
Granted ........................................ 674,178 $ 11.00
Exercised ...................................... -- --
Canceled ....................................... (5,500) $ 11.00
-------- ---------
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
The options (504,500) and warrants (359,770) outstanding at January 3,
1999 had exercise prices ranging between $4.25 to $13.25, of which
360,500 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 3, 1999, 420,120 options and warrants were exercisable at
$10.66.
(f) 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:
1996 1997 1998
---- ---- ----
Net income - as reported ....................................... $1,819,464 $1,014,801 $1,972,554
Pro forma net income - pro forma for SFAS No. 123 .............. 1,309.931 475,007 1,693,317
Net income per share - as reported ............................. 0.54 0.28 0.55
Pro forma net income per share - pro forma for SFAS No. 123 .... 0.39 0.13 0.47
The weighted average fair value of the options and warrants granted
during 1996, 1997 and 1998 is estimated at $3.69, $3.61 and $1.99 per share,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: volatility of 25.0% for 1996, 41.0% for 1997 and
34% for 1998, risk-free interest rate of 6.5%, an expected life of 5 years for
options and 4 years for warrants and 0% dividend yield.
(g) Income Per Share
Statement of Financial Accounting Standards No. 128, "Earnings per
Share", specifies new measurement, presentation and disclosure requirements for
earnings per share and is required to be applied retroactively upon initial
adoption. The Company has adopted SFAS No. 128 effective with the release of
December 28, 1997 earnings data, and accordingly, has restated herein all
previously reported income per share data. 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 and 1998, the
effect of dilutive stock options increase the weighted average shares
outstanding by approximately 4,000 and 2,724 shares respectively, which does not
affect the determination of diluted income per share. Approximately 800,000
options and warrants were considered antidilutive for 1997, and approximately
835,000 were considered antidilutive for 1998.
F-13
33
CASA OLE RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of income per share data for the fiscal year ended
December 27, 1996 is as follows: (numbers shown are in thousands, except for per
share amount.)
Per Share
1996 Income Shares Amounts
---- ------ ------ ---------
Basic EPS
Net Income (pro forma) ...................... $1,819 3,338 $ 0.54
Effect of dilutive securities:
Warrants .................................... -- 35 --
Options ..................................... -- 31 --
------ ----- ---------
Diluted EPS ................................. $1,819 3,404 $ 0.53
------ ----- ---------
(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 will be deferred and
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
$18,149,179.
Future minimum lease payments under non-cancelable operating leases
with initial or remaining lease terms in excess of one year as of January 3,
1999 are:
1999.................................................................... $ 2,597,109
2000.................................................................... 2,501,263
2001.................................................................... 2,422,938
2002.................................................................... 2,227,951
2003.................................................................... 2,034,573
Thereafter.............................................................. 15,908,178
-----------
$27,692,012
===========
Rent expense for restaurant operating space and equipment amounted to
$1,137,891, $1,853,054 and $2,751,094 for the fiscal years 1996, 1997 and 1998,
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.
(8) RELATED PARTY TRANSACTIONS
MDD Investments, Inc., a corporation formed in 1991 by a Company
shareholder, charged fees directly to certain Casa Ole restaurants owned by the
shareholder. The net amount paid to MDD Investments, Inc. in fiscal 1996 (prior
to the offering) was $102,759.
F-14
34
CASA OLE RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Bay Area Management, Inc., owned entirely by the brother of a Company
shareholder and director, provides accounting and administrative services on a
fee basis, to all of the Company-owned Casa Ole restaurants and some franchise
entities. Amounts paid to Bay Area Management, Inc. by the Company in fiscal
1996, 1997 and 1998 were $177,707, $231,095 and $244,304 respectively.
The Company leases its executive offices from a company owned by two
shareholders of Casa Ole Restaurants, Inc. Net lease expense related to these
facilities in fiscal 1996, 1997 and 1998 was $50,375, $57,755 and $60,000
respectively.
The Company paid a success fee of $105,000 to an entity that benefits
one of the Company's 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.
(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.
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.
CASA OLE 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, 1999
/s/ Larry N. Forehand Founder and Vice Chairman of the
- ------------------------------- Board of Directors March 31, 1999
Larry N. Forehand
/s/ Curt Glowacki President and
- ------------------------------- Chief Operating Officer March 31, 1999
Curt Glowacki
/s/ Andrew J. Dennard Vice President and
- ------------------------------- Chief Financial Officer
Andrew J. Dennard (Principal Financial and Accounting Officer) March 31, 1999
/s/ John C. Textor Director March 31, 1999
- -------------------------------
John C. Textor
/s/ Michael D. Domec Director March 31, 1999
- -------------------------------
Michael D. Domec
/s/ J. J. Fitzsimmons Director March 31, 1999
- -------------------------------
J. J. Fitzsimmons
/s/ Richard E. Rivera Director March 31, 1999
- -------------------------------
Richard E. Rivera
/s/ J. Stuart Sargent Director March 31, 1999
- -------------------------------
J. Stuart Sargent
36
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
*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.