<PAGE> 1
UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended SEPTEMBER 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ____________________
Commission file number: 0-28234
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
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of shares outstanding of each of the issuer's classes of common stock, as
of October 26, 1998: 3,597,705 SHARES OF COMMON STOCK, PAR VALUE $.01.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASA OLE RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
9/27/98 12/28/97
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 644,689 $ 986,024
Royalties receivable 75,978 111,964
Receivables from affiliates 0 13,000
Other receivables 574,720 338,599
Inventory 414,273 423,237
Taxes receivable 0 102,409
Prepaid expenses and other current assets 390,428 546,287
------------ ------------
Total current assets 2,100,088 2,521,520
------------ ------------
Property, plant and equipment 17,332,938 21,748,741
Less accumulated depreciation 4,540,389 4,450,221
------------ ------------
Net property, plant and equipment 12,792,549 17,298,520
Deferred tax assets 1,522,671 156,164
Other assets 6,565,868 6,531,934
------------ ------------
$ 22,981,176 $ 26,508,138
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 0 $ 1,150,000
Accounts payable 1,180,439 1,097,238
Income taxes payable 1,546,388 0
Accrued sales and liquor taxes 216,599 348,397
Accrued payroll and taxes 852,586 1,121,011
Accrued expenses 535,059 828,356
------------ ------------
Total current liabilities 4,331,071 4,545,002
------------ ------------
Long-term debt, net of current portion 1,920,000 10,106,871
Other liabilities 109,635 121,075
Deferred gain 3,400,328 0
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized 0 0
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 20,685,610
Retained earnings 3,837,205 2,352,253
Treasury stock, cost of 1,135,000 shares (11,350,000) (11,350,000)
------------ ------------
Total stockholders' equity 13,220,142 11,735,190
------------ ------------
$ 22,981,176 $ 26,508,138
============ ============
</TABLE>
2
<PAGE> 3
CASA OLE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
13-WEEK PERIODS ENDED 39-WEEK PERIODS ENDED
9/27/98 9/28/97 9/27/98 9/28/97
------------ ------------ ------------ ------------
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales $ 11,561,378 $ 11,789,019 $ 34,758,437 $ 22,877,565
Franchise fees 303,795 269,865 866,025 755,725
Other 76,225 33,727 169,524 60,193
------------ ------------ ------------ ------------
11,941,398 12,092,611 35,793,986 23,693,483
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 3,293,633 3,216,899 9,586,280 5,965,926
Labor 3,787,316 4,015,123 11,568,666 7,782,737
Restaurant operating expenses 2,670,493 2,770,572 7,584,778 5,252,268
General and administrative 1,016,160 1,371,401 3,159,776 2,589,975
Depreciation and amortization 406,136 478,847 1,218,675 739,429
------------ ------------ ------------ ------------
11,173,738 11,852,842 33,118,175 22,330,335
------------ ------------ ------------ ------------
Operating income 767,660 239,769 2,675,811 1,363,148
------------ ------------ ------------ ------------
Other income (expense):
Interest income 9,826 0 21,593 140,729
Interest expense 12,172 (152,465) (417,753) (170,055)
Other, net 31,878 (3,741) 83,755 (5,714)
------------ ------------ ------------ ------------
53,876 (156,206) (312,405) (35,040)
------------ ------------ ------------ ------------
Income before income tax expense and extraordinary item 821,536 83,563 2,363,406 1,328,108
Income tax expense 316,291 25,280 918,429 502,483
------------ ------------ ------------ ------------
Income before extraordinary item 505,245 58,283 1,444,977 825,625
Extraordinary item (net of tax of $25,025) 0 0 39,975 0
------------ ------------ ------------ ------------
Net income $ 505,245 $ 58,283 $ 1,484,952 $ 825,625
============ ============ ============ ============
Basic and diluted income per share (before extraordinary item) $ 0.14 $ 0.02 $ 0.40 $ 0.23
============ ============ ============ ============
Basic and diluted income per share (extraordinary item) 0 0 0.01 0
============ ============ ============ ============
Basic and diluted income per share 0.14 0.02 0.41 0.23
============ ============ ============ ============
Weighted average number of shares (diluted) 3,600,302 3,598,477 3,599,392 3,598,023
============ ============ ============ ============
</TABLE>
3
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CASA OLE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
39-WEEK PERIODS ENDED
9/27/98 9/28/97
------------ ------------
(AS RESTATED)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,484,952 $ 825,625
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,218,675 739,429
Deferred taxes (1,366,507) 0
Deferred gain amortization (59,185) 0
Gain on early extinguishment of debt (39,975) 0
Gain on sale of fixed assets (7,188) 0
Reserve for bad debts and note receivable write-offs 0 112,500
Changes in assets and liabilities, net of acquisition:
Royalties receivable 35,986 (12,122)
Receivable from affiliates 13,000 1,000
Other receivables (236,121) 35,166
Income tax receivable/payable 1,623,772 0
Inventory 1,168 (67,459)
Prepaids and other current assets (34,460) (93,854)
Other assets 5,777 (42,285)
Accounts payable 83,201 179,086
Accrued expenses and other liabilities (704,961) 32,669
------------ ------------
Total adjustments 533,182 884,130
------------ ------------
Net cash provided by operating activities 2,018,134 1,709,755
------------ ------------
Cash flows from investing activities:
Payment for purchase of acquisition, net of
cash acquired 0 (11,754,175)
Net sale of marketable securities 0 1,007,255
Proceeds from sale of property 11,360,632 0
Proceeds from minority partners' contribution 0 21,000
Issuance of notes receivable 0 (115,000)
Purchase of property, plant and equipment (4,448,230) (7,075,283)
------------ ------------
Net cash provided by (used in) investing activities 6,912,402 (17,916,203)
------------ ------------
Cash flows from financing activities:
Net borrowings under line of credit agreement 1,297,153 4,640,205
Proceeds from issuance of long-term debt 0 6,000,000
Payments of notes payable (10,569,024) (350,811)
------------ ------------
Net cash used in financing activities (9,271,871) 10,289,394
------------ ------------
Increase (decrease) in cash and cash equivalents (341,335) (5,917,054)
Cash and cash equivalents at beginning of period 986,024 6,419,305
------------ ------------
Cash and cash equivalents at end of period $ 644,689 $ 502,251
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest $ 645,777 $ 168,169
Income taxes 528,636 $ 865,000
Non-cash activities:
Exchange of note for equipment and inventory $ 207,800 $ 0
Note issued for purchase of restaurant $ 0 $ 750,000
</TABLE>
4
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CASA OLE RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of Casa Ole Restaurants, Inc. (the "Company"),
the accompanying consolidated financial statements contain all
adjustments (consisting only of normal recurring accruals and
adjustments) necessary for a fair presentation of the consolidated
financial position as of September 27, 1998, and the consolidated
statements of income and cash flows for the 39-week and 13-week periods
ended September 27, 1998 and September 28, 1997. The consolidated
statements of income for the 39-week and 13-week periods ended
September 27, 1998 are not necessarily indicative of the results to be
expected for the full year.
Beginning in fiscal 1998, the Company changed its fiscal
quarters to four thirteen week quarters. For comparative purposes,
fiscal 1997 consolidated statements of income and cash flows have been
restated for the 39-week and 13-week periods ended September 28, 1997.
2. ACCOUNTING POLICIES
During the interim periods the Company follows the accounting
policies set forth in its consolidated financial statements in its
Annual Report and Form 10-K (file number 0-28234). Reference should be
made to such financial statements for information on such accounting
policies and further financial details.
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 Monterey's Acquisition Corp.
("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, income before income taxes increased
approximately $396,000, net income increased approximately $242,000 and
basic and diluted earnings per share increased approximately $0.06 for
the 39-weeks ended September 27, 1998.
The Company does not have or participate in transactions
involving derivative, financial and commodity instruments.
3. PRO FORMA DATA
On July 2, 1997, the Company purchased 100% of the outstanding
stock of 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."
5
<PAGE> 6
The table below presents unaudited pro forma income statement
information as if the Company had purchased MAC at the beginning of
fiscal 1997. Pro forma adjustments were made 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 39.0% on the combined
income of the Company and MAC. The acquisition was accounted for as a
purchase.
<TABLE>
<CAPTION>
39 Week
Period Ending
9/28/97
-------------
<S> <C>
Revenues ............................................................. $34,159,239
Net income ........................................................... $ 1,068,713
Diluted income per share ............................................. $ 0.30
</TABLE>
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.
4. NEW FINANCIAL ACCOUNTING PRONOUNCEMENTS
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 the 39-week and 13-week
periods ended September 28, 1997, the effect of dilutive stock options
increased the weighted average shares outstanding by 318 and 772 shares
respectively, which does not affect the determination of diluted income
per share. For the 39-week and 13-week periods ended September 27,
1998, the effect of dilutive stock options increased the weighted
average shares outstanding by 1,687 and 2,597 shares respectively,
which does not affect the determination of diluted income per share.
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 and to report the initial adoption
as a cumulative effect of a change in accounting principle. SOP 98-5 is
effective for financial statements for fiscal years beginning after
December 15, 1998. Deferred start-up costs as of September 27, 1998 and
December 28, 1997 were $74,276 and $206,755, respectively.
5. EXTINGUISHMENT OF DEBT
In fiscal 1997, the Company acquired the assets of one of its
franchise locations for a $750,000 note payable to the prior
franchisee. During the first quarter of 1998, the Company accepted an
offer from the prior franchisee to prepay the remaining $450,000
balance of the note for a discounted sum of $385,000, resulting in a
gain, net of taxes, of $39,975.
6
<PAGE> 7
6. SALE-LEASEBACK TRANSACTION
On June 25, 1998, the Company completed a sale and leaseback
transaction involving the sale and lease back of the 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.
Future minimum lease payments under the non-cancelable
operating lease are:
<TABLE>
<S> <C>
1998 ............................................... $ 273,125
1999 ............................................... $ 1,092,500
2000 ............................................... $ 1,114,350
2001 ............................................... $ 1,136,250
2002 ............................................... $ 1,158,924
Thereafter.......................................... $ 13,647,203
------------
$ 18,422,352
============
</TABLE>
7. GUARANTEED EMPLOYEE LOANS
Certain officers and other key employees of the Company borrowed
approximately $400,000 in the aggregate from NationsBank and used the
proceeds to purchase Casa Ole Restaurants, Inc. common stock. The
Company has guaranteed the loans, which mature in two years and require
monthly interest payments. To effect a recent purchase, the Company
temporarily advanced $250,000 to these officers and key employees. Such
amount was repaid in October through the employees financing from
NationsBank.
8. LETTER OF INTENT
On October 6, 1998, the Company announced that it entered into a letter
of intent with the owners of the 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among
others, the following: accelerating growth strategy; dependence on
executive officers; geographic concentration; increasing susceptibility
to adverse conditions in the region; changes in consumer tastes and
eating habits; national, regional or local economic and real estate
conditions; demographic trends; inclement weather; traffic patterns;
the type, number and location of competing restaurants; inflation;
increased food, labor and benefit costs; the availability of
experienced management and hourly employees; seasonality and the timing
of new restaurant openings; changes in governmental regulations; dram
shop exposure; and other factors not yet experienced by the Company.
The use of words such as "believes", "anticipates", "expects",
"intends" and similar expressions are intended to identify
forward-looking statements, but are not the exclusive means of
identifying such statements. Readers are urged to carefully review and
consider the various disclosures made by the Company in this report and
in the Company's Annual Report and Form 10-K for the fiscal year ended
December 28, 1997, that attempt to advise interested parties of the
risks and factors that may affect the Company's business.
RESULTS OF OPERATIONS
The Company closed on its purchase of 100% of the outstanding
stock of Monterey's Acquisition Corp. ("MAC") on July 2, 1997.
Accordingly, the results of operations for the third quarter ending
September 27, 1998 presented below include the operations of the 25 MAC
units. Pro forma information as if the Company had owned MAC for the
39-week and 13-week periods ended September 28, 1997 is presented in
note 3 of the notes to consolidated financial statements included
herein. Beginning in fiscal 1998, the Company changed its fiscal
quarters to four thirteen week quarters. For comparative purposes,
fiscal 1997 consolidated statements of income and cash flows have been
restated for the 39-week and 13-week period ended September 28, 1997.
7
<PAGE> 8
Revenues. The Company's revenues for the third quarter of
fiscal 1998 were down $151,000 or 1.3% to $11.9 million compared with
the same quarter a year ago. Restaurant sales for the third quarter of
1998 were down $228,000 compared with the same quarter a year ago, to
$11.6 million. The decline in restaurant sales is due to the closure
and or sale of five under-performing restaurants. Since the third
quarter ended September 28, 1997, two new restaurants have opened.
Sales at restaurants operating in both fiscal quarters (same-stores)
increased 2.5% over last year's same quarter, reducing the overall
sales decline by $232,000. Franchise-owned same-stores sales for the
quarter were up 6.0%. Total system same-store sales were up 4.1%.
On a year-to-date basis, the Company's revenues were up 51.1%
to $35.8 million over revenues of $23.7 million for the same 39-week
period a year ago. Restaurant sales for the 39-week period were up
$11.9 million over the same 39-week period a year ago. Sales at
restaurants operating in both fiscal quarters increased 1.0% or
$275,000 over last year's 39-week period. The 25 MAC units contributed
$17.2 million in the 39-week period in 1998 and $5.8 million in 1997.
Franchise-owned same-stores operating in the same 39-week period were
up 5.1%. Total system same-store sales were up 2.9%.
Costs and Expenses. Cost of sales, consisting primarily of
food and beverage costs but also includes paper, supplies and franchise
expenses, increased in the third quarter of 1998 to 28.5% of restaurant
sales as compared with 27.3% in the same period in 1997. Excluding
franchise expenses, restaurant level costs and expenses increased 40
basis points to 27.6% compared with 27.2% in the same quarter a year
ago. Contributing to the increase is the new emphasis placed on value
perception within the Casa Ole concept, achieved primarily by
increasing portion sizes. The Company estimates that food cost
increased 1% on a comparable period basis, most of which was due to an
increase in the cost of cheese.
On a year-to-date basis, cost of sales increased to 27.6% of
restaurant sales as compared with 26.1% in the same period a year ago.
This increase is attributable in part to an increase in the proportion
of MAC units, which have a higher average cost of sales than Casa Ole
units. Excluding franchise expense, restaurant level costs and expenses
increased 170 basis points to 27.2% compared with 25.5% in the 39-week
period a year ago.
Labor and other related expenses decreased as a percentage of
restaurant sales by 130 basis points to 32.8% in the third quarter of
1998 as compared with 34.1% in the same period in 1997. This decrease
is due in part to the closure of three under-performing stores and the
sale of two other stores. Further, the Company improved employee
utilization in most operating restaurants.
On a year-to-date basis, labor and other related expenses
decreased as a percentage of restaurant sales by 70 basis points to
33.3% as compared with 34.0% in the same period a year ago. The
decrease is attributed to the same items discussed in the preceding
paragraph.
Restaurant operating expenses, which primarily includes rent,
utilities, repair and maintenance and advertising, decreased as a
percentage of restaurant sales by 40 basis points to 23.1% in the third
quarter of 1998 as compared with 23.5% in the same period in 1997. The
improvements are primarily due to cost cutting measures made throughout
the store system, and especially so in stores developed since the
initial public offering. Expenses showing the most improvement were
smallwares, repair and maintenance, office expense, utilities, and
insurance. 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 stores and the sale of two other stores also
helped to improve overall operating margins.
On a year-to-date basis, restaurant operating expenses
decreased as a percentage of restaurant sales by 110 basis points to
21.8% as compared with 23.0% in the same period a year ago. The
decrease is attributed to the same items discussed in the preceding
paragraph.
8
<PAGE> 9
General and administrative expenses (G&A) decreased as a
percentage of total revenues by 280 basis points to 8.5% in the third
quarter of 1998 as compared with 11.3% in the same period in 1997. The
prior year's quarter included $241,000 in special charges related to
severance agreements and acquisition related costs. Giving effect to
this, G&A as a percentage of total revenues would have been 9.3% for
the same quarter a year ago. Further, the Company recovered $60,000
of the special charges related to severance agreements in the current
quarter. The remaining decrease is due in part to the administrative
efficiencies gained with the purchase of Monterey's Acquisition Corp.
On a year-to-date basis, general and administrative expenses
decreased as a percentage of total revenues by 210 basis points to 8.8%
compared with 10.9% in the same period a year ago. Again, giving effect
to the special charges, G&A as a percentage of total revenues would
have been 9.9% in the same period a year ago. The decrease is
attributed to the same items discussed in the preceding paragraph.
Depreciation and amortization expense decreased as a
percentage of total revenues by 60 basis points to 3.4% in the second
quarter of 1998 as compared with 4.0% in the same period in 1997. This
decrease is the primary result of the sale and leaseback transaction
involving the sale and lease back of land, building and improvements of
13 company-owned restaurants. The leases are classified as operating
leases. Also, effective the first quarter of fiscal 1998, the Company
changed its estimate of the useful lives of certain recently acquired
fixed assets to reflect actual useful lives and industry norms (see
note 2).
On a year-to-date basis, depreciation and amortization expense
increased as a percentage of total revenues by 30 basis points to 3.4%
compared with 3.1% in the same period a year ago. This increase is
primarily due to the added depreciation and amortization related to the
purchase of MAC.
Other Income (Expense). Net other income (expense) increased
from an expense to income for the third quarter of 1998, a change of
approximately $210,000. The increase was due to the sale-leaseback
transaction, the proceeds of which were used to pay off long-term debt,
thus reducing interest expense.
On a year-to-date basis, net other expense increased
approximately $277,000. The increase was due to the reduction in
interest income as the proceeds from the 1996 initial public offering
were used for construction projects and the debt incurred related to
the purchase of MAC.
Income Tax Expense. The Company's effective tax rate for
fiscal 1998 is 38.9%.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $2.0 million for
the 39 weeks ended September 27, 1998, compared to $1.7 million for the
same period last year. As of September 27, 1998, the Company had a
working capital deficit of $2.2 million, which is common in the
restaurant industry, since restaurant companies do not typically
require a significant investment in either accounts receivable or
inventory. Just after the third quarter ended, the Company made an
estimated tax payment of approximately $1.0 million.
During the first 39 weeks of 1998, capital expenditures on
property, plant and equipment were approximately $4.4 million as
compared to $7.1 million for the same period of 1997. Capital
expenditures included the remodeling of thirteen restaurants, one in
Copperas Cove, Texas, one in Waco, Texas, eight in Houston, Texas, one
in Grand Prairie, Texas and two in Lubbock, Texas. Three remodels are
planned for the fourth quarter. One new store opened late in the second
quarter in Boise, Idaho, and an existing store was relocated (primarily
paid for by the landlord) in Houston, Texas. A second new store in
Boise, Idaho opened just after the third quarter ended. Currently the
Company has two new restaurant sites under construction, one of which
is scheduled to open in the fourth quarter of fiscal 1998 and the other
is scheduled to open in the first quarter of fiscal 1999. Another two
sites are
9
<PAGE> 10
currently under contract and are scheduled to open in fiscal 1999.
Additionally, the Company had cash outlays for necessary replacement of
equipment in various older units. The Company estimates its capital
expenditures during the fourth quarter will approximate $3.4 million.
During the second quarter, the Company sold a land site, which no
longer fit within the Company's strategic plan, for approximately
$200,000, incurring a loss on sale of approximately $10,000.
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 note).
Separately, the Company negotiated with FFCA a $14.5 million
forward commitment to finance up to 12 new restaurants. The Company
also 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 $5.0 million revolving line of
credit. The interest rate is either the prime rate or LIBOR plus a
stipulated percentage. The Company is subject to a non-use fee of 0.35%
on the unused portion of the revolver from the date of the credit
agreement. Within the terms of the credit agreement, the Company must
meet certain financial covenants. As of September 27, 1998, the Company
had $1,920,000 outstanding under the revolving line of credit. Just
after the third quarter ended, the Company closed on two of its forward
commitments with FFCA.
The Company's management believes that the sale-leaseback
forward commitments with FFCA, along with operating cash flow and the
Company's revolving line of credit with NationsBank, will be sufficient
to meet its operating requirements and to finance its expansion plans
(exclusive of any acquisitions) through the end of the 2000 fiscal
year.
Year 2000. The Company reached a decision to continue
outsourcing its accounting processes. The new outsourcing group is
setting up an accounting department on the premises of the Company and
will install new computer hardware and software that is Year 2000
adapted. 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 also has initiated discussions
with its significant suppliers and financial institutions to ensure
that those parties have appropriate plans to remediate Year 2000 issues
where their systems interface with the Company's systems or otherwise
impact its operations. The Company is assessing the extent to which its
operations are vulnerable should those organizations fail to remediate
their computer systems properly. Although, management believes that the
Company's systems are compliant, or will be compliant by December 1999,
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. In the interim, there are other manual
procedures the Company could utilize in the event of a "worst case"
scenario. All maintenance and modification costs will be expensed as
incurred, while the cost of new computer hardware and software, if
material, is being capitalized and depreciated over its expected
useful life. The cost of the Year 2000 compliance program is not
anticipated to be greater than $50,000.
10
<PAGE> 11
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the quarter
ended September 27, 1998.
11
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CASA OLE RESTAURANTS, INC.
Dated: October 27, 1998 By: /s/ Louis P. Neeb
Louis P. Neeb -------------------
Chairman of the Board & Chief Executive Officer
(Principal Executive Officer)
Dated: October 27, 1998 By: /s/ Andrew J. Dennard
Andrew J. Dennard ----------------------
Vice President, Chief Financial Officer & Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
12
<PAGE> 13
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> JUN-29-1998
<PERIOD-END> SEP-27-1998
<CASH> 644,689
<SECURITIES> 0
<RECEIVABLES> 680,698
<ALLOWANCES> (30,000)
<INVENTORY> 414,273
<CURRENT-ASSETS> 390,428
<PP&E> 17,332,938
<DEPRECIATION> 4,540,389
<TOTAL-ASSETS> 22,981,176
<CURRENT-LIABILITIES> 4,331,071
<BONDS> 0
0
0
<COMMON> 47,327
<OTHER-SE> 13,172,815
<TOTAL-LIABILITY-AND-EQUITY> 22,981,176
<SALES> 11,561,378
<TOTAL-REVENUES> 11,941,398
<CGS> 3,293,633
<TOTAL-COSTS> 11,173,738
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (12,172)
<INCOME-PRETAX> 821,536
<INCOME-TAX> 316,291
<INCOME-CONTINUING> 505,245
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 505,245
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
