November 11, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Room 1004
Judiciary Plaza
Washington, D.C. 20549
RE: El Chico Restaurants, Inc. 10-Q for Quarter Ended September 30, 1997
Gentlemen:
We are transmitting electronically the Form 10-Q for El Chico Restaurants,
Inc. for the quarter ended September 30, 1997.
Sincerely,
Susan R. Holland
Vice President, Treasurer &
Controller
/ktc
cc: National Assoc. of Securities Dealers, Inc. (electronic EDGAR
submission)
Lawrence E. White
Ron Frappier
Darl Hatfield
Britt Langford
<PAGE>
======================================================================
F O R M 1 0 - Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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 30, 1997
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 0-12802
EL CHICO RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
Texas 75-0982250
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12200 Stemmons Freeway, Suite 100, Dallas, Texas 75234
(Address of principal executive offices)
(Zip Code)
(972) 241-5500
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
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 November 4, 1997.
Common Stock, $0.10 par value: 3,717,386.
========================================================================<PAGE>
EL CHICO RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Par Value Amounts)
September 30, December 31,
1997 1996
(Unaudited)
ASSETS
Current Assets:
Cash and Cash Equivalents $ 995 $ 216
Accounts Receivable 668 1,154
Income Tax Receivable 63 -
Inventories 1,066 976
Prepaid Expenses and Other 1,245 1,330
Deferred Income Taxes 569 824
------ ------
Total Current Assets 4,606 4,500
Property and Equipment - Net 41,204 40,535
Other Assets and Deferred Costs 717 681
Deferred Income Taxes 2,146 1,946
------ ------
$ 48,673 $ 47,662
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Maturities of Long-Term Debt $ 732 $ 27
Trade Accounts Payable 4,489 4,459
Accrued Liabilities 3,001 5,114
Income Taxes Payable - 570
------ -----
Total Current Liabilities 8,222 10,170
Long-Term Debt, Less Current Maturities 8,675 9,765
Other Long-Term Liabilities 3,359 1,442
Stockholders' Equity:
Preferred Stock - Authorized 1,000,000 Shares
of $.10 Par Value; None Issued - -
Common Stock - Authorized 10,000,000 Shares of
$.10 Par Value; Issued 4,772,166 and 4,750,142
Shares in 1997 and 1996, respectively 479 475
Additional Paid-In Capital 16,067 15,925
Retained Earnings 20,842 18,876
Unamortized Value of Restr Stk Issued (26) (37)
------ ------
37,362 35,239
Less Treasury Stock - At Cost 1,054,780
and 1,057,760 Shares in 1997 and
1996, respectively (8,945) (8,954)
28,417 26,285
------ ------
$ 48,673 $ 47,662
<PAGE>
EL CHICO RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
Quarter Ended Nine Months Ended
9/30/97 9/30/96 9/30/97 9/30/96
Revenues:
Sales from Company-Owned
restaurants $25,228 $25,348 $74,765 $76,833
Equipment sales 300 132 590 445
Franchise revenues 487 499 1,427 1,501
------ ------ ------ ------
26,015 25,979 76,782 78,779
------ ------ ------ ------
Costs and Expenses:
Restaurant cost of sales - food
and beverage 6,639 6,660 19,668 20,597
Restaurant cost of sales -
labor 8,484 8,305 25,121 25,476
Restaurant operating exp 7,211 7,165 21,475 22,689
Cost of equipment sales 258 124 514 373
General and administrative 2,597 2,358 7,261 7,174
Special Charge - - - 9,421
Gain on sale of assets (529) (597) (529) (1,202)
Interest expense 185 184 577 490
Interest income (13) (23) (49) (53)
------ ------ ------ ------
24,832 24,176 74,038 84,965
------ ------ ------ ------
Income (loss) before
income taxes 1,183 1,803 2,744 (6,186)
Inc tax provision (benefit) 314 460 778 (2,306)
------ ------ ------ -------
NET EARNINGS (LOSS) $ 869 $ 1,343 $1,966 $(3,880)
====== ====== ====== =======
Net earnings (loss) per common
share $ 0.23 $ 0.35 $ 0.53 $ (0.98)
====== ====== ====== ======
Weighted average number of
shares and share equivalents
outstanding
3,743,471 3,793,548 3,723,546 3,959,476
========= ========= ========= =========
<PAGE>
EL CHICO RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
Nine Months Ended
Sept 30, 1997 Sept 30, 1996
------------- -------------
Cash Flows from Operating Activities:
Net Earnings (Loss) $ 1,966 $(3,880)
Adj to Reconcile Net Earnings (Loss) to Net
Cash Provided by Operating Activities:
Special Charge - 9,421
Gain on Sale of Property (529) (1,202)
Depreciation and Amortization
of Property and Equipment 3,904 4,049
Amortization of Deferred Costs 345 585
Decrease in Accounts Receivable 486 143
Increase in Income Tax Receivable (63) (314)
Decrease (Increase) in Inventories (90) 124
Decrease (Increase) in Prepaid
Expenses and Other 85 (113)
Inc in Other Assets and Defd Costs (381) (275)
Decrease in Trade Accounts Payable and
Accrued Liabilities (2,083) (860)
Decrease in Income Taxes Payable (570) -
Inc (Dec) in Long-Term Liabilities 1,917 (45)
Deferred Income Taxes 55 (2,403)
Other 149 120
------- -------
Net Cash Provided by Oper Activities 5,191 5,350
------- -------
Cash Flows from Investing Activities:
Proceeds from Sale of Property 1,142 1,445
Purchase of Property and Equipment (5,299) (5,864)
------- -------
Net Cash Used in Investing Activities (4,157) (4,419)
------- -------
Cash Flows from Financing Activities:
(Repayment) Borrowings of Long-Term Debt (385) 1,855
Purchase of Treasury Stock - (2,912)
Issuance of Common Stock 130 43
------- -------
Net Cash Used in Financing Activities (255) (1,014)
------- -------
Net Increase (Decrease) in Cash 779 (83)
Cash and Cash Equivalents at Beginning of Period 216 266
------- -------
Cash and Cash Equivalents at End of Period $ 995 $ 183
======= =======
<PAGE>
EL CHICO RESTAURANTS, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
1. Basis of presentation and other accounting information.
The consolidated condensed financial statements and information
included herein are unaudited; however, they reflect all adjustments
which are, in the opinion of Management, necessary for a fair
statement of the results of operations for the interim periods ended
September 30, 1997 and 1996 and the financial position at September
30, 1997. The adjustments consist only of normal recurring items
except for the special charge discussed below. The results of
operations for the nine months ended September 30, 1997 are not
necessarily indicative of the results to be expected for the full
fiscal year. The notes to the consolidated financial statements
contained in the December 31, 1996 Annual Report on Form 10-K should
be read in conjunction with the consolidated condensed financial
statements.
2. Special Charge.
During the quarter ended June 30, 1996, the Company incurred a special
charge of $9.4 million to provide for the impairment and exit plans of six
units slated for closing, the impairment of the carrying values of three
other stores that will continue operating as well as a write-down of
certain other assets. One of the six stores was an older store that was
closed during the quarter and was replaced with a new prototype which
opened July 1996. Subsequently, the Company entered into agreements with
two separate existing franchisees to operate two of the six impaired
restaurants. The three remaining impaired stores have been closed, one of
which has been sold, one of which is subleased and the Company is in the
process of locating a sublessor for the remaining closed store.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking statements regarding management's present plans, or
those of the party expected to acquire the company, to achieve future
performance and objectives involve risks and uncertainties concerning many
factors, many of which are not fully within management's control or
influence. Such factors could cause actual results to differ from plans
or expectations, and such differences could be material. Factors
affecting future performance and plans include but are not limited to:
ability of the party expected to acquire the company to satisfy all
necessary conditions to closing its financing commitments; achievement of
the necessary vote of the company's shareholders to approve the
acquisition of the company by a third party; changing economic and
competitive conditions; ability to negotiate satisfactory agreements with
third parties for supplies, services, financing, new restaurant locations,
and other needs; ability to attract and retain qualified personnel;
ability to achieve expected returns on investments and operational
programs; and consumer reaction to advertising, remodels, new restaurants,
product offerings, and operational improvement programs. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as to the date hereof. Management does not expect to
update such forward-looking statements continually as conditions change,
and readers are urged to review carefully and consider the various
disclosures in periodic reports, including reports on Forms 8-K, 10-K and
10-Q, filed with the Securities and Exchange Commission.
Liquidity and Capital Resources
The Company has an unsecured credit facility with a $16,000,000
commitment comprised of a $15,000,000 revolving line of credit and a
$1,000,000 letter of credit facility. The line of credit matures on
December 31, 1997, and may be converted to a term loan, payable quarterly
on a 10-year amortization schedule, and maturing on December 31, 1999.
Both the line of credit and the term loan bear interest at the Company's
option of prime rate or up to six-month LIBOR plus .75 percent. Both
rates are subject to maintaining certain financial covenants, and interest
is payable upon maturity of the LIBOR advances or quarterly for prime rate
advances. In addition, the Company has entered into an interest rate swap
on a notional balance of $5 million, under which a fixed rate of 6.61
percent is paid against a floating rate equal to three-month LIBOR. A
commitment fee of .25 percent is payable quarterly on any unused
commitments. As of September 30, 1997, $9,363,000 was outstanding under
the line of credit. The credit facility was obtained for the funding of
the construction of new Company-owned restaurants, remodeling existing
restaurants, and the purchase of the Company's headquarters facility
during 1993 and has been used for repurchase of the Company's common stock
subject to certain limitations. During the nine months ended September
30, 1997, the Company had opened one new El Chico restaurant and remodeled
eight El Chico restaurants. During the fourth quarter, the Company plans
to complete up to three remodels and estimates total capital expenditures
during 1997 to be approximately $7 to $8 million, which will be funded by
internal operations and the existing credit facility.
The Company is currently operating with a working capital deficit,
which is common in the restaurant industry, since restaurant companies do
not typically require a significant investment in either accounts
receivable or inventory. Working capital deficit decreased from
$5,670,000 at December 31, 1996 to $3,616,000 at September 30, 1997,
primarily as a result of a reclassification of accrued liabilities,
associated with the second quarter 1996 special charge, to "Other Long-Term
labilities" reflecting present plans for disposition of these
properties.
The Company has entered into an agreement and plan of merger, as
amended, under which the Company would be acquired by another party upon
the affirmative vote of the holders of at least two thirds of the
Company's outstanding Common Stock and upon the successful financing of
the transaction by the acquiring party. The Board of Directors of the
Company unanimously believes the transaction is in the best interests of
the Company's shareholders. The acquiring party presently is working to
obtain the necessary financing, and the Company is providing reasonable
accommodation to assist that effort, as well as preparing to obtain the
vote of shareholders. The Company's plans and financing requirements
could change as a result of the outcome of the transactions.
Results of Operations
Revenues for the quarter ended September 30, 1997 were $26.0 million,
an increase of .1 percent from the quarter ended September 30, 1996.
Company-owned restaurant sales were $25.2 million and $25.3 million,
respectively, for the compared periods, a decrease of .5 percent.
Comparable Company-owned El Chico concept restaurant sales were down 2.1
percent.
Year-to-date revenues were $76.8 million compared with $78.8 million
for the same period a year earlier. Company-owned restaurant sales
included in these amounts decreased from $76.8 million to $74.8 million
due to a decrease of 2.7 percent in comparable Company-owned El Chico
concept restaurant sales.
Franchise-related income decreased for the quarter and year-to-date
due to a decrease in the number of revenue-producing stores and a decrease
in comparable store sales of 2.0 percent and 1.6 percent, respectively.
Pronto Design & Supply, Inc. (Pronto) is a wholly owned subsidiary in
the business of designing food-service kitchens and supplying the related
equipment. Equipment sales increased for the quarter and year-to-date due
to the sale of equipment for a major remodel to a franchisee. Costs of
sales for the quarter decreased as a percentage of sales as the prior year
included a sale with unusually high costs. Cost of sales for the
year-to-date increased due to lower vendor rebates relative to sales.
Restaurant food costs for the quarter remained the same as prior year
as a percentage of sales, 26.3 percent. For the year-to-date, food costs
decreased to 26.3 percent from 26.8 percent. Food cost was higher a year
ago as a result of certain programs initiated to improve value perception
such as 99-cent beer and margaritas, aggressive offering of free
tortillas, product introductions with high food costs and an adjustment
for prior period sales tax. The majority of these programs have been
discontinued.
Restaurant labor increased for the quarter and year-to-date as a
percentage of sales to 33.6 percent from 32.8 percent and to 33.6 percent
from 33.2 percent, respectively, due to increased management compensation.
Operating expenses for the quarter increased as a percentage of sales
from 28.3 percent to 28.6 percent as a result of an increase in
advertising and laundry costs, partly offset by a decrease in repair and
maintenance, insurance and supply costs. Operating expenses for the
year-to-date decreased as a percentage of sales from 29.5 percent to 28.7
percent due to decreases in repair and maintenance costs, depreciation
expense related to the prior year impairment of certain assets and
insurance expense, partly offset by increases in advertising and laundry
expenses.
General and administrative costs increased for the quarter due to
expenses associated with the previously announced merger of the Company
($406,000, including the cost of a fairness opinion and legal and other
fees) and increased professional fees, principally restaurant management
recruiting fees, partly offset by lower development training for existing
managers and employee costs. General and administrative costs increased
for the year-to-date due to cost associated with the merger of $462,000
and increased professional fees, principally restaurant management
recruiting fees, partly offset by lower new management training and
decreased accrued executive bonus.
During the quarter a year ago the Company incurred a pre-tax special
charge of $9.4 million to provide for the impairment and exit plans of six
units slated for closing, the impairment of the carrying values of three
other stores that would continue operating as well as a write-down of
certain other assets. One of the six stores was an older store that was
closed during the quarter a year ago and replaced with a new prototype
which opened July 1996. Subsequently, the Company entered into agreements
with two separate existing franchisees to operate two of the six impaired
restaurants and one of the six impaired stores has been subleased. During
the quarter ended September 30, 1997 one of the six impaired stores was
sold with the gain reflected in "Gain on sale of assets" and the Company
is in the process of locating a sublessor for the remaining closed store.
Subsequent to September 30, 1997, one of the three impaired stores that
was to continue to operate was closed. The Company anticipates the
financial impact of this closing to be immaterial.
In addition to selling one of the impaired stores during the quarter,
the Company sold a parcel of undeveloped land in a market where no further
new store openings are planned in the foreseeable future.
Interest expense remained basically unchanged for the quarter and
increased for the year-to-date due to higher interest rates and
borrowings and lower capitalized interest.
At September 30, 1997 there were 68 Company-operated restaurants and
28 franchised restaurants.
Accounting Matters
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, Earnings Per Share (Statement 128). Statement 128 specifies the
computations, presentation and disclosure requirements for earnings per
share (EPS) for entities with publicly held common stock or potential
common stock. Statement 128 replaces primary EPS and fully diluted EPS
with basic EPS and diluted EPS, respectively. Statement 128 is effective
for financial statements for both interim and annual periods beginning
after December 15, 1997, with earlier application not permitted. If such
early application were permitted, management believes the impact of the
adoption would not have a material impact on the reported EPS at September
30, 1997.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) A Form 8-K was filed on August 29, 1997 related to the employment
agreement between El Chico Restaurants, Inc. and Wallace A. Jones.
(c) A Form 8-K was filed on September 25, 1997 related to the
agreement and plan of merger dated September 23, 1997 by and
between El Chico Holding Company, L.P. and El Chico Acquisition,
Inc. and El Chico Restaurants, Inc. and related escrow agreement.
(d) A Form 8-K was filed on October 24, 1997 for the amendment to the
agreement and plan of merger dated September 23, 1997 by and
between El Chico Holding Company, L.P. and El Chico Acquisition,
Inc. and El Chico Restaurants, Inc.
(e) A Form 8-K was filed on November 4, 1997 for the second amendment,
dated October 31, 1997, to the agreement and plan of merger dated
September 23, 1997, as amended, by and between El Chico Holding
Company, L.P. and El Chico Acquisition, Inc. and El Chico
Restaurants, Inc.
SIGNATURES
Pursuant to the requirements 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.
EL CHICO RESTAURANTS, INC.
Date: November 11, 1997 By: /s/Susan R. Holland
-----------------------------
Susan R. Holland
Vice President, Treasurer &
Controller
<TABLE> <S> <C>
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<CIK> 0000719961
<NAME> EL CHICO RESTAURANTS, INC
<MULTIPLIER> 1,000
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 995
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<RECEIVABLES> 668
<ALLOWANCES> 0
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<PP&E> 41,204
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0
0
<COMMON> 479
<OTHER-SE> 27,938
<TOTAL-LIABILITY-AND-EQUITY> 48,673
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<CGS> 15,123
<TOTAL-COSTS> 25,189
<OTHER-EXPENSES> (542)
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