Mexican Restaurants, Inc.

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Mexican Restaurants, Inc.

1135 Edgebrook
Houston, Texas 77034-1899
U.S.A.
Telephone: (713)943-7574
Fax: (713)943-9554
Web site: http://www.mexicanrestaurantsinc.com

Public Company
Incorporated: 1973 as Casa Ole
Employees: 2,350
Sales: $63.20 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: CASA
NAIC: 72211 Full-Service Restaurants

Mexican Restaurants, Inc. operates nearly 90 Mexican-style restaurants in six states, almost two-thirds of which are company owned. The firm has five different restaurant concepts, which range from the moderately priced, family-oriented Casa Ole, Monterey’s Little Mexico, Monterey’s Tex-Mex Cafe, and La Señorita, to the more upscale Tortuga’s Coastal Cantina. Many of the company’s sites are in its home state of Texas, with the rest located in Louisiana, Oklahoma, Idaho, and Michigan. Nearly a fifth of the publicly owned company is controlled by founder Larry Forehand and members of his family.

Beginnings

Mexican Restaurants, Inc. traces its origins to Larry Forehand, who grew up in Texas during the late 1940s and 1950s. While he was in high school he began working as a busboy at the chain-affiliated Monterey House Mexican Restaurant in his home town of Pasadena, where he worked his way up to manager. After a two-year stint in the army, he returned to Pasadena and his job at Monterey. He soon advanced in the organization, eventually attaining the position of director of store operations for 55 of the company’s locations. By the early 1970s Forehand decided he wanted to run a restaurant of his own, and he sought to buy a franchise from Monterey House. The company was just then preparing for a public offering, however, and had temporarily suspended franchise sales. With three children to support, Forehand decided to use the experience he had gained working for Monterey to open a moderately priced, family-friendly Mexican-style restaurant of his own.

On December 1, 1973 Forehand’s new Casa Ole restaurant debuted in Pasadena. Its first month in operation netted $350 in profits, and sales grew steadily from there. A partner, Mike Domec, opened a second restaurant in Houston in 1976, and two years later the pair formed Casa Ole Franchise Services, Inc. to capitalize on the restaurants’ popularity. One of the first franchisees to sign on was Tom Harken, a Beaumont, Texas man who earlier had sold vacuum cleaners and recreational vehicles. Harken, who had suffered from polio as a child, never finished school or learned to read but nonetheless had become a successful businessman with the help of his wife Melba. Over the next 15 years Harken opened seven Casa Ole restaurants, becoming the company’s largest individual franchisee.

Forehand and Domec themselves also opened a number of new sites in the Houston metro area and in several smaller towns in Texas. By the mid-1980s there were more than 20 Casa Ole restaurants, about half built by the company and half by franchisees. A surge in growth took place beginning in 1984, when the company renovated all of its older locations and opened 12 new restaurants in an 18-month period. By 1988 Casa Ole’s systemwide sales stood at $36.1 million.

The Casa Ole formula of reasonably priced, “gringo”-friendly Mexican-style food served in a sit-down restaurant setting was well received in the marketplace. At a time when most restaurants were seeing declining sales figures, Casa Ole was reporting 10 percent annual per-store sales growth. Speaking to the Houston Chronicle, Forehand attributed this to the firm’s careful growth strategy, its strict quality standards, its low overhead, and adherence to a Tex-Mex menu. The company employed five supervisors who continually inspected the chain’s restaurants, and each Casa Ole gave out customer comment cards with every table check. Forehand or Domec personally reviewed each card and mailed letters, including gift certificates worth $5, to any unhappy patrons. In addition to keeping a close watch on the restaurant chain, Forehand participated in numerous community organizations and sponsored anti-drug and educational achievement programs in the Pasadena schools.

New Investors, Expansion, and an IPO in the Mid-1990s

The firm’s growth slowed during the early 1990s as the U.S. economy faltered. By 1995 there were a total of 39 Casa Ole restaurants in operation, with the last company-funded site having opened in 1989. In the fall of 1995 an agreement was reached with Tex-Mex Partners L.C. to fund renewed expansion of the chain. Tex-Mex principal Louis Neeb became chairman and CEO of Casa Ole and Patrick Morris of Tex-Mex was named president. Forehand stayed on as vice-chairman, and Domec took a seat on the company’s board. Shortly after this realignment, Casa Ole went public, selling two million shares of stock on the NASDAQ exchange. The money was earmarked for buying out Mike Domec’s stake in the company and for funding further expansion.

Following the IPO Casa Ole reached an agreement with Ronald Sacks, a former executive with several restaurant chains, to become a “market partner.” Sacks would oversee company-funded expansion into Idaho, where as many as ten restaurants were planned. The joint venture was given the name Casa Ole Mountain States LLC. Another deal was made to open sites in Louisiana, and later in the year a new company-owned restaurant opened in Copperas Cove, Texas. A franchised outlet was bought back by the company as well.

A visitor to a Casa Ole restaurant at this time would find a Southwestern-style facade that gave way to a bright and upbeat Mexican-themed interior. Free chips and two types of salsa were delivered when customers arrived. The menu included a wide range of Mexican and Tex-Mex dishes, but some American choices were available, mainly aimed at children. A typical lunch entree cost about $5, with dinner around $7, and portions were generous. Casa Ole also served beer and wine, but sales of alcohol were not emphasized. The average 4,300-square-foot restaurant seated 160 to 180.

Acquisition of Monterey’s in 1997

In the spring of 1997 Casa Ole announced that it would acquire Monterey’s Acquisition Corp. for $11.6 million. Monterey’s Acquisition was the successor to Monterey Mexican House, where Larry Forehand had gotten his start in 1959. Monterey’s now operated 26 Mexican restaurants in Texas and Oklahoma under the names Monterey’s Tex-Mex Cafe, Monterey’s Little Mexico, and Tortuga’s Coastal Cantina. The first two concepts, 21 of them Tex-Mex Cafes and two of them Little Mexicos, were similar in format to Casa Ole, but the company’s three Tortuga’s outlets were more upscale. Casa Ole announced plans to convert several of the Monterey’s restaurants into Casa Ole restaurants, but most would be left as they were. Monterey’s, which had been founded in 1954, had struggled through bankruptcy and several changes of ownership before Casa Ole stepped in.

A few months after the Monterey’s purchase, Casa Ole President Pat Morris resigned, citing strategic differences with the company’s board. His replacement was Curt Glowacki, who had come to the company via Monterey’s. Founder Larry Forehand now increased his involvement with Casa Ole, following a period of reduced activity while he led the Texas Restaurant Association. He took the position of Director of Franchising, in addition to serving as vice-chairman.

The company’s sales had been sluggish in the months following the acquisition of Monterey’s, and several steps were soon taken to improve Casa Ole’s financial picture. The most prominent move was a “sale-leaseback” transaction in which Franchise Finance Corporation of America purchased 13 of the company’s sites for $11.5 million, and then leased them back to Casa Ole. This gave the company a needed infusion of capital, which it used to pay down debt.

Shortly after this agreement was reached, Casa Ole made a deal to buy the Michigan-based La Señorita Restaurant chain for $4 million. The purchase gave Casa Ole five of the firm’s nine Mexican-style restaurants and partial interest in a sixth, along with all rights to the concept and name. During 1998 Casa Ole also closed or sold several underperforming restaurants, opened two new sites, and bought another one of its franchised locations.

Company Perspectives:

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: Offering consistent, high-quality, original recipe Mexican menu items that reflect both national and local taste preferences; pricing menu offerings at levels below many family and casual-dining restaurant concepts; selecting, training and motivating its employees to enhance customer dining experiences and the friendly casual atmosphere of its restaurants; providing customers with the friendly, attentive service typically associated with more expensive casual-dining experiences; and reinforcing the perceived value of the dining experience with a comfortable and inviting Mexican decor.

A New Name in 1998

Following completion of the La Señorita acquisition in early 1999, the company effected a name change to Mexican Restaurants, Inc. CEO Neeb stated that this would “more fully reflect the Company’s ongoing strategy of growing by careful new restaurant development in existing markets, coupled with opportunistic acquisitions of proven Mexican restaurant companies.” Neeb and the company’s board also decided that future expansion plans would concentrate on the Tortuga’s Coastal Cantina concept. Tortuga’s, which was likened to a Mexican version of the casual dining chain Denny’s, had substantially higher per-check averages than the company’s other concepts, and it offered a full-service bar. Overall sales volumes were also significantly higher than at the average Casa Ole. During 1999 five Tortuga’s locations were opened or converted from Casa Ole restaurants. At the end of the year Mexican Restaurants owned 55 out of a systemwide total of 92 sites.

Since the public offering Mexican Restaurants had been generally managing a small profit, but with an intensely competitive marketplace and rising prices from suppliers, it was getting tougher and tougher to stay in the black. A new effort was implemented to improve food quality, service, and ambience at the chain’s locations. The result was an increase in foot traffic, but Wall Street was indifferent to the company’s fortunes and the stock price generally stayed below the $4 mark. Seeking to improve shareholder value, in late 2000 the company’s board voted to seek advice on corporate strategy from First Tennessee Securities Corp. Several options were under consideration, included selling the company. During the summer Louis Neeb also handed his CEO duties to President Glowacki, though he continued to act as board chairman.

In early 2001 a former Mexican Restaurants director, John Textor, announced his intentions to seek control of the company, which Neeb characterized as a friendly bid. Textor headed an investor group that had acquired 16 percent of the outstanding stock. At this same time Mexican Restaurants’ principal lender, Bank of America, informed the company that it would end its relationship with the chain. The bank had recently tightened its loan rules, and Mexican Restaurants could no longer meet the requirements. The company was in the process of selling two of its restaurants, but the money would not be available quickly enough to meet the Bank of America obligation.

Mexican Restaurants, Inc. was in a period of transition, which its management hoped would end in a way that would strengthen the company over the long term. While it waited for the changes to come, the firm would continue on its daily mission of providing customers with reasonably priced Mexican-style cuisine in a southwestern-themed setting.

Principal Subsidiaries

Monterey’s Acquisition Corp.; La Señorita Restaurants.

Principal Competitors

Atomic Burrito, Inc.; Avado Brands, Inc.; Brinker International, Inc.; Del Taco, Inc.; El Chico Restaurants, Inc.; Pancho’s Mexican Buffet, Inc.; Prandium, Inc.; Taco Cabana, Inc.

Key Dates:

1973:: Larry Forehand opens the first Casa Ole restaurant in Pasadena, Texas.
1976:: Mike Domec opens a second restaurant in Houston.
1978:: Forehand and Domec combine forces to franchise the Casa Ole concept.
1984:: Firm upgrades its older restaurants and begins to add more company-owned sites.
1996:: Casa Ole goes public on the NASDAQ exchange; new round of expansion begins.
1997:: Purchase of Monterey’s Acquisitions, Inc. adds 26 new restaurants.
1999:: La Señorita chain is acquired; Casa Ole changes its name to Mexican Restaurants, Inc.
2000:: First Tennessee Securities Corp. is hired to look at the company’s strategic options.