-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rt8OYWjQvWC3+Mtj9nqL1mZ/55crFHzIzb1m5Brpdv7Tt++o23r61k/S9mDX3Qzx a9dGFjuvTYtj0oiXpLn8OQ== 0000891082-98-000017.txt : 19981113 0000891082-98-000017.hdr.sgml : 19981113 ACCESSION NUMBER: 0000891082-98-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980927 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TACO CABANA INC CENTRAL INDEX KEY: 0000891082 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 742201241 STATE OF INCORPORATION: DE FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20716 FILM NUMBER: 98743714 BUSINESS ADDRESS: STREET 1: 8918 TESORO DRIVE STREET 2: SUITE 200 CITY: SAN ANTONIO STATE: TX ZIP: 78217-6219 BUSINESS PHONE: 2108040990 MAIL ADDRESS: STREET 1: 3309 SAN PEDRO AVE STREET 2: SUITE 200 CITY: SAN ANTONIO STATE: TX ZIP: 78212 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 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 Commission File Number: 0-20716 TACO CABANA, INC. (Exact name of registrant as specified in its charter) DELAWARE 74-2201241 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 8918 Tesoro Dr., Suite 200 San Antonio, Texas 78217 (Address of principal executive offices) (210) 804-0990 (Registrant's telephone number, including area code) 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 Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Outstanding at October 30, 1998 Common Stock 13,633,150 shares TACO CABANA, INC. INDEX Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets at September 27, 1998 and December 29, 1997 2 Condensed Consolidated Statements of Operations for the Thirteen Weeks Ended September 27, 1998 and September 28, 1997 3 Condensed Consolidated Statements of Operations for the Thirty-nine weeks Ended September 27, 1998 and September 28, 1997 4 Condensed Consolidated Statements of Cash Flows for the Thirty-nine weeks Ended September 27, 1998 and September 28, 1997 5 Notes to Condensed Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-16 PART II. OTHER INFORMATION Items 1, 2, 3 and 5 have been omitted since the registrant has no reportable events in relation to the items Item 4. Submission of Matters to a Vote of Security Holders 17 Item 6. Exhibits and Reports on Form 8-K 17 Signature 17 TACO CABANA, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) December 28,September 27, 1997 1998 ----------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents.............. $ 339,000 $ 803,000 Receivables, net....................... 502,000 316,000 Inventory.............................. 2,105,000 2,287,000 Prepaid expenses....................... 1,704,000 3,616,000 Federal income taxes receivable........ 200,000 200,000 ----------- ----------- Total current assets................... 4,850,000 7,222,000 PROPERTY AND EQUIPMENT, net............ 59,540,000 68,784,000 NOTES RECEIVABLE....................... 344,000 292,000 INTANGIBLE ASSETS, net................. 11,293,000 11,864,000 OTHER ASSETS........................... 233,000 204,000 ----------- ----------- TOTAL.................................. $76,260,000 $87,366,000 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable....................... $4,430,000 $3,838,000 Accrued liabilities.................... 6,266,000 6,046,000 Current maturities of long-term debt and capital leases..................... 1,573,000 2,105,000 Line of credit......................... 4,223,000 4,270,000 ----------- ----------- Total current liabilities.............. 16,492,000 16,259,000 LONG-TERM OBLIGATIONS, net of current maturities: Capital leases......................... 2,357,000 2,196,000 Long-term debt......................... 11,170,000 19,774,000 ----------- ----------- Total long-term obligations............ 13,527,000 21,970,000 ACQUISITION AND CLOSED RESTAURANT LIABILITIES............................ 9,126,000 9,433,000 DEFERRED LEASE PAYMENTS................ 702,000 771,000 STOCKHOLDERS' EQUITY: Common stock........................... 157,000 157,000 Additional paid-in capital............. 97,095,000 97,315,000 Retained deficit....................... (57,278,000)(49,230,000) Treasury stock, at cost (871,937 shares at December 28, 1997 and 1,862,437 shares at September 27, 1998)......... (3,561,000) (9,309,000) ----------- ----------- Total stockholders' equity........... 36,413,000 38,933,000 ----------- ----------- TOTAL.................................. $76,260,000 $87,366,000 =========== =========== See Notes to Condensed Consolidated Financial Statements. TACO CABANA, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the Thirteen Weeks Ended ---------------------------- September 28,September 27, 1997 1998 ------------ ------------ REVENUES: Restaurant sales.......................... $34,967,000 $36,176,000 Franchise fees and royalty income......... 84,000 94,000 ----------- ----------- Total revenues............................ 35,051,000 36,270,000 ----------- ----------- COSTS AND EXPENSES: Restaurant cost of sales.................. 10,873,000 11,102,000 Labor..................................... 9,794,000 9,599,000 Occupancy................................. 2,123,000 1,966,000 Other restaurant operating costs.......... 6,899,000 6,259,000 General and administrative................ 1,515,000 1,911,000 Depreciation, amortization and restaurant opening costs........................... 2,698,000 1,995,000 ----------- ----------- Total costs and expenses.................. 33,902,000 32,832,000 ----------- ----------- INCOME FROM OPERATIONS.................... 1,149,000 3,438,000 ----------- ----------- INTEREST EXPENSE, NET..................... (256,000) (543,000) ----------- ----------- INCOME BEFORE INCOME TAXES................ 893,000 2,895,000 PROVISION FOR INCOME TAXES................ (331,000) - ----------- ----------- NET INCOME................................ $562,000 $2,895,000 =========== =========== BASIC EARNINGS PER SHARE.................. $ 0.04 $ 0.20 =========== =========== BASIC WEIGHTED SHARES OUTSTANDING......... 15,036,811 14,186,259 =========== =========== DILUTED EARNINGS PER SHARE................ $ 0.04 $ 0.20 =========== =========== DILUTED WEIGHTED SHARES OUTSTANDING....... 15,108,018 14,305,200 =========== =========== See Notes to Condensed Consolidated Financial Statements. TACO CABANA, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the Thirty-Nine weeks Ended ------------------------------- September 28,September 27, 1997 1998 ------------ ------------ REVENUES: Restaurant sales.......................... $99,171,000 $104,704,000 Franchise fees and royalty income......... 267,000 265,000 ----------- ------------ Total revenues............................ 99,438,000 104,969,000 ----------- ------------ COSTS AND EXPENSES: Restaurant cost of sales.................. 30,607,000 31,723,000 Labor..................................... 27,173,000 28,009,000 Occupancy................................. 6,222,000 5,830,000 Other restaurant operating costs.......... 18,650,000 18,355,000 General and administrative................ 5,089,000 5,777,000 Depreciation, amortization and restaurant opening costs........................... 7,758,000 5,837,000 ----------- ----------- Total costs and expenses.................. 95,499,000 95,531,000 ----------- ----------- INCOME FROM OPERATIONS.................... 3,939,000 9,438,000 ----------- ----------- INTEREST EXPENSE, NET..................... (772,000) (1,389,000) INCOME BEFORE FOR INCOME TAXES............ 3,167,000 8,049,000 ----------- ----------- PROVISION FOR INCOME TAXES................ (1,172,000) - ----------- ----------- NET INCOME................................ $1,995,000 $8,049,000 =========== =========== BASIC EARNINGS PER SHARE.................. $ 0.13 $ 0.55 =========== =========== BASIC WEIGHTED SHARES OUTSTANDING......... 15,474,687 14,593,555 =========== =========== DILUTED EARNINGS PER SHARE................ $ 0.13 $ 0.55 =========== =========== DILUTED WEIGHTED SHARES OUTSTANDING....... 15,555,680 14,746,499 =========== =========== See Notes to Condensed Consolidated Financial Statements. TACO CABANA, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Thirty-Nine weeks Ended ------------------------------- September 28,September 27, 1997 1998 ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................ $1,995,000 $8,049,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......... 7,758,000 5,375,000 Deferred income taxes................. 2,313,000 - Capitalized interest.................. (88,000) (94,000) Deferred lease payments............... (114,000) 69,000 Changes in operating working capital items.................................(2,188,000) (2,637,000) ---------- ----------- Net cash provided by operating activities. 9,676,000 10,762,000 ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment.......(12,838,000)(16,987,000) Proceeds from the sale of property and equipment........................... 1,379,000 3,195,000 ----------- ----------- Net cash used for investing activities...(11,459,000)(13,792,000) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of notes payable and draws on line of credit............ 13,173,000 11,130,000 Principal payments under long-term debt and line of credit..................... (8,213,000) (1,967,000) Principal payments under capital leases.. (146,000) (141,000) Purchase of treasury stock............... (3,561,000) (5,748,000) Exercise of stock options................ - 220,000 ----------- ----------- Net cash provided by financing activities 1,253,000 3,494,000 ----------- ----------- NET (DECREASE) INCREASE IN CASH.......... (530,000) 464,000 CASH AND CASH EQUIVALENTS, beginning of period................................. 748,000 339,000 ---------- ----------- CASH AND CASH EQUIVALENTS, end of period. $218,000 $803,000 ========== =========== See Notes to Condensed Consolidated Financial Statements. TACO CABANA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation Principles of Consolidation - The consolidated financial statements include all accounts of Taco Cabana, Inc. and its wholly-owned subsidiaries (the Company). All significant intercompany balances and transactions have been eliminated. The unaudited Condensed Consolidated Financial Statements include all adjustments, consisting of normal, recurring adjustments and accruals, which the Company considers necessary for fair presentation of financial position and the results of operations for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The interim financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 28, 1997. Recently Issued Accounting Pronouncements: In April 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities". The accounting standard requires entities to expense as incurred all start-up and preopening costs that are not otherwise capitalizable as long-lived assets. The accounting standard is effective for fiscal years beginning after December 15, 1998, with earlier application encouraged. The Company adopted the accounting standard during the first quarter of 1998. The cumulative effect of the change in the accounting principle is not material to the results of operations or financial position of the Company. 2. Earnings per Share Basic earnings per share was computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Outstanding stock options issued by the Company represent the only dilutive effect reflected in diluted weighted average shares. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement of Financial Accounting Standards No. 128, Earnings per Share. The following table sets forth the computation of basic and diluted earnings per share: 13 Weeks Ended 39 Weeks Ended -------------- -------------- September 28,September 27, September 28,September 27, 1997 1998 1997 1998 ------------ ------------ ------------ ------------ Numerator for basic and diluted earnings per share - net income..... $562,000 $2,895,000 $1,995,000 $8,049,000 Denominator for basic earnings per share: Weighted-average shares............... 15,036,811 14,186,259 15,474,687 14,593,555 Effect of dilutive securities: Employee stock options 71,207 118,941 80,993 152,944 ---------- ---------- ---------- ---------- Denominator for diluted earnings per share: Adjusted weighted-average and assumed conversions......... 15,108,018 14,305,200 15,555,680 14,746,499 =========== ========== ========== ========== Basic earnings per share........... $ 0.04 $ 0.20 $ 0.13 $ 0.55 ========== ========== ========== ========== Diluted earnings per share............ $ 0.04 $ 0.20 $ 0.13 $ 0.55 ========== ========== ========== ========== 3. Supplemental Disclosure of Cash Flow Information Thirty-nine weeks Ended ----------------------- September 28, September 27, ------------ ------------ 1997 1998 ------------ ------------ (Unaudited) (Unaudited) Cash paid for interest ......... $ 890,000 $1,313,000 Interest capitalized on construction costs ........... 88,000 94,000 Cash paid for income taxes ..... 74,000 - Cash received for income taxes . 4,000 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction The Company commenced operations in 1978 with the opening of the first Taco Cabana restaurant in San Antonio, Texas. As of November 9, 1998, the Company had 103 Company-owned restaurants and 10 franchised restaurants including one joint-venture owned. The Company's revenues are derived primarily from sales by Company-owned restaurants, with franchise fees and royalty income currently contributing less than 1% of total revenues. During the thirty-nine weeks ended September 27, 1998, the Company opened seven and closed four Company-owned restaurants and a franchisee of the Company closed one restaurant. Subsequent to September 27, 1998, the Company opened two restaurants. The following table sets forth for the periods indicated the percentage relationship to total revenues, unless otherwise indicated, of certain operating statement data. The table also sets forth certain restaurant data for the periods indicated. 13 Weeks Ended 39 Weeks Ended -------------- -------------- September 28, September 27, September 28,September 27, 1997 1998 1997 1998 ------------ ------------ ------------ ------------ Operating Statement Data: REVENUES: Restaurant sales....... 99.8% 99.7% 99.7% 99.7% Franchise fees and royalty income......... 0.2 0.3 0.3 0.3 ----- ----- ----- ----- Total revenues......... 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== COSTS AND EXPENSES: Restaurant cost of sales (1).............. 31.1% 30.7% 30.9% 30.3% Labor (1).............. 28.0 26.5 27.4 26.8 Occupancy (1).......... 6.1 5.4 6.3 5.6 Other restaurant operating costs (1).............. 19.7 17.3 18.8 17.5 General and administrative 4.3 5.3 5.1 5.5 Depreciation, amortization and restaurant opening costs 7.7 5.5 7.8 5.6 ----- ----- ----- ----- INCOME FROM OPERATIONS... 3.3 9.5 4.0 9.0 INTEREST EXPENSE, net.... (0.7) (1.5) (0.8) (1.3) ----- ----- ----- ----- INCOME BEFORE INCOME TAXES........... 2.5 8.0 3.2 7.7 PROVISION FOR INCOME TAXES........... (0.9) - (1.2) - ----- ----- ----- ----- NET INCOME............... 1.6% 8.0% 2.0% 7.7% ===== ===== ===== ===== Restaurant Data: Company-owned restaurants: Beginning of period.... 107 101 104 98 Opened................. 2 1 5 7 Acquired............... 1 - 1 - Closed................. - (1) - (4) ----- ----- ----- ----- End of period.......... 110 101 110 101 Franchised (2) and joint-venture owned restaurants:..... 11 10 11 10 ----- ----- ----- ----- Total restaurants:....... 121 111 121 111 ===== ===== ===== ===== (1) Percentage is calculated based upon restaurant sales. (2) Excludes Two Pesos licensed restaurants. The Thirteen Weeks Ended September 27, 1998 Compared to the Thirteen Weeks Ended September 28, 1997 Restaurant Sales. Restaurant sales increased by $1.2 million, or 3.5%, to $36.2 million for the third quarter of 1998 from $35.0 million for the third quarter in 1997. The increase was due primarily to an increase in sales at existing restaurants and sales from restaurants opened after September 28, 1997, offset by sales from restaurants closed after September 28, 1997. Comparable store sales, defined as Taco Cabana restaurants that have been open 18 months or more at the beginning of the quarter, increased 2.8%. Management attributes the increase to several factors including a more consistent marketing program featuring a value meal message, a commitment to increased staffing levels at existing restaurants, the ongoing reimage program, a menu price increase of approximately 2% which was implemented during the first quarter of 1998 and the closing of underperforming restaurants. Sales from restaurants opened after September 28, 1997 accounted for an increase of $4.4 million. This increase was offset by sales of $2.8 million from restaurants which were closed after September 28, 1997. Restaurant Cost of Sales. Restaurant cost of sales, calculated as a percentage of restaurant sales, decreased to 30.7% for the third quarter of 1998 from 31.1% for the third quarter of 1997. The decrease was due primarily to continued improvements in the management of food costs through utilizing increased controls and improved purchasing programs, including the continued negotiation of favorable commodity pricing. In addition, food costs as a percentage of restaurant sales were favorably impacted by a menu price increase of approximately 2% which was implemented during the first quarter of 1998. Restaurant cost of sales, as a percentage of restaurant sales, have increased from 29.9% in the second quarter of 1998 primarily due to recent commodity price increases. Management expects this trend to continue during the remainder of 1998. Labor. Labor costs, calculated as a percentage of restaurant sales, decreased to 26.5% during the third quarter of 1998 from 28.0% for the same period in 1997. Adjusting for restaurants closed after September 28, 1997, comparable labor as a percentage of restaurant sales in the third quarter of 1997 was 25.7%. The increase in comparable labor costs was due to an increase in the minimum wage in September 1997, management's continued commitment to increased staffing levels at the restaurant level in order to provide a consistent guest experience as well as higher than normal labor costs at newer restaurants. New restaurants generally have higher than normal labor costs for the first four to six months of operations. Management expects the trend in comparable labor costs to continue during the remainder of 1998. Occupancy. Occupancy costs decreased by $157,000 during the third quarter of 1998 compared to the third quarter of 1997. The decrease was primarily due to the closure of underperforming restaurants during 1997. As a percentage of restaurant sales, occupancy costs decreased to 5.4% in the third quarter of 1998 compared to 6.1% in the third quarter of 1997, due primarily to increased restaurant average unit sales volumes, which was in turn attributable to the closure of underperforming restaurants and the opening of new restaurants with higher sales volumes. Other Restaurant Operating Costs. Other restaurant operating costs decreased to $6.3 million in the third quarter of 1998 compared to $6.9 million in the third quarter of 1997. As a percentage of restaurant sales, other restaurant operating costs decreased to 17.3% for the third quarter of 1998 compared to 19.7% for the third quarter of 1997. The decrease was due to decreased marketing and promotional activities and increased restaurant average unit sales volumes. Management expects the favorable comparisons as a percentage of sales to continue during 1998. General and Administrative. General and administrative expenses increased to $1.9 million for the third quarter of 1998 from $1.5 million in the comparable period of 1997. As a percentage of sales, general and administrative expenses increased to 5.3% for the third quarter of 1998 compared to 4.3% in the same period of 1997. The increase was primarily due to the reversal of bonus accruals during the third quarter of 1997. Management expects this amount to slightly decrease or remain constant, as a percentage of sales, throughout the remainder of 1998. Depreciation, Amortization and Restaurant Opening Costs. Depreciation, amortization and restaurant opening costs consisted of the following: Thirteen Weeks Ended -------------------- September 28, September 27, ------------ ------------ 1997 1998 ------------ ------------ (Unaudited) (Unaudited) Depreciation of property and equipment ................... $2,214,000 $1,784,000 Amortization ofintangible assets ...................... 382,000 146,000 Restaurant opening costs .... 102,000 65,000 Depreciation expense decreased by $430,000 for the quarter ended September 27, 1998 compared to the quarter ended September 28, 1997. The decrease was primarily due to the closure of restaurants and the writedown of assets in conjunction with the special charge recorded in the fourth quarter of 1997, offset by new restaurants opened since September 28, 1997, as well as continued capital improvements to existing restaurants. Amortization of intangible assets decreased by $236,000 for the quarter ended September 27, 1998 compared to the quarter ended September 28, 1997. The decrease was primarily due to the writedown of intangible assets in conjunction with the special charge recorded in the fourth quarter of 1997. Restaurant opening costs decreased by $37,000 during the third quarter of 1998 compared to the same period in 1997, primarily due to the opening of one Company owned restaurant during the third quarter of 1998. See footnote 1 to Condensed Consolidated Financial Statements regarding the treatment of restaurant opening costs. Interest Expense, net. Interest expense, net of interest capitalized on construction costs, increased to $543,000 in the third quarter of 1998 from $256,000 in the third quarter of 1997, primarily as a result of additional borrowings under the Company's debt facilities. In addition, the Company capitalized $17,000 of interest related to new restaurant construction in the most recent quarter compared to $43,000 during the third quarter of 1997. Income Taxes. Provision for income taxes decreased to zero for the third quarter of 1998 compared to $331,000, or 37% of income before taxes, for the third quarter of 1997. The decrease in income taxes is due to the recognition of previously reserved deferred tax assets. Net Income and Earnings Per Share. Net income increased to $2.9 million for the third quarter of 1998 from $562,000 for the same period in 1997. Net income was 8.0% of total revenues for the third quarter in 1998 compared to 1.6% in the third quarter of 1997. Diluted earnings per share was $0.20 for the third quarter of 1998 compared to $0.04 in the same period of 1997. The increase in earnings per share during the third quarter of fiscal 1998 compared to the same quarter last year was due to higher sales at existing restaurants, the opening of new restaurants, continued strong cost controls, the closing of underperforming restaurants, a reduction in depreciation and amortization expense, the lack of a provision for income taxes in the current quarter and a reduction in the number of shares outstanding. The Thirty-nine weeks Ended September 27, 1998 Compared to the Thirty-nine weeks Ended September 28, 1997 Restaurant Sales. Restaurant sales increased by $5.5 million, or 5.6%, to $104.7 million for the thirty-nine weeks ended September 27, 1998 from $99.2 million for the comparable period in 1997. The increase was due primarily to an increase in sales at existing restaurants and sales from restaurants opened after September 28, 1997, offset by sales from restaurants closed after September 28, 1997. Comparable store sales, defined as Taco Cabana restaurants that have been open 18 months or more at the beginning of the quarter, increased 4.5%. Management attributes the increase to several factors including a more consistent marketing program featuring a value meal message, a commitment to increased staffing levels at existing restaurants, the ongoing reimage program, favorable weather during the first quarter of 1998 compared to 1997, a menu price increase of approximately 2% which was implemented during the first quarter of 1998 and the closing of underperforming restaurants. Sales from restaurants opened after September 28, 1997 accounted for an increase of $11.0 million. This increase was offset by sales from restaurants which were closed after September 28, 1997 of $8.0 million. Restaurant Cost of Sales. Restaurant cost of sales, calculated as a percentage of restaurant sales, decreased to 30.3% for the thirty-nine weeks ended September 27, 1998 from 30.9% for the same period in 1997. The decrease was due primarily to continued improvements in the management of food costs through utilizing increased controls and improved purchasing programs, including the continued negotiation of favorable commodity pricing. In addition, food costs as a percentage of restaurant sales were favorably impacted by a menu price increase of approximately 2% which was implemented during the first quarter of 1998. Management expects cost of sales to increase slightly, as a percentage of sales, during the remainder of the year due to recent increases in commodity prices. Labor. Labor costs, calculated as a percentage of restaurant sales, decreased to 26.8% for the thirty-nine weeks ended September 27, 1998 from 27.4% for the same period in 1997. Adjusting for restaurants closed after September 28, 1997, comparable labor as a percentage of restaurant sales during the thirty-nine weeks ended September 27, 1998 was 26.1%. The increase in comparable labor costs was due to an increase in the minimum wage in September 1997, management's continued commitment to increased staffing levels at the restaurant level in order to provide a consistent guest experience as well as higher than normal labor costs at newer restaurants. New restaurants generally have higher than normal labor costs for the first four to six months of operations. Management expects the trend in comparable labor costs to continue during the remainder of 1998. Occupancy. Occupancy costs decreased by $392,000 during the thirty-nine weeks ended September 27, 1998 compared to the same period in 1997. The decrease was primarily due to the closure of underperforming restaurants during 1997. As a percentage of restaurant sales, occupancy costs decreased to 5.6% in the thirty-nine weeks ended September 27, 1998 compared to 6.3% in the same period of 1997. The decrease was due to an increase in restaurant average unit sales volumes during 1998. Other Restaurant Operating Costs. Other restaurant operating costs decreased to $18.4 million in the thirty-nine weeks ended September 27, 1998 compared to $18.7 million in the same period of 1997. As a percentage of restaurant sales, other restaurant operating costs decreased to 17.5% for the thirty- nine weeks ended September 27, 1998 compared to 18.8% for the same period of 1997. The decrease was due to decreased marketing and promotional activities and an increase in restaurant average unit sales volumes. Management expects the favorable comparisons as a percentage of sales to continue during 1998. General and Administrative. General and administrative expenses increased to $5.8 million for the thirty-nine weeks ended September 27, 1998 from $5.1 million in the comparable period of 1997. The increase was primarily due to an increased level of expenditures to support the Company's operations and an increase in the bonus accrual during the thirty nine weeks ended September 27, 1998 compared to the same period in 1997. As a percentage of sales, general and administrative expenses increased to 5.5% for the thirty-nine weeks ended September 27, 1998 compared to 5.1% for the same period of 1997. Management expects this amount to slightly decrease or remain constant, as a percentage of sales, throughout the remainder of 1998. Depreciation, Amortization and Restaurant Opening Costs. Depreciation, amortization and restaurant opening costs consisted of the following: Thirty-nine weeks Ended ----------------------- September 28, September 27, ------------ ------------ 1997 1998 ------------ ------------ (Unaudited) (Unaudited) Depreciation of property and equipment ................... $6,351,000 $4,946,000 Amortization of intangible assets ...................... 1,194,000 429,000 Restaurant opening costs .... 213,000 462,000 Depreciation expense decreased by $1.4 million for the thirty-nine weeks ended September 27, 1998 compared to the same period in 1997. The decrease was primarily due the closure of restaurants and the writedown of assets in conjunction with the special charge recorded in the fourth quarter of 1997, offset by new restaurants opened since September 28, 1997, as well as continued capital improvements to existing restaurants. Amortization of intangible assets decreased by $765,000 for the thirty-nine weeks ended September 27, 1998 compared to the same period in 1997. The decrease was primarily due to the writedown of intangible assets in conjunction with the special charge recorded in the fourth quarter of 1997. Restaurant opening costs increased by $249,000 during the thirty-nine weeks ended September 27, 1998, compared to the same period in 1997. The increase was primarily due to the opening of seven restaurants during the thirty-nine weeks ended September 27, 1998. See footnote 1 to Condensed Consolidated Financial Statements regarding the treatment of restaurant opening costs. Interest Expense, net. Interest expense, net of interest capitalized on construction costs, increased to $1.4 million in the thirty-nine weeks ended September 27, 1998 from $772,000 in the same period of 1997, primarily as a result of additional borrowings under the Company's debt facilities. In addition, the Company capitalized $94,000 of interest related to new restaurant construction during the thirty-nine weeks ended September 27, 1998 compared to $88,000 during the same period in 1997. Income Taxes. Provision for income taxes decreased to zero for the thirty-nine weeks ended September 27, 1998 compared to $1.2 million, or 37% of income before taxes, for the same period in 1997. The decrease in income taxes was due to the recognition of previously reserved deferred tax assets. Net Income and Earnings Per Share. Net income increased to $8.0 million for the thirty-nine weeks ended September 27, 1998 from $2.0 million for the same period in 1997. Net income was 7.7% of total revenues for the thirty-nine weeks ended September 27, 1998 compared to 2.0% in the same period of 1997. Diluted earnings per share was $0.55 for the thirty-nine weeks ended September 27, 1998 compared to $0.13 in the same period of 1997. The increase in earnings per share during the thirty-nine weeks ended September 27, 1998 compared to the same period last year was due to higher sales at existing restaurants, the opening of new restaurants, continued strong cost controls, the closing of underperforming restaurants, a reduction in depreciation and amortization expense, the lack of a provision for income taxes and a reduction in the number of shares outstanding. Liquidity and Capital Resources Historically, the Company has financed business and expansion activities by using funds generated from operating activities, build-to-suit leases, equity financing, short and long-term debt and capital leases. The Company maintains credit facilities totaling $30.0 million, including a $5.0 million unsecured revolving line of credit. As of October 30, 1998, $24.8 million was outstanding under these commitments. Net cash provided by operating activities was $10.8 million for the thirty-nine weeks ended September 27, 1998, and $9.7 million for the thirty-nine weeks ended September 28, 1997. Net cash used in investing activities was $13.8 million for the thirty-nine weeks ended September 27, 1998 representing primarily capital expenditures of $17.0 million for the construction of new restaurants and improvements to existing restaurants. This was offset by the sale of assets generating $3.2 million in proceeds. This compares to $11.5 million in net cash used in investing activities for the thirty-nine weeks ended September 28, 1997, representing primarily capital expenditures for the construction of new restaurants and improvements to existing restaurants, offset by the sale of assets generating $1.4 million in proceeds. Net cash provided by financing activities was $3.5 million for the thirty-nine weeks ended September 27, 1998 representing primarily net draws from the Company's debt facilities of $9.2 million, offset by the purchase of $5.7 million in treasury stock. This compares to net cash provided by financing activities of $1.3 million in the same period of 1997, representing net draws on the Company's debt facilities of $5.0 million, offset by the purchase of $3.6 million in treasury stock. The Company's Board of Directors previously approved a plan to repurchase up to 2,500,000 shares of the Company's Common Stock. As of October 30, 1998, the Company had repurchased 2,149,700 shares at an average cost of $5.11 per share. The Company has funded the repurchases through available bank credit facilities, as well as the liquidation of the Company's short term investment portfolio. The timing, price, quantity and manner of future purchases will be made at the discretion of management and will depend upon market conditions. The Company intends to fund the repurchase program through available credit under its bank credit facilities and current cash flows from operations. The special charges recorded in 1997 and 1995 included accruals of approximately $10.2 million to record the estimated monthly lease payments, net of expected sublease receipts, associated with certain restaurants which have been closed. Cash requirements for this accrual were approximately $1.5 million during the thirty-nine weeks ended September 27, 1998. During the thirty-nine weeks ended September 27, 1998, the Company sold properties relating to the special charges which resulted in proceeds of $3.2 million, which approximated the carrying value of the assets sold. The Company currently has three closed restaurant properties for sale which were covered by the special charges. Although there can be no assurance of the particular price at which such properties will be sold, the Company expects to receive funds equal to or in excess of the carrying value upon the actual disposition of these properties. In addition, certain acquisition and accrued liabilities related to the Two Pesos acquisition were reduced by payments of approximately $193,000 during the thirty-nine weeks ended September 27, 1998. The Company believes that existing cash balances, funds generated from operations, its ability to borrow, and the possible use of lease financing will be sufficient to meet the Company's capital requirements through 1999, including the planned opening of ten to fifteen restaurants in 1999, and the reimaging of 30 restaurants during the 1999 fiscal year. Total capital expenditures related to new restaurants are estimated to be $12.0 to $17.0 million. The total for other capital expenditures, including the cost of the reimagings, is estimated to be $6.0 to $8.0 million. Total capital expenditures for 1999 are expected to approximate $18.0 to $25.0 million. Impact of Inflation Although increases in labor, food or other operating costs could adversely affect the Company's operations, management does not believe that inflation has had a material adverse effect on the Company's operations to date. Seasonality and Quarterly Results The Company's sales fluctuate seasonally. Historically, the Company's highest sales and earnings occur in the second and third quarters. In addition, quarterly results are affected by the timing of the opening and closing of stores. Therefore, quarterly results cannot be used to indicate results for the entire year. Forward-Looking Statements Statements in this quarterly report concerning Taco Cabana which are (a) projections of revenues, costs, including trends in cost of sales, operating costs, labor and general and administrative costs or other financial items, (b) statements of plans and objectives for future operations, specifically statements regarding planned restaurant openings and reimages as well as share repurchases and cash flows (c) statements of future economic performance, or (d) statements of assumptions or estimates underlying or supporting the foregoing are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The ultimate accuracy of forward-looking statements is subject to a wide range of risks, uncertainties and other factors which may cause actual results and outcomes to differ, often materially, from expectations. Any number of important factors could cause actual results to differ materially from those in the forward-looking statements herein, including the following: the timing and extent of changes in prices of commodities and supplies that the Company utilizes; cost and availability of labor; actions of our customers and competitors; changes in state and federal environmental, economic, safety and other policies and regulations and any legal or regulatory delays or other factors beyond the Company's control; execution of planned capital projects; weather conditions affecting the Company's operations; natural disasters affecting operations; and adverse rulings, judgments, or settlements in litigation or other legal matters. The Company disclaims any intention or obligation to update or revise any such forward-looking statements, whether as a result of new information, future events or otherwise. Item 4. Submission of Matters to a Vote of Security Holders At the annual meeting of stockholders held on August 18, 1998, the Company's stockholders elected six directors. There were no broker non-votes. The votes were as follows: For Withheld Stephen V. Clark 14,298,217 96,397 William J. Nimmo 14,296,637 97,977 Richard Sherman 14,297,457 97,157 Cecil Schenker 14,296,057 98,557 Lionel Sosa 14,296,132 98,482 Rod Sands 14,298,357 96,257 Item 6. Exhibits and Reports on Form 8-K Exhibit 27 Financial Data Schedule. Filed with EDGAR version. No reports on Form 8-K were filed during the period covered by this report. Signature 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. Dated: November 11, 1998 Taco Cabana, Inc. /s/David G. Lloyd ---------------------------------------------- David G. Lloyd Senior Vice President, Chief Financial Officer, Secretary and Treasurer Signing on behalf of the registrant and as the principal financial and accounting officer EX-27 2
5 9-MOS JAN-3-1999 SEP-27-1998 803,000 0 705,000 97,000 2,287,000 7,222,000 98,963,000 30,179,000 87,366,000 16,259,000 0 0 0 157,000 38,776,000 87,366,000 104,704,000 104,969,000 31,723,000 78,087,000 17,444,000 0 1,389,000 8,049,000 0 8,049,000 0 0 0 8,049,000 .55 .55
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