-----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, IzcoDnlps6WKFqnX/s7d9l/oxdyt3I8d+IVpWi/5H+QrggZMY4xtnvKJPXIjZOku 3jZkKxvGIzSfXpzzif3IDw== 0000891082-99-000018.txt : 19991117 0000891082-99-000018.hdr.sgml : 19991117 ACCESSION NUMBER: 0000891082-99-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991003 FILED AS OF DATE: 19991116 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: 99758909 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: 8918 TESORO DRIVE STREET 2: SUITE 200 CITY: SAN ANTONIO STATE: TX ZIP: 78217 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 October 3, 1999 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 November 5, 1999 Common Stock 13,096,950 shares TACO CABANA, INC. INDEX Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets at October 3, 1999 and January 3, 1999 2 Condensed Consolidated Statements of Operations for the Thirteen Weeks Ended October 3, 1999 and September 27, 1998 3 Condensed Consolidated Statements of Operations for the Thirty-Nine Weeks Ended October 3, 1999 and September 27, 1998 4 Condensed Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended October 3, 1999 and September 27, 1998 5 Notes to Condensed Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 PART II. OTHER INFORMATION Items 1, 2, 3 and 5 have been omitted since the registrant has no reportable events in relation to these items Item 4. Submission of Matters to a Vote of Security Holders 18 Item 6. Exhibits and Reports on Form 8-K 18 Signature 19 1 TACO CABANA, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) January 3, October 3, 1999 1999 ----------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................. $ 719,000 $ 1,637,000 Receivables, net.......................... 438,000 503,000 Inventory................................. 2,273,000 2,375,000 Prepaid expenses.......................... 3,128,000 3,309,000 Federal income taxes receivable........... 200,000 200,000 ----------- ------------ Total current assets...................... 6,758,000 8,024,000 PROPERTY AND EQUIPMENT, net............... 72,250,000 82,682,000 NOTES RECEIVABLE.......................... 258,000 285,000 INTANGIBLE ASSETS, net.................... 10,724,000 10,285,000 OTHER ASSETS.............................. 212,000 268,000 ----------- ------------ TOTAL..................................... $90,202,000 $101,544,000 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................... $ 5,362,000 $ 4,469,000 Accrued liabilities....................... 5,265,000 6,376,000 Current maturities of long-term debt and capital leases.......................... 5,704,000 3,119,000 Line of credit............................ 3,550,000 2,155,000 ----------- ------------ Total current liabilities................. 19,881,000 16,119,000 LONG-TERM OBLIGATIONS, net of current maturities: Capital leases............................ 2,140,000 1,963,000 Long-term debt............................ 18,930,000 25,910,000 ----------- ------------ Total long-term obligations............... 21,070,000 27,873,000 ACQUISITION AND CLOSED RESTAURANT LIABILITIES 7,713,000 6,773,000 DEFERRED LEASE PAYMENTS................... 761,000 781,000 STOCKHOLDERS' EQUITY: Common stock.............................. 159,000 134,000 Additional paid-in capital................ 98,056,000 84,711,000 Retained deficit.......................... (43,544,000) (33,268,000) Treasury stock, at cost (2,576,937 shares at January 3, 1999 and 192,700 shares at October 3, 1999)........................ (13,894,000) (1,579,000) ----------- ------------ Total stockholders' equity.............. 40,777,000 49,998,000 ----------- ------------ TOTAL..................................... $90,202,000 $101,544,000 =========== ============ See Notes to Condensed Consolidated Financial Statements. 2 TACO CABANA, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the Thirteen Weeks Ended ---------------------------- September 27, October 3, 1998 1999 ------------ ---------- REVENUES: Restaurant sales.......................... $36,176,000 $41,359,000 Franchise fees and royalty income......... 94,000 90,000 ----------- ----------- Total revenues............................ 36,270,000 41,449,000 ----------- ----------- COSTS AND EXPENSES: Restaurant cost of sales.................. 11,102,000 12,539,000 Labor..................................... 9,599,000 11,245,000 Occupancy................................. 1,966,000 2,094,000 Other restaurant operating costs.......... 6,259,000 6,953,000 General and administrative................ 1,911,000 1,915,000 Depreciation, amortization and restaurant opening costs............................. 1,995,000 2,462,000 ----------- ----------- Total costs and expenses.................. 32,832,000 37,208,000 ----------- ----------- INCOME FROM OPERATIONS.................... 3,438,000 4,241,000 ----------- ----------- INTEREST EXPENSE, NET..................... (543,000) (586,000) ----------- ----------- INCOME BEFORE INCOME TAXES................ 2,895,000 3,655,000 INCOME TAX EXPENSE........................ - - ----------- ----------- NET INCOME................................ $ 2,895,000 $ 3,655,000 =========== =========== BASIC EARNINGS PER SHARE.................. $ 0.20 $ 0.27 =========== =========== BASIC WEIGHTED SHARES OUTSTANDING......... 14,186,259 13,392,151 =========== =========== DILUTED EARNINGS PER SHARE................. $ 0.20 $ 0.27 =========== =========== DILUTED WEIGHTED SHARES OUTSTANDING........ 14,305,200 13,776,090 =========== =========== See Notes to Condensed Consolidated Financial Statements. 3 TACO CABANA, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the Thirty-Nine Weeks Ended ------------------------------- September 27, October 3, 1998 1999 ----------- ----------- REVENUES: Restaurant sales.......................... $104,704,000 $119,516,000 Franchise fees and royalty income......... 265,000 260,000 ------------ ------------ Total revenues............................ 104,969,000 119,776,000 ------------ ------------ COSTS AND EXPENSES: Restaurant cost of sales.................. 31,723,000 35,975,000 Labor..................................... 28,009,000 32,785,000 Occupancy................................. 5,830,000 6,167,000 Other restaurant operating costs.......... 18,355,000 19,853,000 General and administrative................ 5,777,000 5,876,000 Depreciation, amortization and restaurant opening costs............................. 5,837,000 7,142,000 ------------ ------------ Total costs and expenses.................. 95,531,000 107,798,000 ------------ ------------ INCOME FROM OPERATIONS.................... 9,438,000 11,978,000 ------------ ------------ INTEREST EXPENSE, NET..................... (1,389,000) (1,702,000) ------------ ------------ INCOME BEFORE FOR INCOME TAXES............ 8,049,000 10,276,000 INCOME TAX EXPENSE........................ - - ------------ ------------ NET INCOME............................... $ 8,049,000 $10,276,000 ============ ============ BASIC EARNINGS PER SHARE................. $ 0.55 $ 0.77 ============ ============ BASIC WEIGHTED SHARES OUTSTANDING......... 14,593,555 13,378,942 ============ ============ DILUTED EARNINGS PER SHARE................ $ 0.55 $ 0.75 ============ ============ DILUTED WEIGHTED SHARES OUTSTANDING....... 14,746,499 13,760,243 ============ ============ See Notes to Condensed Consolidated Financial Statements. 4 TACO CABANA, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Thirty-Nine Weeks Ended ------------------------------- September 27, October 3, 1998 1999 ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................ $8,049,000 $10,276,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......... 5,375,000 6,471,000 Capitalized interest.................. (94,000) (107,000) Changes in operating working capital items......................... (2,568,000) (1,202,000) ---------- ---------- Net cash provided by operating activities. 10,762,000 15,438,000 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment........ (16,987,000) (17,624,000) Proceeds from the sale of property and equipment................................. 3,195,000 1,337,000 ---------- ---------- Net cash used for investing activities.... (13,792,000) (16,287,000) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of notes payable and draws on line of credit............. 11,130,000 11,404,000 Principal payments under long-term debt and line of credit........................ (1,967,000) (8,422,000) Principal payments under capital leases... (141,000) (159,000) Purchase of treasury stock................ (5,748,000) (1,579,000) Exercise of stock options................. 220,000 523,000 ---------- ---------- Net cash provided by financing activities. 3,494,000 1,767,000 ---------- ---------- NET INCREASE IN CASH...................... 464,000 918,000 CASH AND CASH EQUIVALENTS, beginning of period.................................... 339,000 719,000 ---------- ---------- CASH AND CASH EQUIVALENTS, end of period.. $ 803,000 $1,637,000 ========== ========== See Notes to Condensed Consolidated Financial Statements. 5 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 January 3, 1999. 2. Stockholders' Equity The Company's Board of Directors previously approved plans to repurchase up to a total of 4,000,000 shares of the Company's Common Stock. Through the first quarter of 1999, the Company had repurchased 2,585,000 shares with an aggregate cost of $13.9 million. During the first quarter of 1999, the Company retired all shares held as treasury shares. The cost of retired shares in excess of par value has been charged to additional paid in capital. Subsequent to the first quarter, the Company repurchased an additional 192,700 shares at an aggregate cost of $1,579,000, which as of October 3, 1999 were held as treasury stock. The timing, price, quantity and manner of any future purchases will be made at the discretion of management and will depend upon market conditions. 3. 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. 6 The following table sets forth the computation of basic and diluted earnings per share: 13 Weeks Ended 39 Weeks Ended ----------------------- ----------------------- September 27, October 3, September 27, October 3, 1998 1999 1998 1999 ---------- -------- ----------- -------- Numerator for basic and diluted earnings per share: Net income $2,895,000 $3,655,000 $8,049,000 $10,276,000 Denominator for basic earnings per share: Weighted-average shares 14,186,259 13,392,151 14,593,555 13,378,942 Effect of dilutive securities: Employee stock options 118,941 383,939 152,944 381,301 ---------- ---------- --------- ---------- Denominator for diluted earnings per share: Adjusted weighted-average shares and assumed conversions 14,305,200 13,776,090 14,746,499 13,760,243 ========== ========== ========== ========== Basic earnings per share $ 0.20 $ 0.27 $ 0.55 $ 0.77 ========== ========== ========== ========== Diluted earnings per share $ 0.20 $ 0.27 $ 0.55 $ 0.75 ========== ========== ========== ========== 4. Supplemental Disclosure of Cash Flow Information Thirty-Nine Weeks Ended --------------------------- September 27, October 3, 1998 1999 ------------ ----------- (Unaudited) (Unaudited) Cash paid for interest ......... $1,313,000 $1,656,000 Interest capitalized on construction costs ............. 94,000 107,000 5. Supplemental Disclosure of Noncash Investing and Financing Activities During 1999 assets having a net book value of $439,000 were disposed of and charged to acquisition and closed restaurant liabilities. 7 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 5, 1999, the Company had 109 Company-owned restaurants and 10 franchised restaurants. 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 October 3, 1999, the Company opened eight and closed two Company-owned restaurants. Subsequent to October 3, 1999, the Company opened one restaurant. 8 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 27,October 3, September 27,October 3, 1998 1999 1998 1999 ---------- -------- ----------- --------- Operating Statement Data: REVENUES: Restaurant sales....... 99.7% 99.8% 99.7% 99.8% Franchise fees and royalty income......... 0.3 0.2 0.3 0.2 ----- ----- ----- ----- Total revenues......... 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== COSTS AND EXPENSES: Restaurant cost of sales (1).............. 30.7% 30.3% 30.3% 30.1% Labor (1).............. 26.5 27.2 26.8 27.4 Occupancy (1).......... 5.4 5.1 5.6 5.2 Other restaurant operating costs (1).............. 17.3 16.8 17.5 16.6 General and administrative 5.3 4.6 5.5 4.9 Depreciation, amortization and restaurant opening costs 5.5 5.9 5.6 6.0 ----- ----- ----- ----- INCOME FROM OPERATIONS... 9.5 10.2 9.0 10.0 INTEREST EXPENSE, net.... (1.5) (1.4) (1.3) (1.4) ----- ----- ----- ----- INCOME BEFORE INCOME TAXES........... 8.0 8.8 7.7 8.6 INCOME TAX EXPENSE....... - - - - ----- ----- ----- ----- NET INCOME............... 8.0% 8.8% 7.7% 8.6% ===== ===== ===== ===== Restaurant Data: Company-owned restaurants: Beginning of period.... 101 106 98 102 Opened................. 1 2 7 8 Closed................. (1) - (4) (2) ----- ----- ----- ----- End of period.......... 101 108 101 108 Franchised (2) restaurants: 10 10 10 10 ----- ----- ----- ----- Total restaurants:....... 111 118 111 118 ===== ===== ===== ===== (1) Percentage is calculated based upon restaurant sales. (2) Excludes Two Pesos licensed restaurants. 9 The Thirteen Weeks Ended October 3, 1999 Compared to the Thirteen Weeks Ended September 27, 1998 Restaurant Sales. Restaurant sales increased by $5.2 million, or 14%, to $41.4 million for the third quarter of 1999 from $36.2 million for the third quarter of 1998. The increase was due primarily to an increase in sales at existing restaurants and the opening of new restaurants. Comparable store sales, defined as Taco Cabana restaurants that have been open 18 months or more at the beginning of the quarter, increased 5.2%. Management attributes the increase to several factors including a more consistent marketing program, a commitment to increased staffing levels at existing restaurants, the ongoing reimage program and a price increase of approximately 2%. Sales from restaurants opened after September 27, 1998 accounted for an increase of $3.4 million. This increase was partially offset by sales of $563,000 from restaurants which were closed after September 27, 1998. Restaurant Cost of Sales. Restaurant cost of sales, calculated as a percentage of restaurant sales, decreased to 30.3% for the third quarter of 1999 from 30.7% for the third quarter of 1998. The decrease was due primarily to continued improvements in the management of food costs through utilizing increased controls, improved purchasing programs and a year-over-year reduction in cheese costs. Management expects this trend to continue during the remainder of 1999. Labor. Labor costs, calculated as a percentage of restaurant sales, increased to 27.2% during the third quarter of 1999 from 26.5% for the same period in 1998. The increase is primarily due to 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 labor costs to continue during the remainder of 1999. Occupancy. Occupancy costs increased by $128,000 during the third quarter of 1999 compared to the third quarter of 1998. The increase is primarily due to the opening of new restaurants in 1999. As a percentage of restaurant sales, occupancy costs decreased to 5.1% in the third quarter of 1999 compared to 5.4% in the third quarter of 1998. Management expects the dollar amount to increase, although it should continue to show improvement from the prior year as a percentage of sales for the remainder of 1999. Other Restaurant Operating Costs. Other restaurant operating costs increased to $7.0 million in the third quarter of 1999 compared to $6.3 million in the third quarter of 1998. As a percentage of restaurant sales, other restaurant operating costs decreased to 16.8% for the third quarter of 1999 compared to 17.3% for the third quarter of 1998. The decrease as a percentage of sales is primarily due to leverage from higher than average sales, as the dollar amount per store open remained relatively flat. Management expects the favorable comparisons as a percentage of sales to continue for the remainder of 1999. 10 General and Administrative. General and administrative expenses, calculated as a percentage of sales, decreased to 4.6% for the third quarter of 1999 compared to 5.3% in the same period of 1998. Management expects this dollar amount to remain constant or increase slightly during the remainder of 1999, although it should continue to decrease as a percentage of sales. Depreciation, Amortization and Restaurant Opening Costs. Depreciation, amortization and restaurant opening costs consisted of the following: Thirteen Weeks Ended ---------------------------- September 27, October 3, 1998 1999 ------------- ------------ (Unaudited) (Unaudited) Depreciation of property and equipment ......................... $ 1,784,000 $ 2,089,000 Amortization of intangible assets 146,000 146,000 Restaurant opening costs .......... 65,000 227,000 Depreciation expense increased by $305,000 for the quarter ended October 3, 1999 compared to the quarter ended September 27, 1998. The increase was due to the addition of new restaurants as well as continued capital improvements to existing restaurants. Restaurants opened after September 27, 1998 accounted for $166,000 of the increase. Restaurant opening costs increased by $162,000 during the third quarter of 1999 compared to the same period in 1998, primarily due to the opening of two Company owned restaurants during the third quarter of 1999 compared to one opening during the third quarter of 1998. Interest Expense, net. Interest expense, net of interest capitalized on construction costs, increased to $586,000 in the third quarter of 1999 from $543,000 in the third quarter of 1998, primarily as a result of additional borrowings under the Company's debt facilities. This increase is offset by lower interest rates in the third quarter of 1999 compared to the same quarter last year. In addition, the Company capitalized $22,000 of interest related to new restaurant construction in the most recent quarter compared to $17,000 during the third quarter of 1998. Income Taxes. Income tax expense was zero for the third quarter of 1999 and 1998 due to the recognition of previously reserved deferred tax assets. Net Income and Earnings Per Share. Net income increased to $3.7 million for the third quarter of 1999 from $2.9 million for the same period in 1998. Net income was 8.8% of total revenues for the third quarter of 1999 compared to 8.0% in the third quarter of 1998. Diluted earnings per share was $0.27 for the third quarter of 1999 compared to $0.20 in the same period of 1998. The increase in earnings per share during the third quarter of fiscal 1999 compared to the same quarter last year was due to higher sales at existing restaurants, the opening of new restaurants, continued strong cost controls and a reduction in the number of shares outstanding. 11 The Thirty-nine weeks Ended October 3, 1999 Compared to the Thirty-nine weeks Ended September 27, 1998 Restaurant Sales. Restaurant sales increased by $14.8 million, or 14%, to $119.5 million for the thirty-nine weeks ended October 3, 1999 from $104.7 million for the comparable period in 1998. The increase was due primarily to an increase in sales at existing restaurants and the opening of higher than average volume restaurants. Comparable store sales, defined as Taco Cabana restaurants that have been open 18 months or more at the beginning of the quarter, increased 5.4%. Management attributes the increase to several factors including a more consistent marketing program, a commitment to increased staffing levels at existing restaurants, the ongoing reimage program and a price increase of approximately 2%. Sales from restaurants opened after September 27, 1998 accounted for an increase of $8.3 million. This increase was partially offset by sales from restaurants which were closed after September 27, 1998 of $1.6 million. Restaurant Cost of Sales. Restaurant cost of sales, calculated as a percentage of restaurant sales, decreased to 30.1% for the thirty-nine weeks ended October 3, 1999 from 30.3% for the same period in 1998. The decrease was due primarily to continued improvements in the management of food costs through utilizing increased controls, improved purchasing programs and a year-over-year reduction in cheese costs. Management expects cost of sales, as a percentage of sales, to decrease compared to the prior year for the remainder of 1999. Labor. Labor costs, calculated as a percentage of restaurant sales, increased to 27.4% for the thirty-nine weeks ended October 3, 1999 from 26.8% for the same period in 1998. The increase is primarily due to 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 labor costs to continue during the remainder of 1999. Occupancy. Occupancy costs increased by $337,000 during the thirty-nine weeks ended October 3, 1999 compared to the same period in 1998. As a percentage of restaurant sales, occupancy costs decreased to 5.2% in the thirty-nine weeks ended October 3, 1999 compared to 5.6% in the same period of 1998. Management expects the dollar amount to increase due to new openings but continue to decrease as a percentage of sales. Other Restaurant Operating Costs. Other restaurant operating costs increased to $19.9 million in the thirty-nine weeks ended October 3, 1999 compared to $18.4 million in the same period of 1998. As a percentage of restaurant sales, other restaurant operating costs decreased to 16.6% for the thirty-nine weeks ended October 3, 1999 compared to 17.5% for the same period of 1998. The decrease as a percentage of sales is primarily due to leverage from higher than average sales along with a relatively flat dollar amount per store open. Management expects the favorable comparisons as a percentage of sales to continue during 1999. 12 General and Administrative. General and administrative expenses, calculated as a percentage of sales, decreased to 4.9% for the thirty- nine weeks ended October 3, 1999 compared to 5.5% for the same period of 1998. Management expects this amount to continue to decrease, as a percentage of sales, throughout the remainder of 1999. Depreciation, Amortization and Restaurant Opening Costs. Depreciation, amortization and restaurant opening costs consisted of the following: Thirty-nine weeks Ended -------------------------- September 27, October 3, 1998 1999 ------------ ---------- (Unaudited) (Unaudited) Depreciation of property and equipment ......................... $4,946,000 $ 6,032,000 Amortization of intangible assets 429,000 439,000 Restaurant opening costs .......... 462,000 671,000 Depreciation expense increased by $1.1 million for the thirty-nine weeks ended October 3, 1999 compared to the same period in 1998. The increase was due to the addition of new restaurants as well as continued capital improvements on existing restaurants. Restaurants opened after January 1, 1998 accounted for $727,000 of the increase. Restaurant opening costs increased by $209,000 during the thirty-nine weeks ended October 3, 1999, compared to the same period in 1998. The increase was primarily due to the opening of eight restaurants during the thirty-nine weeks ended October 3, 1999 compared to seven restaurants in the same period of 1998. Interest Expense, net. Interest expense, net of interest capitalized on construction costs, increased to $1.7 million in the thirty-nine weeks ended October 3, 1999 from $1.4 million in the same period of 1998, primarily as a result of additional borrowings under the Company's debt facilities. In addition, the Company capitalized $107,000 of interest related to new restaurant construction during the thirty-nine weeks ended October 3, 1999 compared to $94,000 during the same period of 1998. Income Taxes. Income tax expense was zero for the thirty-nine weeks ended October 3, 1999 and the same period in 1998 due to the recognition of previously reserved deferred tax assets. Net Income and Earnings Per Share. Net income increased to $10.3 million for the thirty-nine weeks ended October 3, 1999 from $8.0 million for the same period in 1998. Net income was 8.6% of total revenues for the thirty-nine weeks ended October 3, 1999 compared to 7.7% in the same period of 1998. Diluted earnings per share was $0.75 for the thirty-nine weeks ended October 3, 1999 compared to $0.55 in the same period of 1998. The increase in earnings per share during the thirty-nine weeks ended October 3, 1999 compared to the same period last year was due to higher sales at existing restaurants, the opening of new restaurants, continued strong cost controls and a reduction in the number of shares outstanding. 13 Year 2000 Issue Description. The Company relies to a large extent on computer technology to carry out its day-to-day operations. Many software products in the marketplace are only able to recognize a two digit year date and therefore will recognize a date using "00" as the year 1900 instead of the year 2000 ( the "Year 2000 Issue" ). This problem could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in similar normal business activities. State Of Readiness. The Company has established a plan to prepare its systems for the Year 2000 Issue as well as to reasonably assure that its critical business partners are prepared. To date, the Company has completed its assessment of all internal systems that could be significantly affected by the Year 2000 Issue. Based upon its assessment, the Company determined that it was required to modify or replace portions of its software supporting Human Resources, Payroll, Accounting, Labor Analysis and the Point of Sale. The Company believes that with modifications or replacements of the identified software programs, the Year 2000 Issue can be mitigated. However, if all additional phases of the Year 2000 plan are not completed on time, the Year 2000 Issue could have a material impact on the operations of the Company. As of November 5, 1999, the Company has completed software reprogramming and replacement of the identified systems. Systems continue to be tested for integration and will continue to be tested until December 31, 1999. Many hardware upgrades were made as part of the Company's continued efforts to upgrade its technology, but no further hardware replacement has been identified as a result of the Year 2000 Issue. As such, the Company is not currently remediating additional hardware. However, the existence of embedded technology is by nature more difficult to identify. While the Company believes that all significant systems are Year 2000 compliant, the Company plans to continue testing its operating equipment. The Company has deferred other information technology projects due to the Year 2000 Issue. The deferral of these projects is not expected to have a material effect on the Company's financial position or results of operations. Significant Third Parties. The Company's significant third party business partners consist of suppliers, banks and service providers. The Company has significant system interfaces with banks, credit card processors and tax filing services. An initial inventory of significant third party business partners and an assessment of their Year 2000 compliance status has been completed. Additionally, the Company has identified and met with key suppliers and distributors and discussed their Year 2000 readiness. The Company has developed contingency plans for third party business partners that appear to have substantial Year 2000 operational risks. 14 Costs. The Company has used both internal and external resources to reprogram, or replace, and test software for Year 2000 Issue modifications. The total cost of the Year 2000 Issue project is estimated to be approximately $600,000, of which the Company has incurred $520,000 relating to the purchase of new software. The costs relating to the Year 2000 Issue are being financed through operating cash flows and borrowings from the Company's available credit facilities. Of the total project cost, the majority is attributable to the purchase of new software, which has been capitalized. The remaining amount, which will be expensed as incurred, is not expected to have a material effect on the results of operations. To date, the costs the Company has incurred and expensed relating to the assessment of, and preliminary efforts in connection with, its Year 2000 Issue and the development of a remediation plan have not had a material effect on the results of operations. Risks And Contingency Plans. Management believes it has an effective plan in place to resolve the Year 2000 Issue in a timely manner. However, due to the forward-looking nature and lack of historical experience with Year 2000 Issues, it is difficult to predict with certainty what will happen after December 31, 1999. Despite the Year 2000 remediation efforts being made, it is likely that there will be disruptions and unexpected business problems during the early months of 2000. The Company plans to make diligent efforts to assess the Year 2000 readiness of its significant business partners and will develop contingency plans for all critical systems where it believes its exposure to Year 2000 risk is the greatest. However, despite the Company's efforts, it may encounter unanticipated third party failures, public infrastructure failures or a failure to successfully conclude its remediation efforts as planned. If the remaining Year 2000 plan is not completed timely, in addition to the implications noted above, the Company may be required to utilize manual processing of certain otherwise automated processes. Any one of these unforeseen events could have a material adverse impact on the Company's results of operations, financial condition, or cash flows in 1999 and beyond. 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 $40.0 million, including a $5.0 million unsecured revolving line of credit. As of November 5, 1999, the aggregate outstanding balance under these commitments was $29.6 million. Net cash provided by operating activities was $15.4 million for the thirty-nine weeks ended October 3, 1999, and $10.8 million for the thirty-nine weeks ended September 27, 1998. Net cash used for investing activities was $16.3 million for the thirty- nine weeks ended October 3, 1999 representing primarily capital expenditures of $17.6 million for the construction of new restaurants and improvements to existing restaurants. This was offset by the sale of assets generating $1.3 million in proceeds. This compares to $13.8 million in net cash used for investing activities for the thirty-nine weeks ended September 27, 1998, representing primarily capital expenditures for the construction of new restaurants and improvements to existing restaurants, offset by the sale of assets generating $3.2 million in proceeds. 15 Net cash provided by financing activities was $1.8 million for the thirty-nine weeks ended October 3, 1999 representing primarily net draws from the Company's debt facilities of $3.0 million, offset by the purchase of $1.6 million in treasury stock. This compares to net cash provided by financing activities of $3.5 million in the same period of 1998, representing net draws on the Company's debt facilities of $9.2 million, offset by the purchase of $5.7 million in treasury stock. The Company's Board of Directors previously approved plans to repurchase up to a total of 4,000,000 shares of the Company's Common Stock. As of November 5, 1999, the Company had repurchased 3,137,137 shares at an average cost of $5.96 per share. The Company has funded the repurchases primarily through available bank credit facilities. 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 $628,000 during the thirty-nine weeks ended October 3, 1999. During the thirty-nine weeks ended October 3, 1999, the Company sold properties relating to the special charges which resulted in proceeds of $1.3 million, which approximated the carrying value of the assets sold. In addition, certain acquisition and accrued liabilities related to the Two Pesos acquisition were reduced by payments of approximately $205,000 during the thirty-nine weeks ended October 3, 1999. 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 2000, including the planned opening of fifteen restaurants in 2000, and the reimaging of fourteen restaurants during the first half of the 2000 fiscal year. Total capital expenditures related to new restaurants are estimated to be $19.0 to $22.0 million. The total for other capital expenditures is estimated to be $4.0 to $6.0 million. Total capital expenditures for 2000 are expected to approximate $23.0 to $28.0 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. 16 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 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risk from changes in interest rates on debt and changes in commodity prices. The Company's exposure to interest rate risk currently consists of its notes payable and outstanding line of credit. The Company has notes payable and a line of credit which bear interest at the lesser of the London Interbank Offer Rate plus 2.25% or the prime rate, adjusted quarterly. The aggregate balance outstanding of these notes and the line of credit as of November 5, 1999 was $29.6 million. The Company also has a note payable which bears interest at the prime rate. The outstanding balance of this note as of November 5, 1999 was $1.0 million. The impact on the Company's results of operations of a one- point interest rate change on the outstanding balances under the notes payable and line of credit as of November 5, 1999 would be immaterial. The Company purchases certain commodities such as beef, chicken, flour, produce and dairy products. These commodities are generally purchased based upon market prices established with vendors. These purchase arrangements may contain contractual features that limit the price paid by establishing price floors or caps. The Company does not use financial instruments to hedge commodity prices because these purchase arrangements help control the ultimate cost and any commodity price aberrations are generally short term in nature. 17 This market risk discussion contains forward-looking statements. Actual results may differ materially from this discussion based upon general market conditions and changes in financial markets. PART II Items 1, 2, 3, and 5 have been omitted since the registrant has no reportable events in relation to these items. Item 4. Submission of Matters to a Vote of Security Holders At the annual meeting of stockholders held on August 19, 1999, the Company's stockholders elected six directors. There were no broker non- votes. The votes were as follows: For Withheld Stephen V. Clark 11,404,472 111,056 William J. Nimmo 11,402,441 113,087 Richard Sherman 11,400,291 115,237 Cecil Schenker 11,400,384 115,144 Lionel Sosa 11,393,662 121,866 Rod Sands 11,403,372 112,156 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. 18 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 16, 1999 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 19 EX-27 2
5 9-MOS JAN-2-2000 OCT-3-1999 1,637,000 0 899,000 111,000 2,375,000 8,024,000 121,185,000 38,503,000 101,544,000 16,119,000 0 0 0 134,000 49,864,000 101,544,000 119,516,000 119,776,000 35,975,000 88,613,000 19,185,000 0 1,702,000 10,276,000 0 0 0 0 0 10,276,000 .77 .75
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