September 30, 1996
VIA EDGAR
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, DC 20549
RE: Cucos Inc. - Commission File No. 0-12701
Gentlemen:
On behalf of Cucos Inc. (the "Company"), there follows herewith
for filing the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1996, with exhibits.
The filing fee of $250 imposed by Rule 13a-1 under the Exchange
Act has been transmitted to the Commission in accordance with 17
C.F.R. 2-202.3a.
The Company's 1996 Proxy Statement, and related proxy card, are
being transmitted today for filing under separate cover.
Very truly yours,
CUCOS INC.
Thomas J. Sandeman
Vice President-Finance
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark
One)
/X/ Annual Report under Section 13 or 15(d) of the
Securities Exchange Act of 1934 (Fee Required)
for the fiscal year ended June 30, 1996
/ / Transition report under Section 13 or 15(d) of
the
Securities Exchange Act of 1934 (No Fee
Required) for the transition period from
____________ to ___________
Commission file number 0-12701
CUCOS INC.
(Exact name of Small Business Issuer in its charter)
Louisiana 72-0915435
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 Veterans Blvd., Suite 222 70005
Metairie, Louisiana (Zip Code)
(Address of principal executive
offices)
Issuer's telephone number: (504) 835-0306
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Check whether the Issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act
during the past 12 months (or for such shorter period that the
Issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
X No
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in this form,
and no disclosure will be contained, to the best of issuer's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. ____
Issuer's revenues for its most recent fiscal year: $21,546,002
Aggregate market value (based on the average bid and asked
prices in the over the-counter market) of the voting stock held
by non-affiliates of the Registrant as of September 9, 1996:
approximately $1,962,939.
Number of shares outstanding of each of the Issuer's Classes
of common stock as of September 9, 1996: 2,113,747 shares of
Common Stock, no par value.
Documents Incorporated By Reference.
Portions of the Registrant's 1996 Annual Report to
Shareholders (the "1996 Annual Report") are incorporated by
reference into Part II, and portions of the definitive Proxy
Statement for the 1996 Annual Meeting of Shareholders (the "1996
Proxy Statement") are incorporated by reference into Part III.
INTRODUCTORY
Definitions. Except where the context indicated otherwise,
the following terms have the following respective meanings when
used in this Annual Report: the "Registrant" means Cucos Inc.
and the "Fiscal Year" means the 52 weeks ended June 30, 1996,
which is the year for which this Annual Report is filed.
Presentation and Dates of Information. The Item numbers
appearing in this Annual Report correspond with those used in
Securities and Exchange Commission Form 10-KSB (and, to the
extent that it is incorporated into Form 10-KSB, the letters used
in the Commission's Regulation S-B) as effective on the date
hereof, which specifies the information required to be included
in Annual Reports to the Commission. The information contained
in this Annual Report is, unless indicated to be given as of a
specified date or for a specified period, given as of September
30, 1996. In computing the aggregate market value of the
Registrant's voting stock held by non-affiliates disclosed on the
cover page to this Annual Report, the following stockholders were
treated as affiliates: all executive officers and directors of
the Registrant; any person owning more than 10% of the
Registrant's Common Stock.
PART I
Item 1. Business
The Registrant, which was organized in March 1981 by
Vincent J. Liuzza, Jr., Chairman of the Board and Chief Executive
Officer of the Registrant, and other members of the Liuzza
family, operates and franchises full-service restaurants serving
moderately priced Sonoran and Tex-Mex Mexican appetizers and
entrees and complementary alcoholic beverages. The first Cucos
restaurant opened in a suburb of New Orleans (Metairie) in June
1981. At fiscal year end on June 30, 1996, 21 restaurants were
operating under the Cucos name, 16 of which are owned by the
Registrant and 5 by franchisees. There were twenty-two and
twenty-seven total restaurants in operation at the end of fiscals
1995 and 1994.
During the fiscal year ended July 3, 1994, Registrant
experienced a decline in comparable sales per restaurant after
nine (9) consecutive years of increases. Casino gambling on the
Gulf Coast adversely affected results, as did a myriad of
openings by indirect competitors in multiple markets. In
addition, the Registrant opened one new Border Cafe restaurant in
the New Orleans market, which temporarily affected the sales of
two other restaurants in New Orleans. To offset these negative
trends for the future, the Registrant began work on its first
television commercial and instituted a major consumer research
effort.
During the fiscal year ended July 2, 1995, the Company
experienced a 1.7% decline in comparable sales per restaurant.
The proliferation of casino gaming in Louisiana and Mississippi
continued to adversely affect the Company's sales and
profitability. Additional gaming facilities are planned for both
Louisiana and Mississippi. The second competitive factor hurting
sales and profits was the negative study on Mexican food by the
Center for Science in the Public Interest (CSPI), which affected
the complete Mexican Segment. Well known large Mexican chains
such as Chi-Chis and Pancho's reported significant declines in
comparable sales per restaurant during the last twelve months.
The third competitive factor was the continued expansion of
Mexican items at other casual dining restaurants. In addition,
the casual segment of the restaurant industry moved from using
primarily word-of-mouth and radio advertising to television.
To counteract these trends, management instituted a
program to competitively reposition the Cucos concept by:
Accelerating the remodeling of all Company and
franchised restaurants.
Modestly reducing prices to ensure there were
sufficient number of choices at lower price points
for its guests.
Intensifying advertising, including the development
of the Company's first television campaign.
These actions were mostly completed during the Third
and Fourth Quarters of fiscal 1995. Comparable sales per
restaurant for company-owned locations increased 4.7% for the
Fourth Quarter of fiscal 1995. This was the first quarterly
increase in comparable sales per restaurant in almost two years.
During fiscal year ended June 30, 1996, these programs
resulted in an increase in comparable sales per company-owned
restaurant of 9.0%. Comparable guest counts increased by 10.5%
while average check declined by $.14. Average company-owned
restaurant profit advanced 19.8% and restaurant level profit
margins expanded to 13.6% or the highest level since fiscal 1989.
Management expects to continue the strategies of remodeling,
repricing and television advertising in fiscal 1997.
REGISTRANT-OWNED RESTAURANTS
General. Cucos restaurants are full-service
restaurants which serve a limited menu of Sonoran and Tex-Mex
Mexican appetizers and entrees at moderate prices. The
Registrant's specialties are the "Chimichanga", the "Wild
Tostada", the "Super Taco", the "Alotta Enchilada", the "Burrito
Supreme" and "Fresh-itas", Cucos' version of fajitas. The
restaurants also offer the more traditional tacos, tamales,
tostadas, enchiladas, fajitas and burritos. Most of the dishes
are served with Cucos Special Sauce, a spicy beef stock-based
sauce which is prepared by the Registrant from its own secret
recipe. The menu also offers various combination platters;
various appetizers, including the "Macho Nacho", avocado,
guacamole and taco salads; half-pound "El Hamburgers" served with
french fries; a deep fried ice cream and banana chimichanga
desserts. In addition, during fiscal 1992 the Registrant
introduced its new "Heart Healthy" menu which was developed in
conjunction with Ochsner Hospital of New Orleans. The "Heart
Healthy" menu selections have reduced calories, fat content and
cholesterol without sacrificing flavor. The restaurants also
serve a variety of alcoholic beverages, including American and
Mexican beer and the Registrant's own special-recipe Margaritas,
Strawberry Margaritas, Pina Coladas, Strawberry Coladas and
Sangria. The restaurants are open seven days a week from 11 a.m.
until midnight.
The Registrant emphasizes the freshness and quality of
its food and beverages, the size of its portions and its plate
presentations. The Registrant's menu items are designed to
appeal to the American palate. Fresh ingredients are used in
preparing the menu items. The Registrant uses a higher quality
beef than the traditional hamburger meat or shredded beef used in
many Mexican restaurants.
Food sales account for approximately 78% of revenues at
the fifteen Registrant-owned restaurants operated in fiscal 1996,
with alcoholic and other beverages representing approximately
22%. Special Luncheon menu items range in price from $3.99 to
$6.95. The prices of the specialty and combination dinner items
range from $5.95 to $9.95. The per person average check,
including beverage for fiscal 1996, is $9.73 and the average
dining time per table is approximately 45 minutes.
The restaurants are decorated with an abundance of
cactus plants and distinctive neon decorations intended to create
a Southwestern motif. Employees are encouraged to provide
friendly service to each restaurant guest. Management believes
that the restaurants have a casual, festive atmosphere which
appeals particularly to adults between the age of 20 and 50.
Restaurant Management and Supervision. Each restaurant
is operated in accordance with uniform standards set by
management relating to the preparation and service of food and
drink, appearance and conduct of employees, and cleanliness of
facilities. Food and beverage products are periodically tested
for quality and uniformity of portions. In accordance with the
Registrant's standards, each restaurant is run by a general
manager, assisted by two managers, a kitchen supervisor, a
service supervisor and a bar supervisor. At least one manager is
on duty during all serving periods. Each of Registrant's
restaurant general managers receives, in addition to a salary,
incentive compensation calculated as a percentage of sales in
excess of a predetermined base level.
The Registrant's long-term expansion plans require it
to develop additional trained general managers. The Registrant
requires candidates for general manager to undergo a thorough
training program designed to familiarize them with all aspects of
the Registrant's operations. A candidate serves as an assistant
manager before becoming a general manager. Persons selected for
training as general managers normally have several years of food
service experience.
Expansion Program. During fiscal year 1997, the
Registrant will consider acquisition of other sites or franchisee-
owned restaurants as they come available. Management intends
that the primary growth in sales for fiscal 1997 be accomplished
by increasing comparable sales per restaurant through a
continuation of existing advertising and remodeling strategies.
The Registrant is planning for expansion of the Cucos
system over the long-term. In this connection, the Registrant is
currently studying the population densities, traffic patterns,
income levels, competition and comparative cost structures for
other suitable sites. The Registrant also intends to expand by
further franchising. See "Franchised Restaurants" below.
The ability of the Registrant or a franchisee to open a
new restaurant will depend on locating satisfactory sites, the
availability of bank and lease financing at acceptable terms,
having sufficient working capital, obtaining adequate property,
casualty and liquor liability insurance coverages at a reasonable
cost, securing appropriate local government permits, licenses and
approvals, and on the capacity of the Registrant or a franchisee
to supervise construction and to recruit and train management
personnel. Such factors may cause a delay in the Registrant's
planned development schedule.
The Registrant believes that its development plan of
controlled growth will occur in the Southeastern United States.
The Registrant expects in most cases to locate Registrant-owned
and franchised restaurants in high traffic, high growth areas of
commercial or residential concentration, at or near shopping
centers. Registrant-owned and franchised restaurant sites will
be judged by the Registrant's executive management against
certain criteria as to population density, income levels, amount
of competition, ingress/egress and traffic patterns.
The Registrant believes that there are a number of
existing restaurant facilities which have either closed or are
currently operating at a loss or at marginal levels of
profitability. The Registrant believes that a number of these
units may be suitable for conversion to a Cucos restaurant and
can be leased or purchased at attractive prices. The
Registrant's strategy for expansion (with respect to both
Registrant-owned and franchised restaurants), therefore, is
primarily to locate units of this type rather than to follow the
strategy of most specialty restaurant chains, which has been to
construct new restaurant facilities on land owned or leased by
the chain or to enter build-to-suit arrangements under which new
facilities are built to the specifications of the chain. In
addition to the economic benefits of the Registrant's strategy,
such strategy may substantially reduce the delay between the site
selection and the opening of a new restaurant and may allow the
Registrant to gain entry into densely-populated suburban and
urban markets in which land is either not available for the
construction of new restaurants or, if available, is
prohibitively expensive. The Registrant's expansion strategy
may, however, subject it to the same adverse factors that caused
the existing facility to operate marginally or unprofitably prior
to being converted to a Cucos restaurant. The Registrant intends
to combat these adverse factors by providing food and service, in
renovated facilities, that will appeal to the available customer
base.
The Registrant estimates that the initial investment
that will be required in leasing an existing restaurant facility
and converting it for operation as a Registrant-owned restaurant
will be between $550,000 and $740,000. A new (rather than
existing) leased facility could involve substantially higher
costs for leasehold improvements.
When a new Registrant-owned restaurant is opened, the
Registrant temporarily transfers experienced personnel from one
or more of its existing restaurants to the new restaurant. Prior
to opening, personnel at the new location undergo intensive
training, which includes several pre-opening events at which test
meals are served.
The success of the Registrant's expansion program will
depend on, among other factors, capital availability, whether the
Registrant is able to attract and retain sufficient qualified,
experienced managers and assistant managers, and whether
management will be able to ensure that Registrant-owned and
franchise restaurants operate in accordance with the Registrant's
standards.
Purchasing. Management believes that centralized
purchasing is advantageous to the Registrant in that it has
allowed it to take advantage of certain volume discounts. Fresh
produce, beverages and certain other items are purchased by each
Registrant-owned restaurant from local wholesalers. The
Registrant believes that satisfactory local sources of supply are
generally available for all of the other items it regularly uses
in its restaurants.
Insurance. Insurance costs have risen considerably in
the restaurant business, especially for those restaurants with
liquor licenses. The Registrant carries fire and casualty
insurance on its Registrant-owned restaurants and liability
insurance in amounts which management feels is adequate for its
operations.
Marketing. The Registrant advertises primarily by
television advertising. Its advertising promotes the name
"Cucos" and emphasizes quality dining in a festive atmosphere at
moderate prices. Periodically, print and radio advertising are
also used to advertise special events and promotions.
FRANCHISED RESTAURANTS
At the present time, the Registrant is offering
franchises on a selective basis. No assurances can be given as
to the number of franchise development areas that will be sold
during the fiscal year 1997 or the impact of development fee
revenues upon the Registrant's profitability and cash position
during fiscal year 1997.
The development agreements generally obligate the
developer to construct a specified number of Cucos restaurants
within the licensed territory. The restaurants may be either new
restaurants or conversions of existing restaurants, although the
Registrant encourages franchisees to convert existing restaurants
whenever possible (see "Expansion Program"). A developer must
open new Cucos restaurants within the development territory in
accordance with the schedule set forth in the development
agreement. If a developer fails to open restaurants in
accordance with the schedule, generally the Registrant may notify
the developer that it is in default under the development
agreement and may terminate the agreement 30 days thereafter if
the default has not been cured.
Generally, a development agreement expires three years
after the latest date set forth in the development schedule.
During the first year after completion of the schedule, the
Registrant is prohibited from either opening a Cucos restaurant
or granting a franchise to someone other than the developer to
establish a Cucos restaurant within the licensed territory. If
during the second and third year after the completion of the
schedule, the Registrant desires to establish additional
restaurants within the licensed territory, the developer for that
area has a right of first refusal to enter into additional
development agreements with respect to such additional
restaurants so long as the developer is in compliance with the
then existing development agreement. If the developer exercises
its right of first refusal, the developer is required to pay the
fees for each restaurant then being charged to new developers.
Upon expiration of the development agreement, the Registrant may
open Registrant-owned restaurants in the previously licensed
territory or grant franchises to other persons to open additional
franchised restaurants in the previously licensed territory.
Development agreements provide for the payment of an
initial nonrefundable development fee by the developer upon
execution of the agreement. The development fee with respect to
development agreements is generally $15,000 per restaurant up to
five restaurants and $10,000 per restaurant thereafter. The
Registrant anticipates that the amount of the development fee
with respect to future development agreements will be based upon
the size and nature of the area covered by the development
agreement.
Prior to the acquisition of a site for a restaurant in
the licensed territory, the developer must submit to the
Registrant certain information concerning the site and certain
market information. Upon the Registrant's approval of the site,
the developer is required to enter into a license agreement with
the Registrant with respect to the restaurant to be developed
under the development agreement.
The license agreements generally have terms of 20 years
from the date of their execution. However, if the license
agreement pertains to a franchised restaurant that is leased, the
license agreement terminates upon the earlier of 20 years from
the commencement date of the lease or upon the termination or
expiration of the primary term of the lease, plus any options to
renew the lease.
Generally franchisees are required to pay to the
Registrant under the license agreement a continuing royalty fee
equal to 4% of gross revenues at the restaurant. In addition,
franchisees are required to pay a continuing monthly contribution
to an advertising materials fund equal to .5% of gross revenues
at the restaurant and if a national advertising fund or a
regional advertising fund applicable to the franchisee's region
is established by the Registrant (the Registrant has not done so
to date), the franchisees must also pay to the Registrant
continuing monthly contributions, for use by such funds, equal to
amounts not to exceed 1% and 2% of gross revenues of the
restaurant, respectively, for the national media fund or the
regional advertising fund in the franchisee's region. The
Registrant has not established a national or regional advertising
fund and accordingly has not required contributions for such
funds.
The license agreement provides that the franchisees
will comply strictly with the Registrant's standards,
specifications, processes, procedures, requirements and
instructions regarding the operation of the franchisee's
restaurant. The Registrant is obligated to provide initial
training programs for franchisees and to provide personnel for on-
site assistance in opening each franchised restaurant. The
Registrant has the right to approve the person designated by the
franchisee to have overall supervisory authority over franchised
restaurant operations or, if no such overall operations manager
is designed, to approve each restaurant general manager.
Franchisees purchase food products and restaurant
supplies conforming to Registrant's specifications from
independent suppliers. Alternate sources of these items are
generally readily available. The Registrant may sell equipment,
food or supplies to franchisees upon request, but otherwise does
not intend to do so. The Registrant continues to sell a small
amount of proprietary advertising materials and confidential
recipe spice packs to franchisees. The Registrant anticipates
continuing these sales.
ADMINISTRATION AND RELATED MATTERS
L.B.G., Inc. (formerly Sizzler Family Steak Houses of
Southern Louisiana, Inc.) ("L.B.G.") is a company owned by
Vincent J. Liuzza, Jr., Chairman of the Board and Chief Executive
Officer of the Registrant, David M. Liuzza, a former officer of
the Registrant, and Mrs. Vincent J. Liuzza, Sr., (as executrix of
the Succession of Vincent J. Liuzza, Sr.) a principal shareholder
of the Registrant. Until February, 1994, L.B.G. operated a
franchised Cucos restaurant.
Under an agreement with L.B.G. dated as of October 1,
1983, the Registrant provides bookkeeping, accounting and similar
administrative services to L.B.G., which pays the Registrant for
a portion of the expenses of providing these services based on
L.B.G.'s proportionate share of the aggregate gross sales of
L.B.G. and the Registrant. As of June 30, 1996, these costs
total about $21,793 per four-week period. Under the above
formula, L.B.G. currently pays the Registrant for about .3% of
these costs, and the Registrant bears the remaining 99.7%. For
fiscal 1996, approximately $808 of these costs were allocated to
L.B.G.
The Registrant and L.B.G. also share rental expenses
based upon the square footage of the building occupied by each of
them. Under that formula, the Registrant paid approximately
95.5% of the building rental and L.B.G. bore the remaining 4.5%.
In the Fiscal Year ended June 30, 1996, the Registrant paid rent
of $104,306 and L.B.G. paid $4,867.
On July 28, 1995, the Company sold its Zero-Coupon
Convertible Secured Notes due June 30, 2015, in the aggregate
principal amount of $500,000 (the "Notes") to three individuals
including Mr. Elie Khoury, President of the Company, who
purchased $87,500 principal amount of the Notes for $87,500, and
Mr. Frank Ferrara, a Director of the Company who purchased
$206,250 principal amount for $206,250. The Notes are
convertible into shares of the Company's Common Stock at a
conversion price of $0.947 per share of Common Stock, subject to
adjustments under antidilution provisions; provided that the
conversion privileges cannot be exercised unless (1) shares to be
received upon conversion are to be immediately resold in the open
marketplace, (2) five years have passed from the date of issuance
of the Notes or (3) certain conditions relating to the sale or
control of the Company have occurred.
On July 28, 1995, the Company granted Mr. Khoury and
the two other individuals who purchased the Notes, development
rights to obtain five licenses to use the Company's unique
restaurant system at specific locations within the State of
Louisiana to be designated in separate license agreements at a
development fee of $15,000 per restaurant. $500 ($100 per
license) of this development fee was paid on July 28, 1995, and
$14,900 will be payable upon the execution of each license
agreement.
Mr. Khoury serves as President of Mexican Restaurant
Management, Inc., a corporation which purchased all of the
outstanding stock of Restaurant Investments of Hattiesburg, Inc.,
a corporation operating a franchised Cucos restaurant in
Hattiesburg, Mississippi, on October 18, 1995. Mr. Khoury is
voting trustee under a Voting Trust dated October 18, 1995, for
all of the stock of Restaurant Investments of Hattiesburg, Inc.
Mexican Restaurant Management, Inc. is owned by Mr. Khoury, Mr.
Frank Ferrara, a Director of the Company and an independent third
party, who has also guaranteed the obligation of Restaurant
Investments of Hattiesburg, Inc., to Cucos Inc. As an incentive,
Cucos Inc. and Restaurant Investments of Hattiesburg, Inc.
entered into a Royalty Incentive Program signed February 6, 1996.
The royalty incentive plan is based on quantitative measures,
that, once achieved, is expected to result in an operationally
sound and stable restaurant as well as provide the franchisee
with a further incentive to spend advertising dollars. The
franchisee has paid or will pay royalties in an amount of $1,200
per month from October, 1995, through December, 1996, and $1,500
per month beginning January, 1996, and ending December, 1997. At
June 30, 1996, Restaurant Investments of Hattiesburg, Inc. owed
Cucos Inc. $3,497 in current royalties and miscellaneous
receivables.
Mr. Khoury also serves as President of Restaurant
Investments of Jackson, Inc. which operates a franchised
restaurant in Jackson, Mississippi. On February 19, 1996, Cucos
Inc. awarded Development Rights to obtain up to (2) Licenses to
Restaurant Investment of Jackson, Inc. for Dothin, Hinds, Rankin
and Madison Counties, Mississippi. In consideration for the
development rights, Licensee shall pay no development fee for the
first restaurant and $15,000 for the second restaurant which will
be paid upon the opening of that restaurant. Also, on February
19, 1996, Cucos Inc. granted a license to Restaurants Investments
of Jackson, Inc. to operate a restaurant at 1270 E. County Line
Road in Ridgeland, Mississippi. The license fee was for all out-
of-pocket expenses. The royalty agreement under the License
calls for no royalties for the first six months of operation.
Royalties for months 7 - 18 will be 1.0%; for months 19 - 30
royalties will be 2.0%; for months 31 - 42 royalties will be
3.0%; and for months 43 and thereafter will be 4.0%. Mr. Khoury,
Mr. Ferrara and an independent third party each own one-third of
the outstanding stock of Restaurant Investments of Jackson, Inc.
At June 30, 1996, Restaurant Investments of Jackson, Inc. owed
the Registrant $4,735 for miscellaneous receivables.
As described above, the Registrant believes that the
terms of the transactions described above are all on terms that
are not less favorable to the Registrant than those that could be
negotiated with an independent third party.
EMPLOYEES
At June 30, 1996, the Registrant-owned restaurants
employed approximately 863 part-time and full-time persons, of
which 57 were managers and assistant managers, all of whom are
full-time. In addition, 19 persons were employed at the
Registrant's executive office. The Registrant endeavors to
control its employee turnover rate by offering to all full-time
restaurant employees certain paid benefits, including life
insurance, health insurance and vacation. None of the
Registrant's employees are represented by a labor union. The
Registrant has experienced no work stoppages attributable to
labor disputes and considers its employee relations to be
satisfactory.
COMPETITION
The restaurant business is highly competitive and is
often affected by changes in taste and eating habits, by local
and national economic conditions affecting spending habits, and
by population and traffic patterns. The Registrant believes that
the quality and price of food products are the principal means of
competition in the restaurant industry. Also of importance are
site locations, quality and speed of service, cleanliness,
advertising and attractiveness of facilities.
The Registrant presently competes directly with Casa
Garcia, El Patio, Jalapeno's and Chili's at its Metairie
locations; with Dos Gringo's at its Westbank location; with El
Chico at its Alexandria and Monroe locations; with Vera Cruz and
Vaquero's at its New Orleans location; and with Chili's and
several independent Mexican restaurants at its other locations.
Each location also competes with numerous restaurants offering
other types of moderately-priced foods and beverages, as well as
Mexican appetizers and entrees. Many of these restaurants are
nationally or regionally-known chain operations which operate
more restaurants and have greater financial resources and greater
name recognition than the Registrant.
In addition, gaming operations often offer food at
discounted or below cost prices which provide a new level of
indirect competition in the Registrant's Louisiana and
Mississippi markets.
GOVERNMENT REGULATION
Each of the Registrant's restaurants is subject to
licensing and regulation by state liquor control boards and the
state police in Louisiana (with respect to video poker), and by
municipal health, sanitation, safety and fire department
agencies. The Registrant expects that liquor sales and video
poker revenues will account for a significant portion of the
Registrant's revenues. During 1996 liquor sales and video poker
commissions accounted for about 16.4% and 2.8% of revenues,
respectively. During fiscal 1996 and 1995 video poker
commissions were significant to the Company's operating results.
During fiscal 1996, the State of Louisiana passed a
local option ordinance on all forms of gambling including video
poker. In November, 1996, all parishes in the state will vote
whether to retain video poker and other forms of gambling.
Management is unable to predict which Parishes will vote for or
against the continuation of video poker. If video poker is voted
out by a Parish, existing video poker operators will be allowed
to operate until July 1999.
The loss of an existing liquor license or video poker
license or the inability to obtain a liquor or video poker
license at a new restaurant would adversely affect the
Registrant's operations at that restaurant.
The Registrant is also subject to the Fair Labor
Standards Act, which governs such matters as minimum wages,
overtime, and other working conditions. Many of the Registrant's
food service personnel are paid at rates related to the minimum
wage and, accordingly, increases in the minimum wage increase the
Registrant's labor costs.
The Registrant is also subject to the provisions of
Americans with Disabilities Act. The Registrant has remodeled
its restaurants to meet these requirements where necessary.
The Registrant's franchise operations are subject to a
variety of laws regulating the marketing of franchises. Federal
Trade Commission regulations impose certain disclosure
requirements on persons engaged in the business of offering
franchises. States in which the Registrant offers franchises
also may have franchising laws that require registration prior to
the offering of franchises for sale in those states or that
afford franchisees substantive rights, including limiting the
circumstances under which franchises may be terminated.
MISCELLANEOUS
Customers. No material part of the Registrant's
business is dependent upon a single customer, or a very few
customers, the loss of any one of which would have a material
adverse effect on the Registrant. No single customer accounts
for as much as 10% of the Registrant's total revenues.
Seasonality. The Registrant's results are impacted by
seasonality. Usually the highest sales periods occur in late
Spring and Summer, with sales declining in the Fall and Winter.
This is especially true for the Gulf Coast restaurants where
sales are more dependent on tourism.
Service Marks and Trademarks. The Registrant is the
owner of United States Service Mark Registrations Nos. 1,509,612,
dated October 18, 1988, for the mark CUCOS; 1,733,801 dated
November 17, 1992, for the mark CUCOS BORDER CAFE and DESIGN; and
1,941,214, dated December 12, 1995, for the mark CUCOS MEXICAN
CAFE & DESIGN. The Registrant is also the owner of United States
Trademark Registrations Nos. 1,405,169, dated August 12, 1986,
for the mark FRESH-ITAS (Cucos' version of fajitas) and
1,465,729, dated November 17, 1987, for the mark FRESH-ITA NACHOS
(Cucos' version of fajita nachos). Those registrations which
issued prior to November 16, 1989, have an effective term of 20
years and those issued on or after November 16, 1989, have an
effective term of 10 years, unless sooner terminated by law, and
all may be renewed for successive terms so long as the marks
continue to be used by Registrant in interstate commerce for the
specified services or goods. The Registrant has a pending
application for the mark THE TASTE TO MAKE YOU SAY OLE, the mark
of which has been approved by the Examiner for publication in the
Official Trademark Gazette; and a pending application for IT
TASTES BETTER OUR WAY, the mark of which has also been approved
by the Examiner for publication in the Official Trademark
Gazette. The Registrant also owns a service mark registration as
issued by the State of Louisiana, dated July 14, 1987, for the
name CU-CO's. This registration is effective for a term of 10
years and may be renewed for successive terms. All of these
registrations are valid and subsisting. In addition, Registrant
is the owner of Copyright Registrations for its Cucos Power
Manual and Video, dated November 4, 1988.
Item 2. Properties.
The following table summarizes certain information
concerning Registrant-owned restaurants located in facilities
that are leased from others as of September 9, 1996.
Lease
Size Dining Lease Option(s)
Location Opened/Acquired (Sq. Capacity Expires Through
Ft.)
New Orleans -
Metairie June 1981 4250 136 1997 2017
Biloxi, MS April 1982 5600 159 1997 2032
New Orleans -
Westbank September 1983 4800 147 1998 2010
Monroe, LA June 1984 4284 146 1999 2019
Slidell, LA November 1984 4200 139 2008 2018
Alexandria, LA March 1985 5040 143 2000 2015
New Orleans -
Uptown November 1985 4539 120 2000 2015
Pascagoula, MS December 1989 5160 130 2011 2021
Hammond, LA July 1990 6062 130 1996* 2002
Birmingham, AL March 1992 4560 150 2006 2012
Houma, LA September 1992 6000 148 2007 2027
Birmingham, AL February 1993 5000 160 2006 2026
Montgomery, AL February 1993 5100 170 1997 2007
Ruston, LA February 1996 5476 162 2003 2026
* Renewed through 2002.
The New Orleans-Westbank location, the Slidell location
and the second Birmingham and Montgomery, Alabama, locations are
in strip shopping centers. The Hammond, first Birmingham and
Houma locations are in shopping malls. Seven leased locations
are free-standing buildings. The restaurant leases require the
Registrant to pay real estate taxes, insurance and utilities, and
to bear repair, maintenance and other expenses normally borne by
the lessee under a triple net lease. The Company owns the land
and building of its Pensacola restaurant.
Item 3. Legal Proceedings.
As previously reported by the Registrant, on May 2,
1991, the Court of Appeals of Tennessee affirmed the dismissal,
without prejudice, by the Chancery Court of Shelby County,
Tennessee, of a complaint styled Tennsonita (Memphis), Inc., et
al. v. Cucos Inc. (Civil Action No. 98110-1), filed against the
Registrant by Tennsonita (Memphis), Inc., Tennsonita Realty,
Inc., Joseph Files, Donald M. Quinn, III, Jerome F. Moeller and
James A. Moeller. The plaintiffs had asserted claims against the
Registrant for, among other things, misrepresentation, breach of
contract, fraud and unfair trade practices in the marketing and
sale to the plaintiffs of franchise development rights for the
state of Tennessee, and in the operating support that the
Registrant provided to the plaintiffs in connection with the
development of their restaurant in that territory. The complaint
also alleged that the Registrant breached an agreement with the
plaintiffs to purchase plaintiffs' restaurant and development
rights. The relief sought by the plaintiffs included specific
performance of the alleged purchase agreement, compensatory
damages in excess of $1.6 million, punitive damages, treble
damages pursuant to the Tennessee Consumer Protection Act (the
"Act"), and attorney's fees pursuant to the Act. On April 12,
1990, the Chancery Court granted the Registrant's motion to
dismiss, without prejudice, the plaintiffs' claim on the grounds
that it had to be brought in a Louisiana forum pursuant to a
contract between the parties.
Also as previously reported by the Registrant, on April
11, 1990, the primary plaintiff filed a complaint in the 24th
Judicial District Court for the Parish of Jefferson, Louisiana,
against the Company and, as an additional defendant, its
President and Chairman of the Board of Directors, Vincent J.
Liuzza, Jr., entitled Tennsonita (Memphis), Inc. v. Cucos Inc.
(Case No. 397857-5). The allegations contained therein are
substantially similar to those asserted in the dismissed
Tennessee complaint. The relief sought by plaintiff includes
actual damages, in an amount to be proven at trial, together with
attorney's fees, costs, legal interest, and such other relief as
the Court may deem appropriate. The Registrant and Mr. Liuzza
initially filed certain exceptions to plaintiff's suit, seeking,
among other things, dismissal of the suit. The District Court
overruled these exceptions. However, the Registrant and Mr.
Liuzza presently have pending two additional exceptions, which
have not yet been argued. If these exceptions are ruled
favorably upon by the District Court, the plaintiff's case would
be dismissed by the District Court, subject to plaintiff's right
to appeal such a decision. There has been no activity in this
litigation for more than two years. On August 3, 1992, however,
plaintiff advised Registrant that they had closed the restaurant
in Memphis, Tennessee, which closure was allegedly necessitated
by the continuing damages and losses suffered by Tennsonita as
alleged in the lawsuit. The Registrant believes the plaintiff's
claims are groundless.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Registrant's
security holders, through the solicitation of proxies or
otherwise, during the fourth quarter of the Fiscal Year.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Shareholder Matters.
Reference is made to the information concerning the
market for the Registrant's common stock, no par value, and
related shareholder matters appearing on page 14 of the 1996
Annual Report. Such information is incorporated herein by
reference to the 1996 Annual Report.
Item 6. Management's Discussion and Analysis or Plan of
Operation.
Reference is made to "Management's Discussion and
Analysis of Results of Operation and Financial Condition"
appearing on pages 5 through 10 of the 1996 Annual Report. Such
information is incorporated herein by reference to the 1996
Annual Report.
Item 7. Financial Statements.
Reference is made to the following financial statements
and notes thereto appearing on pages 11 through 15 of the 1996
Annual Report. Such information is incorporated herein by
reference to the 1996 Annual Report, which is attached as Exhibit
13 to this Report on Form 10-KSB.
Statements of Operations Fiscal Years ended June 30, 1996,
July 2, 1995, and July 3, 1994
Balance Sheets June 30, 1996, and July 2, 1995
Statements of Cash Flows Fiscal Years ended June 30, 1996,
July 2, 1995, and July 3, 1994
Statements of Shareholders' Fiscal Years ended June 30, 1996,
Equity July 2, 1995, and July 3, 1994
Report of Ernst and Young Fiscal Years ended June 30, 1996,
LLP, Independent Auditors July 2, 1995, and July 3, 1994
Report of Management Fiscal Years ended June 30, 1996,
July 2, 1995, and July 3, 1994
Notes to Financial Statements
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with
Section 16(a) of the Exchange Act of the Registrant.
Reference is made to the information concerning the
directors of the Registrant and the nominees for re-election as
directors appearing under the caption "Election of Directors" in
the 1996 Proxy Statement. Such information is incorporated
herein by reference to the Registrant's 1996 Proxy Statement
filed with the Securities and Exchange Commission on September
30, 1996.
Reference is made to the information concerning the
executive officers of the Registrant who are not directors
appearing under the caption "Executive Officers of the Company"
in the 1996 Proxy Statement. Such information is incorporated
herein by reference to the Registrant's 1996 Proxy Statement
filed with the Securities and Exchange Commission on September
30, 1996.
Reference is made to the information concerning
compliance with Section 16(a) of the Exchange Act appearing under
the caption "Section 16A, Beneficial Ownerships Reporting
Compliance" in the 1996 Proxy Statement. Such information is
incorporated herein by reference to the Registrant's 1996 Proxy
Statement filed with the Securities and Exchange Commission on
September 30, 1996.
Item 10. Executive Compensation.
Reference is made to the information concerning
remuneration of directors and executive officers of the
Registrant appearing under the captions "Additional Information-
Executive Compensation," "Additional Information-Stock Option
Grants During Fiscal 1996," "Additional Information-Aggregated
Stock Option Exercises and Fiscal Year-Ended Option Values," and
"Additional Information-Compensation of Directors," in the 1996
Proxy Statement. Such information is incorporated herein by
reference to the Registrant's 1996 Proxy Statement filed with the
Securities and Exchange Commission on September 30, 1996.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
Reference is made to the information concerning
beneficial ownership of the Registrant's Common Stock, which is
the only class of the Registrant's voting securities, appearing
under the captions "Beneficial Ownership" and "Election of
Directors" in the 1996 Proxy Statement. Such information is
incorporated herein by reference to the Registrant's 1996 Proxy
Statement filed with the Securities and Exchange Commission on
September 30, 1996.
Item 12. Certain Relationships and Related Transactions.
Reference is made to the information regarding certain
relationships and transactions between the Registrant and its
directors, nominees for re-election as directors of the
Registrant, its executive officers, beneficial owners of 5% or
more of its Common Stock and any member of the immediate family
of any of the foregoing persons, appearing under the caption
"Additional Information-Certain Relationships and Related
Transactions" in the 1996 Proxy Statement. Such information is
incorporated herein by reference to the Registrant's 1996 Proxy
Statement filed with the Securities and Exchange Commission on
September 30, 1996.
Item 13. Exhibits and Reports on Form 8-K.
EXHIBITS
The following exhibits are filed with this Annual
Report or are incorporated herein by reference:
Exhibit Number Title
1 2 - Joint Agreement of Merger, dated February 23,
1983, of Cu-Co's of Biloxi, Inc.
1 3-A - Copy of Articles of Incorporation of the
Registrant.
1 3-A-1 - Copy of Amendment to Articles of
Incorporation of the Registrant.
1 3-A-2 - Copy of Amendment to Articles of
Incorporation of the Registrant.
1 3-A-3 - Copy of Amendment to Articles of
Incorporation of the Registrant.
1 3-B - Copy of By-Laws of the Registrant.
2 3-B-1 - Copy of Amendment to By-Laws of Registrant.
9 3-B-2 - Amended and Restated By-Laws of the
Registrant.
3 4-A - Rights Agreement, dated as of February 5,
1990, between the Registrant and Commercial
National Bank in Shreveport.
3 4-B - Letter, dated February 26, 1991, from Whitney
National Bank to the Registrant confirming
the change of Rights Agent from Commercial
National Bank in Shreveport to Whitney
National Bank.
3 4-C - Assignment of Rights Agreement, dated August
30, 1993, among Whitney National Bank,
Boatmen's National Bank and the Registrant
with respect to the change of Rights Agent
from Whitney National Bank to Boatmen's
National Bank.
11 4-D - Copy of Mortgage and Security Agreement dated
April 25, 1994, with First National Bank of
Commerce for $450,000.
11 4-E - Copy of Promissory Note dated October 27,
1994, with First National Bank of Commerce
for $200,000.
11 4-F - Copy of Promissory Note dated October 27,
1994, with First National Bank of Commerce
for $250,000.
11 4-G - Copy of Promissory Note dated October 27,
1994, with First National Bank of Commerce
for $500,000.
10 4-H - Note Purchase Agreement (with Exhibits).
10 4-I - Amendment No. 1 to Rights Agreement.
1 10-A - Copy of Registrant's 1983 Stock Option Plan.
1 10-B - Copy of letter agreement between the
Registrant and certain stockholders of the
Registrant relating to piggyback registration
rights.
4 10-C - Amendment No. 1 to 1983 Stock Option Plan of
Cucos Inc.
5 10-D - Amendment No. 2 to 1983 Stock Option Plan of
Cucos Inc.
5 10-E - Amendment No. 3 to 1983 Stock Option Plan of
Cucos Inc.
6 10-F - Amendment No. 4 to 1983 Stock Option Plan of
Cucos Inc.
7 10-G - Amendment No. 5 to 1983 Stock Option Plan of
Cucos Inc.
5 10-H - Form of Incentive Stock Option Agreement for
1983 Stock Option Plan.
5 10-I - Form of Non-Qualified (Employee) Stock Option
Agreement for 1983 Stock Option Plan.
5 10-J - Form of Non-Qualified (Director) Stock Option
Agreement for 1983 Stock Option Plan.
8 10-K - Description of Registrant's Bonus Plan.
9 10-L - Copy of Registrant's 1993 Stock Option Plan
as amended.
9 10-M Form of Non-Qualified Stock Option Agreement
for 1993 Stock Option Plan
9 10-N Form of Incentive Stock Option Agreement for
1993 Stock Option Plan
13 - Copy of Registrant's 1996 Annual Report to
Shareholders
23 - Consent of Independent Auditors
27 - Financial Data Schedule
________________________________
1 Filed as an exhibit to the Registrant's Registration
Statement on Form S-18 (Commission File No. 2-87372A) and
incorporated herein by reference.
2 Filed as an exhibit to Form 10-K for the fiscal year ended
July 1, 1984 (Commission File No. 0-12701) and incorporated
herein by reference.
3 Filed as an exhibit to Form 8-K dated February 23, 1990
(Commission File No. 0-12701), as amended by Form 8 dated
March 12, 1990, and incorporated herein by reference.
4 Filed as an exhibit to the Registrant's Registration
Statement on Form S-8 (Commission File No. 33-03953) and
incorporated herein by reference.
5 Filed as an exhibit to the Registrant's Registration
Statement on Form S-8 (Commission File No. 33-15785) and
incorporated herein by reference.
6 Filed as an exhibit to the Registrant's Registration
Statement on Form S-8 (Commission File No. 33-26941) and
incorporated herein by reference.
7 Filed as an exhibit to Form 10-K for the fiscal year ended
June 28, 1992 (Commission File No. 0-12701) and incorporated
herein by reference.
8 Filed as an exhibit to Form 10-K for the fiscal year ended
June 28, 1987 (Commission File No. 0-12701) and incorporated
herein by reference.
9 Filed as an exhibit to Form 10-KSB for the fiscal year ended
July 3, 1994 (Commission File No. 0-12701) and incorporated
herein by reference.
10 Filed as an exhibit to Form 8-K filed August 11, 1995
(Commission File No. 0-12701) and incorporated herein by
reference.
11 Filed as an exhibit to Form 10-KSB for the fiscal year ended
July 2, 1995 (Commission File No. 0-12701) and incorporated
herein by reference.
The Registrant is a party to various agreements
defining the rights of holders of long-term debt of the
Registrant, but no single agreement authorizes securities in an
amount which exceeds 10% of the total assets of the Registrant.
Accordingly, such agreements are omitted as exhibits as permitted
by Item 601(b) (4) (ii) of Regulation S-B.
REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the fourth
quarter of Fiscal Year ended June 30, 1996.
QUALIFICATION BY REFERENCE
Information contained in this Annual Report as to the
contents of any contract or other document referred to or
evidencing a transaction referred to is necessarily not complete,
and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to this Annual
Report or incorporated herein by reference, all such information
being qualified in its entirety by such reference.
SIGNATURES
In accordance with Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CUCOS INC.
Date: September 26, 1996 By:/s/ Vincent J. Liuzza, Jr.
Vincent J. Liuzza, Jr.
Chairman of the Board and
Chief Executive Officer
Date: September 26, 1996 By:/s/ Thomas J. Sandeman
Thomas J. Sandeman
Vice President-Finance and
Treasurer (Principal Financial
Officer and Principal
Accounting Officer)
In accordance with the Securities Exchange Act of 1934,
this report has been signed below by the following persons on
behalf of the Registrant and in the capacities indicated as of
September 26, 1996.
/s/ Sidney C. Pulitzer /s/ Thomas J. Grace
Sidney C. Pulitzer, Director Thomas J. Grace, Director and
Secretary
/s/ Miguel Uria /s/ Frank J. Ferrara, Jr.
Miguel Uria, Director Frank J. Ferrara, Director
/s/ David M. Liuzza /s/ Vincent J. Liuzza, Jr.
David M. Liuzza, Director Vincent J. Liuzza, Jr., Chairman
of the Board of Directors and Chief
Executive Officer
/s/
Elie V. Khoury, Director
and President
EXHIBIT INDEX
Exhibit Number Title
(1) 2 - Joint Agreement of Merger, dated February 23,
1983, of Cu-Co's of Biloxi, Inc.
(1) 3-A - Copy of Articles of Incorporation of the
Registrant.
(1) 3-A-1 - Copy of Amendment to Articles of Incorporation
of the Registrant.
(1) 3-A-2 - Copy of Amendment to Articles of Incorporation
of the Registrant.
(1) 3-A-3 - Copy of Amendment to Articles of Incorporation
of the Registrant.
(1) 3-B - Copy of By-Laws of the Registrant.
(2) 3-B-1 - Copy of Amendment to By-Laws of Registrant.
(9) 3-B-2 - Amended and Restated By-Laws of the Registrant.
(3) 4-A - Rights Agreement, dated as of February 5, 1990,
between the Registrant and Commercial National
Bank in Shreveport.
(3) 4-B - Letter, dated February 26, 1991, from Whitney
National Bank to the Registrant confirming the
change of Rights Agent from Commercial National
Bank in Shreveport to Whitney National Bank.
(3) 4-C - Assignment of Rights Agreement, dated August 30,
1993, among Whitney National Bank, Boatmen's
National Bank and the Registrant with respect to
the change of Rights Agent from Whitney National
Bank to Boatmen's National Bank.
(11) 4-D - Copy of Mortgage and Security Agreement dated
April 25, 1994, with First National Bank of
Commerce for $450,000.
(11) 4-E - Copy of Promissory Note dated October 27, 1994,
with First National Bank of Commerce for
$200,000.
(11) 4-F - Copy of Promissory Note dated October 27, 1994,
with First National Bank of Commerce for
$250,000.
(11) 4-G - Copy of Promissory Note dated October 27, 1994,
with First National Bank of Commerce for
$500,000.
(10) 4-H - Note Purchase Agreement (with Exhibits).
(10) 4-I - Amendment No. 1 to Rights Agreement.
(1) 10-A - Copy of Registrant's 1983 Stock Option Plan.
(1) 10-B - Copy of letter agreement between the Registrant
and certain stockholders of the Registrant
relating to piggyback registration rights.
(4) 10-C - Amendment No. 1 to 1983 Stock Option Plan of
Cucos Inc.
(5) 10-D - Amendment No. 2 to 1983 Stock Option Plan of
Cucos Inc.
(5) 10-E - Amendment No. 3 to 1983 Stock Option Plan of
Cucos Inc.
(6) 10-F - Amendment No. 4 to 1983 Stock Option Plan of
Cucos Inc.
(7) 10-G - Amendment No. 5 to 1983 Stock Option Plan of
Cucos Inc.
(5) 10-H - Form of Incentive Stock Option Agreement for
1983 Stock Option Plan.
(5) 10-I - Form of Non-Qualified (Employee) Stock Option
Agreement for 1983 Stock Option Plan.
(5) 10-J - Form of Non-Qualified (Director) Stock Option
Agreement for 1983 Stock Option Plan.
(8) 10-K - Description of Registrant's Bonus Plan.
(9) 10-L - Copy of Registrant's 1993 Stock Option Plan as
amended.
(9) 10-M Form of Non-Qualified Stock Option Agreement for
1993 Stock Option Plan
(9) 10-N Form of Incentive Stock Option Agreement for
1993 Stock Option Plan
13 - Copy of Registrant's 1996 Annual Report to
Shareholders
23 - Consent of Independent Auditors
27 - Financial Data Schedule
________________________________
(1) Filed as an exhibit to the Registrant's Registration
Statement on Form S-18 (Commission File No. 2-87372A) and
incorporated herein by reference.
(2) Filed as an exhibit to Form 10-K for the fiscal year ended
July 1, 1984 (Commission File No. 0-12701) and incorporated
herein by reference.
(3) Filed as an exhibit to Form 8-K dated February 23, 1990
(Commission File No. 0-12701), as amended by Form 8 dated
March 12, 1990, and incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Registration
Statement on Form S-8 (Commission File No. 33-03953) and
incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's Registration
Statement on Form S-8 (Commission File No. 33-15785) and
incorporated herein by reference.
(6) Filed as an exhibit to the Registrant's Registration
Statement on Form S-8 (Commission File No. 33-26941) and
incorporated herein by reference.
(7) Filed as an exhibit to Form 10-K for the fiscal year ended
June 28, 1992 (Commission File No. 0-12701) and incorporated
herein by reference.
(8) Filed as an exhibit to Form 10-K for the fiscal year ended
June 28, 1987 (Commission File No. 0-12701) and incorporated
herein by reference.
(9) Filed as an exhibit to Form 10-KSB for the fiscal year ended
July 3, 1994 (Commission File No. 0-12701) and incorporated
herein by reference.
(10) Filed as an exhibit to Form 8-K filed August 11, 1995
(Commission File No. 0-12701) and incorporated herein by
reference.
(11) Filed as an exhibit to Form 10-KSB for the fiscal year ended
July 2, 1995 (Commission File No. 0-12701) and incorporated
herein by reference.
OUTSIDE COVER
CUCOS INC. 1996 ANNUAL REPORT
PHOTO
<Inside Cover Page>
(Logo) Restaurant Locations
Company Restaurants Franchised Restaurants
Alabama Arkansas
Birmingham (2) Fort Smith
Montgomery
Florida
Florida Boynton Beach
Pensacola Tallahassee
Louisiana Louisiana
Alexandria Metairie
Gretna
Hammond Mississippi
Houma Hattiesburg
Metairie Jackson
Monroe
New Orleans
Ruston
Slidell
Mississippi
Biloxi
Pascagoula
(MAP)
Table of Contents
Restaurants LocationsInside Front Cover
Financial Summary 1 Cucos Inc. is a full-
Letter to Shareholders 2 service, casual dining
Selected Financial Data 4 restaurant chain offering
Management's Discussion and Analysis 5 moderately priced Mexican
Statements of Operations 11 appetizers, entrees and
Balance Sheets 12 complementing beverages.
Statements of Cash Flows 13 Cucos was founded in 1981
Statements of Shareholders' Equity 14 and currently operates
Stock Data (unaudited) 14 fifteen company-owned and
Notes to Financial Statements 15 six franchised
Report of Independent Auditors 19 restaurants located in
Report of Management 19 the Southeastern United
Directors & Officers 20 States.
Corporate InformationInside Back Cover
<Page 1>
<TABLE>
Financial Summary
<CAPTION>
Percent Change
<C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 96 vs. 95 95 vs. 94
<S> <C> <C> <C> <C> <C>
System Sales $ 26.9 million $ 29.4 million $ 31.0 million -8.5 -5.2
Company Revenues $ 21.5 million $ 19.5 million $ 22.9 million 10.3 -14.6
Net income (Loss) before
Cumulative Effect $ 15 thousand $(1,518) thousand $ 208 thousand n/a n/a
Cumulative Effect* - - 152 thousand n/a n/a
Net Income (Loss) $ 15 thousand $(1,518) thousand $ 360 thousand n/a n/a
Per Share
Net income (Loss) before
Cumulative Effect $ .01 $ (.72) $.10 n/a n/a
Cumulative Effect* - - .07 n/a n/a
Net Income (Loss)
Per Share $ .01 $ (.72) $.17 n/a n/a
Number of Restaurants**
Company-owned 16 15 15 6.7 -
Franchised 5 7 12 -28.6 -41.7
Total 21 22 27 -4.5 -18.5
Net Book Value Per Share $1.07 $1.06 $1.73 - -39.3
</TABLE>
* During Fiscal 1994 the Company adopted SFAS #109 resulting in a
nonrecurring Cumulative Effect Adjustment to income of $152,000
($.07 per share).
** As of year end.
(Logo)
<Page 2>
Dear Shareholder:
Fiscal 1996 was a turnaround year for our Company. We reaped the
benefits of the strategies we had implemented the previous year.
These elements, which were put into place to counter massive
competitive pressures and to make our Company the aggressor in the
marketplace, included:
Accelerating our remodel program. Seven remodels were completed
during this Period.
More competitive pricing. We did this selectively to insure
that our guests have sufficient choices at lower price points
so they can return more often, while still offering higher
priced items.
Doubling the level of advertising. We have implemented regular
television in all our major markets.
Adding new items to the menu. Our "Seasonal Menu" items change
often and assure that our guests will have sufficient variety
to encourage them to return more often.
These strategies worked! We were profitable in Fiscal 1996,
compared to a loss of $1,500,000 the year before. We believe this was
a notable achievement. Our sales per comparable restaurant increased
9%, with guest counts increasing more than 10%. These results were
achieved against an industry background of a decline of 4% in guest
counts for the nation's largest casual restaurant chains and an 8%
drop for the Mexican Segment.
Our average restaurant sales increased to $1,364,000, an all time
high. Restaurant-level profit margins increased to 13.6%, a 20%
increase over the previous year. Our sales to investment ratio
improved to 1.33. Cash return on total assets employed at the
restaurant level is now 28%, while our return on cash invested in an
average restaurant is up to 87%. In short, our unit economics now
warrant renewed growth.
On the corporate level, expenses were reduced by $317,000 or 18%,
including a reduction in officers' and supervisors' compensation of
10%. Four restaurants formerly leased to franchisees were subleased
to third parties. Three franchised restaurants were closed, one
opened in Jackson, Mississippi, and a franchised restaurant is under
construction in West Des Moines, Iowa. A company-owned restaurant
opened in Ruston, Louisiana, in March.
For these reasons, we feel our Company is ready to add additional
restaurants, as soon as financing is secured. Our goal is to begin
construction on at least two units during Fiscal 1997 and three
restaurants during Fiscal 1998.
Profits will be only marginal for the first half of Fiscal 1997,
but should improve in the second half. Conventional wisdom suggests
the industry will raise prices this fall to cover the minimum wage and
other cost increases. Our strategy will be to maintain our
competitive pricing on existing items while adding popularly priced
new items.
Subsequent to the end of Fiscal 1996, a number of changes at the
corporate level were made to better organize our company for renewed
growth. These changes were achieved without any increase in corporate
personnel expense. Vincent Liuzza will continue as CEO and Chairman,
<Page 3>
while Elie Khoury, formerly Executive Vice President, has been named
President and Chief Operating Officer. Jimmy Guidry has been named
Director of Development, overseeing franchising and new restaurant
development efforts. Elias Daher has been named Senior Operations
Supervisor.
Our Board and its strategic consultants, Dick Butler, formerly
Executive Vice President of El Torito, and Ken Reimer, formerly
President of Tony Roma's, did an outstanding job in working with
management in devising and implementing the above-mentioned aggressive
strategies which proved to be so effective.
Our Annual Meeting will again be held at Cucos Border Cafe at 3000
Veterans Boulevard in Metairie , Louisiana, on October 31, 1996, at
3:00 P.M. We look forward to seeing you.
Sincerely,
Vincent J. Liuzza, Jr. Elie V. Khoury
Chairman, Chief Executive Officer President, Chief Operating Officer
(Chart)
<Page 4>
Selected Financial Data
<TABLE>
Operating Statement Data
<CAPTION>
Fiscal Year Ended
<C> <C> <C> <C> <C>
June 30 July 2 July 3 July 4 June 28
Revenues: 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Sales of Food and Beverages $21,052,194 $18,812,719 $22,023,962 $20,499,109 $16,708,230
Franchise Fees and Royalties 161,777 354,719 409,345 518,856 669,636
Commissary, Rent and Other Income 332,031 373,671 441,203 324,271 409,714
Total Revenues 21,546,002 19,541,109 22,874,510 21,342,236 17,787,580
Restaurant Costs and Expenses:
Cost of Sales 5,658,370 4,900,784 5,538,354 5,086,291 4,233,082
Restaurant Labor and Benefits 6,991,336 6,344,056 7,469,706 6,857,383 5,474,489
Other Operating Expenses 3,369,466 3,054,604 3,465,149 3,431,125 2,896,573
Occupancy Costs 2,148,059 2,173,439 2,609,042 2,318,803 1,821,775
Preopening Costs 28,959 - 110,396 157,628 170,119
Total Restaurant Expenses 18,196,190 16,472,883 19,192,647 17,851,230 14,596,038
Operations and Franchise Expenses 1,436,308 2,323,976 1,409,101 1,267,320 1,358,109
Corporate Expenses 1,483,754 1,800,396 1,665,850 1,683,524 1,401,506
Interest Expense 414,800 416,092 398,972 338,632 269,148
Income (Loss) Before Income Taxes and
Cumulative Effect of Accounting Change 14,950 (1,472,238) 207,940 201,530 162,779
Income Taxes - 46,090 - - -
Income (Loss) Before Cumulative
Effect of Accounting Change 14,950 (1,518,328) 207,940 201,530 162,779
Cumulative Effect of Accounting Change - - 152,000 - -
Net Income (Loss) $14,950 (1,518,328) $359,940 $201,530 $162,779
Weighted Average Number of Common
Shares Outstanding 2,601,116 2,223,747 2,179,773 2,144,474 2,113,747
Income Per Share:
Income (Loss) Before Cumulative
Effect of Accounting Change $.01 $(0.72) $0.10 $0.09 $0.08
Cumulative Effect of Accounting Change - - $0.07 - -
Net Income (Loss) Per Share $.01 $(0.72) $0.17 $0.09 $0.08
Balance Sheet Data
Current Assets $1,923,871 $1,991,356 $2,531,960 $2,657,931 $2,273,987
Property, Equipment (Net) 6,374,462 5,844,173 6,141,364 6,173,240 4,323,484
Total Assets 9,044,640 8,419,431 9,257,078 8,949,663 6,800,313
Current Liabilities 3,283,791 3,320,725 3,160,206 3,202,129 1,847,628
Long-Term Debt *2,934,051 2,838,359 2,253,862 2,241,464 1,598,145
Shareholders' Equity 2,264,298 2,249,348 3,767,676 3,407,736 3,206,206
</TABLE>
*Excludes $500,000 convertible debenture
<TABLE>
Selected Balance Sheet Ratios
<S> <C> <C> <C> <C> <C>
Current Ratio .59 0.60 0.80 0.83 1.23
Long-Term Debt/Equity Ratio 1.30 1.26 0.60 0.66 0.50
Net Book Value Per Share $1.07 $1.06 $1.73 $1.59 $1.52
</TABLE>
<Page5>
Management's Discussion and Analysis
of Results of Operations and Financial Condition
The following table sets forth the relative percentage that
certain items in the Company's operating statements bear to total
revenues (except restaurant cost and expenses which are a percentage
of sales) and the percent increase (decrease) of the actual components
of the statement of operations for the indicated periods.
Percentage Breakdown
<TABLE>
<S> <C>
Fiscal Year Ended % Change
</TABLE>
<TABLE>
<C> <C> <C> <C> <C> <C>
1996 1995 1994 96 vs. 95 95 vs.94
</TABLE>
<TABLE>
Revenues:
<S> <C> <C> <C> <C> <C>
Sales of Food and Beverages 97.71% 96.27% 96.28% 11.90% (14.58)%
Franchise Fees and Royalties .75 1.82 1.79 (54.39) (13.34)
Commissary, Rent and Other Income 1.54 1.91 1.93 (11.14) (15.31)
Total Revenues 100.00 100.00 100.00 10.26 (14.57)
Restaurant Costs and Expenses:
Cost of Sales 26.88 26.05 25.15 15.46 (11.51)
Restaurant Labor and Benefits 33.21 33.72 33.92 10.20 (15.07)
Other Operating Expenses 16.01 16.24 15.73 10.31 (11.85)
Occupancy Costs 10.20 11.55 11.84 (1.17) (16.70)
Preopening Costs .13 - 0.50 N/A N/A
Total Restaurant Expenses 86.43 87.56 87.14 10.46 (14.17)
Operations and Franchise Expenses 6.67 11.89 6.16 (38.20) (64.93)
Corporate Expenses 6.89 9.21 7.28 (17.59) 8.08
Interest Expense 1.93 2.13 1.74 (.31) 4.29
Income (Loss) Before Income Taxes
and Cumulative Effect .07 (7.53) 0.91 N/A N/A
Income Taxes - 0.24 - N/A N/A
Income (Loss) Before Cumulative
Effect of Accounting Change .07% (7.77)% 0.91% N/A N/A
</TABLE>
<Page 6>
1996 Compared to 1995
For the fiscal year ended June 30, 1996, Revenues were
$21,546,002, up 10.26%, compared to $19,541,109 in fiscal 1995. Sales
of Food and Beverages increased 11.9% to $21,052,194 in fiscal 1996
from $18,812,719 in fiscal 1995. This increase was primarily due to an
increase in comparable sales per restaurant of 9.0% and the opening of
one new company-owned restaurant.
The improvement in comparable sales per company-owned restaurant
was primarily due to the company's remodeling program, an expansion of
TV advertising and the continued effects of a price decrease
instituted in the fourth quarter of fiscal 1995. Comparable guest
counts advanced by 10.5% while average check declined by $.14 compared
to fiscal 1995.
Franchise Fees and Royalties decreased to $161,777 in 1996 from
$354,719 in 1995. Royalties from franchised restaurants declined to
$146,335 in 1996 from $272,109 because of lower sales from fewer
franchised restaurants. During 1996 one franchised restaurant opened,
and three franchised restaurants closed. License Fee Revenues were
$5,442 in fiscal 1996 compared to $20,609 in 1995. There was one
franchised restaurant opened in fiscal 1996 compared to two in fiscal
1995. Franchise Development Fee Revenues were zero in fiscal 1996
compared to $12,000 in 1995. In addition, Development Fee Revenues
from forfeiture of development rights was $10,000 in fiscal 1996
compared to $50,000 in 1995.
Commissary, Rent and Other Income decreased to $332,031 in 1996
from $373,671 in 1995. This decline is primarily due to a decline in
rental income of $88,967, offset by increases in Commissary Revenues
of $18,546, interest income of $7,777, a $15,779 increase in earnings
from LaMexiCo, and an increase in management fees of $8,907.
Restaurant Costs and Expenses increased 10.46% to $18,196,190 in
fiscal 1996 from $16,472,883 in 1995 primarily due to having a 10.5%
increase in comparable guest counts per restaurant. Total restaurant
expenses as a percentage of Sales of Food and Beverages were 86.43% in
1996 compared to 87.56% in 1995. Cost of Sales as a percentage of
Sales of Food and Beverages increased to 26.88% from 26.05% in 1995
due to the price decrease and higher food prices. Restaurant Labor and
Benefits declined .51% as a percentage of Sales of Food and Beverages
to 33.21% in 1996 from 33.72 % in 1995. This decline as a percent of
sales is primarily due to the semi-fixed nature of these expenses.
Other Operating Expenses, which include such expenses as utilities,
restaurant supplies, and advertising and promotion costs, increased
10.31% to $3,369,466 in 1996 from $3,054,604 in 1995, primarily due to
having higher guest counts and increased television advertising
expenditures. Media advertising costs due to the new television
advertising campaigns increased to $847,925 in 1996 (up 56.6%)
compared to $541,530 in 1995. Occupancy Costs include rent, common
area maintenance, taxes, insurance, and depreciation. These costs
decreased in absolute terms ($25,380) and as a percentage of sales.
Occupancy costs as a percent of Sales of Food and Beverages were
10.20% in 1996 compared to 11.55% in 1995. There were absolute
decreases in restaurant insurance costs ($47,000) and Taxes and
Licenses ($27,000) due to ongoing cost reduction programs. Preopening
costs were $28,959 in fiscal 1996 compared to $0 in fiscal 1995.
During 1996 one company-owned restaurant opened, while no new company-
owned restaurants opened during fiscal 1995.
Operations and Franchise Expenses declined $887,668 (38.20%) and
as a percentage of Total Revenues decreased to 6.67% in fiscal 1996
from 11.89% in 1995. The dollar decrease primarily represents the
closing charge associated with three franchisees ceasing operations at
four restaurants subleased to them by the Company in 1995. These costs
consisted of the establishment of a reserve for asset impairment, a
reserve established for rent and other costs during the time required
for disposal, and amounts for bad debts associated with these
franchisees. During 1995 the Company incurred an asset impairment
write-down of $190,826 for the Bossier City and Cutler Ridge
restaurants. In addition, a reserve of $392,823 for future rental and
other costs was established for the four locations to cover the
estimated expenses to carry the properties during the time required
for sublease or disposal. In addition, the Company increased its
provision for doubtful accounts by $344,197, primarily to reflect
receivable losses associated with the closure of these four
restaurants plus three additional franchised restaurants during fiscal
1995. All of the properties were subleased before the end of fiscal
1996.
Corporate Expenses declined in absolute terms ($316,642) and as a
percentage of revenues (2.32%). The decrease between years is due to a
planned decrease in all corporate departments due to cost savings
<Page 7>
actions instituted in Fiscal 1996, including a 10% decrease in
compensation for all officers of the Company. Interest Expense
declined to $414,800 in 1996 from $416,092 in 1995.
These factors resulted in income before income taxes of $14,950
in 1996 compared to a pretax loss of $1,472,238 in 1995. There was a
federal tax provision of $46,090 from a change in the valuation
allowance for deferred tax assets in 1995 compared to zero in 1996.
Net income after giving effect to this impact was an after tax loss of
$1,518,328 ($.72) per share in fiscal 1995 compared to a profit of
$14,950 in fiscal 1996.
1995 Compared to 1994
During the fiscal year ended July 2, 1995, revenues declined to
$19,541,109, down 14.57%, compared to $22,874,510 in fiscal 1994.
Sales of Food and Beverages decreased 14.58% to $18,812,719 in fiscal
1995 from $22,023,962 in fiscal 1994. This decrease was primarily due
to having 15 restaurants in operation for all of fiscal 1995 compared
to 18 for most of fiscal 1994, and to a 1.7% decline in comparable
sales per restaurant. Comparable sales per restaurant declined for a
number of reasons. On July 18,1994, the Center for Science In the
Public Interest (CSPI) issued a study labeling Mexican food as
unhealthy. Obviously, management disagrees with this study and its
methods. However, the impact of this negative press has been felt
throughout the Mexican Restaurant Segment. National Mexican restaurant
chains have experienced sales declines as high as 15%. The second
significant reason for the decline in comparable sales per restaurant
is casino gaming. Gaming continues to grow on the Mississippi Gulf
Coast, New Orleans, and the rest of the state of Louisiana. The short
to intermediate impact of casino gaming will continue to be negative
on Cucos. Casino gaming results in a reallocation of discretionary
income, and casinos often sell food at or below cost.
Despite these negative influences, we were able to build
comparable sales per restaurant by 4.7% during the fourth quarter.
This improvement was primarily due to our remodeling program, the
introduction of TV advertising and a price decrease. The fourth
quarter increase in comparable sales per restaurant reversed a two
year downtrend in this important sales statistic.
Franchise Fees and Royalties decreased to $354,719 in 1995 from
$409,345 in 1994. Royalties from franchised restaurants declined
$71,811 to $272,109 in 1995 from $343,920 because of lower sales from
franchised restaurants. During 1995 two franchised restaurants opened,
and seven franchised restaurants closed due to the factors noted
above, in addition to increased competition from other casual dining
chains. License Fee Revenues were $20,609 in 1995 compared to $14,425
in 1994. There were two franchised restaurants opened in 1995 compared
to one in fiscal 1994. Franchise Development Fee Revenues were $12,000
in 1995 compared to $1,000 in 1994. In addition, Development Fee
Revenues from forfeiture of development rights was $50,000 in both
fiscal 1995 and 1994.
Commissary, Rent and Other Income decreased to $373,671 in 1995
from $441,203 in 1994. This decline is primarily due to a $72,286
decline in rental income, because of the closing of four franchised
restaurants previously subleased to franchisees, and a $13,483 decline
in commissary sales, offset by an increase of $29,268 in management
fees. The Company manages one restaurant for an affiliated franchisee
for a fee of 5.0% of sales.
Restaurant Costs and Expenses decreased 14.17% to $16,472,883 in
fiscal 1995 from $19,192,647 in 1994 primarily due to having three
fewer restaurants in 1995 compared to 1994. Total restaurant expenses
as a percentage of Sales of Food and Beverages were 87.56% in 1995
compared to 87.14% in 1994. Cost of Sales as a percentage of Sales of
Food and Beverages increased to 26.05% from 25.15% in 1994 due to a
price decrease and higher produce costs. Restaurant Labor and Benefits
declined .20% as a percentage of Sales of Food and Beverages to 33.72%
in 1995 from 33.92% in 1994. This decline as a percent of sales is
primarily due to decreased health insurance and workman's compensation
costs during fiscal 1995. Other Operating Expenses, which include such
expenses as utilities, restaurant supplies, and advertising and
promotion costs, declined 11.85% to $3,054,604 in 1995 from $3,465,149
in 1994, primarily due to having three fewer restaurants in operation
in 1995 compared to 1994. Media advertising
<Page 8)
costs due to the new
television advertising campaigns increased to $541,530 in 1995 (up
39.0%) compared to spending of $389,550 in 1994. Occupancy Costs
include rent, common area maintenance, taxes, insurance, and
depreciation. These costs decreased slightly as a percentage of sales
to 11.55% of Sales of Food and Beverages in 1995 compared to 11.84% in
1994. Preopening costs were $0 in 1995 compared to $110,396 in 1994.
Preopening costs are amortized over twelve months. Amortization of
these costs from the four restaurants opened or purchased in 1993 was
completed in 1994. No new company-owned restaurants opened during
fiscal 1995.
Operations and Franchise Expenses increased $914,875 (64.93%) and
as a percentage of Total Revenues increased to 11.89% in 1995 from
6.16% in 1994. The dollar increase primarily represents the costs
associated with three franchisees ceasing operations at four
restaurants subleased to them by the Company. These costs consisted of
a write down for asset impairment, a reserve established for rent and
other costs during the time required for disposal, and amounts for bad
debts associated with these franchisees. During 1995 the Company
incurred a write down for asset impairment of $190,826 for the Bossier
City and Cutler Ridge restaurants. In addition, a reserve of $392,823
for future rental and other costs was established for the four
locations to cover the estimated expenses to carry the properties
during the time required for sublease or disposal. In addition, the
Company increased its provision for doubtful accounts by $344,197,
primarily to reflect receivable losses associated with the closure of
these four restaurants plus three additional franchised restaurants
during fiscal 1995. One of the properties was subleased before year-
end. At year-end there was $172,123 remaining in the reserves for
rents and related costs.
Corporate Expenses increased in absolute terms ($134,546) and as
a percentage of revenues (1.93%). The increase between years is due to
an increase in professional fees (primarily legal fees) of $49,000,
marketing consulting fees of $23,000, marketing research of $39,000
and construction and real estate of $18,000. Interest Expense
increased to $416,092 in 1995 from $398,972 in 1994, primarily
reflecting the increased level of debt due to remodeling five
restaurants during the fiscal year.
These factors resulted in a loss before income taxes of
$1,472,238 in 1995 compared to a profit of $207,940 in 1994. There was
a federal tax provision of $46,090 in 1995 compared to zero in 1994.
Because of the factors discussed throughout this analysis, management
increased the valuation allowance related to deferred taxes. The
income tax expense recognized during fiscal 1995 is a result of this
increase in the valuation allowance. Management believes that the
remaining deferred tax assets of $105,910 are realizable through
future taxable income and the future reversals of existing taxable
temporary differences. Uncertainties that effect the ultimate
realization of deferred tax assets include the risk of incurring
additional losses in the future. This risk has been considered in
determining the need for a valuation allowance. During the first
quarter of 1994, the Company adopted SFAS No. 109, "Accounting for
Income Taxes" and has reported the cumulative effect of the change in
method of accounting for income taxes as of the beginning of 1994
fiscal year in the financial statements. The cumulative effect on
prior years of this change in accounting principle was $152,000 or
$.07 per share. Net income after giving effect to this accounting
change was $359,940 ($.17 per share) in 1994 compared to an after tax
loss of $1,518,328 ($.72) per share in fiscal 1995.
<Page 9>
Liquidity and Capital Resources
The Company relies on cash flow from operating activities to
finance normal recurring capital expenditures and scheduled maturities
of debt. A combination of long-term debt and lease financing is used
to fund expansion and remodeling.
Net Cash Provided By Operating Activities increased to $896,101
in 1996 compared to $202,596 in fiscal 1995 and $863,722 recorded in
1994. These changes were primarily due to income of $14,950 in fiscal
1996 compared to a loss of $1,518,328 incurred in fiscal 1995 and a
profit of $359,940 in 1994. Depreciation and amortization declined to
$884,654 from $912,183 in 1995 and $1,012,725 in 1994. The decline in
1996 compared to 1995 was due to the asset impairments recorded in
fiscal 1995 offset by increased depreciation and preopening
amortization due to remodelings and one new company-owned restaurant.
The decline in 1995 compared to 1994 was mostly due to the decline in
preopening expense amortization of $110,396. These negatives were
partially offset by the cash produced from having lower receivable
balances ($102,155) and higher accrual and payable balances ($131,295)
in fiscal 1996 compared to fiscal 1995. These factors resulted in a
decline in the Company's working capital position of $30,551. Current
assets were $1,923,871 at the end of fiscal 1996, or .59 times current
liabilities of $3,283,791. This compares to a current ratio of .60 at
the end of 1995 and .81 at the end of 1994.
The Company has provided a valuation allowance for deferred tax
assets of $1,119,667 related primarily to net operating loss carry-
forwards which may not be realized through future taxable income and
future reversal of existing temporary differences. Management believes
that the remaining deferred tax assets of $105,910 are realizable
through future taxable income and the future reversals of existing
taxable temporary differences. Uncertainties that affect the ultimate
realization of deferred tax assets include the risk of incurring
additional operating losses in the future. The risk has been
considered in determining the need for a valuation allowance.
Management will continue to assess the adequacy of the valuation
allowance on a quarterly basis in fiscal 1997.
Net cash used in investing activities in 1996 increased to
$1,189,017 compared to $748,293 in 1995 and $1,003,767 in 1994. The
primary reason for the net increase was because of the sale of its
Gainesville restaurant in 1995. In 1995 the Company received $351,079
in proceeds from the sale of its Gainesville restaurant. In addition,
capital expenditures increased $93,245 to $1,192,617, compared to
capital expenditures of $1,099,372 in 1995 and $1,204,883 in 1994. In
1996 the increase in capital expenditures was due to the addition of
the newest company-owned restaurant in Ruston, Louisiana, offset by a
decrease in the number of remodelings of existing restaurants. The
Company remodeled three of its restaurants in 1996 compared to five
major remodelings in 1995 and one in 1994. In 1995 and 1994 the
Company did not open or buy any restaurants. During 1994 the Company
bought the land and building of one of its previously leased
restaurants for $550,000.
Virtually all of the 1996 capital expenditures associated with
remodeling and the new restaurant were financed with long-term debt or
leases. The Company has one working capital line of credit at June 30,
1996. Approximately $57,000 remained on the working capital line at
the end of the fiscal year. Net cash provided by financing activities
was $507,266 in 1996 compared to $497,602 in 1995 and $167,958 in
1994. During fiscal 1996 the Company issued $500,000 of zero-coupon
convertible Notes, due June 30, 2015, in a private transaction. The
long-term debt to equity ratio, excluding the convertible note, was
1.30 to 1.00 at the end of fiscal 1996 compared to 1.26 to 1.00 at the
end of 1995 and .60 to 1.00 at the end of 1994. The Company has
certain covenants as to liquidity and debt levels with two of its
major lenders. At year-end the Company was in compliance with these
debt covenants.
In 1997 the Company intends to continue remodeling its
restaurants. The Company is in discussions with several financing
sources about the funding of these remodelings as well as new company-
owned restaurants.
<Page 10>
Impact of Inflation and Changing Prices
Inflation in food, labor, construction costs and interest rates
can affect the Company's operations. Many of the Company's employees
are paid hourly rates related to the minimum wage. Legislation was
recently signed increasing the minimum wage $.50 on October 1, 1996,
and an additional $.40 on September 1, 1997 for nontipped employees.
Management expects to institute sales building and cost savings
actions to offset the effect of this increase.
Management reviews its pricing regularly to ensure it is priced
competitively, that it offers outstanding value to its customers, and
that margins are maintained. Inflation can also affect food costs,
rent, taxes, maintenance, and insurance costs. The Company has offset
many of these increases through increased purchasing efficiencies.
Seasonality and Reporting Periods
The Company's results are affected by seasonality. Usually the
highest sales periods occur in late Spring and Summer, with sales
declining in the Fall and Winter. This is especially true for the Gulf
Coast restaurants where sales are more dependent on tourism.
For fiscal 1997, the year will end on June 29, 1997, and will
consist of one sixteen week quarter ending October 20, 1996, and three
twelve week quarters ending January 12, 1997, April 6, 1997, and June
29, 1997.
Local Gaming Referendum
During fiscal 1996 the State of Louisiana passed a local option
ordinance on all forms of gambling including video poker. In November,
1996, all parishes in the state will vote whether to retain video
poker and other forms of gambling. Management is unable to predict
which Parishes will vote for or against the continuation of video
poker or casino gaming. If video poker is voted out by a Parish,
existing video poker operators will be allowed to operate until July
1999.
<Page 11>
Statements of Operations - Cucos Inc.
Fiscal Year Ended
June 30 July 2 July 3
1996 1995 1994
Revenues
Sales of Food and Beverages $21,052,194 $18,812,719 $22,023,962
Franchise Fees and Royalties 161,777 354,719 409,345
Commissary, Rent and Other Income 332,031 373,671 441,203
Total Revenues 21,546,002 19,541,109 22,874,510
Restaurant Costs and Expenses
Cost of Sales 5,658,370 4,900,784 5,538,354
Restaurant Labor and Benefits 6,991,336 6,344,056 7,469,706
Other Operating Expenses 3,369,466 3,054,604 3,465,149
Occupancy Costs 2,148,059 2,173,439 2,609,042
Preopening Costs 28,959 - -
Total Restaurant Expenses 18,196,190 16,472,883 19,192,647
Operations and Franchise Expenses 1,436,308 2,323,976 1,409,101
Corporate Expenses 1,483,754 1,800,396 1,665,850
Interest Expense 414,800 416,092 398,972
Income (Loss) Before Income Taxes
and Cumulative Effect of
Accounting Change 14,950 (1,472,238) 207,940
Income Taxes - 46,090 -
Income (Loss) Before Cumulative
Effect of Accounting Change 14,950 (1,518,328) 207,940
Cumulative Effect of Accounting Change - - 152,000
Net Income (Loss) $ 14,950 $(1,518,328) $359,940
Weighted Average Number of Common
Shares Outstanding 2,601,116 2,113,747 2,179,773
Income (Loss) Per Share:
Income (Loss) Before Cumulative
Effect of Accounting Change $ .01 $ (0.72) $ 0.10
Cumulative Effect of Accounting
Change - - 0.07
Net Income (Loss) Per Share $ .01 $ (0.72) $ 0.17
See notes to financial statements.
<Page 12>
Balance Sheets - Cucos Inc.
June 30 July 2
1996 1995
Assets
Current Assets
Cash and cash equivalents $ 781,090 $566,740
Receivables:
Trade 326,147 616,470
Due from affiliates 306,793 233,942
Notes receivable from franchisees 15,536 28,864
Less allowance for doubtful accounts 99,118 194,034
549,358 685,242
Inventories 244,589 219,653
Prepaids, deferred taxes and other current assets 348,834 302,511
Property held for resale - 217,210
TOTAL CURRENT ASSETS 1,923,871 1,991,356
Deferred Taxes and Noncurrent Assets 322,508 309,737
Property, Equipment and Other
Land 327,000 327,000
Property and equipment 4,896,737 4,300,009
Building and leasehold improvements 5,183,624 4,275,063
Reacquired franchise rights 528,896 528,896
10,936,257 9,430,968
Less accumulated depreciation and amortization 4,561,795 3,586,795
6,374,462 5,844,173
Preopening costs less accumulated amortization of
$28,959 at June 30, 1996 96,519 -
Investment in LaMexiCo, L.L.C. 245,178 249,053
Deferred Costs, less accumulated amortization of
$18,971 at June 30, 1996, and $15,597 at
July 2, 1995 82,102 25,112
$9,044,640 $8,419,431
Liabilities and Shareholders' Equity
Current Liabilities
Short-term debt payable to banks $ 93,000 $ 313,725
Trade accounts payable 1,477,670 1,469,585
Accrued expenses and other 544,119 564,752
Accrued payroll 200,606 185,133
Current portion of long-term debt 968,396 787,530
TOTAL CURRENT LIABILITIES 3,283,791 3,320,725
Long-Term Debt, less current portion 2,934,051 2,838,359
Convertible Debenture - Non-Interest Bearing -
See Note B 500,000 -
Deferred Revenue 62,500 11,000
Shareholders' Equity
Preferred Stock, no par value-1,000,000
shares authorized, none issued or outstanding
Common Stock, no par value-20,000,000 shares
authorized, 2,113,747 shares issued and
outstanding at June 30, 1996 and July 2, 1995 4,745,585 4,745,585
Additional paid-in capital 67,849 67,849
Retained earnings (deficit) (2,549,136) (2,564,086)
TOTAL SHAREHOLDERS' EQUITY 2,264,298 2,249,348
$9,044,640 $8,419,431
See notes to financial statements.
<Page 13)
<TABLE>
Statements of Cash Flows - Cucos Inc.
Fiscal Year Ended
<C> <C> <C>
June 30 July 2 July 3
1996 1995 1994
</TABLE>
Operating Activities
<TABLE>
<S> <C> <C> <C> <C>
Net income (loss) $ 14,950 $ (1,518,328) $ 359,940
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities
Depreciation and amortization 884,654 912,183 1,012,725
Increase (Decrease) in deferred revenue 51,500 (64,334) (23,000)
Loss on sale of assets and other 23,619 40,389 19,270
Cumulative effect of accounting change - - (152,000)
Asset impairment and rent reserve 89,220 578,141 -
Costs associated with closed restaurants (217,592) (219,303) -
Equity in earnings of equity investee,
net of distributions 3,875 5,710 (10,763)
Changes in operating assets and
liabilities:
Receivables 102,155 117,978 (138,660)
Inventories (24,936) 40,391 37,644
Prepaids and other (37,161) 176,092 (43,308)
Preopening costs (125,478) 15,143 3,099
Accounts payable 8,086 265,141 31,869
Accrued expenses 107,736 (123,482) (141,230)
Accrued payroll 15,473 (23,125) (91,864)
NET CASH PROVIDED BY
OPERATING ACTIVITIES 896,101 202,596 863,722
Investing Activities
Change in certificates of deposit - - 117,000
Purchases of property and equipment (1,192,617) (1,099,372) (1,204,883)
Contributions to equity investee - - (244,000)
Proceeds from sale of assets 3,600 351,079 328,116
NET CASH USED IN INVESTING
ACTIVITIES (1,189,017) (748,293) (1,003,767)
Financing Activities
Change in short-term debt payable to banks (220,725) 23,725 (45,000)
Proceeds from long-term borrowings 1,150,915 1,346,200 1,504,953
Proceeds of convertible debt 500,000 - -
Principal payments on borrowings (874,357) (872,323) (1,291,995)
Debt issuance costs (48,567) - -
NET CASH PROVIDED BY
FINANCING ACTIVITIES 507,266 497,602 167,958
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 214,350 (48,095) 27,913
Cash and cash equivalents at beginning
of year 566,740 614,835 586,922
CASH AND CASH EQUIVALENTS
AT END OF YEAR $781,090 $ 566,740 $ 614,835
</TABLE>
See notes to financial statements.
<Page14>
<TABLE>
Statements of Shareholders' Equity - Cucos Inc.
Additional Retained
Common Paid-In Earnings
Stock Capital (Deficit) Total
<S> <C> <C> <C> <C>
Balance as of July 4, 1993 $4,745,585 $67,849 $(1,405,698) $3,407,736
Net income for the year - - 359,940 359,940
Balance as of July 3, 1994 4,745,585 67,849 (1,045,758) 3,767,676
Net loss for the year - - (1,518,328) (1,518,328)
Balance as of July 2, 1995 4,745,585 67,849 (2,564,086) 2,249,348
Net income for the year - - 4,950 14,950
Balance as of June 30, 1996 $4,745,585 $67,849 $(2,549,136) $2,264,298
</TABLE>
Cucos Inc. - Stock Data (unaudited)
The Company's common stock is traded on The NASDAQ Small-Cap Market
under the symbol CUCO. The following table sets forth the range of the
high and low bid and ask prices for each of the quarters indicated for
fiscal 1995 and fiscal 1996.
Fiscal 1995 High Bid-Ask Low Bid-Ask
1st Quarter ended 10/23/94 1 1/2-2 1 1/2-2
2nd Quarter ended 1/15/95 2-2 1 1/2-1 7/8
3rd Quarter ended 4/9/95 1 5/8-1 7/8 1 1/4-1 5/8
4th Quarter ended 7/2/95 1 5/8-1 5/8 1 1/4-1 5/8
Fiscal 1996 High Bid-Ask Low Bid-Ask
1st Quarter ended 10/22/95 1 1/2-1 5/8 1-1 3/8
2nd Quarter ended 1/14/96 1 3/4-1 3/4 1 1/8-1 3/8
3rd Quarter ended 4/7/96 1 1/2-1 1/2 1 1/8-1 1/8
4th Quarter ended 6/30/96 1 5/8-1 5/8 1 1/8-1 1/8
On September 9, 1996, the closing bid and ask prices for Cucos
common stock were 1 1/8 bid and 1 5/8 ask.
The foregoing quotations reflect inter-dealer prices, without retail
markup, mark-down or commission and may not necessarily represent
actual transactions.
Since becoming a public company, Cucos Inc. has paid no cash
dividends and has no present intention of paying dividends, but rather
will retain its earnings to provide funds for expansion of its
business and other corporate purposes.
Approximate number of shareholders (including beneficial
shareholders through nominee registration) as of September 9, 1996:
1,001
Market makers: Herzog, Heine, Geduld, Inc., Legg Mason Wood Walker
Inc., Paragon Capital Corp. and Morgan, Keegan & Company.
<Page 15)
Note A - Significant Accounting Policies
Fiscal Year: The Company uses a 52/53 week year for financial
reporting purposes with the Company's fiscal year ending on the Sunday
closest to June 30 of each year. Fiscal 1996, 1995 and fiscal 1994
were fifty-two week years. Fiscal 1997 will also be a fifty-two week
year.
Industry: The Company is a full-service casual dining restaurant
chain offering Mexican appetizers, entrees and complementing
beverages. At June 30, 1996, the Company operated sixteen restaurants
and franchised five restaurants.
Use of Estimates: The preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Cash and Cash Equivalents: Cash and cash equivalents include cash
on hand, cash in bank accounts and money market accounts, and
certificates of deposit with original maturities of less than three
months.
Inventories: Inventories, consisting primarily of food and
beverages, are stated at the lower of cost (first-in, first-out
method) or market.
Property, Equipment, and Other: Property, Equipment and Other is
stated on the basis of cost. Depreciation and amortization are
computed by the straight-line method over the assets' useful lives or
their lease terms, whichever is shorter. The useful lives of equipment
range from 3-10 years; the useful lives of leasehold improvements are
generally 15 years, and the useful lives of reacquired franchise
rights, which represents the costs to reacquire franchised restaurants
in excess of the tangible assets acquired, are 15 years. Depreciation
and amortization expenses for these assets are $855,696, $912,183 and
$901,145 for the fiscal years 1996, 1995 and 1994, respectively.
Deferred Costs: Preopening costs include hiring, training and
associated costs of opening new company-owned restaurants. These costs
are capitalized and amortized on a straight-line basis over a one-year
period once the restaurant is opened. Deferred site costs incurred in
the selection of sites for new company-owned restaurants are
capitalized and amortized on a straight-line basis over a 10-year
period; costs incurred in the selection of sites for franchised
restaurants are accumulated and expensed when the related franchise
revenue is recognized. If a potential site is abandoned, the deferred
costs related to that site are charged to current operations. Other
deferred costs, primarily trademarks, are amortized on a straight-line
basis over 20 years. Deferred issuance costs are amortized over the
life of the convertible debenture (20 years).
Advertising Costs: Advertising costs are expensed as incurred.
Media advertising expense was $847,925, $541,530 and $389,550 for
fiscal years 1996, 1995 and 1994, respectively.
Franchise Fees and Royalties (See Note H): The Company sells
exclusive rights to develop Cucos restaurants for designated
territories, as well as individual franchises for each restaurant. The
area development agreements call for a nonrefundable fee for
territorial exclusivity and for other development opportunities lost
or deferred as a result of the rights granted under the agreement.
Franchise development fee revenue from these agreements is deferred
and recognized as income on a pro rata basis as restaurants are
developed in the designated territory or when the developer forfeits
the development rights under the agreement. Franchise fee revenue from
the individual restaurants is recognized as income when all
obligations of the Company are substantially fulfilled, which occurs
when the franchise restaurant begins operations. Royalty income is
based upon a percentage of franchise sales and recognized as income
when earned. Royalties and other receivables are often collaterized by
personal guarantees and sometimes equipment owned by the franchisee.
Income Taxes: During the first quarter of fiscal 1994, the
Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." As permitted under the Statement, the
Company elected not to restate the financial statements of prior
years. The cumulative effect as of July 5, 1993, of adopting Statement
109 increased net income by $152,000, or $.07 per share. Under
Statement 109, the liability method is used in accounting for income
taxes. Under this method deferred tax assets and liabilities are
determined based on differences between financial reporting and tax
bases of assets and liabilities, and are measured using the enacted
tax rates and laws that will be in effect when the differences are
expected to reverse. Prior to the adoption of Statement 109, income
tax expense was determined using the liability method prescribed by
Statement 96, which was superseded by Statement 109. Among other
changes, Statement 109 changed the recognition and measurement
criteria for deferred tax assets included in Statement 96.
Impairment of Long-Lived Assets: In March 1995 the FASB issued
Statement 121 that requires impairment losses to be recorded on long-
lived assets used in operations when impairment indicators are present
and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement 121 also
addresses the accounting for long-lived assets that are expected to be
disposed of. The Company will adopt Statement 121 in the first quarter
of fiscal 1997. The Company does not anticipate that the adoption of
Statement 121 will be material to the financial statements.
Stock-Based Compensation: The Company accounts for its stock
compensation arrangements under the provision of Accounting Principles
Board ("APB") No. 25, "Accounting for Stock Issued to Employees," but
is reviewing the provisions of SFAS No. 123, "Accounting for Stock-
Based Compensation," which is effective for fiscal years beginning
after December 15, 1995. SFAS No. 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans.
The Company has not yet finalized its review of the provisions of this
statement, and, accordingly, has not yet determined whether it will
adopt SFAS No. 123 for expense recognition purposes, or continue to
follow APB Opinion No. 25 and make the proforma information
disclosures required under the new standard.
Reclassifications: Certain balances in prior fiscal years have
been reclassified to conform with the presentation in the current
fiscal year.
<Page 16>
Note B - Debt
June 30 July 2
1996 1995
Notes payable to banks and finance companies:
Fixed interest rates from 7.8% to 13.8% $1,413,879 $ 1,253,340
Variable interest rates from prime
to prime plus 1.5% 895,568 871,193
Other, including obligations under capital leases:
Fixed interest rates of 4.3% to 17.6% 1,385,240 1,225,036
Variable interest rates at prime
plus 1.5% 207,760 276,320
3,902,447 3,625,889
Less current portion 968,396 787,530
$2,934,051 $2,838,359
Notes payable to banks and finance companies are collateralized
by restaurant equipment, land, building and leasehold improvements
with a carrying value of approximately $3,441,369 and $2,164,042 at
June 30, 1996, and July 2, 1995, respectively. At June 30, 1996, and
July 2, 1995, capital lease obligations of $630,149 and $608,473
respectively, existed, which relate to restaurant equipment and
leaseholds with a net carrying value of $917,280 and $793,504,
respectively. Amortization of assets recorded under capital leases is
included in depreciation expense.
Maturities of long-term debt for each of the next five fiscal
years are $968,396 in 1997; $870,619 in 1998; $1,173,572 in 1999;
$553,157 in 2000 and $336,704 in 2001. Interest expense approximates
interest paid for each of the last three fiscal years. At June 30,
1996, the prime rate was approximately 8.25%.
The Company has one line-of-credit agreement under which $150,000
can be borrowed at June 30, 1996. There was $57,000 available under
that agreement as of that date. The agreement is unsecured and matures
in October 1996. The weighted average interest cost on the short-term
borrowings at June 30, 1996, is 10.25%.
Certain credit and long-term debt agreements contain covenants
which include provisions for the maintenance of net worth and various
ratios. At June 30, 1996, the Company was in compliance with all such
covenants.
On July 28, 1995, the Company issued $500,000 of zero-coupon
convertible unregistered Notes due June 30, 2015, $293,750 principal
amount of which was issued to related parties. The notes do not bear
interest and are convertible into 527,983 shares of the Company's
common stock. The notes are not convertible until July, 2000, except
under certain conditions, primarily those relating to the sale or
control of the Company. The notes are secured by the assignment of one
the Company's leases and a lien on the Company's tangible personal
property located at the restaurant.
The carrying amounts reported in the balance sheet for debt
approximate fair value, as estimated using discounted cash flow
analyses, based on the Company's current incremental borrowing rates
for similar types of borrowing instruments.
Note C - Income Taxes
Significant components of the Company's deferred tax assets and
liabilities are as follows:
June 30 July 2
1996 1995
Deferred tax assets:
Net operating loss carryforwards $631,889 $619,809
Tax credit carryforwards 565,557 489,158
Other - net 62,149 160,554
Total deferred tax assets 1,259,595 1,269,521
Valuation allowance for deferred tax assets 1,119,667 (1,132,438)
139,928 137,083
Deferred tax liabilities:
Opened site costs 34,018 31,173
Net deferred tax assets $105,910 $105,910
The following is a reconciliation of income taxes at the Federal
statutory rate of 34% to income taxes reported in the statements of
operations based on income before income taxes:
<Page 17>
June 30 July 2 July 3
1996 1995 1994
Income tax expense (benefit) at the
Federal statutory rate $ 5,083 $(500,561) $70,700
State taxes, net of Federal deductions 598 (58,890) 8,317
Tax credits (15,901) (43,786) 2,338
Graduated tax rate differential (2,841) - (11,750)
Miscellaneous items not deductible for
Federal income taxes 25,832 5,687 14,462
Net operating loss utilized - - (84,067)
Change in valuation allowance (12,771) 643,640 -
Income Taxes $ - $46,090 $ -
For Federal income tax purposes, the Company had net operating
loss carryforwards of approximately $1,390,000 and investment and jobs
tax credits carryforwards of approximately $599,000. These
carryforwards expire beginning in 1999 at June 30, 1996.
The Company has provided a valuation allowance for deferred
operating loss carryforwards, which may not be realized through future
taxable income and the reversals of taxable temporary differences.
Because of lower than expected revenues and earnings, management
increased the valuation allowance during 1995 resulting in $46,090 of
income tax expense.
Note D - Leases
The Company leases eighteen restaurant facilities and its
corporate headquarters under noncancelable operating lease agreements
with initial lease terms expiring between 1996 and 2011. Sixteen of
the restaurant leases have remaining renewal options, and fifteen
provide for contingent rentals based on sales performance in excess of
specified minimums. Contingent rentals were not material in any year.
Some of the leases also have varying escalation clauses based either
on fixed dollar increases, a percentage of the previous minimum annual
rental, or the consumer price index. The Company subleases four of its
restaurant facilities under noncancelable sublease agreements with
lease terms expiring from 1998-2011. The Company anticipates that
income from these sublease agreements will be sufficient to cover the
Company's remaining minimum lease payments.
Future minimum lease and sublease payments were as follows at
June 30, 1996:
Lease Sublease Net
1997 $1,386,000 $299,000 $1,087,000
1998 1,221,000 338,000 883,000
1999 988,000 231,000 757,000
2000 935,000 233,000 702,000
2001 831,000 265,000 566,000
Thereafter 4,384,000 1,577,000 2,807,000
$9,745,000 $2,943,000 $6,802,000
Rent expense for real estate on all the Company's operating
leases was $1,410,000 in 1996, $1,390,000 in 1995 and $1,564,000 in
1994.
Note E - Related Party Transactions
The Company is affiliated with L.B.G., Inc., through common
ownership. L.B.G., Inc. reimburses the Company for accounting and
administrative services based on the gross sales of each company. At
June 30, 1996, L.B.G. owed the Company $234,892 for food, rent
supplies and services. The receivable is secured by L.B.G.'s
membership interest in LaMexiCo.
The Company owns a 26.6% interest in LaMexiCo, L.L.C., a limited
liability company, that operates a franchised Cucos at 3000 Veterans
Boulevard in Metairie, Louisiana. The Company also manages the
restaurant for LaMexiCo, L.L.C., and receives 5% of net sales as
compensation. The restaurant opened under the development rights
previously owned by L.B.G. Inc. L.B.G. Inc. currently owns 21.6% of
LaMexiCo, L.L.C. The Company received $50,997, $45,665 and $26,815 in
royalties from LaMexiCo in fiscal 1996, 1995 and 1994, respectively.
The Company received $85,108, $76,109 and $46,811 in management fee
revenues in fiscal 1996, 1995 and 1994, respectively. The Company
accounts for its interest in LaMexiCo, L.L.C., using the equity
method. The Company's share of the affiliate's earnings was $26,302,
$10,523 and $10,763 in fiscal 1996, 1995 and 1994, respectively. At
June 30, 1996, LaMexiCo had assets of $1,009,000, of which $74,000
were current and liabilities of $209,082 of which $179,949 were current.
During fiscal 1996, LaMexiCo's revenues, expenses and net income were
$1,840,000, $1,741,000 and $99,000, respectively.
<Page 18>
The Company has entered into seven agreements with Brothers
Video, Inc., an affiliated company, pursuant to which Brothers Video
will supply video poker machines in nine Cucos restaurants located in
Louisiana. The term of an agreement is 5 years. The Company has the
option to renew each contract for two additional years.
Under the agreements the Company will receive a commission of 65%
of the net receipts during the first two years of the term and 70%
thereafter. Under the agreements, Brothers Video absorbs all taxes,
lease expenses and service costs associated with operating the
machines. Vincent J. Liuzza, Jr., the Chairman, Chief Executive
Officer and a director of the Company, is the sole stockholder of
Brothers Video. At June 30, 1996, Brothers Video, Inc., owed the
Company $48,604 for video poker commissions and other expenses. The
Company received $186,134 in video poker commissions from Brothers
Video in Fiscal 1996.
Also see Note B for description of issuance of $293,750 of non
interest bearing convertible debt to related parties.
Note F - Stock Options
The Company has two stock option Plans: the 1983 Plan which
expired in 1993 and the 1993 Plan, which was adopted by the
shareholders in October, 1993. Officers, directors, and key employees
of the Company may be granted incentive or nonqualified stock options
to purchase up to 350,000 and 250,000 shares, respectively under each
of the Plans. No additional options may be granted under the 1983
Plan. The option price of each incentive stock option granted may not
be less than 100% of the fair market value of the Common Stock at date
of grant. No minimum option price is required for nonqualified stock
options, but the Company's policy is that these options will not be
granted with an exercise price of less than the fair market value of
the Common Stock at the date of grant.
The following table summarizes options outstanding as of the end
of fiscal 1996, 1995 and 1994.
<TABLE>
1996 1995 1994
Average Average Average
<S>
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 355,600 $1.73 390,400 $1.75 323,200 $1.75
Granted 74,400 $1.43 7,200 $1.63 79,200 $1.71
Canceled (34,600) $1.77 (42,000) $1.85 (12,000) $1.53
Exercised - - - - - -
Outstanding at end of year 395,400 $1.67 355,600 $1.73 390,400 $1.75
</TABLE>
Note G - Per Share Amounts
Per share amounts are based on the weighted average number of
shares of Common Stock and dilutive Common Stock equivalents
outstanding, which were 2,601,116 in fiscal 1996, 2,113,747 in fiscal
1995 and 2,179,773 in fiscal 1994.
Note H - Franchise Operations
In addition to its company-owned restaurants, the Company had
five, seven and twelve franchised restaurants in operation at the end
of fiscal 1996, 1995 and 1994, respectively. Royalty income from
franchised restaurants was $146,335 in 1996, $272,109 in 1995 and
$343,920 in 1994. During fiscal 1996, one franchised restaurant opened
and three closed. During 1995 two franchised restaurants opened and
seven closed. See Management Discussion Page 6 for a discussion of the
costs of three franchisees ceasing operations in 1995. During 1994 one
franchised restaurant opened, four franchised restaurants closed, and
two restaurants previously operated by the Company were franchised. On
July, 1996 an additional company-owned restaurant was franchised.
Note I - Shareholders' Rights Agreement
In 1989 the Company declared a distribution of rights to purchase
the Company's Common Stock at a rate of one right for each outstanding
share of the Company's Common Stock. The rights were issued in
February 1990. The rights are not exercisable until ten days following
the occurrence of one of the following events: 1) acquisition by a
group or person of 15% or more of the Company's Common Stock, or 2) an
announcement by a potential acquirer of a tender or exchange offer
that would result in the ownership of 15% or more of the Company's
Common Stock. Once exercisable, unless redeemed earlier by the
Company, each right entitles the holder to buy $12 worth of shares of
the Company's Common Stock for an exercise price of $6. The Company
may redeem the rights at $.01 per right at any time until 10 days
after 15% or more of the Company's Common Stock is acquired by a
person or group. The rights will expire on December 31, 1999.
Note J - Defined Contribution Plan
The Company sponsors a defined contribution savings plan which is
available to substantially all employees. Eligible employees may
contribute up to 20% of their compensation. The Company contributes an
additional amount to the plan equal to 15% of employee contributions
up to 5% of their compensation. Company contributions were $10,196,
$22,577 and $25,186 in fiscal years 1996, 1995 and 1994, respectively.
<Page 19>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Shareholders
Cucos Inc.
We have audited the accompanying balance sheets of Cucos Inc. as
of June 30, 1996 and July 2, 1995, and the related statements of
operations, shareholders' equity, and cash flows for each of the three
years in the period ended June 30, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Cucos Inc. at June 30, 1996 and July 2, 1995, and the results of its
operations and its cash flows for each of the three years in the
period ended June 30, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note A to the financial statements, during the
year ended July 3, 1994, the Company changed its method of accounting
for income taxes.
New Orleans, Louisiana ERNST & YOUNG LLP
August 20, 1996
Report of Management
The management of Cucos Inc. has the responsibility for preparing
the accompanying financial statements and for their integrity and
objectivity. The statements, which include amounts that are based on
management's best estimates and judgments, have been prepared in
conformity with generally accepted accounting principles and are free
of material misstatement. Management also prepared the other
information in the annual report and is responsible for its accuracy
and consistency with the financial statements.
We maintain a system of internal control over the preparation of
our published annual financial statements. It should be recognized
that even an effective internal control system, no matter how well
designed, can provide only reasonable assurance with respect to the
preparation of reliable financial statements; further, because of
changes in conditions, internal control system effectiveness may vary
over time. The concept of reasonable assurance is based upon a
recognition that the cost of the controls should not exceed the
benefit derived. After judging the cost and benefit factors, we
believe our system of internal control provides this reasonable
assurance.
The Audit Committee of the Board of Directors, consisting of one
inside and two outside directors, recommends independent auditors for
appointment by the Board and reviews their reports. Our independent
auditors, Ernst & Young LLP, and our Chief Financial Officer have full
and free access to the Audit Committee. The results of audits and
related auditors' opinions and reports are reviewed by the Committee.
Our financial statements have been audited by Ernst & Young LLP,
whose report appears above. Their report expresses an opinion as to
the fair presentation, in all material respects, of the financial
statements and is based on an independent audit made in accordance
with generally accepted auditing standards.
Vincent J. Liuzza, Jr. Thomas J. Sandeman
Chairman of the Board and Chief Financial Officer
Chief Executive Officer
<Page 20)
Board of Directors Officers
Vincent J. Liuzza, Jr. Vincent J. Liuzza, Jr.
Founder, Chairman of the Board Founder, Chairman of the
since 1981. Board of Cucos Inc. since
Committees: Executive, Audit, 1981. Chairman and other
Compensation, Stock Option Offices-L.B.G. Inc.,
Chairman-Executive (formerly Sizzler Family
Steakhouses of Southern
Frank J. Ferrarra Louisiana, Inc.) since 1969.
Director since 1996. Managing
Partner - Thomas J. Grace
Ferrarra & Ferrarra since 1982. Secretary since 1983 and
Committees: Stock Option, Audit, General Counsel since 1992.
Compensation
Chairman-Compensation. Elie V. Khoury
President since July 1996.
Elie V. Khoury Vice President-Operations
President since July 1996. (1990-1996)
Vice President-Operations (1990- Executive Director of
1996) Operations (1989-1990).
Executive Director of Operations District Supervisor (1985-
(1989-1990). District Supervisor 1989).
(1985-1989).
Glenda T. Liuzza
Thomas J. Grace Founder, Vice President
Founder and Secretary since 1983. Concept Development since
General Counsel since 1992. 1985. Director of Marketing
Committee: Executive. (1983-1985).
David M. Liuzza Thomas J. Sandeman
Founder and Director since 1995. Vice President-Finance and
President and other offices of Treasurer since 1983. Vice
L.B.G., Inc., formerly Sizzler President-Financial Planning
Family Steakhouses of Southern and Internal Audit-Ponderosa
Louisiana, Inc. since 1969. Inc. (1977-1983).
President-LaMexiCo, L.L.C., a
franchisee of the Company since
1994. Committee: Consultants to the Board
Executive
Richard E. Butler
Sidney C. Pulitzer Consultant since 1994
Director since 1983. Chairman- Formerly Executive Vice-
Wemco Inc., a manufacturer of President - El Torito
men's neckwear and sportswear Mexican Restaurants
since 1985. President of the
World Trade Center in 1994. Kenneth F. Reimer
Committees: Compensation, Stock Consultant since 1994
Option and Audit Chairman-Audit. Formerly President and CEO -
Roma Corporation, operator
Miguel Uria of Tony Roma's, A Place for
Director since 1983. President- Ribs.
Oro Financial, a registered
broker/dealer since 1988. Prior
to 1988, Mr. Uria served as First
Vice President of Howard, Weil,
Labouisse, Friederichs
Incorporated, an investment
banking firm. Committees:
Compensation and Stock Option
Chairman-Stock Option
<Inside Back Cover>
Corporate Information
Transfer Agent
Boatmen's Trust Company
St. Louis, Missouri
Securities Counsel
Drinker Biddle & Reath
Philadelphia, Pennsylvania
Independent Auditors
Ernst & Young LLP
New Orleans, Louisiana
Corporate Offices
110 Veterans Blvd., Suite 222
Metairie, Louisiana 70005
504-835-0306
NASDAQ Symbol: CUCO
Annual Meeting
The annual meeting of shareholders will be held at Cucos Border
Cafe, 3000 Veterans Boulevard, Metairie, Louisiana, at 3:00 p.m.
on Thursday, October 31, 1996.
Form 10-KSB
A copy of Form 10-KSB, the Corporation's annual report to the
Securities and Exchange Commission, can be obtained without
charge by writing or faxing your request to:
Thomas J. Sandeman
Vice President-Finance
Cucos Inc.
110 Veterans Blvd., Suite 222
Metairie, Louisiana 70005
Fax No. 1-504-836-3194
Form 10-QSB
A copy of Form 10-QSB, the Company's quarterly report to the
Securities and Exchange Commission, can be obtained without
charge by faxing your request to:
Cucos Inc.
Attn. Investor Relations
Fax No. (504) 836-3194
Advertising Agency
Bandy Carroll Hellige
Louisville, Kentucky
Design Firm
Thomasgraphics
Baton Rouge, Louisiana
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual
Report (Form 10-KSB) of Cucos Inc. of our report dated August 20,
1996, included in the 1996 Annual Report to Shareholders of Cucos
Inc.
We also consent to the incorporation by reference in the
Registration Statements (Form S-8 No. 33-03953, No. 33-15785, No.
33-26941, No. 33-45224 and No. 33-83712) pertaining to the Stock
Option Plans of Cucos Inc. of our report dated August 20, 1996,
with respect to the financial statements of Cucos Inc.
incorporated by reference in this Annual Report (Form 10-KSB) for
the year ended June 30, 1996.
Ernst & Young LLP
New Orleans, Louisiana
September 30, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 781,090
<SECURITIES> 4,769
<RECEIVABLES> 648,476
<ALLOWANCES> 99,118
<INVENTORY> 244,589
<CURRENT-ASSETS> 1,923,871
<PP&E> 10,936,257
<DEPRECIATION> 4,561,795
<TOTAL-ASSETS> 9,044,640
<CURRENT-LIABILITIES> 3,283,791
<BONDS> 3,434,051
0
0
<COMMON> 4,745,585
<OTHER-SE> 2,481,287
<TOTAL-LIABILITY-AND-EQUITY> 9,044,640
<SALES> 21,052,194
<TOTAL-REVENUES> 21,546,002
<CGS> 5,658,370
<TOTAL-COSTS> 18,196,190
<OTHER-EXPENSES> 2,787,752
<LOSS-PROVISION> 132,310
<INTEREST-EXPENSE> 414,800
<INCOME-PRETAX> 14,950
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,950
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,950
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
