October 21, 1999
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/A for the
fiscal year ended June 27, 1999, with exhibits.
Very truly yours,
CUCOS INC.
Vincent J. Liuzza, Jr.
Chairman
Part I, Item 1 - Business; Part
I, Item 3 - Legal Proceedings;
Part II, Item 6 - Management's
Discussion and Analysis or Plan
of Operation; and Part II, Item
7 - Financial Statements were
the subject of a filing under
Rule 12b-25 on September 27,
1999.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark
One)
/X/ Annual Report under Section 13 or 15(d) of theSecurities
Exchange Act of 1934 (Fee Required) for the fiscal year
ended June 27, 1999
/ / 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 incorporation or (I.R.S. Employer
organization) Identification No.)
110 Veterans Blvd., Suite 222, Metairie, 70005
Louisiana
(Address of principal executive offices) (Zip Code)
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. /X/
Issuer's revenues for its most recent fiscal year: $20,120,000
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 October 11, 1999:
approximately $1,823,064.37.
Number of shares outstanding of each of the Issuer's Classes
of common stock as of October 11, 1999: 2,651,730 shares of
Common Stock, no par value.
Documents Incorporated By Reference.
Portions of the definitive Proxy Statement for the 1999
Annual Meeting of Shareholders (the "1999 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 27, 1999,
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 October 11,
1999. 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 27, 1999, 18 restaurants were
operating under the Cucos name, 14 of which were owned by the
Registrant and 4 by franchisees. During 1999, one franchised
restaurant was closed and one company-owned restaurant was
closed. There were twenty total restaurants in operation at the
end of fiscal 1998. In July, 1999, the Company sold a restaurant
in Birmingham, Alabama, to a former employee to become a
franchisee.
REGISTRANT-OWNED RESTAURANTS
General. Cucos Mexican Restaurants are full service
restaurants emphasizing fresh ingredients and its own proprietary
recipes.
Cucos serves a variety of traditional Mexican dishes
and appetizers such as sizzling steak, chicken, or shrimp
Fajitas, Burritos, Enchiladas, Tamales, and Chimichangas. Cucos
also serves several large combination dinners. The restaurants
serve Vegetarian items as well as Burgers. Cucos' margarita was
voted Best Margarita in New Orleans four years in a row. Cucos
was also voted Best Mexican Restaurant in New Orleans by the
readers of New Orleans Magazine.
The restaurants are decorated with Mexican antiques and
furniture, terra-cotta tile and hand painted large colorful
murals which are unique to each Cucos restaurant. Mexican
pottery, southwestern plants, colorful hand made Mexican flowers
and festive lighting add more Mexican touches to the casual
restaurants.
Food sales accounted for approximately 77% of revenues
at the fifteen Registrant-owned restaurants operated in fiscal
1999, with alcoholic and other beverages representing
approximately 20% of revenues. Special luncheon items range in
price from $4.85 to $7.45. The prices of the specialty and
combination dinner items range from $5.95 to $12.95. The per
person average check, including beverage, for fiscal 1999 was
$10.42 and the average dining time per table was approximately 45
minutes.
As a result of the continuing decline in guest counts,
in fiscal 1998 the Registrant undertook a comprehensive review of
its operations. It was decided that the intense emphasis on cost
reductions of the previous three years had impacted the food
presentation and the guest experiences resulting in a decline in
guest satisfaction. As a result, it was determined that a change
in philosophy to focus on customer satisfaction was needed. The
Company's President and Chief Operating Officer was replaced,
and a new Executive Vice President, Daniel L. Earles, was hired
and placed in charge of operations, and supervisory
responsibilities were restructured. His experience was with a
leading national restaurant concept that placed a high emphasis
on customer satisfaction and food presentation. Consequently,
beginning in late fiscal year 1998, the Registrant began several
new programs which were implemented during fiscal year 1999. The
keystone of these programs is to place more responsibility for
restaurant operations with the restaurant general managers by
implementing the "GM Empowerment Program". This change was
intended to accelerate the growth, development, and effectiveness
of the restaurant managers, and to enable them to require less
supervision. One program was to restore the use of garnishments
and to improve the presentation of the food. Another program was
to implement the use of new uniforms and redesigned menus. Also,
the Registrant added a full time key employee to each restaurant
to assume certain duties of the manager to enable him to focus
more directly on guest satisfaction during meal periods. A price
increase was instituted, and a new seasonal menu was added. This
was the first general price increase in over three years.
Finally, a new advertising campaign was developed to emphasize
the concept that the Registrant provides the "Best Mex." All of
these changes were intended to re-establish the Registrant's
image and make the restaurants more competitive. In fiscal 1999,
the costs of these programs was approximately $400,000. Despite
their cost, management believes these actions have improved
operating results and cash flows, beginning in late fiscal 1999.
There can be no assurances that management's programs will be
effective in fiscal 2000.
Restaurant Management and Supervision. Each restaurant
is operated utilizing 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
Registrants 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 the Registrant's
restaurant general managers receives, in addition to a salary,
incentive compensation calculated as a percentage of sales and
profits in excess of a predetermined base level.
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. The Company currently has no plans
for expansion, but may consider new locations as they become
available and if appropriate financing is available.
Management's current focus is on improving profits from existing
operations.
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. 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 serving tasty food in a
festive atmosphere at moderate prices. Periodically, print and
radio advertising are also used.
FRANCHISED RESTAURANTS
At the present time, the Registrant is not actively
seeking franchisees, but should the opportunity arise, it would
offer a franchise on a very selective basis.
Generally franchisees are required to pay to the
Registrant under the license agreement a continuing royalty fee
equal to 4% of gross revenues generated 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 generated at the restaurant.
EMPLOYEES
At June 27, 1999, the Registrant-owned restaurants
employed approximately 692 part-time and full-time persons, of
which 47 were managers and assistant managers, all of whom were
full-time. In addition, 15 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 competes with several national chains
including El Chico, Rio Bravo, Don Pablo's, El Patio, Chili's,
Applebees, Olive Garden, and LaFiesta, as well as, several local
dining concepts. Several of the national chains have had
significant funding available provided by public stock offerings,
which has enabled them to expand significantly in the
Registrant's smaller markets. These expansions have adversely
impacted the Registrant's guest counts in the smaller markets.
These national chains, as well as some regional chains, 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 an additional level of indirect competition in the
Registrant's Louisiana and Mississippi markets.
GOVERNMENT REGULATION
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.
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.
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 1999, liquor sales and video
poker revenues accounted for approximately 14.4% and 3.1%,
respectively, of food and beverage revenues. The loss of an
existing liquor license or video poker license would adversely
affect the Registrant's operations at that restaurant.
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 voted whether
to retain video poker and other forms of gambling. Voters in
five parishes in which the Registrant operates voted to end video
poker and other forms of gambling. The ban on video poker at
these locations was put into effect on June 30, 1999. In fiscal
1999, the Registrant recorded video poker revenues of $350,000 at
these locations.
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.
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, Trademarks and Copyrights. The
Registrant is the owner of United States Service Mark
Registrations Nos. 1,509,612, dated October 18, 1988, for the
mark CUCOS and Design; 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). The Registrant is also the owner of United
States Service Mark Registration No. 1,996,748, dated August 27,
1996, for the mark THE TASTE TO MAKE YOU SAY OLE` and United
States Service Mark Registration No. 2,019,308, issued November
27, 1996, for the mark IT TASTES BETTER OUR WAY. 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
also owns a service mark registration as issued by the State of
Louisiana, dated July 14, 1987; a Tennessee State Registration,
issued July 2, 1987; a Florida State Registration No. 707,637,
dated July 17, 1987; an Alabama State Registration No. 103,383,
issued July 14, 1987; a Mississippi State Registration No.
1,509,612, issued on July 27, 1987; and an Arkansas State
Registration No. 181-87, issued on July 8, 1987 for the service
mark CU-CO's. These registrations are 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 Registration No. TXU 357-784 for the
Cucos Power Manual and Copyright Registration No. PAU 1,195,506
for the Video, both dated November 4, 1988.
Item 2. Properties.
The following table summarizes certain information
concerning Registrant-operated restaurants located in facilities
that are leased from others as of August 19, 1999.
Lease
Size Dining Lease Option(s)
Location Opened/Acquired (Sq. Ft.) Capacity Expires Through
New Orleans -
Metairie June 1981 5138 136 2007 2027
Biloxi, MS April 1982 5600 159 2002 2032
New Orleans -
Westbank September 1983 4800 147 2001 2010
Monroe, LA June 1984 4476 146 2004 2019
Slidell, LA November 1984 5300 139 2008 2018
Alexandria, LA March 1985 5125 143 2001 2015
New Orleans -
Uptown November 1985 4539 120 2000 2015
Pascagoula, MS December 1989 5160 130 2011 2021
Hammond, LA July 1990 6062 130 2001 None
Birmingham, AL March 1992 4560 150 2006 2012
Houma, LA September 1992 6000 148 2007 2017
Montgomery, AL February 1993 5100 170 2002 2012
Ruston, LA February 1996 5476 162 2003 2026
The New Orleans-Westbank location, the Slidell location
and the Montgomery, Alabama, location are in strip shopping
centers. The Hammond, 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.
In addition to the leases above, the Registrant has
leases on two restaurant properties that are no longer used in
its operations. The properties have been subleased to other
companies.
Location Lease Expires Sublease Expires
Macon, GA 2011 2011
Columbus, GA 2004 2004
Item 3. Legal Proceedings.
On November 23, 1998, the Company filed a lawsuit
against Elie V. Khoury, a Cucos' franchisee and former employee
and officer of the Company, to enforce non-competition agreements
and other agreements involving a prohibition against the hiring
of Company employees. The petition, entitled, "Cucos, Inc. Vs.
Elie V. Khoury", being Civil Action No. 532-296 on the docket of
the 24th Judicial District court for the Parish of Jefferson,
State of Louisiana, sought a permanent injunction and damages
from the defendant. On December 7, 1998, Khoury filed an Answer
and Reconventional Demand, alleging that because of the Company's
interference with his "choice of vocation", he had incurred
damages, injury and loss, as well as future damages, for which he
prayed for unspecified damages from the Company. A Judgment was
entered by the court on February 9, 1999, in favor of Khoury and
against the Company, dismissing the Company's claims against
Khoury. The judgment did not address Khoury's Reconventional
Demand for damages. This matter is now on appeal to the Fifth
Circuit Court of Appeal, State of Louisiana, No. 99-CA-714. The
Registrant believes that the Reconventional Demand is without
legal merit.
A contractor built a restaurant for a franchisee and
affiliated company, L.B.G., Inc. The contractor was not paid by
L.B.G., Inc. and the contractor has sued the Registrant for
$65,000. The Registrant believes the claim against it is without
merit and that it will prevail in this matter.
On April 11, 1990, a franchisee filed a complaint
against the Registrant and certain of its officers alleging
breach of contract and misrepresentation and seeks damages in
excess of $1.6 million. There has been no activity in this
litigation for more than eight years except for a discovery
request filed in January 1997, which avoided a dismissal of the
litigation for non-prosecution. The Registrant believes the
claims are without merit and the likelihood of a loss is remote.
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.
Cucos Inc. - Stock Data
The Registrant's common stock which was formerly traded on
The NASDAQ Small-Cap Market under the symbol CUCO was delisted on
February 2, 1999. The Registrant's common stock is currently
listed on the OTC Bulletin Board. The following table sets forth
the range of the high and low bid and ask prices for each of the
quarters indicated for fiscal 1999 and fiscal 1998.
Fiscal 1998 High Bid-Ask Low Bid-Ask
1st Quarter ended 10/19/97 1 1/2 - 1 7/8 1 1/8 - 1 1/4
2nd Quarter ended 1/11/98 1 1/4 - 1 1/2 1 1/8 - 1/3/8
3rd Quarter ended 4/5/98 1 1/4 23/32 - 1/1/8
4th Quarter ended 6/28/98 1 3/4 - 1
Fiscal 1999 High Ask Low Bid
1st Quarter ended 10/18/98 1 3/16 3/4
2nd Quarter ended 1/10/99 7/8 5/16
3rd Quarter ended 4/4/99 1 1/16 3/8
4th Quarter ended 6/27/99 7/16 1/4
On September 23, 1999, the closing bid and ask prices for
the Registrant's common stock were 11/16 bid and 7/8 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, the Registrant 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 20,
1999: 930. Market makers: Herzog, Heine, Geduld, Inc., Paragon
Capital Corp. and Morgan, Keegan & Company.
Item 6. Management's Discussion and Analysis or Plan of
Operation.
1999 Compared to 1998
Sales of Food and Beverages declined $1,042,000 (4.9%) to
$20,120,000 from $21,162,000. This decrease in sales was
primarily the result of one fewer restaurant (Pensacola) which
was sold in the Fourth Quarter of Fiscal Year 1998. In addition,
the Registrant closed the Meridian, Mississippi, restaurant in
the Third Quarter of Fiscal Year 1999. Sales of Food and
Beverages at restaurants open throughout the Current and
Comparable Fiscal Years were virtually unchanged.
Net Royalty and Franchise Revenues increased $16,000 (14.2%)
to $129,000 from $113,000. Income from Royalties decreased 3.3%,
but was offset by lower expenses associated with supervision of
franchised restaurants. During the Current Fiscal Year, the
franchised restaurant in Boynton Beach, Florida, was closed.
Commissary and Other Income decreased $51,000 (29.5%) to
$122,000 from $173,000. During the Comparable Fiscal Year, the
restaurant in Pensacola, Florida, was sold at a $236,000 gain.
There was no comparable asset sold in the Current Fiscal Year.
Restaurant Cost of Sales decreased $23,000 (.4%) to
$5,568,000 from $5,591,000. The decrease was primarily due to
the additional restaurant (Pensacola) in the Comparable Fiscal
Year. This decrease, however, was offset by increases in prices
of produce, dairy, and cheese items.
Restaurant Labor and Benefits increased $77,000 (1.1%) to
$7,168,000 from $7,091,000. During the Current Fiscal Year,
management began implementing its Guest Experience Enhancement
Programs designed to improve guest satisfaction. These programs
significantly increased Labor and Benefits for restaurants open
throughout the Current and Comparable Fiscal Years.
Other Operating Expenses decreased $200,000 (5.1%) to
$3,754,000 from $3,954,000. This decrease was primarily due to
one fewer restaurant (Pensacola) in the Current Fiscal Year.
Occupancy costs decreased $79,000 (3.4%) to $2,245,000 from
$2,324,000. The decrease resulted from one less restaurant
(Pensacola) and decreased rent overage, taxes, and depreciation
and amortization for comparable restaurants open throughout the
Comparable Fiscal Years.
Preopening Expenses decreased $32,000 (36.8%) to $55,000
from $87,000. Amortization of costs for Meridian (opened in
Fiscal Year 1998) was completed in Fiscal Year 1999. No new
company-owned restaurant opened during Fiscal Year 1999.
Operations Supervision Expenses decreased $164,000 (16.9%)
to $804,000 from $968,000. The decline is primarily due to fewer
supervisory personnel and decreased costs associated with
recruiting and training of management candidates. These
decreases were offset by additional provisions for doubtful
accounts on franchised restaurants.
Corporate Expenses increased $152,000 (9.9%) to $1,685,000
from $1,533,000. These increases are primarily the result of
approximately $78,000 in additional legal fees, a non-cash charge
of approximately $61,000 for abandoned site selection expenses,
and a marketing charge of $103,000 primarily associated with
television commercial production. These increases were offset by
a reduction of approximately $90,000 of other expenses.
During the Current Fiscal Year, the Company adjusted the
value of assets on impaired property located in Meridian,
Birmingham, Montgomery, Cutler Ridge, and Macon. These non-cash
impairment charges were $1,926,000 compared to asset impairment
charges of $178,000 in the Comparable Fiscal Year. See Note 2 of
the Company's financial statements for additional information.
Interest Expense declined $29,000 (5.6%) to $488,000 from
$517,000, reflecting the full effect in 1999 of the debt
refinancing completed in fiscal 1998.
Because of lower than expected revenues and earnings,
management increased the valuation allowance for deferred income
tax assets resulting in an income tax expense of $107,000 in
Fiscal Year 1998. The Company recorded no income tax provision
or benefit during 1999.
During Fiscal Year 1998, the Company entered into the new
credit facility with a commercial lending institution referred to
below. In connection with the refinancing, the Company incurred
prepayment penalties of $162,000 which were reported as an
extraordinary loss. There was no comparable activity during
fiscal 1999.
Liquidity and Capital Resources
In fiscal 1999 and fiscal 1998, despite net losses of
$3,322,000 and $1,064,000, respectively, the Company's operating
activities provided cash flow of $425,000 and $106,000, respectively.
Because of its operating losses, beginning in fiscal year 1998,
management undertook a comprehensive review of its operations,
and implemented several new programs designed to improve guest
satisfaction and re-establish the Registrant's image. Despite
their cost, management believes these actions have improved
operating results and cash flows beginning in late fiscal 1999.
Management projects these improvements will continue to generate
cash flow from operating activities sufficient to allow it to
operate and meet its obligations. However, there can be no
assurances that management's programs will be effective in 2000
or that its projections will be accurate.
During fiscal 1999 and fiscal 1998, working capital needs
were financed from operations and short-term borrowings.
Presently, the Company has no commitments from third parties to
provide short-term borrowings. Net cash provided by operations
increased $319,000 from fiscal 1998 which primarily resulted from
the Company's ability to extend its trade accounts payable
terms, offset by the effects of increased operating losses.
There can be no assurances that the Company will be able to
continue to extend its trade payable terms, or to maintain its
current extended terms with vendors, although the Company expects
to maintain these extended terms through fiscal 2000.
Net cash used by investing activities was $188,000 in 1999
compared to cash provided of $195,000 in 1998. The change of
$383,000 resulted primarily from the sale of the Pensacola
property offset by higher purchases of property and equipment in
1998. The Company currently has no plans for expansion, but may
consider new locations as they become available and if
appropriate financing is available. Presently, the Company has
no commitments from third parties to provide financing for
expansion.
Net cash used in financing activities was $348,000 in 1999
and included repayment of the Company's line of credit and
principal payments on long-term debt. Proceeds from long-term
borrowings in 1999 were from notes payable collateralized by life
insurance policies.
In 1998, the Company entered into a credit facility of
$3,590,000 with a commercial lending institution. This credit
facility consists of a term loan to be repaid in monthly
payments over 10 years and is secured by the restaurant operating
properties. The proceeds from this term loan were used to repay
substantially all of the existing long-term debt and short-term
debt payable to banks. In connection with this refinancing, the
Company incurred a charge to earnings of $162,000 related to
prepayment penalties associated with the existing debt. In May
1999, the Company and its commercial lender entered into a
forbearance agreement whereby the commercial lender agreed to
defer the Company's requirement to make required principal and
interest payments for May, June and July 1999 until April 2001,
and to defer required principal payments for August, September
and October 1999 until April 2001. The deferred payments will
bear interest at 14.6% until paid. The Company may negotiate
additional payment deferrals in fiscal year 2000, but there can
be no assurances that it will be able to obtain additional
deferrals.
Because of the Company's recurring losses from operations
and its net capital deficiency, there is substantial doubt about
the Company's ability to continue as a going concern. The
Company has taken steps to refocus its operations, reverse sales
declines and increase restaurant profitability. The Company
believes that it has developed a viable plan to address the
Company's operating results, and that this plan will enable the
Company to meet its obligations through the end of fiscal year
2000. However, considering, among other things, the Company's
historical operating losses and the current lack of commitments
from third parties to provide short-term or long-term financial
resources, there can be no assurance that this plan will have
the expected effect on the Company's results of operations and
its cash flows in fiscal 2000.
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.
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.
Seasonality
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.
Forward-Looking Statements
Forward-looking statements regarding management's present
plans or expectations for new unit openings, remodels, other
capital expenditures, the financing thereof, and disposition of
impaired units, involve risks and uncertainties relative to
return expectations and related allocation of resources, and
changing economic or competitive conditions, as well as the
negotiation of agreements with third parties, which could cause
actual results to differ from present plans or expectations, and
such differences could be material. Similarly, forward-looking
statements regarding management's present expectations for
operating results involve risk and uncertainties relative to
these and other factors, such as advertising effectiveness and
the ability to achieve cost reductions, which also would cause
actual results to differ from present plans. Such differences
could be material. Management does not expect to update such
forward-looking statements continually as conditions change, and
readers should consider that such statements speak only as to the
date hereof.
Impact of Year 2000
Some of the Company's older computer programs were written
using two digits rather than four to define the applicable year.
As a result, those computer programs have time-sensitive software
that recognize a date using "00" as the year 1900 rather than the
year 2000. This could cause a system failure or miscalculations
causing disruptions of operations, including, among other things,
a temporary inability to process transactions, send invoices, or
engage in similar normal business activities (Year 2000 Issues).
The Company has completed an assessment and will have to
modify or replace hardware and software so that certain of its
computer systems, primarily its general ledger and accounting
packages, will function properly with respect to dates in the
year 2000 and thereafter. In 1998, the Company replaced
substantially all of its restaurant point of sales systems and
believes these new systems do not have any year 2000 issues. The
total Year 2000 project cost is estimated at approximately
$50,000 of which $1,000 has been incurred at June 27, 1999.
These costs are primarily for the purchase of new software and
hardware that will be capitalized. Substantially all of the
costs remaining to be incurred at June 27, 1999 relate to
hardware, and the Company has received a commitment from a third-
party to finance these costs through a capital lease.
The project is estimated to be completed not later than
December 31, 1999, which is prior to any anticipated impact on
its operating systems. The Company believes that with
modifications to existing software and conversions to new
software, the Year 2000 Issue will not pose significant
operational problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed
timely, the Year 2000 Issue could have a material adverse impact
on the operations of the Company.
The costs of the project and the date on which the Company
believes it will complete the Year 2000 modifications are based
on management's best estimates, which were derived utilizing
numerous assumptions of future events, continued availability of
certain resources and other factors. However, there can be no
guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but
are not limited to, the availability and cost of personnel
trained in this area and the availability of software and
hardware.
The Company has initiated communications with all of its
significant suppliers to determine the extent to which the
Company's interface systems are vulnerable to those third
parties' failure to remediate their own Year 2000 Issues. There
is no guarantee that the systems of other companies on which the
Company's systems rely will be timely converted and would not
have an adverse effect on the Company's systems.
The Company has no contingency plans, but will consider the
need to create one in the event circumstances arise to indicate
the Company may not be able to complete certain aspects of its
plans related to Year 2000 Issues.
Item 7. Financial Statements.
Cucos Inc.
Balance Sheet
June 27, 1999
Assets
Current Assets
Cash and Cash Equivalents $ 516,000
Receivables:
Trade, Less Allowance for Doubtful Accounts of $352,000 160,000
Due from Affiliates 84,000
244,000
Inventories 199,000
Prepaid Expenses 226,000
Other Current Assets 123,000
TOTAL CURRENT ASSETS 1,308,000
Property and Equipment
Equipment 2,466,000
Leasehold Improvements 3,494,000
5,960,000
Less Accumulated Depreciation and Amortization and
Impairment Reserves 3,585,000
2,375,000
Due from Affiliates 57,000
Investment in LaMexiCo, L.L.C. 245,000
Deferred Costs, Less Accumulated Amortization of $130,000 256,000
Other Assets 246,000
TOTAL ASSETS $4,487,000
Liabilities and Net Capital Deficiency
Current Liabilities
Trade Accounts Payable $ 2,161,000
Accrued Expenses 511,000
Accrued Payroll 188,000
Current Portion of Long-Term Debt 422,000
TOTAL CURRENT LIABILITIES 3,282,000
Long-Term Debt, Less Current Portion 3,170,000
Deferred Revenue 83,000
Net Capital Deficiency
Preferred Stock, No Par Value-1,000,000 -
Shares Authorized, None Issued or Outstanding
Common Stock, No Par Value - 20,000,000 Shares 5,253,000
Authorized, 2,651,730 Shares Issued and Outstanding
Additional paid-in capital 111,000
Retained earnings deficit (7,412,000)
NET CAPITAL DEFICIENCY (2,048,000)
TOTAL LIABILITIES AND NET CAPITAL DEFICIENCY $ 4,487,000
See accompanying notes.
<TABLE>
<CAPTION>
Cucos Inc.
Statements of Operations
Fiscal Year Ended
June 27, 1999 June 28, 1999
Restaurant operations:
<S> <C> <C>
Sales of food and beverages $20,120,000 $21,162,000
Restaurant expenses:
Cost of sales 5,568,000 5,591,000
Restaurant labor and benefits 7,168,000 7,091,000
Other operating expenses 3,754,000 3,954,000
Occupancy expenses 2,245,000 2,324,000
Preopening expenses 55,000 87,000
Total restaurant expenses 18,790,000 19,047,000
Income from restaurant operations 1,330,000 2,115,000
Royalties and franchise revenues, net of expenses of
$3,000 and $23,000, respectively 129,000 113,000
Commissary and other income 122,000 173,000
1,581,000 2,401,000
Operations supervision expenses 804,000 968,000
Corporate expenses 1,685,000 1,533,000
Charges related to closed units and asset impairment 1,926,000 178,000
Operating loss (2,834,000) (278,000)
Interest expense 488,000 517,000
Loss before income taxes and extraordinary item (3,322,000) (795,000)
Income taxes - 107,000
Loss before extraordinary item (3,322,000) (902,000)
Extraordinary item - debt restructuring penalties - (162,000)
Net loss $(3,322,000) $(1,064,000)
Weighted average number of common shares and common share 2,652,000 2,306,000
equivalents outstanding - basic and diluted
Net loss per share before extraordinary item - basic and $(1.25) $(0.39)
diluted
Extraordinary item - basic and diluted $ - $(0.07)
Net loss per share - basic and diluted $(1.25) $(0.46)
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Cucos Inc.
Statements of Cash Flows
Fiscal Year Ended
June 27, 1999 June 28, 1998
Operating activities
<S> <C> <C>
Net loss $(3,322,000) $(1,064,000)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Charges related to closed units and asset impairment 1,926,000 178,000
Deferred income taxes - 107,000
Debt restructuring penalties - 162,000
Depreciation and amortization 809,000 920,000
Amortization of deferred costs 156,000 (5,000)
Change in deferred revenue (7,000) (209,000)
Gain on sale of assets and other - (187,000)
Accretion of discount on convertible debenture - 21,000
Equity in earnings of equity investee, net of distributions
of $20,000 and $44,000 (3,000) 11,000
Changes in operating assets and liabilities:
Receivables 199,000 105,000
Inventories 34,000 21,000
Prepaids and other 4,000 55,000
Trade accounts payable 716,000 (109,000)
Accrued expenses and other (60,000) 88,000
Accrued payroll (27,000) 12,000
Net cash provided by operating activities 425,000 106,000
Investing activities
Purchases of property and equipment (188,000) (639,000)
Proceeds from sale of assets - 834,000
Net cash provided by (used in) investing activities (188,000) 195,000
Financing activities
Changes in short-term debt payable to banks (100,000) (50,000)
Proceeds from long-term borrowings 74,000 4,506,000
Principal payments on borrowings (322,000) (4,155,000)
Debt restructuring penalties - (162,000)
Debt issuance costs - (289,000)
Net cash used in financing activities (348,000) (150,000)
Increase (decrease) in cash and cash equivalents (111,000) 151,000
Cash and cash equivalents at beginning of year 627,000 476,000
Cash and cash equivalents at end of year $516,000 $627,000
Noncash financing and investing activities
Equipment and leasehold improvements financed by capital leases $ - $400,000
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Cucos Inc.
Statements of Shareholders' Equity
Additional Retained
Common Paid-In Earnings
Stock Capital (Deficit) Total
<S> <C> <C> <C> <C>
Balance as of June 30, 1997 $4,746,000 $228,000 $(3,026,000) $1,948,000
Net loss for the year - - (1,064,000) (1,064,000)
Conversion of debenture 500,000 (117,000) - 383,000
Common Stock for services 7,000 - - 7,000
Balance as of June 28, 1998 5,253,000 111,000 (4,090,000) 1,274,000
Net loss for the year - - (3,322,000) (3,322,000)
Balance as of June 27, 1999 $5,253,000 $111,000 $(7,412,000) $(2,048,000)
</TABLE>
See accompanying notes.
Cucos Inc.
June 27, 1999
Notes to Financial Statements
1. Significant Accounting Policies
Basis of Presentation: The Company has incurred operating losses
of $2,834,000 in 1999 and $278,000 in 1998. In addition, at June
27, 1999, the Company had a net capital deficiency of $2,048,000.
These factors indicate there is substantial doubt about the
Company's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the
uncertainties related to the recoverability and classification of
assets or the amounts and classification of liabilities that may
result from the inability of the Company to continue as a going
concern. The Company has taken steps to refocus its operations,
reverse sales declines and increase restaurant profitability.
The Company believes that it has developed a viable plan to
address the Company's operating results, and that this plan will
enable the Company to continue to meet its obligations through
the end of fiscal year 2000. However, considering, among other
things, the Company's historical operating losses and the current
lack of commitments from third parties to provide short-term or
long-term financial resources, there can be no assurance that this
plan will have the expected effect on the Company's results of
operations and its cash flows in fiscal 2000.
Fiscal Year: The Company uses a 52/53 week year for financial
reporting purposes with its fiscal year ending on the Sunday
closest to June 30. 1999 and 1998 were 52-week years.
Industry: The Company is a full-service casual dining restaurant
chain offering Mexican appetizers, entrees and complementing
beverages. At year end, the Company operated 14 restaurants and
franchised 4 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: The Company considers all highly
liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
Inventories: Inventories, consisting primarily of food and
beverages, are stated at the lower of cost (first-in, first-out
method) or market.
Property and Equipment: Property and equipment 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. Amortization of assets recorded
under capital leases is included in depreciation expense. The
useful lives of equipment range from 3-10 years, and the useful
lives of leasehold improvements are generally 15 years.
Deferred Costs: Deferred costs represent site costs, debt
issuance costs and other, primarily trademarks. 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. Deferred debt issuance costs are
amortized over the life of the related debt. Other deferred
costs, primarily trademarks, are amortized on a straight-line
basis over 20 years.
Advertising Costs: Advertising costs are expensed as incurred.
Advertising expense was $794,000 and $982,000 in 1999 and 1998,
respectively.
Franchise Fees and Royalties: The Company sells exclusive rights
to develop Cucos restaurants in designated territories (Area
Development Agreements), as well as individual franchises for
each restaurant. The Area Development Agreements call for a
nonrefundable fee paid to the Company in exchange for territorial
exclusivity. 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 related to 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 is recognized as income
when earned. Royalties and other receivables are often
collateralized by personal guarantees and sometimes by equipment
owned by the franchisee.
Investment in LaMexiCo, L.L.C.: The Company accounts for its
investment using the equity method of accounting. The difference
between the carrying amount of the investment and the amount of
the underlying equity in the net assets of the investee is being
amortized over the term of the franchise agreement.
Income Taxes: The Company accounts for income taxes using the
liability method. 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.
Impairment of Long-Lived Assets: The Company reviews long- lived
assets to be held and used in the business for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset or a group of assets may not be
recoverable. Assets are evaluated for impairment at the operating
unit level. The Company considers a history of operating losses
to be its primary indicator of potential impairment. An asset is
deemed to be impaired if a forecast of undiscounted future
operating cash flows directly related to the asset, including
disposal value if any, is less than its carrying amount. If an
asset is determined to be impaired, the loss is measured as the
amount by which the carrying amount of the asset exceeds its fair
value. The Company generally estimates fair value by discounting
estimated future cash flows. Considerable judgment is necessary
to estimate cash flows. Accordingly, it is reasonably possible
that actual results could vary significantly from such estimates.
Stock-Based Compensation: The Company accounts for its stock
compensation arrangements under the provision of Accounting
Principles Board No. 25, Accounting for Stock Issued to
Employees.
Reclassifications: Certain balances in the prior fiscal year have
been reclassified to conform with the presentation in the current
fiscal year.
2. Charges related to closed units and asset impairment.
During the third quarter of 1999, the Company recorded an
impairment write down of $1,860,000, primarily related to
equipment, leasehold improvements, and reacquired franchise
rights. One unit which the Company abandoned in the quarter, and
three units which the Company intended to operate, but which were
considered to be impaired, were consistent with the Company's
accounting policy for impairment of long-lived assets, as
described in Note 1.
During the fourth quarter of 1999, the Company recorded an
additional impairment write-down of $66,000 related to certain
leasehold improvements on property subleased to another company.
3. Debt
Notes payable to commercial lender - fixed interest
rate - 11.6% - monthly payments of $55,000 $3,105,000
Capital lease obligations - fixed interest rates of
9.5% to 14.2% monthly payments of $13,000 412,000
Note payable to insurance companies - fixed interest 75,000
rate - 5.4%-6.9% - collateralized by life insurance
policies with a total cash surrender value of $53,000
3,592,000
Less current portion 422,000
$3,170,000
In November 1997, the Company used the proceeds from a loan by a
commercial lending company to refinance all of its outstanding
notes payable to banks and finance companies, capital lease
obligations, and other long-term debt that was outstanding at
that time. This loan is part of a pool of loans financed by the
lender. A provision of this loan requires the Company to pay
additional interest if certain conditions of the loan pool are
not met. This provision would require the Company to pay
additional interest each month if the loan pool conditions are
not met. These monthly payments, if required, may increase the
interest costs by a maximum of $400,000 over the life of the
loan. During fiscal 1999, the Company paid no additional
interest.
In May 1999, the Company and its commercial lender entered into a
forbearance agreement whereby the commercial lender agreed to
defer the Company's requirement to make required principal and
interest payments for May, June and July 1999 until April 2001,
and to defer required principal payments for August, September
and October 1999 until April 2001. The deferred payments will
bear interest at 14.6% until paid.
The Company's debt is collateralized by substantially all of the
restaurant equipment and leasehold improvements and other assets
and is guaranteed by a Company officer.
Maturities of long-term debt for each of the next five fiscal
years are $422,000 in 2000, $641,000 in 2001, $425,000 in 2002,
$386,000 in 2003, and $372,000 in 2004. Interest expense
approximates interest paid for each of the last two fiscal years.
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.
4. Income Taxes
Significant components of the Company's deferred tax assets and
liabilities are as follows:
Deferred tax assets:
Net operating loss carryforwards $1,455,000
Tax credit carryforwards 642,000
Property 1,116,000
Other - net 32,000
Total deferred tax assets 3,245,000
Valuation allowance for deferred tax assets (3,133,000)
112,000
Deferred tax liabilities:
Prepaid and deferred costs (112,000)
Net deferred tax assets $ -
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 loss before income taxes:
June 27, 1999 June 28, 1998
Income tax benefit at the federal statutory
rate $(1,129,000) $(364,000)
State taxes, net of federal deductions (121,000) (47,000)
Change in valuation allowance 1,250,000 828,000
Income taxes $ - $ -
At year end, the Company had net operating loss carryforwards of
approximately $3,830,000 and investment and jobs tax credits
carryforwards of approximately $642,000. These carryforwards
expire beginning in 2000.
The Company has provided a valuation allowance for deferred tax
assets, which may not be realized through future taxable income
and the reversals of taxable temporary differences. Because of
lower than expected revenues and earnings in 1998 management
increased the valuation allowance resulting in income tax expense
of $107,000.
5. Leases
The Company leases 17 restaurant facilities and its corporate
headquarters under noncancelable operating lease agreements with
initial lease terms expiring between 2000 and 2011. The
restaurant leases have remaining renewal options, and 14 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.
Amortization of assets recorded under capital leases is included
in depreciation expense.
The Company subleases three restaurant facilities under
noncancelable sublease agreements with lease terms expiring from
2005-2012. 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
year end:
Operating Leases Capital
Lease Sublease Net Lease
2000 $1,632,000 $152,000 $1,080,000 $111,000
2001 1,176,000 185,000 993,000 111,000
2002 1,099,000 178,000 921,000 111,000
2003 891,000 177,000 714,000 57,000
2004 729,000 177,000 552,000 -
Thereafter 1,658,000 137,000 1,521,000 -
390,000
Less unamortized discount 81,000
$309,000
Rent expense for real estate on all the Company's operating
leases was $1,419,000 in 1999 and $1,594,000 in 1998.
6. Related Party Transactions
The Company is affiliated with L.B.G., Inc. (LBG), through common
ownership. The Company charges LBG for accounting and
administrative services based on the gross sales of each company.
The amounts reimbursed in 1999 and in 1998 were nominal. At June
27, 1999, LBG owed the Company $69,000 on a Note for past
purchases of food, restaurant supplies, rent and services. The
Note bears interest at prime plus 2% and is due in monthly
installments of $1,314. In addition, L.B.G. owed the Company
$3,404 at year end for miscellaneous items. All sums due the
Company by L.B.G. were current as of June 27, 1999.
The Company owns a 31.0% interest in LaMexiCo, L.L.C. (LaMexiCo),
a limited liability company, that operates a franchised Cucos in
Metairie, Louisiana. The Company also manages the restaurant for
LaMexiCo, and receives 4% of net sales as compensation. There was
no undistributed income from LaMexiCo included in the Company's
retained earnings at June 27, 1999. The restaurant opened under
the development rights previously owned by LBG. LBG currently
owns 25.3% of LaMexiCo. At year end, LaMexiCo owed the Company
$7,000, which is paid current, for management fees, royalties and
other expenses.
The following summarizes the Company's relationships with
LaMexiCo.
1999 1998
Royalties received $62,000 $58,000
Management fees received $78,000 $77,000
Receivable outstanding at year end $ 7,000 $32,000
Equity in earnings $24,000 $33,000
LaMexiCo summarized financial information (based on the
investee's fiscal year ending April of each year) is as follows:
1999 1998
Balance Sheet:
Total liabilities $359,000 $259,000
Members' equity 656,000 696,000
Total assets $1,015,000 $955,000
Statement of income:
Revenues $2,220,000 $2,202,000
Net income $56,000 $133,000
The Company leases the land, building and improvements for one
Company-owned restaurant from a director. The primary term of the
lease is 15 years and expires in 2000 with an option to renew for
15 years. The Company paid rent of $129,000 in 1999 and $127,000
in 1998.
The Company has agreements with Brothers Video, Inc., an
affiliated company, to supply video poker machines in nine Cucos
restaurants located in Louisiana. The term of each agreement is
10 years. The Company has the option to renew each contract for
two additional years.
Under the agreements the Company shares in the gross device
revenues less state franchise fees and receives 70% of the net
receipts. The Chairman and Chief Executive Officer of the Company
is the sole stockholder of Brothers Video, Inc. At June 27, 1999,
the Company had a current accounts receivable from Brothers
Video, Inc. of $42,000 for video poker revenues earned. The
Company's share of video poker revenues, included in sales of
food and beverages, was 3.1% of sales of food and beverages in
1999 and 1998, respectively.
7. Stock Options
The Company's 1993 Incentive Stock Option Plan (Option Plan) has
authorized the grant of options to directors and management
personnel for up to 509,000 shares of the Company's common
stock. 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. Additionally, the Company may award
nonqualified stock options under the Option Plan at an exercise
price of not less than the fair market value of the Common Stock
at the date of grant. All options granted have 10-year terms and
vest and become exercisable in four equal annual installments
beginning one year after the grant date.
The following table summarizes options outstanding for 1999 and
1998.
<TABLE>
<CAPTION>
1999 1998
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 444,200 $1.33 370,000 $1.40
Granted 43,500 $0.67 81,700 $1.04
Forfeited (85,000 $1.34 (7,500) $1.51
Outstanding at end of year 402,700 $1.26 444,200 $1.33
Exercisable at end of year 311,800 249,000
Exercise Price $.72-$1.94 $1.1 8-$1.94
</TABLE>
The weighted average remaining contractual life of the options
outstanding at June 27, 1999 is 7.7 years. The weighted average
fair value of options granted during 1999 and 1998 were $.59 and
$1.00 per share, respectively.
Pro forma information regarding net income and earnings per share
is required by FASB Statement 123, Accounting for Stock Based
Compensation, which also requires that the information be
determined as if the Company has accounted for its employee stock
options under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted-
average assumptions for 1999 and 1998, respectively: risk-free
interest rates of 6.1% and 6.3%; no dividends; volatility factors
of the expected market price of the Company's common stock of
.60 and .54; and a weighted-average expected life of the options
of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's employee stock options have
characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting
period. The Company's pro forma information follows (in
thousands except for earnings per share information).
1999 1998
Pro forma net loss $(3,397,000) $(1,089,000)
Pro forma loss per share - basic and diluted $ (1.28) $ (.47)
8. Per Share Amounts
Basic loss per share amounts are based on the weighted average
number of shares of common stock outstanding. Diluted per share
amounts give effect to securities (stock options) outstanding, if
any. Stock options were anti-dilutive in 1999 and 1998.
9. Franchise Operations
In addition to its company-owned restaurants, the Company had
four franchised restaurants in operation at the end of 1999.
During 1999 no franchised restaurants opened and one franchised
restaurants closed. During 1998 no franchised restaurant opened
and two closed.
10. 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 10 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.
11. 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 compensation. Company
contributions were $13,000 and $15,000 in 1999 and 1998,
respectively.
12. Contingencies
On November 23, 1998, the Company filed a lawsuit against Elie V.
Khoury, a Cucos' franchisee and former employee and officer of
the Company, to enforce non-competition agreements and other
agreements involving a prohibition against the hiring of Company
employees. The petition, entitled, "Cucos, Inc. Vs. Elie V.
Khoury", being Civil Action No. 532-296 on the docket of the 24th
Judicial District court for the Parish of Jefferson, State of
Louisiana, sought a permanent injunction and damages from the
defendant. On December 7, 1998, Khoury filed an Answer and
Reconventional Demand, alleging that because of the Company's
interference with his, "choice of vocation" he had incurred
damages, injury and loss, as well as future damages, for which he
prayed for unspecified damages from the Company. A judgment was
entered by the court on February 9, 1999, in favor of Khoury and
against the Company, dismissing the Company's claims against
Khoury. The Judgment did not address Khoury's Reconventional
Demand for damages. This matter is now on appeal to the Fifth
Circuit Court of Appeal, State of Louisiana, No. 99-CA-714. The
Company believes that the Reconventional Demand is without legal
merit.
A contractor built a restaurant for a franchisee and affiliated
company, L.B.G., Inc. The contractor was not paid by L.B.G.,
Inc. and the contractor has sued the Company for $65,000. The
Company believes the claim against it is without merit and that
it will prevail in this matter.
On April 11, 1990, a franchisee filed a complaint against the
Company and certain of its officers alleging breach of contract
and misrepresentation and seeks damages in excess of $1.6
million. There has been no activity in this litigation for more
than eight years except for a discovery request filed in January,
1997, which avoided a dismissal of the litigation for non-
prosecution. The Registrant believes the claims are without
merit and the likelihood of a loss is remote.
The Company has various other lawsuits arising from its normal
operations for which the Company carries appropriate levels of
insurance. It is the opinion of management that the outcome of
these matters will not have a material adverse effect on the
Company's financial position or results of operations.
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
Cucos Inc.
We have audited the accompanying balance sheet of Cucos Inc. as
of June 27, 1999, and the related statements of operations,
shareholders' equity, and cash flows for each of the two years in
the period ended June 27, 1999. 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 27, 1999, and the results of its operations
and its cash flows for each of the two years in the period ended
June 27, 1999, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, the Company's
recurring losses from operations and net capital deficiency raise
substantial doubt about its ability to continue as a going
concern. Management's plans as to these matters are also
described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
Ernst & Young LLP
New Orleans, Louisiana
September 22, 1999
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 1999 Proxy Statement. Such information is incorporated
herein by reference to the Registrants 1999 Proxy Statement to
be filed with the Securities and Exchange Commission in October
1999.
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 1999 Proxy Statement. Such information is incorporated
herein by reference to the Registrant's 1999 Proxy Statement to
be filed with the Securities and Exchange Commission in October
1999.
Reference is made to the information concerning
compliance with Section 16(a) of the Exchange Act appearing under
the caption "Section 16A, Beneficial Ownership's Reporting
Compliance" in the 1999 Proxy Statement. Such information is
incorporated herein by reference to the Registrant's 1999 Proxy
Statement to be filed with the Securities and Exchange Commission
on October 1999.
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 1998," "Additional Information-Aggregated
Stock Option Exercises and Fiscal Year-Ended Option Values," and
"Additional Information-Compensation of Directors," in the 1999
Proxy Statement. Such information is incorporated herein by
reference to the Registrant's 1999 Proxy Statement to be filed
with the Securities and Exchange Commission in October 1999.
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 1999 Proxy Statement. Such information is
incorporated herein by reference to the Registrant's 1999 Proxy
Statement to be filed with the Securities and Exchange Commission
in October 1999.
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 1999 Proxy Statement. Such information is
incorporated herein by reference to the Registrant's 1999 Proxy
Statement to be filed with the Securities and Exchange Commission
in October 1999.
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 Title
Number
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 dated July 28, 1995
(with Exhibits).
10 4-I - Amendment No. 1 to Rights Agreement dated March
12, 1991.
12 4-J - Assignment of Rights Agreement dated June 2,
1997, among Boatmans National Bank, ChaseMellon
Shareholder Services, L.L.C. and the Registrant
with respect to the change of Rights Agent to
ChaseMellon Shareholder Services, L.L.C.
13 4-K - Assignment of Rights Agreement dated September
21, 1998, among ChaseMellon shareholder Services,
L.L.C., Registrar and Transfer Company and the
Registrant with respect to the change of Rights
Agent to Registrar and Transfer Company.
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
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, 1991
(Commission File No. 0-12701), as amended by Form 8 dated
March 12, 1991, 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.
12 Filed as an exhibit to Form 8-A dated September 11, 1998,
and incorporated herein by reference.
13 Filed as an exhibit to Form 10-KSB dated September 29, 1998.
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 27, 1999.
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.
SIGNATURE
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: October 15, 1999 By: /s/ Vincent J. Liuzza, Jr.
Vincent J. Liuzza, Jr.
Chairman of the Board and
Chief Executive 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
October 15, 1999.
/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/ V. M. Wheeler III
David M. Liuzza, Director V. M. Wheeler III, Director
/s/ Vincent J. Liuzza, Jr.
Vincent J. Liuzza, Jr., Chairman of the
Board of Directors and
Chief Executive Officer
EXHIBIT INDEX
Exhibit Title
Number
(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 dated July 28, 1995
(with Exhibits).
(10) 4-I - Amendment No. 1 to Rights Agreement dated March
12, 1991.
(12) 4-J - Assignment of Rights Agreement dated June 2,
1998, among Boatman's National Bank, ChaseMellon
Shareholder Services, L.L.C. and the Registrant
with respect to the change of Rights Agent to
ChaseMellon Shareholders Services, L.L.C.
(13) 4-K - Assignment of Rights Agreement dated September
21, 1998, among ChaseMellon shareholder
Services, L.L.C., Registrar and Transfer Company
and the Registrant with respect to the change of
Rights Agent to Registrar and Transfer Company.
(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
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, 1991, 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.
(12) Filed as an exhibit to Form 8-A dated September 11, 1998,
and incorporated herein by reference.
(13) Filed as an exhibit to Form 10-KSB dated September 29, 1998.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the
Registration Statement (Form S-8 No. 33-26941), pertaining
to the 1993 Stock Option Plan of Cucos Inc. of our report
dated September 22, 1999, with respect to the financial
statements of Cucos Inc. included in this Annual Report
(Form 10-KSB) for the year ended June 27, 1999.
Ernst & Young LLP
New Orleans, Louisiana
October 21, 1999
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