EXHIBIT 13
(CUCOS' COLOR LOGO)
CUCOS INC.
2000 ANNUAL REPORT
Restaurant Locations
(black/white logo) Company Franchised
Restaurants Restaurants
Alabama Arkansas
Birmingham Fort Smith
Louisiana Louisiana
Alexandria Metairie
Gretna
Hammond Mississippi
Houma Hattiesburg
Metairie
Monroe Alabama
New Orleans Birmingham
Ruston Montgomery
Slidell
Mississippi
Biloxi
Pascagoula
Table of Contents
Restaurant Locations Inside front cover Cucos Inc. is a full-service,
Letter to Shareholders 1 casual dining restaurant
Management's Discussion and Analysis 2 chain offering moderately
Balance Sheet 5 priced Mexican appetizers,
Statements of Operations 6 entrees and complimenting
Statements of Cash Flows 7 beverages. Cucos was founded
Statement of Shareholders' Equity 8 in 1981 and currently
Notes to Financial Statements 8 operates twelve company-
Report of Independent Auditors 15 owned and five franchised
Stock Data (unaudited) 16 restaurants located in the
Directors and Officers Inside back cover Southeastern United States.
Corporate Information Inside back cover
Letter to Shareholders
Dear Fellow Shareholder:
The fiscal year 2000 has been one of major change for Cucos
Inc. After the November 5, 1999, takeover through a written
consent of a majority of the shareholders, a new board of
directors was appointed for the Company, and I took over as
President and Chief Executive Officer. At that point in time,
the Company was on the verge of bankruptcy; was in default with
its credit facility, AMRESCO; was defaulting on many of its
leases; and had outstanding payables in excess of $1,800,000.
Since that time, we have worked out a forbearance agreement
with AMRESCO, resolved our defaults with the landlords, reduced
payables by over $600,000, reduced corporate overhead by over
$500,000 per year, and improved the cost structure of Company
operations. Jacksonville Restaurant Acquisition Corp. (JRAC), a
restaurant investment firm, invested $400,000 in the Company in
December 1999 and January 2000 in exchange for 400,000 shares of
Preferred Stock of Cucos Inc. in order to keep the Company
running.
In July 2000, JRAC, through a stock tender offer, acquired
an additional 1,200,000 shares of Cucos Common Stock, giving JRAC
52% control of the Company and four out of seven members on the
board of directors. At the completion of this offering and the
resignation of Frank J. Ferrara, Jr. as Chairman, I also became
Chairman of the Board.
We are actively seeking to secure working capital under a
new Credit Agreement with JRAC to enable the Company to refurbish
existing operations, pursue new company and franchise growth, as
well as develop possible acquisitions that could be rolled into
the Company involving a possible stock offering. We hope,
through putting our financial house in order, refurbishing and
marketing our existing restaurants, and combining new operations
with growth potential, to return the Company to a profitable
position once again.
We believe the Cucos' concept is well accepted as exhibited
by recent awards in the New Orleans area for the "Best Mexican
Restaurant" and the "Best Margarita". It's now a matter of
capitalizing on our market position, in addition to running an
efficient, effective organization.
Yours truly,
James W. Osborn
President, Chief Executive Officer and
Chairman
Management's Discussion and Analysis
Of Results of Operations and Financial Condition
Overview
The Company operates and franchises full-service restaurants
serving moderately priced Sonoran and Tex-Mex Mexican appetizers
and entrees and complementing alcoholic and non-alcoholic
beverages. At the end of fiscal 2000, 17 restaurants were
operating under the Cucos name, 12 of which were owned by the
Company and 5 by franchisees. There were eighteen restaurants in
operation at the end of fiscal 1999. During fiscal 2000, one
franchised restaurant was closed and two Company-owned
restaurants became franchised restaurants when the Company sold
the restaurants, one in Birmingham and one in Montgomery,
Alabama, to former employees.
Fiscal 2000 Compared to Fiscal 1999
Sales of Food and Beverages declined $4,037,700 (20.1%) to
$16,082,399 from $20,120,099. This decrease in sales was
primarily the result of three fewer restaurants in fiscal 2000.
Two Company-owned restaurants in Birmingham and Montgomery,
Alabama, were closed and sold to franchisees during the first
quarter of fiscal 2000, and the Meridian, Mississippi, restaurant
closed at the end of the third quarter of 1999 fiscal year. The
closings accounted for $2,214,946 of the decline in Sales of Food
and Beverages. Sales of Food and Beverages at restaurants open
throughout the 2000 and 1999 fiscal years (the "Comparable
Restaurants") decreased $1,427,076. In addition, the ban on
video poker devices in five Louisiana parishes became effective
June 30, 1999, resulting in a decline in revenues of $395,678.
Net Royalty and Franchise Revenues decreased $3,836 (3%) to
$125,311 from $129,147. Royalty Revenue decreased $22,222
primarily due to the closing of the franchised restaurants in Des
Moines, Iowa, and Boynton Beach, Florida. Although two
franchised restaurants in Birmingham and Montgomery, Alabama
opened, the royalties from these restaurants were considerably
less than the restaurant that closed during fiscal 2000. The
decrease in Royalty Revenue was partially offset by the
Development Fee forfeited by the Des Moines franchisee when the
restaurant was closed.
Commissary and Other Income declined $104,991 (85.8%) to
$17,318 from $122,309. During the second quarter of fiscal 2000,
the Company's contract to manage a franchised restaurant was
cancelled. The reduction in management fee income was $46,001,
and the Company's share of profits for this restaurant declined
an additional $16,968 versus the 1999 fiscal year. During the
same quarter, the Company closed its commissary operation and
contracted with a vendor to supply these services, resulting in a
revenue decline of $25,420.
Restaurant Cost of Sales decreased $1,205,073 (21.6%) to
$4,363,359 from $5,568,432. The reduction attributed to the
three closed restaurants was $641,549, and Comparable Restaurants
Cost of Sales declined $563,524. Cost of Sales as a percentage
of Food and Beverage Sales decreased 1.01% for Comparable
Restaurants.
Restaurant Labor and Benefits decreased $1,171,534 (16.3%)
to $5,996,316 from $7,167,850. Closed restaurants accounted for
$953,898 of the reduction, while Comparable Restaurants Labor and
Benefits costs declined $217,636. Comparable Restaurant Labor and
Benefits increased 1.88% as a percentage of sales.
Other Operating Expenses decreased $1,322,604 (35.2%) to
$2,431,628 from $3,754,232. Comparable Restaurants Other
Operating Costs declined $774,261, and closed restaurants
accounted for $548,343. Comparable Restaurants costs declined
3.3% as a percentage of sales.
Occupancy Costs decreased $526,143 (23.4%) to $1,719,188
from $2,245,331. The reduction attributed to the three closed
restaurants was $418,311, while Comparable Restaurants decreased
$107,832. As a percentage of sales, Comparable Restaurants
Occupancy Costs were virtually unchanged.
Preopening Expenses decreased $54,525. Amortization of
costs for the Meridian, Mississippi, restaurant (opened in fiscal
year 1998) was completed in fiscal year 1999. No new Company-
owned restaurants opened during the fiscal year 2000.
Operations Supervision Expenses declined $242,977 (30.2%) to
$561,077 from $804,054. The decline in expenses is primarily the
result of a decrease in the costs associated with management
training and supervision (labor and benefits), and decreased bad
debt provision.
Corporate Expenses decreased $491,095 (29.2%) to $1,193,506
from $1,684,601. The decline is attributable to reductions of
personnel in the marketing, construction, accounting, finance,
and legal departments, and the downsize of the corporate offices.
The Company, working with a consultant, negotiated reductions of
various vendor payables. In addition, during fiscal year 1999,
the Company incurred charges of $250,000 for legal fees,
abandoned sites, and costs associated with television commercial
production.
During fiscal 2000, the Company recorded a charge of
$364,251 in connection with the settlement with the former
Chairman and CEO. The expense primarily includes amounts
attributable to the transfer of the Company's interest in a
franchise restaurant to the former Chairman and CEO and the
forgiveness of a receivable from a company of which the former
Chairman and CEO is an affiliate.
During fiscal 1999, the Company adjusted the value of
impaired property located in Meridian, Birmingham, Cutler Ridge
and Macon, resulting in impairment charges of $1,926,557. During
fiscal 2000, management's efforts to dispose of these assets and
settle related lease liabilities resulted in a net benefit of
$117,304.
Interest expense increased $279,011 (57%) to $766,798 from
$487,787. This increase is due to additional interest associated
with the Company's credit facility, which is discussed in detail
in the Notes to Financial Statements.
Liquidity and Capital Resources
In fiscal 2000, the Company's operating activities used
$407,298. In fiscal 1999, the Company's operating activities
provided cash flow of $425,853. The change in net cash provided
by (used in) operating activities from fiscal 1999 to fiscal 2000
resulted primarily because the Company significantly reduced its
trade accounts payable in fiscal 2000, compared to fiscal 1999
when the Company had extended its trade payable terms with
vendors.
During fiscal 2000, the Company's working capital needs were
financed primarily by the sale of $400,000 of convertible
preferred stock to JRAC. In fiscal 1999, 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 used by investing activities was $86,120 in fiscal
2000 compared to $188,143 in 1999. In fiscal 2000, the Company
received $78,600 from the sale of assets for a closed unit.
Net cash provided by financing activities was $245,920 in
fiscal 2000, and included $400,000 of proceeds from the sale of
convertible preferred stock and $166,155 of principal payments on
long-term debt. Net cash used in financing activities was
$347,953 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.
The Company considers earnings before interest, taxes,
depreciation and amortization (EBITDA) to be a relevant indicator
of liquidity. EBITDA is not a measure defined by accounting
principles generally accepted in the United States, however. The
amounts presented below may not be comparable to similarly titled
measures reported by other companies. EBITDA increased to
$503,347 for fiscal year ended July 2, 2000 compared to a deficit
of $43,213 for fiscal year ended June 27, 1999.
[CAPTION]
<TABLE>
EBITDA
Fiscal Year Ended
July 2, 2000 June 27, 1999
<S> <C> <C>
Net Loss $(1,053,791) $(3,321,814)
Add:
Depreciation and amortization of property and 543,393 809,732
equipment
Preopening amortization - 54,525
Interest 766,798 487,787
Charges related to closed units and asset (117,304) 1,926,557
impairment, net
Charges related to settlement with former 364,251 -
management
EBITDA $503,347 $(43,213)
</TABLE>
Management attributes the total financial improvement to
improved operational controls and administrative and operational
personnel reductions.
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 Company did not make its
required interest payment on October 1, 1999, nor did it make its
required principal and interest payment on November 1, 1999 and
December 1, 1999, and was therefore in default on its credit
facility. The Company received notice from its commercial lender
that under the terms of the credit facility, the entire amount
outstanding, $3,105,031 at October 17, 1999 was immediately due,
and the lender could take possession of the assets pledged as
collateral. Until September 1, 2000, the commercial lender
agreed, pursuant a forbearance agreement, to not exercise its
rights to the collateral. The Company is attempting to obtain
financing through JRAC to repay the debt in default, negotiate a
waiver of the credit facility default, or obtain additional
payment deferrals in fiscal year 2001. There can be no
assurances that the Company will be successful in these efforts.
On September 29, 2000, the Company entered into a ten year
Line of Credit Agreement (the "Credit Agreement") with JRAC, the
Company's majority shareholder. Under the terms of the Credit
Agreement, JRAC may lend the Company up to $5 million for working
capital, payment of outstanding indebtedness, refurbishing units,
establishing new units, and future acquisitions. The loan is
secured by substantially all of the assets of the Company.
Advances will accrue interest at an annual rate equal to three
percentage points above the prime lending rate of Wells Fargo
Bank. JRAC will receive an origination fee of two percent of the
amount of each cash advance. Beginning January 1, 2001, the
outstanding loans (which include $120,000 advanced from August
14, 2000 to August 28, 2000) will be repayable in monthly
installments of principal and interest. The Company has the
right to prepay in whole or part at any time any indebtedness
outstanding under the Credit Agreement. Future advances under
this line of credit are subject to the ability of JRAC to fund
such advances.
Because of the Company's recurring net losses, the debt in
default, its net capital deficiency, and the lack of firm
commitments from third parties to provide short-term or long-term
financial resources, there can be no assurance that the Company
will be able to meet its obligations as they come due in 2001.
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,
which is subject to fluctuation.
Management reviews its pricing regularly to ensure that its
Company's product(s) are priced competitively, that it offers
outstanding value to its customers, and that margins are
maintained. Inflation can also affect 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.
[CAPTION]
<TABLE>
Balance Sheet - Cucos Inc.
July 2, 2000
Assets
<S> <C>
Current assets:
Cash $268,712
Receivables less allowance for doubtful accounts of $66,716 99,015
Inventories 150,958
Prepaid expenses 154,792
Other current assets 3,968
TOTAL CURRENT ASSETS 677,445
Property and equipment:
Equipment 2,085,926
Leasehold improvements 3,009,947
5,095,873
Less accumulated depreciation and amortization and impairment 3,009,359
reserves 2,086,514
Deferred costs, less accumulated amortization of $96,760 225,414
Other assets 253,898
TOTAL ASSETS $3,243,271
Liabilities and Net Capital Deficiency
Current liabilities:
Trade accounts payable $1,346,626
Accrued interest 321,253
Accrued expenses 522,021
Current portion of long-term debt 190,767
Debt in default 3,105,031
TOTAL CURRENT LIABILITIES 5,485,698
Long-term debt, less current portion 177,971
Deferred revenue 270,954
Net Capital Deficiency:
Convertible preferred stock, no par value-1,000,000 shares
authorized: 400,000 issued and outstanding, stated at liquidation 400,000
preference value of $1 per share
Common stock, no par value - 20,000,000 shares: authorized,
2,663,605 shares issued and outstanding 5,264,649
Additional paid-in capital 110,788
Retained earnings deficit (8,466,789)
NET CAPITAL DEFICIENCY (2,691,352)
TOTAL LIABILITIES AND NET CAPITAL DEFICIENCY $3,243,271
</TABLE>
See accompanying notes.
[CAPTION]
<TABLE>
Statements of Operations - Cucos Inc.
Fiscal Year Ended
July 2, 2000 June 27, 1999
<S> <C> <C>
Restaurant operations:
Sales of food and beverages $16,082,399 $20,120,099
Restaurant expenses:
Cost of sales 4,363,359 5,568,432
Restaurant labor and benefits 5,996,316 7,167,850
Other operating expenses 2,431,628 3,754,232
Occupancy expenses 1,719,188 2,245,331
Preopening expenses - 54,525
Total restaurant expenses 14,510,491 18,790,370
Income from restaurant operations 1,571,908 1,329,729
Royalties and franchise revenues, net of expenses of
$2,093 and $2,979, respectively 125,311 129,147
Commissary and other income 17,318 122,309
1,714,537 1,581,185
Operations supervision expenses 561,077 804,054
Corporate expenses 1,193,506 1,684,601
Charges related to settlement with former management 364,251 -
Charges related to closed units and asset impairment (117,304) 1,926,557
Operating loss (286,993) (2,834,027)
Interest expense 766,798 487,787
Loss before income taxes (1,053,791) (3,321,814)
Income taxes - -
Net loss $(1,053,791) $(3,321,814)
Net loss per share - basic and diluted $(0.40) $(1.25)
Weighted average number of common shares and common
share equivalents outstanding - basic and diluted 2,642,272 2,651,730
</TABLE>
See accompanying notes.
[CAPTION]
<TABLE>
Statements of Cash Flows - Cucos Inc.
Fiscal Year Ended
July 2, 2000 June 27, 1999
Operating activities
<S> <C> <C>
Net loss $(1,053,791) $(3,321,814)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Payments related to closed units and asset impairment - 1,926,557
Costs paid related to closed units (42,961) -
Depreciation and amortization of property and equipment 543,393 809,732
Amortization of deferred costs 30,283 157,522
Change in deferred revenue 187,212 (7,578)
Gain on sale of assets and other (76,156) (3,571)
Charges related to settlement with former management 364,251 -
Changes in operating assets and liabilities:
Receivables 80,728 199,339
Inventories 48,348 33,573
Prepaid expenses and other current assets 183,300 4,145
Trade accounts payable (815,452) 715,650
Accrued expenses 143,547 (87,702)
Net cash provided by (used in) operating activities (407,298) 425,853
Investing activities
Purchases of property and equipment (164,720) (188,143)
Proceeds from sale of assets 78,600 -
Net cash used in investing activities (86,120) (188,143)
Financing activities
Changes in short-term debt payable to banks - (100,000)
Proceeds from borrowings - 74,364
Principal payments on borrowings (166,155) (322,317)
Proceeds from sale of convertible preferred stock 400,000 -
Proceeds from sale of common stock 11,875 -
Net cash provided by (used in) financing activities 245,720 (347,953)
Change in cash (247,698) (110,243)
Cash at beginning of year 516,410 626,653
Cash at end of year $268,712 $516,410
Supplemental cash flow information:
Non-cash financing and investing activities:
Equipment and leasehold improvements financed by capital leases $48,349 $ -
Interest paid $543,094 $424,734
</TABLE>
See accompanying notes.
[CAPTION]
<TABLE>
Cucos Inc.
Statements of Shareholders' Equity
Additional Retained
Preferred Common Preferred Common Paid-In Earnings
Shares Shares Stock Stock Capital (Deficit) Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of June 28, 1998 - 2,651,730 $ - $5,252,774 $110,788 $(4,091,184) $1,272,378
Net loss - - - - - (3,321,814) (3,321,814)
Balance as of June 27, 1999 - 2,651,730 - $5,252,774 $110,788 $(7,412,998) $(2,049,436)
Net loss - - - - - (1,053,791) (1,053,791)
Sale of common stock - 11,875 - 11,875 - - 11,875
Sale of preferred stock 400,000 - $400,000 - - - 400,000
Balance as of July 2, 2000 400,000 2,663,605 $400,000 $5,264,649 $110,788 $(8,466,789) $(2,691,352)
</TABLE>
See accompanying notes.
Cucos Inc.
July 2, 2000
Notes to Financial Statements
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation: Cucos Inc. (the "Company") incurred a net
loss of $1,053,791 in the fiscal year 2000 and $3,321,814 in the
fiscal year 1999. In addition, at July 2, 2000, the Company had
a net capital deficiency of $2,691,352 and was in default on debt
totaling $3,105,031. See note 3. These conditions raise
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 developed plans to refocus its operations,
reverse sales declines, increase restaurant profitability and
reduce other operating and corporate expenses. The Company is
also attempting to obtain alternate financing to repay the debt
in default, or negotiate with its commercial lender to
restructure the terms of the debt in default. The Company
believes that it can continue to meet its obligations through the
end of fiscal year 2001 if it can extend its existing forbearance
agreement with its commercial lender, or restructure the terms of
the debt in default, or obtain alternate financing to repay the
debt, on terms acceptable to the Company. However, considering,
among other things, the Company's history of net losses and the
debt in default, there can be no assurance that these plans will
have the expected effect on the Company's results of operations
and its cash flows in fiscal 2001.
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. Fiscal year 2000 was a 53-week year, and
fiscal year 1999 was a 52-week year.
Use of Estimates: The preparation of the financial statements in
conformity with accounting principles generally accepted in the
United States 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.
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 at 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 debt issuance and other
costs, which are primarily trademarks. Deferred debt issuance
costs are amortized over the life of the related debt. 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.
Advertising Costs: Advertising costs are expensed as incurred.
Advertising expense was $222,000 in fiscal 2000 and $794,000 in
fiscal 1999.
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.
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. Tender Offer
In August 2000, pursuant to a tender offer to the Company's
shareholders, the Jacksonville Restaurant Acquisition Corp.
(JRAC) purchased 1.2 million shares of the Company's Common Stock
for $1,200,000 in cash. During fiscal 2000, JRAC purchased
400,000 shares of convertible Preferred Stock at $1 per share.
3. Debt
Capital lease obligations, fixed interest rates of 12.09% to
14.2% with monthly payments of $10,100 $330,805
Other 37,933
368,738
Less current portion 190,767
$177,971
Debt in default $3,105,031
Debt in default represents a note payable to a commercial lender.
This note is part of a pool of loans financed by the commercial
lender at a stated interest rate of 11.6%. However, the loan
agreement requires the Company to pay additional interest each
month if certain loan pool conditions are not met. These monthly
payments, if required, would increase interest incurred by a
maximum of $400,000 over the life of the loan. During fiscal
2000, the Company incurred additional interest of $52,000 as a
result of these requirements. The loan agreement also contains a
provision that requires the Company to pay prepayment premiums in
the event the loan is paid prior to its maturity. At July 2,
2000, this premium was approximately $660,000.
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 Company did not make its
required interest payment on October 1, 1999, nor did it make its
required principal and interest payment on November 1, 1999 and
December 1, 1999, and was therefore in default on its credit
facility. The Company received notice from its commercial lender
that under the terms of the credit facility, the entire amount
outstanding, $3,105,031 at October 17, 1999 was immediately due,
and the lender could take possession of the assets pledged as
collateral. Until September 1, 2000, the commercial lender
agreed, pursuant a forbearance agreement, to not exercise its
rights to the collateral. The Company is attempting to obtain
financing through JRAC to repay the debt in default, negotiate a
waiver of the credit facility default, or obtain additional
payment deferrals in fiscal year 2001. There can be no
assurances that the Company will be successful in these efforts.
On September 29, 2000, the Company entered into a ten year Line
of Credit Agreement (the "Credit Agreement") with JRAC, the
Company's majority shareholder. Under the terms of the Credit
Agreement, JRAC may lend the Company up to $5 million for working
capital, payment of outstanding indebtedness, refurbishing units,
establishing new units, and future acquisitions. The loan is
secured by substantially all of the assets of the Company.
Advances will accrue interest at an annual rate equal to three
percentage points above the prime lending rate of Wells Fargo
Bank. JRAC will receive an origination fee of two percent of the
amount of each cash advance. Beginning January 1, 2001, the
outstanding loans (which include $120,000 advanced from August
14, 2000 to August 28, 2000) will be repayable in monthly
installments of principal and interest. The Company has the
right to prepay in whole or part at any time any indebtedness
outstanding under the Credit Agreement. Future advances under
this line of credit are subject to the ability of JRAC to fund
such advances.
This debt is collateralized by substantially all of the Company's
restaurant equipment and leasehold improvements and other assets.
Maturities of long-term debt, including capital leases, not in
default for each of the next five fiscal years are $190,767 in
fiscal year 2001, $103,404 in fiscal year 2002, $63,268 in fiscal
year 2003, $9,575 in fiscal year 2004, and $1,724 in fiscal year
2005.
The carrying amounts reported in the balance sheet for debt not
in default 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. The
Company is not able to calculate the fair value of debt in
default.
4. Charges Related to Closed Units and Asset Impairment
In fiscal year 1999, the Company recorded impairment charges of
$1,926,557, primarily related to equipment, leasehold
improvements, reacquired franchise rights and certain subleased
properties. These charges were determined based upon the
Company's accounting policy for impairment of long-lived assets,
as described in Note 1. During fiscal 2000, management's efforts
to dispose of these assets and settle related lease liabilities
resulted in a net benefit of $117,304.
5. Income Taxes
Significant components of the Company's deferred tax assets and
liabilities are as follows:
Deferred tax assets:
Net operating loss carryforwards $2,543,000
Tax credit carryforwards 642,000
Property and equipment 283,000
Other - net 85,000
Total deferred tax assets 3,553,000
Valuation allowance for deferred tax assets (3,488,000)
65,000
Deferred tax liabilities:
Prepaid expenses and deferred costs 65,000
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 the loss before income taxes:
July 2, 2000 June 27, 1999
Income tax benefit at the federal $(318,000) $(1,129,000)
statutory rate
State taxes, net of federal deductions (37,000) (121,000)
Change in valuation allowance 355,000 1,250,000
Income taxes $ - $ -
At year end, the Company had net operating loss carryforwards of
approximately $6,692,900 and investment and jobs tax credits
carryforwards of approximately $642,000. These carryforwards
expire beginning in 2001. The acquisition of 45% of the
Company's stock by JRAC in August 2000 constituted a change in
control. Internal Revenue Code provisions limit the amount of
net operating loss carryforwards which can be utilized each year
to approximately $200,000.
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.
6. Leases
The Company leases 12 restaurant facilities and its corporate
headquarters under noncancelable operating lease agreements with
initial lease terms expiring in fiscal 2001 and through fiscal
2008. The restaurant leases have remaining renewal options and
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 three restaurant facilities under
noncancelable sublease agreements with lease terms expiring in
fiscal year 2002 through fiscal year 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 under the non-
cancelable leases were as follows at year end:
Operating Leases Capital
Lease Sublease Net Lease
2001 $ 923,000 $ 66,000 $857,000 $217,000
2002 839,000 66,000 773,000 121,000
2003 723,000 66,000 657,000 68,000
2004 620,000 65,000 555,000 11,000
2005 523,000 35,000 488,000 2,000
Thereafter 834,000 48,000 786,000 -
419,000
Less unamortized discount (12.09% - 14.2%) 88,000
$331,000
Rent expense on all the Company's operating leases was $1,029,000
in fiscal 2000 and $1,419,000 in fiscal 1999.
7. Related Party Transactions
The Company recorded a charge of $364,251 in the second quarter
of the fiscal year 2000 in connection with the settlement with
its former Chairman and CEO. The charge includes amounts
attributable to the transfer of the Company's interest in a
franchisee, LaMexiCo, L.LC., to the former Chairman and CEO and
the forgiveness of debts owed to the Company by affiliated
entities. The Company believes that the settlement was in the
best interests of the Company and its shareholders.
During the third quarter of fiscal 2000, the Company negotiated a
settlement with a former board member and franchisee.
Receivables of $55,000 were settled for a cash payment of $15,000
and forfeiture of $17,000 in development fees.
In addition, during the fourth quarter of fiscal 2000, the
Company agreed to forgive $20,000 of debts owed by its former
President. In return, the development fee of $500 for the Baton
Rouge area was forfeited.
Also, in connection with the settlement with the former Chairman
and CEO, the Company terminated agreements with Brothers Video,
Inc., formerly an affiliated company, to supply video poker
machines in four Cucos restaurants located in Louisiana.
On January 26, 2000, the Company sold 300,000 shares of its
Series A Preferred Stock, no par value per share (the Preferred
Stock), to JRAC for $300,000. On February 1, 2000, the Company
sold 100,000 shares of Preferred Stock to JRAC for $100,000.
Each share of Preferred Stock is convertible at JRAC's option
into one share of the Company's Common Stock. These shares were
issued in transactions exempt from registration under Section
4(2) of the Securities Act of 1933, as amended (the "Securities
Act"), in a private offering to a single investor.
8. Capital Stock
Convertible Preferred Stock: Each share of convertible preferred
stock is convertible, at the option of the holder, into one share
of common stock at any time.
Stock Option: The Company's 1993 Incentive Stock Option Plan
(Option Plan) authorizes 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 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 fiscal
2000 and fiscal 1999.
[CAPTION]
<TABLE>
2000 1999
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 402,700 $1.26 444,200 $1.33
Granted 162,000 $1.02 43,500 $0.67
Forfeited (189,625) $1.25 (85,000) $1.34
Exercised (11,875) $1.00 0 -
Outstanding at end of year 363,200 $1.17 402,700 $1.26
Exercisable at end of year 187,950 311,800
Exercise price $0.41- $1.94 $0.72 - $1.94
</TABLE>
The weighted average remaining contractual life of the options
outstanding at July 2, 2000 is 6.8 years. The weighted average
fair value of options granted during fiscal 2000 and fiscal 1999
were $1.08 and $0.59 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. The fair value of these
options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average
assumptions for fiscal 2000 and the fiscal year 1999,
respectively: weighted average risk-free interest rates of 6.34%
and 6.06%; no dividends; volatility factors of the expected
market price of the Company's common stock of .74 and .60; 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).
2000 1999
Pro forma net loss $(1,099,000) $(3,397,000)
Pro forma loss per share - basic and diluted $ (.42) $ (1.28)
9. 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 fiscal 2000 and fiscal
1999.
10. Franchise Operations
In addition to its company-owned restaurants, the Company had
five franchised restaurants in operation at the end of fiscal
2000. During fiscal 2000 two franchised restaurants opened and
one franchised restaurant closed. During fiscal 1999 no
franchised restaurant opened and one closed.
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 $13,086 and $13,465 in fiscal year 2000 and
fiscal year 1999, respectively.
12. Contingencies
On April 11, 1990, a franchisee filed a complaint in 24th
District Court, State of Louisiana, Parish of Jefferson, Case No.
397856-5 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 ten years except for a discovery request
filed in January 1996, which avoided a dismissal of the
litigation for non-prosecution. The Company believes the claims
are without merit and the likelihood of a loss is remote.
Ronnie Natal Contractors, Inc. versus Cucos, Inc., Civil Action
No. 95-17928, Section "L", Civil District Court for the Parish
of Orleans, State of Louisiana. In this action, Ronnie Natal
Contractors, Inc. ("Natal") and Current Electric, Inc. seek to
recover on what is allegedly due and owing in connection with the
build out of a Cucos Restaurant in New Orleans, Louisiana. Natal
alleges it is owed $64,935.00; Current Electric claims to be owed
$3,408.00. Cucos, Inc. does not deny that Natal and Current
provided some service in connection with the restaurant build
out, although Cucos does have questions with the accuracy of the
amount claimed. Rather, the principal issue in this litigation
is whether any amount is owed by Cucos, Inc. The restaurant at
issue was not owned by Cucos, Inc. but rather was a franchise
restaurant owned by LBG, Inc. a closely held corporation
controlled by former members of management of Cucos.
Significantly, the amount claimed by Natal and Current Electric
does not represent all amounts billed by them in connection with
the restaurant build out. In fact, tenant build out funds were
advanced by the lessor, and these funds were used in part to
satisfy Current Electric and Natal's claims. However, as LBG
defaulted on its lease, the lessor refused to advance further
tenant build out leaving the balance that is allegedly due.
Natal and Current claim that they were under the misapprehension
that the work they were providing was for Cucos, Inc. as opposed
to LBG citing the fact that persons at Cucos involved with
franchisee relations had direct dealings with both Natal and
Current.
Cucos has filed a third party demand against LBG. LBG has failed
to answer timely, and Cucos is in the process of securing a
default. A non jury trial of this matter is scheduled for
January 9, 2001.
Discovery is not complete in this matter and it is not possible
at this time to estimate the company's ultimate liability, if
any. Counsel has been instructed to defend this matter
vigorously, and counsel has not been provided with settlement
authority.
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 Independent Auditors
The Board of Directors and Shareholders
Cucos Inc.
We have audited the accompanying balance sheet of Cucos Inc. as
of July 2, 2000, and the related statements of operations,
shareholders' equity, and cash flows for each of the two years in
the period ended July 2, 2000. 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 auditing standards
generally accepted in the United States. 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 July 2, 2000, and the results of its operations
and its cash flows for each of the two years in the period ended
July 2, 2000, in conformity with accounting principles generally
accepted in the United States.
As discussed in Note 1 to the financial statements, the Company
is in default on debt totaling $3,105,000. This default,
combined with 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 these uncertainties.
Ernst & Young LLP
New Orleans, Louisiana
September 6, 2000, except for the
third paragraph of Note 3, as to
which the date is September 29, 2000.
Cucos Inc. - Stock Data
The Company's Common Stock which was formerly traded on The
NASDAQ Small-Cap Market under the symbol CUCO was delisted on
February 2, 1999. The Company'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 2000 and fiscal 1999 as indicated
by Yahoo Finance website.
Fiscal 1999 High Ask Low Bid
1st Quarter ended 10/18/98 $1.1875 $0.7500
2nd Quarter ended 01/10/99 0.0875 0.3125
3rd Quarter ended 04/04/99 1.0625 0.3750
4th Quarter ended 06/27/99 0.4375 0.2500
Fiscal 2000 High Ask Low Bid
1st Quarter ended 10/17/99 $0.8750 $0.1250
2nd Quarter ended 01/09/00 2.2650 0.6520
3rd Quarter ended 04/02/00 1.6875 1.0000
4th Quarter ended 07/02/00 1.3750 0.6250
On September 14, 2000, the closing bid and ask prices for
the Company's Common Stock were $1.50 bid and $1.50 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 Company has paid no
cash dividends and has no present intention of paying dividends,
but rather expects to 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,
2000: 725.
On January 26, 2000, the Company sold 300,000 shares of its
Series A Preferred Stock, no par value per share (the Preferred
Stock), to JRAC for $300,000. On February 1, 2000, the Company
sold 100,000 shares of Preferred Stock to JRAC for $100,000.
Each share of Preferred Stock is convertible at JRAC's option
into one share of the Company's Common Stock. These shares were
issued in transactions exempt from registration under Section
4(2) of the Securities Act of 1933, as amended (the "Securities
Act"), in a private offering to a single investor.
On February 21, 2000, Mr. Daniel Earles, former Executive
Vice President of Operations of the Company, exercised his
options to purchase 11,875 shares of Common Stock at a price of
$1.00 per share. These shares were issued in a transaction
exempt from registration pursuant to Section 4(2) of the
Securities Act.
On January 20, 2000 and on May 16, 2000, the Company granted
options to purchase an aggregate of 135,000 shares of Common
Stock to some of its officers and directors. These options were
issued in transactions exempt from registration pursuant to
Section 4(2) of the Securities Act.
DIRECTOR AND OFFICERS CORPORATE INFORMATION
Board of Directors Transfer Agent
Registrar and Transfer Company
James W. Osborn Cranford, New Jersey
President, Chief Executive
Officer and Chairman and has Securities Counsel
been with the Company since Correro Fishman Haygood Phelps
November, 1999. Walmsley & Casteix, L.L.P.
Committees: None New Orleans, Louisiana
Elias Daher
Vice President of Operations Independent Auditors
and Director and has been with Ernst & Young LLP
the Company since 1986. New Orleans, Louisiana
Committees: None
Corporate Office
Thomas L. McCormick 110 Veterans Boulevard
Secretary/Treasurer and Suite 222
Director since November, 1999. Metairie, Louisiana 70005
Manager-Finance Department - 504-835-0306
Louisiana Medical Mutual
Insurance Company located in OTC:BB Symbol: CUCO
Metairie, Louisiana, since
1996. Annual Meeting
Committees: Compensation, The annual meeting of
Audit shareholders will be held at
Chairman-Audit the Ramada Limited, 2713 North
Causeway Blvd., Metairie,
Lee W. Randall Louisiana, at 3:00 p.m. on
Director since November, 1999. Thursday, November 9, 2000.
CFO-Transmission of Entergy
Corporation located in New Form 10-KSB
Orleans, Louisiana, since A copy of Form 10-KSB, the
August, 2000. Corporation's annual report to
Committees: Compensation, the Securities and Exchange
Audit Commission, can be obtained
without charge by writing or
Calvin O. Cox faxing your request to:
Director since January, 2000.
Partner - Grassy Creek L.C. and Cucos Inc.
Valley Homes L.C. located in 110 Veterans Boulevard,
Harrisonburg, Virginia, since Suite 22
1993. Metairie, Louisiana 70005
Committees: None Fax No.: 1-504-836-3194
Dennis A. Grinn Form 10-QSB
Director since August, 2000. A copy of Form 10-QSB, the
Self-employed trader for the Company's quarterly report to
last 5 years. the Securities and Exchange
Committees: Compensation Commission, can be obtained
without charge by writing or
William F. Saculla faxing your request to:
Director since August, 2000.
President and Director of Cucos Inc.
Arthur Treacher's Fish & Chips 110 Veterans Boulevard,
located in Jacksonville, Suite 22
Florida, since 1984. Metairie, Louisiana 70005
Committees: Audit Fax No.: 1-504-836-3194
OFFICERS
James W. Osborn
President, Chief Executive
Officer and Director since
November, 1999.
Chairman (August, 2000)
Elias Daher
Vice President of Operations
and Director since 1999.
Regional V.P. (1998-1999),
Senior Operations Supervisor
(1995-1998), and has been with
the Company since 1986.
