UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 29, 1996
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 0-20716
TACO CABANA, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 74-2201241
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8918 Tesoro Drive, Suite 200
San Antonio, Texas 78217
--------------------------------------
(Address of principal executive offices)
Telephone Number (210) 804-0990
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for
such shorter period that the registrant was
required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days:
Yes X No
--- ---
Indicate the number of shares of each of the
issuer's classes of common stock as of the latest
practicable date:
Class Outstanding at November 1 , 1996
------------ --------------------------------
Common Stock 15,706,537 shares
TACO CABANA, INC.
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 29, 2
1996 and December 31, 1995
Condensed Consolidated Statements of Operations for the 3
Thirteen Weeks Ended September 29, 1996 and October 1,
1995
Condensed Consolidated Statements of Operations for the 4
Thirty-Nine Weeks Ended September 29, 1996 and October
1, 1995
Condensed Consolidated Statements of Cash Flows for the 5
Thirty-Nine Weeks Ended September 29, 1996 and October
1, 1995
Notes to Condensed Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of 11-20
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Items 2 through 5 have been omitted since the registrant
has no reportable events in relation to the items
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
TACO CABANA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 29, December 31,
1996 1995
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 791,000 $ 2,749,000
Receivables, net 1,451,000 1,376,000
Inventory 1,866,000 1,846,000
Prepaid expenses 1,185,000 1,700,000
Pre-opening costs, net 57,000 500,000
Federal income taxes receivable 491,000 2,777,000
Deferred income taxes 1,766,000 497,000
----------- -----------
Total current assets 7,607,000 11,445,000
PROPERTY AND EQUIPMENT, net 88,330,000 87,695,000
NOTES RECEIVABLE, net 763,000 780,000
INTANGIBLE ASSETS, net 45,807,000 47,038,000
OTHER ASSETS 827,000 934,000
INVESTMENT IN JOINT VENTURE 936,000 686,000
----------- -----------
TOTAL $144,270,000 $148,578,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,475,000 $ 5,409,000
Accrued liabilities 2,945,000 3,864,000
Current maturities of long-term debt
and capital leases 2,372,000 2,074,000
Line of credit 1,500,000 2,186,000
----------- -----------
Total current liabilities 10,292,000 13,533,000
LONG-TERM OBLIGATIONS, net of current
maturities:
Capital leases 4,094,000 4,242,000
Long-term debt 7,154,000 10,788,000
----------- -----------
Total long-term obligations 11,248,000 15,030,000
ACQUISITION LIABILITIES 4,356,000 4,888,000
DEFERRED LEASE PAYMENTS 658,000 935,000
DEFERRED INCOME TAXES 3,869,000 1,865,000
STOCKHOLDERS' EQUITY:
Common stock 157,000 157,000
Additional paid-in capital 97,073,000 96,954,000
Retained earnings 16,617,000 15,216,000
----------- -----------
Total stockholders' equity 113,847,000 112,327,000
----------- -----------
TOTAL $144,270,000 $148,578,000
=========== ===========
See notes to Condensed Consolidated Financial Statements.
TACO CABANA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Thirteen Weeks Ended
----------------------------
September 29, October 1,
1996 1995
------------- ----------
REVENUES:
Restaurant sales $33,676,000 $35,454,000
Franchise fees and royalty income 134,000 214,000
---------- ----------
Total revenues 33,810,000 35,668,000
---------- ----------
COSTS AND EXPENSES:
Restaurant cost of sales 10,770,000 11,454,000
Labor 8,843,000 9,426,000
Occupancy 2,038,000 2,091,000
Other restaurant operating costs 6,013,000 6,996,000
General and administrative 1,616,000 1,448,000
Depreciation and amortization 2,285,000 2,653,000
Total costs and expenses 31,565,000 34,068,000
---------- ----------
INCOME FROM OPERATIONS 2,245,000 1,600,000
---------- ----------
INTEREST EXPENSE, NET (308,000) (409,000)
---------- ----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 1,937,000 1,191,000
PROVISION FOR INCOME TAXES (717,000) (440,000)
---------- ----------
NET INCOME $ 1,220,000 $ 751,000
========== ==========
NET INCOME PER SHARE $ 0.08 $ 0.05
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 16,014,352 15,723,263
========== ==========
See notes to Condensed Consolidated Financial Statements.
TACO CABANA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Thirty-Nine Weeks Ended
-------------------------------
September 29, October 1,
1996 1995
------------- -----------
REVENUES:
Restaurant sales $ 99,969,000 $104,274,000
Franchise fees and royalty income 413,000 1,166,000
----------- -----------
Total revenues 100,382,000 105,440,000
----------- -----------
COSTS AND EXPENSES:
Restaurant cost of sales 31,546,000 33,649,000
Labor 26,082,000 27,418,000
Occupancy 6,134,000 6,178,000
Other restaurant operating costs 17,956,000 20,227,000
General and administrative 4,933,000 4,349,000
Depreciation and amortization 6,868,000 7,730,000
Litigation settlement 3,400,000 -
Special charge - 8,100,000
Reserve for notes and
other receivables - 3,500,000
----------- -----------
Total costs and expenses 96,919,000 111,151,000
----------- -----------
INCOME (LOSS) FROM OPERATIONS 3,463,000 (5,711,000)
----------- -----------
INTEREST EXPENSE, NET (1,076,000) (1,018,000)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 2,387,000 (6,729,000)
BENEFIT (PROVISION) FOR INCOME
TAXES (986,000) 2,490,000
---------- -----------
NET INCOME (LOSS) $ 1,401,000 $ (4,239,000)
=========== ===========
NET INCOME (LOSS) PER SHARE $ 0.09 $ (0.27)
=========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING 15,952,239 15,564,162
=========== ===========
See notes to Condensed Consolidated Financial Statements.
TACO CABANA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Thirty-Nine Weeks Ended
-------------------------------
September 29, October 1,
1996 1995
------------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,401,000 $ (4,239,000)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 6,868,000 7,730,000
Deferred income taxes 735,000 (1,652,000)
Special charge - 8,100,000
Reserve for notes and other
receivables - 3,500,000
Changes in operating working capital
items (850,000) (7,899,000)
----------- -----------
Net cash provided by operating activities 8,154,000 5,540,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,811,000) (16,170,000)
Investment in joint venture (250,000) (250,000)
----------- -----------
Net cash used for investing activities (6,061,000) (16,420,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term debt
and line of credit (4,006,000) (2,273,000)
Principal payments under capital leases (164,000) (110,000)
Exercise of stock options 119,000 9,000
Proceeds from issuance of notes payable - 10,369,000
----------- -----------
Net cash provided (used) by financing
activities (4,051,000) 7,995,000
----------- ------------
NET DECREASE IN CASH (1,958,000) (2,885,000)
CASH AND CASH EQUIVALENTS, beginning of
period 2,749,000 7,275,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 791,000 $ 4,390,000
=========== ===========
See notes to Condensed Consolidated Financial Statements.
TACO CABANA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Principles of Consolidation - The consolidated financial
statements include all accounts of Taco Cabana, Inc. and its
wholly-owned subsidiaries (the "Company"). All significant
intercompany balances and transactions have been eliminated.
The unaudited Condensed Consolidated Financial Statements
include all adjustments, consisting of normal, recurring
adjustments and accruals, which the Company considers
necessary for fair presentation of financial position and
the results of operations for the periods presented. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or
omitted. The interim financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.
2. Litigation Settlement
On July 24, 1996, the Company entered into a proposed
settlement, subject to court approval and certain other
conditions, (the "Settlement"), of A.L. Park, et al. v. Taco
Cabana, Inc., et al., (the "Lawsuit"), a suit originally
filed in the United States District Court for the Western
District of Texas (Cause No. SA95CA0847), in September 1995
seeking status as a class action.
Under the terms of the Settlement, the plaintiffs will
receive a total of $6.0 million. The Company's insurance
carrier has deposited $3.05 million in cash, and the Company
has deposited $2.95 million in cash into an escrow account
for such purposes. Additionally, the Company has accrued
$450,000 for the payment of legal and related expenses
incurred and anticipated to be incurred in connection with
the Settlement. As of September 29, 1996, the Company had
paid approximately $220,000 in legal expenses relating to
the lawsuit.
The Company denies any liability or wrongdoing in connection
with the Lawsuit. The Settlement was entered into to avoid
continuing distraction of management, reduce overall legal
cost liability and exposure to risk of adverse outcome. The
Settlement is contingent upon final approval by U.S.
District Court. A hearing upon such settlement is scheduled
for December 20, 1996.
3. Special Charge
A review of all operations was performed during the second
quarter of 1995. The review was precipitated by a change in
the Company's core markets, including a decline in average
unit volumes and profitability, as well as a change in the
Company's senior management.
The sales trends of the Company's core markets had turned
negative. Comparable restaurants sales trends softened in
the third and fourth quarters of 1994, declining by about
2.9% in the third quarter and 5.9% in the fourth quarter.
The decrease continued in the first quarter of 1995, when
comparable restaurant sales declined by approximately 10.1%.
The decline continued into the second quarter of 1995, which
finished with a decline of approximately 7.7%. This decline
in sales led to a decline in profitability.
In late April 1995, Stephen Clark was hired as President and
Chief Operating Officer of Taco Cabana. After several weeks
of analyzing the then recent trends and personnel, Mr. Clark
led a comprehensive review of the Company's operations. The
review, which took place during May and June 1995, included
a detailed review of the existing restaurants including
their sales and profitability trends, recent and future
marketing plans, development plans for new Company
restaurants as well as for franchisees; relationships with
current franchisees; and overhead components, including mid
and senior level management, office space, non-restaurant
assets, and bonus payouts.
To reverse the adverse trends in operating results,
management began implementing a plan to improve the unit
level economics of the Company's restaurants. In particular,
the Company created several operations-related positions to
design and implement comprehensive labor management and
restaurant operating systems; increased the number of
operations supervisory positions thus lowering the average
number of restaurants each supervisor is responsible for, in
order to increase the effectiveness of such positions;
redirected its marketing program to increase focus on local
store marketing efforts and promotional-based advertising;
performed market research to enhance the effectiveness of
the Company's marketing efforts and to provide improved
market data to aid in the design and location of future
restaurants; and revised its development criteria, including
construction costs, design factors, menu strategy, and began
reviewing the possibility of alternative development (e.g.,
in-line and other non-traditional construction versus stand-
alone restaurants).
The review resulted in the decision to close several
restaurants, allow several franchise restaurants to close or
revert back to the Company's control, restructure or forgive
several franchise-related receivables, make several
management personnel changes, sell certain non-restaurant
assets, pay certain discretionary bonuses which related to
the prior year but were not going to paid by prior
management, restructure the Company's marketing efforts,
slow all current Company and franchise development, and
write-off certain prepaid costs determined to no longer have
future value due to the changes management planned to make.
These decisions resulted in the Company's recording a
special charge during the second quarter of 1995 of $8.1
million pretax, and a reserve for notes and other
receivables of $3.5 million pretax (a total of $7.3 million
after tax, or $0.47 per share).
The special charge of $8.1 million was comprised of:
* Market valuation adjustments totaling $2.65 million
resulting from the decision to close six Company-owned
restaurants, and dispose of those restaurant assets;
* A provision of $1.225 million to record the estimated
monthly lease obligation, net of expected sublease receipts,
for certain other restaurants which had been closed or were
to be closed;
* Market valuation adjustments totaling $1.225 million to
allow for the disposition of certain non-restaurant capital
assets, including the Company's principal office and
corporate airplanes (most of which assets were owned by the
Company, so that the disposition of such assets would
generate cash);
* The accrual of $980,000 related to the severance of
certain contractual employment and consulting agreements and
the payment of relocation expenses for Mr. Clark and other
new members of management;
* The write-off of $810,000 related to certain capitalized
media production assets which will no longer be utilized or
were deemed to no longer have value due to the change in the
Company's marketing philosophy described above;
* The write-off of $370,000 in development costs associated
with the sites which were under development at the time of
the decision to slow development;
* An accrual of $300,000 for the payment of certain
operational bonuses which are described above;
* An accrual of $420,000 for certain employee litigation
claims;
* An accrual of $120,000 for miscellaneous expenses.
The reserve for notes and other receivables included $2.0
million for notes receivable which were outstanding in
connection with the sale of restaurants to franchisees. The
decision to reserve for these notes was based on discussions
held with the franchisees during the second quarter of 1995
and a review of their financial position. Three notes
totaling $1.3 million of this amount were reserved due to
the fact that the franchisee approached the Company during
the second quarter of 1995 and indicated that the
devaluation of the Mexican Peso in December 1994 had
permanently harmed its restaurants to an extent that they
were going to close the restaurants. These restaurants were
all closed during 1995. The remaining amount relates to a
restaurant whose sales trends continue to erode and there is
substantial doubt as to the recoverability of the balance.
The reserve amounts were calculated by reducing the
outstanding note balances to the estimated value of the
underlying collateral and reserving the remaining balance.
The restaurants reserved for were all in Texas.
The remaining $1.5 million primarily relates to franchisee
receivables. Approximately $250,000 of this amount relates
to periodic franchise and royalty fees owed by the
franchisees noted above, including interest. An additional
$500,000 is reserved due to a franchisee's failure to meet a
contractual obligation and make payment on a development
agreement during the second quarter of 1995. Approximately
$350,000 of the amount relates to periodic royalty fees and
franchise fees from a franchisee with whom the Company had
been in discussions to acquire its restaurants. Due to the
Company's decision to slow all development, the Company
broke off these negotiations. The remaining balances,
totaling $400,000, include various types of receivables
including other franchisee amounts, employee receivables,
and other miscellaneous receivables.
4. Earnings per Share
Net income per share has been computed by dividing net
income by the weighted average number of common shares
outstanding during each period. Common stock equivalent
shares, which relate to stock options, are included in the
weighted average when the effect is dilutive.
5. Intangible Assets
Goodwill, or the excess of acquisition costs over the fair
market value of the assets acquired and liabilities assumed,
is amortized using the straight-line method from 25 to 40
years. The trade name and the rights to the Taco Cabana name
purchased in 1986 and 1987, are amortized using the
straight-line method over forty years. Noncompetition
agreements are amortized using the straight-line method over
their estimated useful lives, ranging from two to fifteen
years. Management assesses the recoverability of goodwill on
the basis of actual and undiscounted projected cash flows
from the restaurants acquired. Should projected cash flows
not be sufficient to recover the Company's investment,
including any recorded goodwill, management would utilize
either a discounted cash flow basis or other determination
of current fair value in order to determine the amount of
the impairment.
6. Commitments and Contingencies
The Company does not subscribe to worker's compensation
insurance in its Texas market. The Company accrues for
claims based on historical actual payments made for claims
and expenses, as well as an evaluation of current and
anticipated claims and expenses. The Company does maintain
an excess liability coverage which management believes is
adequate to cover any substantial claims.
The Company remains contingently liable on three operating
leases which were assigned to the purchasers of units
previously sold or closed. Future minimum lease commitments
under these contingent obligations approximate $290,000 in
1997, and $303,000 in 1998 thru 2001. Thereafter, the total
minimum lease payments are approximately $3.2 million. The
Company assesses the probability of its having to assume
primary liability under these assignments as part of its
ongoing assessment of franchisee relationships.
7. Acquisition Liabilities
The Company establishes acquisition liabilities, as
necessary, in connection with the purchase method of
accounting for restaurants and other assets it acquires.
Such liabilities are primarily related to leases that were
at terms less favorable than market rates prevailing at the
acquisition date and anticipated store closure costs, if
any.
The reserve established for leases in excess of the
prevailing market were based on current market rental rates
at the date of acquisition as compared to the terms of the
leases acquired. This liability is being amortized as a
reduction of occupancy expense over the remaining term of
the applicable leases. At December 31, 1995, the total
amount of this reserve was $2.0 million. During the thirty-
nine weeks ended September 29, 1996, approximately $154,000
of the balance was amortized in this manner.
The remaining balance relates to reserves established for
the closure of certain acquired restaurants. These
restaurants were anticipated to be closed at the time of
acquisition. The amounts reserved were equal to the value
assigned to the building and equipment acquired, less any
anticipated salvage value, plus an amount estimated to
terminate the lease prior to its expiration date. At
December 31, 1995, the total amount of this reserve was $2.9
million. During the thirty-nine weeks ended September 29,
1996, approximately $378,000 of this reserve was utilized in
the closure of two restaurants. No gain or loss was recorded
on any of these transactions.
8. Supplemental Disclosure of Cash Flow Information
Thirty-Nine Weeks Ended
---------------------------
September 29, October 1,
1996 1995
------------- ----------
Cash paid for interest $ 901,000 $ 869,000
Interest capitalized on construction
costs - 109,000
Cash paid (received) for income
taxes (2,074,000) 400,000
Notes receivable acquired in
exchange for property, plant
and equipment - 1,286,000
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
- ------------
The Company commenced operations in 1978 with the opening of
the first Taco Cabana restaurant in San Antonio. As of
November 1, 1996 the Company had 104 company-owned, three
joint-venture owned and 17 franchised restaurants. The
Company's revenues are derived primarily from sales by
company-owned restaurants, with franchise fees and royalty
income currently contributing less than 1% of total revenues
for the first nine months of the 1996 fiscal year.
During the thirty-nine weeks ended September 29, 1996, the
Company closed two Company-owned restaurants, franchisees of
the Company closed five restaurants and a franchisee of the
Company, in which the Company has a joint-venture interest,
opened one restaurant.
Special Charge and Reserve for Notes and Other Receivables
- ----------------------------------------------------------
During the second quarter of 1995, the Company recorded a
reserve for notes and other receivables of $3.5 million and
a special charge of $8.1 million. The charges were the
result of a review of all operations which was performed
during the second quarter of 1995. The review was
precipitated by a change in the Company's core markets,
including a decline in average unit volumes and
profitability, as well as a change in the Company's senior
management.
The sales trends of the Company's core markets had turned
negative. Comparable restaurants sales trends softened in
the third and fourth quarters of 1994, declining by about
2.9% in the third quarter and 5.9% in the fourth quarter.
The decrease continued in the first quarter of 1995, when
comparable restaurant sales declined by approximately 10.1%.
The decline continued into the second quarter of 1995, which
finished with a decline of approximately 7.7%. This decline
in sales led to a decline in profitability.
In late April 1995, Stephen Clark was hired as President and
Chief Operating Officer of Taco Cabana. After several weeks
of analyzing the then recent trends and personnel, Mr. Clark
led a comprehensive review of the Company's operations. The
review, which took place during May and June 1995, included
a detailed review of the existing restaurants including
their sales and profitability trends, recent and future
marketing plans, development plans for new Company
restaurants as well as for franchisees; relationships with
current franchisees; and overhead components, including mid
and senior level management, office space, non-restaurant
assets, and bonus payouts.
To reverse the adverse trends in operating results,
management began implementing a plan to improve the unit
level economics of the Company's restaurants. In particular,
the Company created several operations-related positions to
design and implement comprehensive labor management and
restaurant operating systems; increased the number of
operations supervisory positions thus lowering the average
number of restaurants each supervisor is responsible for, in
order to increase the effectiveness of such positions;
redirected its marketing program to increase focus on local
store marketing efforts and promotional-based advertising;
performed market research to enhance the effectiveness of
the Company's marketing efforts and to provide improved
market data to aid in the design and location of future
restaurants; and revised its development criteria, including
construction costs, design factors, menu strategy, and began
reviewing the possibility of alternative development (e.g.,
in-line and other non-traditional construction versus stand-
alone restaurants).
The review resulted in the decision to close several
restaurants, allow several franchise restaurants to close or
revert back to the Company's control, restructure or forgive
several franchise-related receivables, make several
management personnel changes, sell certain non-restaurant
assets, pay certain discretionary bonuses which related to
the prior year but were not going to be paid by prior
management, restructure the Company's marketing efforts,
slow all current Company and franchise development, and
write-off certain prepaid costs determined to no longer have
future value due to the changes management planned to make.
These decisions resulted in the Company's recording a
special charge of $8.1 million pretax, and a reserve for
notes and other receivables of $3.5 million pretax (a total
of $7.3 million after tax, or $0.47 per share).
The special charge of $8.1 million was comprised of:
* Market valuation adjustments totaling $2.65 million
resulting from the decision to close six Company-owned
restaurants, and dispose of those restaurant assets;
* A provision of $1.225 million to record the estimated
monthly lease obligation, net of expected sublease receipts,
for certain other restaurants which had been closed or were
to be closed;
* Market valuation adjustments totaling $1.225 million to
allow for the disposition of certain non-restaurant capital
assets, including the Company's principal office and
corporate airplanes (most of which assets were owned by the
Company, so that the disposition of such assets would
generate cash);
* The accrual of $980,000 related to the severance of
certain contractual employment and consulting agreements and
the payment of relocation expenses for Mr. Clark and other
new members of management;
* The write-off of $810,000 related to certain capitalized
media production assets which will no longer be utilized or
were deemed to no longer have value due to the change in the
Company's marketing philosophy described above;
* The write-off of $370,000 in development costs associated
with the sites which were under development at the time of
the decision to slow development;
* An accrual of $300,000 for the payment of certain
operational bonuses which are described above;
* An accrual of $420,000 for certain employee litigation
claims;
* An accrual of $120,000 for miscellaneous expenses.
The reserve for notes and other receivables included $2.0
million for notes receivable which were outstanding in
connection with the sale of restaurants to franchisees. The
decision to reserve for these notes was based on discussions
held with the franchisees during the second quarter of 1995
and a review of their financial position. Three notes
totaling $1.3 million of this amount were reserved due to
the fact that the franchisee approached the Company during
the second quarter of 1995 and indicated that the
devaluation of the Mexican Peso in December 1994 had
permanently harmed its restaurants to an extent that they
were going to close the restaurants. These restaurants were
all closed during 1995. The remaining amount relates to a
restaurant whose sales trends continue to erode and there is
substantial doubt as to the recoverability of the balance.
The reserve amounts were calculated by reducing the
outstanding note balances to the estimated value of the
underlying collateral and reserving the remaining balance.
The restaurants reserved for were all in Texas.
The remaining $1.5 million primarily relates to franchisee
receivables. Approximately $250,000 of this amount relates
to periodic franchise and royalty fees owed by the
franchisees noted above, including interest. An additional
$500,000 is reserved due to a franchisee's failure to meet a
contractual obligation and make payment on a development
agreement during the second quarter of 1995. Approximately
$350,000 of the amount relates to periodic royalty fees and
franchise fees from a franchisee with whom the Company had
been in discussions to acquire its restaurants. Due to the
Company's decision to slow all development, the Company
broke off these negotiations. The remaining balances,
totaling $400,000, include various types of receivables
including other franchisee amounts, employee receivables,
and other miscellaneous receivables.
Litigation Settlement
- ---------------------
On July 24, 1996, the Company approved the proposed
Settlement of A.L. Park, et al. v. Taco Cabana, Inc., et
al., a suit originally filed in September 1995 seeking
status as a class action. As a result thereof, the Company
recorded a charge of $3.4 million during the second quarter
of fiscal 1996.
Under the terms of the Settlement, the plaintiffs will
receive a total of $6.0 million. The Company's insurance
carrier has deposited $3.05 million in cash, and the Company
has deposited $2.95 million in cash into an escrow account
for such purposes. Additionally, the Company has accrued
$450,000 for the payment of legal and related expenses
incurred and anticipated to be incurred in connection with
the Settlement. As of September 29, 1996, the Company had
paid approximately $220,000 in legal expenses relating to
the lawsuit.
The following table sets forth for the periods indicated the
percentage relationship to total revenues, unless otherwise
indicated, of certain operating statement data. The table
also sets forth certain restaurant data for the periods
indicated.
<TABLE>
13 Weeks Ended 39 Weeks Ended
------------------------- --------------------------
September 29, October 1, September 29, October 1,
1996 1995 1996 1995
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Operating Statement Data:
REVENUES:
Restaurant sales 99.6% 99.4% 99.6% 98.9%
Franchise fees and royalty
income 0.4 0.6 0.4 1.1
---- ---- ---- ----
Total revenues 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
COSTS AND EXPENSES:
Restaurant cost of sales (1) 32.0% 32.3% 31.6% 32.3%
Labor (1) 26.3 26.6 26.1 26.3
Occupancy (1) 6.1 5.9 6.1 5.9
Other restaurant operating
costs (1) 17.9 19.7 18.0 19.4
General and administrative
costs 4.8 4.1 4.9 4.1
Depreciation and
amortization 6.8 7.4 6.8 7.3
Litigation settlement - - 3.4 -
Special charge - - - 7.7
Reserve for notes and other
receivables - - - 3.3
INCOME (LOSS) FROM OPERATIONS 6.6 4.5 3.4 (5.4)
INTEREST EXPENSE, net (0.9) (1.1) (1.1) (1.0)
----- ----- ----- -----
INCOME (LOSS) BEFORE INCOME
TAXES 5.7 3.3 2.4 (6.4)
BENEFIT (PROVISION) FOR
INCOME TAXES 2.1 (1.2) (1.0) 2.4
----- ----- ----- -----
NET INCOME (LOSS) 3.6% 2.1% 1.4% (4.0)%
===== ===== ===== =====
Restaurant Data:
Company-owned restaurants:
Beginning of period 104 109 106 104
Opened - - - 10
Sold (refranchised) - - - (3)
Closed - (1) (2) (3)
----- ----- ----- -----
End of period 104 108 104 108
Franchised and joint-venture
owned restaurants:
End of period 20 27 20 27
----- ----- ----- -----
Total restaurants:
End of period 124 135 124 135
===== ===== ===== =====
(1) Percentage is calculated based upon restaurant sales.
</TABLE>
The Thirteen Weeks Ended September 29, 1996 Compared to the
Thirteen Weeks Ended October 1, 1995
Revenues. Restaurant sales decreased by $1.8 million, or
5.0 %, to $33.7 million for the third quarter of 1996 from
$35.5 million for the third quarter in 1995. Sales from
restaurants opened after July 2, 1995 accounted for an
increase of $600,000. Sales from restaurants which were
closed after July 2, 1995 accounted for $1.2 million of the
decrease. Sales from restaurants opened or acquired prior to
January 1, 1995 accounted for a decrease of approximately
$1.2 million. Comparable store sales, defined as Taco Cabana
restaurants that have been open 18 months or more at the
beginning of the quarter, decreased 2.5% during the third
quarter of 1996. Comparable store sales in the Company's
core markets of San Antonio, Austin, Houston and Dallas,
which represent over 90% of the Company's sales volume, were
flat for the third quarter of 1996. Management attributes
much of the decline in sales to the adverse economic
conditions in the Texas - Mexico border market. The Company
also experienced a decrease in sales in its Colorado market
during the third quarter of 1996.
Costs and Expenses. Restaurant cost of sales, calculated as
a percentage of restaurant sales, decreased to 32.0% in the
third quarter of 1996 from 32.3% for the third quarter of
1995. The decrease was due primarily to the negotiation of
favorable commodity pricing at the beginning of 1996. The
decrease was partially offset by an increase in certain
commodity costs, primarily cheese and bacon, during the
third quarter of 1996 compared to the prior quarters of
1996.
Labor costs calculated as a percentage of restaurant sales
improved slightly during the third quarter of 1996 compared
to the same period in 1995. The labor costs were negatively
impacted due to a relatively high rate of restaurant
management turnover during third quarter of 1996. The
turnover is part of the Company's continuing process of
raising the standards and accountability within the
management ranks of the Company.
Occupancy costs decreased during the third quarter of 1996
compared to the same period in 1995. The decrease is due to
a decrease in the number of restaurants opened during the
thirteen weeks ended September 29, 1996 compared to the
thirteen weeks ended October 1, 1995.
Other restaurant operating costs as a percentage of
restaurant sales decreased to 17.9% in the third quarter of
1996 from 19.7% for the same period of 1995. This decrease
is due primarily to management's increased focus on unit
level operations.
General and administrative expenses increased to $1.6
million from $1.4 million, and increased as a percentage of
total revenues to 4.8% for the third quarter of 1996 from
4.1% for the comparable period in 1995. This increase was
primarily attributable to the addition of management, as
well as an increased level of expenditures to support the
Company's operations.
Depreciation and amortization expense consisted of the
following:
Thirteen Weeks Ended
----------------------------
September 29, October 1,
1996 1995
------------ ----------
Depreciation of property and
equipment $ 1,822,000 $1,640,000
Amortization of intangible assets 416,000 423,000
Amortization of pre-opening costs 47,000 590,000
Depreciation expense increased by approximately $182,000 for
the quarter ended September 29, 1996 compared to the quarter
ended October 1, 1995. The increase was due primarily to
restaurant openings during 1995, as well as capital
expenditures on existing restaurants during the first nine
months of 1996. Amortization of pre-opening costs decreased
by approximately $543,000 in the third quarter of 1996
compared to the third quarter of 1995, due to the decrease
in the number of stores opened during the most recent twelve-
month period compared to the twelve-month period ended
October 1, 1995.
Interest Expense, net. Interest expense, net of interest
capitalized on construction costs, decreased to $361,000 in
the third quarter of 1996 from $499,000 in the third quarter
of 1995 as a result of the repayment of a substantial
portion of the Company's line of credit during 1996. No
interest was capitalized during the third quarter of 1996.
The Company earned $53,000 of interest income during the
third quarter of 1996 on cash balances compared to $90,000
of interest income earned during the third quarter of 1995.
Net Income and Net Income Per Share. The Company recorded
net income of $1,220,000 for the third quarter of 1996
compared to net income of $751,000 for the comparable period
of 1995. The recorded net income was 3.6% as a percentage of
total revenues for the third quarter of 1996 compared to net
income equal to 2.1% of total revenues in the third quarter
of 1995. The net income per share was $0.08 for the third
quarter of 1996 compared to net income per share of $0.05 in
the comparable period of 1995. Management believes that the
increase in net income and net income per share are largely
due to improved operating margins at the restaurant level.
The Thirty-Nine Weeks Ended September 29, 1996 Compared to
the Thirty-Nine Weeks Ended October 1, 1995
Revenues. Restaurant sales decreased by $4.3 million, or
4.1%, to $100.0 million for the thirty-nine weeks ended
September 29, 1996 from $104.3 million for the comparable
period in 1995. Sales from restaurants opened after January
1, 1995 accounted for an increase of $2.8 million. This was
offset by sales from restaurants which were closed after
January 1, 1995 of $4.2 million, as well as a decrease in
sales of approximately $2.9 million for restaurants opened
or acquired prior to January 1, 1995. Comparable store
sales, defined as Taco Cabana restaurants that have been
open 18 months or more at the beginning of the year,
decreased 2.1% during the thirty-nine weeks ended September
29, 1996. Management attributes much of this decline in
sales to a decrease in sales from the Company's restaurants
in the Texas - Mexico border market, due to adverse economic
conditions in that market, increased levels of competition
in the Company's core markets and inclement weather during
the first quarter of 1996. The Company also experienced a
decrease in sales in its Colorado market during the first
three quarters of 1996.
Franchise and royalty fees decreased by $753,000 to $413,000
for the thirty-nine weeks ended September 29, 1996 compared
to the same period of 1995, due primarily to decreased
revenues related to new franchise development agreements.
Costs and Expenses. Restaurant cost of sales, calculated as
a percentage of restaurant sales, decreased to 31.6% in the
thirty-nine weeks ended September 29, 1996 from 32.3% for
the thirty-nine weeks ended October 1, 1995. The decrease
was due primarily to the negotiation of favorable commodity
pricing at the beginning of 1996. The decrease was partially
offset by increases in certain commodity costs, primarily
cheese and bacon, during the third quarter of 1996 compared
to the prior quarters of 1996.
Labor costs calculated as a percentage of restaurant sales
improved slightly during the thirty-nine weeks ended
September 29, 1996 compared to the same period in 1995. The
labor costs were negatively impacted due to a relatively
high rate of restaurant management turnover during third
quarter of 1996. The turnover is part of the Company's
continuing process of raising the standards and
accountability within the management ranks of the Company.
Occupancy costs decreased slightly during the thirty-nine
weeks ended September 29, 1996 compared to the same period
in 1995.
Other restaurant operating costs as a percentage of
restaurant sales decreased to 18.0% in the thirty-nine weeks
ended September 29, 1996 from 19.4% for same period of 1995.
This decrease is due primarily to management's increased
focus on unit level operations.
General and administrative expenses increased to $4.9
million from $4.3 million, and increased as a percentage of
total revenues to 4.9% for the third quarter of 1996 from
4.1% for the comparable period in 1995. This increase was
primarily attributable to the addition of management, as
well as an increased level of expenditures to support the
Company's operations.
Depreciation and amortization expense consisted of the
following:
Thirty-Nine Weeks Ended
-------------------------
September 29, October 1,
1996 1995
------------ ----------
Depreciation of property and
equipment $ 5,158,000 $ 4,552,000
Amortization of intangible
assets 1,236,000 1,237,000
Amortization of pre-opening
costs 474,000 1,941,000
Depreciation expense increased by approximately $606,000 for
the thirty-nine weeks ended September 29, 1996 compared to
the thirty-nine weeks ended October 1, 1995. The increase
was due primarily to restaurant openings during 1995, as
well as capital expenditures during the first nine months of
1996. Amortization of pre-opening costs decreased by
approximately $1,467,000 in the thirty-nine weeks ended
September 29, 1996 compared to the thirty-nine weeks ended
October 1, 1995, due to the decrease in the number of stores
opened during the most recent twelve-month period compared
to the twelve-month period ended October 1, 1995.
As a result of the litigation settlement recorded during the
second quarter of 1996, the Company recorded a charge of
$3.4 million pretax ($2.2 million after tax). The Company
deposited $2.95 million in cash into an escrow account
during the third quarter of 1996. Additionally, the amount
recorded included $450,000 for the payment of legal and
related expenses incurred and anticipated to be incurred in
connection with the litigation settlement. As of September
29, 1996, the Company has paid approximately $220,000 in
legal expenses relating to the lawsuit. See Part II, Item 1.
"Legal Proceedings" and Note 2. "Litigation Settlement" to
the Condensed Consolidated Financial Statements.
Interest Expense, net. Interest expense, net of interest
capitalized on construction costs, decreased slightly in the
thirty-nine weeks ended September 29, 1996 compared to the
same period in 1995. No interest was capitalized during the
thirty-nine weeks ended September 29, 1996. The Company
earned $155,000 of interest income during the thirty-nine
weeks ended September 29, 1996, compared to $241,000 of
interest income earned during the thirty-nine weeks ended
October 1, 1995. The decrease can be attributed to a
decrease in the level of short-term investments that the
Company maintains.
Net Income (Loss) and Net Income (Loss) Per Share. Net
income increased to $1,401,000 for the thirty-nine weeks
ended September 29, 1996 from a net loss of $4,239,000 for
the same period in 1995. Net income was 1.4% of total
revenues for the thirty-nine weeks ended September 29, 1996
compared to a net loss of 4.0% for the thirty-nine weeks
ended October 1, 1995. Earnings per share was $0.09 for the
thirty-nine weeks ended September 29, 1996 compared to a
loss per share of $0.27 in the same period of 1995.
Disregarding the litigation settlement, recorded in the
second quarter of 1996, the Company would have reported net
income of $3,645,000 for the thirty-nine weeks ended
September 29, 1996, equal to $0.23 per share. Disregarding
the reserve for receivables and the special charge recorded
in the second quarter of 1995, the Company would have
reported net income of $3,069,000 equal to $0.20 per share
during the thirty-nine weeks ended October 1, 1995.
Liquidity and Capital Resources
- -------------------------------
Historically, the Company has financed business and
expansion activities by using funds generated from operating
activities, build-to-suit leases, equity financing, long-
term debt and capital leases. The Company maintains loan
facilities totaling $20 million, including a $5 million
unsecured revolving line of credit for construction or
operating funds. As of October 31, 1996, $7.6 million had
been used under these facilities.
Net cash provided by operating activities was $8.2 million
for the thirty-nine weeks ended September 29, 1996, and $5.5
million for the thirty-nine weeks ended October 1, 1995.
Management attributes much of the increase to the receipt of
$2.1 million of federal income tax refunds during the third
quarter of 1996 as well as an increase in net income.
Net cash used in investing activities was $6.1 million for
the thirty-nine weeks ended September 29, 1996, representing
primarily capital expenditures for improvements to existing
restaurants. This compares to $16.4 million for the thirty-
nine weeks ended October 1, 1995, representing primarily
capital expenditures for the construction of ten Company-
owned restaurants.
Net cash used in financing activities was $4.1 million for
the thirty-nine weeks ended September 29, 1996 representing
primarily repayment of the Company's line of credit and long-
term debt compared to net cash provided from financing
activities of $8.0 million in the same period of 1995
representing borrowings from the Company's debt facilities.
As discussed in "Legal Proceeding" in Item 1 and note 2
"Litigation Settlement" to the Condensed Consolidated
Financial Statements, the Company approved a proposed
settlement of A.L. Park, et al. v. Taco Cabana, Inc., et
al., a suit originally filed in September 1995 seeking
status as a class action.
Under the terms of the Settlement, the plaintiffs will
receive a total of $6.0 million. The Company's insurance
carrier has deposited $3.05 million in cash, while the
Company has deposited $2.95 million in cash into an escrow
account for such purposes. Additionally, the Company has
accrued $450,000 for the payment of legal and related
expenses incurred and anticipated to be incurred in
connection with the Settlement. As of September 29, 1996,
the Company had paid approximately $220,000 in legal
expenses relating to the lawsuit.
The special charge recorded in the second quarter of 1995
included an accrual of approximately $1.2 million to record
the estimated monthly lease payments, net of expected
sublease receipts, associated with certain restaurants which
have been closed. Cash requirements for this accrual were
approximately $250,000 in the thirty-nine weeks ended
September 29, 1996. Several of the restaurants which have
been closed, as well as the Company's previous corporate
offices, are currently for sale. Although there can be no
assurance of the particular price at which any of such
properties will be sold, the Company will receive funds upon
the actual disposition of these properties. In addition,
certain acquisition and accrued liabilities related to the
Two Pesos acquisition were reduced by payments of
approximately $275,000 during the thirty-nine weeks ended
September 29, 1996.
The Company believes that existing cash balances, funds
generated from operations, its ability to borrow, and the
possible use of lease financing will be sufficient to meet
the Company's capital requirements through 1997.
Impact of Inflation
- -------------------
Although increases in labor, food or other operating costs
could adversely affect the Company's operations, management
does not believe that inflation has had a material adverse
effect on the Company's operations to date.
Seasonality and Quarterly Results
The Company's sales fluctuate seasonally. Historically, the
Company's highest sales and earnings occur in the second and
third quarters. In addition, quarterly results are affected
by the timing of the opening and closing of stores.
Therefore, quarterly results cannot be used to predict
results for the entire year.
ITEM 1. LEGAL PROCEEDINGS
On July 24, 1996, the Company entered into a proposed
settlement, subject to court approval and certain other
conditions, of A.L. Park, et al. v. Taco Cabana, Inc., et
al., a suit originally filed in the United States District
Court for the Western District of Texas (Cause No.
SA95CA0847), in September 1995 seeking status as a class
action.
Under the terms of the Settlement, the plaintiffs will
receive a total of $6.0 million. The Company's insurance
carrier has deposited $3.05 million in cash, and the Company
has deposited $2.95 million in cash into an escrow account
for such purposes. Additionally, the Company has accrued
$450,000 for the payment of legal and related expenses
incurred and anticipated to be incurred in connection with
the Settlement. As of September 29, 1996, the Company had
paid approximately $220,000 in legal expenses relating to
the lawsuit.
The Company denies any liability or wrongdoing in connection
with the Lawsuit. The Settlement was entered into to avoid
continuing distraction of management, reduce overall legal
cost liability and exposure to risk of adverse outcome. The
Settlement is contingent upon final approval by U.S.
District Court. A hearing upon such settlement is scheduled
for December 20, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 11 Statement re Computation of Per Share
Earnings.
No reports on Form 8-K were filed during the period covered
by this report.
Signature
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
Dated: November 13, 1996 Taco Cabana, Inc.
/s/ David G. Lloyd
-------------------
David G. Lloyd
Vice President, Chief Financial
Officer, Secretary and Treasurer
Signing on behalf of the registrant
and as the principal financial and
accounting officer
Exhibit 11
TACO CABANA, INC.
Statement re
Computation of Per Share Earnings
<TABLE>
13 Weeks Ended 39 Weeks Ended
------------------------- --------------------------
September 29, October 1, September 29, October 1,
1996 1995 1996 1995
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Net Income (Loss) $ 1,220,000 $ 751,000 $ 1,401,000 $(4,239,000)
Net Income (Loss) per
share Computation:
Average Common Shares
Outstanding 15,700,302 15,723,263 15,690,674 15,564,162
Common stock equivalents-
dilutive options 314,050 - 261,565 -
---------- ---------- ---------- ----------
Average outstanding
common and common
equivalent shares 16,014,352 15,723,263 15,952,239 15,564,162
========== ========== ========== ==========
Net Income (Loss) per
share $ 0.08 $ 0.05 $ 0.09 $ (0.27)
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-END> SEP-29-1996
<CASH> (1,212,000)
<SECURITIES> 2,003,000
<RECEIVABLES> 1,972,000
<ALLOWANCES> 521,000
<INVENTORY> 1,866,000
<CURRENT-ASSETS> 7,607,000
<PP&E> 108,046,000
<DEPRECIATION> 19,716,000
<TOTAL-ASSETS> 144,270,000
<CURRENT-LIABILITIES> 10,292,000
<BONDS> 7,154,000
0
0
<COMMON> 157,000
<OTHER-SE> 113,690,000
<TOTAL-LIABILITY-AND-EQUITY> 144,270,000
<SALES> 99,969,000
<TOTAL-REVENUES> 100,382,000
<CGS> 31,546,000
<TOTAL-COSTS> 53,572,000
<OTHER-EXPENSES> 6,868,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,076,000
<INCOME-PRETAX> 2,387,000
<INCOME-TAX> 986,000
<INCOME-CONTINUING> 1,401,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,401,000
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
