9
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 June 28, 1998
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-20716
TACO CABANA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2201241
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8918 Tesoro Dr., Suite 200
San Antonio, Texas 78217
(Address of principal executive offices)
(210) 804-0990
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days:
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding at July 31, 1998
Common Stock 14,256,200 shares
TACO CABANA, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 28, 1998
and December 29, 1997 2
Condensed Consolidated Statements of Operations for the Thirteen Weeks
Ended June 28, 1998 and June 29, 1997 3
Condensed Consolidated Statements of Operations for the Twenty-Six Weeks
Ended June 28, 1998 and June 29, 1997 4
Condensed Consolidated Statements of Cash Flows for the Twenty-Six Weeks
Ended June 28, 1998 and June 29, 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7-16
PART II. OTHER INFORMATION
Items 1 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 16
Signature 17
TACO CABANA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 28, June 28,
1997 1998
------------ --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 339,000 $ 685,000
Receivables, net 502,000 268,000
Inventory 2,105,000 2,256,000
Prepaid expenses 1,704,000 1,659,000
Federal income taxes receivable 200,000 200,000
----------- -----------
Total current assets 4,850,000 5,068,000
PROPERTY AND EQUIPMENT, net 59,540,000 66,240,000
NOTES RECEIVABLE 344,000 295,000
INTANGIBLE ASSETS, net 11,293,000 11,010,000
OTHER ASSETS 233,000 233,000
----------- -----------
TOTAL $76,260,000 $82,846,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $4,430,000 $2,945,000
Accrued liabilities 6,266,000 5,836,000
Current maturities of long-term debt
and capital leases 1,573,000 2,530,000
Line of credit 4,223,000 2,824,000
----------- -----------
Total current liabilities 16,492,000 14,135,000
LONG-TERM OBLIGATIONS, net of
current maturities:
Capital leases 2,357,000 2,250,000
Long-term debt 11,170,000 16,933,000
----------- -----------
Total long-term obligations 13,527,000 19,183,000
ACQUISITION AND CLOSED
RESTAURANT LIABILITIES 9,126,000 8,657,000
DEFERRED LEASE PAYMENTS 702,000 749,000
STOCKHOLDERS' EQUITY:
Common stock 157,000 157,000
Additional paid-in capital 97,095,000 97,303,000
Retained deficit (57,278,000)(52,124,000)
Treasury stock, at cost (881,937
shares at December 29, 1997 and
1,254,937 shares at June 28, 1998) (3,561,000) (5,214,000)
Total stockholders' equity 36,413,000 40,122,000
----------- -----------
TOTAL $76,260,000 $82,846,000
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
TACO CABANA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Thirteen Weeks Ended
----------------------------
June 29, June 28,
1997 1998
----------- ----------
REVENUES:
Restaurant sales $34,104,000 $36,206,000
Franchise fees and royalty income 96,000 86,000
----------- -----------
Total revenues 34,200,000 36,292,000
----------- -----------
COSTS AND EXPENSES:
Restaurant cost of sales 10,572,000 10,829,000
Labor 9,292,000 9,738,000
Occupancy 2,052,000 1,958,000
Other restaurant operating costs 6,276,000 6,093,000
General and administrative 1,782,000 1,954,000
Depreciation, amortization and
restaurant opening costs 2,570,000 1,974,000
----------- -----------
Total costs and expenses 32,544,000 32,546,000
----------- -----------
INCOME FROM OPERATIONS 1,656,000 3,746,000
----------- -----------
INTEREST EXPENSE, NET (265,000) (449,000)
------------ -----------
INCOME BEFORE INCOME TAXES 1,391,000 3,297,000
----------- -----------
PROVISION FOR INCOME TAXES (515,000) -
----------- -----------
NET INCOME $ 876,000 $3,297,000
=========== ===========
BASIC EARNINGS PER SHARE $ 0.06 $ 0.22
=========== ===========
BASIC WEIGHTED SHARES OUTSTANDING 15,680,713 14,768,266
=========== ===========
DILUTED EARNINGS PER SHARE $ 0.06 $ 0.22
=========== ===========
DILUTED WEIGHTED SHARES OUTSTANDING 15,743,447 15,091,502
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
TACO CABANA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Twenty-Six Weeks Ended
------------------------------
June 29, June 28,
1997 1998
------------ ------------
REVENUES:
Restaurant sales $64,204,000 $68,528,000
Franchise fees and royalty income 182,000 171,000
----------- -----------
Total revenues 64,386,000 68,699,000
----------- -----------
COSTS AND EXPENSES:
Restaurant cost of sales 19,734,000 20,621,000
Labor 17,378,000 18,410,000
Occupancy 4,099,000 3,865,000
Other restaurant operating costs 11,751,000 12,095,000
General and administrative 3,575,000 3,867,000
Depreciation, amortization and
restaurant opening costs 5,060,000 3,842,000
----------- -----------
Total costs and expenses 61,597,000 62,700,000
----------- -----------
INCOME FROM OPERATIONS 2,789,000 5,999,000
----------- -----------
INTEREST EXPENSE, NET (516,000) (845,000)
----------- -----------
INCOME BEFORE FOR INCOME TAXES 2,273,000 5,154,000
----------- -----------
PROVISION FOR INCOME TAXES (841,000) -
----------- -----------
NET INCOME $1,432,000 $5,154,000
=========== ===========
BASIC EARNINGS PER SHARE $ 0.09 $ 0.35
=========== ===========
BASIC WEIGHTED SHARES OUTSTANDING 15,693,625 14,797,202
=========== ===========
DILUTED EARNINGS PER SHARE $ 0.09 $ 0.34
=========== ===========
DILUTED WEIGHTED SHARES OUTSTANDING 15,768,272 15,069,175
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
TACO CABANA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Twenty-Six Weeks Ended
------------------------------
June 29, June 28,
1997 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,432,000 $5,154,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,060,000 3,445,000
Deferred income taxes 901,000 -
Capitalized interest (45,000) (77,000)
Deferred lease payments (144,000) 47,000
Changes in operating working
capital items (993,000) (1,739,000)
----------- ------------
Net cash provided by operating activities 6,211,000 6,830,000
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (6,270,000) (12,209,000)
Proceeds from the sale of property
and equipment - 1,955,000
----------- ------------
Net cash used for investing activities (6,720,000) (10,254,000)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable
and draws on line of credit 2,414,000 6,685,000
Principal payments under long-term
debt and line of credit (1,073,000) (1,378,000)
Principal payments under capital leases (105,000) (92,000)
Purchase of treasury stock (1,449,000) (1,653,000)
Exercise of stock options - 208,000
----------- ------------
Net cash provided (used) by
financing activities (213,000) 3,770,000
----------- ------------
NET INCREASE (DECREASE) IN CASH (722,000) 346,000
CASH AND CASH EQUIVALENTS,
beginning of period 748,000 339,000
----------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 26,000 $685,000
=========== ============
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 28, 1997.
Recently Issued Accounting Pronouncements: In April 1998, the Accounting
Standards Executive Committee of the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities". The accounting standard requires entities to
expense as incurred all start-up and preopening costs that are not otherwise
capitalizable as long-lived assets. The accounting standard is effective for
fiscal years beginning after December 15, 1998, with earlier application
encouraged. The Company adopted the accounting standard during the first
quarter of 1998. The cumulative effect of the change in the accounting
principle is not material to the results of operations or financial position
of the Company.
2. Earnings per Share
Basic earnings per share was computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for
the reporting period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock. Outstanding stock
options issued by the Company represent the only dilutive effect reflected in
diluted weighted average shares. All earnings per share amounts for all
periods have been presented, and where necessary, restated to conform to the
Statement of Financial Accounting Standards No. 128, Earnings per Share.
The following table sets forth the computation of basic and diluted earnings
per share:
13 Weeks Ended 26 Weeks Ended
-------------- --------------
June 29, June 28, June 29, June 28,
1997 1998 1997 1998
--------- ---------- ----------- -----------
Numerator for basic and
diluted earnings per
share - net income $876,000 $3,297,000 $1,432,000 $5,154,000
Denominator:
Denominator for basic
earnings per share:
Weighted-average shares 15,680,713 14,768,266 15,693,625 14,797,202
Effect of dilutive securities:
Employee stock options 62,734 323,236 74,647 271,973
---------- ---------- ---------- ----------
Denominator for diluted
earnings per share:
Adjusted weighted-average
and assumed conversions 15,743,447 15,091,502 15,768,272 15,069,175
========== ========== ========== ==========
Basic earnings per share $ 0.06 $ 0.22 $ 0.09 $ 0.35
========== ========== ========== ==========
Diluted earnings per share $ 0.06 $ 0.22 $ 0.09 $ 0.34
========== ========== ========== ==========
3. Supplemental Disclosure of Cash Flow Information
Twenty-Six Weeks Ended
----------------------
June 29, June 28,
1997 1998
---------- ----------
(Unaudited) (Unaudited)
Cash paid for interest $ 604,000 $ 810,000
Interest capitalized on
construction costs 45,000 77,000
Cash paid for income taxes 62,000 -
Cash received for income taxes 4,000 -
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, Texas. As of July 31, 1998, the Company had
100 Company-owned restaurants and 10 franchised restaurants including one joint-
venture owned. The Company's revenues are derived primarily from sales by
Company-owned restaurants, with franchise fees and royalty income currently
contributing less than 1% of total revenues.
During the twenty-six weeks ended June 28, 1998, the Company opened six and
closed three Company-owned restaurants and a franchisee of the Company closed
one restaurant. Subsequent to June 28, 1998, one Company owned restaurant was
closed.
The following table sets forth for the periods indicated the percentage
relationship to total revenues, unless otherwise indicated, of certain operating
statement data. The table also sets forth certain restaurant data for the
periods indicated.
13 Weeks Ended 26 Weeks Ended
---------------- ----------------
June 29, June 28, June 29, June 28,
1997 1998 1997 1998
-------- ------- -------- -------
Operating Statement Data:
REVENUES:
Restaurant sales 99.7% 99.8% 99.7% 99.8%
Franchise fees and
royalty income 0.3 0.2 0.3 0.2
------ ------ ------ ------
Total revenues 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
COSTS AND EXPENSES:
Restaurant cost of
sales (1) 31.0% 29.9% 30.7% 30.1%
Labor (1) 27.2 26.9 27.1 26.9
Occupancy (1) 6.0 5.4 6.4 5.6
Other restaurant operating
costs (1) 18.4 16.8 18.3 17.6
General and administrative 5.2 5.4 5.6 5.6
Depreciation, amortization and
restaurant opening costs 7.5 5.4 7.9 5.6
------ ------ ------ ------
INCOME FROM OPERATIONS 4.8 10.3 4.3 8.7
------ ------ ------ ------
INTEREST EXPENSE, net (0.8) (1.2) (0.8) (1.2)
------ ------ ------ ------
INCOME BEFORE
INCOME TAXES 4.1 9.1 3.5 7.5
PROVISION FOR
INCOME TAXES (1.5) - (1.3) -
------ ------ ------ ------
NET INCOME 2.6% 9.1% 2.2% 7.5%
====== ====== ====== ======
Restaurant Data:
Company-owned restaurants:
Beginning of period 106 99 104 98
Opened 1 3 3 6
Closed - (1) - (3)
------ ------ ------ ------
End of period 107 101 107 101
Franchised (2) and joint-venture
owned restaurants: 14 10 14 10
------ ------ ------ ------
Total restaurants: 121 111 121 111
====== ====== ====== ======
(1) Percentage is calculated based upon restaurant sales.
(2) Excludes Two Pesos licensed restaurants.
The Thirteen Weeks Ended June 28, 1998 Compared to the Thirteen Weeks Ended June
29, 1997
Restaurant Sales. Restaurant sales increased by $2.1 million, or 6.2%, to $36.2
million for the second quarter of 1998 from $34.1 million for the second quarter
in 1997. The increase is due primarily to an increase in sales at existing
restaurants. Comparable store sales, defined as Taco Cabana restaurants that
have been open 18 months or more at the beginning of the quarter, increased
4.2%. Management attributes the increase to several factors including a more
consistent marketing program featuring a value meal message, a commitment to
increased staffing levels at existing restaurants, the ongoing reimage program,
a menu price increase of approximately 2% which was implemented during the first
quarter of 1998 and the closing of underperforming restaurants. Sales from
restaurants opened after June 29, 1997 accounted for an increase of $4.1
million. This increase was offset by sales of $2.4 million from restaurants
which were closed after June 28, 1998.
Restaurant Cost of Sales. Restaurant cost of sales, calculated as a percentage
of restaurant sales, decreased to 29.9% in the second quarter of 1998 from 31.0%
for the second quarter of 1997. The decrease was due primarily to continued
improvements in the management of food costs through utilizing increased
controls and improved purchasing programs, including the continued negotiation
of favorable commodity pricing. In addition, food costs as a percentage of
restaurant sales were favorably impacted by a menu price increase of
approximately 2% which was implemented during the first quarter of 1998.
Management expects cost of sales to increase slightly, as a percentage of sales,
during the remainder of the year due to recent increases in commodity prices.
Labor. Labor costs calculated as a percentage of restaurant sales decreased to
26.9% during the second quarter of 1998 from 27.2% for the same period in 1997.
Adjusting for restaurants closed after June 29, 1997, comparable labor as a
percentage of restaurant sales in the second quarter of 1997 was 25.9%. The
increase in comparable labor costs is due to an increase in the minimum wage in
September 1997, management's continued commitment to increased staffing levels
at the restaurant level in order to provide a consistent guest experience as
well as higher than normal labor costs at newer restaurants. New restaurants
generally have higher than normal labor costs for the first four to six months
of operations. Management expects the trend in comparable labor costs to
continue during the remainder of 1998.
Occupancy. Occupancy costs decreased by $94,000 during the second quarter of
1998 compared to the second quarter of 1997. The decrease is primarily due to
the closure of underperforming restaurants during 1997. As a percentage of
restaurant sales, occupancy costs decreased to 5.4% in the second quarter of
1998 compared to 6.0% in the second quarter of 1997, due to increased restaurant
average unit volumes attributable to the closure of underperforming restaurants
and the opening of new restaurants with higher sales volumes.
Other Restaurant Operating Costs. Other restaurant operating costs decreased to
$6.1 million in the second quarter of 1998 compared to $6.3 million in the
second quarter of 1997. As a percentage of restaurant sales, other restaurant
operating costs decreased to 16.8% for the second quarter of 1998 compared to
18.4% for the second quarter of 1997. The decrease is due to decreased
marketing and promotional activities and increased restaurant average unit
volumes. Management expects the favorable comparisons as a percentage of sales
to continue during 1998.
General and Administrative. General and administrative expenses increased to
$2.0 million for the second quarter of 1998 from $1.8 million in the comparable
period of 1997. As a percentage of sales, general and administrative expenses
increased to 5.4% for the second quarter of 1998 compared to 5.2% in the same
period of 1997. Management expects this amount to slightly decrease or remain
constant, as a percentage of sales, throughout the remainder of 1998.
Depreciation, Amortization and Restaurant Opening Costs. Depreciation,
amortization and restaurant opening costs consisted of the following:
Thirteen Weeks Ended
--------------------
June 29, June 28,
1997 1998
-------- --------
(Unaudited) (Unaudited)
Depreciation of property
and equipment $2,102,000 $1,632,000
Amortization of intangible 396,000 146,000
assets
Restaurant opening costs 72,000 196,000
Depreciation expense decreased by $470,000 for the quarter ended June 28, 1998
compared to the quarter ended June 29, 1997. The decrease was primarily due to
the closure of restaurants and the writedown of assets in conjunction with the
special charge recorded in the fourth quarter of 1997, offset by new restaurants
opened since June 29, 1997, as well as continued capital improvements to
existing restaurants. Amortization of intangible assets decreased by $250,000
for the quarter ended June 28, 1998 compared to the quarter ended June 29, 1997.
The decrease was primarily due to the writedown of intangible assets in
conjunction with the special charge recorded in the fourth quarter of 1997.
Restaurant opening costs increased by $124,000 during the second quarter of 1998
compared to the same period in 1997, primarily due to the opening of three
Company owned restaurants during the second quarter of 1998. See footnote 1 to
Condensed Consolidated Financial Statements regarding the treatment of
restaurant opening costs.
Interest Expense, net. Interest expense, net of interest capitalized on
construction costs, increased to $449,000 in the second quarter of 1998 from
$265,000 in the second quarter of 1997, primarily as a result of additional
borrowings under the Company's debt facilities. In addition, the Company
capitalized $25,000 of interest related to new restaurant construction in the
most recent quarter compared to $24,000 during the second quarter of 1997.
Income Taxes. Provision for income taxes decreased to zero for the second
quarter of 1998 compared to $515,000, or 37% of income before taxes, for the
second quarter of 1997. The decrease in income taxes is due to the recognition
of previously reserved deferred tax assets.
Net Income and Earnings Per Share. Net income increased to $3.3 million for the
second quarter of 1998 from $876,000 for the same period in 1997. Net income
was 9.1% of total revenues for the second quarter in 1998 compared to 2.6% in
the second quarter of 1997. Diluted earnings per share was $0.22 for the second
quarter of 1998 compared to $0.06 in the same period of 1997. The increase in
earnings per share during the second quarter of fiscal 1998 compared to the same
quarter last year is due to higher sales at existing restaurants, the opening of
new restaurants, continued strong cost controls, the closing of underperforming
restaurants, a reduction in depreciation and amortization expense, the lack of a
provision for income taxes in the current quarter and a reduction in the number
of shares outstanding.
The Twenty-Six Weeks Ended June 28, 1998 Compared to the Twenty-Six Weeks Ended
June 29, 1997
Restaurant Sales. Restaurant sales increased by $4.3 million, or 6.7%, to $68.5
million for the twenty-six weeks ended June 28, 1998 from $64.2 million for the
comparable period in 1997. The increase is due primarily to an increase in
sales at existing restaurants. Comparable store sales, defined as Taco Cabana
restaurants that have been open 18 months or more at the beginning of the
quarter, increased 5.5%. Management attributes the increase to several factors
including a more consistent marketing program featuring a value meal message, a
commitment to increased staffing levels at existing restaurants, the ongoing
reimage program, favorable weather during the first quarter of 1998 compared to
1997, a menu price increase of approximately 2% which was implemented during the
first quarter of 1998 and the closing of underperforming restaurants. Sales
from restaurants opened after June 29, 1997 accounted for an increase of $6.6
million. This increase was offset by sales from restaurants which were closed
after June 28, 1998 of $4.5 million.
Restaurant Cost of Sales. Restaurant cost of sales, calculated as a percentage
of restaurant sales, decreased to 30.1% during the twenty-six weeks ended June
28, 1998 from 30.7% for same period in 1997. The decrease was due primarily to
continued improvements in the management of food costs through utilizing
increased controls and improved purchasing programs, including the continued
negotiation of favorable commodity pricing. In addition, food costs as a
percentage of restaurant sales were favorably impacted by a menu price increase
of approximately 2% which was implemented during the first quarter of 1998.
Management expects cost of sales to increase slightly, as a percentage of sales,
during the remainder of the year due to recent increases in commodity prices.
Labor. Labor costs calculated as a percentage of restaurant sales decreased to
26.9% for the twenty-six weeks ended June 28, 1998 from 27.1% for the same
period in 1997. Adjusting for restaurants closed after June 29, 1997,
comparable labor as a percentage of restaurant sales during the twenty-six weeks
ended June 28, 1998 was 26.1%. The increase in comparable labor costs is due to
an increase in the minimum wage in September 1997, management's continued
commitment to increased staffing levels at the restaurant level in order to
provide a consistent guest experience as well as higher than normal labor costs
at newer restaurants. New restaurants generally have higher than normal labor
costs for the first four to six months of operations. Management expects the
trend in comparable labor costs to continue during the remainder of 1998.
Occupancy. Occupancy costs decreased by $234,000 during the twenty-six weeks
ended June 28, 1998 compared to the same period in 1997. The decrease is
primarily due to the closure of underperforming restaurants during 1997. As a
percentage of restaurant sales, occupancy costs decreased to 5.6% in during the
twenty-six weeks ended June 28, 1998 compared to 6.4% in the same period of
1997. The decrease is due to an increase in restaurant average unit volumes
during 1998.
Other Restaurant Operating Costs. Other restaurant operating costs increased to
$12.1 million in the twenty-six weeks ended June 28, 1998 compared to $11.8
million in the same period of 1997. As a percentage of restaurant sales, other
restaurant operating costs decreased to 17.6% for the twenty-six weeks ended
June 28, 1998 compared to 18.3% for the same period of 1997. The decrease is
due to decreased marketing and promotional activities and an increase in
restaurant average unit volumes. Management expects the favorable comparisons as
a percentage of sales to continue during 1998.
General and Administrative. General and administrative expenses increased to
$3.9 million for the twenty-six weeks ended June 28, 1998 from $3.6 million in
the comparable period of 1997. As a percentage of sales, general and
administrative expenses remained constant at 5.6% for the twenty-six weeks ended
June 28, 1998 and for the comparable period in 1997. Management expects this
amount to slightly decrease or remain constant, as a percentage of sales,
throughout the remainder of 1998.
Depreciation, Amortization and Restaurant Opening Costs. Depreciation,
amortization and restaurant opening costs consisted of the following:
Twenty-Six Weeks Ended
----------------------
June 29, June 28,
1997 1998
--------- ----------
(Unaudited) (Unaudited)
Depreciation of property and $4,137,000 $3,163,000
equipment
Amortization of intangible 812,000 283,000
assets
Restaurant opening costs 111,000 396,000
Depreciation expense decreased by $974,000 for the twenty-six weeks ended June
28, 1998 compared to the same period in 1997. The decrease was primarily due
the closure of restaurants and the writedown of assets in conjunction with the
special charge recorded in the fourth quarter of 1997, offset by new restaurants
opened since June 29, 1997, as well as continued capital improvements to
existing restaurants. Amortization of intangible assets decreased by $529,000
for the twenty-six weeks ended June 28, 1998 compared to the same period in
1997. The decrease was primarily due to the writedown of intangible assets in
conjunction with the special charge recorded in the fourth quarter of 1997.
Restaurant opening costs increased by $285,000 during the twenty-six weeks ended
June 28, 1998, compared to the same period in 1997. The increase was primarily
due to the opening of six restaurants during the twenty-six weeks ended June 28,
1998. See footnote 1 to Condensed Consolidated Financial Statements
regarding the treatment of restaurant opening costs.
Interest Expense, net. Interest expense, net of interest capitalized on
construction costs, increased to $845,000 during the twenty-six weeks ended June
28, 1998 from $516,000 in the same period of 1997, primarily as a result of
additional borrowings under the Company's debt facilities. In addition, the
Company capitalized $77,000 of interest related to new restaurant construction
during the twenty-six weeks ended June 28, 1998 compared to $45,000 during the
same period in 1997.
Income Taxes. Provision for income taxes decreased to zero for the twenty-six
weeks ended June 28, 1998 compared to $841,000, or 37% of income before taxes,
for the same period in 1997. The decrease in income taxes is due to the
recognition of previously reserved deferred tax assets.
Net Income and Earnings Per Share. Net income increased to $5.2 million for the
twenty-six weeks ended June 28, 1998 from $1.4 million for the same period in
1997. Net income was 7.5% of total revenues for the twenty-six weeks ended June
28, 1998 compared to 2.2% in the same period of 1997. Diluted earnings per
share was $0.34 for the twenty-six weeks ended June 28, 1998 compared to $0.09
in the same period of 1997. The increase in earnings per share during the
twenty-six weeks ended June 28, 1998 compared to the same period last year is
due to higher sales at existing restaurants, the opening of new restaurants,
continued strong cost controls, the closing of underperforming restaurants, a
reduction in depreciation and amortization expense, the lack of a provision for
income taxes and a reduction in the number of shares outstanding.
Liquidity and Capital Resources
Historically, the Company has financed business and expansion activities by
using funds generated from operating activities, build-to-suit leases, equity
financing, short and long-term debt and capital leases. The Company maintains
credit facilities totaling $30.0 million, including a $5.0 million unsecured
revolving line of credit. As of July 31, 1998, $21.0 million was outstanding
under these commitments.
Net cash provided by operating activities was $6.8 million for the twenty-six
weeks ended June 28, 1998, and $6.2 million for the twenty-six weeks ended June
29, 1997.
Net cash used in investing activities was $10.3 million for the twenty-six weeks
ended June 28, 1998 representing primarily capital expenditures of $12.2 million
for the construction of new restaurants and improvements to existing
restaurants. This was offset by the sale of assets generating $2.0 million in
proceeds. This compares to $6.7 million in net cash used in investing
activities for the twenty-six weeks ended June 29, 1997, representing primarily
capital expenditures for the construction of new restaurants and improvements to
existing restaurants.
Net cash provided by financing activities was $3.8 million for the twenty-six
weeks ended June 28, 1998 representing primarily net draws from the Company's
debt facilities of $5.3 million, offset by the purchase of $1.7 million in
treasury stock. This compares to net cash used in financing activities of
$213,000 in the same period of 1997, representing net draws on the Company's
debt facilities of $1.3 million, offset by the purchase of $1.5 million in
treasury stock.
On April 16, 1997, the Company's Board of Directors approved a plan to
repurchase up to 1,500,000 shares of the Company's Common Stock. As of July 31,
1998, the Company had repurchased all 1,500,000 shares at an average cost of
$4.91 per share. The Company has funded the repurchases through available bank
credit facilities, as well as the liquidation of the Company's short term
investment portfolio. On July 27, 1998, the Company's Board of Directors
approved the purchase of up to an additional 1,000,000 shares of the Company's
Common Stock. The timing, price, quantity and manner of purchases will be made
at the discretion of management and will depend upon market conditions. The
Company will fund the repurchase program through available bank credit
facilities as well as current cash flows from operations.
The special charges recorded in 1997 and 1995 included accruals of approximately
$10.2 million to record the estimated monthly lease payments, net of expected
sublease receipts, associated with certain restaurants which have been closed.
Cash requirements for this accrual were approximately $1.4 million during the
twenty-six weeks ended June 28, 1998. During the twenty-six weeks ended June
28, 1998, the Company sold properties relating to the special charges which
resulted in proceeds of $2.0 million, which approximated the carrying value of
the assets sold. Subsequent to June 28, 1998, the company sold assets relating
to the special charges which resulted in proceeds of $1.2 million, which
approximated the carrying value of the assets sold. The Company currently has
several closed restaurant properties for sale which were covered by the special
charges. Although there can be no assurance of the particular price at which
such property will be sold, the Company expects to receive funds equal to or in
excess of the carrying value upon the actual disposition of this property. In
addition, certain acquisition and accrued liabilities related to the Two Pesos
acquisition were reduced by payments of approximately $129,000 during the
twenty-six weeks ended June 28, 1998.
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 1998, including
the planned opening of eight to ten restaurants, six of which have been opened
at July 31, 1998, and the reimaging of 25 restaurants during the 1998 fiscal
year. Total capital expenditures related to new restaurants are estimated to be
$12.0 to $15.0 million. The total for other capital expenditures, including the
cost of the reimagings, is estimated to be $7.5 to $8.5 million. Total capital
expenditures for 1998 are expected to approximate $19.5 to $23.5 million.
Impact of Inflation
Although increases in labor, food or other operating costs could adversely
affect the Company's operations, management does not believe that inflation has
had a material adverse effect on the Company's operations to date.
Seasonality and Quarterly Results
The Company's sales fluctuate seasonally. Historically, the Company's highest
sales and earnings occur in the second and third quarters. In addition,
quarterly results are affected by the timing of the opening and closing of
stores. Therefore, quarterly results cannot be used to indicate results for the
entire year.
Forward-Looking Statements
Statements in this quarterly report concerning Taco Cabana which are (a)
projections of revenues, costs, including trends in cost of sales, labor and
general and administrative costs or other financial items, (b) statements of
plans and objectives for future operations, specifically statements regarding
planned restaurant openings and reimages as well as share repurchases and cash
flows (c) statements of future economic performance, or (d) statements of
assumptions or estimates underlying or supporting the foregoing are forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. The ultimate
accuracy of forward-looking statements is subject to a wide range of business
risks and changes in circumstances, and actual results and outcomes will differ,
often materially, from expectations. Any number of important factors could
cause actual results to differ materially from those in the forward-looking
statements herein, including the following: the timing and extent of changes in
prices of commodities and supplies that the Company utilizes; actions of our
customers and competitors; state and federal environmental, economic, safety and
other policies and regulations, any changes therein, and any legal or regulatory
delays or other factors beyond the Company's control; execution of planned
capital projects; weather conditions affecting the Company's operations; natural
disasters affecting operations; and adverse rulings, judgments, or settlements
in litigation or other legal matters. The Company undertakes no obligation to
publicly release the result of any revisions to any such forward-looking
statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Item 6. Exhibits and Reports on Form 8-K
The Company has filed the following exhibits with the report:
10.18 Extension and Amendment to Employment Agreement between
Taco Cabana, Inc and Steve Clark
27. Financial Data Schedule
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: August 12, 1998 Taco Cabana, Inc.
David G. Lloyd
Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
Signing on behalf of the registrant and as the
principal financial and accounting officer
EXTENSION AND AMENDMENT TO EMPLOYMENT AGREEMENT
This Extension and Amendment to Employee Agreement (the "Amendment") is
made and entered into this 15th day of May, 1998 by and between TACO CABANA,
INC., a Delaware corporation ("Company"), and STEVE CLARK ("Employee").
WITNESSETH:
WHEREAS, the Company and Employee entered into an Employment Agreement
dated June 6, 1995 (the "Employment Agreement"), which Employment Agreement was
effective as of the 24th day of April, 1995, a copy of which Employment
Agreement is attached hereto as Exhibit A and incorporated herein by reference
for all relevant purposes; and
WHEREAS, Employee is currently the President and Chief Executive Officer of
the Company and is also a member of the Board of Directors thereof; and
WHEREAS, at a Board of Directors meeting the Company held on March 27,
1998, with Employee abstaining, the Board of Directors of the Company in
recognition of the outstanding efforts of the Employee unanimously resolved to
extend the Term of the Employment Agreement, to increase Employee's Base Salary,
to grant to Employee additional options to purchase common shares of the Company
and to provide for a Contract Payment under certain circumstances, all in
accordance with the terms and conditions hereinafter set forth.
NOW, THEREFORE, for and in consideration of the premises herein contained
and other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto hereby agree as follows:
1. The Term of the Employment Agreement set forth in Section 2 thereof
shall be extended one year and as extended shall continue until April 23, 1999
or until otherwise terminated as provided in the Employment Agreement as
modified by the Amendment.
2. The Base Salary to be paid Employee during the extended one (1) year
Term as set forth in Section 3.1 Base Salary of the Employment Agreement shall
be increased to $280,000 by the terms of the Amendment and all of the remaining
provisions of Section 3.1 shall remain in full force and effect.
3. A new Section 7.3 entitled Contract Payment shall be added to the
Employment Agreement and shall read as follows:
"7.3 Contract Payment. In the event the Agreement has not been
terminated during the Term hereof and is in full force and effect on
April 23, 1999 and the Term is not renewed or extended, Employee shall
receive as a Contract Payment $140,000 payable in equal installments
over a period of six (6) months and in accordance with the Company's
general payroll practices less such deductions or amounts to be
withheld as shall be required by applicable law and regulations.
During the Term hereof, in the event there is a Change of Control (as
defined in the Taco Cabana Standard Stock Option Agreement and Plan)
and as a result of such Change of Control the Term of this Agreement
is not renewed and Employee shall not remain employed by the Company
or its successors after the expiration of the Term hereof, Employee
shall receive $280,000 payable over a period of twelve (12) months in
equal installments and in accordance with the Company's payroll
practices less such deductions or amounts to be withheld as required
by applicable law or regulations."
4. A new Section 7.4 entitled Additional Stock Option Provided in the
Extension and Amendment to Employment Agreement shall be added to the Employment
Agreement and shall read as follows:
"7.4 Additional Stock Option Provided in the Extension and
Amendment to Employment Agreement In addition to the stock options
granted in Section 7.2 above of the Employment Agreement, the Company
does hereby grant to Employee an option to acquire 100,000 shares of
stock (the "Stock Option"), which Stock Option shall vest in five (5)
equal installments of 20,000 shares each commencing on April 24, 1999;
provided, however, during the Term hereof in the event of a Change of
Control (as defined in the Taco Cabana Standard Stock Option Agreement
and Plan), then, in such event, any unexercised portion of the Stock
Option shall accelerate and immediately vest in the Employee upon any
such Change of Control."
5. The parties hereto acknowledge it is their intention for
representatives of the Board of Directors of the Company and the Employee to
meet to discuss the status of the Employment Agreement as amended by the
Extension and Amendment to Employment Agreement at least ninety (90) days prior
to the expiration of the Term hereof.
6. The parties hereto agree that all of the terms and conditions of the
Employment Agreement not expressly amended herein shall remain in full force and
effect and are hereby ratified.
IN WITNESS WHEREOF, this Extension and Amendment to Employment Agreement is
executed the day and year above written.
COMPANY:
TACO CABANA, INC.
By:_______________________________________
Its: ______________________________________
EMPLOYEE:
__________________________________________
STEVE CLARK
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<FISCAL-YEAR-END> JAN-3-1999
<PERIOD-END> JUN-28-1998
<CASH> 685,000
<SECURITIES> 0
<RECEIVABLES> 366,000
<ALLOWANCES> 98,000
<INVENTORY> 2,256,000
<CURRENT-ASSETS> 5,068,000
<PP&E> 94,656,000
<DEPRECIATION> 28,416,000
<TOTAL-ASSETS> 82,846,000
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0
0
<COMMON> 157,000
<OTHER-SE> 39,965,000
<TOTAL-LIABILITY-AND-EQUITY> 82,846,000
<SALES> 68,528,000
<TOTAL-REVENUES> 68,699,000
<CGS> 20,621,000
<TOTAL-COSTS> 38,212,000
<OTHER-EXPENSES> 3,867,000
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<INTEREST-EXPENSE> 845,000
<INCOME-PRETAX> 5,154,000
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