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 27, 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 October 30, 1998
Common Stock 13,633,150 shares<PAGE>
TACO CABANA, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 27, 1998
and December 29, 1997 2
Condensed Consolidated Statements of Operations for the Thirteen Weeks
Ended September 27, 1998 and September 28, 1997 3
Condensed Consolidated Statements of Operations for the Thirty-nine weeks
Ended September 27, 1998 and September 28, 1997 4
Condensed Consolidated Statements of Cash Flows for the Thirty-nine weeks
Ended September 27, 1998 and September 28, 1997 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8-16
PART II. OTHER INFORMATION
Items 1, 2, 3 and 5 have been omitted since the registrant has no reportable
events in relation to the items
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 17
TACO CABANA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 28,September 27,
1997 1998
----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............. $ 339,000 $ 803,000
Receivables, net....................... 502,000 316,000
Inventory.............................. 2,105,000 2,287,000
Prepaid expenses....................... 1,704,000 3,616,000
Federal income taxes receivable........ 200,000 200,000
----------- -----------
Total current assets................... 4,850,000 7,222,000
PROPERTY AND EQUIPMENT, net............ 59,540,000 68,784,000
NOTES RECEIVABLE....................... 344,000 292,000
INTANGIBLE ASSETS, net................. 11,293,000 11,864,000
OTHER ASSETS........................... 233,000 204,000
----------- -----------
TOTAL.................................. $76,260,000 $87,366,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................... $4,430,000 $3,838,000
Accrued liabilities.................... 6,266,000 6,046,000
Current maturities of long-term debt
and capital leases..................... 1,573,000 2,105,000
Line of credit......................... 4,223,000 4,270,000
----------- -----------
Total current liabilities.............. 16,492,000 16,259,000
LONG-TERM OBLIGATIONS, net of current maturities:
Capital leases......................... 2,357,000 2,196,000
Long-term debt......................... 11,170,000 19,774,000
----------- -----------
Total long-term obligations............ 13,527,000 21,970,000
ACQUISITION AND CLOSED RESTAURANT
LIABILITIES............................ 9,126,000 9,433,000
DEFERRED LEASE PAYMENTS................ 702,000 771,000
STOCKHOLDERS' EQUITY:
Common stock........................... 157,000 157,000
Additional paid-in capital............. 97,095,000 97,315,000
Retained deficit....................... (57,278,000)(49,230,000)
Treasury stock, at cost (871,937 shares
at December 28, 1997 and 1,862,437
shares at September 27, 1998)......... (3,561,000) (9,309,000)
----------- -----------
Total stockholders' equity........... 36,413,000 38,933,000
----------- -----------
TOTAL.................................. $76,260,000 $87,366,000
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
TACO CABANA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Thirteen Weeks Ended
----------------------------
September 28,September 27,
1997 1998
------------ ------------
REVENUES:
Restaurant sales.......................... $34,967,000 $36,176,000
Franchise fees and royalty income......... 84,000 94,000
----------- -----------
Total revenues............................ 35,051,000 36,270,000
----------- -----------
COSTS AND EXPENSES:
Restaurant cost of sales.................. 10,873,000 11,102,000
Labor..................................... 9,794,000 9,599,000
Occupancy................................. 2,123,000 1,966,000
Other restaurant operating costs.......... 6,899,000 6,259,000
General and administrative................ 1,515,000 1,911,000
Depreciation, amortization and restaurant
opening costs........................... 2,698,000 1,995,000
----------- -----------
Total costs and expenses.................. 33,902,000 32,832,000
----------- -----------
INCOME FROM OPERATIONS.................... 1,149,000 3,438,000
----------- -----------
INTEREST EXPENSE, NET..................... (256,000) (543,000)
----------- -----------
INCOME BEFORE INCOME TAXES................ 893,000 2,895,000
PROVISION FOR INCOME TAXES................ (331,000) -
----------- -----------
NET INCOME................................ $562,000 $2,895,000
=========== ===========
BASIC EARNINGS PER SHARE.................. $ 0.04 $ 0.20
=========== ===========
BASIC WEIGHTED SHARES OUTSTANDING......... 15,036,811 14,186,259
=========== ===========
DILUTED EARNINGS PER SHARE................ $ 0.04 $ 0.20
=========== ===========
DILUTED WEIGHTED SHARES OUTSTANDING....... 15,108,018 14,305,200
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
TACO CABANA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Thirty-Nine weeks Ended
-------------------------------
September 28,September 27,
1997 1998
------------ ------------
REVENUES:
Restaurant sales.......................... $99,171,000 $104,704,000
Franchise fees and royalty income......... 267,000 265,000
----------- ------------
Total revenues............................ 99,438,000 104,969,000
----------- ------------
COSTS AND EXPENSES:
Restaurant cost of sales.................. 30,607,000 31,723,000
Labor..................................... 27,173,000 28,009,000
Occupancy................................. 6,222,000 5,830,000
Other restaurant operating costs.......... 18,650,000 18,355,000
General and administrative................ 5,089,000 5,777,000
Depreciation, amortization and restaurant
opening costs........................... 7,758,000 5,837,000
----------- -----------
Total costs and expenses.................. 95,499,000 95,531,000
----------- -----------
INCOME FROM OPERATIONS.................... 3,939,000 9,438,000
----------- -----------
INTEREST EXPENSE, NET..................... (772,000) (1,389,000)
INCOME BEFORE FOR INCOME TAXES............ 3,167,000 8,049,000
----------- -----------
PROVISION FOR INCOME TAXES................ (1,172,000) -
----------- -----------
NET INCOME................................ $1,995,000 $8,049,000
=========== ===========
BASIC EARNINGS PER SHARE.................. $ 0.13 $ 0.55
=========== ===========
BASIC WEIGHTED SHARES OUTSTANDING......... 15,474,687 14,593,555
=========== ===========
DILUTED EARNINGS PER SHARE................ $ 0.13 $ 0.55
=========== ===========
DILUTED WEIGHTED SHARES OUTSTANDING....... 15,555,680 14,746,499
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
TACO CABANA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Thirty-Nine weeks Ended
-------------------------------
September 28,September 27,
1997 1998
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................ $1,995,000 $8,049,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization......... 7,758,000 5,375,000
Deferred income taxes................. 2,313,000 -
Capitalized interest.................. (88,000) (94,000)
Deferred lease payments............... (114,000) 69,000
Changes in operating working capital
items.................................(2,188,000) (2,637,000)
---------- -----------
Net cash provided by operating activities. 9,676,000 10,762,000
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......(12,838,000)(16,987,000)
Proceeds from the sale of property
and equipment........................... 1,379,000 3,195,000
----------- -----------
Net cash used for investing activities...(11,459,000)(13,792,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable
and draws on line of credit............ 13,173,000 11,130,000
Principal payments under long-term debt
and line of credit..................... (8,213,000) (1,967,000)
Principal payments under capital leases.. (146,000) (141,000)
Purchase of treasury stock............... (3,561,000) (5,748,000)
Exercise of stock options................ - 220,000
----------- -----------
Net cash provided by financing activities 1,253,000 3,494,000
----------- -----------
NET (DECREASE) INCREASE IN CASH.......... (530,000) 464,000
CASH AND CASH EQUIVALENTS, beginning of
period................................. 748,000 339,000
---------- -----------
CASH AND CASH EQUIVALENTS, end of period. $218,000 $803,000
========== ===========
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 39 Weeks Ended
-------------- --------------
September 28,September 27, September 28,September 27,
1997 1998 1997 1998
------------ ------------ ------------ ------------
Numerator for basic and
diluted earnings per
share - net income..... $562,000 $2,895,000 $1,995,000 $8,049,000
Denominator for basic
earnings per share:
Weighted-average
shares............... 15,036,811 14,186,259 15,474,687 14,593,555
Effect of dilutive
securities:
Employee stock options 71,207 118,941 80,993 152,944
---------- ---------- ---------- ----------
Denominator for diluted
earnings per share: Adjusted
weighted-average and assumed
conversions......... 15,108,018 14,305,200 15,555,680 14,746,499
=========== ========== ========== ==========
Basic earnings
per share........... $ 0.04 $ 0.20 $ 0.13 $ 0.55
========== ========== ========== ==========
Diluted earnings
per share............ $ 0.04 $ 0.20 $ 0.13 $ 0.55
========== ========== ========== ==========
3. Supplemental Disclosure of Cash Flow Information
Thirty-nine weeks Ended
-----------------------
September 28, September 27,
------------ ------------
1997 1998
------------ ------------
(Unaudited) (Unaudited)
Cash paid for interest ......... $ 890,000 $1,313,000
Interest capitalized on
construction costs ........... 88,000 94,000
Cash paid for income taxes ..... 74,000 -
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 November 9, 1998, the
Company had 103 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 thirty-nine weeks ended September 27, 1998, the Company opened
seven and closed four Company-owned restaurants and a franchisee of the
Company closed one restaurant. Subsequent to September 27, 1998, the Company
opened two restaurants.
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 39 Weeks Ended
-------------- --------------
September 28, September 27, September 28,September 27,
1997 1998 1997 1998
------------ ------------ ------------ ------------
Operating Statement Data:
REVENUES:
Restaurant sales....... 99.8% 99.7% 99.7% 99.7%
Franchise fees and
royalty income......... 0.2 0.3 0.3 0.3
----- ----- ----- -----
Total revenues......... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
COSTS AND EXPENSES:
Restaurant cost of
sales (1).............. 31.1% 30.7% 30.9% 30.3%
Labor (1).............. 28.0 26.5 27.4 26.8
Occupancy (1).......... 6.1 5.4 6.3 5.6
Other restaurant operating
costs (1).............. 19.7 17.3 18.8 17.5
General and administrative 4.3 5.3 5.1 5.5
Depreciation, amortization and
restaurant opening costs 7.7 5.5 7.8 5.6
----- ----- ----- -----
INCOME FROM OPERATIONS... 3.3 9.5 4.0 9.0
INTEREST EXPENSE, net.... (0.7) (1.5) (0.8) (1.3)
----- ----- ----- -----
INCOME BEFORE
INCOME TAXES........... 2.5 8.0 3.2 7.7
PROVISION FOR
INCOME TAXES........... (0.9) - (1.2) -
----- ----- ----- -----
NET INCOME............... 1.6% 8.0% 2.0% 7.7%
===== ===== ===== =====
Restaurant Data:
Company-owned restaurants:
Beginning of period.... 107 101 104 98
Opened................. 2 1 5 7
Acquired............... 1 - 1 -
Closed................. - (1) - (4)
----- ----- ----- -----
End of period.......... 110 101 110 101
Franchised (2) and joint-venture
owned restaurants:..... 11 10 11 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 September 27, 1998 Compared to the Thirteen Weeks Ended
September 28, 1997
Restaurant Sales. Restaurant sales increased by $1.2 million, or 3.5%, to
$36.2 million for the third quarter of 1998 from $35.0 million for the third
quarter in 1997. The increase was due primarily to an increase in sales at
existing restaurants and sales from restaurants opened after September 28,
1997, offset by sales from restaurants closed after September 28, 1997.
Comparable store sales, defined as Taco Cabana restaurants that have been
open 18 months or more at the beginning of the quarter, increased 2.8%.
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
September 28, 1997 accounted for an increase of $4.4 million. This
increase was offset by sales of $2.8 million from restaurants which
were closed after September 28, 1997.
Restaurant Cost of Sales. Restaurant cost of sales, calculated as a
percentage of restaurant sales, decreased to 30.7% for the third quarter of
1998 from 31.1% for the third 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. Restaurant cost of sales, as a percentage of
restaurant sales, have increased from 29.9% in the second quarter of 1998
primarily due to recent commodity price increases. Management expects this
trend to continue during the remainder of 1998.
Labor. Labor costs, calculated as a percentage of restaurant sales,
decreased to 26.5% during the third quarter of 1998 from 28.0% for the
same period in 1997. Adjusting for restaurants closed after September 28,
1997, comparable labor as a percentage of restaurant sales in the third
quarter of 1997 was 25.7%. The increase in comparable labor costs was 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 $157,000 during the third quarter of
1998 compared to the third quarter of 1997. The decrease was primarily due to
the closure of underperforming restaurants during 1997. As a percentage
of restaurant sales, occupancy costs decreased to 5.4% in the third quarter of
1998 compared to 6.1% in the third quarter of 1997, due primarily to increased
restaurant average unit sales volumes, which was in turn 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
$6.3 million in the third quarter of 1998 compared to $6.9 million in the third
quarter of 1997. As a percentage of restaurant sales, other restaurant operating
costs decreased to 17.3% for the third quarter of 1998 compared to 19.7% for
the third quarter of 1997. The decrease was due to decreased marketing and
promotional activities and increased restaurant average unit sales volumes.
Management expects the favorable comparisons as a percentage of sales to
continue during 1998.
General and Administrative. General and administrative expenses increased to
$1.9 million for the third quarter of 1998 from $1.5 million in the comparable
period of 1997. As a percentage of sales, general and administrative expenses
increased to 5.3% for the third quarter of 1998 compared to 4.3% in the same
period of 1997. The increase was primarily due to the reversal of bonus
accruals during the third quarter 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
--------------------
September 28, September 27,
------------ ------------
1997 1998
------------ ------------
(Unaudited) (Unaudited)
Depreciation of property and
equipment ................... $2,214,000 $1,784,000
Amortization ofintangible
assets ...................... 382,000 146,000
Restaurant opening costs .... 102,000 65,000
Depreciation expense decreased by $430,000 for the quarter ended September 27,
1998 compared to the quarter ended September 28, 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 September 28, 1997, as well as
continued capital improvements to existing restaurants. Amortization of
intangible assets decreased by $236,000 for the quarter ended September 27,
1998 compared to the quarter ended September 28, 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 decreased by $37,000 during the third quarter of 1998
compared to the same period in 1997, primarily due to the opening of one
Company owned restaurant during the third 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 $543,000 in the third quarter of 1998 from
$256,000 in the third quarter of 1997, primarily as a result of additional
borrowings under the Company's debt facilities. In addition, the Company
capitalized $17,000 of interest related to new restaurant construction in the
most recent quarter compared to $43,000 during the third quarter of 1997.
Income Taxes. Provision for income taxes decreased to zero for the third
quarter of 1998 compared to $331,000, or 37% of income before taxes, for the
third 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 $2.9 million for
the third quarter of 1998 from $562,000 for the same period in 1997. Net income
was 8.0% of total revenues for the third quarter in 1998 compared to 1.6% in the
third quarter of 1997. Diluted earnings per share was $0.20 for the third
quarter of 1998 compared to $0.04 in the same period of 1997. The increase in
earnings per share during the third quarter of fiscal 1998 compared to the
same quarter last year was 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 Thirty-nine weeks Ended September 27, 1998 Compared to the Thirty-nine
weeks Ended September 28, 1997
Restaurant Sales. Restaurant sales increased by $5.5 million, or 5.6%, to
$104.7 million for the thirty-nine weeks ended September 27, 1998 from $99.2
million for the comparable period in 1997. The increase was due primarily to
an increase in sales at existing restaurants and sales from restaurants
opened after September 28, 1997, offset by sales from restaurants closed after
September 28, 1997. Comparable store sales, defined as Taco Cabana restaurants
that have been open 18 months or more at the beginning of the quarter,
increased 4.5%. 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
September 28, 1997 accounted for an increase of $11.0 million. This
increase was offset by sales from restaurants which were closed after
September 28, 1997 of $8.0 million.
Restaurant Cost of Sales. Restaurant cost of sales, calculated as a
percentage of restaurant sales, decreased to 30.3% for the thirty-nine weeks
ended September 27, 1998 from 30.9% for the 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 26.8% for the thirty-nine weeks ended September 27, 1998 from
27.4% for the same period in 1997. Adjusting for restaurants closed
after September 28, 1997, comparable labor as a percentage of restaurant
sales during the thirty-nine weeks ended September 27, 1998 was 26.1%. The
increase in comparable labor costs was 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 $392,000 during the thirty-nine weeks
ended September 27, 1998 compared to the same period in 1997. The decrease was
primarily due to the closure of underperforming restaurants during 1997. As a
percentage of restaurant sales, occupancy costs decreased to 5.6% in the
thirty-nine weeks ended September 27, 1998 compared to 6.3% in the same period
of 1997. The decrease was due to an increase in restaurant average unit sales
volumes during 1998.
Other Restaurant Operating Costs. Other restaurant operating costs decreased
to $18.4 million in the thirty-nine weeks ended September 27, 1998 compared to
$18.7 million in the same period of 1997. As a percentage of restaurant
sales, other restaurant operating costs decreased to 17.5% for the thirty-
nine weeks ended September 27, 1998 compared to 18.8% for the same period of
1997. The decrease was due to decreased marketing and promotional activities
and an increase in restaurant average unit sales volumes. Management expects
the favorable comparisons as a percentage of sales to continue during 1998.
General and Administrative. General and administrative expenses increased to
$5.8 million for the thirty-nine weeks ended September 27, 1998 from $5.1
million in the comparable period of 1997. The increase was primarily due to an
increased level of expenditures to support the Company's operations and an
increase in the bonus accrual during the thirty nine weeks ended September 27,
1998 compared to the same period in 1997. As a percentage of sales, general and
administrative expenses increased to 5.5% for the thirty-nine weeks ended
September 27, 1998 compared to 5.1% for 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:
Thirty-nine weeks Ended
-----------------------
September 28, September 27,
------------ ------------
1997 1998
------------ ------------
(Unaudited) (Unaudited)
Depreciation of property and
equipment ................... $6,351,000 $4,946,000
Amortization of intangible
assets ...................... 1,194,000 429,000
Restaurant opening costs .... 213,000 462,000
Depreciation expense decreased by $1.4 million for the thirty-nine weeks
ended September 27, 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 September 28, 1997, as well as
continued capital improvements to existing restaurants. Amortization of
intangible assets decreased by $765,000 for the thirty-nine weeks ended
September 27, 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 $249,000 during the thirty-nine weeks ended September 27,
1998, compared to the same period in 1997. The increase was primarily due to the
opening of seven restaurants during the thirty-nine weeks ended September 27,
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 $1.4 million in the thirty-nine weeks ended
September 27, 1998 from $772,000 in the same period of 1997, primarily as
a result of additional borrowings under the Company's debt facilities. In
addition, the Company capitalized $94,000 of interest related to new restaurant
construction during the thirty-nine weeks ended September 27, 1998 compared to
$88,000 during the same period in 1997.
Income Taxes. Provision for income taxes decreased to zero for the thirty-nine
weeks ended September 27, 1998 compared to $1.2 million, or 37% of income before
taxes, for the same period in 1997. The decrease in income taxes was due to the
recognition of previously reserved deferred tax assets.
Net Income and Earnings Per Share. Net income increased to $8.0 million for
the thirty-nine weeks ended September 27, 1998 from $2.0 million for the same
period in 1997. Net income was 7.7% of total revenues for the thirty-nine
weeks ended September 27, 1998 compared to 2.0% in the same period of 1997.
Diluted earnings per share was $0.55 for the thirty-nine weeks ended
September 27, 1998 compared to $0.13 in the same period of 1997. The increase
in earnings per share during the thirty-nine weeks ended September 27, 1998
compared to the same period last year was 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 October 30, 1998, $24.8 million was outstanding
under these commitments.
Net cash provided by operating activities was $10.8 million for the thirty-nine
weeks ended September 27, 1998, and $9.7 million for the thirty-nine weeks ended
September 28, 1997.
Net cash used in investing activities was $13.8 million for the thirty-nine
weeks ended September 27, 1998 representing primarily capital expenditures of
$17.0 million for the construction of new restaurants and improvements to
existing restaurants. This was offset by the sale of assets generating
$3.2 million in proceeds. This compares to $11.5 million in net cash used
in investing activities for the thirty-nine weeks ended September 28, 1997,
representing primarily capital expenditures for the construction of new
restaurants and improvements to existing restaurants, offset by the sale of
assets generating $1.4 million in proceeds.
Net cash provided by financing activities was $3.5 million for the thirty-nine
weeks ended September 27, 1998 representing primarily net draws from the
Company's debt facilities of $9.2 million, offset by the purchase of $5.7
million in treasury stock. This compares to net cash provided by financing
activities of $1.3 million in the same period of 1997, representing net draws
on the Company's debt facilities of $5.0 million, offset by the purchase of
$3.6 million in treasury stock.
The Company's Board of Directors previously approved a plan to repurchase up
to 2,500,000 shares of the Company's Common Stock. As of October 30, 1998,
the Company had repurchased 2,149,700 shares at an average cost of $5.11 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. The timing, price, quantity and manner of future purchases will be
made at the discretion of management and will depend upon market conditions.
The Company intends to fund the repurchase program through available credit
under its bank credit facilities and 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 $1.5
million during the thirty-nine weeks ended September 27, 1998. During the
thirty-nine weeks ended September 27, 1998, the Company sold properties relating
to the special charges which resulted in proceeds of $3.2 million, which
approximated the carrying value of the assets sold. The Company currently has
three 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 properties will be sold, the Company expects to receive funds equal to
or in excess of the carrying value 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 $193,000
during the thirty-nine weeks ended September 27, 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 1999, including
the planned opening of ten to fifteen restaurants in 1999, and the reimaging of
30 restaurants during the 1999 fiscal year. Total capital expenditures
related to new restaurants are estimated to be $12.0 to $17.0 million. The
total for other capital expenditures, including the cost of the reimagings, is
estimated to be $6.0 to $8.0 million. Total capital expenditures for 1999 are
expected to approximate $18.0 to $25.0 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, operating
costs, 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 risks, uncertainties and other factors which may
cause actual results and outcomes to 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; cost and availability of labor;
actions of our customers and competitors; changes in state and federal
environmental, economic, safety and other policies and regulations
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 disclaims any intention or obligation to update or revise any such
forward-looking statements, whether as a result of new information, future
events or otherwise.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders held on August 18, 1998, the
Company's stockholders elected six directors. There were no broker non-votes.
The votes were as follows:
For Withheld
Stephen V. Clark 14,298,217 96,397
William J. Nimmo 14,296,637 97,977
Richard Sherman 14,297,457 97,157
Cecil Schenker 14,296,057 98,557
Lionel Sosa 14,296,132 98,482
Rod Sands 14,298,357 96,257
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 Financial Data Schedule. Filed with EDGAR version.
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 11, 1998 Taco Cabana, Inc.
/s/David G. Lloyd
----------------------------------------------
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
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