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 July 4, 1999
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 August 6, 1999
Common Stock 13,412,675 shares
TACO CABANA, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at July 4, 1999
and January 3, 1999 2
Condensed Consolidated Statements of Operations
for the Thirteen Weeks Ended July 4, 1999 and
June 28, 1998 3
Condensed Consolidated Statements of Operations
for the Twenty-Six Weeks Ended July 4, 1999 and
June 28, 1998 4
Condensed Consolidated Statements of Cash Flows
for the Twenty-Six Weeks Ended July 4, 1999 and
June 28, 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17
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 18
Signature 19
1
TACO CABANA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
January 3, July 4,
1999 1999
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................. $ 719,000 $ 1,199,000
Receivables, net.......................... 438,000 368,000
Inventory................................. 2,273,000 2,320,000
Prepaid expenses.......................... 3,128,000 3,213,000
Federal income taxes receivable........... 200,000 200,000
----------- -----------
Total current assets...................... 6,758,000 7,300,000
PROPERTY AND EQUIPMENT, net............... 72,250,000 78,490,000
NOTES RECEIVABLE.......................... 258,000 291,000
INTANGIBLE ASSETS, net.................... 10,724,000 10,432,000
OTHER ASSETS.............................. 212,000 248,000
----------- -----------
TOTAL..................................... $90,202,000 $96,761,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................... $ 5,362,000 $ 4,312,000
Accrued liabilities....................... 5,265,000 6,235,000
Current maturities of long-term debt and
capital leases.......................... 5,704,000 3,946,000
Line of credit............................ 3,550,000 2,320,000
----------- -----------
Total current liabilities................. 19,881,000 16,813,000
LONG-TERM OBLIGATIONS, net of current maturities:
Capital leases............................ 2,140,000 2,024,000
Long-term debt............................ 18,930,000 22,807,000
----------- -----------
Total long-term obligations............... 21,070,000 24,831,000
ACQUISITION AND CLOSED RESTAURANT
LIABILITIES............................. 7,713,000 6,550,000
DEFERRED LEASE PAYMENTS................... 761,000 748,000
STOCKHOLDERS' EQUITY:
Common stock.............................. 159,000 134,000
Additional paid-in capital................ 98,056,000 84,607,000
Retained deficit.......................... (43,544,000)(36,922,000)
Treasury stock, at cost (2,576,937 shares
at January 3, 1999)....................... (13,894,000) -
----------- -----------
Total stockholders' equity.............. 40,777,000 47,819,000
----------- -----------
TOTAL..................................... $90,202,000 $96,761,000
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
2
TACO CABANA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Thirteen Weeks Ended
----------------------------
June 28, July 4,
1998 1999
----------- -----------
REVENUES:
Restaurant sales.......................... $36,206,000 $41,321,000
Franchise fees and royalty income......... 86,000 96,000
----------- -----------
Total revenues............................ 36,292,000 41,417,000
----------- -----------
COSTS AND EXPENSES:
Restaurant cost of sales.................. 10,829,000 12,509,000
Labor..................................... 9,738,000 11,413,000
Occupancy................................. 1,958,000 2,063,000
Other restaurant operating costs.......... 6,093,000 6,649,000
General and administrative................ 1,954,000 1,911,000
Depreciation, amortization and restaurant
opening costs........................... 1,974,000 2,450,000
----------- -----------
Total costs and expenses.................. 32,546,000 36,995,000
----------- -----------
INCOME FROM OPERATIONS.................... 3,746,000 4,422,000
----------- -----------
INTEREST EXPENSE, NET..................... (449,000) (565,000)
----------- -----------
INCOME BEFORE INCOME TAXES................ 3,297,000 3,857,000
INCOME TAX EXPENSE........................ - -
----------- -----------
NET INCOME................................ $ 3,297,000 $ 3,857,000
=========== ===========
BASIC EARNINGS PER SHARE.................. $ 0.22 $ 0.29
=========== ===========
BASIC WEIGHTED SHARES OUTSTANDING......... 14,768,266 13,393,833
=========== ===========
DILUTED EARNINGS PER SHARE................ $ 0.22 $ 0.28
=========== ===========
DILUTED WEIGHTED SHARES OUTSTANDING....... 15,091,502 13,804,626
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
3
TACO CABANA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Twenty-Six Weeks Ended
------------------------------
June 28, July 4,
1998 1999
----------- ----------
REVENUES:
Restaurant sales.......................... $68,528,000 $78,158,000
Franchise fees and royalty income......... 171,000 170,000
----------- -----------
Total revenues............................ 68,699,000 78,328,000
----------- -----------
COSTS AND EXPENSES:
Restaurant cost of sales.................. 20,621,000 23,436,000
Labor..................................... 18,410,000 21,541,000
Occupancy................................. 3,865,000 4,073,000
Other restaurant operating costs.......... 12,095,000 12,900,000
General and administrative................ 3,867,000 3,961,000
Depreciation, amortization and restaurant
opening costs........................... 3,842,000 4,679,000
----------- -----------
Total costs and expenses.................. 62,700,000 70,590,000
----------- -----------
INCOME FROM OPERATIONS.................... 5,999,000 7,738,000
----------- -----------
INTEREST EXPENSE, NET..................... (845,000) (1,116,000)
----------- -----------
INCOME BEFORE INCOME TAXES................ 5,154,000 6,622,000
INCOME TAX EXPENSE........................ - -
----------- -----------
NET INCOME................................ $ 5,154,000 $ 6,622,000
=========== ===========
BASIC EARNINGS PER SHARE.................. $ 0.35 $ 0.50
=========== ===========
BASIC WEIGHTED SHARES OUTSTANDING......... 14,797,202 13,372,337
=========== ===========
DILUTED EARNINGS PER SHARE................ $ 0.34 $ 0.48
=========== ===========
DILUTED WEIGHTED SHARES OUTSTANDING....... 15,069,175 13,759,132
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
4
TACO CABANA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Twenty-Six Weeks Ended
------------------------------
June 28, July 4,
1998 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................ $ 5,154,000 $ 6,622,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization......... 3,445,000 4,235,000
Capitalized interest.................. (77,000) (85,000)
Changes in operating working
capital items......................... (1,692,000) (1,007,000)
----------- -----------
Net cash provided by operating activities. 6,830,000 9,765,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........ (12,209,000)(10,937,000)
Proceeds from the sale of property
and equipment........................... 1,955,000 459,000
----------- -----------
Net cash used for investing activities.... (10,254,000)(10,478,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable
and draws on line of credit............. 6,685,000 8,404,000
Principal payments under long-term debt and
line of credit.......................... (1,378,000) (7,528,000)
Principal payments under capital leases... (92,000) (103,000)
Purchase of treasury stock................ (1,653,000) -
Exercise of stock options................. 208,000 420,000
----------- -----------
Net cash provided by financing activities. 3,770,000 1,193,000
----------- -----------
NET INCREASE IN CASH...................... 346,000 480,000
CASH AND CASH EQUIVALENTS,
beginning of period..................... 339,000 719,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of period.. $ 685,000 $ 1,199,000
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
5
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
January 3, 1999.
2. Stockholders' Equity
The Company's Board of Directors previously approved plans to repurchase up
to a total of 4,000,000 shares of the Company's Common Stock. Since the
inception of the stock purchase program, the Company has repurchased a total
of 2,585,000 shares at an aggregate cost of $13.9 million. During the first
quarter of 1999, the Company retired all of the common shares held in
treasury. The cost of the reacquired shares in excess of par value has been
charged to additional paid in capital. The timing, price, quantity and manner
of any future purchases will be made at the discretion of management and will
depend upon market conditions.
3. 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.
6
The following table sets forth the computation of basic and diluted earnings
per share:
13 Weeks Ended 26 Weeks Ended
----------------------- ------------------------
June 28, July 4, June 28, July 4,
1998 1999 1998 1999
Numerator for basic and diluted earnings
per share - net income..... $3,297,000 $3,857,000 $5,154,000 $6,622,000
Denominator:
Denominator for basic earnings per share:
Weighted-average shares 14,768,266 13,393,833 14,797,202 13,372,337
Effect of dilutive securities:
Employee stock options. 323,236 410,793 271,973 386,795
---------- ---------- ---------- ----------
Denominator for diluted earnings per share:
Adjusted weighted-average and assumed
conversions.............. 15,091,502 13,804,626 15,069,175 13,759,132
========== ========== ========== ==========
Basic earnings per share... $ 0.22 $ 0.29 $ 0.35 $ 0.50
========== ========== ========== ==========
Diluted earnings per share. $ 0.22 $ 0.28 $ 0.34 $ 0.48
========== ========== ========== ==========
4. Supplemental Disclosure of Cash Flow Information
Twenty-Six Weeks Ended
------------------------
June 28, July 4,
1998 1999
----------- -----------
(Unaudited) (Unaudited)
Cash paid for interest ......... $ 810,000 $ 1,097,000
Interest capitalized on
construction costs ............. 77,000 85,000
5. Supplemental Disclosure of Noncash Investing and Financing Activities
During 1999 assets having a net book value of $439,000 were disposed of and
charged to acquisition and closed restaurant liabilities.
7
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 August 6, 1999, the Company had
107 Company-owned restaurants and 10 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.
During the twenty-six weeks ended July 4, 1999, the Company opened six and
closed two Company-owned restaurants. Subsequent to July 4, 1999, the Company
opened one restaurant.
8
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 28, July 4, June 28, July 4,
1998 1999 1998 1999
-------- ------- -------- --------
Operating Statement Data:
REVENUES:
Restaurant sales......... 99.8% 99.8% 99.8% 99.8%
Franchise fees and
royalty income........... 0.2 0.2 0.2 0.2
----- ----- ----- -----
Total revenues........... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
COSTS AND EXPENSES:
Restaurant cost of sales (1) 29.9% 30.3% 30.1% 30.0%
Labor (1)................ 26.9 27.6 26.9 27.6
Occupancy (1)............ 5.4 5.0 5.6 5.2
Other restaurant operating
costs (1)................ 16.8 16.1 17.6 16.5
General and administrative 5.4 4.6 5.6 5.1
Depreciation, amortization and
restaurant opening costs 5.4 5.9 5.6 6.0
----- ----- ----- -----
INCOME FROM OPERATIONS..... 10.3 10.7 8.7 9.9
INTEREST EXPENSE, net...... (1.2) (1.4) (1.2) (1.4)
----- ----- ----- -----
INCOME BEFORE
INCOME TAXES............. 9.1 9.3 7.5 8.5
INCOME TAX EXPENSE......... - - - -
----- ----- ----- -----
NET INCOME................. 9.1% 9.3% 7.5% 8.5%
===== ===== ===== =====
Restaurant Data:
Company-owned restaurants:
Beginning of period...... 99 103 98 102
Opened................... 3 4 6 6
Closed................... (1) (1) (3) (2)
--- --- --- ---
End of period............ 101 106 101 106
Franchised (2) and joint-venture
owned restaurants:....... 10 10 10 10
--- --- --- ---
Total restaurants:......... 111 116 111 116
=== === === ===
(1) Percentage is calculated based upon restaurant sales.
(2) Excludes Two Pesos licensed restaurants.
9
The Thirteen Weeks Ended July 4, 1999 Compared to the Thirteen Weeks Ended June
28, 1998
Restaurant Sales. Restaurant sales increased by $5.1 million, or 14%, to $41.3
million for the second quarter of 1999 from $36.2 million for the second quarter
in 1998. The increase is due to an increase in sales at existing restaurants
and the opening of new restaurants. Comparable store sales, defined as Taco
Cabana restaurants that have been open 18 months or more at the beginning of the
quarter, increased 4.7%. Management attributes the increase to several factors
including a more consistent marketing program, a commitment to increased
staffing levels at existing restaurants, the ongoing reimage program, a price
increase of approximately 2% and the continued opening of higher than average
volume restaurants. Sales from restaurants opened after June 28, 1998 accounted
for an increase of $3.9 million. This increase was offset by sales of $765,000
from restaurants which were closed after June 28, 1998.
Restaurant Cost of Sales. Restaurant cost of sales, calculated as a percentage
of restaurant sales, increased to 30.3% in the second quarter of 1999 from 29.9%
for the second quarter of 1998. The increase was due primarily to anticipated
seasonal changes in the product mix. Management expects cost of sales as a
percentage of restaurant sales to decrease compared to the prior year for the
remainder of 1999.
Labor. Labor costs calculated as a percentage of restaurant sales increased to
27.6% during the second quarter of 1999 from 26.9% for the same period in 1998.
The increase is primarily due to 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 percentage to be flat to
slightly up compared to the prior year for the remainder of 1999.
Occupancy. Occupancy costs increased by $105,000 during the second quarter of
1999 compared to the second quarter of 1998. The increase is primarily due to
the opening of new restaurants during 1999. As a percentage of restaurant
sales, occupancy costs decreased to 5.0% in the second quarter of 1999 compared
to 5.4% in the second quarter of 1998. Management expects the dollar amount to
increase in 1999 due to new openings, although it should continue to decrease as
a percentage of sales.
Other Restaurant Operating Costs. Other restaurant operating costs increased to
$6.6 million in the second quarter of 1999 compared to $6.1 million in the
second quarter of 1998. As a percentage of restaurant sales, other restaurant
operating costs decreased to 16.1% for the second quarter of 1999 compared to
16.8% for the second quarter of 1998. The decrease as a percentage of sales is
primarily due to leverage from higher average sales along with a relatively flat
dollar amount per store open. Management expects the favorable comparisons as a
percentage of sales to continue during 1999.
General and Administrative. General and administrative expenses decreased
$43,000 during the second quarter of 1999 compared to the second quarter of
1998. As a percentage of sales, general and administrative expenses decreased to
4.6% for the second quarter of 1999 compared to 5.4% in the same period of 1998.
Management expects this dollar amount to remain constant or increase slightly
during the remainder of 1999, although it should continue to decrease as a
percentage of sales.
10
Depreciation, Amortization and Restaurant Opening Costs. Depreciation,
amortization and restaurant opening costs consisted of the following:
Thirteen Weeks Ended
-----------------------
June 28, July 4,
1998 1999
----------- ------------
(Unaudited) (Unaudited)
Depreciation of property and
equipment .......................$ 1,632,000 $ 2,032,000
Amortization of intangible
assets .......................... 146,000 147,000
Restaurant opening costs ........ 196,000 271,000
Depreciation expense increased by $400,000 for the quarter ended July 4, 1999
compared to the quarter ended June 28, 1998. The increase was due to the
addition of new restaurants as well as continued capital improvements to
existing restaurants. Restaurants opened after March 29, 1998 accounted for
$182,000 of the increase. Restaurant opening costs increased by $75,000 during
the second quarter of 1999 compared to the same period in 1998, primarily due to
the opening of four Company owned restaurants during the second quarter of 1999
compared to three openings during second quarter 1998.
Interest Expense, net. Interest expense, net of interest capitalized on
construction costs, increased to $565,000 in the second quarter of 1999 from
$449,000 in the second quarter of 1998, primarily as a result of additional
borrowings under the Company's debt facilities. The Company capitalized $23,000
of interest related to new restaurant construction in the most recent quarter
compared to $25,000 during the second quarter of 1998.
Income Taxes. Income tax expense was zero for the second quarter of 1999 and
1998 due to the recognition of previously reserved deferred tax assets.
Net Income and Earnings Per Share. Net income increased to $3.9 million for the
second quarter of 1999 from $3.3 million for the same period in 1998. Net
income was 9.3% of total revenues for the second quarter in 1999 compared to
9.1% in the second quarter of 1998. Diluted earnings per share was $0.28 for
the second quarter of 1999 compared to $0.22 in the same period of 1998. The
increase in earnings per share during the second quarter of fiscal 1999 compared
to the same quarter last year is due to higher sales at existing restaurants,
the opening of new restaurants, continued strong cost controls and a reduction
in the number of shares outstanding.
The Twenty-Six Weeks Ended July 4, 1999 Compared to the Twenty-Six Weeks Ended
June 28, 1998
Restaurant Sales. Restaurant sales increased by $9.6 million, or 14%, to $78.2
million for the twenty-six weeks ended July 4, 1999 from $68.5 million for the
comparable period in 1998. The increase is due to an increase in sales at
existing restaurants and the opening of new 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, a
commitment to increased staffing levels at existing restaurants, the ongoing
reimage program, a price increase of approximately 2% and the continued opening
of higher than average volume restaurants. Sales from restaurants opened after
June 28, 1998 accounted for an increase of $5.5 million. This increase was
11
offset by sales from restaurants which were closed after June 28, 1998 of $1.4
million.
Restaurant Cost of Sales. Restaurant cost of sales, calculated as a percentage
of restaurant sales, decreased to 30.0% during the twenty-six weeks ended July
4, 1999 from 30.1% for same period in 1998. The decrease was due primarily to
continued improvements in the management of food costs through utilizing
increased controls and improved purchasing programs, offset by anticipated
seasonal changes in the product mix. Management expects cost of sales as a
percentage of sales to decrease compared to the prior year for the remainder of
1999.
Labor. Labor costs calculated as a percentage of restaurant sales increased to
27.6% for the twenty-six weeks ended July 4, 1999 from 26.9% for the same
period in 1998. The increase is primarily due to 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
percentage to be flat to slightly up for the remainder of 1999.
Occupancy. Occupancy costs increased by $208,000 during the twenty-six weeks
ended July 4, 1999 compared to the same period in 1998. The increase is
primarily due to the opening of new restaurants. As a percentage of restaurant
sales, occupancy costs decreased to 5.2% for the twenty-six weeks ended July 4,
1999 compared to 5.6% for the same period in 1998. Management expects the dollar
amount to increase due to new openings but to continue to decrease as a
percentage of sales.
Other Restaurant Operating Costs. Other restaurant operating costs increased to
$12.9 million in the twenty-six weeks ended July 4, 1999 compared to $12.1
million in the same period of 1998. As a percentage of restaurant sales, other
restaurant operating costs decreased to 16.5% for the twenty-six weeks ended
July 4, 1999 compared to 17.6% for the same period in 1998. The decrease as a
percentage of sales is primarily due to leverage from higher than average sales
along with a relatively flat dollar amount per store open. Management expects
the favorable comparisons as a percentage of sales to continue during 1999.
General and Administrative. General and administrative expenses increased to
$4.0 million for the twenty-six weeks ended July 4, 1999 from $3.9 million in
the comparable period of 1998. As a percentage of sales, general and
administrative expenses decreased to 5.1% for the twenty-six weeks ended July 4,
1999 compared to 5.6% for the same period in 1998. Management expects this
amount to continue to decrease, as a percentage of sales, throughout the
remainder of 1999.
12
Depreciation, Amortization and Restaurant Opening Costs. Depreciation,
amortization and restaurant opening costs consisted of the following:
Twenty-Six Weeks Ended
------------------------
June 28, July 4,
1998 1999
----------- ------------
(Unaudited) (Unaudited)
Depreciation of property and
equipment .......................$ 3,163,000 $ 3,943,000
Amortization of intangible
assets .......................... 283,000 293,000
Restaurant opening costs ........ 396,000 443,000
Depreciation expense increased by $780,000 for the twenty-six weeks ended July
4, 1999 compared to the same period in 1998. The increase was due to the
addition of new restaurants as well as continued capital improvements on
existing restaurants. Restaurants opened after January 1, 1998 accounted for
$357,000 of the increase.
Interest Expense, net. Interest expense, net of interest capitalized on
construction costs, increased to $1.1 million during the twenty-six weeks ended
July 4, 1999 from $845,000 in the same period of 1998, primarily as a result of
additional borrowings under the Company's debt facilities. In addition, the
Company capitalized $85,000 of interest related to new restaurant construction
during the twenty-six weeks ended July 4, 1999 compared to $77,000 during the
same period in 1998.
Income Taxes. Income tax expense was zero for the twenty-six weeks ended July
4, 1999 and for the same period in 1998 due to the recognition of previously
reserved deferred tax assets.
Net Income and Earnings Per Share. Net income increased to $6.6 million for the
twenty-six weeks ended July 4, 1999 from $5.2 million for the same period in
1998. Net income was 8.5% of total revenues for the twenty-six weeks ended July
4, 1999 compared to 7.5% in the same period of 1998. Diluted earnings per share
was $0.48 for the twenty-six weeks ended July 4, 1999 compared to $0.34 in the
same period of 1998. The increase in earnings per share during the twenty-six
weeks ended July 4, 1999 compared to the same period last year is due to higher
sales at existing restaurants, the opening of new restaurants, continued strong
cost controls, and a reduction in the number of shares outstanding.
Year 2000 Issue
Description. The Company relies to a large extent on computer technology to
carry out its day-to-day operations. Many software products in the marketplace
are only able to recognize a two digit year date and therefore will recognize a
date using "00" as the year 1900 instead of the year 2000 (the " Year 2000
Issue"). This problem could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions or engage in similar normal business
activities.
13
State Of Readiness. The Company has established a plan to prepare its systems
for the Year 2000 Issue as well as to reasonably assure that its critical
business partners are prepared. To date, the Company has completed its
assessment of all internal systems that could be significantly affected by the
Year 2000 Issue. Based upon its assessment, the Company determined that it was
required to modify or replace portions of its software supporting Human
Resources, Payroll, Accounting, Labor Analysis and the Point of Sale. The
Company believes that with modifications or replacements of the identified
software programs, the Year 2000 Issue can be mitigated. However, if all
additional phases of the Year 2000 plan are not completed on time, the Year 2000
Issue could have a material impact on the operations of the Company.
As of August 3, 1999, the Company has substantially completed the remediation of
the identified systems and expects to complete software reprogramming and
replacement no later than October 1, 1999. Systems continue to be tested for
integration and will continue to be tested until December 31, 1999. Many
hardware upgrades were made as part of the Company's continued efforts to
upgrade its technology, but no further hardware replacement has been identified
as a result of the Year 2000 Issue. As such, the Company is not currently
remediating additional hardware. However, the existence of embedded technology
is by nature more difficult to identify. While the Company believes that all
significant systems are Year 2000 compliant, the Company plans to continue
testing its operating equipment.
The Company has deferred other information technology projects due to the Year
2000 Issue. The deferral of these projects is not expected to have a material
effect on the Company's financial position or results of operations.
Significant Third Parties. The Company's significant third party business
partners consist of suppliers, banks and service providers. The Company has
significant system interfaces with banks, credit card processors and tax filing
services. An initial inventory of significant third party business partners has
been completed and letters have been mailed requesting information regarding
each parties' Year 2000 compliance status. Additionally, the Company has
identified and met with key suppliers and distributors and discussed their Year
2000 readiness. The Company is currently developing contingency plans for third
party business partners that appear to have substantial Year 2000 operational
risks, which may include the change of some suppliers to minimize such risks.
Costs. The Company will use both internal and external resources to reprogram,
or replace, and test software for Year 2000 Issue modifications. The total cost
of the Year 2000 Issue project is estimated to be approximately $600,000, of
which the Company has incurred $520,000 relating to the purchase of new
software. The costs relating to the Year 2000 Issue are being financed through
operating cash flows and borrowings from the Company's available credit
facilities. Of the total project cost, the majority is attributable to the
purchase of new software, which has been capitalized. The remaining amount,
which will be expensed as incurred, is not expected to have a material effect on
the results of operations. To date, the costs the Company has incurred and
expensed relating to the assessment of, and preliminary efforts in connection
with, its Year 2000 Issue and the development of a remediation plan have not had
a material effect on the results of operations.
14
Risks And Contingency Plans. Management believes it has an effective plan in
place to resolve the Year 2000 Issue in a timely manner. However, due to the
forward-looking nature and lack of historical experience with Year 2000 Issues,
it is difficult to predict with certainty what will happen after December 31,
1999. Despite the Year 2000 remediation efforts being made, it is likely that
there will be disruptions and unexpected business problems during the early
months of 2000. The Company plans to make diligent efforts to assess the Year
2000 readiness of its significant business partners and will develop contingency
plans for all critical systems where it believes its exposure to Year 2000 risk
is the greatest. However, despite the Company's efforts, it may encounter
unanticipated third party failures, public infrastructure failures or a failure
to successfully conclude its remediation efforts as planned. If the remaining
Year 2000 plan is not completed timely, in addition to the implications noted
above, the Company may be required to utilize manual processing of certain
otherwise automated processes. Any one of these unforeseen events could have a
material adverse impact on the Company's results of operations, financial
condition, or cash flows in 1999 and beyond.
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 $40.0 million, including a $5.0 million unsecured
revolving line of credit. As of August 6, 1999, the aggregate outstanding
balance under these commitments was $27.1 million.
Net cash provided by operating activities was $9.8 million for the twenty-six
weeks ended July 4, 1999, and $6.8 million for the twenty-six weeks ended June
28, 1998.
Net cash used in investing activities was $10.5 million for the twenty-six weeks
ended July 4, 1999 representing primarily capital expenditures of $10.9 million
for the construction of new restaurants and improvements to existing
restaurants. This was offset by the sale of assets generating $459,000 in
proceeds. This compares to $10.3 million in net cash used in investing
activities for the twenty-six weeks ended June 28, 1998, representing primarily
capital expenditures for the construction of new restaurants and improvements to
existing restaurants, offset by the sale of assets generating $2.0 million in
proceeds.
Net cash provided by financing activities was $1.2 million for the twenty-six
weeks ended July 4, 1999 representing primarily net draws from the Company's
debt facilities. This compares to $3.8 million in net cash provided by
financing activities for the twenty-six weeks ended June 28, 1998 representing
primarily net draws on the Company's debt facilities, offset by the purchase of
$1.7 million in treasury stock.
15
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 $398,000 during the
twenty-six weeks ended July 4, 1999. During the twenty-six weeks ended July 4,
1999, the Company sold one property relating to the special charges which
resulted in proceeds of $459,000, and approximated the carrying value of the
assets sold. The Company currently has two 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 the property. In addition, certain acquisition
and accrued liabilities related to the Two Pesos acquisition were reduced by
payments of approximately $139,000 during the twenty-six weeks ended July 4,
1999.
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 restaurants, seven of which have been opened at
August 6, 1999, and the reimaging of 30 restaurants, 21 of which have been
reimaged to date. 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 $6.0 to
$8.0 million. Total capital expenditures for 1999 are expected to approximate
$18.0 to $23.0 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.
16
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on debt and
changes in commodity prices.
The Company's exposure to interest rate risk currently consists of its notes
payable and outstanding line of credit. The Company has notes payable and a
line of credit which bear interest at the lesser of the London Interbank Offer
Rate plus 2.25% or the prime rate. The aggregate balance outstanding of these
notes and the line of credit as of August 6, 1999 was $27.1 million. The
Company also has a note payable which bears interest at the prime rate. The
outstanding balance of this note as of August 6, 1999 was $1.1 million. The
impact on the Company's results of operations of a one-point interest rate
change on the outstanding balances under the notes payable and line of credit as
of August 6, 1999 would be immaterial.
The Company purchases certain commodities such as beef, chicken, flour, produce
and dairy products. These commodities are generally purchased based upon market
prices established with vendors. These purchase arrangements may contain
contractual features that limit the price paid by establishing price floors or
caps. The Company does not use financial instruments to hedge commodity prices
because these purchase arrangements help control the ultimate cost and any
commodity price aberrations are generally short term in nature.
17
This market risk discussion contains forward-looking statements. Actual results
may differ materially from this discussion based upon general market conditions
and changes in financial markets.
EXHIBITS AND REPORTS ON FORM 8-K
The Company has filed the following exhibits with the report:
27. Financial Data Schedule
No reports on Form 8-K were filed during the period covered by this report.
18
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 18, 1999 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
19
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