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 October 3, 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 November 5, 1999
Common Stock 13,096,950 shares
TACO CABANA, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at October 3, 1999
and January 3, 1999 2
Condensed Consolidated Statements of Operations for the Thirteen
Weeks Ended October 3, 1999 and September 27, 1998 3
Condensed Consolidated Statements of Operations for the Thirty-Nine
Weeks Ended October 3, 1999 and September 27, 1998 4
Condensed Consolidated Statements of Cash Flows for the Thirty-Nine
Weeks Ended October 3, 1999 and September 27, 1998 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
PART II. OTHER INFORMATION
Items 1, 2, 3 and 5 have been omitted since the registrant has no
reportable events in relation to these items
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
1
TACO CABANA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
January 3, October 3,
1999 1999
----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................. $ 719,000 $ 1,637,000
Receivables, net.......................... 438,000 503,000
Inventory................................. 2,273,000 2,375,000
Prepaid expenses.......................... 3,128,000 3,309,000
Federal income taxes receivable........... 200,000 200,000
----------- ------------
Total current assets...................... 6,758,000 8,024,000
PROPERTY AND EQUIPMENT, net............... 72,250,000 82,682,000
NOTES RECEIVABLE.......................... 258,000 285,000
INTANGIBLE ASSETS, net.................... 10,724,000 10,285,000
OTHER ASSETS.............................. 212,000 268,000
----------- ------------
TOTAL..................................... $90,202,000 $101,544,000
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................... $ 5,362,000 $ 4,469,000
Accrued liabilities....................... 5,265,000 6,376,000
Current maturities of long-term debt and
capital leases.......................... 5,704,000 3,119,000
Line of credit............................ 3,550,000 2,155,000
----------- ------------
Total current liabilities................. 19,881,000 16,119,000
LONG-TERM OBLIGATIONS, net of current maturities:
Capital leases............................ 2,140,000 1,963,000
Long-term debt............................ 18,930,000 25,910,000
----------- ------------
Total long-term obligations............... 21,070,000 27,873,000
ACQUISITION AND CLOSED RESTAURANT LIABILITIES 7,713,000 6,773,000
DEFERRED LEASE PAYMENTS................... 761,000 781,000
STOCKHOLDERS' EQUITY:
Common stock.............................. 159,000 134,000
Additional paid-in capital................ 98,056,000 84,711,000
Retained deficit.......................... (43,544,000) (33,268,000)
Treasury stock, at cost (2,576,937 shares
at January 3, 1999 and 192,700 shares at
October 3, 1999)........................ (13,894,000) (1,579,000)
----------- ------------
Total stockholders' equity.............. 40,777,000 49,998,000
----------- ------------
TOTAL..................................... $90,202,000 $101,544,000
=========== ============
See Notes to Condensed Consolidated Financial Statements.
2
TACO CABANA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Thirteen Weeks Ended
----------------------------
September 27, October 3,
1998 1999
------------ ----------
REVENUES:
Restaurant sales.......................... $36,176,000 $41,359,000
Franchise fees and royalty income......... 94,000 90,000
----------- -----------
Total revenues............................ 36,270,000 41,449,000
----------- -----------
COSTS AND EXPENSES:
Restaurant cost of sales.................. 11,102,000 12,539,000
Labor..................................... 9,599,000 11,245,000
Occupancy................................. 1,966,000 2,094,000
Other restaurant operating costs.......... 6,259,000 6,953,000
General and administrative................ 1,911,000 1,915,000
Depreciation, amortization and restaurant
opening costs............................. 1,995,000 2,462,000
----------- -----------
Total costs and expenses.................. 32,832,000 37,208,000
----------- -----------
INCOME FROM OPERATIONS.................... 3,438,000 4,241,000
----------- -----------
INTEREST EXPENSE, NET..................... (543,000) (586,000)
----------- -----------
INCOME BEFORE INCOME TAXES................ 2,895,000 3,655,000
INCOME TAX EXPENSE........................ - -
----------- -----------
NET INCOME................................ $ 2,895,000 $ 3,655,000
=========== ===========
BASIC EARNINGS PER SHARE.................. $ 0.20 $ 0.27
=========== ===========
BASIC WEIGHTED SHARES OUTSTANDING......... 14,186,259 13,392,151
=========== ===========
DILUTED EARNINGS PER SHARE................. $ 0.20 $ 0.27
=========== ===========
DILUTED WEIGHTED SHARES OUTSTANDING........ 14,305,200 13,776,090
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
3
TACO CABANA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Thirty-Nine Weeks Ended
-------------------------------
September 27, October 3,
1998 1999
----------- -----------
REVENUES:
Restaurant sales.......................... $104,704,000 $119,516,000
Franchise fees and royalty income......... 265,000 260,000
------------ ------------
Total revenues............................ 104,969,000 119,776,000
------------ ------------
COSTS AND EXPENSES:
Restaurant cost of sales.................. 31,723,000 35,975,000
Labor..................................... 28,009,000 32,785,000
Occupancy................................. 5,830,000 6,167,000
Other restaurant operating costs.......... 18,355,000 19,853,000
General and administrative................ 5,777,000 5,876,000
Depreciation, amortization and restaurant
opening costs............................. 5,837,000 7,142,000
------------ ------------
Total costs and expenses.................. 95,531,000 107,798,000
------------ ------------
INCOME FROM OPERATIONS.................... 9,438,000 11,978,000
------------ ------------
INTEREST EXPENSE, NET..................... (1,389,000) (1,702,000)
------------ ------------
INCOME BEFORE FOR INCOME TAXES............ 8,049,000 10,276,000
INCOME TAX EXPENSE........................ - -
------------ ------------
NET INCOME............................... $ 8,049,000 $10,276,000
============ ============
BASIC EARNINGS PER SHARE................. $ 0.55 $ 0.77
============ ============
BASIC WEIGHTED SHARES OUTSTANDING......... 14,593,555 13,378,942
============ ============
DILUTED EARNINGS PER SHARE................ $ 0.55 $ 0.75
============ ============
DILUTED WEIGHTED SHARES OUTSTANDING....... 14,746,499 13,760,243
============ ============
See Notes to Condensed Consolidated Financial Statements.
4
TACO CABANA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Thirty-Nine Weeks Ended
-------------------------------
September 27, October 3,
1998 1999
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................ $8,049,000 $10,276,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization......... 5,375,000 6,471,000
Capitalized interest.................. (94,000) (107,000)
Changes in operating working
capital items......................... (2,568,000) (1,202,000)
---------- ----------
Net cash provided by operating activities. 10,762,000 15,438,000
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........ (16,987,000) (17,624,000)
Proceeds from the sale of property and
equipment................................. 3,195,000 1,337,000
---------- ----------
Net cash used for investing activities.... (13,792,000) (16,287,000)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable
and draws on line of credit............. 11,130,000 11,404,000
Principal payments under long-term debt
and line of credit........................ (1,967,000) (8,422,000)
Principal payments under capital leases... (141,000) (159,000)
Purchase of treasury stock................ (5,748,000) (1,579,000)
Exercise of stock options................. 220,000 523,000
---------- ----------
Net cash provided by financing activities. 3,494,000 1,767,000
---------- ----------
NET INCREASE IN CASH...................... 464,000 918,000
CASH AND CASH EQUIVALENTS, beginning of
period.................................... 339,000 719,000
---------- ----------
CASH AND CASH EQUIVALENTS, end of period.. $ 803,000 $1,637,000
========== ==========
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. Through the first quarter of 1999, the Company had
repurchased 2,585,000 shares with an aggregate cost of $13.9 million.
During the first quarter of 1999, the Company retired all shares held
as treasury shares. The cost of retired shares in excess of par
value has been charged to additional paid in capital. Subsequent to
the first quarter, the Company repurchased an additional 192,700
shares at an aggregate cost of $1,579,000, which as of October 3,
1999 were held as treasury stock. 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 39 Weeks Ended
----------------------- -----------------------
September 27, October 3, September 27, October 3,
1998 1999 1998 1999
---------- -------- ----------- --------
Numerator for basic and
diluted earnings per share:
Net income $2,895,000 $3,655,000 $8,049,000 $10,276,000
Denominator for basic
earnings per share:
Weighted-average shares 14,186,259 13,392,151 14,593,555 13,378,942
Effect of dilutive securities:
Employee stock options 118,941 383,939 152,944 381,301
---------- ---------- --------- ----------
Denominator for diluted earnings per share:
Adjusted weighted-average
shares and assumed
conversions 14,305,200 13,776,090 14,746,499 13,760,243
========== ========== ========== ==========
Basic earnings per share $ 0.20 $ 0.27 $ 0.55 $ 0.77
========== ========== ========== ==========
Diluted earnings per share $ 0.20 $ 0.27 $ 0.55 $ 0.75
========== ========== ========== ==========
4. Supplemental Disclosure of Cash Flow Information
Thirty-Nine Weeks Ended
---------------------------
September 27, October 3,
1998 1999
------------ -----------
(Unaudited) (Unaudited)
Cash paid for interest ......... $1,313,000 $1,656,000
Interest capitalized on
construction costs ............. 94,000 107,000
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 November 5, 1999,
the Company had 109 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 thirty-nine weeks ended October 3, 1999, the Company opened
eight and closed two Company-owned restaurants. Subsequent to October
3, 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 39 Weeks Ended
----------------------- ----------------------
September 27,October 3, September 27,October 3,
1998 1999 1998 1999
---------- -------- ----------- ---------
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).............. 30.7% 30.3% 30.3% 30.1%
Labor (1).............. 26.5 27.2 26.8 27.4
Occupancy (1).......... 5.4 5.1 5.6 5.2
Other restaurant operating
costs (1).............. 17.3 16.8 17.5 16.6
General and administrative 5.3 4.6 5.5 4.9
Depreciation, amortization and
restaurant opening costs 5.5 5.9 5.6 6.0
----- ----- ----- -----
INCOME FROM OPERATIONS... 9.5 10.2 9.0 10.0
INTEREST EXPENSE, net.... (1.5) (1.4) (1.3) (1.4)
----- ----- ----- -----
INCOME BEFORE
INCOME TAXES........... 8.0 8.8 7.7 8.6
INCOME TAX EXPENSE....... - - - -
----- ----- ----- -----
NET INCOME............... 8.0% 8.8% 7.7% 8.6%
===== ===== ===== =====
Restaurant Data:
Company-owned restaurants:
Beginning of period.... 101 106 98 102
Opened................. 1 2 7 8
Closed................. (1) - (4) (2)
----- ----- ----- -----
End of period.......... 101 108 101 108
Franchised (2) restaurants: 10 10 10 10
----- ----- ----- -----
Total restaurants:....... 111 118 111 118
===== ===== ===== =====
(1) Percentage is calculated based upon restaurant sales.
(2) Excludes Two Pesos licensed restaurants.
9
The Thirteen Weeks Ended October 3, 1999 Compared to the Thirteen Weeks
Ended September 27, 1998
Restaurant Sales. Restaurant sales increased by $5.2 million, or 14%,
to $41.4 million for the third quarter of 1999 from $36.2 million for
the third quarter of 1998. The increase was due primarily 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 5.2%. 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 and
a price increase of approximately 2%. Sales from restaurants opened
after September 27, 1998 accounted for an increase of $3.4 million. This
increase was partially offset by sales of $563,000 from restaurants
which were closed after September 27, 1998.
Restaurant Cost of Sales. Restaurant cost of sales, calculated as a
percentage of restaurant sales, decreased to 30.3% for the third quarter
of 1999 from 30.7% for the third quarter of 1998. The decrease was due
primarily to continued improvements in the management of food costs
through utilizing increased controls, improved purchasing programs and a
year-over-year reduction in cheese costs. Management expects this trend
to continue during the remainder of 1999.
Labor. Labor costs, calculated as a percentage of restaurant sales,
increased to 27.2% during the third quarter of 1999 from 26.5% 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 trend in labor costs to
continue during the remainder of 1999.
Occupancy. Occupancy costs increased by $128,000 during the third
quarter of 1999 compared to the third quarter of 1998. The increase is
primarily due to the opening of new restaurants in 1999. As a
percentage of restaurant sales, occupancy costs decreased to 5.1% in the
third quarter of 1999 compared to 5.4% in the third quarter of 1998.
Management expects the dollar amount to increase, although it should
continue to show improvement from the prior year as a percentage of
sales for the remainder of 1999.
Other Restaurant Operating Costs. Other restaurant operating costs
increased to $7.0 million in the third quarter of 1999 compared to $6.3
million in the third quarter of 1998. As a percentage of restaurant
sales, other restaurant operating costs decreased to 16.8% for the third
quarter of 1999 compared to 17.3% for the third quarter of 1998. The
decrease as a percentage of sales is primarily due to leverage from
higher than average sales, as the dollar amount per store open remained
relatively flat. Management expects the favorable comparisons as a
percentage of sales to continue for the remainder of 1999.
10
General and Administrative. General and administrative expenses,
calculated as a percentage of sales, decreased to 4.6% for the third
quarter of 1999 compared to 5.3% 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.
Depreciation, Amortization and Restaurant Opening Costs. Depreciation,
amortization and restaurant opening costs consisted of the following:
Thirteen Weeks Ended
----------------------------
September 27, October 3,
1998 1999
------------- ------------
(Unaudited) (Unaudited)
Depreciation of property and
equipment ......................... $ 1,784,000 $ 2,089,000
Amortization of intangible assets 146,000 146,000
Restaurant opening costs .......... 65,000 227,000
Depreciation expense increased by $305,000 for the quarter ended October
3, 1999 compared to the quarter ended September 27, 1998. The increase
was due to the addition of new restaurants as well as continued capital
improvements to existing restaurants. Restaurants opened after
September 27, 1998 accounted for $166,000 of the increase. Restaurant
opening costs increased by $162,000 during the third quarter of 1999
compared to the same period in 1998, primarily due to the opening of two
Company owned restaurants during the third quarter of 1999 compared to
one opening during the third quarter of 1998.
Interest Expense, net. Interest expense, net of interest capitalized on
construction costs, increased to $586,000 in the third quarter of 1999
from $543,000 in the third quarter of 1998, primarily as a result of
additional borrowings under the Company's debt facilities. This
increase is offset by lower interest rates in the third quarter of 1999
compared to the same quarter last year. In addition, the Company
capitalized $22,000 of interest related to new restaurant construction
in the most recent quarter compared to $17,000 during the third quarter
of 1998.
Income Taxes. Income tax expense was zero for the third 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 $3.7 million
for the third quarter of 1999 from $2.9 million for the same period in
1998. Net income was 8.8% of total revenues for the third quarter of
1999 compared to 8.0% in the third quarter of 1998. Diluted earnings
per share was $0.27 for the third quarter of 1999 compared to $0.20 in
the same period of 1998. The increase in earnings per share during the
third quarter of fiscal 1999 compared to the same quarter last year was
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.
11
The Thirty-nine weeks Ended October 3, 1999 Compared to the Thirty-nine
weeks Ended September 27, 1998
Restaurant Sales. Restaurant sales increased by $14.8 million, or 14%,
to $119.5 million for the thirty-nine weeks ended October 3, 1999 from
$104.7 million for the comparable period in 1998. The increase was due
primarily to an increase in sales at existing restaurants and the
opening of higher than average volume restaurants. Comparable store
sales, defined as Taco Cabana restaurants that have been open 18 months
or more at the beginning of the quarter, increased 5.4%. 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 and a price increase of
approximately 2%. Sales from restaurants opened after September 27,
1998 accounted for an increase of $8.3 million. This increase was
partially offset by sales from restaurants which were closed after
September 27, 1998 of $1.6 million.
Restaurant Cost of Sales. Restaurant cost of sales, calculated as a
percentage of restaurant sales, decreased to 30.1% for the thirty-nine
weeks ended October 3, 1999 from 30.3% for the same period in 1998. The
decrease was due primarily to continued improvements in the management
of food costs through utilizing increased controls, improved purchasing
programs and a year-over-year reduction in cheese costs. 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 27.4% for the thirty-nine weeks ended October 3, 1999 from
26.8% 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 trend in labor
costs to continue during the remainder of 1999.
Occupancy. Occupancy costs increased by $337,000 during the thirty-nine
weeks ended October 3, 1999 compared to the same period in 1998. As a
percentage of restaurant sales, occupancy costs decreased to 5.2% in the
thirty-nine weeks ended October 3, 1999 compared to 5.6% in the same
period of 1998. Management expects the dollar amount to increase due to
new openings but continue to decrease as a percentage of sales.
Other Restaurant Operating Costs. Other restaurant operating costs
increased to $19.9 million in the thirty-nine weeks ended October 3,
1999 compared to $18.4 million in the same period of 1998. As a
percentage of restaurant sales, other restaurant operating costs
decreased to 16.6% for the thirty-nine weeks ended October 3, 1999
compared to 17.5% for the same period of 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.
12
General and Administrative. General and administrative expenses,
calculated as a percentage of sales, decreased to 4.9% for the thirty-
nine weeks ended October 3, 1999 compared to 5.5% for the same period of
1998. Management expects this amount to continue to decrease, as a
percentage of sales, throughout the remainder of 1999.
Depreciation, Amortization and Restaurant Opening Costs. Depreciation,
amortization and restaurant opening costs consisted of the following:
Thirty-nine weeks Ended
--------------------------
September 27, October 3,
1998 1999
------------ ----------
(Unaudited) (Unaudited)
Depreciation of property and
equipment ......................... $4,946,000 $ 6,032,000
Amortization of intangible assets 429,000 439,000
Restaurant opening costs .......... 462,000 671,000
Depreciation expense increased by $1.1 million for the thirty-nine weeks
ended October 3, 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 $727,000 of the increase. Restaurant opening
costs increased by $209,000 during the thirty-nine weeks ended October
3, 1999, compared to the same period in 1998. The increase was primarily
due to the opening of eight restaurants during the thirty-nine weeks
ended October 3, 1999 compared to seven restaurants in the same period
of 1998.
Interest Expense, net. Interest expense, net of interest capitalized on
construction costs, increased to $1.7 million in the thirty-nine weeks
ended October 3, 1999 from $1.4 million in the same period of 1998,
primarily as a result of additional borrowings under the Company's debt
facilities. In addition, the Company capitalized $107,000 of interest
related to new restaurant construction during the thirty-nine weeks
ended October 3, 1999 compared to $94,000 during the same period of
1998.
Income Taxes. Income tax expense was zero for the thirty-nine weeks
ended October 3, 1999 and 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 $10.3
million for the thirty-nine weeks ended October 3, 1999 from $8.0
million for the same period in 1998. Net income was 8.6% of total
revenues for the thirty-nine weeks ended October 3, 1999 compared to
7.7% in the same period of 1998. Diluted earnings per share was $0.75
for the thirty-nine weeks ended October 3, 1999 compared to $0.55 in the
same period of 1998. The increase in earnings per share during the
thirty-nine weeks ended October 3, 1999 compared to the same period last
year was 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.
13
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.
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 November 5, 1999, the Company has completed software reprogramming
and replacement of the identified systems. 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 and an assessment of their Year 2000
compliance status has been completed. Additionally, the Company has
identified and met with key suppliers and distributors and discussed
their Year 2000 readiness. The Company has developed contingency plans
for third party business partners that appear to have substantial Year
2000 operational risks.
14
Costs. The Company has used 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.
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
November 5, 1999, the aggregate outstanding balance under these
commitments was $29.6 million.
Net cash provided by operating activities was $15.4 million for the
thirty-nine weeks ended October 3, 1999, and $10.8 million for the
thirty-nine weeks ended September 27, 1998.
Net cash used for investing activities was $16.3 million for the thirty-
nine weeks ended October 3, 1999 representing primarily capital
expenditures of $17.6 million for the construction of new restaurants
and improvements to existing restaurants. This was offset by the sale
of assets generating $1.3 million in proceeds. This compares to $13.8
million in net cash used for investing activities for the thirty-nine
weeks ended September 27, 1998, representing primarily capital
expenditures for the construction of new restaurants and improvements to
existing restaurants, offset by the sale of assets generating $3.2
million in proceeds.
15
Net cash provided by financing activities was $1.8 million for the
thirty-nine weeks ended October 3, 1999 representing primarily net draws
from the Company's debt facilities of $3.0 million, offset by the
purchase of $1.6 million in treasury stock. This compares to net cash
provided by financing activities of $3.5 million in the same period of
1998, representing net draws on the Company's debt facilities of $9.2
million, offset by the purchase of $5.7 million in treasury stock.
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. As of
November 5, 1999, the Company had repurchased 3,137,137 shares at an
average cost of $5.96 per share. The Company has funded the repurchases
primarily through available bank credit facilities. 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 $628,000 during the thirty-nine weeks ended October
3, 1999. During the thirty-nine weeks ended October 3, 1999, the
Company sold properties relating to the special charges which resulted
in proceeds of $1.3 million, which approximated the carrying value of
the assets sold. In addition, certain acquisition and accrued
liabilities related to the Two Pesos acquisition were reduced by
payments of approximately $205,000 during the thirty-nine weeks ended
October 3, 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 2000, including the planned opening of fifteen restaurants in
2000, and the reimaging of fourteen restaurants during the first half of
the 2000 fiscal year. Total capital expenditures related to new
restaurants are estimated to be $19.0 to $22.0 million. The total for
other capital expenditures is estimated to be $4.0 to $6.0 million.
Total capital expenditures for 2000 are expected to approximate $23.0 to
$28.0 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,
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 3. 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, adjusted
quarterly. The aggregate balance outstanding of these notes and the
line of credit as of November 5, 1999 was $29.6 million. The Company
also has a note payable which bears interest at the prime rate. The
outstanding balance of this note as of November 5, 1999 was $1.0
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 November 5, 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.
PART II
Items 1, 2, 3, and 5 have been omitted since the registrant has no
reportable events in relation to these items.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders held on August 19, 1999, the
Company's stockholders elected six directors. There were no broker non-
votes. The votes were as follows:
For Withheld
Stephen V. Clark 11,404,472 111,056
William J. Nimmo 11,402,441 113,087
Richard Sherman 11,400,291 115,237
Cecil Schenker 11,400,384 115,144
Lionel Sosa 11,393,662 121,866
Rod Sands 11,403,372 112,156
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.
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: November 16, 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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