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 March 29, 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 Drive, Suite 200
San Antonio, Texas 78217
(Address of principal executive offices)
Telephone Number (210) 804-0990
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days:
Yes X No
Indicate the number of shares of each of the issuer's classes of
common stock as of the latest practicable date:
Class Outstanding at May 1, 1998
Common Stock 14,855,600 shares
TACO CABANA, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at March 29, 1998 3
and December 28, 1997
Condensed Consolidated Statements of Income for the 4
Thirteen Weeks Ended March 29, 1998 and March 30, 1997
Condensed Consolidated Statements of Cash Flows for the 5
Thirteen Weeks Ended March 29, 1998 and March 30, 1997
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
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 14
Signature 15
TACO CABANA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 28, March 29,
1997 1998
------------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 339,000 $ 359,000
Receivables, net 502,000 469,000
Inventory 2,105,000 2,082,000
Prepaid expenses 1,704,000 1,803,000
Federal income taxes receivable 200,000 199,000
------------ ----------
Total current assets 4,850,000 4,912,000
PROPERTY AND EQUIPMENT, net 59,540,000 61,807,000
NOTES RECEIVABLE, net 344,000 308,000
INTANGIBLE ASSETS, net 11,293,000 11,156,000
OTHER ASSETS 233,000 225,000
------------ -----------
TOTAL $76,260,000 $78,408,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $4,430,000 $3,451,000
Accrued liabilities 6,266,000 6,759,000
Current maturities of
long-term debt and capital leases 1,573,000 1,633,000
Line of credit 4,223,000 1,834,000
------------ ----------
Total current liabilities 16,492,000 13,677,000
LONG-TERM OBLIGATIONS,
net of current maturities:
Capital leases 2,357,000 2,303,000
Long-term debt 11,170,000 15,481,000
----------- -----------
Total long-term obligations 13,527,000 17,784,000
ACQUISITION AND
CLOSED RESTAURANT LIABILITIES 9,126,000 7,843,000
DEFERRED LEASE PAYMENTS 702,000 725,000
STOCKHOLDERS' EQUITY:
Common stock 157,000 157,000
Additional paid-in capital 97,095,000 97,248,000
Retained deficit (57,278,000) (55,421,000)
Treasury stock, at cost (881,937 shares) (3,561,000) (3,605,000)
------------ -----------
Total stockholders' equity 36,413,000 38,379,000
------------ -----------
TOTAL $76,260,000 $78,408,000
============= ===========
See Notes to Condensed Consolidated Financial Statements.
TACO CABANA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the Thirteen Weeks Ended
----------------------------
March 30, March 29,
1997 1998
--------- ---------
REVENUES:
Restaurant sales $30,100,000 $32,322,000
Franchise fees and royalty income 86,000 85,000
----------- -----------
Total revenues 30,186,000 32,407,000
----------- -----------
COSTS AND EXPENSES:
Restaurant cost of sales 9,162,000 9,792,000
Labor 8,086,000 8,672,000
Occupancy 2,047,000 1,907,000
Other restaurant operating costs 5,476,000 6,002,000
General and administrative 1,792,000 1,912,000
Depreciation, amortization
and restaurant opening costs 2,490,000 1,868,000
----------- -----------
Total costs and expenses 29,053,000 30,153,000
----------- -----------
INCOME FROM OPERATIONS 1,133,000 2,254,000
----------- -----------
INTEREST EXPENSE, NET (250,000) (397,000)
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 883,000 1,857,000
----------- -----------
PROVISION FOR INCOME TAXES (327,000) -
----------- -----------
NET INCOME $ 556,000 $1,857,000
=========== ===========
BASIC EARNINGS PER SHARE $ 0.04 $ 0.13
=========== ===========
BASIC WEIGHTED SHARES OUTSTANDING 15,706,537 14,826,138
=========== ===========
DILUTED EARNINGS PER SHARE $ 0.04 $ 0.12
=========== ===========
DILUTED WEIGHTED SHARES OUTSTANDING 15,840,405 15,028,731
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
TACO CABANA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Thirteen Weeks Ended
----------------------------
March 30, March 29,
1997 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $556,000 $1,857,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,490,000 1,668,000
Deferred income taxes 348,000 -
Capitalized interest (21,000) (52,000)
Changes in operating working
capital items (1,521,000) (1,666,000)
---------- ----------
Net cash provided by operating activities 1,852,000 1,807,000
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,562,000) (5,075,000)
Proceeds from sales of
property and equipment - 1,251,000
----------- ----------
Net cash used for investing activities (2,562,000) (3,824,000)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable
and draws on line of credit 2,949,000 2,611,000
Principal payments under long-term debt (911,000) (639,000)
Principal payments under capital leases (48,000) (44,000)
Purchase of treasury stock - (44,000)
Exercise of stock options - 153,000
---------- ----------
Net cash provided by financing activities 1,990,000 2,037,000
---------- ----------
NET INCREASE IN CASH 1,280,000 20,000
CASH AND CASH EQUIVALENTS,
beginning of period 748,000 339,000
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $2,028,000 $359,000
========== ==========
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:
Thirteen Weeks Ended
--------------------
March 30, 1997 March 29,1998
------------- -------------
(Unaudited) (Unaudited)
Numerator for basic and diluted
earnings per share - net income $556,000 $1,857,000
Denominator:
Denominator for basic earnings
per share - weighted-average shares 15,706,537 14,826,138
Effect of dilutive securities -
Employee stock options 133,868 202,593
---------- ----------
Denominator for diluted earnings per share -
adjusted weighted-average and assumed
conversions 15,840,405 15,028,731
========== ==========
Basic earnings per share $ 0.04 $ 0.13
========== ==========
Diluted earnings per share $ 0.04 $ 0.12
========== ==========
3. Supplemental Disclosure of Cash Flow Information
Thirteen Weeks Ended
--------------------
March 30, March 29,
1997 1998
--------- ---------
(Unaudited) (Unaudited)
Cash paid for interest $ 211,000 $ 385,000
Interest capitalized on
construction costs 21,000 52,000
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 May 1, 1998, the Company had 100
Company-owned restaurants and 11 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.
The Company opened three, and closed two Company-owned restaurants during the
first quarter of 1998 for a total of 99 company-owned and 11 franchised
restaurants, including one joint venture owned, at March 29, 1998. Subsequent
to March 29, 1998, one Company-owned restaurant was opened for a current
systemwide total of 111 restaurants.
The following table sets forth for the periods indicated the percentage
relationship to total revenues, unless otherwise indicated, of certain income
statement data. The table also sets forth certain restaurant data for the
periods indicated.
Thirteen Weeks Ended
----------------------
March 30, March 29,
1997 1998
----------- ----------
Income Statement Data:
REVENUES:
Restaurant sales 99.7% 99.7%
Franchise fees and
royalty income 0.3 0.3
------ ------
Total revenues 100.0% 100.0%
====== ======
COSTS AND EXPENSES:
Restaurant cost of sales (1) 30.4 30.3
Labor (1) 26.9 26.8
Occupancy (1) 6.8 5.9
Other restaurant
operating costs (1) 18.2 18.6
General and administrative
costs 5.9 5.9
Depreciation, amortization
and restaurant opening costs 8.2 5.8
----- -----
INCOME FROM OPERATIONS 3.8 7.0
----- -----
INTEREST EXPENSE (0.8) (1.2)
----- -----
INCOME BEFORE INCOME TAXES 2.9 5.7
PROVISION FOR INCOME TAXES (1.1) -
----- -----
NET INCOME 1.8% 5.7%
===== =====
Restaurant Data:
COMPANY OWNED RESTAURANTS:
Beginning of period 104 98
Opened 2 3
Closed - (2)
--- ---
End of period 106 99
FRANCHISED RESTAURANTS (2): 14 11
--- ---
TOTAL RESTAURANTS: 120 110
=== ===
(1) Percentage is calculated based upon restaurant sales.
(2) Excludes Two Pesos licensed restaurants.
The Thirteen Weeks Ended March 29, 1998 Compared to the Thirteen Weeks Ended
March 30, 1997
Restaurant Sales. Restaurant sales increased by $2.2 million, or 7.4%, to $32.3
million for the first quarter of 1998 from $30.1 million for the first quarter
in 1997. The increase is due primarily to an increase in sales at existing
restaurants. Comparable store sales, defined as Taco Cabana restaurants that
have been open 18 months or more at the beginning of the quarter, increased
6.7%. 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 compared to the first quarter of 1997, and the closing of
underperforming restaurants. Sales from restaurants opened after March 30, 1997
accounted for an increase of $2.5 million. This increase was offset by sales
from restaurants which were closed after March 30, 1997 of $1.9 million.
Restaurant Cost of Sales. Restaurant cost of sales, calculated as a percentage
of restaurant sales, decreased to 30.3% in the first quarter of 1998 from 30.4%
for the first quarter of 1997. The decrease was due primarily to continued
improvements in the management of food costs through utilizing increased
controls and improved purchasing programs, including the continued negotiation
of favorable commodity pricing. In addition, food costs as a percentage of
restaurant sales were favorably impacted by a menu price increase of
approximately 2% which was implemented during the first quarter of 1998.
Management expects the favorable cost of sales trends to continue during 1998.
Labor. Labor costs calculated as a percentage of restaurant sales decreased to
26.8% during the first quarter of 1998 from 26.9% for the same period in 1997.
Adjusting for restaurants closed after March 30, 1997, comparable labor as a
percentage of restaurant sales in the first quarter of 1997 was 25.2%. The
increase in comparable labor costs is due to an increase in the minimum wage in
September 1997, management's continued commitment to increase 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 increased labor as a percentage
of revenues to continue during the remainder of 1998.
Occupancy. Occupancy costs decreased by $140,000 during the first quarter of
1998 compared to the first quarter of 1997. The decrease is primarily due to
the closure of underperforming restaurants during 1997. As a percentage of
restaurant sales, occupancy costs decreased to 5.9% in the first quarter of 1998
compared to 6.8% in the first quarter of 1997, due to increased sales at the
restaurant level.
Other Restaurant Operating Costs. Other restaurant operating costs increased to
$6.0 million in the first quarter of 1998 compared to $5.5 million in the first
quarter of 1997. As a percentage of restaurant sales, other restaurant operating
costs increased to 18.6% for the first quarter of 1998 compared to 18.2% for the
first quarter of 1997. The increase is due to increased marketing and
promotional activities as well as increased bonuses at the restaurant level,
offset by a decrease in utilities. Management expects favorable comparisons as
a percentage of sales beginning in the second quarter of 1998.
General and Administrative. General and administrative expenses increased to
$1.9 million for the first quarter of 1998 from $1.8 million in the comparable
period of 1997. As a percentage of sales, general and administrative expenses
remained constant at 5.9% for the first quarter of 1998 and for the comparable
period in 1997. Management expects this amount to increase slightly, as a
dollar amount, throughout the remainder of 1998. The expected increase is due
primarily to the expected filling of positions which are currently open.
Depreciation, Amortization and Restaurant Opening Costs. Depreciation,
amortization and restaurant opening costs consisted of the following:
Thirteen Weeks Ended
----------------------
March 30, March 29,
1997 1998
--------- ----------
(Unaudited) (Unaudited)
Depreciation of property and
equipment $ 2,035,000 $ 1,531,000
Amortization of intangible
assets 416,000 137,000
Restaurant opening costs 39,000 200,000
Depreciation expense decreased by approximately $504,000 for the quarter ended
March 29, 1998 compared to the quarter ended March 30, 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 March 30, 1997, as well as continued
capital improvements to existing restaurants. Amortization of intangible assets
decreased by $279,000 for the quarter ended March 29, 1998 compared to the
quarter ended March 30, 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 $161,000 during
the first quarter of 1998 compared to the same period in 1997, primarily due to
the opening of three Company owned restaurants during the first 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 $397,000 in the first quarter of 1998 from
$250,000 in the first quarter of 1997, primarily as a result of additional
borrowings under the Company's debt facilities. In addition, the Company
capitalized $52,000 of interest related to new restaurant construction in the
most recent quarter compared to $21,000 during the first quarter of 1997.
Income Taxes. Provision for income taxes decreased to zero for the first
quarter of 1998 compared to $327,000, or 37% of income before taxes, for the
first 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 $1.9 million for the
first quarter of 1998 from $556,000 for the same period in 1997. Net income was
5.7% of total revenues for the first quarter in 1998 compared to 1.8% in the
first quarter of 1997. Diluted earnings per share was $0.12 for the first
quarter of 1998 compared to $0.04 in the same period of 1997. The increase in
net income recorded during the first quarter of fiscal 1998 compared to the same
quarter last year is due to higher sales at existing restaurants, the opening of
six new restaurants during 1997, continued strong cost controls, the closing of
underperforming restaurants, a reduction in depreciation and amortization
expense and the lack of a provision for income taxes in the current quarter.
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 May 1, 1998, $16.8 million had been used under
these commitments.
Net cash provided by operating activities was $1.8 million for the thirteen
weeks ended March 29, 1998, and $1.9 million for the thirteen weeks ended March
30, 1997.
Net cash used in investing activities was $3.8 million for the thirteen weeks
ended March 29, 1998, representing primarily capital expenditures of $5.1
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 $2.6 million in net cash used in investing activities
for the thirteen weeks ended March 30, 1997, representing primarily capital
expenditures for the construction of new restaurants and improvements to
existing restaurants.
On April 16, 1997, the Company's Board of Directors approved a plan to
repurchase up to 1,500,000 shares of the Company's Common Stock. As of March 29,
1998 the Company had repurchased 881,937 shares at an average cost of $4.09 per
share. The timing, price, quantity and manner of remaining purchases, if any,
will be made at the discretion of management and will be dependent upon market
conditions. The Company has funded the repurchases through available bank credit
facilities, as well as the liquidation of the Company's short term investment
portfolio. Remaining purchases, if any, will be funded through a combination of
cash provided by operations and available bank credit facilities.
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 $713,000 during the first
quarter of 1998. During the first quarter of 1998, 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. Subsequent to March
29, 1998, the company sold properties relating to the special charges which
resulted in proceeds of $700,000, which approximated the carrying value of the
assets sold. The Company currently has several closed restaurant properties for
sale which were covered by the special charges. Although there can be no
assurance of the particular price at which such property will be sold, the
Company expects to receive funds equal to or in excess of the carrying value
upon the actual disposition of this property. In addition, certain acquisition
and accrued liabilities related to the Two Pesos acquisition were reduced by
payments of approximately $71,000 during the first quarter of 1998.
The Company believes that existing cash balances, funds generated from
operations, its ability to borrow, and the possible use of lease financing will
be sufficient to meet the Company's capital requirements through 1998, including
the planned opening of eight to ten restaurants and the reimaging of 20 to 25
restaurants. Total capital expenditures related to new restaurants are
estimated to be $12.0 to $15.0 million. The total for other capital
expenditures, including the cost of the reimagings, is estimated to be $7.5 to
$8.5 million. Total capital expenditures for 1998 are expected to approximate
$19.5 to $23.5 million.
Impact of Inflation
Although increases in labor, food or other operating costs could adversely
affect the Company's operations, management does not believe that inflation has
had a material adverse effect on the Company's operations to date.
Seasonality and Quarterly Results
The Company's sales fluctuate seasonally. Historically, the Company's highest
sales and earnings occur in the second and third quarters. In addition,
quarterly results are affected by the timing of the opening and closing of
stores. Therefore, quarterly results cannot be used to indicate the results for
the entire year.
Forward-Looking Statements
Statements in this quarterly report, including those contained in the foregoing
discussion and other items herein concerning the Company which are (a)
projections of revenues, costs, capital expenditures or other financial items,
(b) statements of plans and objectives for future operations, (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 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 often differ 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; 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 or the areas in which the Company's products
are marketed; natural disasters affecting operations; and adverse rulings,
judgments, or settlements in litigations or other legal matters. The Company
undertakes no obligation to publicly release the result of any revisions to any
such forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company has filed the following exhibits with this report:
10.17 Third amended loan agreement with International Bank of Commerce.
27. Financial Data Schedules
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: May 11, 1998 Taco Cabana, Inc.
David G. Lloyd
Senior Vice President, Chief
Financial Officer,
Secretary and Treasurer
Signing on behalf of the registrant
and as the principal financial and
accounting officer