-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AuXAX4w4nFwYZZaEptESOkLb4xnoWs6SL+ALE35zThapprh1DdV+CsmflPXwbtq/ Domn1nsP5vy4ayJwnLMPuA== 0000891082-99-000005.txt : 19990326 0000891082-99-000005.hdr.sgml : 19990326 ACCESSION NUMBER: 0000891082-99-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990103 FILED AS OF DATE: 19990325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TACO CABANA INC CENTRAL INDEX KEY: 0000891082 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 742201241 STATE OF INCORPORATION: DE FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20716 FILM NUMBER: 99572373 BUSINESS ADDRESS: STREET 1: 8918 TESORO DRIVE STREET 2: SUITE 200 CITY: SAN ANTONIO STATE: TX ZIP: 78217-6219 BUSINESS PHONE: 2108040990 MAIL ADDRESS: STREET 1: 3309 SAN PEDRO AVE STREET 2: SUITE 200 CITY: SAN ANTONIO STATE: TX ZIP: 78212 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Mark One X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended January 3, 1999 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 (IRS employer identification no.) of incorporation or organization) 8918 Tesoro Drive, Suite 200 San Antonio, Texas 78217 (Address of principal executive offices, including ZIP Code) (210) 804-0990 (Registrant's telephone number, including area code) Securities Registered Pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on Which Registered None None Securities Registered Pursuant to Section 12(g) of the Act: Title of Each Class Common Stock, $0.01 par value 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. __ As of March 1, 1999, the aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the last sale price of the Common Stock of the Registrant as quoted on the NASDAQ National Market was $84,015,553 (for purposes of calculating this amount, only directors, officers, and beneficial owners of 5% or more of the capital stock of the Registrant have been deemed affiliates). The number of shares of the Common Stock of the Registrant outstanding as of March 1, 1999 was 13,354,200. FORM 10-K INDEX PART I ITEM 1. BUSINESS............................................ 3 ITEM 2. PROPERTIES.......................................... 10 ITEM 3. LEGAL PROCEEDINGS................................... 10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS................................. 11 ITEM 6. SELECTED FINANCIAL DATA............................. 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................. 15 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................ 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......... 26 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................. 26 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.. 27 ITEM 11. EXECUTIVE COMPENSATION.............................. 30 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................................... 35 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...... 36 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K................................. 37 PART I ITEM 1. BUSINESS General Taco Cabana, Inc., a Delaware corporation (the "Company"), pioneered the Mexican patio cafe concept with its first restaurant in 1978 and, as of January 3, 1999, operates and franchises a total of 112 such restaurants system-wide. Of these, the Company owns and operates 102 Taco Cabana restaurants and franchisees of the Company own and operate the remaining 10 Taco Cabana restaurants. The Company's restaurants (including franchises) are located primarily in Texas, and are also located in Georgia, Indiana, New Mexico, and Oklahoma. Taco Cabana restaurants feature generous portions of fresh, premium quality Tex-Mex and traditional Mexican style food at an exceptional value. The restaurants provide interior, semi-enclosed and patio dining areas with a festive Mexican theme. Menu items include flame-grilled beef and chicken fajitas served on sizzling iron skillets, "Chicken Flameante"TM (a marinated rotisserie chicken), quesadillas, traditional Mexican and American breakfasts, other Tex-Mex dishes and fresh, hot flour tortillas. Unlike many of its competitors, the Company makes most menu items fresh daily in each of its restaurants. Taco Cabana Food and Pricing Philosophy The Company is committed to selling premium food which it believes to be among the highest quality of any chain in the restaurant industry. This process begins with the selection of the freshest available ingredients. The Company's menu items are prepared strictly in accordance with authentic and well-tested recipes. Taco Cabana restaurants also offer a variety of beverage choices, including margaritas and beer. Alcoholic beverages currently account for less than 5% of gross sales. The Ingredients. The Company has implemented a purchasing program structured to ensure that all of the ingredients used in the preparation of the Taco Cabana menu items are of the highest quality. The Company regularly inspects its vendors to ensure both that the products purchased by the Company conform to its standards, and that the prices offered are competitive. The meat used in making fajitas as well as most other principal ingredients are purchased through supply contracts to ensure availability and minimize the risks of price fluctuation. The Preparation. The menu items offered at any Taco Cabana restaurant are prepared at that restaurant from fresh meat and produce ingredients delivered by suppliers to most restaurants at least three times each week. The Company is committed to differentiating itself from other quick service competitors by utilizing fresh, high quality ingredients as well as the preparation of most items "from scratch". The Company uses a number of pre-prepared items and is currently testing other pre-prepared items in order to simplify restaurant operations. Pricing Philosophy. The Company offers value by pricing its menu items below the price of comparable menu items in sit-down Mexican restaurants. Although Taco Cabana's food costs (as a percentage of sales) are generally higher than quick service chains as a result of the premium quality of ingredients used, the Company believes that this point of differentiation contributes to the achievement of average unit volumes in excess of most quick service restaurants. Taco Cabana Restaurants Restaurant Layout. Taco Cabana restaurants average approximately 3,200 square feet (exclusive of the exterior dining area) and provide seating for approximately 80 customers, with additional patio seating for approximately 50 customers. Taco Cabana restaurants are typically a vivid pink color (with painted and neon accents), conveying a distinctive Mexican theme and permitting easy identification by passing motorists. Inside, exposed elements of the kitchen display the freshness of Taco Cabana's food and the authenticity of its preparation. Taco Cabana's restaurant design enables customers to observe fresh fajitas cooking on a charcoal grill, a machine making fresh, hot flour tortillas, Chicken FlameanteTM rotating on spits and the preparation of other food items. Upon entry, the customer places an order selected from an overhead menu board, proceeds down a service line to where the order is picked up, and then passes a Salsa Bar en route to the dining area. The distinctive Salsa Bar offers Taco Cabana customers freshly prepared, authentic Tex-Mex ingredients such as Salsa de Fuego (made with charred peppers and tomatoes), pico de gallo and salsa (all "made from scratch" throughout the day at each restaurant), and cilantro, pickled jalapeno slices, crisp chopped onions, and fresh sliced limes. According to the season, time of day and personal preference, the customer may choose to dine either in the restaurant's brightly colored and festive interior dining area or the semi-enclosed or outdoor patio areas. The addition of traditional and contemporary Latin music, tropical landscaping, and authentic decorative artifacts create an overall dining environment which the Company believes is both attractive and festive. Most Taco Cabana restaurants also offer drive-thru service. The Company began constructing its new prototype restaurant in 1996. The prototype incorporates several new and different features that set it apart from Taco Cabana restaurants previously constructed. The new prototype features a rounded front, as well as Southwest accents such as a clay tile roof, heavy wood beams and a trellis that shades the patio area, and adds the use of bright colors outside and inside, including colored tiles, doors, windows, and awnings. Corrugated metal wall panels, aged wood finishes, and distressed stainless steel counter tops are featured inside, all of which are intended to replicate an old Mexican cafe. Bright neon on the exterior of the building broadcasts the unique menu items served at Taco Cabana. Favorite features retained from the original Taco Cabana restaurants include working garage doors that open up the dining area to the outside when weather permits, display cooking where the guest can see the food being prepared, liberal use of the Taco Cabana's signature pink color, and the self-serve fresh Salsa Bar. The prototype was designed to reduce overall construction costs, improve functional efficiency, allow for better guest service, and enhance Taco Cabana's unique patio cafe image. Since November 1996, the Company has opened 17 restaurants under this new design. During 1997, the Company initiated a re-image program for existing restaurants which incorporates many of the features of the new prototype design. As of January 3, 1999, 41 restaurants were re-imaged or converted to the new prototype design, bringing a system-wide total of 57 restaurants with the new design. The Company expects to re-image 30 to 35 restaurants during 1999. Restaurant Locations. The following table sets forth the number of restaurants as of January 3, 1999 by area of dominant influence ("ADI") for television and radio advertising: ADI* Company-OwnedFranchised(1) Total San Antonio 32(2) 0 32 Houston 28(3) 0 28 Austin 15 0 15 Dallas/Fort Worth 18 0 18 El Paso 7 0 7 Lubbock 1 0 1 Atlanta, Georgia 0 1 1 Bryan/College Station 0 2 2 Tulsa, Oklahoma 1 0 1 Waco 0 1 1 Albuquerque, New Mexico 0 2 2 Amarillo 0 2 2 Corpus Christi 0 1 1 Ft. Wayne, Indiana 0 1 1 --- --- --- Total 102 10 112 === === === ___________________________________________________________________________ * All of the ADIs are located in Texas except as otherwise indicated. (1) Represents franchised Taco Cabana restaurants. Does not include licensed Two Pesos franchises. (2) Includes one HEB grocery store unit. (3) Includes three mall-unit Taco Cabana restaurants. Customer Convenience The Company operates its restaurants to enable customers to dine-in or take-out, as they choose. In most cases, the restaurants also provide the convenience of drive-thru windows which, in the aggregate, account for approximately 40% of the Company's sales. A majority of the restaurants are open 24 hours a day. This strategy is continually evaluated for economic viability on a restaurant by restaurant basis. Customer Service The Company is committed to consistently providing personal, attentive and efficient service in order to attract repeat customers. Restaurant and shift managers are encouraged to follow a "front of the house" style of management, which requires that the managers spend most of their time attending to customers at the register, drive-thru windows or in the dining areas. Marketing The Company utilizes an integrated, multi-level marketing approach which includes periodic company-wide promotions, direct mail, in-store promotions, local store marketing, and other strategies, including the use of radio advertising in its major markets. The Company expects to execute this plan utilizing a marketing budget of approximately 3.75% of sales. Expansion The Company's near-term strategy is to achieve a dominant or leading position among quick service Mexican food restaurants in each of its targeted principal markets in order to obtain marketing and operating efficiencies. The Company seeks to implement this strategy by selectively adding restaurants in existing markets in order to expand its existing market share. In accordance with this strategy, the Company may locate new restaurants in close proximity to existing Taco Cabana restaurants in order to provide the Company with increased market penetration and market profitability, even if this may result in a reduction in comparable store sales volumes of certain restaurants. Additionally, the Company is planning to expand into new markets, beginning with the Oklahoma City market in 1999. The Company's 1999 objective is to open ten to twelve freestanding restaurants in existing markets and in Oklahoma City. The Company believes the site selection process is very important in determining the potential success of a particular restaurant and senior management devotes substantial time and resources to analyzing each prospective site. The Company focuses on selecting locations which clear stringent hurdles with regards to the projected return on initial investment. A variety of factors are considered in the site selection process, including local market demographics, site visibility and accessibility (including drive-by traffic and ease of drive-thru accessibility), proximity to competitive operations, and proximity to generators of potential customers, such as major retailers, retail centers, medical or hospital facilities, office complexes, hotel concentrations, and stadiums, arenas, theaters or other entertainment centers. The Company currently uses a software model to assist in the evaluation of potential locations. The software model was developed by the Company using the services of a consulting firm during 1996, and significantly upgraded and enhanced during 1998. Restaurant Operations and Management The Company seeks to maintain quality and consistency in its restaurant operations by carefully training and supervising personnel and establishing exacting standards relating to food quality, friendliness of service and cleanliness of the restaurant facility. It is the Company's policy to ensure that customers are served quickly and that customers receive orders correctly filled and delivered in a courteous manner. The Company maintains financial and accounting controls for each of its restaurants through use of centralized accounting and management information systems. The Company has installed throughout all of its company-owned restaurants an in-store computer-based management support system that allows for daily polling of sales and labor information. Additionally, a separate management information system has been developed and implemented in all company-owned restaurants which provides for daily polling of food costs. This system records the receipt of inventory through the scanning of bar-codes and integrates with the point of sale system thus providing immediate cost of sales data and inventory records. The system is designed to improve food cost management, provide corporate management quicker access to financial data and reduce the time devoted by its restaurant managers to administrative responsibilities. Operations are managed by restaurant general managers who complete an intensive training program during which they are instructed in all areas of Taco Cabana's restaurant operations. Such areas of training include food preparation, customer service, cost controls, facility maintenance, communications skills and employee relations. Restaurant general managers are overseen by division leaders (individuals with responsibility for the operation of multiple restaurants within a market) and by regional Vice Presidents of Operations. An incentive plan has been established in which all restaurant and division leaders participate. Awards under the incentive plan are tied to the achievement of specified sales, profitability and qualitative performance goals. Franchising Program At January 3, 1999, the Company had five franchisees operating a total of 10 Taco Cabana restaurants. The Company did not enter into any new franchise agreements during 1998 and does not currently anticipate new franchisee signings during 1999. Competition Taco Cabana's restaurants compete both with fast food operations and with traditional sit-down Mexican restaurants. Management believes that the Company's combination of freshly prepared food, distinctive ambiance, and superior service help to distinguish Taco Cabana restaurants from fast food operations, while Taco Cabana's price-value relationship differentiates its restaurants from more expensive sit-down or casual dining restaurants. The food service industry is intensely competitive with respect to price, service, location and food quality, and there are many well-established national, regional and locally-owned competitors in the Company's market areas, some of which have greater financial and other resources than the Company. Some of such competitors have also been in existence longer than the Company and are better established in areas where Taco Cabana's restaurants are or will be located. The restaurant business is often affected by changes in consumer tastes, economic conditions, population, traffic patterns, availability of employees and cost increases. Employees At January 3, 1999, the Company employed approximately 3,200 persons, of whom approximately 3,100 were operations employees and the remainder were corporate personnel. Most employees, other than restaurant management and corporate personnel, are paid on an hourly basis. The Company believes that it provides working conditions and wages that are comparable with those of other companies in the restaurant industry operating in its market area. The Company's employees are not covered by a collective bargaining agreement. The Company does not subscribe to any workers' compensation insurance program in the State of Texas, where the great majority of its company-owned restaurants are currently located. As such, it is subject to negligence actions by its employees and is not able to assert contributory negligence and certain other defenses. In addition, employees might be able to recover certain types of damages that would not be available to them if the Company subscribed to a workers' compensation insurance program. The Company self-insures a portion of such risk, and carries excess liability coverage that it believes is adequate. This practice has not had any material adverse effect upon the Company's operations or financial position since it was adopted in November 1988. Trademarks, Service Marks and Trade Dress The Company regards its trademarks, service marks and trade dress as having significant value and as being important to its marketing efforts. The Company has registered its principal Taco Cabana logo and design with the United States Patent and Trademark Office on the Principal Register as a service mark for its restaurant services, has secured or has applied for state and federal registrations of several other advertising or promotional marks, including variations of its principal mark and the service mark "Get Real", and has applied for registrations in foreign countries of its principal mark and several other marks. The Company's policy is to pursue registration of its principal marks and to oppose strenuously any infringement of its marks or trade dress. Government Regulation Each company-owned and franchised restaurant is subject to regulation by federal agencies and to licensing and regulation by state and local health, sanitation, safety, fire and other departments relating to the development and operation of restaurants, including regulations relating to alcoholic beverage sales, environmental, building and zoning requirements, preparation and sale of food, and laws governing the Company's relationship with its employees, including minimum wage requirements, overtime, working conditions and citizenship requirements. Difficulties or failures in obtaining the required licenses or approvals could delay or prevent the opening of new restaurants. The Company is subject to Federal Trade Commission ("FTC") regulation and state laws which regulate the offer and sales of franchises. The Company may also become subject to state laws which regulate substantive aspects of the franchisor-franchisee relationship. The FTC requires the Company to furnish to prospective franchisees a franchise offering circular containing prescribed information. A number of states in which the Company might consider franchising also regulate the offer and sale of franchises and require registration of the franchise offering with state authorities. State laws that regulate the franchisor-franchisee relationship presently exist in a substantial number of states and bills have been introduced in Congress and other states from time to time which would provide for regulation of the franchisor-franchisee relationship in certain respects. Certain of such laws may restrict a franchisor in the termination of a franchise agreement, although these provisions have not had a significant effect on the Company's operations. The Company is subject to the Fair Labor Standards Act and various state laws governing such matters as minimum wage requirements, overtime and other working conditions and citizenship requirements. A significant number of the Company's food service personnel are paid at rates related to the federal minimum wage and increases in the minimum wage will increase the Company's labor costs. The Company is subject to the Texas "dram-shop" laws and may be subject to the "dram-shop" laws of certain other states. Dram-shop laws provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. The Company is also subject to the Americans with Disabilities Act of 1990, which, among other things, may require certain minor further renovations to existing restaurants to meet federally mandated access and use requirements. The cost of these renovations is not expected to be material to the Company. The Company believes that it is operating in substantial compliance with applicable laws and regulations governing its operations. Geographic Concentration During fiscal 1998, approximately 99% of the Company's net sales were derived from restaurants located in the State of Texas. As a result, the Company's results of operations may be materially affected by weather, economic or business conditions within these markets. Also, given the Company's present geographic concentration, adverse publicity relating to Taco Cabana restaurants could have a more pronounced adverse effect on the Company's overall sales than might be the case if the Company's restaurants were more broadly dispersed. ITEM 2. PROPERTIES The Company currently owns 31 of its restaurant sites and owns an additional nine buildings on properties with ground leases. The Company leases its remaining restaurant locations. The Company may purchase a number of its current and future restaurant locations where it is cost effective to do so. Substantially all of Taco Cabana's restaurants are free-standing buildings. The Company has typically needed 120 days after the signing of a lease and obtaining required permits to complete construction and open a new restaurant. Additional time is sometimes needed to obtain certain government approvals and licenses, such as liquor licenses. Land leased by the Company is typically leased under "triple net" leases that require the Company to pay real estate taxes and utilities and maintain insurance with respect to the premises and, in many cases, to pay contingent rentals based on sales in excess of specified amounts. The leases have initial terms of 10 to 20 years with options to renew for additional periods which range from 5 to 15 years. Approximately 92% of the Company's current leases have remaining terms or renewal options extending more than five years from January 3, 1999. ITEM 3. LEGAL PROCEEDINGS The Company is a party to franchise, routine negligence or employment-related litigation in the ordinary course of its business. No such pending matters, individually or in the aggregate, are deemed to be material to the results of operations or financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matter during the fourth quarter of the Company's fiscal year ended January 3, 1999 to a vote of the Company's stockholders, through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Common Stock, $.01 par value, of the Company ("Common Stock") began trading on the NASDAQ National Market on October 16, 1992, the effective date of the Company's initial public offering. Prior to October 16, 1992, there was no public market for the Common Stock. The table below sets forth, for the periods indicated, the reported high and low last sale prices of the Company's Common Stock, as reported on the NASDAQ National Market: High Low Fiscal Year Ended January 3, 1999 Quarter Ended January 3, 1999 $ 7 3/4 $ 4 7/8 Quarter Ended September 27, 1998 6 5/8 4 7/8 Quarter Ended June 28, 1998 7 1/8 5 3/4 Quarter Ended March 29, 1998 7 1/16 4 7/16 Fiscal Year Ended December 28, 1997 Quarter Ended December 28, 1997 $ 5 11/16 $ 4 1/16 Quarter Ended September 28, 1997 5 3/4 4 Quarter Ended June 29, 1997 5 1/2 3 15/16 Quarter Ended March 30, 1997 7 3/8 4 3/4 As of March 1, 1999, the last reported sale price of the Common Stock on the NASDAQ National Market System was $8 11/16 per share. As of March 1, 1999, there were approximately 900 record holders of Common Stock. On June 9, 1995 the Board of Directors declared a dividend distribution of Preferred Share Purchase Rights. The Rights may be redeemed by the Board of Directors for one cent per Right prior to the close of the tenth day (subject to extension by the Board of Directors to the 30th day) after a person or group acquires (or has obtained the right to acquire or announces an intent to acquire) through open-market purchases, a tender offer or otherwise, 15% or more of the Company's shares. For a 120-day period after any date of a change (resulting from a proxy or consent solicitation) in a majority of the Board of Directors in office at the time the solicitation was commenced, the Rights may only be redeemed if there are directors then in office who are continuing directors and the Board of Directors of the Company, with the concurrence of a majority of such continuing directors, determine that the redemption is in the best interest of the Company and its stockholders. The Rights were issued on June 20, 1995 to stockholders of record on that date and will expire in ten years. The Rights are not currently exercisable and automatically trade with the common shares. However, upon the earlier of (i) ten days after a person or group acquires or has obtained the right to acquire 15% or more of the Company's shares, or (ii) ten business days after a person or group commences or discloses an intent to commence a tender or exchange offer the consummation of which would result in such person or group owning 15% or more of the shares, and subject to the Board's right to set a later date (which date will not be later than the 30th day after an event described in (i) or (ii)), the Rights will become exercisable and separate certificates representing the Rights will be distributed. When the Rights first become exercisable, a holder will be entitled to buy from the Company one one-thousandth of a share of a new series of participating cumulative preferred stock for $37.50. If the Company is involved in a merger or other business combination with, or 50% or more of its assets or earning power are sold to, a publicly-traded person or group that has acquired 15% or more of the Company's shares, the "flip-over" provision of the Rights will be triggered and the Rights will entitle a holder to buy a number of shares of common stock of the acquiring company having a market value of twice the exercise price of each Right. If the acquiring person or group is not publicly traded, the "flip-over" provision of the Rights will be triggered and the Rights will entitle the holder to buy at the exercise price, at the holder's option (i) the number of shares of the surviving company having a book value of twice the exercise price, (ii) the number of shares of the acquiring company having a book value of twice the exercise price, or (iii) the number of shares of any publicly traded affiliate of the acquiring company having a market value of twice the exercise price. If any person or group acquires or has obtained the right to acquire 15% or more of the Company's outstanding Common Stock, the "flip-in" provision of the Rights will be triggered and the Rights will entitle a holder (other than such person or any member of such group) to buy that number of one one-thousandths of a preferred share equivalent to the number of shares of Common Stock of the Company having a market value of twice the exercise price of each Right. Following the acquisition by any person or group of 15% or more of the Company's Common Stock, the Board of Directors will also have the ability to exchange the Rights, in whole or in part, for consideration per Right consisting of one-half of the securities that would be issuable at such time upon the exercise of one Right or cash equal to the exercise price of the Right. In addition to authorizing the Stockholder Rights Plan, the Board authorized a new series of participating cumulative preferred stock purchasable upon exercise of the Rights. The shares of the new series of participating cumulative preferred stock will be nonredeemable. Each preferred share will be entitled to a quarterly dividend equal to the greater of $.01 per share or 1,000 times any dividend declared on the common shares during such quarter. In the event of liquidation, the holders of the preferred shares will be entitled to receive an aggregate liquidation payment equal to the greater of $.01 per whole share or an amount per share equal to 1,000 times the payment made per share of Common Stock. Each preferred share will have 1,000 votes, voting together with the common shares. Finally, in the event of any merger, consolidation or other transaction in which common shares are exchanged, each preferred share will be entitled to receive 1,000 times the amount received per common share. These rights are protected by customary anti-dilution provisions. In the event of issuance of preferred shares upon exercise of the Rights, in order to facilitate trading a depository receipt may be issued for each one one-thousandth of a preferred share. The dividend, liquidation and voting rights, and the non- redemption feature, of the preferred shares are designed so that the value of the one-thousandth interest in a preferred share purchasable with each right will approximate the value of one share of Common Stock. The Company has never declared or paid cash dividends on the Common Stock or any of its other securities. The Company presently intends to retain all earnings for the operation and development of its business and does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. Any future determination as to the payment of cash dividends will depend on a number of factors, including future earnings, capital requirements, the financial condition and prospects of the Company and present restrictions. under credit facilities, as well as such other factors as the Board of Directors may deem relevant. There can be no assurance that the Company will pay any dividends in the future. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data, which set forth certain financial information with respect to the Company, have been derived from the financial statements of the Company. The financial statements of the Company for each of the fiscal years in the five-year period ended January 3, 1999 have been audited by Deloitte & Touche LLP, independent certified public accountants. The following selected financial data should be read in conjunction with the Consolidated Financial Statements and the notes thereto included elsewhere in this report. January 1, December 31, December 29, December 28, January 3, 1995 (1) 1995 1996 1997 1999 52 Weeks 52 Weeks 52 Weeks 52 Weeks 53 Weeks (in thousands,except per share data) Income Statement Data: REVENUES: Restaurant sales $124,826 $137,191 $131,680 $ 131,857 $142,592 Franchise fees and royalty income 2,424 1,342 516 346 358 -------- -------- -------- --------- -------- Total revenues 127,250 138,533 132,196 132,203 142,950 COSTS AND EXPENSES: Restaurant cost of sales and operating costs 102,236 115,195 107,703 110,440 114,111 General and administrative 4,818 6,068 6,445 6,964 7,829 Depreciation and amortization 7,112 10,301 9,245 9,659 7,990 Special charges (reversal) (3) - 8,100 2,497 78,738 (2,665) Litigation settlement (2) - - 3,400 - - Reserve for notes and other receivables - 3,500 - - - -------- -------- -------- -------- -------- Total costs and expenses 114,166 143,164 129,290 205,801 127,265 -------- -------- -------- -------- -------- INCOME (LOSS) FROM OPERATIONS 13,084 (4,631) 2,906 (73,598) 15,685 NON-OPERATING INCOME (EXPENSE): 220 (1,397) (1,348) (1,137) (1,951) -------- -------- -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES 13,304 (6,028) 1,558 (74,735) 13,734 (PROVISION) BENEFIT FOR INCOME TAXES (4,784) 2,230 (854) 1,537 - -------- -------- -------- -------- ------- NET INCOME (LOSS) $ 8,520 $(3,798) $ 704 $(73,198) $13,734 ======== ======== ======== ========= ======= BASIC EARNINGS (LOSS) PER SHARE (5) $ 0.56 $ (0.24) $ 0.04 $ (4.78) $ 0.96 ========= ======== ======== ========= ======= DILUTED EARNINGS (LOSS) PER SHARE (5) $ 0.55 $ (0.24) $ 0.04 $ (4.78) $ 0.95 ======== ======== ======== ======== ======= Balance Sheet Data: TOTAL ASSETS $152,222 $148,578 $142,706 $ 76,260 $ 90,202 LINE OF CREDIT, LONG-TERM DEBT AND CAPITAL LEASES, INCLUDING CURRENT MATURITIES 12,945 19,290 13,668 19,323 30,324 STOCKHOLDERS' EQUITY 115,652 112,327 113,172 36,413 40,777 DIVIDENDS PER COMMON SHARE - - - - - (1) Includes results of eight acquired franchised restaurants since their respective dates of acquisition. (2) Includes the 1996 litigation settlement for $3.4 million pre-tax, as described in Note 14 to the Consolidated Financial Statements. (3) Includes the charge related to the 1995 operations review of $8.1 million, the 1996 write-down of the Company's investment in a joint venture and the accrual of related exit costs of $2.5 million, the 1997 charge for the write down of impaired assets and the closure of seventeen restaurants and the reversal of special charges in 1998 as described in Note 2 to the Consolidated Financial Statements. (4) Reserve resulted from the 1995 operations review. (5) The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Standards No. 128, Earnings Per Share. For further discussion of earnings per share and the impact of Statement No. 128, see Notes 1 and 11 to the consolidated financial statements. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction The Company commenced operations in 1978 with the opening of its first Taco Cabana restaurant in San Antonio. As of January 3, 1999, the Company had 102 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 contributing less than 1% of total revenues for the 1998 fiscal year. During the fiscal year ended January 3, 1999, the Company opened nine restaurants and closed five restaurants. Additionally, a franchisee of the Company closed one restaurant. Results of Operations The following table sets forth 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. Fiscal Year Ended ---------------------------------- December 29, December 28, January 3, 1996 1997 1999 Income Statement Data: REVENUES: Restaurant sales 99.6% 99.7% 99.7% Franchise fees and royalty income 0.4 0.3 0.3 ----- ----- ----- Total revenues 100.0 100.0 100.0 ===== ===== ===== COSTS AND EXPENSES: Restaurant cost of sales (1) 31.4 30.8 30.4 Labor (1) 26.3 27.4 26.8 Occupancy (1) 6.2 6.2 5.5 Other restaurant operating costs (1) 17.9 19.3 17.3 General and administrative costs 4.9 5.3 5.5 Depreciation and amortization 7.0 7.3 5.6 Special charges 1.9 59.6 (1.9) Litigation settlement 2.6 - - ----- ----- ----- INCOME (LOSS) FROM OPERATIONS 2.2 (55.7) 11.0 INTEREST EXPENSE, NET (1.0) (0.9) (1.4) ----- ----- ----- INCOME (LOSS) BEFORE INCOME TAXES 1.2 (56.5) 9.6 INCOME TAXES (0.6) 1.2 - ----- ----- ----- NET INCOME (LOSS) 0.5% (55.4)% 9.6% ===== ===== ===== Restaurant Data: COMPANY-OWNED RESTAURANTS: Beginning of period 106 104 98 Opened 1 7 9 Acquired - 1 - Closed (3) (14) (5) ----- ----- ----- End of period 104 98 102 FRANCHISED RESTAURANTS (2): 17 11 10 ----- ----- ----- TOTAL RESTAURANTS: 121 109 112 ===== ===== ===== ______________ (1) As a percentage of restaurant sales. (2) Excludes Two Pesos licensed restaurants. Fiscal 1998 Compared to Fiscal 1997 Restaurant Sales. Restaurant sales increased $10.7 million, or 8.1%, to $142.6 million for fiscal 1998 from $131.9 million for fiscal 1997. The increase in sales is due to an increase in sales at existing restaurants, an additional week of sales in 1998 compared to 1997 and the opening of new restaurants during 1998, offset by a decrease in sales from restaurant closures. Comparable store sales, defined as Taco Cabana restaurants that have been open 18 months or more at the beginning of each quarter, increased 4.7% during 1998. Management attributes much of the increase in comparable store sales to several factors including a more consistent marketing program featuring a value meal message, a commitment to increased staffing levels at existing restaurants and the ongoing reimage program. The additional week of sales in 1998 was due to the fact the Company's fiscal year is a 52 - 53 week year ending on the closest Sunday to December 31. Fiscal year 1998 contained 53 weeks and fiscal year 1997 contained 52 weeks. The additional week accounted for approximately $2.6 million in additional sales for 1998 compared to 1997. Sales from restaurants opened after December 29, 1997 accounted for an increase of $8.3 million. This increase was offset by restaurants closed during 1997 which accounted for sales of $7.1 million during 1997. Franchise Fees and Royalty Income. Franchise and royalty fees remained relatively constant for the fiscal 1998 compared to fiscal 1997. There were no new franchisee openings and one franchisee closing during 1998. Restaurant Cost of Sales. Restaurant cost of sales, calculated as a percentage of restaurant sales, decreased to 30.4% in 1998 from 30.8% in 1997. The decrease was due primarily to a price increase taken in the first quarter of 1998 and continued improvements in the management of food costs through utilizing increased controls and improved purchasing programs, including the continued negotiation of favorable commodity pricing. Management expects cost of sales to stay flat or slightly decrease as a percentage of sales in 1999 due to a price increase in December 1998 and the continued negotiation of favorable commodity contracts. Labor. Labor costs, calculated as a percentage of sales, decreased to 26.8% for the year ended January 3, 1999 compared to 27.4% in 1997. Adjusting for restaurants closed during 1997, comparable labor as a percentage of restaurant sales during 1997 was 26.5%. The increase in comparable labor costs is due to an increase in the minimum wage in September 1997 and management's commitment to increased staffing levels at the restaurant 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 costs for the first four to six months of operations. Management expects that labor costs as a percentage of sales will be flat to slightly higher in 1999. Occupancy. Occupancy costs decreased by $345,000 during 1998 compared to 1997. The decrease was primarily due to the closure of underperforming restaurants during 1997. As a percentage of restaurant sales, occupancy costs decreased to 5.5% in the year ended January 3, 1999 compared to 6.2% in 1997. The decrease is due to an increase in average unit sales volumes during 1998, which was in turn attributable to the closure of underperforming restaurants, the opening of new restaurants with higher volumes and increased sales at existing restaurants. Other Restaurant Operating Costs. Other restaurant operating costs decreased by $679,000 to $24.7 million for the year ended January 3, 1999 compared to $25.4 million in the same period of 1997. As a percentage of restaurant sales, other restaurant operating costs decreased to 17.3% for the year ended January 3, 1999 compared to 19.3% in the same period of 1997. The decrease was due to decreased marketing and promotional activities and an increase in average unit sales volumes. The decrease in marketing and promotional costs is attributed to the management's decision to exit the underperforming Colorado market in December 1997, as well as the decision to move to a radio only media strategy in 1998. Management expects this amount, as a percentage of sales, to be flat or slightly lower in 1999. General and Administrative. General and administrative expenses increased to $7.8 million from $7.0 million, and increased as a percentage of total revenues to 5.5% for the year ended January 3, 1999 from 5.3% for the comparable period in 1997. This increase was primarily attributable to an increased level of expenditures to support the Company's operations, and an increase in the bonus accrual during 1998. Depreciation, Amortization and Restaurant Opening Costs. Depreciation, amortization and restaurant opening expenses consisted of the following: Year Ended -------------------------- December 28, January 3, 1997 1999 Depreciation of property and equipment .........................$ 7,942,000 $ 6,816,000 Amortization of intangible assets ............................ 1,313,000 569,000 Restaurant opening costs .......... 404,000 605,000 Depreciation expense decreased by approximately $1.1 million for fiscal 1998 compared to fiscal 1997. The decrease was due primarily to the closure of restaurants and writedown of assets in conjunction with the special charge recorded in the fourth quarter of 1997, offset by new restaurants opened after December 28, 1997, as well as continued capital improvements to existing restaurants. Amortization of intangible assets decreased by approximately $744,000 primarily due to the writedown of goodwill and other intangible assets during the fourth quarter of 1997. Restaurant opening costs increased by approximately $201,000 during fiscal 1998 compared to fiscal 1997, due to the increase in the number of restaurants opened during 1998 compared to 1997. Management expects these amounts to increase during 1999 due to the ongoing reimage program as well as the opening of new restaurants. Special Charge Reversal. As part of the special charges recorded in the fourth quarter of 1996 and 1997, the Company reduced the carrying value of assets and established reserves for the estimated lease liabilities associated with restaurants that were closed. During 1998, the Company successfully completed sales of several of these properties to third parties or negotiated favorable lease terminations. The amount of the proceeds in excess of the carrying value of the assets and the remaining lease liabilities was approximately $2.7 million. This amount was recorded as a special charge reversal during the fourth quarter of 1998. Interest Expense, net. Interest expense, net of interest income and interest capitalized on construction costs, increased to $2.0 million in fiscal 1998 from $1.1 million in fiscal 1997, primarily as a result of additional borrowings under the Company's debt facilities. In addition, the Company capitalized $117,000 of interest during 1998 compared to $147,000 during 1997. Net Income (Loss) and Net Income (Loss) Per Share. The Company recorded net income of $13.7 million for 1998 compared to a net loss of $73.2 million for 1997. Diluted earnings per share was $0.95 for 1998 compared to a loss per share of $4.78 in 1997. The net income recorded in 1998 includes the reversal of a portion of the special charges recorded during 1996 and 1997 totaling $2.7 million. Also, net income recorded in 1998 does not include any income tax expense due to the utilization of previously unrecognized net operating loss carryforwards relating to the special charge recorded in 1997. Including a pro- forma income tax expense utilizing the same rate as the prior year, and excluding the special charge reversal in 1998, the Company would have reported net income of approximately $7.0 million, or $0.48 per share (diluted). The loss recorded in 1997 includes special charges totaling $78.7 million pretax ($75.7 million after-tax, or $4.94 per share). Excluding these charges, the Company would have reported net income of $2.5 million equal to $0.16 per share in fiscal 1997. In summary, the increase in net income and diluted earnings per share in 1998 is attributable to several factors including an increase in sales at existing restaurants, continued strong cost controls, the closing of underperforming restaurants and an extra week of operations in 1998 compared to 1997. Fiscal 1997 Compared to Fiscal 1996 Restaurant Sales. Restaurant sales increased $177,000, or 0.1%, to $131.9 million for fiscal 1997 from $131.7 million for fiscal 1996. The increase in sales was due to an increase in the number of store operating weeks during 1997 compared to 1996. The increase was offset by a decrease in comparable store sales in 1997 compared to 1996. In the aggregate, the number of operating weeks increased 1.6% in 1997 compared to 1996. Comparable store sales decreased 2.9% during 1997. Much of the decline in comparable store sales occurred during the first six months of the year. Comparable stores sales for the first six months of fiscal 1997 decreased 4.8%, while comparable store sales for the last six months of the year decreased only 0.8%. Management attributes much of the decline during the first six months to unfavorable weather conditions, significant declines in the Colorado market (which was closed in November 1997), and a promotional strategy which highlighted higher priced, premium products in an intensely price competitive landscape. This strategy was changed during the second half of the year to a promotional strategy which continually highlights various meals at a competitive price. Franchise Fees and Royalty Income. Franchise and royalty fees decreased $170,000 to $346,000 for 1997, from $516,000 for 1996, due primarily to a decrease in the number of franchises open during 1997 compared to 1996. Restaurant Cost of Sales. Restaurant cost of sales, calculated as a percentage of restaurant sales, decreased to 30.8% in 1997 from 31.4% in 1996. 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. Labor. Labor costs, calculated as a percentage of sales, increased to 27.4% for the year ended December 28, 1997 compared to 26.3% in 1996. The increase was due to lower average unit volumes as well as management's commitment to increase staffing levels at the restaurant level in order to provide a consistent guest experience. In addition, approximately 15% of this increase in percentage of sales amount was due to increased labor costs associated with the Colorado market. During January 1997, the Company announced its plans to commit additional resources, primarily in marketing and restaurant level staffing, in an attempt to reverse the negative sales trends and operating losses of this market. The restaurants in the market were closed during November 1997. Occupancy. Occupancy costs increased slightly during 1997 compared to 1996. The increase was due to an increase in the number of restaurants open during fiscal 1997 compared to fiscal 1996. Other Restaurant Operating Costs. Other restaurant operating costs increased by $1.9 million for the year ended December 28, 1997 compared to the same period of 1996. As a percentage of restaurant sales, other restaurant operating costs increased to 19.3% for the year ended December 28, 1997 compared to 17.9% in the same period of 1996, primarily due to decreased sales at the restaurant level and additional marketing expenditures during the year ended December 28, 1997. Total marketing expenditures accounted for 4.7% of sales in 1997 versus 3.8% in 1996. Approximately $600,000, or 0.5% of sales, of this increase was due to increased marketing in the Colorado market. General and Administrative. General and administrative expenses increased to $7.0 million from $6.4 million, and increased as a percentage of total revenues to 5.3% for the year ended December 28, 1997 from 4.9% for the comparable period in 1996. This increase was primarily attributable to the addition of corporate support staff, as well as an increased level of expenditures to support the Company's operations, offset by lower bonus accruals. Depreciation and Amortization. Depreciation and amortization expense consisted of the following: Year Ended ---------------------------- December 29, December 28, 1996 1997 Depreciation of property and equipment ......................... $ 7,079,000 $ 7,942,000 Amortization of intangible assets ............................ 1,651,000 1,313,000 Amortization of pre-opening costs ............................. 515,000 404,000 Depreciation expense increased by approximately $863,000 for fiscal 1997 compared to fiscal 1996. The increase was due primarily to restaurant openings during 1997, as well as capital expenditures on existing restaurants during 1997 and 1996. The increase was partially offset by a reduction in depreciation due to the closure of 14 restaurants and the write-down of certain depreciable assets during the fourth quarter of 1997. Amortization of intangible assets decreased by $338,000 primarily due to the write-off of goodwill and other intangible assets during the fourth quarter of 1997. Amortization of pre-opening costs decreased by approximately $111,000 during fiscal 1997 compared to fiscal 1996, due to the decrease in the number of restaurants opened during the most recent twelve-month period compared to the twelve-month period ended December 29, 1996. Special Charge. During the fourth quarter of fiscal 1997, management made the decision to close the seven restaurants in its Colorado market. The Company committed substantial resources to this market during 1997 in an attempt to reverse trends of poor sales and losses. The desired results from the implementation of the plan were not achieved and the decision to close the market was made. These seven restaurants had total sales of approximately $3.0 million and operating losses of $2.1 million during the approximately eleven months of 1997 that they were in operation. Additionally, the Company continued to experience unfavorable sales trends during 1997, concluding the year with comparable restaurant sales declining 2.9%. However, during the first six months of 1997, comparable restaurant sales declined 4.8%. This trend compelled management to continue its evaluation of the operating model of the Company. During this evaluation, management concluded that certain volumes must be achieved in order to operate individual restaurants in accordance with Company standards. These standards include food quality, cleanliness, speed of service, and profitability. Management reviewed all existing restaurants to determine which restaurants could not reasonably be expected to achieve these volume levels, generally annual revenues of at least $1 million. This led to the decision to close an additional ten restaurants. Due to the significance of the closures described above, management performed an evaluation of the recoverability of all remaining assets as described in Statement of Financial Accounting Standards No. 121 ("FAS 121"). Management concluded from the results of this evaluation that a significant impairment of intangible as well as long-lived assets was required to be recognized. The impairment was reflective of a market value determined to be less than the carrying value of approximately 40 restaurants, 31 of which were acquired. The assets were tested for impairment by projecting cash flows for individual restaurants based on recent results and trends specific to that restaurant. The undiscounted projected cash flows for each restaurant were compared to the carrying value for that restaurant, including allocated goodwill, where applicable. If the undiscounted cash flows were less than the carrying value, an impairment was deemed to have occurred. The amount of the impairment was determined by calculating the difference between the present value of the projected cash flows and the carrying value attributable to the specific restaurant. The cash flows were discounted using the rate of return the Company utilizes for approving new restaurant construction. Such discounted cash flows are, in management's opinion, the best estimate of the assets' current value. Considerable management judgment is necessary to estimate future discounted cash flows. Accordingly, actual results could vary significantly from management's estimates. The process described above resulted in the Company's recording a special charge during the fourth quarter of 1997 of $78.7 million pre-tax, $75.7 million after-tax, or $4.94 per share. This amount had the following components: . Impairment of intangible assets of $33.1 million and impairment of long-lived assets of $22.1 million for restaurants that will continue in operation, based on the FAS 121 analysis described above; . A provision of $23.3 million for the closure of seventeen restaurants, including all of the restaurants in the Colorado market. The amount was determined in accordance with FAS 121 and was comprised of: . $13.3 million for the carrying value of the assets, net of estimated proceeds of $1.5 million for the sale of restaurant properties; . $9.0 million to record the estimated lease related obligations for closed restaurants. This amount was determined as the lesser of the present value of the monthly lease commitments, net of expected sublease receipts, or lease termination provisions; . $500,000 for severance and relocation benefits paid to employees displaced by the restaurant closures; . $500,000 for the probable settlement of a franchisee lawsuit related to the Colorado market. . The write-off of other assets totaling $200,000. During 1997, the seventeen restaurants contributed a total of $9.6 million in sales, and had operating losses totaling $2.5 million. In addition, the total amount of depreciation and amortization recorded during 1997 relating to assets which were impaired was approximately $3.2 million. Interest Expense, net. Interest expense, net of interest income and interest capitalized on construction costs, decreased to $1.1 million in fiscal 1997 from $1.3 million in fiscal 1996. The difference was due to lower interest expense due to a decrease in the average debt outstanding during 1997 compared to 1996, a reduction in interest income and an increase in interest capitalized on construction cost. The Company earned $76,000 of interest income during 1997, compared to $201,000 of interest income earned during the 1996. The decrease was due to a reduction in short-term investments. In addition the Company capitalized $147,000 of interest during 1997. No interest was capitalized during 1996. Net Income (Loss) and Net Income (Loss) Per Share. The Company recorded a net loss of $73,198,000 for 1997 compared to net income of $704,000 for 1996. Net loss per share was $4.78 for 1997 compared to net income per share of $0.04 in 1996. The loss recorded in 1997 includes special charges totaling $78.7 million pretax ($75.7 million after-tax, or $4.94 per share). Excluding these charges, the Company would have reported net income of $2.5 million equal to $0.16 per share in fiscal 1997. Net income in 1996 included charges totaling $5.9 million pretax ($4.0 million after-tax, or 26 cents per share). Excluding these charges, the Company would have reported net income of $4.7 million equal to $0.30 per share for fiscal 1996. Disregarding these charges, management believes that the decrease in income was largely due to declining sales, and increased labor and marketing expenditures. 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 currently maintains credit facilities totaling $40 million, including a $5 million unsecured revolving line of credit. As of March 1, 1999, approximately $29.5 million had been used under these commitments. Net cash provided by operating activities was $15.7 million for 1998, compared to $12.9 million for 1997. Net cash used in investing activities was $17.0 million for 1998, representing the construction of nine Company owned restaurants, the reimaging of twenty-seven restaurants and capital expenditures for improvements to existing restaurants. This was offset by the sale of assets generating $4.3 million in proceeds. This compared to $15.4 million for 1997, representing primarily capital expenditures for improvements to existing restaurants, the construction of five free-standing and two non-traditional restaurants, and the conversion of two Sombrero Rosa and two Two Pesos restaurants to the Taco Cabana concept. Net cash provided by financing activities was $1.6 million for 1998 representing primarily net borrowings under the Company's credit facilities, offset in part by the purchase of $10.3 million of the Company's stock in market transactions, which is held as treasury stock. This compared to net cash provided by financing activities of $2.1 million in 1997 representing primarily net borrowings under the Company's credit facilities, offset in part by the purchase of $3.6 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 March 1, 1999, the Company had repurchased 2,585,000 shares at an average cost of $5.39 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 totaling approximately $10.2 million to record the estimated monthly lease payments, net of expected sublease receipts, associated with certain restaurants which have been closed. Cash requirements for this accrual were approximately $1.7 million during year ended January 3, 1999. During the year ended January 3, 1999, the Company sold properties relating to the special charges which resulted in proceeds of $4.3 million. Subsequent to January 3, 1999 the Company sold one property relating to the special charges which resulted in proceeds of $458,000 which approximated the carrying value of the property. The Company currently has two closed restaurant property 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 $262,000 during the year ended January 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 1999, including the planned opening of ten to twelve restaurants and the reimaging of 30 to 35 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 $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 of new stores, and the Company's growth may offset the impact of seasonal influences. Therefore, quarterly results are not indicative of results for the entire year. 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 March 1, 1999, the Company has substantially completed the remediation of the identified systems and expects to complete software reprogramming and replacement no later than June 1, 1999. Once the software is reprogrammed or replaced with a Year 2000 compliant version, the Company will test and implement the software Completion of the testing phase for all significant systems is expected by June 30, 1999. Many hardware upgrades were necessary 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 mailed requesting information regarding each parties' Year 2000 compliance status. Additionally, the Company has identified key suppliers and distributors which it intends to meet with and discuss their Year 2000 readiness. The Company intends to develop contingency plans by June 30, 1999 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 $500,000 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 will be capitalized. The remaining amount, which will be expensed as incurred over the next year, 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. Forward-Looking Statements Statements in this annual 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 7A. 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 March 1, 1999 was $27.2 million. The Company also has a note payable which bears interest at the prime rate. The outstanding balance of this note as of March 1, 1999 was $1.3 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 March 1, 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. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data are set forth in this annual report on Form 10-K commencing on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors and Executive Officers The directors and executive officers of the Company and their respective ages are as follows: Name Age Position Stephen V. Clark 45 Chief Executive Officer, President and Director Douglas Gammon 52 Senior Vice President - Human Resources and People Development Dennis Greenia 49 Senior Vice President - Marketing David G. Lloyd 35 Senior Vice President - Finance, Chief Financial Officer, Secretary and Treasurer William J. Nimmo 44 Director Rod Sands 50 Director Cecil Schenker 56 Director Richard Sherman 55 Director Lionel Sosa 59 Director Mr. Clark has served as the Company's Chief Executive Officer since November 1996, and as the President, Chief Operating Officer, and as a Director since April 1995. Prior to that, Mr. Clark was with Church's Chicken, a division of America's Favorite Chicken, for seventeen years with his final title having been Senior Vice President and Concept General Manager. He also served on the executive committee of America's Favorite Chicken and was on the Board of Directors of Church's Operators Purchasing Association. In his final position with America's Favorite Chicken, Mr. Clark was primarily responsible for the day-to-day operations of over 1100 company-owned and franchised units with aggregate sales volume in excess of $600 million. Mr. Gammon joined the Company in March 1997 as Senior Vice President, Human Resources and People Development. From December 1989 to March 1997, Mr. Gammon served as Vice President of Human Resources at Marriott International which has over 15,000 employees in 50 states. Mr. Gammon has over 18 years of experience in the human resources field as well as over six years experience in restaurant operations. He was the past President for the Council of Hotel and Restaurant Trainers. Mr. Greenia joined the Company in July 1998 as Senior Vice President - Marketing. From January 1989 to July 1998, Mr. Greenia served as President of the Merrill Group, a marketing consulting firm in Atlanta GA., whose clients included the Coca-Cola Company, Dominos Pizza, Bally's Total Fitness and Hardee's Foods. Mr. Greenia has over 19 years experience both nationally and internationally in the food service industry holding positions with Burger King Corporation, J. Walter Thompson Advertising and Coca Cola USA. Mr. Greenia is also a majority partner in Mobile Media Network of Atlanta, Inc. Mr. Lloyd joined the Company in October 1994 as Vice President - Finance, Chief Financial Officer, Secretary and Treasurer and was promoted to Senior Vice President in May 1996. From August 1985 to October 1994, Mr. Lloyd served in various capacities with Deloitte & Touche (the Company's independent auditors), with his last position being Senior Audit Manager. Mr. Lloyd is a certified public accountant. Mr. Nimmo has served as a director of the Company since November 1991. Since May 1997, Mr. Nimmo has been a Partner with Halpern, Denny & Co., a venture capital firm in Boston, Massachusetts. Prior to that, Mr. Nimmo served as Managing Director of Cornerstone Equity Investors, Inc., and its predecessor firm, Prudential Equity Investors, Inc., since September 1989. Mr. Sands has been a director of the Company since February 1998. Since July 1997, Mr. Sands has served as the Managing Director of Silver Venture Capital Management, a private equity investment fund. From August 1992 to July 1997, Mr. Sands served as the President and Chief Operating Officer of Pace Foods, a food manufacturer with revenues in excess of $200 million. Mr. Sands currently serves on the board of directors of Orval Kent Holdings, Packaged Ice, Inc., Texas Commerce Bank/Chase-San Antonio and Benefit Planners, Inc. He is also a member of St. Mary's University Business Advisory Board. Mr. Schenker has been a director of the Company since January 1992. Mr. Schenker is a corporate securities attorney and is the managing partner of the San Antonio, Texas office of the law firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P., of which Mr. Schenker has been a partner through his professional corporation since January of 1984. Akin, Gump, Strauss, Hauer & Feld, L.L.P. has regularly performed legal services for the Company. Mr. Schenker is also a director of LOT$OFF Corporation, formerly 50-Off Stores, Inc. Mr. Sherman has been a director of the Company since November 1991. Mr. Sherman is a private investor and retail consultant. Mr. Sherman served as President and Chief Executive Officer of Rally's, Inc. from September 1987 to January 1991. From August 1989 to January 1991, he also served as Chairman of the Board of Rally's, Inc. Mr. Sherman currently serves as a member of the Board of Trustees of Paul Quinn College in Dallas, Texas and as a director of Reed's Jewelers, Inc., Papa John's International, Inc., and PJ America, Inc. Mr. Sosa has been a director of the Company since August 1997. Mr. Sosa has served as the Chief Executive Officer of KJS Marketing Agency since January 1996. From 1994 to 1996 he served as Chairman of DMB&B/Americas, a network of advertising agencies in the U.S. and Latin America. In 1980 Mr. Sosa founded the agency of Sosa, Bromley, Aguilar, Noble & Associates, an advertising agency specializing in Hispanic marketing in the U.S. Mr. Sosa sold Sosa, Bromley, Aguilar, Noble & Associates in 1994. Mr. Sosa is currently a Director of the Children's Television Workshop Network. The Board of Directors has a compensation and stock option committee which currently consists of William J. Nimmo, Richard Sherman, Lionel Sosa and Rod Sands. The Board of Directors also has an audit committee which currently consists of William J. Nimmo, Richard Sherman, Lionel Sosa, Cecil Schenker and Rod Sands. The Board of Directors does not currently have a nominating committee. All directors serve for a term of one year and until their successors are duly elected. Each director who is not also an employee of the Company receives an annual retainer of $25,000, and an attendance fee of $2,500 per Board meeting for up to four meetings each year. All non-employee directors are reimbursed for their expenses. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") requires each director and executive officer of the Company, and each person who owns more than 10% of a registered class of the Company's equity securities to file by specific dates with the Securities and Exchange Commission (the "SEC") initial reports of ownership and reports of change in ownership of Common Stock and other equity securities of the Company. Officers, directors and 10% stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. The Company is required to report in this report any failure of its directors and executive officers to file by the relevant due date any of these reports during the Company's fiscal year. To the Company's knowledge, all Section 16(a) filing requirements applicable to the Company's officers, directors, and 10% stockholders were complied with except one late filing each as to a Form 4 for Lionel Sosa and Rod Sands. ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table. The following table sets forth certain information concerning the compensation earned during the Company's last three fiscal years by the Company's Chief Executive Officer and the Company's other executive officers (collectively the "named executive officers"): Summary Compensation Table Annual Compensation Long-Term Compensation --------------------- --------------------------- Awards Payouts -------------------- ------- Other Securities Annual Restricted Underlying All Other Name and Compen- Stock Options/ LTIP Compen- Principal Fiscal Salary Bonus sation Award(s) SARs Payouts sation Position Year ($) ($) ($)(1) ($) (#) ($) ($) Stephen V. 1998 281,882 163,846 - - 100,000 - - Clark, 1997 255,420 - - - - - - Chief 1996 233,404 - - - - - - Executive Officer, President , Chief Operating Officer David G. 1998 157,004 61,845 - - 50,000 - - Lloyd, 1997 143,528 - - - - - - Senior Vice 1996 135,138 - - - - - - President, Chief Financial Officer, Secretary and Treasurer Douglas 1998 142,469 53,577 38,393 - 25,000 - - Gammon 1997 113,820 - (3) - 75,000 - - Senior Vice (2) 55,135 President - (3) Human Resources and People Development Dennis 1998 61,060 26,000 - - 75,000 - - Greenia (4) Senior Vice President - Marketing James A. 1998 204,256 - - - - - - Eliasberg (5) Senior Vice 1997 191,877 - - - - - - President 1996 189,235 - - - - - - and General Counsel __________________ (1) Certain of the Company's executive officers receive personal benefits in addition to salary; however, the Company has concluded that the aggregate amounts of such personal benefits do not exceed the lesser of $50,000 or 10% of annual salary and bonus reported for any named executive officer. (2) Mr. Gammon joined the Company in March 1997. (3) Represents relocation expense reimbursements. (4) Mr. Greenia joined the Company in July 1998. (5) Mr. Eliasberg served as Senior Vice President and General Counsel until September 1998. Employment Agreements. The Company has a written employment agreement with Stephen Clark which expires in April 1999. Under the agreement, Mr. Clark receives a base salary of $280,000 per year. Additionally, Mr. Clark is eligible for a bonus based on the Company's achievement of certain performance goals. Pursuant to such agreement, Mr. Clark has agreed not to participate in any manner, during his term of employment and for two years thereafter, in any business which owns a Mexican fast food restaurant or Mexican "quick service" restaurant in the Continental United States. Stock Option Plans and Directors' Options Under the Taco Cabana, Inc. 1990 Stock Option Plan (the "1990 Option Plan"), amended in August 1992, and the 1994 Stock Option Plan (the "1994 Option Plan"), amended in August 1997, options to purchase up to 1,500,000 and 1,250,000 shares, respectively, of Common Stock may be granted to employees, outside directors and consultants and advisers of the Company or any subsidiary corporation or entity. The stock is intended to permit the Company to retain and attract qualified individuals who will contribute to its overall success. Shares that by reason of the expiration of an option (other than by reason of exercise) or which are no longer subject to purchase pursuant to an option granted under an Option Plan may be reoptioned thereunder. The 1990 and 1994 Option Plans are administered by a committee of outside directors (the "Committee"). The Committee sets specific terms and conditions of options granted under the 1990 and 1994 Option Plans and administers the 1990 and 1994 Option Plans, as well as the Company's other employee benefit plans which may be in effect from time to time. The Committee currently consists of William J. Nimmo, Lionel Sosa, Richard Sherman and Rod Sands. The Company's employees are eligible to receive either incentive stock options or nonqualified stock options or a combination of both, as the Committee determines. Non-employee participants may be granted only nonqualified stock options. Stock options may be granted for a term not to exceed ten years (five years with respect to a holder of 10% or more of the Company's shares in the case of an incentive stock option) and are not transferable other than by will or the laws of descent and distribution. Each option may be exercised within the term of the option pursuant to which it is granted (so long as the optionee, if an employee, continues to be employed by the Company). In addition, an incentive option may be exercised within 90 days after the termination of employment of the optionee (subject to any limitations in the particular option), within one year after termination in case of termination because of disability, or throughout the term of the option in the event of the optionee's death, to the extent in each case the option was exercisable at the termination date. A nonqualified stock option may be exercised for such period, but not later than the expiration date, after termination of employment, disability or death, as may be specified in the particular option. The exercise price of all incentive stock options must be at least equal to the fair market value of the Common Stock on the date of grant, or 110% of fair market value with respect to any incentive stock option issued to a holder of 10% or more of the Company's shares. Stock options may be exercised by payment in cash of the exercise price with respect to each share to be purchased, by delivering Common Stock of the Company already owned by such optionee with a market value equal to the exercise price, or by a method in which a concurrent sale of the acquired stock is arranged, with the exercise price payable in cash from such sale proceeds. The 1994 Option Plan provides that each outside director will automatically receive a grant of 3,000 nonqualified stock options each year on the fifth business day following the first public release of the Company's audited earnings report on results of operations for the preceding fiscal year. Each such option will become exercisable in whole or in part on the first anniversary of the award through the balance of its ten-year term. Subject to availability of shares allocated to the 1994 Option Plan and not already reserved for other outstanding stock options, outside directors who join the Board in the future will in addition receive an initial grant of options for 20,000 shares, which will become exercisable in five equal increments beginning on the first anniversary of the award and on each of the next four succeeding anniversary dates. Such options will be exercisable for a term of ten years. Such options will be awarded upon their appointment or election to the Board. Options, once granted and to the extent exercisable, will remain exercisable throughout their term, regardless of whether the holder continues as a director. The exercise price of the options is equal to 100% of the fair market value of a share of Common Stock at the time of grant. The 1990 Option Plan will terminate on October 14, 2000. The 1994 Option Plan will terminate on October 17, 2004. The Board of Directors may, however, terminate the 1990 and 1994 Option Plans at any time prior to such respective dates. Termination of the 1990 and 1994 Option Plans will not alter or impair, without the consent of the optionee, any of the rights or obligations pursuant to any option granted under the Option Plans. As of January 3, 1999, options for 471,342 shares of common stock had been granted under the 1990 Option Plan and were outstanding, with a weighted average exercise price of $6.05 per share, and no additional shares were available for issuance upon exercise of options which may be granted in the future. As of January 3, 1999, options for 1,028,658 shares had been exercised. As of January 3, 1999, options for 1,070,767 shares of common stock had been granted under the 1994 Option Plan and were outstanding, with a weighted average exercise price of $5.43 per share, and 179,233 additional shares were available for issuance upon exercise of options which may be granted in the future. As of January 3, 1999, 120,584 options had been exercised. Stock Option Grant Table. The following table sets forth certain information concerning options granted to the named executive officers during the Company's fiscal year ended January 3, 1999: Option Grants in Last Fiscal Year Percent of Total Potential Realizable Options Value at Assumed Granted Annual Rates of to Stock Price Employees Exercise Appreciation Options in or for Option Term (2) Granted Fiscal Base Price Expiration -------------------- Name #(1) (3) Year ($/Sh) Date 5% ($) 10% ($) - ------------------------------------------------------------------------------- Stephen 100,000 21% 6.125 4/24/2008 385,198 976,167 V. Clark David G. 50,000 10% 6.1875 6/09/2008 194,564 493,064 Lloyd Douglas 25,000 5% 6.125 11/16/2008 96,299 244,042 Gammon Dennis 75,000 16% 6.25 7/26/2008 294,794 747,067 Greenia James A. - - - - - - Eliasberg - ------------------------------------------------------------------------------- (1)All such stock options were granted for the number of shares indicated at exercise price equal to the fair market value of the Common Stock on the date of grant as determined by the Company's Board of Directors. All such stock options noted above were granted 10 years prior to the noted expiration date The options become exercisable beginning one year after the date of grant in five equal annual installments.The Company's current Option Plans do not make provision for the award of stock appreciation rights ("SARs") and the Company has no SARs currently outstanding. (2)As required by rules of the Securities and Exchange Commission ("SEC"), potential values stated are based on the assumption that the Company's Common Stock will appreciate in value from the date of grant to the end of the option term (ten years from the date of grant) at annualized rates of 5% and 10% (total appreciation of approximately 63% and 159%), respectively, and therefore are not intended to forecast possible future appreciation, if any, in the price of the Common Stock. (3)Upon occurrence of a change of control of Taco Cabana, as defined in the related Stock Option Agreements, all outstanding options, to the extent not exercisable, will immediately become exercisable. Stock Option Exercises and Holdings Table. The following table provides information concerning the exercise of options and value of unexercised options held by the named executive officers at January 3, 1999: Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values Shares Acquired Number of Value of Unexercised on Value Unexercised Options In-the-Money Options Name Exercise Realized at Fiscal Year End at Fiscal Year End (#) ($) (#) ($)(1) - ------------------------------------------------------------------------------ Exercis- Unexercis- Exercis- Unexercis- able able able able - ------------------------------------------------------------------------------ Stephen V. - - 120,000 180,000 315,000 372,500 Clark David G. - - 65,000 85,000 84,375 134,375 Lloyd Douglas - - 15,000 85,000 41,250 205,625 Gammon Dennis - - - 75,000 - 112,500 Greenia James A. - - - - - - Eliasberg - ------------------------------------------------------------------------------- (1) Values stated are based on the last sale price of $7.75 per share of the Company's Common Stock on the NASDAQ National Market System on December 31, 1998 the last trading day of the fiscal year, and equal the aggregate amount by which the market value of the option shares exceeds the exercise price of such options at the end of the fiscal year. (2) Mr. Eliasberg served as Senior Vice President and General Counsel until September 1998. Compensation Committee Interlocks and Insider Participation None. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information concerning the beneficial ownership of the Company's Common Stock as of March 1, 1999, by: (i) each person known by the Company to be the beneficial owner of more than 5% of its Common Stock, (ii) each named executive officer of the Company, (iii) each director of the Company, and (iv) all directors and officers as a group. Unless otherwise indicated, each of the stockholders has sole voting and investment power with respect to the shares beneficially owned. Shares Beneficially Owned Name Number Percent Stephen V. Clark (1) 130,063 * David G. Lloyd (2) 76,000 * Douglas Gammon (3) 30,000 * Dennis Greenia (4) - - William J. Nimmo (5) 11,817 * Richard Sherman (6) 87,003 * Cecil Schenker (7) 107,503 * Lionel Sosa (8) 8,000 * Rod Sands (9) 70,000 * Sawtooth Capital Management LP (10) 1,383,200 10.1% Massachusetts Financial Services Co. (11) 1,199,301 8.7% Dimensional Fund Advisors, Inc. (12) 982,764 7.1% All directors and officers as a group (9 persons) (13)520,386 3.8% ___________________________ * Less than 1%. (1) Includes 120,000 shares subject to presently exercisable options (or those exercisable within 60 days). Excludes 180,000 shares issuable pursuant to options which are not currently exercisable (or exercisable within 60 days). (2) Includes 65,000 shares subject to presently exercisable options (or those exercisable within 60 days). Excludes 85,000 shares issuable pursuant to options which are not currently exercisable (or exercisable within 60 days). (3) Includes 25,000 shares issuable pursuant to presently exercisable options (or those exercisable within 60 days). Excludes 75,000 shares issuable pursuant to options which are not currently exercisable (or exercisable within 60 days). (4) Excludes 75,000 shares issuable pursuant to options which are not currently exercisable (or exercisable within 60 days). (5) Includes 8,000 shares issuable pursuant to presently exercisable options (or those exercisable within 60 days). Excludes 18,000 shares issuable pursuant to options which are not currently exercisable (or exercisable within 60 days). (6) Represents shares subject to presently exercisable options (or those exercisable within 60 days). Excludes 6,000 shares issuable pursuant to options which are not currently exercisable (or exercisable within 60 days). (7) Represents shares subject to presently exercisable options (or those exercisable within 60 days). Excludes 6,000 shares issuable pursuant to options which are not currently exercisable (or exercisable within 60 days). (8) Represents shares subject to presently exercisable options (or those exercisable within 60 days). Excludes 18,000 shares issuable pursuant to options which are not currently exercisable (or exercisable within 60 days). (9) Includes 5,000 shares subject to presently exercisable options (or those exercisable within 60 days). Excludes 18,000 shares issuable pursuant to options which are not currently exercisable (or exercisable within 60 days). (10) Based upon Schedule 13G, filed jointly in February 1999, indicating beneficial ownership as stated in the table and shared dispositive power as to all shared beneficially owned. Included in the joint filing were Sawtooth Capital Management LP, indicating beneficial ownership as to 721,640 shares, Sawtooth Partners LP indicating beneficial ownership as to 1,383,200 shares and Bartley Boyd Blount indicating beneficial ownership as to 1,383,200 shares. Address: 100 Wilshire Boulevard, 15th floor, Santa Monica, California 90401. (11) Based upon Schedule 13G, filed jointly in February 1996, and amended in February 1999, indicating beneficial ownership as stated in the table, and shared dispositive power as to all shares beneficially owned. Included in the joint filing were Massachusetts Financial Services Company ("MFS"), indicating beneficial ownership and sole dispositive power of 1,199,301 shares and MFS Series Trust II - MFS Emerging Growth Fund ("MEG"), indicating 770,000 shares beneficially owned by MFS as well as MEG. Address: 500 Boylston Street, Boston, Massachusetts 02116. (12) Based upon Schedule 13G, filed in February 1999, indicating beneficial ownership, sole dispositive power and sole voting power as stated in the table. Address: 1299 Ocean Avenue, 11th Floor, Santa Monica, CA 90401. (13) Includes 425,506 shares subject to presently exercisable options (or those exercisable within 60 days). Excludes 481,000 shares issuable pursuant to options which are not currently exercisable (or exercisable within 60 days). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: Financial Statements Independent Auditors' Report Consolidated Balance Sheets at December 28, 1997 and January 3, 1999. Consolidated Statements of Operations for the years ended December 29, 1996, December 28, 1997 and January 3, 1999 Consolidated Statements of Stockholders' Equity for the years ended December 29, 1996, December 28, 1997 and January 3, 1999 Consolidated Statements of Cash Flows for the years ended December 29, 1996, December 28, 1997 and January 3, 1999 Notes to Consolidated Financial Statements Financial Statement Schedules No financial statement schedules are submitted because of the absence of the conditions under which they are required or because the required information is included in the Consolidated Financial Statements or notes thereto. Exhibits 3.1 Restated Certificate of Incorporation, filed on December 29, 1993. (b) 3.2 Bylaws of Registrant. (a) 4.1 Form of Common Stock Certificate. (a) 4.2 Rights Agreement dated as of June 9, 1995, between Taco Cabana, Inc. and Society National Bank, as Rights Agent. (d) 10.1* Employment Agreement dated April 24, 1995 between the Registrant and Stephen V. Clark. (c) 10.5 Sample Franchise Agreement. (a) 10.6 Sample Franchise Development Agreement. (a) 10.7 Sample Beverage Sublease Agreement. (a) 10.8 Sample Concessionaire Management Agreement. (a) 10.9* Amended and Restated Stock Option Plan. (a) 10.14* 1994 Stock Option Plan. (b) 10.16 Second Amended Loan Agreement with International Bank of Commerce. (e) 10.17 Third Amended Loan Agreement with International Bank of Commerce. (f) 10.18 Extension and Amendment to Employment Agreement between Taco Cabana, Inc. and Steve Clark. (g) 10.19 Fourth Amended Loan Agreement with International Bank of Commerce. (h) 21. Subsidiaries of the Registrant. (h) 23. Consent of Deloitte & Touche LLP. (h) 24. Powers of attorney to sign amendments to this report. Reference is made to the signature page of this report. 27. Financial Data Schedule. (h) ________________________ * Executive compensation plan or arrangement. (a) Filed as an exhibit to Form S-1 Registration Statement No. 33-51430, effective October 16, 1992. (b) Filed as an exhibit to Form 10-K for the fiscal year ended January 1, 1995. (c) Filed as an exhibit to Form 10-K for the fiscal year ended December 31, 1995. (d) Filed as an exhibit to Form 8-A Registration Statement No.0- 20716, effective June 9, 1995. (e) Filed as an exhibit to Form 10-K for the fiscal year ended December 29, 1996. (f) Filed as an exhibit to Form 10-Q for the quarter ended March 29, 1998. (g) Filed as an exhibit to Form 10-Q for the quarter ended June 28, 1998. (h) Filed herewith. (b) Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TACO CABANA, INC. By: STEPHEN V. CLARK Stephen V. Clark Chief Executive Officer and President Date: March 24, 1999 Each person whose signature appears below authorizes Stephen V. Clark and David G. Lloyd or either of them, each of whom may act without joinder of the other, to execute in the name of each such person who is then an officer or director of the Registrant and to file any amendments to this annual report on Form 10-K necessary or advisable to enable the Registrant to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission in respect thereof, which amendments may make such changes in such report as such attorney-in-fact may deem appropriate. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date STEPHEN V. CLARK Chief Executive Officer, March 24, 1999 Stephen V. Clark President and Director (Principal Executive Officer) DAVID G. LLOYD Senior Vice President - March 24, 1999 David G. Lloyd Finance, Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) WILLIAM J. NIMMO Director March 24, 1999 William J. Nimmo ROD SANDS Director March 24, 1999 Rod Sands CECIL SCHENKER Director March 24, 1999 Cecil Schenker RICHARD SHERMAN Director March 24, 1999 Richard Sherman LIONEL SOSA Director March 24, 1999 Lionel Sosa EXHIBIT INDEX Exhibit No. 10.19Fourth Amended Loan Agreement with International Bank of Commerce. 21. Subsidiaries of the Registrant 23. Consent of Deloitte & Touche LLP 27. Financial Data Schedule EXHIBIT 21 Subsidiaries of Registrant TP Acquisition Corp., a Texas corporation Get Real, Inc., a Delaware corporation Texas Taco Cabana, L.P., a Texas limited partnership T. C. Management Inc., a Delaware corporation T.C Lease Holdings III, V and VI, Inc., a Texas corporation Taco Cabana Multistate, Inc., a Delaware corporation Colorado Cabana, Inc., a Colorado corporation Taco Cabana Atlanta, Inc., a Delaware corporation Taco Cabana Investments, Inc., a Delaware corporation Taco Cabana Management, Inc., a Texas corporation EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33- 56438 and No. 33-98124 of Taco Cabana, Inc. on Form S-8 of our report dated February 4, 1999 appearing in this Annual Report on Form 10-K of Taco Cabana, Inc. for the year ended January 3, 1999. DELOITTE & TOUCHE LLP San Antonio, Texas March 24, 1999 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Consolidated Financial Statements: Independent Auditors' Report F-2 Consolidated Balance Sheets at December 28, 1997 and January 3, 1999 F-3 Consolidated Statements of Operations for the Years Ended December 29, 1996, December 28, 1997, and January 3, 1999 F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 29, 1996, December 28, 1997 and January 3, 1999 F-5 Consolidated Statements of Cash Flows for the Years Ended December 29, 1996, December 28, 1997 and January 3, 1999 F-6 Notes to Consolidated Financial Statements F-8 INDEPENDENT AUDITORS' REPORT To the Board of Directors Taco Cabana, Inc. We have audited the accompanying consolidated balance sheets of Taco Cabana, Inc. and subsidiaries ("the Company") as of January 3, 1999 and December 28, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended January 3, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Taco Cabana, Inc. and subsidiaries at January 3, 1999 and December 28, 1997, and the results of their operations and their cash flows for each of the three years in the period ended January 3, 1999 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP San Antonio, Texas February 4, 1999 TACO CABANA, INC. CONSOLIDATED BALANCE SHEETS December 28, January 3, ASSETS 1997 1999 CURRENT ASSETS: Cash and cash equivalents $ 339,000 $ 719,000 Receivables, net 502,000 438,000 Inventory 2,105,000 2,273,000 Prepaid expenses 1,704,000 3,128,000 Federal income taxes receivable 200,000 200,000 -------------- -------------- Total current assets 4,850,000 6,758,000 PROPERTY AND EQUIPMENT, net 59,540,000 72,250,000 NOTES RECEIVABLE 344,000 258,000 INTANGIBLE ASSETS, net 11,293,000 10,724,000 OTHER ASSETS 233,000 212,000 -------------- -------------- TOTAL ASSETS $ 76,260,000 $ 90,202,000 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 4,430,000 $ 5,362,000 Accrued liabilities 6,266,000 5,265,000 Current maturities of long-term debt and capital leases 1,573,000 5,704,000 Line of credit 4,223,000 3,550,000 -------------- -------------- Total current liabilities 16,492,000 19,881,000 LONG-TERM OBLIGATIONS, net of current maturities: Capital leases 2,357,000 2,140,000 Long-term debt 11,170,000 18,930,000 -------------- -------------- Total long-term obligations 13,527,000 21,070,000 ACQUISITION AND CLOSED RESTAURANT 9,126,000 7,713,000 LIABILITIES DEFERRED LEASE PAYMENTS 702,000 761,000 STOCKHOLDERS' EQUITY: Preferred stock, series A; $.01 par value, 100,000 shares authorized - - Common stock; $.01 par value, 30,000,000 shares authorized - 15,706,537 and 15,907,937 shares issued at December 28, 1997 and January 3, 1999, respectively 157,000 159,000 Additional paid-in capital 97,095,000 98,056,000 Retained deficit (57,278,000) (43,544,000) Treasury stock, at cost - 871,937 shares at December 28, 1997 and 2,576,937 shares at January 3, 1999 (3,561,000) (13,894,000) -------------- -------------- Total stockholders' equity 36,413,000 40,777,000 -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 76,260,000 $ 90,202,000 ============== ============== See notes to consolidated financial statements. TACO CABANA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended --------------------------------------------- December 29, December 28, January 3, 1996 1997 1999 (52 Weeks) (52 Weeks) (53 Weeks) REVENUES: Restaurant sales $ 131,680,000 $ 131,857,000 $ 142,592,000 Franchise fees and royalty income 516,000 346,000 358,000 --------------- --------------- -------------- Total revenues 132,196,000 132,203,000 142,950,000 --------------- --------------- -------------- COSTS AND EXPENSES: Restaurant cost of sales 41,336,000 40,668,000 43,347,000 Labor 34,653,000 36,169,000 38,185,000 Occupancy 8,161,000 8,185,000 7,840,000 Other restaurant operating costs 23,553,000 25,418,000 24,739,000 General and administrative 6,445,000 6,964,000 7,829,000 Depreciation, amortization and restaurant opening costs 9,245,000 9,659,000 7,990,000 Special charges (reversal) 2,497,000 78,738,000 (2,665,000) Litigation settlement 3,400,000 - - --------------- --------------- -------------- Total costs and expenses 129,290,000 205,801,000 127,265,000 --------------- --------------- -------------- INCOME (LOSS) FROM OPERATIONS 2,906,000 (73,598,000) 15,685,000 INTEREST EXPENSE, NET (1,348,000) (1,137,000) (1,951,000) --------------- --------------- -------------- INCOME (LOSS) BEFORE INCOME TAXES 1,558,000 (74,735,000) 13,734,000 (PROVISION) BENEFIT FOR INCOME TAXES (854,000) 1,537,000 - --------------- --------------- -------------- NET INCOME (LOSS) $ 704,000 $ (73,198,000)$ 13,734,000 =============== =============== ============== BASIC EARNINGS (LOSS) PER SHARE $ 0.04 $ (4.78)$ 0.96 =============== =============== ============== DILUTED EARNINGS (LOSS) PER SHARE $ 0.04 $ (4.78)$ 0.95 =============== =============== ============== See notes to consolidated financial statements. TACO CABANA, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Preferred Stock Common Stock Additional Retained Treasury Stock -------- ----------------- Paid-in Earnings ------------------- Amount Shares Amount Capital (Deficit) Shares Amount BALANCE, January 1, 1996 $ - 15,681,162 $157,000 $96,954,000 $15,216,000 - $ - Options exercised - 25,375 - 119,000 - - - Tax benefit from stock options - - - 22,000 - - - Net income - - - - 704,000 - - ---- --------- -------- ----------- ----------- --------- ---------- BALANCE, December 29, 1996 - 15,706,537 157,000 97,095,000 15,920,000 - - Purchase of stock - - - - 871,937 (3,561,000) Net loss - - - -(73,198,000) - - ---- ---------- -------- ------------ ---------- --------- ---------- BALANCE, December 28, 1997 - 15,706,537 157,000 97,095,000(57,278,000) 871,937 (3,561,000) Options exercised - 201,400 2,000 961,000 - - - Purchase of stock - - - - - 1,705,000(10,333,000) Net income - - - - 13,734,000 - - ---- ---------- -------- ------------ ---------- --------- ---------- BALANCE, January 3, 1999 $ - 15,907,937 $159,000 $98,056,000$(43,544,000)2,576,937$(13,894,000) ==== ========== ======== ============ =========== ========= =========== See notes to consolidated financial statements. TACO CABANA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended --------------------------------------- December 29, December 28, January 3, 1996 1997 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 704,000 $(73,198,000) $ 13,734,000 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 9,245,000 9,659,000 7,385,000 Deferred income taxes 450,000 (1,818,000) - Special charges 2,497,000 78,738,000 (2,665,000) Capitalized interest (12,000) (147,000) (117,000) Deferred income and lease payments (278,000) (157,000) 59,000 Decrease (increase) in assets: Receivables 291,000 634,000 150,000 Inventory (12,000) (656,000) (168,000) Prepaid expenses and other assets 203,000 (1,018,000) (1,424,000) Federal income taxes receivable 2,414,000 163,000 - Other assets 393,000 58,000 21,000 (Decrease) increase in liabilities: Accounts payable and accrued liabilities (3,009,000) 2,328,000 (103,000) Acquisition and closed restaurant liabilities (676,000) (1,656,000) (1,194,000) ------------ ------------- ------------- Net cash provided by operating activities 12,210,000 12,930,000 15,678,000 ------------ ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (9,188,000) (16,812,000) (21,259,000) Proceeds from sales of property and equipment 846,000 1,379,000 4,330,000 Investment in joint venture (388,000) - - ------------ ------------- ------------- Net cash used by investing activities (8,730,000) (15,433,000) (16,929,000) ------------ ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt and draws on line of credit - 18,423,000 14,469,000 Principal payments under long-term debt and line of credit (5,398,000) (11,074,000) (3,276,000) Principal payments under capital leases (224,000) (1,694,000) (192,000) Purchase of treasury stock - (3,561,000) (10,333,000) Exercise of stock options 141,000 - 963,000 ------------ ------------- ------------- Net cash (used) provided by financing activities (5,481,000) 2,094,000 1,631,000 ------------ ------------- ------------- NET (DECREASE) INCREASE IN CASH (2,001,000) (409,000) 380,000 CASH AND CASH EQUIVALENTS, beginning of period 2,749,000 748,000 339,000 ------------ -------------- ------------ CASH AND CASH EQUIVALENTS, end of period $ 748,000 $ 339,000 $ 719,000 ============ ============== ============ (Continued) TACO CABANA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS SUMMARY OF NON-CASH TRANSACTIONS: During 1996, the Company closed one restaurant and charged its net book value of $139,000 to acquisition and closed restaurant liabilities. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Year Ended --------------------------------------- December 29, December 28, January 3, 1996 1997 1999 Cash paid for interest, net of interest capitalized $ 1,144,000 $ 1,171,000 $ 1,848,000 Cash received for income taxes 2,504,000 4,000 9,000 Cash paid for income taxes 477,000 74,000 - (Concluded) TACO CABANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS Nature of Operations - Taco Cabana, Inc. (the "Company") operates a chain of Tex-Mex patio style quick service restaurants located primarily in the Southwestern United States. At January 3, 1999, the Company owned and operated a total of 102 units. There were also 10 Taco Cabana franchised units. Principles of Consolidation - The consolidated financial statements include all accounts of the Company and its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated. Fiscal Year - The Company's accounting period is based upon a 52 or 53 week fiscal year ending on the Sunday closest to December 31. The fiscal years 1996, 1997 and 1998 were comprised of the 52 weeks ending December 29, 1996 and December 28, 1997 and the 53 weeks ending January 3, 1999, respectively. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Liquor Sales - To conform to state liquor laws, liquor licenses are maintained and liquor sales are accounted for by a separate liquor corporation. The liquor corporation pays the Company a management fee based on liquor sales, reimburses the Company for its share of operating costs, and pays base and additional rent based on liquor sales. In order to more accurately reflect restaurant operations, all revenues and expenses relating to liquor sales have been included in the consolidated financial statements of the Company. Inventory - Inventory is stated at the lower of cost using the first-in, first-out method or market, and consists primarily of food products, beverages and paper supplies. Property and Equipment - Property and equipment is stated at cost. Equipment and buildings under capital leases are stated at the lower of the present value of minimum lease payments or fair market value of the asset at the inception of the lease. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets or the applicable lease term, if less. The estimated useful lives used in computing depreciation and amortization are as follows: Furniture, fixtures and equipment 2-10 years Buildings 20-30 years Leasehold improvements 5-30 years Maintenance and repairs are charged to expense as incurred; improvements which increase the value of the property and extend the useful life are capitalized. TACO CABANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (Continued) Intangible Assets - Goodwill, or the excess of acquisition costs over the fair market value of the assets acquired and liabilities assumed, is amortized using the straight-line method over 25 to 40 years. The trade name and the rights to the Taco Cabana name are amortized using the straight-line method over 40 years. Management assesses the recoverability of goodwill on the basis of actual and undiscounted, projected cash flows from the restaurants acquired. Should projected cash flows not be sufficient to recover the Company's investment, including any recorded goodwill, management utilizes either a discounted cash flow basis or other determination of current fair value, in order to determine the amount of the impairment. Franchise Income - The Company has sold franchises that give the franchisees the right to operate Taco Cabana restaurants in specified areas. Generally, each franchisee acquires the right to open three or more restaurants. A development fee is recognized as income when the agreement is signed, while the franchise fee on each restaurant is deferred until the opening of the franchised restaurant. In addition, the franchise agreement requires a franchise royalty fee and an advertising fee on gross sales; such fees are recorded as income when earned. In some markets, franchisees pay an additional percentage of gross sales for expanded media coverage in their respective areas. Concentrations of Credit Risk - Financial instruments that potentially subject the Company to concentrations of credit risk consisted principally of amounts due from franchisees and receivables from credit card sales. These risks are limited due to their geographic dispersion. The Company has no significant concentrations of credit risk. Income Taxes - Income taxes are recorded using a liability approach based upon currently enacted tax rates. The effect of future changes in tax laws will be recorded, when the laws are enacted. Earnings (Loss) Per Share - In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per Share", which requires presentation of basic and diluted earning per share. Basic earnings per share is computed by dividing income available to common shareholders 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. As required, the Company adopted the provisions of SFAS No. 128 in the year ended December 28, 1997. All prior year weighted average and per share information has been restated in accordance with SFAS No. 128. Outstanding stock options issued by the Company represent the only dilutive effect reflected in diluted weighted average shares. Statements of Cash Flows - For purposes of reporting cash flows, the Company considers all highly liquid debt instruments with a remaining maturity at the date of purchase of three months or less to be cash equivalents. TACO CABANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS (Continued) Commitments and Contingencies - The Company does not subscribe to worker's compensation insurance in its Texas market. The Company accrues for claims based on historical actual payments made for such claims and expenses, as well as an evaluation of current and anticipated claims and expenses. The Company does maintain an excess liability coverage which management believes is adequate to cover any substantial claims. Stock-Based Compensation - The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's common stock at the date of grant over the amount an employee must pay to acquire the stock. The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, as included in Note 12. Reclassifications - Certain reclassifications have been made to the prior year's consolidated financial statements to conform to the presentation and classification used in fiscal 1998. 2. SPECIAL CHARGES (REVERSAL) During fiscal 1996, 1997 and 1998, the following special charges are included in the Company's consolidated financial statements: December 29, December 28, January 3, 1996 1997 1999 Special charge (reversal) $ 2,497,000 $ 78,738,000 $(2,665,000) Pro forma income tax (benefit) provision (747,000) (3,018,000) 986,000 Decrease (increase) on net income 1,750,000 75,720,000 (1,679,000) Decrease (increase) per share $ 0.11 $ 4.94 $ (0.12) Fiscal 1998 - As part of the special charges recorded in the fourth quarter of 1996 and 1997, the Company reduced the carrying value of assets and established reserves for the estimated lease liabilities associated with restaurants that were closed. During 1998, the company successfully completed sales of several of these properties to third parties or negotiated favorable lease terminations. The amount of the proceeds in excess of the carrying value of the assets and the remaining lease liabilities was approximately $2.7 million. This amount was recorded as a special charge reversal during the fourth quarter of 1998. TACO CABANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SPECIAL CHARGES (Continued) Fiscal 1997 - During the fourth quarter of fiscal 1997, management made the decision to close the seven restaurants in its Colorado market. The Company committed substantial resources to this market during 1997 in an attempt to reverse trends of poor sales and losses. The desired results from the implementation of the plan were not achieved and the decision to close the market was made. These seven restaurants had total sales of approximately $3.0 million and operating losses of $2.1 million during the approximately eleven months of 1997 that they were in operation. Additionally, the Company continued to experience unfavorable sales trends during 1997, concluding the year with comparable restaurant sales declining 2.9%. However, during the first six months of 1997, comparable restaurant sales declined 4.8%. This trend compelled management to continue its evaluation of the operating model of the Company. During this evaluation, management concluded that certain volumes must be achieved in order to operate individual restaurants in accordance with Company standards. These standards include food quality, cleanliness, speed of service, and profitability. Management reviewed all existing restaurants to determine which restaurants could not reasonably be expected to achieve these volume levels, generally annual revenues of at least $1 million. This led to the decision to close an additional ten restaurants. Due to the significance of the closures described above, management performed an evaluation of the recoverability of all remaining assets as described in Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of ". Management concluded from the results of this evaluation that a significant impairment of intangible as well as long- lived assets was required to be recognized. The impairment was reflective of a market value determined to be less than the carrying value of approximately 40 restaurants, 31 of which were acquired. The assets were tested for impairment by projecting cash flows for individual restaurants based on recent results and trends specific to that restaurant. The undiscounted projected cash flows for each restaurant were compared to the carrying value for that restaurant, including allocated goodwill, where applicable. If the undiscounted cash flows were less than the carrying value, an impairment was deemed to have occurred. The amount of the impairment was determined by calculating the difference between the present value of the projected cash flows and the carrying value attributable to the specific restaurant. The cash flows were discounted using the rate of return the Company utilizes for approving new restaurant construction. Such discounted cash flows are, in management's opinion, the best estimate of the assets current value. Considerable management judgment is necessary to estimate future discounted cash flows. Accordingly, actual results could vary significantly from management's estimates. The process described above resulted in the Company's recording a special charge during the fourth quarter of 1997 of $78.7 million pre-tax, $75.7 million after-tax, or $4.94 per share. This amount had the following components: . Impairment of intangible assets of $33.1 million and impairment of long- lived assets of $22.1 million for restaurants that will continue in operation, based on the SFAS 121 analysis described above; TACO CABANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SPECIAL CHARGES (Continued) . A provision of $23.3 million for the closure of seventeen restaurants, including all of the restaurants in the Colorado market. The amount was determined in accordance with FAS 121 and was comprised of: . $13.3 million for the carrying value of the assets, net of estimated proceeds of $1.5 million for the sale of restaurant properties; . $9.0 million to record the estimated lease related obligations for closed restaurants. This amount was determined as the lesser of the present value of the monthly lease commitments, net of expected sublease receipts, or lease termination provisions; . $500,000 for severance and relocation benefits paid to employees displaced by the restaurant closures; . $500,000 for the probable settlement of a franchisee lawsuit related to the Colorado market. . The write-off of other assets totaling $200,000. During 1997, the seventeen restaurants contributed a total of $9.6 million in sales, and had operating losses totaling $2.5 million. In addition, the total amount of depreciation recorded during 1997 relating to assets which were impaired was approximately $2.5 million. Fiscal 1996 - The Company has a 50% interest in a joint venture which operated three restaurants in the Atlanta market. During the fourth quarter of 1996, the Company decided to write-down its investment in the joint venture and accrue for certain costs associated with the closing of two of the three restaurants operated by the joint venture. This decision resulted in a special charge of $2.5 million pre-tax, $1.7 million after-tax or $0.11 per share. The special charge was comprised of the following: Write-down of investment in joint venture $ 1,191,000 Reserve for notes and accounts receivable 268,000 Estimated lease obligations 632,000 Estimated legal and professional fees 245,000 Other costs 161,000 ------------- Total $ 2,497,000 ============= TACO CABANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. ACCOUNTS AND NOTES RECEIVABLE Accounts and notes receivable consisted of the following: December 28, January 3, 1997 1999 Trade receivables: Royalties $ 84,000 $ 97,000 Other 356,000 365,000 Notes receivable - current portion 109,000 78,000 Employees 2,000 - ----------- ----------- Total 551,000 540,000 Less allowance for doubtful accounts (49,000) (102,000) ----------- ----------- Receivables, net $ 502,000 $ 438,000 =========== =========== Notes receivable - noncurrent: Franchisees $ 344,000 $ 258,000 =========== =========== Notes receivable from franchisees approximate fair value because the underlying instruments have an interest rate that approximates current market rates. The Company's allowance for doubtful accounts is reflected as a reduction of receivables in the consolidated balance sheets. TACO CABANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. PROPERTY AND EQUIPMENT, NET Property and equipment, net, consisted of the following: December 28, January 3, 1997 1999 Property and equipment: Land $ 18,759,000 $ 20,384,000 Furniture, fixtures and equipment 39,627,000 48,245,000 Leasehold improvements 8,335,000 13,820,000 Buildings 13,159,000 17,322,000 Construction in progress 1,195,000 920,000 -------------- -------------- 81,075,000 100,691,000 Less accumulated depreciation and amortization (24,525,000) (31,424,000) -------------- -------------- Total 56,550,000 69,267,000 -------------- -------------- Property and equipment held under capital leases: Buildings 4,254,000 4,401,000 Less accumulated amortization (1,264,000) (1,418,000) -------------- -------------- Total 2,990,000 2,983,000 -------------- -------------- Property and equipment, net $ 59,540,000 $ 72,250,000 ============== ============== At January 3, 1999, the Company had three restaurants held for sale. The total carrying amount of these assets is $1.1 million which management estimates to be the net proceeds from the disposition of these assets. See Note 2. TACO CABANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. INTANGIBLE AND OTHER ASSETS Intangible and other assets consisted of the following: December 28, January 3, 1997 1999 Intangible assets: Goodwill $ 16,154,000 $ 16,154,000 Trade name 1,575,000 1,576,000 -------------- -------------- 17,729,000 17,730,000 Less accumulated amortization (6,436,000) (7,006,000) -------------- -------------- Intangible assets, net $ 11,293,000 $ 10,724,000 ============== ============== Other assets: Deposits $ 214,000 $ 177,000 Other 19,000 35,000 -------------- --------------- Other assets $ 233,000 $ 212,000 ============== =============== 6. ACCRUED LIABILITIES Accrued liabilities consisted of the following: December 28, January 3, 1997 1999 Closed restaurant obligations $ 2,827,000 $ 740,000 Payroll related 1,468,000 2,380,000 Property taxes 627,000 557,000 Employee injury 138,000 271,000 Restaurant expenses 297,000 433,000 Legal 332,000 168,000 Other 577,000 716,000 ------------- -------------- Total $ 6,266,000 $ 5,265,000 ============= ============== TACO CABANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. LEASES Operating Leases - The Company leases restaurant facilities under non- cancelable operating leases with initial terms ranging from ten to twenty years with options to renew. The future minimum lease commitments under all non-cancelable operating lease obligations as of January 3, 1999 were as follows: Years ending: 1999 $ 6,432,000 2000 6,426,000 2001 6,348,000 2002 6,290,000 2003 6,387,000 Thereafter 36,733,000 -------------- Total $ 68,616,000 ============== The total rental expense for operating leases was approximately $6.6 million for both 1996 and 1997, and $6.2 million for 1998, including additional rents of approximately $308,000, $291,000 and $185,000 for 1996, 1997 and 1998, respectively. The Company remains contingently liable on eight operating leases which were assigned to the purchasers of units previously sold or closed. Future minimum lease commitments under these contingent obligations approximate $597,000 in 1999, and a total of $2.4 million in 2000 through 2003. Thereafter, the total minimum lease payments are approximately $2.6 million. The Company assesses the probability of its having to assume primary liability under these assignments as part of its ongoing assessment of franchisee relationships. TACO CABANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. LEASES (Continued) Capital Leases - The Company leases certain buildings under capital lease agreements with third parties. The leases have fifteen and twenty year terms. Future minimum lease payments under the capital leases and the net present value of the minimum lease payments at January 3, 1999 were: Years ending: 1999 $ 445,000 2000 445,000 2001 446,000 2002 446,000 2003 439,000 Thereafter 1,220,000 ------------- Total minimum lease payments 3,441,000 Less amount representing interest at 9% to 13% 1,086,000 ------------- Net present value of minimum lease payments 2,355,000 Less current portion 215,000 ------------- Long-term portion of capital leases $ 2,140,000 ============= In addition to the minimum lease payments, several of the leases have a contingent rental based on 5% to 6% of gross sales, if such amounts exceed minimum rent. No payments have been made under these agreements. Furthermore, certain leases have been guaranteed by a stockholder of the Company. TACO CABANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. LONG-TERM DEBT Long-term debt consisted of the following notes payable bearing interest at the prime rate of 7.75% at January 3, 1999: December 28, January 3, 1997 1999 Notes payable to a bank, collateralized by certain restaurant assets, due in monthly installments of principal and interest through August 2004 $ 10,521,000 $ 19,754,000 Notes payable to a bank, collateralized by certain restaurant assets, due in January 1999, subsequently refinanced - 3,300,000 Note payable to a bank, unsecured, due in monthly installments of principal and interest through April 2000 1,777,000 1,365,000 Note payable to a corporation, collateralized by certain restaurants, due in monthly installments of principal and interest through September 1998 256,000 - --------------- -------------- Total 12,554,000 24,419,000 Less current maturities 1,384,000 5,489,000 --------------- -------------- Long-term debt, net $ 11,170,000 $ 18,930,000 =============== ============== The future minimum payments of long-term debt outstanding at January 3, 1999 were as follows: Years ending: 1999 $ 5,489,000 2000 2,761,000 2001 1,996,000 2002 2,444,000 2003 2,437,000 Thereafter 9,292,000 -------------- Total $ 24,419,000 ============== The amounts stated in the Company's consolidated balance sheets for long-term debt approximate fair value because the underlying note payable balance fluctuates frequently or it is at a rate approximating current market rates. TACO CABANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. LINE OF CREDIT During 1998 the Company had in place two secured credit facilities totaling $30 million, including a $5 million revolving line of credit. Interest on funds borrowed under the facilities are charged at the prime rate which was 7.75% at January 3, 1999. On December 31, 1998 the credit facilities were amended and increased to a total of $40 million. As a part of the amendment, the commitments were extended to December 31, 2000. Interest on funds borrowed under the amended facility are charged at the prime rate or, at the Company's choice, 2.25% over the London Interbank Offered Rate (LIBOR), adjusted quarterly. The credit facilities are secured by property and equipment. The facilities contain certain covenants, including cash flow to fixed charges ratio, minimum net worth, debt to tangible net worth ratio, and intangible assets to net worth ratio requirements. During the year ended January 3, 1999, the Company was in compliance with all such covenants. At January 3, 1999, the Company had approximately $11.5 million available for cash borrowings under these credit facilities. 10.ACQUISITION AND CLOSED RESTAURANT LIABILITIES The Company establishes acquisition liabilities, as necessary, in connection with the purchase method of accounting for restaurants and other assets it acquires. Such liabilities are primarily related to leases that were at terms less favorable than market rates prevailing at the acquisition date and anticipated restaurant closure costs, if any. The liability established for leases in excess of the prevailing market were based on current market rental rates at the date of acquisition as compared to the terms of the leases acquired. This liability is being amortized as a reduction of occupancy expense over the remaining term of the applicable leases. The total amount of this reserve was $1.4 million and $1.2 million, at December 28, 1997 and January 3, 1999, respectively. During 1997 and 1998, approximately $203,000 and $181,000, respectively, of the balance was amortized in this manner. Acquisition liabilities includes reserves established for the closure of certain acquired restaurants. These restaurants were anticipated to be closed at the time of acquisition. The amounts reserved were equal to the value assigned to the building and equipment acquired, less any anticipated salvage value, plus an amount estimated to terminate the lease prior to its expiration date. The total amount of this reserve was $1.5 million and $261,000 at December 28, 1997 and January 3, 1999, respectively. During 1997 and 1998, approximately $900,000 and $1.0 million, respectively, of this reserve was utilized in the closure of restaurants. As part of the special charge reversal recorded in 1998, the Company reversed $200,000 of this reserve. TACO CABANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10.ACQUISITION AND CLOSED RESTAURANT LIABILITIES (continued) In 1997, as part of the special charge, the Company reserved amounts for closed restaurant liabilities. The amounts reserved were equal to the lesser of the present value of the monthly lease commitments, net of expected sublease receipts, or lease termination provisions. These reserves were approximately $7.1 million and $6.2 million at December 28, 1997 and January 3, 1999, respectively. It is currently anticipated that payments of approximately $740,000 will be made under lease and other obligations during 1999. During 1997 and 1998, approximately $1.9 million and $2.7 million, respectively, of this reserve was utilized in the closure of restaurants. During 1998, the Company received proceeds of approximately $4.3 million from the sales of closed restaurant properties. As part of the special charge reversal recorded in 1998, the Company re-evaluated lease obligations for closed restaurants and reversed approximately $2.5 million of the lease liability reserves for such restaurants. 11.EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: December 29, December 28, January 3, 1996 1997 1999 Numerator for basic and diluted earnings per share - net income (loss) $ 704,000 $ (73,198,000) $13,734,000 Denominator: Denominator for basic earnings per share - weighted-average 15,694,757 15,314,665 14,336,526 shares Effect of dilutive securities- Employee stock options 251,923 - 140,067 -------------- ------------- ----------- Denominator for diluted earnings per share - adjusted weighted-average and assumed conversions 15,946,680 15,314,665 14,476,593 ============== ============= =========== Basic earnings (loss) per share $ 0.04 $ (4.78) $ 0.96 ============== ============= ========== Diluted earnings (loss) per share $ 0.04 $ (4.78) $ 0.95 ============== ============= ========== For additional disclosures regarding outstanding employee stock options, see Note 12. TACO CABANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12.STOCKHOLDERS' EQUITY AND STOCK OPTIONS Stock Options - The Company has stock option plans (the "Plans") for employees, outside directors, and advisors of the Company covering 2,750,000 shares of the Company's common stock. Options under such plans generally become exercisable ratably over a two to five year period. All options expire at the earlier of termination of employment or ten years after the date of grant. The Plans terminate in 2000 and in 2004. The Plans are administered by a committee of outside members of the Board of Directors. In addition, certain directors were awarded non-qualified stock options pursuant to the terms of separate compensation agreements. At January 3, 1999, there were 179,233 shares available for issuance upon exercise of options that may be granted in the future. Options outstanding are as follows: Weighted Average Total Options Exercise Outstanding Price Options outstanding, December 31, 1995 1,053,125 $ 6.40 Granted 231,250 6.30 Exercised (25,375) 4.85 Expired or canceled (147,500) 5.36 --------- Options outstanding, December 29, 1996 1,111,500 $ 6.18 Granted 379,750 4.63 Exercised - - Expired or canceled (140,375) 8.57 --------- Options outstanding, December 28, 1997 1,350,875 $ 5.64 Granted 480,050 6.17 Exercised (201,400) 4.78 Expired or canceled (125,000) 5.24 --------- Options outstanding, January 3, 1999 1,504,525 $ 5.76 ========= Options exercisable, January 3, 1999 635,195 $ 5.95 ========= TACO CABANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12.STOCKHOLDERS' EQUITY AND STOCK OPTIONS (Continued) For the options outstanding at January 3, 1999, the weighted average remaining life and exercise price of these outstanding options were 26 months and $5.79, respectively. In addition, the weighted average exercise price of options granted during 1998 was $6.17. SFAS No. 123, Accounting for Stock-Based Compensation, allows entities to continue to use Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. The Company has evaluated SFAS No. 123 and intends to continue following APB Opinion No. 25. The pro-forma compensation expense, net income (loss) and earnings (loss) per share which were calculated as if SFAS No. 123 had been applied are as follows: Year Ended -------------------------------------------- December 29, December 28, January 3, Pro Forma 1996 1997 1999 Compensation expense $ 741,000 $ 555,000 $ 329,000 Net income (loss) 237,000 (73,548,000) 13,405,000 Diluted earnings (loss) per share $ 0.01 $ (4.80) $ 0.93 The Black-Scholes option pricing model was used to determine the above pro- forma information. The calculations relied upon estimates of the volatility of the Company's stock and expected dividends, as well as determinations of a risk-free interest rate and expected life of the options. A volatility rate of 49.0% was used for options granted prior to 1994, 37.5% was used for options granted during 1994, 36.0% was used for options granted during 1995 through 1996, 34.0% was used for options granted during 1997, and 33.0% was used for options granted during 1998. Dividends were estimated at zero. The discount rate charged on loans to depository institutions by the Federal Reserve Bank was used as the risk-free interest rate. The discount rate was approximately 5.0% for all of 1998. The life of the Company's options range from two to five years. TACO CABANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12.STOCKHOLDERS' EQUITY AND STOCK OPTIONS (Continued) Preferred Stock Purchase Rights - In June 1995, the Company's Board of Directors declared a distribution of one preferred stock purchase right for each share of the Company's common stock. The rights were distributed on June 20, 1995 to stockholders of record as of the close of business on that day. Each right will entitle the holder to buy 1/1000 of a share of a newly authorized Series A preferred stock at an exercise price of $37.50 per right. The rights become exercisable on the tenth day after public announcement that a person or group has acquired 15% or more of the Company's common stock. The rights may be redeemed by the Company prior to becoming exercisable by action of the Board of Directors at a redemption price of $0.01 per right. If the Company is acquired in a merger or other business combination transaction in which it is not the surviving corporation, each right will entitle its holder to purchase stock of the acquiring company having a market value of twice the exercise price. In the event that the Company is the surviving corporation, each right will entitle its holder to purchase the Company's common stock having a market value of twice the exercise price of each right. At January 3, 1999, there were 13,331,000 rights outstanding. Preferred Stock - In June 1995, in connection with its implementation of the stockholders' rights plan discussed above, the Company authorized 100,000 shares of Series A, preferred stock with a par value of $0.01 per share, which would become issuable only at such time, if ever, as the rights become exercisable. As of January 3, 1999 there were no shares outstanding. Treasury Stock - The Company's Board of Directors previously authorized the purchase in the open market of up to 4,000,000 shares of the Company's outstanding common stock. At December 28, 1997 and January 3, 1999, the Company held treasury stock of 871,937 shares and 2,576,937 shares of its common stock at a cost of $3,561,000 and $13,894,000, respectively. TACO CABANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13.INCOME TAXES The provision (benefit) for income taxes differs from the amount computed using statutory rates as shown below: December 29, December 28, January 3, 1996 1997 1999 Federal income tax at statutory rate $ 530,000 $(25,410,000) $ 4,670,000 State income taxes 39,000 48,000 - Goodwill and other 285,000 4,819,000 (15,000) Valuation allowance on net deferred tax asset - 19,006,000 (4,655,000) ------------ ------------ ------------- Total $ 854,000 $ (1,537,000) $ - ============ ============ ============ The provision (benefit) for income taxes is comprised of the following: Year Ended ------------------------------------------- December 29, December 28, January 3, 1996 1997 1999 Current $ 404,000 $ 281,000 $ - Deferred 450,000 (1,818,000) - ------------ --------------- ----------- Total $ 854,000 $ (1,537,000) $ - ============ ============== =========== Deferred income taxes and benefits are provided for differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Significant deferred tax assets and liabilities are as follows: TACO CABANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13.INCOME TAXES (Continued) December 28, January 3, 1997 1999 Current: Deferred Federal Tax Assets: Workmen's compensation claims $ 494,000 $ 337,000 Investment in joint venture 718,000 - Accounts receivable 17,000 35,000 Charitable contributions 34,000 - Accrued vacation 38,000 21,000 ----------- ----------- Total 1,301,000 393,000 ----------- ----------- Deferred Federal Tax Liabilities - Pre-opening costs (119,000) - ----------- ----------- Total (119,000) - ----------- ----------- Net Current Deferred Tax Asset $ 1,182,000 $ 393,000 =========== =========== Noncurrent: Deferred Federal Tax Assets: Net operating loss carryforward $ 5,601,000 $ 6,955,000 General busines tax credit carryforward 627,000 590,000 Closed stores 916,000 1,400,000 Alternative minimum tax credit carryforward 1,258,000 1,277,000 Production costs 79,000 - Deferred rent 791,000 2,416,000 Other - Special charge 12,907,000 6,071,000 Charitable Contributions - 51,000 ------------ ------------ Total 22,179,000 18,760,000 ------------ ------------ Deferred Federal Tax Liabilities: Fixed and intangible assets (4,312,000) (4,802,000) Other reserves (43,000) - ------------ ------------ Total (4,355,000) (4,802,000) ============ ============ Net Noncurrent Deferred Tax Asset 17,824,000 13,958,000 ============ ============ Net Deferred Tax Asset before valuation allowance 19,006,000 14,351,000 Valuation Allowance (19,006,000) (14,351,000) ------------ ------------ Net Deferred Tax Asset $ - $ - ============ ============ TACO CABANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13.INCOME TAXES (Continued) At January 3, 1999, the Company had net operating loss, alternative minimum tax and general business tax credit carry-overs of approximately $20 million, $1.3 million and $590,000, respectively. A portion of the above carry-overs resulted from the acquisition of Two Pesos; the Company was allowed to utilize the net operating loss of $5.4 million and tax credit carry-overs of $178,000 of Two Pesos that existed at the date of acquisition. However, these carry-overs may only offset the post-acquisition taxable income and tax liability of the Company's subsidiary that acquired Two Pesos. In addition, because of the change in ownership, the net operating loss carry-over utilization is further limited to approximately $953,000 per year, and the tax credit carry-over acquired from Two Pesos is limited each year to the tax equivalent of any remaining portion of the net operating loss limitation. The net operating loss and tax credit carry-overs begin to expire in 2003 and 2000, respectively. The alternative minimum tax credit carry-over and the remaining general business credit carry-overs are available to offset future regular tax liabilities. The general business credit begins to expire in 2007. The alternative minimum tax credit has no expiration date. 14.LITIGATION SETTLEMENT AND LEGAL PROCEEDINGS On July 24, 1996, the Company approved the settlement of A.L. Park, et al v. Taco Cabana, Inc., et al., a suit originally filed in September 1995 seeking status as a class action. As a result thereof, the Company recorded a charge of $3.4 million pre-tax, $2.2 million after-tax, or $0.14 per share, during the second quarter of fiscal 1996. Under the terms of the settlement, the plaintiffs received a total of $6.0 million of which the Company's insurance carrier paid $3.05 million. Additionally, the Company paid approximately $450,000 for legal and related expenses incurred in connection with the settlement. In addition, the Company is a party to routine negligence or employment-related litigation in the ordinary course of its business. No such pending matters, individually or in the aggregate, are deemed to be material to the results of operations or financial condition of the Company. TACO CABANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15.QUARTERLY FINANCIAL DATA (Unaudited) Quarter Ended ------------------------------------------------------- March 30, June 29, September 28, December 28, 1997 1997 1997 1997 (1) Total revenues $ 30,186,000 $ 34,200,000 $ 35,051,000 $ 32,765,000 Gross profit 21,024,000 23,628,000 24,178,000 22,704,000 Net income (loss) applicable to common stock 556,000 876,000 562,000 (75,193,000) Basic and diluted earnings (loss) per share (2) $ 0.04 $ 0.06 $ 0.04 $ (5.07) Quarter Ended ------------------------------------------------------- March 29, June 28, September 27, January 3, 1998 1998 1998 1999 (1) Total revenues $32,407,000 $36,292,000 $ 36,270,000 $ 37,981,000 Gross profit 22,615,000 25,463,000 25,168,000 26,357,000 Net income applicable to common stock 1,857,000 3,297,000 2,895,000 5,686,000 Basic earnings per share $ 0.13 $ 0.22 $ 0.20 $ 0.42 Diluted earnings per share $ 0.12 $ 0.22 $ 0.20 $ 0.41 (1) See Note 2 for discussion of charges recorded in these quarters. (2) The earnings per share amounts have been restated as required to comply with Statement of Financial Standards No. 128 (SFAS 128), "Earnings Per Share". For further discussion of earnings per share and the impact of SFAS 128, see Note 11. EX-99 2 FOURTH AMENDED LOAN AGREEMENT This Fourth Amended Loan Agreement (this "Agreement"), dated as of the 31st day of December, 1998, is entered into by and among TACO CABANA, INC., a Delaware corporation, TEXAS TACO CABANA, L.P., a Texas limited partnership, TP ACQUISITION CORP., a Texas corporation, T.C. MANAGEMENT, INC., a Delaware corporation, TACO CABANA MANAGEMENT, INC., a Texas corporation, COLORADO CABANA, INC., a Colorado corporation and TACO CABANA MULTISTATE, INC., a Delaware corporation (collectively the "Borrower"), and INTERNATIONAL BANK OF COMMERCE, a state banking association (the "Lender"). For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: SECTION 1. THE LOANS. 1.1 Loan Commitment. Subject to the terms and conditions hereof, the Lender agrees to lend and advance to Borrower, from time to the time until December 31, 2000 (the "Loan Commitment Period"), such sums as the Borrower may request, but which shall not exceed, in the aggregate principal amount at any one time outstanding, the amount of $35,000,000.00 ("Loan Commitment"). 1.2 The Loans. Each borrowing under the Loan Commitment shall be referred to herein as a "Loan", (and such borrowings shall be collectively referred to as the "Loans"), shall be deemed a separate and independent loan, and shall be evidenced and secured as set forth below. The loans (the "Existing Loans") evidenced by the following described promissory notes (each a "Note" as such term is used and defined herein) are Loans governed by this Agreement: (i) that certain real estate lien note in the original principal amount of Ten Million and No/100 Dollars ($10,000,000.00) dated May 15, 1995, executed by Borrower and being payable to the order of Lender; and (ii) that certain real estate lien note in the original principal amount of Three Million Seven Hundred Thousand and No/100 Dollars ($3,700,000.00) dated August 8, 1997, executed by Borrower and being payable to the order of Lender; (iii) that certain real estate lien note in the original principal amount of $11,000,000.00, dated December 23, 1997, executed by Borrower and being payable to the order of Lender; and (iv) that certain real estate lien note in the original principal amount of $13,300,000, dated of even date herewith, executed by Borrower and being payable to the order of the Lender. 1.3 Interest. Subject to Section 7, interest on the Loans shall be calculated in accordance with the following: a. All of the Loans shall bear interest at the Applicable Rate (as defined below). For purposes hereof "Applicable Rate" shall mean, at any time, the rate of interest per annum equal to the lessor of (i) at Borrower's option exercised as set forth below, (A) the LIBOR Rate (as herein after defined) then in effect plus two and 25/100th percent (2.25%), to be recomputed as of each Interest Adjustment Date, or (B) the New York Prime Rate (as hereinafter defined), or (ii) the maximum rate of interest allowed by applicable law, as now or hereafter in effect (the "Maximum Rate"). The term "Interest Adjustment Date" shall mean each of March 31, 19999, June 30, 1999, September 30, 1999, December 31, 1999, March 31, 2000, June 30, 2000, September 30, 2000 and December 31, 2000. The "New York Prime Rate" shall mean the floating annual lending rate of interest announced from time to time by the Chase Manhattan Bank, N.A., New York, New York, as its prime rate; if a prime rate is not announced by Chase Manahattan Bank, N.A., then the term "New York Prime Rate" shall mean the floating annual lending rate of interest announced from time to time by Lender as its prime rate less one percent (1%). The term "LIBOR Rate" shall mean, as of a particular date, the per annum rate of interest identified as the three months London Interbank Offered Rate in the "Money Rates" Section of the edition of the Southwest Edition of the Wall Street Journal most recently published as of Interest Adjustment Date immediately previous to such date; provided, however, that if the Wall Street Journal shall discontinue or shall fail to regularly publish such rate in its "Money Rates" section or should the LIBOR Rate become for any other reason unascertainable or be construed by a court of competent jurisdiction as not constituting an index or formula by which the foregoing described rate of interest can be determined, then the LIBOR Rate option will no longer be available hereunder. Borrower acknowledges that Lender makes no warranty or representation that the New York Prime Rate, LIBOR Rate or Lender's prime rate are more favorable than another rate or index, or that rates on other loans or credit facilities may not be based on other indices, or that rates on loans to others may not be made below such rates. Installments of principal and interst under each Loan shall be payable quarterly and amortized over a ten (10) year period, and have a term specified by Lender which will not exceed seven (7) years from the date of such Loan. b. Upon at least two (2) Business Days' prior to written notice from Borrower to Lender in substantially the form attached hereto as Exhibit "A", Borrower may, on any Interest Adjustment Date elect to use either the New York Prime Rate, the LIBOR Rate for the calculation of the Applicable Rate; provided, however, that the rate of interest as elected in this section must be the same rate of interest as elected in Section 1.3 of that certain Third Amended Revolving Loan Agreement dated of even date herewith by and between Borrower and Lender. c. To the extend Borrower has not made an effective elective under and in accordance with this Section 1.3, the Applicable Rate shall be calculated using the New York Prime Rate. 1.4 Commitment Fee. During the Loan Commitment Period, Borrower agrees to pay to Lender a commitment fee computed at the rate of one-quarter of one percent (0.25%) per annum on the daily average unused amount of the Loan Commitment during each Quarterly Cycle (as hereinafter defined). Such commitment fee shall be payable quarterly, in arrears, on the last day of each March, June, September and December during the Loan Commitment Period, commencing December 31, 1998 and continuing in consecutive quarterly payments thereafter until the date of expiration of the Loan Commitment Period, on which date any accrued and unpaid fee computed in accordance with the provisions of this Section shall be due and payable. For purposes of this Section 1.4, the term "Quarterly Cycle" shall refer to each calendar quarter during the Loan Commitment Period. 1.5 Replaces Prior Commitment. This Fourth Amended Loan Agreement replaces entirely that certain Third Amended Loan Agreement dated October 15, 1998 (the "Prior Loan Agreement") which governed the terms of a $25,000,000.00 loan commitment from Lender to Borrower ("Prior Commitment"). The Borrower and Lender acknowledge that the Prior Commitment is null and void and of no further force or effect. 1.6 Revolving Loan Agreement. The Borrower and Lender have entered into a Third Amended Revolving Loan Agreement of even date herewith ("Revolving Loan Agreement"). The term "Revolving Loan Documents" as used in this Fourth Amended Loan Agreement shall have the meaning provided in the Revolving Loan Agreement. SECTION 2. SECURITY AND COLLATERAL. 2.1 Composition of the Collateral. The Loans shall be secured primarily with first liens and security interests upon those tracts of Borrower's real property which are agreed upon between Borrower and Lender ("Security Tracts"), together with the improvements, furniture, fixtures, equipment, accounts and inventory located on, attributable to or used in connection with the Security Tracts, as specifically set out in, and together with such other mortgages, liens and security interests as set out in the Loan Documents (as defined in Section 3.2). The security granted by the Loan Documents shall constitute collateral for the indebtedness established by the Loans and as otherwise established and set out in the Loan Documents (cumulatively the "Secured Indebtedness"). All of the mortgages, liens, security interests, and rights granted to Lender by the Loan Documents shall secure any and all Secured Indebtedness. Lender shall not be required to release any of the liens, security interests, and rights granted or given to Lender by any of the Loan Documents unless and until all of the Secured Indebtedness has been paid in full. The Loan Documents shall provide, and Borrower hereby agrees, that a default under any Loan Document shall constitute a default under the Loan Documents for all Loans and under each of the Revolving Loan Documents, and a default under any of the Revolving Loan Documents shall constitute a default under each of the Loan Documents. 2.2 Priority of Liens. The liens, security interests, and rights granted to Lender to secure the Secured Indebtedness shall be first and prior except for (i) liens for ad valorem taxes not yet delinquent, and (ii) those matters expressly approved by Lender, in advance and in writing, which approval Lender is under no obligation to provide. 2.3 Perfection and Preservation of Liens. Borrower will (i) execute and deliver to Lender from time to time at the request of Lender such documents or instruments as Lender shall deem necessary or appropriate, and will take such other and further actions as Lender may from time to time request, in order to perfect, continue, protect and preserve the liens, security interests and rights granted to Lender by the Loan Documents; and (ii) pay or reimburse the Lender for all costs and taxes of filing or recording the same in such public offices as the Lender may designate. SECTION 3. CONDITIONS PRECEDENT. The obligation of the Lender to make a Loan hereunder is subject to the following conditions precedent: 3.1 Certain Events. The following conditions precedent must be fully satisfied as of the date of any Loan: a. No Event of Default (as defined below) under this Agreement or any Loan Document, as defined below, shall have occurred, and no event shall have occurred and be continuing that, with the giving of notice or passage of time, or both, would be such an Event of Default. b. Lender shall have received an appraisal of the fair market value of the real property and improvements thereon to be granted as security for the Loan, in a form, and prepared by an appraiser, approved by Lender, which indicates that the amount of the proposed Loan is no greater than eighty percent (80%) of the lesser of (i) the appraised fair market value of such property, or (ii) the purchase price paid by Borrower for such property. 3.2 Documents Required for the Closing. Prior to any disbursement of any Loan (the "Closing"), the following documents ("Loan Documents", such term including all loan documents, other than the Prior Loan Agreement, executed and/or delivered in connection with the Existing Loans) shall have been delivered to Lender, fully executed and acknowledged where required and all in form and substance acceptable to Lender: a. This Agreement. b. A Real Estate Lien Note ("Note"). c. A Security Agreement between Borrower and Lender, granting to Lender a security interest in, among other property, all of Borrower's right, title and interest, whether now or hereafter acquired, in all accounts, inventory and equipment, and all proceeds thereof, located on, attributable to or used in connection with the Security Tracts. d. A Deed of Trust, Assignment of Rents, Security Agreement and Financing Statement from Borrower to Thomas L. Travis, Trustee for the benefit of Lender, granting a first lien upon the real property and improvements thereon to secure the respective Loan. e. Financing Statements as Lender shall deem necessary to file from time to time in order to perfect and preserve the security interests granted by the Loan Documents. f. A Commitment and Policy for Mortgagee Title Insurance issued by a title company acceptable to Lender and for the aggregate amount of the respective Loan. g. A survey of the real property and improvement thereon prepared by a surveyor acceptable to Lender. h. Engineering and other information evidencing the absence of pollution or contamination on the property being acquired and the suitability of such property for Borrower's intended restaurant operation. i. Tax Certificates evidencing that there are no ad valorem taxes or assessments which are past due or payable. j. Liability and casualty insurance coverage in an amount and issued by carriers approved by Lender. k. For the first Loan made hereunder, certified (as of the date of Closing) copies of (i) resolutions of the Borrower's board of directors (for each Borrower which is a corporation) or a consent of all general partners (for each Borrower which is a partnership) authorizing the execution, delivery, and performance of this Agreement and the Loan Documents, and each other document to be delivered pursuant hereto including a certification (dated the date of the Closing) of the Borrower's secretary or its managing or general partner, as the case may be, as to the incumbency and signatures of the officers of the Borrower signing the Loan Documents, and each other document to be delivered pursuant hereto; (ii) Borrower's bylaws, or partnership agreement, including all amendments thereto; (iii) Borrower's articles of incorporation, including any and all amendments thereto; and (iv) certificates of existence and certificates as to the good standing of Borrower from applicable governmental authorities. For each Loan after the first Loan, Borrower shall deliver to Lender and the applicable title insurer (i) a current written statement of the Borrower's corporate secretary or managing partner, as the case may be, stating that each of the documents listed in this Section 3.2(k) delivered in conjunction with the first Loan remains valid, unamended and effective and applicable to the particular Loan to be made (or, if such statement cannot truthfully be given then a current written statement of Borrower's corporate secretary stating the particular reasons why such statement cannot be truthfully given, together with any amended documents), and (ii) any of the documents listed in this Section 3.2(k) which are required by the title insurer for a particular Loan, in order to issue the required mortgagees title insurance policy. l. Any and all other documents or instruments as may be required by Lender. m. Prior to the first Loan, and thereafter at the request of Lender, a true and complete list of all legal actions, claims, proceedings, investigations and notices thereof, against or affecting Borrower. SECTION 4. REPRESENTATIONS AND WARRANTIES. 4.1 Original. To induce the Lender to enter into this Agreement, and to fund the [Loans to be made hereunder], each Borrower represents and warrants to the Lender as follows: a. Borrower is a corporation or general partnership or limited partnership, as applicable, duly organized, validly existing, and in good standing under the laws of the state under which it was organized; Borrower has the lawful power to own its properties and to engage in the business it conducts, and is duly qualified and in good standing as a foreign corporation or foreign partnership in the jurisdictions wherein the nature of the business transacted by it or property owned by it makes such qualification necessary. b. Borrower is not in default with respect to any of its existing indebtedness, and the making and performance of the Loan Documents will not immediately or with the passage of time, or the giving of notice, or both: (i) violate the charter or bylaw or partnership provisions of Borrower, or (ii) violate any laws or result in a default under any contract, agreement, or instrument to which Borrower is a party or by which Borrower or its property is bound. c. Borrower has the power and authority to enter into and perform each of the Loan Documents to which it is a party, and to incur the obligations herein and therein provided for, and has taken all corporate or partnership action necessary to authorize the execution, delivery, and performance of this Agreement and such other Loan Documents. d. The Loan Documents are, and each Note when delivered will be, valid, binding, and enforceable in accordance with their respective terms. e. There is no pending order, notice, claim, litigation, proceeding, or investigation against or affecting Borrower, whether or not covered by insurance, that would materially and adversely affect the business of Borrower if adversely determined. f. All financial information given to Lender, including any schedules and notes pertaining thereto, have been prepared in accordance with generally accepted accounting principles consistently applied, fully and fairly present the financial condition of Borrower at the dates thereof and the results of' operations for the periods covered thereby, and there have been no material adverse changes in the consolidated financial condition or business of Borrower set forth therein, to the date hereof. g. Except as otherwise permitted herein, Borrower has filed and paid all federal, state, and local tax returns and other required reports and all taxes, assessments, and other governmental charges that are due and payable prior to the date hereof. h. Except to the extent that the failure to comply would not materially interfere with the conduct of the business of the Borrower, Borrower has complied, and shall comply, with all applicable laws and regulations. i. No representation or warranty by the Borrower contained herein or in any Loan Document or certificate or other document furnished by the Borrower contains any untrue or misleading statement of material fact or omits to state a material fact necessary to make such representation or warranty not misleading in light of the circumstances under which it was made. j. Each consent, approval or authorization of, or filing, registration, or qualification required to be obtained by Borrower in connection with the execution and delivery of this Agreement, the Loan Documents, or the undertaking or performance of any obligation hereunder or thereunder, has been duly obtained. 4.2 Survival. All of the representations and warranties set forth in Section 4.1 shall survive until all Secured Indebtedness is satisfied in full. SECTION 5. COVENANTS OF BORROWER. Borrower does hereby covenant and agree with the Lender that, so long as any of the Secured Indebtedness remains unpaid, Borrower will comply with the following covenants: 5.1 Affirmative Covenants. a. Taco Cabana, Inc. will furnish to Lender within one hundred twenty (120) days after the close of each fiscal year (or, in the event an extension of the deadline for filing such information with the Securities and Exchange Commission ("SEC") is required or authorized by the SEC, then within one hundred eighty (180) days after the close of each fiscal year), for such fiscal year, the following independently audited and prepared financial information for itself and its subsidiaries prepared on a consolidated basis: (i) a statement of stockholders' or partners' equity and a statement of changes of cash flows; (ii) income statements; and (iii) balance sheets; all in reasonable detail, including all supporting schedules and comments, and certified by an independent certified public accountant auditor, approved by Lender, to have been prepared in accordance with generally accepted accounting principles consistently applied. b. Taco Cabana, Inc. will furnish to Lender within fifty (50) days after the close of each quarterly accounting period in each fiscal year of each Borrower and its subsidiaries, for such quarter, prepared on a consolidated basis: (i) a statement of stockholders' or partners' equity and a statement of changes in financial position; (ii) income statements; and (iii) balance sheets as of the end of such quarterly period, all in reasonable detail, Subject to year-end audit adjustments, and certified by Taco Cabana Inc.'s secretary to have been prepared in accordance with generally accepted accounting principles consistently applied. c. Borrower will furnish to Lender such other financial statements or reports as Lender may reasonably and periodically require, including without limitation balance sheets and income statements for each Borrower on an individual basis. d. Borrower will maintain its inventory, equipment, real estate, and other properties in good condition and repair (normal wear and tear excepted); will pay and discharge, or cause to be paid and discharged when due, the cost of repairs to or maintenance of the same; and will pay or cause to be paid all rental or mortgage payments due on such real estate. The Borrower hereby agrees that, in the event Borrower fails to pay or cause to be paid any such payment, the Lender may do so and on demand be reimbursed therefor by the Borrower. e. In addition to any requirements in the Loan Documents, Borrower will maintain, or cause to be maintained, public liability insurance and fire and extended coverage insurance on all assets owned by them, all in such form and amounts, and with such insurers, as are reasonable satisfactory to Lender. Such policies shall contain a provision whereby they cannot be canceled except after thirty (30) days' written notice to the Lender, and shall name Lender as an additional insured. Borrower will furnish to the Lender such evidence of insurance as the Lender may require. Borrower hereby agrees that, in the event any Borrower fails to pay or cause to be paid the premium on any such insurance, the Lender may do so and on demand be reimbursed therefor by the Borrower. f. Borrower will pay or cause to be paid when due all taxes, assessments or fees imposed upon it or on any of its property or that it is required to withhold and pay over, except when, prior to impending foreclosure, such taxes, assessments or fees are contested in good faith by appropriate proceedings, with adequate reserves therefor having been set aside on its books. g. Borrower will, when requested so to do, make available for inspection by duly authorized representatives of the Lender any of their books and records, and will furnish the Lender any information regarding their business affairs and financial condition within a reasonable time after written request therefor. h. Borrower will take all necessary steps to preserve its corporate or partnership existence and franchises and will comply with all present and future laws applicable to them in the operation of their respective businesses and all material agreements to which they are subject. i. Within ten (10) days after the Lender's request therefor, Borrower will furnish the Lender with copies of federal income tax returns filed by the Borrower. j. Borrower will pay when due (or within applicable grace periods) all indebtedness due third parties. If any Borrower defaults in the payment of any principal (or installment thereof) of, or interest on, any such indebtedness, the Lender shall have the right, but not the obligation, to pay such interest or principal for the account of Borrower and be reimbursed by Borrower therefor on demand. k. Borrower will notify the Lender immediately if it becomes aware of the occurrence of any Event of Default, as defined below, or of any fact, condition, or event that, with the giving of notice or passage of time, or both, could become an Event of Default hereunder, or of the failure of Borrower to observe any of its undertakings hereunder. l. The Borrower's shareholders' or partners' equity (as determined in accordance with generally accepted accounting principals consistently applied) less the value of any intangible assets (as determined in accordance with generally accepted accounting principles consistently applied) shall at all times equal or exceed 90% of Tangible Net Worth of Borrower and Borrower's Subsidiaries. m. All cash, cash equivalents and funds derived from operations of the Borrower shall be the property of the Borrower at the close of each business day, unless such cash, cash equivalents and funds are utilized by other entities for the payment of obligations in compliance with applicable law. This provision is not intended to restrict Borrower's use of funds or usual and regular course of business. n. The Borrower and its Subsidiaries have (i) initiated and will pursue to completion a review and assesment of all areas within Borrower and each of its Subsidiaries' business and operations (including those affected by information received from suppliers and vendors) that could reasonably be expected to be adversely affected by the Year 2000 Problem, (ii) developed and will pursue to completion a plan and timeline for addressing the Year 2000 Problem on a timely basis, and (iii) to date, implemented that plan substantially in accordance with that timetable. The Borrower reasonably believes that all computer applications (including those affected by information received from its suppliers and vendors) that are material to Borrower or any of its Subsidiaries' business and operations will on a timely basis be Year 2000 Compliant, except to the extend that a failure to do so could not reasonably be expected to have Material Adverse Effect. o. The Borrower will promptly notify the Lender in the event the Borrower discovers or determines that any computer application (including those affected by information received from its suppliers and vendors) that is material to Borrower or any of its Subsidiaries' business and operations will not be Year 2000 Compliant on a timely basis, except to the extent that such failure could not reasonably be expected to have a Material Adverse Effect. p. Borrower will maintain Quarterly Cash Flow (as defined) for the immediately preceding four fiscal quarters in an amount equal to, or in excess of, $4,000,000.00. 5.2 Negative Covenants. a. For so long as any Indebtedness under the Loans remains outstanding, Borrower shall not without the prior written consent of the holder of the Notes: (1) Permit the ratio of Consolidated Cash Flow to Consolidated Fixed Charges for the immediatly preceding four fiscal quarters of Borrower to be less than 2.0:1.0.(1) Permit Consolidated Net Worth at any time to be less than the Minimum Consolidated Net Worth (as defined below) then in effect; (2) Permit the ratio of Debt to Consolidated Net Worth to be greater than 1.00:1.00 at any time; provide, however, that all treasury stock purchases shall be excluded when calculating Consolidated Net Worth; or (3) Permit the ratio of Intangible Assets to Consolidated Net Worth to be greater than 0.40: 1.0 at any time; or (4) Incur Capital Expenditures: (i) in excess of $25,000,000.00 during the 1999 fiscal year of Borrower; (ii) in excess of $30,000,000.00 during the 2000 fiscal year of Borrower. For purposes of subsections 5.1(l) (n),(o) and (p_) and this subsection 5.2(a), the following terms shall have the following meanings: "Capital Expenditures" as to Borrower shall mean the aggregate amount paid or accrued by Borrower and its Subsidiaries for the rental, lease, purchase (including by way of the acquisition of securities of another person or entity), construction or use of any property the value or cost of which, in accordance with generally accepted accounting principles consistently applied would appear on Borrower's balance sheet in the category of property, plant or equipment. "Consolidated Cash Flow" for any period shall mean the consolidated net income of the Borrower and all Subsidiaries for such period (after having taken into account the effects of income tax), plus (without duplication) interest expense, depreciation, amortization and all other non-cash charges, all as determined in accordance with generally accepted accounting principles consistently applied. "Consolidated Fixed Charges" for any period shall mean (i) consolidated interest expense, and obligations under capitalized leases for such period, plus (ii) matured debt and any additional debt maturing within one year of the date of determination, plus (iii) dividends and distributions to partners in respect of their partnership interest, for the Borrower and all Subsidiaries, all as determined in accordance with generally accepted accounting principles consistently applied. "Consolidated Net Worth" shall mean consolidated shareholders' or partners' equity of the Borrower and all Subsidiaries as determined in accordance with generally accepted accounting principles consistently applied. "Debt" means, with respect to the Borrower and its Subsidiaries, on a consolidated basis: (i) indebtedness for borrowed money or for the deferred purchase price of property or services, (ii) obligations as lessee under leases which shall have been or should be, in accordance with generally accepted accounting principles, recorded as capital leases, (iii) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clause (i) or (ii) above, and (iv) liabilities in respect of unfunded vested benefits under plans covered by Title IV of the Employee Retirement Income Security Act of 1974, as amended. "Intangible Assets" means, with respect to the Borrower and its Subsidiaries, on a consolidated basis, goodwill, organizational expenses, trademarks, tradenames, and any other items which are treated as intangibles in conformity with generally accepted accounting principles consistently applied. "Material Adverse Effect" means a material adverse effect on (i) the business, properties, prospects, operations or condition, financial or otherwise, of the Borrower and its Subsidiaries, taken as a whole, (ii) the ability of the Borrower to pay or perform its respective obligations, liabilities and indebtedness under the Loan Documents as such payment or performance becomes due in accordance with terms thereof, or (iii) the rights, powers and remedies of the Lender under any Loan Document or the validity, legality or enforceability thereof. "Minimum Consolidated Net Worth" means, during any calendar year, $40,000,000.00 minus the amount paid by Borrower in any allowed purchase of capital stock consummated pursuant to Section 5.25b,plus 50% of the consolidated net income of Borrower (as determined in accordance with generally accepted accounting principles, consistently applied) for the period commencing (January 1, 1998), to December 31 of the calendar year immediately prior to the calendar year in which the determination of Minimum Tangible Net Worth is being made. "Quarterly Cash Flow" shall mean for any fiscal quarter of Borrower the consolidated net income of Borrower and its Subsidiaries for such period (after having taken into account the effects of income tax) plus (without duplication) interest expense, depreciation, amortization and all other non-cash charges, all as determined in accordance with generally accepted accounting principles consistently applied. "Subsidiaries" means all corporations or partnerships of which at least 99% of the partnership interests, or of the shares of stock of every class of which, outstanding at the time as of which any determination is being made, is owned by the Borrower, either directly or through a Subsidiary. "Subsidiary" means each of the Subsidiaries. "Tangible Net Worth" means, with respect to the Borrower and its Subsidiaries, on a consolidated basis, Consolidated Net Worth less the value of any intangible assets as determined in accordance with generally accepted accounting principles consistently applied. "Year 2000 Compliant" means, all computer applications (including those affected by information received from its suppliers and vendors) that are material to the Borrower's or any of its Subsidiaries' business and operations will on a timely basis be able to perform properly data-sensitive functions involving all dates on and after January 1, 2000. "Year 2000 Problem" means the risk that computer applications used by the Borrower and any of its Subsidiaries (including those affected by information received from its suppliers and vendors) may be unable to recognize and perform properly data-sensitive functions involving certain dates on and after January 1, 2000. b. No Borrower shall change its name, enter into any merger, consolidation, reorganizations or recapitalization, or reclassify its capital stock without the prior written consent of Lender, which consent shall not be unreasonably withheld, except that Borrower shall be permitted to purchase common stock of Borrower in an aggregate amount expended in the purchase thereof after September 30, 1998, not to exceed $12,500,000.00. c. No Borrower shall sell, transfer, lease, or otherwise dispose of all, or (except in the ordinary course of business) any material part of, its assets, without the prior written consent of Lender, which consent shall not be unreasonably withheld. d. No Borrower shall mortgage, pledge, grant, or permit to exist a security interest in or lien upon any of the security given for the Loans, other than pursuant to the Loan Documents and Revolving Loan Documents and statutory liens in the ordinary course of its business. e. Borrower shall not furnish the Lender with any certificate or other document that will contain any untrue statement of material fact or that will omit to state a material fact necessary to make it not misleading in light of the circumstances under which it was furnished. f. No Borrower shall transfer, alienate, sell, assign, or encumber any of its capital stock or partnership interests in any Subsidiary. g. No Borrower shall incur, create, assume, or permit any indebtedness other than (i) under the Revolving Loan Documents and the Loan Documents; (ii) obligations under leases for real or personal property used in Borrower's business; (iii) loans between Borrowers; (iv) loans between Borrowers and nonborrower Subsidiaries not exceeding the aggregate principal amount of $100,000.00 without the consent of the Lender, which consent shall not be unreasonably withheld; (v) normal accruals and trade accounts payable incurred in the ordinary course of business, or otherwise become liable, directly or indirectly, as guarantor or otherwise for any obligation (other than the endorsement of commercial paper for deposit or collection in the ordinary course of business and guaranties of affiliate transactions made in the ordinary course of business). h. Borrower shall not make any loans or advances to any officer, shareholder, director, or employee of Borrower or of any Subsidiary which, at any time, exceed the outstanding aggregate principal amount of $300,000.00. SECTION 6. DEFAULT. 6.1 Events of Default. The occurrence of any one or more of the following events shall constitute an "Event of Default" hereunder: a. Any installment of principal and/or interest on the Loans or any other sums due by Borrower under the Loan Documents shall not be paid when due and payable. b. Any Borrower shall breach any of the affirmative or negative covenants contained herein and the breach is not cured within five days after written notice of the breach is given by the Lender to the Borrower. c. Any Borrower shall fail to perform, keep or otherwise observe any other obligation, term, provision, covenant, warranty or representation contained herein or in any of the Loan Documents and such failure is not cured within five days after written notice of the breach is given by the Lender to the Borrower. d. Any financial statement or report, representation, warranty, or certificate made or furnished by any Borrower to the Lender hereunder or in connection with this Agreement, any Loan or any Loan Documents, or in any separate statement or document to be delivered under the Loan Documents to the Lender, shall be materially false, incorrect, or incomplete when made or furnished. e. Any Borrower shall admit its inability to pay its debts as they mature, or shall make an assignment for the benefit of its or any of its creditors. f. Proceedings in bankruptcy, or for the dissolution, full or partial liquidation or reorganization of any Borrower, or for the readjustment of any of their respective debts, under the Bankruptcy Code, as amended, or any part thereof, or under any other laws, whether state or federal, for the relief of debtors, now or hereafter existing, shall be commenced by Borrower. g. If an application is made by any Borrower for the appointment of a receiver, trustee, or custodian for Borrower or for any substantial part of their respective assets, or any Borrower shall discontinue business or materially change the nature of its business. h. If a receiver, trustee, or custodian shall be appointed for any Borrower or for any part of their respective assets, and shall not be discharged within 30 days of such appointment. i. If all or any of any borrower's assets are attached, seized, subjected to a writ, or are levied upon, or come within the possession of any receiver, trustee, custodian or assignee for the benefit of creditors. j. If any Borrower is permanently enjoined, restrained or in any way prevented by court order from conducting any material part of its business affairs. k. If a notice of lien, levy or assessment is filed of record with respect to all or any of Borrower's assets by the United States or any department, agency or instrumentality thereof, or by any state, county, municipality or other governmental agency, or if any taxes or debts owing at any time or times hereafter to any one or more of them becomes a lien, upon all or any material portion of Borrower's assets. l. A judgment creditor of any Borrower shall obtain possession of any of the collateral securing repayment of the Loans by any means, including, but without limitation, levy, distraint, replevin, or self-help. m. Any Event of Default occurs under the terms of any of the Loan Documents or under the terms of any of the Revolving Loan Documents. n. Any Borrower shall dissolve, liquidate, or otherwise terminate its existence, or take any action to effect such termination. o. Any Borrower shall suffer a final judgment in excess of $250,000.00, and shall not discharge the same within thirty (30) days. p. Any Borrower furnishes the Lender with any certificate or other document that contains any untrue statement of material fact or that omits to state a material fact necessary to make it not misleading in light of the circumstances under which it was furnished. q Any material nonborrower Subsidiary shall have failed to pay when due all taxes, assessments or fees imposed upon it or on any of its property or that it is required to withhold and pay over, except when, prior to impending foreclosure, such taxes, assessments or fees are contested in good faith by appropriate proceedings, with adequate reserves therefor having been set aside on its books. r. Any material nonborrower Subsidiary fails to take all necessary steps to preserve its corporate or partnership existence and franchises, or fails to comply with all present and future laws applicable to it in the operation of its business and all material agreements to which it is subject. s. Lender, at its discretion and after five days written notice given to Borrower, deems itself to be adversely affected and/or insecure by reason of any material change in any of Borrower's (including any endorsers and/or guarantors) net worth, or by reason of any other material change of condition whether or not described herein. 6.2 Remedies. Upon the occurrence of an Event of Default, Lender, at its option, may: a. Terminate any obligation to make any further Loans and declare the entire principal balance of the Secured Indebtedness and all interest, unpaid accrued and earned thereon to be immediately due and payable without demand for payment, presentment for payment, notices of intention to accelerate maturity, notices of election to accelerate maturity, protest and notice of protest or any other notice whatsoever, all of which are hereby expressly waived. b. Enforce or avail itself of any and all rights and remedies given to it by any or all of the Loan Documents. c. Enforce or avail itself of all rights and remedies allowed by all applicable laws. SECTION 7. INTEREST LIMITATION. 7.1 Limitation. Interest on the debt evidenced by the Notes or otherwise in connection with the Loans shall not exceed the maximum amount of nonusurious interest that may be contracted for, taken, reserved, charged, or received under law; any interest in excess of that maximum amount shall be credited on the principal of the debt or, if that has been paid, refunded. On any acceleration or required or permitted prepayment, any such excess shall be canceled automatically as of the acceleration or prepayment or, if already paid, credited on the principal of the debt or, if the principal of the debt has been paid, refunded. This provision overrides other provisions in this and all other instruments concerning the debt. All sums paid or agreed to be paid for the use, forbearance or detention of the indebtedness of Borrower to Lender shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full stated term of such indebtedness until payment in full so that the rate or amount of interest on account of such indebtedness does not exceed the maximum rate of interest allowed by law for so long as such indebtedness is outstanding, and to the extent that Chapter 303 of the Texas Finance Code, as amended, and Chapter 10 of the Texas Credit Title, as amended, is applicable to such indebtedness, the quarterly rate ceiling from time to time in effect under such article shall be the applicable ceiling. This provision overrides other provisions in this and all other instruments concerning the debt. SECTION 8. MISCELLANEOUS. 8.1 No Permanent Waivers. No waiver at any time of the provisions or conditions of this Agreement or of any of the other Loan Documents shall be construed as a waiver of any of the other provisions or conditions hereof or thereof nor be construed as a right to a subsequent waiver or any other provisions or conditions. 8.2 Severability. Unenforceability for any reason against any person or persons of any provision of this Loan Agreement, or of any of the other Loan Documents or other Agreements between Borrower and the Lender, shall not limit or impair the operation or validity of any other provisions of this Agreement or any of the other Loan Documents. 8.3 Descriptive Headings and Defined Terms. The descriptive headings of the various sections and subsection of this Agreement and the Loan Documents and any schedule, agreement or other instrument, executed with reference hereto are inserted for convenience of reference only, do not constitute a part of any such document and no inference is to be drawn from such headings. Whenever the context shall require, words of any gender shall be deemed to include the other gender and either the singular or the plural shall include the other, including with respect to terms defined herein. 8.4 Further Assurance. From time to time, Borrower will execute and deliver to the Lender such additional documents and will provide such additional information as the Lender may reasonably require to carry out the terms of this Agreement and be informed of the Borrower's status and affairs. 8.5 Enforcement and Waiver by the Lender. All rights and remedies of the Lender are cumulative and concurrent, and the exercise of one right or remedy shall not be deemed a waiver or release of any other right or remedy. The Lender shall have the right at all times to enforce the provisions of this Agreement and the Loan Documents in strict accordance with the terms hereof and thereof, notwithstanding any conduct or custom on the part of the Lender in refraining from so doing at any time or times. The failure of the Lender at any time or times to enforce its rights under such provisions, strictly in accordance with the same, shall not be construed as having created a custom in any way or manner contrary to specific provisions of this Agreement or such Loan Documents or as having in any way or manner modified or waived the same. 8.6 Expenses of the Lender. The Borrower will, on demand, pay, or reimburse the lender, for all reasonable expenses, including the reasonable fees and expenses of legal counsel for the Lender, incurred by the Lender in connection with the preparation, administration, amendment, modification, or enforcement of this Agreement and the Loan Documents, and the collection or attempted collection of any and all Notes. All reasonable costs, including but not limited to reasonable attorney's fees of Borrower, Lender, or other interested parties, other professional fees, appraiser's and surveyor's fees, taxes and all expenses of all kinds incurred in connection with the Loans, shall be borne by Borrower, and Borrower agrees to indemnify the Lender and save it harmless from the payment, defense and/or expense of any claim or demand for such fees, costs, taxes and expenses. 8.7 Notices. Any notices or consents required or permitted by this Agreement shall be in writing and shall be deemed given when delivered in person, or upon deposit in the U.S. Mail, if sent by certified mail, postage prepaid, return receipt requested, as follows, unless such address is changed by written notice hereunder: a. If to Borrower: Taco Cabana, Inc. Texas Taco Cabana, L.P. TP Acquisition Corp. T.C. Management, Inc. Taco Cabana Management, Inc. Taco Cabana Multistate, Inc. Colorado Cabana, Inc. 8918 Tesoro Drive, Suite 200 San Antonio, Texas 78217 b. If to the Lender: International Bank of Commerce 130 East Travis San Antonio, Texas 78205 Attention: Mr. Steve E. Edlund 8.8 RELEASE BY THE BORROWER. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAWS, BORROWER RELEASES THE LENDER AND ITS DIRECTORS, OFFICERS, ATTORNEYS, AGENTS, AND EMPLOYEES FROM ALL CLAIMS, CAUSES, DAMAGES, LIABILITY AND RELATED EXPENSES ARISING OUT OF ANY ACT OR OMISSION ON THE PART OF ANY OF THEM, WITH REGARD TO THIS AGREEMENT, WHICH DOES NOT INVOLVE FRAUD, BAD FAITH OR NEGLIGENCE BY LENDER OR ITS DIRECTORS, OFFICERS, ATTORNEYS, AGENTS OR EMPLOYEES. 8.9 Governing Law. This Agreement is made and accepted, and the obligations of the parties set forth herein shall be performable, in the County of Bexar and State of Texas, and this Agreement and all the Loan Documents shall be governed by, and construed in accordance with the laws of the State of Texas except to the extent that such laws may be preempted by laws of the United States of America. The parties hereby agree that this Agreement and the Loans to be made pursuant hereto shall not be subject to the provisions of (Chapter 15 of the Texas Credit Code). 8.10 Lender's Relationship to Other. Lender is not a partner or joint venturer in any manner whatsoever with any Borrower. 8.11 Waiver, Modification. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. 8.12 Cumulative Remedies. The right and remedies of the Lender under the Loan Documents shall be cumulative and the exercise, or partial exercise, of any such right or remedy shall not preclude the exercise of any other right or remedy. 8.13 Binding Effect. This Loan Agreement shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns, provided that no Borrower may assign its rights or obligations hereunder. If more than one party executes this Agreement a Borrower, the term "Borrower" shall mean and refer to each such party, jointly and severally. 8.14 Survival of Agreement. The provisions thereof shall survive the execution of all instruments herein mentioned, and shall continue in full force until the Secured Indebtedness is paid in full and shall prevail and control over any conflicting provision contained elsewhere in the Loan Documents. 8.15 Entire Agreement. The Loan Documents embody the entire agreement between the parties and supersedes all prior agreements and understandings, if any, relating to the subject matter hereof. There are no oral agreements or understandings between the parties which are not evidenced by the Loan Documents. 8.16 Subsidiaries. Except where otherwise specified herein, the term "Subsidiary" shall mean every entity of which more than fifty percent (50%) of the outstanding voting stock or other ownership interests shall, at the time of determination, be owned directly or indirectly by the named Borrower or through one or more intermediaries of Borrower. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. WITNESS: BORROWER: TACO CABANA, INC. By: Name: Name: Title: TEXAS TACO CABANA, L.P., a Texas limited partnership By: Taco Cabana Management, Inc., a Texas Corporation, General Partner By: Name: Name: Title: TP ACQUISITION CORP. By: Name: Name: Title: T.C. MANAGEMENT, INC. By: Name: Name: Title: TACO CABANA MANAGEMENT, INC. By: Name: Name: Title: TACO CABANA MULTISTATE, INC. By: Name: Name: Title: COLORADO CABANA, INC. By: Name: Name: Title: LENDER: INTERNATIONAL BANK OF COMMERCE By: Name: Steve E. Edlund, Executive Vice President EX-27 3
5 YEAR JAN-3-1999 JAN-3-1999 719,000 0 798,000 102,000 2,273,000 6,758,000 105,092,000 32,842,000 90,202,000 19,881,000 0 0 0 159,000 40,618,000 90,202,000 142,592,000 142,950,000 43,347,000 106,271,000 20,994,000 0 1,951,000 13,734,000 0 0 0 0 0 13,734,000 0.96 0.95
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