<PAGE>
EXHIBIT 99.1
TACO CABANA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
Consolidated Financial Statements:
Independent Auditors' Report 2
Consolidated Balance Sheets at January 3, 1999 and January 2, 2000 3
Consolidated Statements of Operations for the Years Ended
December 28, 1997, January 3, 1999, and January 2, 2000 4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 28, 1997, January 3, 1999 and January 2, 2000 5
Consolidated Statements of Cash Flows for the Years Ended
December 28, 1997, January 3, 1999 and January 2, 2000 6
Notes to Consolidated Financial Statements 8
</TABLE>
1
<PAGE>
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 2, 2000 and January 3, 1999,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended January 2, 2000.
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 auditing standards generally accepted
in the United States of America. 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 2, 2000 and January 3, 1999, and the results of their operations and
their cash flows for each of the three years in the period ended January 2, 2000
in conformity with accounting principles generally accepted in the United States
of America.
/s/ DELOITTE & TOUCHE LLP
San Antonio, Texas
February 1, 2000
2
<PAGE>
TACO CABANA, INC.
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 3, January 2,
ASSETS 1999 2000
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 719,000 $ 1,303,000
Receivables, net 438,000 507,000
Inventory 2,273,000 2,413,000
Prepaid expenses 3,128,000 3,237,000
Federal income taxes receivable 200,000 200,000
--------------- ----------------
Total current assets 6,758,000 7,660,000
PROPERTY AND EQUIPMENT, net 72,250,000 82,616,000
NOTES RECEIVABLE 258,000 278,000
INTANGIBLE ASSETS, net 10,724,000 10,139,000
OTHER ASSETS 212,000 312,000
--------------- ----------------
TOTAL ASSETS $ 90,202,000 $ 101,005,000
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,362,000 $ 4,962,000
Accrued liabilities 5,265,000 6,063,000
Current maturities of long-term debt and capital leases 5,704,000 5,251,000
Line of credit 3,550,000 1,000,000
--------------- ----------------
Total current liabilities 19,881,000 17,276,000
LONG-TERM OBLIGATIONS, net of current maturities:
Capital leases 2,140,000 1,901,000
Long-term debt 18,930,000 31,756,000
--------------- ----------------
Total long-term obligations 21,070,000 33,657,000
ACQUISITION AND CLOSED RESTAURANT LIABILITIES 7,713,000 6,330,000
DEFERRED LEASE PAYMENTS 761,000 744,000
STOCKHOLDERS' EQUITY:
Preferred stock, series A; $.01 par value, 100,000 shares authorized - -
Common stock; $.01 par value, 30,000,000 shares authorized -
15,907,937 and 13,435,575 shares issued at January 3, 1999
and January 2, 2000, respectively 159,000 134,000
Additional paid-in capital 98,056,000 84,731,000
Retained deficit (43,544,000) (30,427,000)
Treasury stock, at cost - 2,576,937 shares at January 3, 1999
and 1,354,600 shares at January 2, 2000 (13,894,000) (11,440,000)
---------------- -----------------
Total stockholders' equity 40,777,000 42,998,000
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 90,202,000 $ 101,005,000
=============== ================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
TACO CABANA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------------------
December 28, January 3, January 2,
1997 1999 2000
(52 Weeks) (53 Weeks) (52 Weeks)
REVENUES:
<S> <C> <C> <C>
Restaurant sales $ 131,857,000 $ 142,592,000 $ 159,241,000
Franchise fees and royalty income 346,000 358,000 359,000
--------------- --------------- ---------------
Total revenues 132,203,000 142,950,000 159,600,000
--------------- --------------- ---------------
COSTS AND EXPENSES:
Restaurant cost of sales 40,668,000 43,347,000 47,764,000
Labor 36,169,000 38,185,000 43,715,000
Occupancy 8,185,000 7,840,000 8,302,000
Other restaurant operating costs 25,418,000 24,739,000 26,790,000
General and administrative 6,964,000 7,829,000 7,907,000
Depreciation, amortization and restaurant
opening costs 9,659,000 7,990,000 9,581,000
Special charge (reversal) 78,738,000 (2,665,000) -
--------------- --------------- ---------------
Total costs and expenses 205,801,000 127,265,000 144,059,000
--------------- --------------- ---------------
INCOME (LOSS) FROM OPERATIONS (73,598,000) 15,685,000 15,541,000
INTEREST EXPENSE, NET (1,137,000) (1,951,000) (2,424,000)
--------------- --------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES (74,735,000) 13,734,000 13,117,000
BENEFIT FOR INCOME TAXES 1,537,000 - -
--------------- --------------- ---------------
NET INCOME (LOSS) $ (73,198,000) $ 13,734,000 $ 13,117,000
=============== =============== ===============
BASIC EARNINGS (LOSS) PER SHARE $ (4.78) $ 0.96 $ 0.99
=============== =============== ===============
DILUTED EARNINGS (LOSS) PER SHARE $ (4.78) $ 0.95 $ 0.97
================ =============== ===============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
TACO CABANA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
----------------- ------------------------ Additional Retained ----------------------------
Paid-in Earnings
Amount Shares Amount Capital (Deficit) Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 30, 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)
Options exercised - 104,575 1,000 543,000 - - -
Purchase of stock - - - - - 1,354,600 (11,440,000)
Retirement of treasury stock - (2,576,937) (26,000) (13,868,000) - (2,576,937) 13,894,000
Net income - - - - 13,117,000 - -
------------- ---------- -------- ---------- ----------- ---------- -----------
BALANCE, January 2, 2000 $ - 13,435,575 $134,000 $84,731,000 $(30,427,000) 1,354,600 $ (11,440,000)
============= ========== ======== =========== ============ ========== =============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
TACO CABANA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------------------
December 28, January 3, January 2,
1997 1999 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ (73,198,000) $ 13,734,000 $ 13,117,000
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 9,659,000 7,385,000 8,761,000
Deferred income taxes (1,818,000) - -
Special charge (reversal) 78,738,000 (2,665,000) -
Capitalized interest (147,000) (117,000) (151,000)
Deferred income and lease payments (157,000) 59,000 (17,000)
Decrease (increase) in assets:
Receivables 634,000 150,000 (89,000)
Inventory (656,000) (168,000) (140,000)
Prepaid expenses (1,018,000) (1,424,000) (109,000)
Federal income taxes receivable 163,000 - -
Other assets 58,000 21,000 (100,000)
(Decrease) increase in liabilities:
Accounts payable and accrued liabilities 2,328,000 (103,000) 398,000
Acquisition and closed restaurant liabilities (1,656,000) (1,194,000) (1,348,000)
--------------- --------------- ---------------
Net cash provided by operating activities 12,930,000 15,678,000 20,322,000
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (16,812,000) (21,259,000) (19,763,000)
Proceeds from sales of property and equipment 1,379,000 4,330,000 1,337,000
--------------- --------------- ---------------
Net cash used by investing activities (15,433,000) (16,929,000) (18,426,000)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt
and draws on line of credit 18,423,000 14,469,000 20,045,000
Principal payments under long-term debt and line of credit (11,074,000) (3,276,000) (10,246,000)
Principal payments under capital leases (1,694,000) (192,000) (215,000)
Purchase of treasury stock (3,561,000) (10,333,000) (11,440,000)
Exercise of stock options - 963,000 544,000
--------------- --------------- ---------------
Net cash (used) provided by financing activities 2,094,000 1,631,000 (1,312,000)
--------------- --------------- ----------------
NET (DECREASE) INCREASE IN CASH (409,000) 380,000 584,000
CASH AND CASH EQUIVALENTS, beginning of period 748,000 339,000 719,000
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 339,000 $ 719,000 $ 1,303,000
=============== =============== ===============
</TABLE>
(Continued)
6
<PAGE>
TACO CABANA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
SUMMARY OF NON-CASH TRANSACTIONS:
During 1999, assets having a net book value of $439,000 were disposed of and
charged to acquisition and closed restaurant liabilities.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------------
December 28, January 3, January 2,
1997 1999 2000
<S> <C> <C> <C>
Cash paid for interest, net of interest capitalized $ 1,171,000 $ 1,848,000 $ 2,092,000
Cash received for income taxes 4,000 9,000 -
Cash paid for income taxes 74,000 - 2,000
</TABLE>
See notes to consolidated financial statements. (Concluded)
7
<PAGE>
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 2, 2000, the Company owned and
operated a total of 109 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 1997, 1998 and 1999 were comprised of the 52 weeks ended December
28, 1997, the 53 weeks ended January 3, 1999 and the 52 weeks ended
January 2, 2000.
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.
8
<PAGE>
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 10 to 40 years. The trade
name and the rights to the Taco Cabana name are amortized using the
straight-line method over 40 years.
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. The Company has not
recognized any franchise fees in the fiscal years 1997, 1998 or 1999.
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 - Deferred income taxes are recognized by applying statutory
tax rates in effect at the balance sheet date to differences between the
financial statement basis and the tax basis of assets and liabilities. The
resulting deferred tax assets and liabilities are adjusted to reflect
changes in tax laws or rates at the time such changes occur. Deferred tax
assets are reported net of an allowance that management believes reduces
net deferred tax assets to the amount that is more likely than not
realizable.
Earnings (Loss) Per Share - Basic earnings per share is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding for the reporting period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. Outstanding stock options issued by the
Company represent the only dilutive effect reflected in diluted weighted
average shares.
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.
9
<PAGE>
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 1997
and 1998 consolidated financial statements to conform to the presentation
and classification used in fiscal 1998 and 1999.
2. SPECIAL CHARGE (REVERSAL)
During fiscal 1997 and 1998, the following special charge and reversal are
included in the Company's consolidated financial statements:
<TABLE>
<CAPTION>
December 28, January 3,
1997 1999
<S> <C> <C>
Special charge (reversal) $ 78,738,000 $ (2,665,000)
Pro forma income tax (benefit) provision (3,018,000) 986,000
Decrease (increase) on net income 75,720,000 (1,679,000)
Decrease (increase) per share $ 4.94 $ (0.12)
</TABLE>
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.
10
<PAGE>
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
2. SPECIAL CHARGE (REVERSAL) (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:
o 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;
11
<PAGE>
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
2. SPECIAL CHARGE (REVERSAL) (Continued)
o 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:
o $13.3 million for the carrying value of the assets, net of
estimated proceeds of $1.5 million for the sale of restaurant
properties;
o $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;
o $500,000 for severance and relocation benefits paid to employees
displaced by the restaurant closures;
o $500,000 for the probable settlement of a franchisee lawsuit
related to the Colorado market.
o 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.
3. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consisted of the following:
<TABLE>
<CAPTION>
January 3, January 2,
1999 2000
<S> <C> <C>
Trade receivables:
Royalties $ 97,000 $ 75,000
Other 365,000 505,000
Notes receivable - current portion 78,000 26,000
------------- -------------
Total 540,000 606,000
Less allowance for doubtful accounts (102,000) (99,000)
------------- -------------
Receivables, net $ 438,000 $ 507,000
============= =============
Notes receivable - noncurrent:
Franchisees $ 258,000 $ 278,000
============= =============
</TABLE>
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.
12
<PAGE>
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of the following:
<TABLE>
<CAPTION>
January 3, January 2,
1999 2000
<S> <C> <C>
Property and equipment:
Land $ 20,384,000 $ 21,635,000
Furniture, fixtures and equipment 48,245,000 56,416,000
Leasehold improvements 13,820,000 18,272,000
Buildings 17,322,000 21,355,000
Construction in progress 920,000 616,000
--------------- ---------------
100,691,000 118,294,000
Less accumulated depreciation and amortization (31,424,000) (39,007,000)
--------------- ---------------
Total 69,267,000 79,287,000
--------------- ---------------
Property and equipment held under capital leases:
Buildings 4,401,000 4,915,000
Less accumulated amortization (1,418,000) (1,586,000)
--------------- ---------------
Total 2,983,000 3,329,000
--------------- ---------------
Property and equipment, net $ 72,250,000 $ 82,616,000
=============== ===============
</TABLE>
At January 2, 2000, the Company had two properties held for sale. The
total carrying amount of these assets is $600,000, which management
estimates to be the net proceeds from the disposition of these assets. See
Note 2.
13
<PAGE>
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
5. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consisted of the following:
<TABLE>
<CAPTION>
January 3, January 2,
1999 2000
Intangible assets:
Goodwill $ 16,154,000 $ 16,154,000
Trade name 1,576,000 1,576,000
--------------- ---------------
17,730,000 17,730,000
Less accumulated amortization (7,006,000) (7,591,000)
--------------- ---------------
Intangible assets, net $ 10,724,000 $ 10,139,000
=============== ===============
Other assets:
Deposits $ 177,000 $ 184,000
Other 35,000 128,000
--------------- ---------------
Other assets $ 212,000 $ 312,000
=============== ===============
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<CAPTION>
January 3, January 2,
1999 2000
<S> <C> <C>
Payroll related $ 2,380,000 $ 2,807,000
Closed restaurant obligations 740,000 798,000
Property taxes 557,000 583,000
Restaurant expenses 433,000 472,000
Interest 36,000 306,000
Employee injury 271,000 297,000
Legal 168,000 157,000
Other 680,000 643,000
--------------- ---------------
Total $ 5,265,000 $ 6,063,000
=============== ===============
</TABLE>
14
<PAGE>
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 2, 2000
were as follows:
Years ending:
2000 $ 7,710,000
2001 7,879,000
2002 7,671,000
2003 7,587,000
2004 7,459,000
Thereafter 34,889,000
--------------
Total $ 73,195,000
==============
The total rental expense for operating leases was approximately $6.6
million for 1997, $6.2 million for 1998 and $6.7 million for 1999,
including additional rents of approximately $291,000, $185,000 and
$215,000 for 1997, 1998 and 1999, 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
$669,000 in 2000, and a total of $2.4 million in 2001 through 2004.
Thereafter, the total minimum lease payments are approximately $ 2.0
million. The Company assesses the probability of its having to assume
primary liability under these assignments on an annual basis.
15
<PAGE>
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 2, 2000 were:
Years ending:
2000 $ 445,000
2001 446,000
2002 446,000
2003 439,000
2004 368,000
Thereafter 846,000
--------------
Total minimum lease payments 2,990,000
Less amount representing interest at 9% to 13% 851,000
--------------
Net present value of minimum lease payments 2,139,000
Less current portion 238,000
--------------
Long-term portion of capital leases $ 1,901,000
==============
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 former employee of
the Company.
16
<PAGE>
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
8. LONG-TERM DEBT
Long-term debt consisted of the following notes payable:
<TABLE>
<CAPTION>
January 3, January 2,
1999 2000
<S> <C> <C>
Notes payable to a bank, bearing interest at the lessor of prime or LIBOR
plus 2.25% (8.25% at January 2, 2000), collateralized by certain
restaurant assets, due in installments of principal and
interest through December 2006 $ 23,054,000 $ 35,815,000
Note payable to a bank, bearing interest at prime (8.50% at January 2,
2000), unsecured, due in monthly installments of
principal and interest through April 2000 1,365,000 954,000
-------------- --------------
Total 24,419,000 36,769,000
Less current maturities 5,489,000 5,013,000
-------------- --------------
Long-term debt, net $ 18,930,000 $ 31,756,000
============== ==============
</TABLE>
The future minimum payments of long-term debt outstanding at January 2,
2000 were as follows:
Years ending:
2000 $ 5,013,000
2001 4,157,000
2002 4,519,000
2003 4,515,000
2004 11,000,000
Thereafter 7,565,000
--------------
Total $ 36,769,000
==============
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.
17
<PAGE>
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
9. LINE OF CREDIT
During 1999 the Company had in place two secured credit facilities
totaling $40 million, including a $5 million revolving line of credit. On
December 20, 1999 the credit facilities were amended and increased to a
total of $50 million. As part of the amendment, the commitments were
extended to December 31, 2001. Interest on funds borrowed under the
facilities 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 2,
2000, the Company was in compliance with all such covenants. At January 2,
2000, the Company had approximately $9.0 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 $1.2 million
and $1.0 million, at January 3, 1999 and January 2, 2000, respectively.
During 1998 and 1999, approximately $181,000 and $170,000, respectively,
of the balance was amortized in this manner.
Acquisition liabilities include 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
$261,000 and $175,000 at January 3, 1999 and January 2, 2000,
respectively. During 1998 and 1999, approximately $1.0 million and
$86,000, 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.
18
<PAGE>
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 $6.2 million and $5.5 million at January 3,
1999 and January 2, 2000, respectively. It is currently anticipated that
payments of approximately $800,000 will be made under lease and other
obligations during 2000. During 1998 and 1999, approximately $2.7 million
and $754,000, respectively, of this reserve was utilized in the closure of
restaurants. During 1998 and 1999, the Company received proceeds of
approximately $4.3 million and $1.3 million, respectively, 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:
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------------------
December 28, January 3, January 2,
1997 1999 2000
<S> <C> <C> <C>
Numerator for basic and diluted earnings
per share - net income (loss) $ (73,198,000) $ 13,734,000 $ 13,117,000
Denominator:
Denominator for basic earnings per
share - weighted-average shares 15,314,665 14,336,526 13,199,044
Effect of dilutive securities -
Employee stock options - 140,067 366,806
-------------- -------------- --------------
Denominator for diluted earnings per
share - adjusted weighted-average
and assumed conversions 15,314,665 14,476,593 13,565,850
============== ============== ==============
Basic earnings (loss) per share $ (4.78) $ 0.96 $ 0.99
============= ============== ==============
Diluted earnings (loss) per share $ (4.78) $ 0.95 $ 0.97
============= ============== ==============
</TABLE>
For additional disclosures regarding outstanding employee stock options,
see Note 12.
19
<PAGE>
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 2, 2000, there were no shares available for issuance. Options
outstanding are as follows:
<TABLE>
<CAPTION>
Weighted
Average
Total Options Exercise
Outstanding Price
<S> <C> <C>
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
Granted 218,908 8.75
Exercised (104,575) 5.20
Expired or canceled (39,675) 7.05
------------
Options outstanding, January 2, 2000 1,579,183 $ 6.17
============
Options exercisable, January 2, 2000 838,304 $ 5.82
============
</TABLE>
20
<PAGE>
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
12. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (Continued)
For the options outstanding at January 2, 2000, the weighted average
remaining life and exercise price of these outstanding options were 42
months and $6.12, respectively. In addition, the weighted average exercise
price of options granted during 1999 was $8.75.
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:
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------------------
December 28, January 3, January 2,
Pro Forma 1997 1999 2000
<S> <C> <C> <C>
Compensation expense $ 555,000 $ 329,000 $ 380,000
Net income (loss) (73,548,000) 13,405,000 12,737,000
Basic earnings (loss) per share $ (4.80) $ 0.94 $ 0.96
Diluted earnings (loss) per share $ (4.80) $ 0.93 $ 0.94
</TABLE>
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, 33.0% was used for options granted during 1998, and
26% was used for options granted during 1999. 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 1999. The Company's options have a
ten year life and vesting periods ranging from two to five years.
21
<PAGE>
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 2, 2000, there
were 12,080,975 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 2, 2000 there were no shares
outstanding.
Treasury Stock - The Company's Board of Directors previously authorized
the purchase in the open market of up to 4,500,000 shares of the Company's
outstanding common stock. Through the first quarter of 1999, the Company
had repurchased 2,585,000 shares with an aggregate cost of $13.9 million.
During the first quarter, the Company retired all shares held as treasury
shares. The cost of retired shares in excess of par value has been charged
to additional paid in capital. Subsequent to the first quarter, the
Company repurchased an additional 1,354,600 shares at an aggregate cost of
$11.4 million, which as of January 2, 2000 were held as treasury stock.
Subsequent to January 2, 2000, the Company purchased an additional 510,400
shares of the Company's common stock at an average price of $6.93.
22
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------------
December 28, January 3, January 2,
1997 1999 2000
<S> <C> <C> <C>
Federal income tax at statutory rate $ (25,410,000) $ 4,670,000 $ 4,460,000
State income taxes 48,000 - -
Goodwill and other 4,819,000 (15,000) (339,000)
Change in valuation allowance 19,006,000 (4,655,000) (4,121,000)
-------------- -------------- --------------
Total $ (1,537,000) $ - $ -
============== ============== =============
The provision (benefit) for income taxes is comprised of the following:
<CAPTION>
Year Ended
----------------------------------------------------------
December 28, January 3, January 2,
1997 1999 2000
<S> <C> <C> <C>
Current $ 281,000 $ - $ -
Deferred (1,818,000) - -
-------------- -------------- -------------
Total $ (1,537,000) $ - $ -
=============== ============== =============
</TABLE>
23
<PAGE>
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
13. INCOME TAXES (Continued)
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:
<TABLE>
<CAPTION>
January 3, January 2,
1999 2000
Current:
<S> <C> <C>
Deferred Federal Tax Assets:
Workmen's compensation claims $ 337,000 $ 101,000
Accounts receivable 35,000 34,000
Accrued vacation 21,000 30,000
-------------- --------------
Net Current Deferred Tax Asset $ 393,000 $ 165,000
============== ==============
Noncurrent:
Deferred Federal Tax Assets:
Net operating loss carryforward $ 6,955,000 $ 4,672,000
General business tax credit carryforward 590,000 655,000
Closed stores and lease liabilities 1,400,000 2,435,000
Alternative minimum tax credit carryforward 1,277,000 997,000
Deferred rent 2,416,000 766,000
Other - Special charge 378,000 266,000
Charitable Contributions 51,000 149,000
Intangible Assets 1,857,000 1,591,000
Other - 159,000
-------------- --------------
Total 14,924,000 11,690,000
-------------- --------------
Deferred Federal Tax Liabilities:
Fixed assets (966,000) (1,625,000)
-------------- --------------
Total (966,000) (1,625,000)
-------------- --------------
Net Noncurrent Deferred Tax Asset 13,958,000 10,065,000
-------------- --------------
Net Deferred Tax Asset before valuation allowance 14,351,000 10,230,000
Valuation Allowance (14,351,000) (10,230,000)
-------------- --------------
Net Deferred Tax Asset $ - $ -
============== ==============
</TABLE>
24
<PAGE>
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
13. INCOME TAXES (Continued)
At January 2, 2000, the Company had net operating loss, alternative
minimum tax and general business tax credit carry-overs of approximately
$13.7 million, $997,000 and $655,000, respectively. A portion of the above
carry-overs resulted from a prior acquisition; the Company was allowed to
utilize the net operating loss of $5.4 million and tax credit carry-overs
of $178,000 that existed at the date of acquisition. However, 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 a prior acquisition 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
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.
25
<PAGE>
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
15. QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------
March 29, June 28, September 27, January 3,
1998 1998 1998 1999 (1)
<S> <C> <C> <C> <C>
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
<CAPTION>
Quarter Ended
---------------------------------------------------------------------
April 4, July 4, October 3, January 2,
1999 1999 1999 2000
Total revenues $ 36,910,000 $ 41,417,000 $ 41,449,000 $39,824,000
Gross profit 25,983,000 28,908,000 28,910,000 28,035,000
Net income applicable to
common stock 2,764,000 3,857,000 3,655,000 2,840,000
Basic earnings per share $ 0.21 $ 0.29 $ 0.27 $ 0.22
Diluted earnings per share $ 0.20 $ 0.28 $ 0.27 $ 0.22
</TABLE>
(1) See Note 2 for discussion of the special charge reversal recorded in this
quarter.
26
