EL CHICO RESTAURANTS INC, PRER14A, 1997-11-24

EL CHICO RESTAURANTS INC
PRER14A, 1997-11-24
EATING PLACES

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<PAGE> 1
SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934

Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]

Check the appropriate box:

[x] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a- 6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12

EL CHICO RESTAURANTS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

N/A
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)

Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[x] Fee computed below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1) Title of each class of securities to which transaction applies: Common
Stock, $.10 par value, of El Chico Restaurants, Inc.
- --------------------------------------------------------------------------------

(2) Aggregate number of securities to which transaction applies: 3,717,135

- --------------------------------------------------------------------------------

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): $12.75;
Cash Merger Consideration
- --------------------------------------------------------------------------------

(4) Proposed maximum aggregate value of transaction: $49,363,873

- --------------------------------------------------------------------------------

(5) Total fee paid: $9,877.09
- --------------------------------------------------------------------------------

[x] Fee paid previously by written preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid: $9,877.09

- --------------------------------------------------------------------------------

(2) Form, Schedule or Registration Statement No.: Schedule 14A
- --------------------------------------------------------------------------------

(3) Filing Party: Registrant
- --------------------------------------------------------------------------------

(4) Date Filed: November 24, 1997

- --------------------------------------------------------------------------------
<PAGE> 2
EL CHICO RESTAURANTS, INC.
12200 STEMMONS FREEWAY, SUITE 100
DALLAS, TEXAS 75234

November 28, 1997

To our Shareholders:

You are cordially invited to attend a Special Meeting of Shareholders
(the "Special Meeting") of El Chico Restaurants, Inc. (the "Company") to be
held at 10:00 a.m., local time, on December 30, 1997 at The Texas Commerce Bank
Tower, 2200 Ross Avenue, 7th Floor, Dallas, Texas.

At the Special Meeting, you will be asked to consider and vote upon a
proposal to adopt the Agreement and Plan of Merger dated as of September 23,
1997, as amended (as so amended, the "Merger Agreement") and to approve the
merger of El Chico Acquisition, Inc., a Texas corporation and a wholly owned
subsidiary of El Chico Holding Company, L.P., a Texas limited partnership
("Purchaser") with and into the Company (the "Merger") as contemplated by the
Merger Agreement. Subject to the terms and conditions of the Merger Agreement,
at the effective time of the Merger (the "Effective Time") each share of common
stock, par value $.10 per share, of the Company ("Company Common Stock")
outstanding immediately prior to the Effective Time (other than shares held in
treasury by the Company or owned by Purchaser, or any subsidiary of the Company
or Purchaser, and shares held by shareholders of the Company who have validly
exercised and perfected appraisal rights under Texas law) will be converted
into the right to receive $12.75 in cash. Please note that for federal income
tax purposes, an individual holder of shares of Company Common Stock who
exchanges such shares for cash pursuant to the Merger or who receives cash in
exchange for such shares pursuant to the exercise of appraisal rights will be
treated as having sold his or her shares of Company Common Stock for cash in a
taxable transaction. See "Certain Federal Income Tax Consequences" in the
Proxy Statement.

In connection with the Merger, holders of shares of Company Common
Stock who comply with certain requirements and procedures set forth in Articles
5.11, 5.12 and 5.13 of the Texas Business Corporation Act (the "TBCA") may be
entitled to seek an appraisal of their shares and to obtain the "fair value" of
their shares. To exercise appraisal rights, holders of shares of Company
Common Stock must comply strictly with the procedural requirements of Articles
5.11, 5.12 and 5.13 of the TBCA, a description of which is set forth under "The
Merger--Rights of Dissenting Shareholders," in the Proxy Statement and the full
text of which is included as Appendix C to the Proxy Statement.

The Board of Directors of the Company (the "Board") has carefully
reviewed and considered the terms and conditions of the proposed Merger and the
other factors described in the attached Proxy Statement (the "Proxy Statement")
under "The Merger--The Company's Reasons for the Merger; Recommendation of the
Board of Directors." As more fully set forth in such description of factors
considered by the Board, the Board requested and received a written opinion
dated as of September 22, 1997 from NationsBanc Montgomery Securities, Inc.
("Montgomery"), the Company's financial advisor, with respect to the fairness
from a financial point of view (as of such date) of the consideration to be
received by the holders of shares of Company Common Stock pursuant to the
Merger. The full text of the Montgomery opinion is included as Appendix B to
the Proxy Statement. Several other important factors were considered by the
Board, along with the opinion of Montgomery, and these are more fully described
in the Proxy Statement under "The Merger--Opinion of Financial Advisor to the
Company" and "The Merger--The Company's Reasons for the Merger; Recommendation
of the Board of Directors." You are urged to read, understand and consider
the discussions of all of these factors in the Proxy Statement in connection
with your analysis of whether to vote for or against the Merger.

On June 17, 1997, the Board unanimously appointed a Special Committee
of three directors who were not members of management or franchisees of the
Company to evaluate, and make recommendations to the Board with respect to,
any and all strategic alternatives or other options for the enhancement of
shareholder value and to take steps it considered appropriate to maximize that
value. As directors, each member of the Special Committee will receive the
same cash consideration, $12.75 per share, as all other shareholders for each
share of Company Common Stock owned. Additionally, each director will receive
cash consideration for his unexercised stock options equal to the difference
between $12.75 and the exercise price of such stock options times the number of
shares granted under the options. See "Summary--Conflicts of Interest" in the
Proxy Statement.

<PAGE> 3

FOR THE REASONS SET FORTH IN THE PROXY STATEMENT, THE BOARD BELIEVES
THAT THE MERGER IS FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY AND ITS
SHAREHOLDERS, AND RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" ADOPTION OF THE
MERGER AGREEMENT AND APPROVAL OF THE MERGER. PLEASE NOTE THAT CERTAIN MEMBERS
OF THE BOARD HAVE CONFLICTS OF INTEREST WITH THIS RECOMMENDATION AND WITH THE
MERGER AS DESCRIBED MORE FULLY IN THE ATTACHED PROXY STATEMENT UNDER
"SUMMARY--CONFLICTS OF INTEREST."

Details of the proposed Merger and other material information are
included in the Proxy Statement. Please review the Proxy Statement carefully.
The affirmative vote of the holders of at least two-thirds of the outstanding
shares of Company Common Stock is required to adopt the Merger Agreement and
approve the Merger, SO FAILURE TO VOTE WILL HAVE THE SAME EFFECT AS A VOTE
AGAINST THE MERGER AGREEMENT AND THE MERGER. ACCORDINGLY, WE URGE YOU TO
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY OR VOTING INSTRUCTION CARD AND
RETURN IT IN THE ENCLOSED RETURN ENVELOPE, whether or not you plan to attend
the Special Meeting. Your vote is important regardless of the number of shares
you own.

If you have any questions prior to the Special Meeting or need further
assistance, please call the undersigned at (972) 241-5500.

Sincerely,

/s/ Wallace A. Jones
-------------------------------------
Wallace A. Jones
President and Chief Executive Officer
<PAGE> 4
EL CHICO RESTAURANTS, INC.
12200 STEMMONS FREEWAY, SUITE 100
DALLAS, TEXAS 75234

-------------------------

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 30, 1997

-------------------------

To the Shareholders of El Chico Restaurants, Inc.:

A Special Meeting of Shareholders (the "Special Meeting") of El Chico
Restaurants, Inc., a Texas corporation (the "Company"), will be held on
December 30, 1997 at 10:00 a.m., local time, at the Texas Commerce Bank Tower,
2200 Ross Avenue, 7th Floor, Dallas, Texas, for the following purposes:

1. To consider and vote upon a proposal to (a) adopt the
Agreement and Plan of Merger, dated as of September 23, 1997, as
amended (as so amended, the "Merger Agreement"), by and among El Chico
Holding Company, L.P., a Texas limited partnership ("Purchaser"), El
Chico Acquisition, Inc., a Texas corporation and a wholly owned
subsidiary of Purchaser ("Sub"), and the Company, and (b) approve the
merger of Sub with and into the Company (the "Merger") as contemplated
by the Merger Agreement. Subject to the terms and conditions of the
Merger Agreement, at the effective time of the Merger (the "Effective
Time") each share of common stock, par value $.10 per share, of the
Company ("Company Common Stock") outstanding immediately prior to the
Effective Time (other than shares held in treasury by the Company or
owned by Purchaser, or any subsidiary of the Company or Purchaser, and
shares held by shareholders of the Company who have validly exercised
and perfected appraisal rights under Texas law) will be converted into
the right to receive $12.75 in cash. For federal income tax purposes,
an individual holder of shares of Company Common Stock who exchanges
such shares for cash pursuant to the Merger or who receives cash in
exchange for such shares pursuant to the exercise of appraised rights
will be treated as having sold his or her shares of Company Common
Stock for cash in a taxable transaction. See "Certain Federal Income
Tax Consequences" in the Proxy Statement. Upon completion of the
Merger, the Company will be a wholly owned subsidiary of Purchaser,
all as more fully set forth in the attached Proxy Statement (the
"Proxy Statement") and in the Merger Agreement, a copy of which is
included as Appendix A thereto; and

2. To transact such other business as may properly come
before the Special Meeting or any adjournment thereof.

The Board of Directors has fixed the close of business on November 24,
1997, as the record date (the "Record Date") for the determination of
shareholders entitled to notice of, and to vote at, the Special Meeting or any
adjournment thereof. Only holders of record of shares of Company Common Stock
at the close of business on the Record Date are entitled to notice of, and to
vote at, the Special Meeting.

YOUR VOTE IS IMPORTANT. THE AFFIRMATIVE VOTE OF AT LEAST TWO-THIRDS
OF THE HOLDERS OF THE OUTSTANDING SHARES OF COMPANY COMMON STOCK IS REQUIRED
FOR ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER. EVEN IF YOU
PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, WE REQUEST THAT YOU SIGN AND
RETURN THE ENCLOSED PROXY OR VOTING INSTRUCTION CARD AND THUS ENSURE THAT YOUR
SHARES WILL BE REPRESENTED AT THE SPECIAL MEETING IF YOU ARE UNABLE TO ATTEND.
IF YOU DO ATTEND THE SPECIAL MEETING AND WISH TO VOTE IN PERSON, YOU MAY
WITHDRAW YOUR PROXY AND VOTE IN PERSON.
<PAGE> 5
PLEASE DO NOT SEND ANY CERTIFICATES REPRESENTING YOUR SHARES OF
COMPANY COMMON STOCK AT THIS TIME. You will receive instructions regarding the
surrender of your share certificate(s) and receive payment for your shares of
Company Common Stock after the Effective Time.

By Order of the Board of Directors

Susan R. Holland
Secretary

Dallas, Texas

November 28, 1997

<PAGE> 6
EL CHICO RESTAURANTS, INC.
12200 STEMMONS FREEWAY, SUITE 100
DALLAS, TEXAS 75234

---------------

PROXY STATEMENT

SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 30, 1997

---------------

This Proxy Statement relates to the proposed merger of El Chico
Acquisition, Inc., a Texas corporation and wholly owned subsidiary ("Sub") of
El Chico Holding Company, L.P., a Texas limited partnership ("Purchaser"), with
and into El Chico Restaurants, Inc., a Texas corporation (the "Company"),
pursuant to the Agreement and Plan of Merger dated as of September 23, 1997, by
and among Purchaser, Sub and the Company, as amended by the First Amendment to
the Agreement and Plan of Merger, dated as of October 23, 1997, by and among
Purchaser, Sub and the Company and the Second Amendment to the Agreement and
Plan of Merger, dated as of October 31, 1997, by and among Purchaser, Sub and
the Company (as so amended, the "Merger Agreement"). The merger contemplated
by the Merger Agreement is referred to herein as the "Merger."

Subject to the terms and conditions of the Merger Agreement, at the
effective time of the Merger (the "Effective Time"), (i) each share of common
stock, par value $.10 per share, of the Company's outstanding common stock
("Company Common Stock") immediately prior to the Effective Time (other than
shares held in treasury by the Company or owned by Purchaser, or any subsidiary
of the Company or Purchaser (a "Subsidiary"), and shares held by shareholders
of the Company who have validly exercised and perfected appraisal rights under
Texas law) will be converted into the right to receive $12.75 in cash, (ii) Sub
will be merged with and into the Company, and (iii) the Company will become a
wholly owned subsidiary of Purchaser.

This Proxy Statement is being furnished to holders of shares of
Company Common Stock in connection with the solicitation of proxies by the
Board of Directors of the Company (the "Board") for use at a special meeting of
shareholders of the Company (the "Special Meeting") to be held on December 30,
1997. This Proxy Statement and the accompanying forms of proxy are first being
mailed to shareholders of the Company on or about November 28, 1997.

At the Special Meeting, holders of shares of Company Common Stock will
be asked to adopt the Merger Agreement and approve the Merger. THE BOARD HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE MERGER AND UNANIMOUSLY
RECOMMENDS THAT YOU VOTE "FOR" THE ADOPTION OF THE MERGER AGREEMENT AND
APPROVAL OF THE MERGER. CERTAIN MEMBERS OF THE BOARD HAVE CONFLICTS OF
INTEREST WITH SUCH RECOMMENDATION AND WITH THE MERGER AS DESCRIBED MORE FULLY
IN "Summary--Conflicts of Interest."

NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN
CONNECTION WITH THE SOLICITATION OF PROXIES MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON.

THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") NOR HAS THE COMMISSION
PASSED UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR
ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO
THE CONTRARY IS UNLAWFUL.
<PAGE> 7
TABLE OF CONTENTS

<TABLE>
<S> <C>
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Merger and the Merger Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Terms of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Rights of Dissenting Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Market Price Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Dividend Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Company's Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
New Restaurant Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Governmental Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

MARKET FOR COMPANY COMMON STOCK AND RELATED SHAREHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . 13
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Comparative Performance Nine Months Ended September 30, 1997 vs. Nine Months Ended
September 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Consolidated Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Comparative Performance 1996 vs. 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Comparative Performance 1995 vs. 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Accounting Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

THE SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Date, Time and Place . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Purposes of the Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Record Date and Outstanding Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Voting and Revocation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
General Description of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
The Company's Reasons for the Merger; Recommendation of the Board of Directors . . . . . . . . . . . . . . . . 22
Opinion of Financial Advisor to the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Existing Relationships with Purchaser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Rights of Dissenting Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
</TABLE>

<PAGE> 8

<TABLE>
<S> <C>
CERTAIN TERMS OF THE MERGER AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Effective Time of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Manner and Basis of Converting Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Conditions to the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Certain Covenants; Conduct of Business Prior to the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Certain Post-Merger Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Termination or Amendment of the Merger Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Expenses and Termination Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

SHAREHOLDER PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1

APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1

APPENDIX B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1

APPENDIX C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-2
</TABLE>

ii
<PAGE> 9
SUMMARY

The following is a summary of certain information contained elsewhere in
this Proxy Statement. Reference is made to, and this summary is qualified in
its entirety by, the more detailed information contained in or incorporated by
reference in this Proxy Statement and the appendices hereto. Shareholders of
the Company are urged to read carefully this Proxy Statement and the appendices
hereto in their entirety. As used in this Proxy Statement, unless otherwise
required by the context, the term "Purchaser" means El Chico Holding Company,
L.P. and its Subsidiaries, the term "Sub" means El Chico Acquisition, Inc. and
its Subsidiaries and the term "Company" means El Chico Restaurants, Inc. and
its Subsidiaries. Capitalized terms used herein without definition are, unless
otherwise indicated, defined in the Merger Agreement and used herein with such
meanings.

THE SPECIAL MEETING

Date, Time and Place. The Special Meeting will be held on December 30,
1997 at The Texas Commerce Bank Tower, 2200 Ross Avenue, 7th Floor, Dallas,
Texas 75201, commencing at 10:00 a.m. local time.

Purposes of the Special Meeting. At the Special Meeting, the Company's
shareholders will consider and vote upon a proposal to adopt the Merger
Agreement and approve the Merger. The Company's shareholders will also
consider and vote upon such other matters as may properly come before the
Special Meeting.

Record Date; Shares Entitled to Vote. Only holders of record of shares of
Company Common Stock at the close of business on November 24, 1997 (the "Record
Date") are entitled to notice of and to vote at the Special Meeting. On such
date, there were 3,717,135 shares of Company Common Stock outstanding, each of
which is entitled to one vote on each matter to be acted upon at the Special
Meeting.

Quorum; Vote Required. The presence, in person or by proxy, at the Special
Meeting of the holders of a majority of shares of Company Common Stock
outstanding and entitled to vote at the Special Meeting is necessary to
constitute a quorum at the Special Meeting. The affirmative vote of at least
two-thirds of the holders of shares of Company Common Stock outstanding and
entitled to vote thereon at the Special Meeting is required under the Texas
Business Corporation Act (the "TBCA") to adopt the Merger Agreement and to
approve the Merger. ABSTENTIONS AND BROKER NON-VOTES WILL HAVE THE SAME EFFECT
AS A VOTE AGAINST ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER.

Security Ownership of Management. As of the Record Date, the directors and
executive officers of the Company and their affiliates owned 58,104 shares of
Company Common Stock, or approximately 1.6% of the shares entitled to vote at
the Special Meeting (which does not include 592,500 shares of Company Common
Stock subject to vested options or options that will vest as a result of the
Merger).

THE PARTIES

The Company

El Chico Restaurants, Inc. was incorporated in Texas in 1957 as a successor
to a restaurant business operated since 1940. The Company's primary business
is operating and franchising full-service, family-style restaurants under the
name "El Chico" that offer moderately priced, high quality, Mexican-style
cuisine and alcoholic beverages. As of September 30, 1997, a total of 96
restaurants were in operation in Alabama, Arkansas, Florida, Georgia, Indiana,
Kansas, Kentucky, Louisiana, Mississippi, Missouri, Oklahoma, South Carolina,
Tennessee, and Texas, of which 68 were Company-operated and 28 were franchised.
Included in the 68 Company-owned restaurants were one restaurant under the name
"Casa Rosa Restaurante", and two restaurants under the name "Cantina Laredo."
During the nine months ended September 30, 1997, the Company opened one
Company-owned El Chico restaurant. No other restaurants, Company-operated or
franchised, were opened or closed during that same period. Subsequent to
September 30, 1997, two Company-operated restaurants were closed, one in
Oklahoma and one in Georgia. One franchised restaurant was closed in Kansas.
The Company also is engaged in designing and supplying food-service equipment
through Pronto Design & Supply, Inc., a Subsidiary of the Company ("Pronto").

<PAGE> 10

Purchaser

Purchaser filed its Certificate of Limited Partnership with the Secretary
of State of Texas on September 17, 1997 and was organized on September 23, 1997
for the purposes of consummating the Merger and holding the outstanding
securities of the Company after the Merger. Purchaser's principal address is
5956 Sherry Lane, Suite 1450, Dallas, Texas 75225. Substantially all of the
assets of Purchaser shall be expended to consummate the Merger. The sole and
managing general partner of Purchaser is Cracken, Harkey, Street & Co., L.L.C.
a Texas limited liability company ("CHC"). John R. W. Cracken, John D. Harkey,
Jr. and E. Gene Street each beneficially own equity interests in both Purchaser
and CHC, and CHC may pursue additional equity investors.

Sub

Sub was incorporated under the laws of the State of Texas on September 17,
1997, for the purpose of consummating the Merger. Sub's principal address is
5956 Sherry Lane, Suite 1450, Dallas, Texas 75225. The assets of Sub consist
of $1,000 of paid-in capital.

CONFLICTS OF INTEREST

After the Merger it is anticipated that the executive officers of the
Company will continue their employment with the surviving corporation in their
present positions. Purchaser has entered into discussions with each of the
executive officers regarding employment agreements. It is presently
anticipated that Mr. Wallace A. Jones' employment terms could include an
increase of approximately $50,000 in his base salary, as well as opportunities
for equity participation in the surviving corporation. It also is anticipated
that Mr. Charles A. Cooper's employment terms could include an increase in his
base salary of approximately $10,000. Mr. Wallace A. Jones and Mr. Lawrence E.
White are employed by the Company under existing employment agreements, and the
remaining executive officers are beneficiaries of a severance plan that will be
invoked should their employment be terminated following the Merger.

Wallace A. Jones, President and Chief Executive Officer of the Company,
entered into an Employment Agreement with the Company effective November 28,
1994, as amended on August 7, 1997. The term of Mr. Jones' agreement
terminates on November 28, 1998, unless earlier terminated as provided by the
agreement. Pursuant to the agreement, in the event Mr. Jones' employment with
the Company is terminated on or within three years after the date of the
Merger Agreement, whether such termination is by the Company or Mr. Jones, but
not if the Company terminates Mr. Jones due to the fact that he has reached the
age of 65, for cause or due to his death, then within five days after the date
of such termination, the Company shall pay to Mr. Jones a lump sum amount equal
to two times Mr. Jones' annualized includable compensation from the Company
during the period consisting of the five full taxable years of Mr. Jones ending
immediately prior to the year in which such transaction occurred, or such
shorter period he was employed by the Company.

Lawrence E. White, the Executive Vice President and Chief Financial Officer
of the Company, entered into an Employment Agreement with the Company on August
7, 1997. The terms of Mr. White's agreement commenced as of January 1, 1997
and terminate on November 28, 1998, unless earlier terminated as provided by
the agreement. Pursuant to the agreement, in the event Mr. White's employment
with the Company is terminated on or within three years after the date of the
Merger Agreement, whether such termination is by the Company or Mr. White, but
not if the Company terminates Mr. White due to the fact that he has reached the
age of 65, for cause or due to his death, then within five days after the date
of such termination, the Company shall pay to Mr. White a lump sum amount equal
to two times Mr. White's annualized includable compensation from the Company
during the period consisting of the five full taxable years of Mr. White ending
immediately prior to the year in which such transaction occurred.

The members of the Board, with the exception of Mr. Jones, will cease to
serve as directors following the Merger. All directors and executive officers
of the Company will receive the same cash consideration, $12.75 per share, as
all other shareholders (including shareholders who own 5% or more of the
Company Common Stock) for each share of Company

2
<PAGE> 11

Common Stock owned. Additionally, each director and executive officer will
receive cash compensation for all of their unexercised stock options equal to
the difference between $12.75 and the exercise price of such stock options times
the number of shares granted under the options. The following table describes
the number of options held by each director and executive officer and the
amount that such director or officer will receive in exchange for his or her
options as a result of the Merger:

<TABLE>
<CAPTION>
Number of Exercise Amount
Name Position with the Company Options Price Received
<S> <C> <C> <C> <C>
Wallace A. Jones President and Chief Executive 250,000 $ 12.125 $156,250
Officer

Lawrence E. White Executive Vice President and Chief 50,000 $ 9.5625 $228,125
Financial Officer 25,000 $ 10.00

Charles A. Cooper Senior Vice President of 25,000 $ 9.625 $226,563
Development and Franchising 25,000 $ 9.5625
25,000 $ 10.00

Susan R. Holland Vice President, Treasurer, 25,000 $ 9.625 $157,813
Controller and Corporate Secretary 25,000 $ 9.5625

Mark P. Lamm Vice President of Operations 25,000 $ 9.625 $130,750
5,000 $ 10.00
2,250 $ 8.00
10,250 $ 10.00

Joseph S. Thompson Chairman of the Board of the 15,000 $ 11.00 $ 64,063
Company 5,000 $ 7.9375
2,500 $ 7.25

Jack D. Knox Director 15,000 $ 11.00 $159,963
5,000 $ 7.9375
2,500 $ 7.25
10,000 $ 3.16

Joseph V. Mariner, Director 15,000 $ 11.00 $ 64,063
Jr. 5,000 $ 7.9375
2,500 $ 7.25

Grahame N. Clark, Director 15,000 $ 11.00 $ 64,063
Jr. 5,000 $ 7.9375
2,500 $ 7.25
</TABLE>

See "Certain Terms of the Merger Agreement--Stock Options." In considering the
recommendation of the Board with respect to the Merger, the Company's
shareholders should be aware that the Merger Agreement contains certain
provisions with respect to indemnification of the Company's directors and
officers. See "Certain Terms of the Merger Agreement-- Indemnification."

THE MERGER AND THE MERGER AGREEMENT

Terms of the Merger. At the Effective Time, Sub will merge with and into
the Company, with the Company being the surviving corporation and becoming a
wholly owned subsidiary of Purchaser. Subject to the terms and conditions of

3
<PAGE> 12
the Merger Agreement, at the Effective Time, each share of Company Common Stock
outstanding at the Effective Time will be converted into the right to receive
$12.75 in cash.

Recommendation of the Board of Directors. THE BOARD HAS UNANIMOUSLY
DETERMINED THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, THE
SHAREHOLDERS OF THE COMPANY AND RECOMMENDS THAT THE SHAREHOLDERS OF THE COMPANY
ADOPT THE MERGER AGREEMENT AND APPROVE THE MERGER. See "The
Merger--Background" and "--The Company's Reasons for the Merger; Recommendation
of the Board of Directors." In considering the recommendation of the Board with
respect to the Merger, the Company's shareholders should consider the
information set forth in "Summary--Conflicts of Interest."

Opinion of Financial Advisor to the Company. NationsBanc Montgomery
Securities, Inc. ("Montgomery") was retained by the Company to render an
opinion to the Board with respect to the fairness, from a financial point of
view, to the holders of shares of Company Common Stock of the consideration to
be received by such holders in connection with the Merger. The full text of
the written opinion of Montgomery, dated as of September 22, 1997, which sets
forth the assumptions made, matters considered and limitations on the review
undertaken is attached as Appendix B to this Proxy Statement and should be read
carefully in its entirety. Montgomery's opinion is directed only to the
fairness from a financial point of view of the consideration to be received by
holders of shares of Company Common Stock pursuant to the Merger, does not
address any other aspect of the Merger or related transactions and does not
constitute a recommendation to any shareholder as to how such shareholder
should vote at the Special Meeting. See "The Merger--Opinion of Financial
Advisor to the Company."

TERMS OF THE MERGER

Effective Time of the Merger. The Merger will become effective upon the
filing of Articles of Merger with the Secretary of State of the State of Texas.
Assuming all conditions to the Merger contained in the Merger Agreement are
satisfied or, to the extent susceptible to waiver, waived prior thereto, it is
anticipated that the Effective Time of the Merger will occur as soon as
practicable following the Special Meeting.

Certain Conditions to the Consummation of the Merger. The obligations of
Purchaser, Sub and the Company to consummate the Merger are subject to the
satisfaction of certain conditions including the following: (i) adoption of the
Merger Agreement and approval of the Merger by the shareholders of the Company;
(ii) the absence of any suit, action, or other proceeding or order by any
Governmental Authority making the Merger illegal or otherwise prohibiting
consummation of the Merger; (iii) the absence of certain regulatory conditions;
and (iv) the receipt of all Company Required Statutory Approvals and Purchaser
Required Statutory Approvals. In addition, the obligations of each of
Purchaser, Sub and the Company are subject to the accuracy of the
representations and warranties of the other parties and to compliance with all
agreements and covenants on the part of the other parties contained in the
Merger Agreement. Each of Purchaser, Sub or the Company may extend the time
for performance of any of the obligations of the other parties or waive
compliance with those obligations at its discretion. See "Certain Terms of the
Merger Agreement--Conditions to the Merger."

Governmental Approvals. With respect to the Merger, no filing or
notification is required with the Federal Trade Commission or the Antitrust
Division of the Department of Justice under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.

Stock Options. At the Effective Time, each holder of a then outstanding
option to purchase shares under any of the Company's stock option plans or
arrangements (collectively, the "Stock Option Plans"), whether or not then
exercisable or vested (collectively, the "Options"), shall, in cancellation and
settlement thereof, receive for each share subject to such Option an amount
(subject to any applicable withholding tax) equal to the difference between
$12.75 and the per share exercise price of such Option to the extent such
difference is a positive number (such amount being hereinafter referred to as,
the "Option Consideration"). As of the date hereof, 763,225 Options were
outstanding, having an aggregate Option Consideration of approximately $2.0
million. The Company shall take such actions as are appropriate to provide
that, at the Effective Time (i) all Options then outstanding under any of the
Stock Option Plans, whether or not

4
<PAGE> 13

then exercisable or vested, shall become fully exercisable and vested; (ii)
each Option then outstanding under any of the Stock Option Plans shall be
canceled and (iii) in consideration of such cancellation and in full
satisfaction of all rights of the holder under such Option, each such Option
shall be converted into an amount in cash in respect thereof equal to the
Option Consideration. Further, the Company will take such action as may be
necessary so that from and after the date of the Merger Agreement, no further
grants of stock, options, or other rights will be made under any of the Stock
Option Plans. See "Certain Terms of the Merger Agreement--Stock Options."

No Solicitation. The Merger Agreement provides that the Company will, and
will cause its Subsidiaries not to, permit any of its representatives to, and
will use its best efforts to cause such persons not to, directly or indirectly,
initiate, solicit or encourage, or take any action to facilitate the making of
any offer or proposal that constitutes or is reasonably likely to lead to any
Takeover Proposal (as defined below) with respect to the Company, or, in the
event of any unsolicited Takeover Proposal with respect to the Company, engage
in negotiations or provide any confidential information or data to any person
relating to any Takeover Proposal with respect to the Company. The Merger
Agreement further provides that the Company will notify Purchaser orally and in
writing of any such inquiries, offers or Takeover Proposals (including, without
limitation, the terms and conditions of any such proposal and the identity of
the person making it) within 48 hours of the receipt thereof, and that the
Company will immediately cease and cause to be terminated all discussions and
negotiations, if any, with any other persons conducted prior to the date of the
Merger Agreement with respect to any Takeover Proposal regarding the Company.
Notwithstanding anything stated above to the contrary, the Merger Agreement
provides that: (i) the Company may, prior to the vote of the shareholders of
the Company for approval of the Merger (and not thereafter if the Merger is
approved thereby) in response to an unsolicited request therefor, furnish
information, including non-public information, to any person or "group" (within
the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) pursuant to a confidentiality agreement on
substantially the same terms as provided in the Company Confidentiality
Agreement to the extent that the Board determines in good faith after
consultation with and based on the advice of outside counsel that such action
could reasonably be required by their fiduciary duties under applicable law;
and (ii) the Company may engage in discussions and negotiations (but may not
enter into any binding agreement regarding a Takeover Proposal other than the
confidentiality agreement referenced above) with any person or group that has
made an unsolicited Takeover Proposal, among other things, to determine whether
such proposal (as opposed to any further negotiated proposal) is a Superior
Takeover Proposal (as defined below) and the Company may take and disclose to
its shareholders a position contemplated by Rule 14e-2(a) following the
Company's receipt of a Takeover Proposal that is in the form of a tender offer
under Section 14(e) of the Exchange Act. A "Takeover Proposal" means any
tender or exchange offer, proposal for merger, consolidation or other business
combination involving the Company or any of its material Subsidiaries; any
proposal to acquire, directly or indirectly, for consideration consisting of
cash, securities or a combination thereof, all of the common stock of the
Company then outstanding in a transaction or a series of transactions; or any
proposal to acquire all or substantially all of the assets of the Company;
provided, however, that a "Takeover Proposal" shall not mean the Merger or any
alternative transactions between the Company and Purchaser that may be proposed
pursuant to the Merger Agreement. See "Certain Terms of the Merger
Agreement--No Solicitation."

Termination of the Merger Agreement. The Merger Agreement may be
terminated at any time prior to the Effective Time (i) by mutual written
consent of the general partner of Purchaser and the Board or (ii) by either
party by written notice to the other, if (a) the Effective Time has not
occurred on or before January 31, 1998, (b) any state or federal law, order,
rule or regulation is adopted or issued that shall prohibit consummation of the
Merger or if any court of competent jurisdiction in the United States or any
State shall have issued an order, judgment or decree permanently restraining,
enjoining or otherwise prohibiting the Merger, and such order, judgment or
decree shall have become final and nonappealable, (c) the required approvals of
the shareholders of the Company are not received at the Special Meeting, or (d)
if the Company accepts a bona fide written proposal made by a third party
relating to a Takeover Proposal on terms that the Board determines in its good
faith reasonable judgment (after consultation with a financial advisor of
nationally recognized reputation) to be more favorable to the Company's
shareholders than the Merger and the Board could reasonably be required to
accept, based on applicable fiduciary duties and the advice of counsel (a
"Superior Takeover Proposal"). Purchaser has the right to match the terms of
any Superior Takeover Proposal or, if matching is impossible due to the type of
consideration offered, the Company has the obligation to negotiate in good
faith with Purchaser so that such Takeover Proposal will no longer be a
Superior Takeover Proposal.

5
<PAGE> 14

By Purchaser. Purchaser may terminate the Merger Agreement, by written
notice to the Company (i) upon a material breach of any representation,
warranty, covenant or agreement on the part of the Company set forth in the
Merger Agreement, subject to a limited cure period under certain circumstances,
(ii) if the Board withdraws or modifies in a manner adverse to Purchaser the
Board's recommendation of the Merger or approves or recommends to the
shareholders of the Company any Superior Takeover Proposal, or (iii) if there
has been a material adverse change affecting the Company since June 30, 1997,
subject to a limited cure period, and which has been remedied as of the Closing
Date.

By the Company. The Company may terminate the Merger Agreement, by written
notice to Purchaser, upon a breach of any material representation, warranty,
covenant or agreement on the part of Purchaser set forth in the Merger
Agreement, subject to a limited cure period. See "Certain Terms of the Merger
Agreement--Termination or Amendment of the Merger Agreement."

Termination Fee. In the event (i) the Company breaches its undertakings
with regard to its representation that it will generally not solicit a Takeover
Proposal, (ii) the Board withdraws its approval of the Merger Agreement and the
transactions contemplated thereby, (iii) the Merger Agreement and the
transactions contemplated thereby are not approved by the Company's
shareholders at the Special Meeting and the Company approves any Takeover
Proposal within one year of the date of the Merger Agreement, which Takeover
Proposal is ultimately consummated, whereby any party other than Purchaser or
Sub would acquire directly or indirectly, for consideration consisting of cash,
securities or a combination thereof, two-thirds (2/3rds) or more of the Company
Common Stock then outstanding or all or substantially all of the assets of the
Company or (iv) the Merger is abandoned because the Company accepted a Superior
Takeover Proposal, then, in each case, Purchaser and Sub may terminate the
Merger Agreement without liability on their respective parts and Purchaser
shall be entitled to receive from the Company a fee in the amount of $1.5
million, payable in cash within 10 business days following demand therefor. See
"Certain Terms of the Merger Agreement--Expenses and Termination Fee." If the
Merger Agreement is terminated as the result of any material breach of any
representation or warranty, or any material breach of any covenant or agreement
thereunder, or if there has been a material adverse change affecting the
Company, then the breaching party, or the Company if there has been a material
adverse change affecting the Company, shall promptly pay to the other party, as
liquidated damages, an amount in cash equal to the out-of-pocket expenses and
fees incurred by the other party arising out of, or in connection with or
related to, the Merger or the transactions contemplated by the Merger Agreement
not in excess of $1 million; provided, however, that if the Merger Agreement is
terminated by a party as a result of a willful breach of a representation,
warranty, covenant or agreement by the other party, the non-breaching party may
pursue any remedies available to it at law or in equity and shall, in addition
to the amount of out-of-pocket expenses set forth above, be entitled to recover
such additional amounts as such non-breaching party may be entitled to receive
at law or in equity. Notwithstanding however, in the event of failure of the
closing of the Merger due to a material breach of the Merger Agreement by
Purchaser (other than as a result of Purchaser's inability to obtain financing
reasonably satisfactory to Purchaser), the Company will be entitled to receive
$2.5 million as liquidated damages under the terms of the Escrow Agreement
entered into between the parties pursuant to the Merger Agreement. In the
event of failure of the Closing of the Merger as a result of Purchaser's
inability to obtain financing reasonably satisfactory to Purchaser, the Company
will be entitled to receive $500,000 as liquidated damages under such Escrow
Agreement.

Indemnification. The Merger Agreement provides that the Company will, and
from and after the Effective Time, the surviving corporation will, indemnify,
defend, hold harmless and advance expenses to each person who is at the time of
execution of the Merger Agreement, or has been at any time prior to the date of
execution of the Merger Agreement, an officer, director, employee or agent of
the Company or any of its Subsidiaries (the "Indemnified Parties") to the same
extent and in the same manner as is now provided in the respective certificates
or articles of incorporation or bylaws of the Company and such Subsidiaries in
effect on the date of the Merger Agreement with respect to any claim,
liability, loss, damage, judgment, cost, expense or amount paid in settlement
arising in whole or in part out of (i) the fact that such person is or was a
director, officer, employee or agent of the Company or any of its Subsidiaries
and (ii) any matter existing or occurring at or prior to the Effective Time
("Indemnified Liabilities"). The Merger Agreement further provides that any
Indemnified Party wishing to claim indemnification, upon learning of a claim,
action, suit, proceeding or investigation, shall notify the Company (or after
the Effective Time, the surviving corporation) (but the failure so to notify
shall not relieve a party from any liability for indemnification which it may
have except to the extent such failure materially prejudices such

6
<PAGE> 15

party's position with respect to such claims). The foregoing rights to
indemnification existing in favor of the Indemnified Parties with respect to
matters occurring through the Effective Time shall survive the Merger and shall
continue in full force and effect until the disposition of such Indemnified
Liabilities. The Merger Agreement is intended to provide identical protection
to that afforded by the Company's Articles of Incorporation and Bylaws on the
date of the Merger Agreement. Purchaser acknowledges in the Merger Agreement
that each of the Indemnified Parties is an intended third-party beneficiary.

Purchaser shall, subject to the terms set forth in the Merger Agreement,
indemnify and hold harmless each Indemnified Party against any Indemnified
Liability incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative,
arising out of or pertaining to the transactions contemplated by the Merger
Agreement.

The Merger Agreement provides that for a period of four years after the
Effective Time, the surviving corporation shall cause to be maintained in
effect the policies of directors' and officers' liability insurance maintained
by the Company and its Subsidiaries (provided that the surviving corporation
may substitute therefor policies of at least the same coverage and amounts
containing terms and conditions that are no less advantageous in any material
respect to the Indemnified Parties) with respect to matters arising before and
omissions occurring or existing at or prior to the Effective Time, including
the transactions contemplated by the Merger Agreement. The Merger Agreement
further provides that, if the aggregate annual premiums for such insurance at
any time during such four-year period shall exceed 200% of the premiums paid by
the Company and its Subsidiaries for such insurance for the 12 calendar months
immediately preceding the date of the Merger Agreement, then the obligation of
the surviving corporation to provide insurance shall be limited to the maximum
coverage that shall then be available at an annual premium equal to 200% of the
premiums paid by the Company and its Subsidiaries for such insurance for the 12
calendar months immediately preceding the date of the Merger Agreement.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The receipt of cash for shares of Company Common Stock pursuant to the
Merger or pursuant to the exercise of appraisal rights with respect to shares
of Company Common Stock will be a taxable transaction for federal income tax
purposes and may also be a taxable transaction under state, local and other tax
laws. In general, a shareholder will recognize gain or loss for federal income
tax purposes to the extent of the difference between the cash received and the
holder's basis in the shares of Company Common Stock exchanged for cash. For a
discussion of these and other federal income tax considerations in connection
with the Merger, see "The Merger--Certain Federal Income Tax Consequences."
HOLDERS OF SHARES OF COMPANY COMMON STOCK ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE TAX CONSEQUENCES OF THE MERGER PARTICULAR TO THEM, INCLUDING
THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND OTHER TAX LAWS.

RIGHTS OF DISSENTING SHAREHOLDERS

In connection with the Merger, holders of shares of Company Common Stock
who comply with certain requirements and procedures set forth in Articles 5.11,
5.12 and 5.13 of the TBCA may be entitled to seek an appraisal of their shares
and to obtain the "fair value" of their shares. To exercise appraisal rights,
holders of shares of Company Common Stock must comply strictly with the
procedural requirements of Articles 5.11, 5.12 and 5.13 of the TBCA, a
description of which is set forth under "The Merger--Rights of Dissenting
Shareholders," and the full text of which is included as Appendix C hereto.

MARKET PRICE DATA

The Company Common Stock is traded on the National Association of
Securities Dealers National Market System (the "Nasdaq National Market") under
the symbol "ELCH." On September 22, 1997, the last trading day prior to the
date of the announcement by Purchaser and the Company that they had executed
the Merger Agreement, the closing per share sales price of the Company Common
Stock, as reported by the Nasdaq National Market, was $10.50. On November 24,
1997, the closing per share sales price of the Company Common Stock, as
reported by the Nasdaq National Market, was

7
<PAGE> 16
$______. See "Market for Company Common Stock and Related Shareholder
Matters." Shareholders are urged to obtain current market quotations for
Company Common Stock.

DIVIDEND POLICY

The Company has never paid cash dividends on Company Common Stock. The
Company presently intends to retain earnings to finance the expansion of its
business and, therefore, does not expect to pay any cash dividends in the
foreseeable future. The Company's current credit facilities prohibit the
payment of dividends. See "Market for Company Common Stock and Related
Shareholder Matters."

8
<PAGE> 17
INTRODUCTION

THE COMPANY'S BUSINESS

El Chico Restaurants, Inc. was incorporated in Texas in 1957 as a successor
to a restaurant business operated since 1940. The Company's primary business
is operating and franchising full-service, family-style restaurants under the
name "El Chico" that offer moderately priced, high quality, Mexican-style
cuisine and alcoholic beverages. As of September 30, 1997, a total of 96
restaurants were in operation in Alabama, Arkansas, Florida, Georgia, Indiana,
Kansas, Kentucky, Louisiana, Mississippi, Missouri, Oklahoma, South Carolina,
Tennessee, and Texas, of which 68 were Company-operated and 28 were franchised.
Included in the 68 Company-owned restaurants were one restaurant under the name
"Casa Rosa Restaurante", and two restaurants under the name "Cantina Laredo."
During the nine months ended September 30, 1997, the Company opened one
Company-owned El Chico restaurant in Round Rock, Texas. No other Company-
operated or franchised restaurant opened or closed during 1997 through
September 30. Subsequent to September 30, 1997, two Company-operated
restaurants were closed, one in Oklahoma and one in Georgia. One franchised
restaurant was closed in Kansas. The Company also is engaged in designing and
supplying food-service equipment through Pronto.

NEW RESTAURANT CONSTRUCTION

Management estimates that the cost of building, equipping, and opening a
new freestanding El Chico restaurant will range from $1,425,000 to $2,350,000,
including approximately $290,000 to $830,000 for land, approximately $600,000
to $760,000 for sitework, construction, and landscaping, and approximately
$535,000 to $760,000 for equipment, furniture, and opening costs. The Company
also expects to open smaller, in-line versions of the El Chico restaurant to be
called "El Chico Cafe," as well as in-line versions of its Cantina Laredo
concept, but has not yet done so, and therefore the Company has no actual
present experience with the range of investments it might encounter, but it
expects these restaurants generally to be less than the cost of a freestanding
El Chico restaurant. The cost of developing new Company restaurants will vary,
primarily because of differing costs of land, sitework, signage, pre-opening,
and labor.

During the nine months ended September 30, 1997, one Company-owned El Chico
restaurant was opened. By the end of 1997, the Company expects to open not
more than one additional restaurant, a franchise.

EMPLOYEES

As of September 30, 1997, the Company employed approximately 3,970 persons
(including full-time and part-time personnel), of whom 3,890 were restaurant
employees and 80 were restaurant supervision and corporate employees. Company
restaurants employ an average of approximately 50 to 60 full-time or part-time
employees. None of the Company's employees are covered by collective
bargaining agreements, and the Company has never experienced a major work
stoppage, strike, or labor dispute. The Company considers its employee
relations to be good.

COMPETITION

The restaurant business is highly competitive, and competition among
restaurants serving Mexican cuisine is increasing. The Company believes that
the principal competitive factors in its restaurant business are quality,
value, service, atmosphere, and location. The Company's restaurants compete
with many food service operations in the vicinity of each restaurant, including
restaurants specializing in Mexican food. The Company believes that its
competitive position in certain markets is enhanced by regional name
recognition and by its moderately priced menu, quality food, and a comfortable,
full-service, family-oriented dining atmosphere. Other companies, however,
continue to open restaurants similar to the Company's restaurants, and certain
of these competitors have greater resources than the Company.

9
<PAGE> 18
GOVERNMENTAL REGULATION

The Company is subject to various federal, state, and local laws affecting
its business. Many stringent and varied requirements of local governmental
bodies with respect to zoning, land use, and environmental factors have
increased and can be expected to continue to increase both the cost of and the
time required for constructing new restaurants as well as the cost of operating
Company restaurants. The Company's restaurants are subject to various health,
sanitation, and safety standards and are also subject to state and local
licensing and regulation with respect to the service of alcoholic beverages.
The service of alcoholic beverages is material to the business of the Company.
The failure to receive or retain, or a delay in obtaining, a liquor license in
a particular location could adversely affect the Company's operations in that
location. Liquor licenses must be renewed annually. The Company has not
encountered any significant problems relating to alcoholic beverage licenses
and permits to date.

The Company may be subject in certain states to "dram-shop" statutes, which
may establish liability for improper alcoholic beverage service. The Company
carries liquor liability coverage as part of its existing comprehensive general
liability insurance.

The Company is also subject to state and federal labor laws. These include
the Fair Labor Standards Act, which governs such matters as minimum wages,
overtime, and other working conditions; the Immigration and Naturalization Act,
which governs employee citizenship requirements; and the Americans with
Disabilities Act, which governs non- discriminating employment practices and
reasonable accommodations for disabled persons, both employees and customers.
A significant portion of the Company's food service personnel are paid at rates
related to the federal minimum wage; and, accordingly, increases in the minimum
wage increase the Company's labor costs. The Company has managed cost
increases from past minimum wage increases by adjusting prices, adding and
deleting menu items, and changing plate presentations. On September 1, 1997,
the minimum wage increased from $4.75 an hour to $5.15 an hour, and the Company
is evaluating a possible menu price increase to begin in November 1997 to
compensate for such an increase. However, the ability to manage future
increases depends on the size of the increases, their timing, and the
competitive environment.

In recent years many states have enacted laws regulating franchise
operations. Much of this legislation requires detailed disclosure in the offer
and sale of franchises and the registration of the franchisor with state
administrative agencies. The Company is also subject to FTC regulations
relating to disclosure requirements in the sale of franchises. Additionally,
certain states have enacted, and others may enact, legislation governing the
termination and non-renewal of franchises and other aspects of the franchise
relationship that are intended to protect franchisees. The foregoing matters
may result in some modifications in the Company's franchising activities and
some delays or failures in enforcing certain of its rights and remedies under
license and lease agreements. The laws applicable to franchise operations and
relationships are developing rapidly, and the Company is unable to predict the
effect on its intended operations of additional requirements or restrictions
that may be enacted or promulgated or of court decisions that may be adverse to
franchisors.

Effective September 1, 1991, the Company elected to become a non-subscriber
of the Texas Workers' Compensation Act. Since this election, excess liability
insurance has been maintained, and an employee benefit trust was established to
provide for benefits in the event of injury. Indications are that this
election has been favorable; however, the Texas Workers' Compensation Act has
undergone certain favorable reforms, with further changes expected. Management
reviews this election periodically.

PROPERTIES

As of September 30, 1997, the Company owned 21 of its restaurant locations
and leased the remaining 47 restaurant locations. The leases have terms that
expire between 1997 and 2010, excluding renewal options not yet exercised, and
have an average remaining term of approximately six years. The leases
generally provide for rentals ranging from 3% to 6% of gross restaurant sales,
with a stated minimum rental. Under substantially all of its leases, the
Company is required to pay real estate taxes, insurance, and maintenance
expenses. A lease has been executed for a location in Dallas, Texas for a new
Cantina Laredo, with an early 1998 anticipated opening date.

Of the 68 restaurants operated by the Company as of September 30, 1997, 50
were freestanding buildings, nine were located in strip shopping centers, and
nine were located in shopping malls. As of the same date, one of the Company's
28

10
<PAGE> 19

franchised locations was leased by the Company and subleased to a franchisee,
and 27 were directly leased or owned by the franchisees.

As of September 30, 1997, the Company owned three tracts of raw land, which
are located (i) adjacent to two open and operating Company-owned locations,
and (ii) adjacent to a former Company restaurant presently leased to a non-
related business. As of the same date, the Company owned two parcels of real
estate, one of which is leased to a non-related business. In addition, there
are seven locations that are leased by the Company but not used in Company
operations; four are subleased to non-related businesses, two are previously
impaired Company-owned restaurants operated by franchisees, and one is a closed
restaurant site for which the Company is in the process of locating a sublease
or other disposition. Of the two Company-operated restaurants closed subsequent
to September 30, 1997, one was a mall location on which the Company determined
not to renew a lease because of restaurant sales performance, and one was a
freestanding, owned location on which the Company has a potential contract to
sell to an unrelated party.

During 1993, the Company purchased a 67,665 square foot office facility,
where it had been leasing approximately 20,000 square feet of space. The
Company continues to office in the facility and is leasing the majority of the
remaining square footage to unrelated businesses. A 15,000 square foot
warehouse is leased which houses restaurant equipment and is located in close
proximity to the office facility. The Company also owns a tract of land
consisting of approximately one acre and an 8,000 square foot building in
Carrollton, Texas. This property is utilized primarily for the training of
restaurant management and for test kitchen operations, with a portion leased to
another party.

LEGAL PROCEEDINGS

The Company is not a party to any material pending legal proceedings
arising out of the ordinary course of its business.

11
<PAGE> 20
MARKET FOR COMPANY COMMON STOCK
AND RELATED SHAREHOLDER MATTERS

The Company's common stock is quoted on the Nasdaq National Market under
the symbol "ELCH." The following table sets forth the high and low sale prices
as reported on the Nasdaq National Market for the periods indicated.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
CALENDAR YEAR 1997
------------------
<S> <C> <C>
First Quarter . . . . . . . . . . . . . . . . . $ 8.13 $ 6.50
Second Quarter . . . . . . . . . . . . . . . . $ 9.88 $ 6.00
Third Quarter . . . . . . . . . . . . . . . . . $ 12.13 $ 8.88
Fourth Quarter (through November 24) . . . . . $ $

CALENDAR YEAR 1996
------------------

First Quarter . . . . . . . . . . . . . . . . . $ 9.50 $ 7.63
Second Quarter . . . . . . . . . . . . . . . . $ 9.13 $ 7.00
Third Quarter . . . . . . . . . . . . . . . . . $ 8.25 $ 7.13
Fourth Quarter . . . . . . . . . . . . . . . . $ 8.75 $ 6.88

CALENDAR YEAR 1995
------------------

First Quarter . . . . . . . . . . . . . . . . . $ 11.75 $ 7.63
Second Quarter . . . . . . . . . . . . . . . . $ 9.88 $ 7.63

Third Quarter . . . . . . . . . . . . . . . . . $ 12.63 $ 9.38
Fourth Quarter . . . . . . . . . . . . . . . . $ 12.13 $ 9.00
</TABLE>

To date, the Company has not paid any cash dividends on shares of
common stock. It is the general policy of the Company to retain earnings to
support the Company's growth.

As of November 24, 1997, the number of record holders of Company
Common Stock was approximately 300, and the Company estimates that as of that
date there were 1,100 beneficial owners of its stock.

12
<PAGE> 21
SELECTED FINANCIAL DATA

The following summary of selected financial data has been derived from
the more detailed Consolidated Financial Statements and Notes thereto of the
Company contained elsewhere in this report or previous reports.

<TABLE>
<CAPTION>
Nine
Months Nine Months
Ended Ended Year Year
September September Ended Ended
30, 30, December 31, December 31,
1997 (1) 1996 (2) 1996 (2) 1995
--------- --------- ------------ --------------
(In thousands except per share amounts)
<S> <C> <C> <C>
INCOME STATEMENT INFORMATION:
Revenues . . . . . . . . $ 76,782 $ 78,779 $ 104,481 $ 104,618
Income (loss) before
income taxes . . . . . . $ 2,744 ($ 6,186) $ (5,051) $ 5,592
Net earnings (loss) . . . $ 1,966 ($ 3,880) $ (3,062) $ 3,958
Net earnings (loss) per
share . . . . . . . . . . $ 0.53 ($ 0.98) $ (0.79) $ 0.98

BALANCE SHEET INFORMATION:
Total assets . . . . . . $ 48,673 $ 47,349 $ 47,662 $ 51,039
Long-term debt . . . . . $ 8,675 $ 10,271 $ 9,765 $ 8,435
Shareholders' equity . . $ 28,417 $ 25,763 $ 26,285 $ 32,497

Year Year Transition Fiscal Year
Ended Ended Period Ended Ended
December December 31, December 31, June 1,
31, 1994 1993 1992 (3)(4) 1992 (5)
------------ --------- ---------- ---------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
INCOME STATEMENT INFORMATION:
Revenues . . . . . . . . $ 97,826 $ 88,465 $ 51,257 $ 90,818
Income (loss) before
income taxes . . . . . . $ 5,581 $ 4,339 $ 2,912 $ (1,568)(6)
Net earnings (loss) . . . $ 3,728 $ 2,713 $ 2,135 $ (969)
Net earnings (loss) per
share . . . . . . . . . . $ 0.88 $ 0.64 $ 0.49 $ (0.22)

BALANCE SHEET INFORMATION:
Total assets . . . . . . $ 43,964 $ 37,347 $ 31,730 $ 32,499
Long-term debt . . . . . $ 5,533 $ 3,303 $ 1,109 $ 1,215
Shareholders' equity . . $ 28,882 $ 24,844 $ 21,900 $ 22,679
</TABLE>

(1) During the nine months ended September 30, 1997, the Company sold one of
the six impaired stores (as discussed in note 2 below) and a parcel of
undeveloped land resulting in pre-tax gains of $529,000. In addition,
pre-tax earnings reflect $462,000 of merger-related cost.

(2) During the nine months ended September 30, 1996, the Company recorded a
pre-tax special charge of $9,421,000 to provide for the impairment and
exit plans of six units slated for closing, the impairment of the
carrying value of three other stores that were expected to continue
operating as well as a write-down of certain other assets. In addition
during the year, parcels of real estate were sold resulting in pre-tax
gains of $1,202,000 and $1,203,000 for the nine months ended September
30, 1996 and for the year ended December 31, 1996, respectively.
Excluding the non-recurring impairment charge and property gains, net
earnings would have been $1,545,000 or $0.39 per share and $2,363,000 or
$0.61 per share for the nine months ended September 30, 1996 and for the
year ended December 31, 1996, respectively.

(3) On November 6, 1992, the Company changed its fiscal year from the Monday
nearest May 31 to December 31.

(4) Includes a tax-free gain of $847,000 on disposition of one of the
Company's specialty restaurants.

(5) Fiscal 1992 includes 53 weeks of operations.

(6) During fiscal 1992, the Company recorded a pre-tax special charge of
$3,977,000 to provide for: write-downs of under performing restaurants
and other properties and assets, higher than expected insurance costs,
and costs associated with personnel changes.

13
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Forward-looking statements regarding management's present plans, or those
of the party expected to acquire the Company, to achieve future performance and
objectives involve risks and uncertainties concerning many factors, many of
which are not fully within management's control or influence. Such factors could
cause actual results to differ from plans or expectations, and such differences
could be material. Factors affecting future performance and plans include but
are not limited to: ability of the party expected to acquire the Company to
satisfy all necessary conditions to closing its financing commitments;
achievement of the necessary vote of the Company's shareholders to approve the
acquisition of the Company by a third party; changing economic and competitive
conditions; ability to negotiate satisfactory agreements with third parties for
supplies, services, financing, new restaurant locations, and other needs;
ability to attract and retain qualified personnel; ability to achieve expected
returns on investments and operational programs; and consumer reaction to
advertising, remodels, new restaurants, product offerings, and operational
improvement programs. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as to the date hereof.
Management does not expect to update such forward-looking statements continually
as conditions change, and readers are urged to review carefully and consider the
various disclosures in periodic reports, including reports on Forms 8-K, 10-K
and 10-Q, filed with the Securities and Exchange Commission.

RESULTS OF OPERATIONS

COMPARATIVE PERFORMANCE NINE MONTHS ENDED SEPTEMBER 30, 1997 VS. NINE MONTHS
ENDED SEPTEMBER 30, 1996

Revenues for the nine months ended September 30, 1997 were $76.8
million compared to $78.8 million for the same period a year earlier.
Company-owned restaurant sales included in these amounts decreased from $76.8
million to $74.8 million, due to a decrease of 2.7% in comparable Company-owned
El Chico concept restaurant sales.

Franchise-related income decreased for the nine months ended
September 30, 1997, due to a decrease in the number of revenue-producing stores
and a decrease in comparable store sales of 1.6%.

Pronto is a wholly owned subsidiary in the business of designing
food-service kitchens and supplying the related equipment. Equipment sales for
the nine months ended September 30, 1997 increased due to the sale of equipment
for a major remodel to a franchisee. Cost of sales for the quarter decreased
as a percentage of sales as the prior year included a sale with unusually high
costs. Cost of sales for the nine months ended September 30, 1997 increased
due to lower vendor rebates relative to sales.

For the nine months ended September 30, 1997 food costs decreased to
26.3% from 26.8%. Food cost was higher as a percentage of revenue for the
prior period as a result of certain programs initiated to improve value
perception such as 99-cent beer and margaritas, aggressive offering of free
tortillas, product introductions with high food costs and the adjustment for
prior period sales tax. The majority of these programs have been discontinued.

Restaurant labor increased for the nine months ended September 30,
1997 as a percentage of sales to 33.6% from 33.2%, due to increased management
compensation.

Operating expenses for the nine months ended September 30, 1997
decreased as a percentage of sales from 29.5% to 28.7% due to decreases in
repair and maintenance costs, depreciation expense related to the prior year
impairment of certain assets and insurance expense, partly offset by increases
in advertising and laundry expenses.

General and administrative costs increased for the nine months ended
September 30, 1997 due to costs associated with the previously announced merger
of the Company ($462,000, including the cost of a fairness opinion and legal
and other fees) and other professional fees, principally restaurant management
recruiting fees, partly offset by lower new management training and decreased
accrued executive bonuses.

14
<PAGE> 23

During the second quarter ended June 30, 1996, the Company incurred a
pre-tax special charge of $9.4 million to provide for the impairment and exit
plans of six units slated for closing, the impairment of the carrying values of
three other stores that would continue to operate as well as a write-down of
certain other assets. One of the six stores was an older store that was closed
during the quarter a year ago and replaced with a new prototype which opened
July 1996. Subsequently, the Company entered into agreements with two separate
existing franchisees to operate two of the six impaired restaurants and one of
the six impaired stores has been subleased. During the nine-months ended
September 30, 1997, one of the six impaired stores was sold with a gain
reflected in "Gain on sale of assets" and the Company is in the process of
locating a sublessor for the remaining closed store. Subsequent to September
30, 1997, one of the three impaired stores that was to continue to operate was
closed. The Company anticipates the financial impact of this closing to be
immaterial.

In addition to selling one of the impaired stores during the
nine-months ended September 30, 1997, the Company sold a parcel of undeveloped
land in a market where no further new store openings are planned in the
foreseeable future.

Interest expense increased for the nine months ended September 30,
1997 due to higher interest rates and borrowings and lower anticipated
interest.

At September 30, 1997 there were 68 Company-operated restaurants and
28 franchised restaurants.

CONSOLIDATED STATEMENT OF OPERATIONS

The Consolidated Statements of Operations reported herein represent
results of operations for the years ended December 31, 1996, 1995, and 1994.
The following table summarizes key results of operations:

<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
---------------- ---------------- ----------------
(Dollar amounts in thousands)
<S> <C> <C> <C>
Number of Company-owned restaurants . . . . . . 67 72 65
Number of franchised restaurants . . . . . . . 28 29 29
Weighted average annual sales per
Company-owned restaurant . . . . . . . . . . $ 1,494 $ 1,479 $ 1,600
Revenues from Company operations . . . . . . . $ 104,481 $ 104,618 $ 97,826
Net sales from Company operations . . . . . . . $ 101,698 $ 101,628 $ 94,901
Income (loss) before taxes . . . . . . . . . . $ (5,051) $ 5,592 $ 5,581
Net income (loss) . . . . . . . . . . . . . . $ (3,062) $ 3,958 $ 3,728
Profit margin . . . . . . . . . . . . . . . . . (2.9%) 3.8% 3.8%
</TABLE>

COMPARATIVE PERFORMANCE 1996 VS. 1995

Net sales for Company-owned restaurants increased approximately
$70,000 or 0.7% to $101,698,000 in 1996 from $101,628,000 in 1995. The average
number of stores operating throughout 1996 versus 1995 increased and weighted
average annual sales per Company-owned restaurant opened the full year
increased 1.0%. These increases were offset by a decrease in same-store sales
of 2.3% including a decrease in El Chico concept same-store sales of 2.8%. As
of January 1, 1996, the Company adopted a new convention that added new stores
to the same-store sales comparison in the quarter in which they reach their
18-month anniversary. During 1996, the Company opened two Company-owned El
Chico restaurants, one of which was a replacement store for a store closed
earlier in the year, and converted two Company-owned El Chico restaurants to
franchise stores. In addition, four Company-owned stores were closed.

15
<PAGE> 24
Franchise revenue decreased from $2,082,000 to $1,958,000 as a result
of a decrease in the average number of stores operating throughout 1996 versus
1995 and a decrease in franchise same-store sales of 2.8%. During 1996, three
franchise stores were closed including one closed temporarily due to fire, and
two Company-owned stores were converted to franchise stores. The converted
stores are operating under special franchise agreements under which payment of
fees will not begin until certain sales objectives are achieved.

Food costs increased from 25.4% of sales to 26.6% due to an increase
in ingredient costs, primarily cheese and beef, and certain menu mix changes.
These increases were partly offset by a decline in avocado cost.

Labor costs increased from 33.1% of sales to 33.2%. Management
compensation expense increased as a percentage of sales due to an increase in
management base pay. This increase was partly offset by a decrease in hourly
labor. During 1995, the Company eliminated the restaurant cashier position by
changing to a server-banking system, and converted certain restaurant employees
from minimum wage to tipped compensation. Minimum wage increased on October 1,
1996, but did not have a material effect on labor costs.

Operating costs increased from 28.6% to 29.3% due to an increase in
advertising and ongoing insurance expenses. These increases were partly offset
by a decrease in preopening amortization and a one-time insurance class action
settlement.

Equipment sales for Pronto decreased from $908,000 in 1995 to $825,000
in 1996. The 1995 amount included sales to a new franchise restaurant.
Equipment cost of sales as a percentage of sales remained basically stable at
84.8% versus 86.1% in 1995.

General and administrative costs increased from $9,227,000 to
$9,421,000 as a result of increased employee costs, an increase in the number
of multi-unit restaurant supervisors and new training seminars for existing
managers. These increases were partly offset by decreased professional fees.

Interest expense increased from $602,000 to $686,000, primarily as a
result of increased borrowings and interest rates. Interest income decreased
from $78,000 to $75,000 due to a decline in average invested cash balances.

The income tax provision reflects an increase in the FICA tip credit
and higher state taxes.

COMPARATIVE PERFORMANCE 1995 VS. 1994

Net sales for Company-owned restaurants increased 7.1% to $101,628,000
in 1995 from $94,901,000 in 1994. The increase in sales is due to an increase
in the average number of stores operating throughout 1995 versus 1994.
Weighted average annual sales per Company-owned restaurant decreased 7.6% and
same-store sales decreased 2.2% including a decrease in El Chico concept
same-store sales of 2.5%. As a result of mix changes and certain menu price
increases associated with a new menu introduction, the Company's check-average
increased approximately 1.7% in 1995. During 1995, the Company used a
same-store sales convention that reflected new stores beginning when they were
opened for the full quarter of the prior year.

Franchise revenue decreased from $2,093,000 to $2,082,000 as a result
of a decrease in the average number of stores operating throughout 1995 versus
1994. This decrease was partly offset by an increase in franchise same-store
sales of 0.7%. During 1995, the Company purchased an El Chico restaurant from
a franchisee and opened one new franchise store.

Food costs decreased from 25.6% of sales to 25.4% due to a decrease in
the cost of beef, avocados and beans.

Labor costs remained unchanged at 33.1% of sales. Hourly labor cost
decreased as a percentage of sales as a result of eliminating the restaurant
cashier position by changing to a server-banking system, and from converting
certain restaurant

16
<PAGE> 25
employees from minimum wage to tipped compensation. This decrease was offset
by management compensation expense, which increased as a percentage of sales as
a result of lower weighted average sales per restaurant.

Operating costs increased from 28.3% of sales to 28.6% due to an
increase in supplies, repair and maintenance and property taxes partly offset
by decreased laundry and insurance costs. At the end of 1994, the Company
converted from cloth napkins to paper napkins which resulted in reduced laundry
costs, partly offset by an increase in supply costs.

Pronto equipment sales increased from $832,000 to $908,000 primarily
reflecting sales to a new franchise restaurant. Equipment cost of sales
increased as a percentage of sales due to a decrease in vendor rebate income
relative to sales. Vendor rebate income includes rebates on outside sales as
well as rebates on equipment purchases for El Chico restaurants.

General and administrative costs increased from $8,967,000 to
$9,227,000 as a result of increased employee costs, an increase in the number
of multi-unit restaurant supervisors and increased training wages. These
increases were partly offset by decreased professional fees, incentive bonuses
and travel.

Interest expense increased from $146,000 to $602,000, primarily as a
result of increased borrowings, partly offset by a decline in interest rates.
Interest income decreased from $88,000 to $78,000 due to a decline in average
invested cash balances.

The income tax provision decreased as a percentage of income before
taxes due to an increase in the FICA tip credit and lower state taxes.

LIQUIDITY AND CAPITAL RESOURCES

The Company has an unsecured credit facility with a $16,000,000
commitment comprised of a $15,000,000 revolving line of credit and a $1,000,000
letter of credit facility. The line of credit matures on December 31, 1997,
and may be converted to a term loan, payable quarterly on a 10-year
amortization schedule, and maturing on December 31, 1999. Both the line of
credit and the term loan bear interest at the Company's option of prime rate or
up to six-month LIBOR plus .75%. Both rates are subject to maintaining certain
financial covenants, and interest is payable upon maturity of the LIBOR
advances or quarterly for prime rate advances. In addition, the Company has
entered into an interest rate swap on a notional balance of $5 million, under
which a fixed rate of 6.61% is paid against a floating rate equal to
three-month LIBOR. A commitment fee of .25% is payable quarterly on any unused
commitments. As of September 30, 1997, $9,363,000 was outstanding under the
line of credit. The credit facility was obtained for the funding of the
construction of new Company-owned restaurants, remodeling existing restaurants,
and the purchase of the Company's headquarters facility during 1993 and has
been used for repurchase of the Company's common stock subject to certain
limitations. During the nine months ended September 30, 1997, the Company had
opened one new El Chico restaurant and remodeled eight El Chico restaurants.
During the fourth quarter, the Company plans to complete up to three remodels
and estimates total capital expenditures during 1997 to be approximately $7 to
$8 million, which will be funded by internal operations and the existing credit
facility.

The Company is currently operating with a working capital deficit,
which is common in the restaurant industry, since restaurant companies do not
typically require a significant investment in either accounts receivable or
inventory. Working capital deficit decreased from $5,670,000 at December 31,
1996 to $3,616,000 at September 30, 1997, primarily as a result of a
reclassification of accrued liabilities, associated with the second quarter
1996 special charge, to "Other Long-Term Liabilities" reflecting present plans
for disposition of these properties.

On November 6, 1997, the Company eliminated 21 of 87 existing general
administrative positions. Severance costs and earned vacation payments were
$96,000, and annual general and administrative savings are estimated to be
approximately $950,000.

17
<PAGE> 26
ACCOUNTING MATTERS

In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, Earnings Per Share (Statement 128). Statement 128 specifies the
computations, presentation and disclosure requirements for earnings per share
(EPS) for entities with publicly held common stock or potential common stock.
Statement 128 replaces primary EPS and fully diluted EPS with basic EPS and
diluted EPS, respectively. Statement 128 is effective for financial statements
for both interim and annual periods beginning after December 15, 1997, with
earlier application not permitted. If such early application were permitted,
management believes the impact of the adoption would not have a material impact
on the reported EPS at September 30, 1997.

18
<PAGE> 27
THE SPECIAL MEETING

DATE, TIME AND PLACE

The Special Meeting will be held December 30, 1997, at The Texas
Commerce Bank Tower, 2200 Ross Avenue, 7th Floor, Dallas, Texas, commencing at
10:00 a.m. local time.

PURPOSES OF THE SPECIAL MEETING

The purposes of the Special Meeting are to consider and vote upon (i)
a proposal to adopt the Merger Agreement and approve the Merger and (ii) such
other matters as may properly be brought before the Special Meeting.

RECORD DATE AND OUTSTANDING SHARES

Only holders of record of Company Common Stock at the close of
business on the Record Date are entitled to notice of, and to vote at, the
Special Meeting. On the Record Date, there were approximately 300 holders of
record of the 3,717,135 shares of Company Common Stock then issued and
outstanding. Each share of Company Common Stock entitles the holder thereof to
one vote on each matter submitted for shareholder approval. See "Principal
Shareholders and Stock Ownership of Management" for information regarding
persons known to management of the Company to be the beneficial owners of more
than 5% of the outstanding shares of Company Common Stock. A complete list of
the shareholders entitled to notice of, and to vote at, the Special Meeting
will be available for examination at the offices of the Company in Dallas,
Texas during normal business hours by any of the Company's shareholders, for
any purpose germane to the Special Meeting, for a period of 10 days prior to
the Special Meeting.

VOTING AND REVOCATION OF PROXIES

A form of proxy for use by shareholders of the Company at the Special
Meeting accompanies this Proxy Statement. All properly executed proxies that
are received prior to or at the Special Meeting and not revoked will be voted
at the Special Meeting in accordance with the instructions contained therein.
IF A HOLDER OF COMPANY COMMON STOCK EXECUTES AND RETURNS A PROXY AND DOES NOT
SPECIFY OTHERWISE, THE SHARES REPRESENTED BY SUCH PROXY WILL BE VOTED "FOR"
ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER IN ACCORDANCE WITH
THE RECOMMENDATION OF THE BOARD. A shareholder of the Company who has executed
and returned a proxy may revoke it at any time before it is voted at the
Special Meeting by (i) executing and returning a proxy bearing a later date,
(ii) filing written notice of such revocation with the Secretary of the Company
stating that the proxy is revoked or (iii) attending the Special Meeting and
voting in person.

VOTE REQUIRED

The presence at the Special Meeting, in person or by proxy, of the
holders of a majority of the outstanding shares of Company Common Stock
entitled to vote thereat will constitute a quorum for the transaction of
business. Adoption of the Merger Agreement and approval of the Merger requires
the affirmative vote of at least two-thirds of the issued and outstanding
shares of Company Common Stock entitled to vote thereon. On the Record Date,
there were 3,717,135 shares of Company Common Stock outstanding and entitled to
vote at the Special Meeting. In determining whether the Merger Agreement and
the Merger have received the requisite number of affirmative votes, abstentions
and broker non-votes will have the same effect as a vote against the Merger.

SOLICITATION OF PROXIES

In addition to solicitation by mail, the directors, officers,
employees and agents of the Company may solicit proxies from the shareholders
of the Company by personal interview, telephone, telegram or otherwise. The
Company will bear the costs of the solicitation of proxies from its
shareholders. Arrangements will also be made with brokerage firms and other

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custodians, nominees and fiduciaries who hold of record voting securities of
the Company for the forwarding of solicitation materials to the beneficial
owners thereof. The Company will reimburse such brokers, custodians, nominees
and fiduciaries for the reasonable out-of-pocket expenses incurred by them in
connection therewith.

OTHER MATTERS

At the date of this Proxy Statement, the Board does not know of any
business to be presented at the Special Meeting other than as set forth in the
notices attached to this Proxy Statement. If any other matters should properly
come before the Special Meeting, it is intended that the shares represented by
proxies will be voted with respect to such matters in accordance with the
judgment of the persons voting such proxies.

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THE MERGER

GENERAL DESCRIPTION OF THE MERGER

The Merger Agreement provides that, at the Effective Time, Sub will
merge with and into the Company, with the Company being the surviving
corporation, and, subject to the terms and conditions of the Merger Agreement
and the provisions of the TBCA concerning dissenting shareholders' right of
appraisal, each outstanding share of Company Common Stock will be converted
into the right to receive $12.75 in cash. As a consequence of the Merger, the
Company will become a wholly owned subsidiary of Purchaser.

BACKGROUND

From time to time in early 1997, the Company received certain
unsolicited exploratory inquires, which were not offers, from other parties
about a possible combination or acquisition. The Board determined that it did
not want to pursue a sale of the Company at that time without first examining
its strategic alternatives. In March 1997, the Company retained Montgomery to
analyze strategic alternatives for the Company and make presentations to the
Board with respect to such alternatives. A formal presentation of these
strategic alternatives was made by Montgomery on July 2, 1997, and is more fully
described below. On April 30, 1997, the Company received a letter expressing
interest in a possible acquisition of the Company's outstanding stock at a price
ranging between $8.00 and $9.00 per share. The Board considered the inquiry but
determined not to pursue the matter and so advised the inquiring party. The
Board believed that it was in the best interests of the shareholders to continue
to pursue the long term operating strategy of the Company and not pursue a sale
at that time, in light of the then-current business climate in the restaurant
industry. On June 11, 1997, three Company shareholders (GHS Management, Inc.,
G. Houston Hall and James C. Smith) filed a Schedule 13D with the SEC containing
a letter sent to the Board by them stating that it had come to their attention
that the Company was not pursuing the transaction referred to in the April 30,
1997 letter. A June 16, 1997, letter from Cracken, Harkey & Co, L.L.C.
("Cracken Harkey"), an affiliate of CHC, expressed interest in discussing a
possible merger with the Company and a new entity to be formed by an investor
group led by Cracken Harkey. A June 16, 1997, letter from another restaurant
company expressed an interest in pursuing an acquisition of the Company at an
unstated price. On June 17, 1997, at a regularly scheduled meeting, the Board
of Directors reviewed the Company's financial condition and certain projections,
noted the market price of the Company Common Stock and discussed recent
developments, including the three letters mentioned above (the June 11 and two
June 16 letters). The Board determined at that time that it did not then want to
pursue a sale of the Company without further examining its strategic
alternatives; and if a sale of the Company were to be pursued as the best
strategic alternative, the Board wanted to further investigate whether the
foregoing proposals reflected the best and highest price available for a sale of
the Company. The Board at that meeting unanimously appointed a Special
Committee of three directors who were not members of management or franchisees
of the Company to consider and evaluate all available alternatives to the
Company and report its findings to the Board. The members of the Special
Committee are Joe Mariner, Jr., Grahame N. Clarke, Jr., and Jack D. Knox. The
Special Committee was authorized to evaluate any and all strategic alternatives
or other options for the enhancement of shareholder value and to take all steps
it considered appropriate to maximize that value. As directors, each member of
the Special Committee will receive the same cash consideration, $12.75 per
share, as all other shareholders for each share of Company Common Stock owned.
Additionally, each director will receive cash consideration for their
unexercised stock options equal to the difference between $12.75 and the
exercise price of such stock options times the number of shares granted under
the options. See "Summary--Conflicts of Interest."

On June 17, 1997, the Special Committee met, engaged legal counsel and
separately engaged Montgomery as financial advisor to identify opportunities for
maximizing shareholder value, which could include a sale of the Company,
advising the Company concerning such opportunities and participating on the
Company's behalf in negotiations resulting from these opportunities. The
Special Committee requested Montgomery to make a preliminary analysis of the
recent expressions of interest and to report on possible courses of action for
the Company. On June 18, 1997, the Company announced that it had received two
unsolicited expressions of interest, which were the June 16 letters mentioned
above from Cracken Harkey and another restaurant company, as discussed above,
and described the formation of an independent Special Committee to review and
evaluate these and any other proposals. The announcement also stated that the
Special Committee had retained Montgomery to advise it and to evaluate various
alternatives to maximize shareholder value.

The Special Committee met on June 25, 1997, and received and
discussed a preliminary oral report from Montgomery on the number and nature of
inquiries received by Montgomery as a result of the Company's

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<PAGE> 30

announcement and the related publicity. Montgomery made a detailed
presentation of such matters to the Special Committee on July 2, 1997. On such
date, the Special Committee met with Montgomery who presented an analysis of
the Company's current situation, including analyses of stock price, ownership
and management's business plan. It reviewed strategic alternatives the Company
might pursue and their possible outcomes, time frame to achieve those outcomes
and possible risks associated with those outcomes. The strategic alternatives
included potential acquisitions by the Company, brand extensions (including
with respect to the Company's Cantina Laredo restaurant concept), financial
restructurings such as share repurchases or a special dividend to shareholders,
a potential sale of the Company and maintenance of the existing strategy. As
to the possible sale of the Company, Montgomery discussed a list of potential
strategic and financial buyers and a list of specific firms that had expressed
interest or that might be interested in buying the Company. Each of the
interested parties received a confidential offering memorandum including those
entities that had previously made unsolicited exploratory inquiries to the
Company or delivered expressions of interest as discussed below. These
alternatives were further discussed by the Special Committee with Montgomery
present. After Montgomery's departure from the meeting, the Special Committee
continued its discussion and unanimously agreed to pursue a controlled sale of
the Company and reject the other strategic alternatives presented by
Montgomery. The Special Committee believed that a controlled sale of all or
part of the Company presented the most effective way to enhance shareholder
value, in addition to providing immediate liquidity for all shareholders and
providing the Company with a structure and process with which to evaluate the
buyer interest that had been expressed. A controlled sale is a process
pursuant to which a wide range of logical, potential buyers are contacted and
qualified based upon the likelihood of those buyers paying a high premium in
the sale and their financial ability to consummate a transaction. In addition,
the Special Committee believed that a controlled sale of the Company would
provide a degree of confidentiality while at the same time stimulating a sense
of competition among buyers. This type of sale is in contrast to a closed
negotiation, whereby an extremely limited number of contacts are made and
discussions are held only with those parties that had previously expressed
interest in a transaction. The Special Committee then specifically directed
Montgomery to assist in soliciting bids or indications of interest from
strategic and financial buyers and to provide information to potential buyers
signing an appropriate confidentiality agreement. The Special Committee
further requested that Montgomery conduct a full market test in connection with
the sale process, whereby Montgomery would assist the Company in the
preparation of a confidential offering memorandum concerning the Company, which
would be made available to, and used in discussions with, prospective
purchasers of the Company. Montgomery also developed and prepared for the
Special Committee a list of potential strategic and financial buyers that could
be interested in acquiring the Company. Following its meeting, the Special
Committee met with the Board of Directors and reported the results of its
meeting. After discussion, the Board unanimously accepted the Special
Committee's report and directed the Special Committee to proceed.

The Special Committee met on July 28, 1997 and discussed a proposal
from a bidder to enter into exclusive negotiations. The Special Committee
unanimously determined to continue the controlled sale by pursuing multiple
potential bidders.

The Special Committee met on August 4, 1997. Montgomery presented five
bid letters that had been received. Such bids ranged in price from $10.00 to
$12.00 per share. The form of consideration in four of the five bids was all
cash. One bid was structured as a combination of cash and stock of the bidder.
Montgomery described the process used, the parties contacted, their response,
and Montgomery's evaluation of the parties' interest. Montgomery further
described the number of investors contacted, the number of confidential
offering memorandums sent to those parties, the remarks and concerns expressed
to Montgomery regarding the Company (including recent trends in the Company's
business), the Company's reputation within the restaurant industry, the
potential for synergies and the portability of the Company's concept.
Montgomery reviewed the purchase price per share of each bid, the form of the
transaction that was proposed (stock purchase versus asset purchase), the
conditions to closing (necessary board of directors and shareholder approvals),
due diligence requirements and financing contingencies. The bids, the bidders,
their finances, and their indicated due diligence requirements were analyzed by
Montgomery. Montgomery also reviewed the conditions to closing, any necessary
board of directors and shareholder approvals and any available financing
documentation that supported the offer. The Special Committee unanimously
determined that a second round of bidding should be conducted.

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<PAGE> 31

Arrangements were made for the five bidders to have access to Company
material for their due diligence review. Counsel were directed to draft a form
of acquisition agreement to be used in negotiating with bidders. The Special
Committee met with the Board on August 7, 1997 for a Montgomery presentation
similar to that given to the Committee on August 4, 1997. The Board unanimously
agreed to continuation of the process as arranged by the Special Committee and
conducted by Montgomery.

The Special Committee met on September 9, 1997 with Montgomery, who
presented three bids received in the second round of the sale process and
described the continuation of the process since August 7, 1997. Such bids
ranged in price from $11.00 to $12.75 per share. The form of consideration in
two of the bids was all cash, subject to available financing. One bid was
structured as a combination of cash and stock of the bidder, subject to
available financings. The bids, the bidders, their finances, their due
diligence and their terms and conditions were discussed by the Special Committee
and Montgomery. Montgomery reviewed the financing contingencies for each of the
bids, including preliminary commitment letters received from lenders to each of
the bidders. The Special Committee compared the bid prices, the form of
consideration (cash and/or stock), the bidders' financing contingencies, the
bidders' proposed form of definitive agreement and various other factors.
Counsel to the Company reviewed the bidders' proposed forms of definitive
agreement and discussed with the Board in detail the revisions to the form of
definitive agreement that had been circulated to the bidders. On the basis of
the comparison and Montgomery's presentation, the Special Committee unanimously
determined that negotiations toward a definitive agreement should be pursued
with Cracken Harkey, who offered all cash consideration, and that efforts should
be made to maintain the interest of a second bidder and obtain an improved offer
from it. Montgomery and counsel for the Company and counsel for the Special
Committee continued negotiations with Cracken Harkey and the second bidder.

During the period from September 9 to September 20, 1997, Montgomery
provided brief, telephonic updates to the Special Committee regarding the
progress of negotiations with CHC.

The Special Committee met on September 20. It reviewed the forms of
definitive agreement negotiated with Cracken Harkey and with the second bidder,
particularly with respect to financing methods and conditions, breakup and
termination fees (and related escrow), closing conditions, and method of
determining the amount of shares included in the second bid.

After further consideration of the form of consideration, the
purchase price per share, the proposed form of the transaction and the
conditions to closing, the Special Committee unanimously approved the Cracken
Harkey agreement, which has the highest bid, and recommended it to the Board.
The second bidder proposed an offer of cash and stock that would have required
the approval of that bidder's shareholders. The Special Committee met with the
Board regarding its recommendation on September 22, 1997. On that date, the
Board considered the form of consideration, purchase price per share, the
proposed form of the transaction and the conditions to closing and unanimously
accepted the recommendation of the Special Committee, and gave its final
approval of the Merger on September 23, 1997. Certain members of the Board have
conflicts of interest in connection with the recommendations and the Merger.
See "Summary--Conflicts of Interest."

THE COMPANY'S REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS

At a meeting held on September 23, 1997, the Board, after a unanimous
recommendation by the Special Committee, concluded that the Merger was fair to
and in the best interests of the shareholders of the Company, unanimously
approved the Merger Agreement and the Merger, and recommended that the
shareholders of the Company adopt the Merger Agreement and approve the Merger.
Based upon its business judgment regarding competition in the Tex-Mex food
service industry and the Company's recent business trends, the Board believed
that the proposed Merger represented the best opportunity to maximize
shareholder value. In reaching its determination, the Board considered a number
of factors, including the matters discussed above and the oral opinion of
Montgomery rendered to the Board on September 22, 1997 (subsequently confirmed
by delivery of a written opinion dated as of such date) to the effect that, as
of such date and based upon and subject to certain matters stated in such
opinion, the consideration to be received by the holders of shares of Company
Common Stock was fair to such holders, from a financial point of view, as of
such date.

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<PAGE> 32

The September 22, 1997 written opinion rendered by Montgomery to the Board is
similar in all material respects to the oral opinion delivered by Montgomery to
the Board on the same date. See "--Opinion of Financial Advisor to the
Company." The Board considered such opinion in the total mix of information
regarding the proposed Merger that was available to, and evaluated by, the
Board. See "--Background."

The Board believes that all of the factors described above supported
its conclusion that the Merger is in the best interests of the Company and its
shareholders. Because the Board believes that the Merger is in the best
interests of all of the shareholders and that no material conflicts of interest
exist between the Board and nonaffiliated shareholders, an independent
representative to represent the interests of any shareholder was not retained.

The Board also recognized that the possibility of a Superior Takeover
Proposal was not precluded by the Merger Agreement.

In analyzing the proposed Merger, the Board evaluated the factors and
considerations described above and consulted with its financial and legal
advisors and with the Company's management. In evaluating the Merger versus
other alternatives, the Board considered the factors noted above, but did not
view any one such factor as determinative and did not assign particular weight
to any one such factor. Based upon the information presented to the directors,
the members of the Board unanimously adopted the Merger Agreement and
recommended that the shareholders of the Company vote "FOR" the adoption of the
Merger Agreement and approval of the Merger.

The Board has certain conflicts of interest with the Merger. See
"Summary--Conflicts of Interest."

OPINION OF FINANCIAL ADVISOR TO THE COMPANY

Pursuant to an engagement letter dated July 23, 1997 (the "Engagement
Letter"), the Special Committee retained Montgomery to act as its financial
advisor in connection with the consideration by the Company of various strategic
and financial alternatives available to it to maximize shareholder value,
including the possible sale of all or a portion of the Company. Montgomery was
engaged by the Board to analyze strategic alternatives for the Company, but was
later separately engaged by the Special Committee for such purpose and to
conduct a controlled sale of the Company and to assist in the drafting and
preparation of a confidential offering memorandum to be circulated to potential
buyers. Montgomery is a nationally recognized firm and, as part of its
investment banking activities, is regularly engaged in the valuation of
businesses and their securities in connection with merger transactions and other
types of acquisitions, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. The Company selected Montgomery as its financial advisor on
the basis of Montgomery's experience and expertise in transactions similar to
the Merger, and its reputation in the restaurant and investment communities.

In connection with the consideration by the Board of the merits of the
Merger, Montgomery was asked under the terms of the Engagement Letter to
perform various financial analyses and deliver to the Board the opinion based
on such analyses. THE OPINION OF MONTGOMERY WAS DIRECTED SOLELY TO THE BOARD
FOR ITS CONSIDERATION IN CONNECTION WITH THE MERGER, AND IS NOT A
RECOMMENDATION TO ANY HOLDER OF COMPANY COMMON STOCK AS TO WHETHER THE MERGER
IS IN SUCH HOLDER'S BEST INTERESTS OR AS TO WHETHER HOLDERS OF COMPANY COMMON
STOCK SHOULD VOTE FOR OR AGAINST THE MERGER. THE FULL TEXT OF SUCH WRITTEN
OPINION OF MONTGOMERY DATED SEPTEMBER 22, 1997, IS ATTACHED HERETO AS APPENDIX
B AND SETS FORTH CERTAIN IMPORTANT QUALIFICATIONS, ASSUMPTIONS MADE, MATTERS
CONSIDERED, AREAS OF RELIANCE ON OTHERS, AND LIMITATIONS ON THE REVIEW
UNDERTAKEN IN CONNECTION WITH SUCH OPINION. THE SUMMARY DESCRIPTION OF SUCH
OPINION SET FORTH BELOW IS QUALIFIED IN ITS ENTIRETY BY THE FULL TEXT OF THE
OPINION ATTACHED HERETO AS APPENDIX B, AND IS INCORPORATED HEREIN BY REFERENCE
AND SHOULD BE READ CAREFULLY AND IN ITS ENTIRETY IN CONNECTION WITH THIS PROXY
STATEMENT.

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<PAGE> 33
In connection with its opinion, Montgomery among other things: (i)
reviewed certain publicly available financial and other data with respect to
the Company, including the consolidated financial statements for recent years
and interim periods to June 30, 1997, and certain other relevant financial and
operating data relating to the Company made available to Montgomery from
published sources and from the internal records of the Company; (ii) reviewed
the financial terms and conditions of the Merger Agreement; (iii) reviewed
certain publicly available information concerning the historical market prices
and trading activity for Company Common Stock; (iv) compared the Company from a
financial point of view with certain other companies in the restaurant industry
which Montgomery deemed to be relevant; (v) considered the financial terms, to
the extent publicly available, of selected recent business combinations of
companies in the restaurant industry which Montgomery deemed to be comparable,
in whole or in part, to the Merger; (vi) reviewed and discussed with
representatives of the management of the Company certain information of a
business and financial nature regarding the Company, furnished to Montgomery by
the management of the Company, including financial forecasts and related
assumptions; (vii) made inquiries regarding and discussed the Merger and the
Merger Agreement and other matters related thereto with the Company's counsel;
and (viii) performed such other analyses and examinations as Montgomery deemed
appropriate.

Based upon its review of the foregoing, but subject to the limitations
set forth below and in reliance upon the assumptions set forth below,
Montgomery provided the Board with its opinion as investment bankers that as of
the date of their opinion (and as of September 22, 1997, which was the date
that Montgomery presented its financial analysis to the Board), the aggregate
consideration to be received by the holders of Company Common Stock pursuant to
the Merger was fair to such holders of shares of Company Common Stock from a
financial point of view. The terms of the Merger and the amount of the
consideration to be received by shareholders of the Company thereunder was
determined pursuant to negotiations between the Company and the Purchaser and
not pursuant to recommendations of Montgomery. No limitations were imposed by
the Company on Montgomery with respect to the investigations made or procedures
followed in rendering its opinion.

In connection with its review, Montgomery did not assume any
obligation for independent verification of financial and other information
reviewed by it and relied on such information being accurate and complete in
all material respects. With respect to the financial forecasts for the Company
provided to Montgomery by the company's management, Montgomery assumed that the
forecasts had been reasonably prepared on bases reflecting the best available
estimates and judgments of the Company's management as to the future financial
performance of the Company and that such projections provided a reasonable
basis upon which Montgomery could form its opinion. Montgomery also assumed
that there had been no material changes in the Company's assets, financial
condition, results of operations, business or prospects since the dates of the
last financial statements made available to Montgomery. Montgomery relied on
advice of the counsel and the independent accountants to the Company as to all
legal and financial reporting matters with respect to the Company, this Proxy
Statement, the Merger and the Merger Agreement. Montgomery assumes that the
Merger will be consummated in a manner that complies in all respects with the
applicable provisions of the Securities Act of 1933, as amended, the Exchange
Act and all other applicable federal and state statutes, rules and regulations.
In addition, Montgomery did not assume responsibility for making an independent
evaluation, appraisal or physical inspection of any of the assets or
liabilities (contingent or otherwise) of the Company, nor was Montgomery
furnished with any such appraisals. Finally, Montgomery's opinion was based on
economic, monetary, market and other conditions as in effect on, and the
information made available to Montgomery as of, the date of the opinion
(September 22, 1997). Accordingly, although subsequent developments may affect
this opinion, Montgomery did not assume and does not have any obligation to
update, revise or reaffirm this opinion.

Montgomery also assumed that the Merger will be consummated in
accordance with the terms described in the Merger Agreement, without any further
amendments thereto, and without waiver by the Company of any of the conditions
to its obligations thereunder. However, Montgomery has informed the Company
supplementally that the amendments to the Merger Agreement do not adversely
affect its opinion. The full text of the Merger Agreement is attached hereto
as Appendix A and the terms described in the Merger Agreement and the conditions
to the Company's obligations thereunder should be reviewed and understood by
holders of shares of Company Common Stock in connection with their consideration
of the Merger.

Set forth below is a brief summary of selected analyses presented by
Montgomery to the Board on September 22, 1997 in connection with its September
22, 1997 opinion described above.

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Market Test

Montgomery conducted a market test by circulating a confidential
offering memorandum to 41 potential acquirors of the Company. Of those
entities contacted, the Company received five preliminary bids. Such bids
ranged in price from $10.00 to $12.00 per share. The form of consideration in
four of the five bids was all cash. One bid was structured as a combination of
cash and stock of the bidder. The Company subsequently received three final
bids to acquire the Company. Such bids ranged in price from $11.00 to $12.75
per share. The form of consideration in two of the bids was all cash, subject
to available financing. One bid was structured as a combination of cash and
stock of the bidder. See "The Merger--Background." Of these three final bids,
the bid submitted by the Purchaser contemplating the Merger (resulting in
consideration to be received by the shareholders of the Company of $12.75 in
cash per share) was selected by the Board was the highest bid received and was
selected as the best bid. The second highest bidder proposed an offer of cash
and stock that would have required the approval of that bidder's shareholders.

Comparable Company Analysis

Using public and other available information, Montgomery calculated
the imputed per share value of the Company Common Stock based on the multiples
of latest twelve months' ("LTM") earnings before interest, taxes, depreciation
and amortization ( "EBITDA") and earnings before interest and taxes ("EBIT") of
selected publicly traded restaurant companies. Montgomery applied the mean and
median multiples of LTM, EBITDA and EBIT for the selected restaurant companies
to the LTM, EBITDA and EBIT of the Company and to the projections by the
Company's management of its 1997 fiscal year. This analysis indicated an
imputed aggregate value (defined as equity value plus net debt) of the Company
of between $52.8 million and $56.7 million, or an equity value of between
$11.10 or $12.09 per share.

Comparable Transactions Analysis

Montgomery also reviewed the consideration paid in selected merger
and acquisition transactions in the restaurant industry that have been
announced since January 1988. Montgomery analyzed the consideration paid in
such transactions as a multiple of the target companies' LTM revenues and
EBITDA, respectively. Montgomery then applied the foregoing multiples to the
Company's LTM revenues and EBITDA. This analysis indicated an imputed
aggregate value of the Company of between $50.9 million and $73.1 million, or
an equity value of between $10.61 and $16.37 per share.

Premiums Paid Analysis

Montgomery reviewed the consideration paid in comparable U.S.
acquisitions involving cash consideration of between $30 million and $100
million that have been announced since January 1, 1990. Montgomery calculated
the premiums paid in these transactions over the applicable stock prices of the
target companies one day and one week prior to the announcement of the
acquisition offer, and then calculated the mean and median of those
premiums (which were 39.2% and 28.1%, respectively). Montgomery then applied
the mean and median premiums so derived to the Company's closing share prices
on June 12, 1997 ($7.25) and September 19, 1997 ($10.50). The share price of
the Company as of June 12, 1997, was selected for this analysis because on the
following day (June 13) a 5% shareholder of the Company filed a Schedule 13D
which included a copy of an open letter sent concurrently to the Board
expressing, among other things, these shareholders' desire that the Board
consider qualified proposals of acquisition. This analysis indicated an
imputed aggregate value of the Company of between $45.9 million and $66.4
million, or an equity value of between $9.30 and $14.61 per share, based on the
price of Company Common Stock.

No other company or transaction used in the comparable company
analysis, the comparable transactions analysis or the premiums paid analysis as
a comparison is identical to the Company or the Merger. Accordingly, an
analysis of the

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<PAGE> 35
results of the foregoing is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading value of the companies to which the Company and the Merger are being
compared.

Discounted Cash Flow Analysis

Montgomery applied a discounted cash flow analysis to the Company's
financial forecasts for 1997 through 2000. The Company did not provide
Montgomery with any financial forecasts for periods beyond 2000.

In conducting its discounted cash flow analysis, Montgomery calculated
the estimated future streams of free cash flows that the Company would produce
through 2001 (using management's financial forecasts for 1997 through 2000, and
applying the mathematical assumptions with respect to debt, depreciation,
capital expense and changes in working capital for 2001). Such cash flow
streams and aggregate values were discounted to present values using a range of
discount rates of between 9.6% and 10.7%, chosen to reflect assumptions
regarding the Company's cost of capital. Assuming a perpetuity growth rate of
between 3% and 5%, this analysis indicated an imputed aggregate value of the
Company of between $47.0 million and $72.0 million respectively, or an equity
value of between $9.62 and $15.99 per share.

While the foregoing summary describes all analyses and examinations
that Montgomery deemed material to the preparation of its opinion to the Board,
it does not purport to be a comprehensive description of all analyses and
examinations actually conducted by Montgomery. The preparation of a fairness
opinion necessarily is not susceptible to partial analysis or summary
description; and selecting portions of the analyses and of the factors
considered by Montgomery, without considering all analyses and factors, would
create an incomplete view of the process underlying the analyses set forth in
the presentation of Montgomery to the Board on September 22, 1997. In
addition, Montgomery may have given some analyses more or less weight than
other analyses, and may have deemed various assumptions more or less probable
than other assumptions. Accordingly, the ranges of valuations resulting from
any particular analysis described above should not be taken to be Montgomery 's
view of the actual value of the Company or Company Common Stock. To the
contrary, Montgomery expressed no opinion on the actual value of the Company or
Company Common Stock, and its opinion that is addressed and limited to the
Board extends only to the belief expressed by Montgomery that the immediate
value to holders of Company Common Stock, from a financial point of view under
the Merger, is within the range of values that might fairly be ascribed to the
Company Common Stock as of the date of the opinion of Montgomery (September 22,
1997), and as of the date of Board's consideration of the Merger (September 22,
1997). At the time of the delivery of its oral opinion, Montgomery provided a
draft form of opinion that was identical in all material respects to the
executed opinion later provided to the Board.

In performing its analyses, Montgomery made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of the Company. The
analyses performed by Montgomery are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than those suggested by such analyses. Such analyses were prepared
solely as part of Montgomery's analysis for the Board of the fairness of the
Merger to the Company from a financial point of view, and were provided solely
to the Board in connection with the Board's consideration of the Merger. The
analyses do not purport to be appraisals or to reflect the prices at which a
company might actually be sold or the prices at which any securities may trade
at any time in the future. Montgomery used in its analyses various projections
of future performance prepared by the management of the Company. The
projections are based on numerous variables and assumptions which are
inherently unpredictable and must be considered not certain or accurate as
projected. Accordingly, actual results could vary significantly from those set
forth in such projections.

As described above, the opinion of Montgomery and the presentation to
the Special Committee and the Board summarized above were among the many
factors taken into consideration by the Board in making its determination to
approve, and to recommend that its shareholders approve, the Merger.
Montgomery, however, does not make any recommendation to holders of shares of
Company Common Stock (or to any other person or entity) as to whether such
shareholders should vote for or against the Merger.

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<PAGE> 36

In accordance with the Engagement Letter, the opinion of Montgomery is
addressed solely to the Board and may not be relied upon by any other person. It
is Montgomery's position that its duties in connection with its fairness opinion
are solely to the Board, and that it has no legal responsibility to any other
persons, including the Company's shareholders, under California state law, the
governing law of the Engagement Letter. Montgomery would likely assert the
substance of the foregoing disclaimer as a defense to any claims that might be
brought against it by holders of Company Common Stock with respect to its
fairness opinion. However, since no California state court has definitively
ruled on the availability to a financial advisor of an express disclaimer as a
defense to shareholder liability with respect to its fairness opinion, this
issue necessarily would have to be resolved by a court of competent
jurisdiction. Furthermore, there can be no assurance that a court of competent
jurisdiction would apply California state law to the resolution of this issue if
it were ever to be presented. In any event, the availability or
non-availability of such a defense will have no effect on Montgomery's rights
and responsibilities under the federal securities laws, or the rights and
responsibilities of the Board under governing state law or under the federal
securities laws.

Pursuant to the Engagement Letter, the Company agreed to pay
Montgomery a retainer of $50,000 and a fee equal to $250,000 upon the delivery
of the written opinion to the Board that is described above (or, if earlier,
upon the execution of a definitive agreement for the sale of the Company).
This $250,000 fee was not conditioned on the outcome of Montgomery's opinion or
whether such opinion was deemed favorable or unfavorable by the Company or its
Board. In addition, if the Merger is effected on the terms set forth in the
Merger Agreement, the Engagement Letter provides for the Company to pay
Montgomery a fee equal to approximately $1.6 million (the "Contingent Fee").
The $50,000 retainer and the $250,000 fee described above will be credited
against the Contingent Fee payable to Montgomery if the Merger is effected.
The Company will be obligated to pay the Contingent Fee only if the Merger (or
another transaction) is consummated. Accordingly, the payment of a substantial
majority of Montgomery's total fee is subject to the consummation of the
Merger. The Board was aware of this fee structure and took it into account in
considering Montgomery's opinion and in approving the Merger Agreement and the
transactions contemplated thereby. The Engagement Letter also calls for the
Company to reimburse Montgomery for its reasonable out-of-pocket expenses up to
$100,000. Pursuant to a separate letter agreement, the Company has agreed to
indemnify Montgomery, its affiliates, and their respective partners, directors,
officers, agents, consultants, employees and controlling persons against
certain liabilities, including liabilities under the federal securities laws,
relating to or arising out of Montgomery's engagement. Montgomery and its
affiliates may maintain business relationships with the Company and its
affiliates.

In the ordinary course of business, Montgomery may trade equity
securities of the Company for its own account and for the accounts of customers
and, accordingly, may at any time hold a long or short position in such
securities.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The following is a general summary of certain federal income tax
consequences of the Merger to holders of shares of Company Common Stock. This
discussion is based on the Internal Revenue Code of 1986, as amended (the
"Code"), existing and proposed regulations thereunder, Internal Revenue Service
("IRS") rulings and pronouncements, reports of congressional committees,
judicial decisions and current administrative rulings and practice, all as in
effect on the date hereof. Any change to the foregoing sources could be
retroactive and, accordingly, could modify the tax consequences discussed
herein. No ruling from the IRS with respect to the matters discussed herein
has been requested and there is no assurance that the IRS will agree with the
conclusions set forth in this discussion. In addition, no tax opinion has been
requested or received by the Company with respect to the federal income tax
consequences of the Merger.

The discussion below does not address all of the federal income tax
consequences that may be relevant to particular shareholders in light of their
personal circumstances or to certain types of shareholders (such as dealers in
securities, corporations, insurance companies, foreign individuals and
entities, financial institutions and tax-exempt entities) who may be subject to
special treatment under the federal income tax laws. This discussion also does
not address the federal income tax consequences to shareholders who acquired
their shares of Company Common Stock through the exercise of employee stock
options or otherwise as compensation. Furthermore, this discussion does not
address any tax consequences under state, local or foreign laws. This summary
assumes that the shares of Company Common Stock are held as "capital assets"
within the meaning of section 1221 of the Code.

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For federal income tax purposes, an individual holder of shares of
Company Common Stock who exchanges such shares for cash pursuant to the Merger
or who receives cash in exchange for such shares pursuant to the exercise of
appraisal rights will be treated as having sold his or her shares of Company
Common Stock for cash in a taxable transaction. Gain or loss will be
recognized on the exchange in an amount equal to the difference between the
cash received and the holder's adjusted tax basis in the shares of Company
Common Stock exchanged therefor. Such gain or loss will be a capital gain or
loss if the holder of the shares of Company Common Stock held such shares as a
capital asset at the Effective Time, and may qualify as long-term capital gain
or loss if such holder held the shares of Company Common Stock for a period
greater than 12 months at the Effective Time. Furthermore, such capital gain
may qualify for a reduced rate of tax if a holder held the shares of Company
Common Stock as a capital asset for a period of more than 12 but less than 18
months at the Effective Time and may qualify for a further reduced rate of tax
if the holder held the shares as a capital asset for more than 18 months.

Holders of Company Common Stock or other payees generally will be
required to provide the Exchange Agent (as defined in "Certain Terms of the
Merger Agreement--Manner and Basis of Converting Shares") with their correct
taxpayer identification numbers (certified under penalties of perjury) on the
Substitute Forms W-9 included as part of the transmittal forms sent to such
shareholders pursuant to the Merger. The taxpayer identification number of an
individual is his or her social security number. A holder of Company Common
Stock or other payee who does not provide the Exchange Agent with a correct
taxpayer identification number may be subject to a $50 fine imposed by the IRS.
Furthermore, payments made to a holder of Company Common Stock or other payee
may be subject to backup withholding if: (i) the Company shareholder or other
payee fails to furnish a correct taxpayer identification number, (ii) the
Company shareholder or other payee furnishes an incorrect taxpayer
identification number, (iii) the Company, Purchaser, or the Exchange Agent is
notified by the IRS that such Company shareholder or other payee failed to
report interest or (iv) under certain circumstances, the Company shareholder
fails to provide a certified statement, signed under penalty of perjury, that
the taxpayer identification number provided is the correct number and that the
Company shareholder is not subject to backup withholding.

If backup withholding applies, the Exchange Agent is required to and
will withhold 31 percent of any payment made to a holder of Company Common
Stock or other payee. Backup withholding is not an additional tax but is
credited against the federal income tax liability of the taxpayer subject to
the withholding. If backup withholding results in an overpayment of a
taxpayer's federal income taxes, that taxpayer may obtain a refund from the
IRS.

Generally, a holder of Company Common Stock or other payee may avoid
backup withholding by completing the Substitute Form W-9 included as part of
the transmittal forms and certifying that the taxpayer identification number
included therein is correct and that the holder of Company Common Stock or
other payee is not subject to backup withholding. Certain types of taxpayers
(including corporations and certain foreign individuals) are not subject to
these reporting or withholding requirements.

SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF PARTICIPATING IN THE MERGER, INCLUDING
THE APPLICABILITY OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, CHANGES IN
APPLICABLE TAX LAWS AND ANY PENDING OR PROPOSED LEGISLATION.

ACCOUNTING TREATMENT

The Merger will be accounted for as a purchase under generally
accepted accounting principles ("GAAP").

EXISTING RELATIONSHIPS WITH PURCHASER

The Company has never conducted business with nor has it had any
business relationship with Purchaser prior to the transactions described in the
Merger Agreement. The Company's activities have been limited to providing due
diligence information and reasonable accommodation with respect to Purchaser's
information needs in its efforts to secure financing commitments. Purchaser
has begun to discuss employment agreements with the five executive officers

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of the Company in contemplation of these officers continuing in their roles in
the surviving corporation. Additionally, Mr. Wallace A. Jones is expected to
be a member of the board of directors of the surviving corporation. Also, Mr.
Jones previously was a business partner in an unrelated restaurant venture with
one of the beneficial owners of Purchaser, Mr. E. Gene Street.

RIGHTS OF DISSENTING SHAREHOLDERS

If the Merger is consummated, shareholders of the Company who did not
vote in favor of the Merger will have certain rights to dissent and demand the
appraisal of and payment in cash for the "fair value" of their shares of
Company Common Stock pursuant to Articles 5.11, 5.12 and 5.13 of the TBCA (the
"Appraisal Rights Statutes"). Under the Appraisal Rights Statutes, if the
statutory procedures are complied with, a judicial determination of the fair
value (excluding any depreciation or appreciation in anticipation of the
Merger) required to be paid in cash to such dissenting holders for their shares
will be made. The value so determined could be more or less than the purchase
price per share pursuant to the Merger Agreement.

ANY SHAREHOLDER CONTEMPLATING THE EXERCISE OF APPRAISAL RIGHTS IS
URGED TO REVIEW CAREFULLY THE PROVISIONS OF ARTICLES 5.11, 5.12 AND 5.13 OF THE
TBCA (A COPY OF WHICH IS ATTACHED AS APPENDIX C TO THIS PROXY STATEMENT),
PARTICULARLY WITH RESPECT TO THE PROCEDURAL STEPS REQUIRED TO PERFECT THE RIGHT
OF APPRAISAL. IF THE RIGHT OF APPRAISAL IS LOST DUE TO THE SHAREHOLDER'S
FAILURE TO COMPLY WITH THE PROCEDURAL REQUIREMENTS OF THE APPRAISAL RIGHTS
STATUTES, THE SHAREHOLDER WILL RECEIVE THE MERGER CONSIDERATION WITHOUT
INTEREST FOR EACH SHARE OWNED. SET FORTH BELOW IS A SUMMARY OF THE PROCEDURES
RELATING TO THE EXERCISE OF THE RIGHT OF APPRAISAL, WHICH SHOULD BE READ IN
CONJUNCTION WITH THE FULL TEXT OF ARTICLES 5.11, 5.12 AND 5.13 OF THE TBCA.

Article 5.12 of the TBCA provides that a shareholder wishing to
exercise such shareholder's rights for appraisal with respect to the Merger
must file, prior to the Special Meeting, a written objection to the Merger
stating that its right to dissent will be exercised if the Merger becomes
effective and giving the shareholder's address, to which notice of the approval
of the Merger shall be delivered or mailed in such event. If the Merger is
effected and the shareholder did not vote in favor of the Merger, the surviving
corporation will, within 10 days after the Effective Time, deliver or mail to
the shareholder written notice that the Merger has been effected. In order to
exercise his or her right of appraisal, a shareholder must, within ten days
from the delivery or mailing of the notice from the surviving corporation, make
written demand ("Demand") on the surviving corporation for payment of the fair
value of the shareholder's shares. The Demand must state the number of shares
owned by such shareholder, and the shareholder's estimate of the fair value of
such shares. Any shareholder failing to make Demand within the 10-day period
will be bound by the Merger.

The Demand should be executed by or for such shareholder of record,
fully and correctly, as such shareholder's name appears on the certificate(s)
formerly representing the shares. If shares are owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, execution of the Demand
should be made in such capacity. If shares are owned of record by more than
one person, as in a joint tenancy or tenancy in common, the Demand should be
executed by or for all joint owners. Any shareholder who has made a Demand may
withdraw the Demand at any time before payment for the shares is made or before
any petition asking for a determination of the fair value of the shares is
filed.

Within 20 days after making a Demand, the shareholder must submit the
certificates representing the shares to the surviving corporation for notation
thereon that a Demand has been made. The failure of a shareholder to submit
the certificates will terminate the shareholder's rights of appraisal.

Within 20 days after receipt of a Demand, the surviving corporation
must deliver or mail to the shareholder a written notice that either (i)
accepts the amount claimed in the Demand and agrees to pay such amount within
90 days after the Effective Time upon the surrender of the duly endorsed
certificates formerly representing such shareholder's shares, or (ii) contains
an estimate by the surviving corporation of the fair value of the shares
together with an offer to pay such amount within 90 days after the Effective
Time. If the surviving corporation responds to the Demand with an estimate of
the fair

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value of the shares and the shareholder wishes to accept the surviving
corporation's estimate, the surviving corporation must receive written notice
from the shareholder accepting such estimate within 60 days after the
shareholder receives the estimate from the surviving corporation and
surrendering the duly endorsed certificates formerly representing such
shareholder's shares. If, within 60 days after the Effective Time, the value
of the shares is agreed upon between the shareholder and the surviving
corporation, payment for the shares will be made within 90 days after the
Effective Time and upon surrender of the certificates duly endorsed. Upon
payment of the agreed value, the shareholder will cease to have any interest in
the shares or the company.

If, within the period of 60 days after the Effective Time, the
shareholder and the surviving corporation do not agree on the fair value of the
Shares, then the shareholder or the surviving corporation may, within 60 days
following the expiration of such 60-day period, file a petition in any court of
competent jurisdiction in the county in which the principal office of the
surviving corporation is located, to obtain a judicial finding and
determination of the fair value of the shareholder's shares. Upon filing such
petition, the shareholder must serve the surviving corporation with a copy of
such petition. Within 10 days after being served with a copy of the petition,
the surviving corporation must file with the court a list of shareholders who
have demanded payment for their shares and with whom agreements as to the value
of their shares have not been reached. All shareholders will be notified as to
the time and place of the hearing of the petition. All shareholders thus
notified and the surviving corporation will then be bound by the final
judgement of the court. After the hearing of the petition, the court will
appoint one or more qualified appraisers who will determine the fair value of
the shares and will file a report of that value with the clerk of the court.
Each party will have reasonable opportunity to submit to the appraisers
pertinent evidence as to the value of the shares. Either party may make
exceptions to the appraiser's report. The court will then determine the fair
value of the shares and will direct the surviving corporation, upon receipt of
the duly endorsed certificates formerly representing such Shares, to pay the
value together with interest thereon beginning on the 91st day after the
Effective Time to the date of the judgment to such shareholders entitled to
payment. Upon payment of the judgment, the dissenting shareholders will cease
to have any interest in the shares or the company.

The TBCA provides that, in the absence of fraud, the foregoing
procedures represent the exclusive remedy under Texas law for a shareholder
objecting to the Merger Agreement for the recovery of the value of such
holder's shares or of money damages to such shareholder with respect to the
Merger.

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<PAGE> 40
CERTAIN TERMS OF THE MERGER AGREEMENT

The following description does not purport to be complete and is
qualified in its entirety by reference to the Merger Agreement, a copy of which
is attached as Appendix A to this Proxy Statement and is incorporated herein by
reference.

EFFECTIVE TIME OF THE MERGER

The Merger Agreement provides that, as promptly as practicable after
the satisfaction or waiver of the conditions to effecting the Merger, the
parties shall cause the Merger to be consummated by filing Articles of Merger
with the Secretary of State of the State of Texas, in such form as required by,
and executed in accordance with, the relevant provisions of the TBCA. It is
anticipated that, if the Merger Agreement is approved and adopted at the
Special Meeting and all other conditions to the Merger have been satisfied or
waived, the Effective Time will occur on the date of the Special Meeting or as
soon thereafter as practicable.

MANNER AND BASIS OF CONVERTING SHARES

At the Effective Time, by virtue of the Merger and without any action
on the part of any holder of any capital stock of the Company, Purchaser or
Sub, each share of Company Common Stock, if any, that is owned by Purchaser or
Sub or any Subsidiary of Purchaser or held in the treasury of the Company shall
be canceled and cease to exist and no capital stock of Purchaser or other
consideration shall be delivered in exchange therefor. Each issued and
outstanding share of Company Common Stock (other than shares of Company Common
Stock canceled pursuant to the previous sentence), which shall include the
right attached to each share of Company Common Stock pursuant to the Rights
Agreement, shall be converted into $12.75 (the "Conversion Value"). Upon such
conversion, all such shares of Company Common Stock shall be canceled and cease
to exist, and the holder of a certificate representing such shares shall cease
to have any rights with respect thereto, except the right to receive the cash
consideration specified above upon the surrender of such certificate (or, in
the case of shareholders perfecting their right to dissent in accordance with
the TBCA, the rights of dissenting shareholders under the TBCA). Each issued
and outstanding share of common stock, par value $.01 per share, of Sub shall
be converted into one fully paid and nonassessable share of common stock, par
value $.10 per share, of the surviving corporation.

Holders of shares of Company Common Stock shall have the right under
Article 5.11 of the TBCA to dissent from the Merger. If the Merger is
consummated, each holder of Company Common Stock who has not voted in favor of
the Merger and who otherwise has perfected its right to dissent under Article
5.12 of the TBCA shall be entitled to such rights of a dissenting shareholder,
and each share of Company Common Stock in respect of which such rights to
dissent shall have been perfected shall not be converted into the Conversion
Value unless such appraisal rights shall cease as provided in Article 5.13 of
the TBCA.

As soon as practicable after the date of the Merger Agreement and in
any case prior to the Effective Time, Purchaser and the Company shall mutually
agree on a bank or trust company to act as exchange agent for the Merger (the
"Exchange Agent"). On the Closing Date of the Merger (defined in the Merger
Agreement as the second business day immediately following the date on which
the last of the conditions to the Merger are fulfilled, or otherwise waived, or
at such other time and date as Purchaser and the Company shall mutually agree)
and prior to the filing of the Articles of Merger, Sub shall deposit with the
Exchange Agent a sufficient amount of cash to pay to the shareholders of the
Company the consideration for the Merger. Such cash will be invested by the
Exchange Agent in U.S. government securities maturing in 30 days or less and
all interest which is earned thereon prior to the time the cash is fully paid
to the shareholders of the Company shall be paid over by the Exchange Agent to
the surviving corporation in accordance with the terms of the agreement with
the Exchange Agent on the first anniversary of the Closing Date (if not
otherwise required to satisfy obligations owing to the shareholders of the
Company).

As soon as practicable after the Effective Time, the Exchange Agent
shall mail to each holder of record of a certificate or certificates that,
immediately prior to the Effective Time, represented outstanding shares of
Company Common Stock (the "Certificates") that were converted (collectively,
the "Converted Shares") into cash,

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<PAGE> 41

(i) a form of letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to any Certificate shall pass, only upon
actual delivery of such Certificate to the Exchange Agent) and (ii) instructions
for use in effecting the surrender of Certificates in exchange for such cash.
Upon surrender of a Certificate to the Exchange Agent (or to such other agent or
agents as may be appointed by agreement of Purchaser and the Company), together
with a duly executed letter of transmittal and such other documents as the
Exchange Agent shall require, the holder of such Certificate shall be entitled
to receive in exchange therefor a check representing the consideration that such
holder has the right to receive pursuant to the provisions of the Merger
Agreement. In the event of a transfer of ownership of Converted Shares that is
not registered in the transfer records of the Company, a check representing the
consideration may be issued to the transferee if the Certificate representing
such Converted Shares is presented to the Exchange Agent, accompanied by all
documents required to evidence and effect such transfer and by evidence
satisfactory to the Exchange Agent that any applicable stock transfer taxes have
been paid. If any Certificate shall have been lost, stolen, mislaid or
destroyed, then upon receipt of (a) an affidavit of that fact from the holder
claiming such Certificate to be lost, mislaid, stolen or destroyed, (b) such
bond, security or indemnity, as Purchaser or the Exchange Agent may reasonably
require, and (c) any other documentation necessary to evidence and effect the
bona fide exchange thereof, the Exchange Agent shall issue to such holder a
check representing the consideration into which the shares represented by such
lost, stolen, mislaid or destroyed Certificate shall have been converted. Until
surrendered as contemplated by this paragraph, each Certificate shall be deemed
at any time after the Effective Time to represent only the right to receive upon
such surrender the consideration for the Merger contemplated above.

From and after the Effective Time, the stock transfer books of the
Company shall be closed and no transfer of any Company Common Stock shall
thereafter be made. If after the Effective Time any certificates evidencing
shares of Company Common Stock are presented for transfer, they shall be
canceled and exchanged for the consideration determined in accordance with the
Merger Agreement.

All funds held by the Exchange Agent for payment to the holders of
unsurrendered Certificates and unclaimed at the end of one year from the
Effective Time shall be returned to the surviving corporation whereupon any
holder of unsurrendered Certificates shall look as a general unsecured creditor
only to the surviving corporation for payment of any funds to which such holder
may be entitled, subject to applicable law. Neither Purchaser, the Company nor
the surviving corporation shall be liable to any person for such shares or
funds delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.

At and after the Effective Time, the officers and directors of the
surviving corporation will be authorized to execute and deliver, in the name
and on behalf of the Company or Sub, any deeds, bills of sale, assignments or
assurances and to take and do, in the name and on behalf of the Company or Sub,
any other actions and things to vest, perfect or conform of record or otherwise
in the surviving corporation any and all right, title and interest in, to and
under any of the rights, properties or assets acquired or to be acquired by the
surviving corporation as a result of, or in connection with, the Merger.

STOCK OPTIONS

At the Effective Time, each holder of a then outstanding Option,
whether or not then exercisable or vested, shall, in cancellation and
settlement thereof, receive the Option Consideration. As of the date hereof,
763,225 Options were outstanding, having an aggregate Option Consideration of
approximately $2.0 million. The Company shall take such actions as are
appropriate to provide that, at the Effective Time (i) all options then
outstanding under any of the Stock Option Plans, whether or not then
exercisable or vested, shall become fully exercisable and vested; (ii) each
Option then outstanding under any of the Stock Option Plans shall be canceled
and (iii) in consideration of such cancellation and in full satisfaction of all
rights of the holder under such Option, each such Option shall be converted
into an amount in cash in respect thereof equal to the Option Consideration.
Further, the Company will take such action as may be necessary so that from and
after the date of the Merger Agreement, no further grants of stock, options, or
other rights will be made under any of the Stock Option Plans.

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<PAGE> 42
CONDITIONS TO THE MERGER

The respective obligations of Purchaser and the Company to consummate
the Merger are subject to the satisfaction of the following conditions, any or
all of which may be waived in writing by the Company and Purchaser, in whole or
in part, to the extent permitted by applicable law: (a) the Merger Agreement
shall have been adopted and the Merger shall have been approved by a vote of
the holders of at least two-thirds of the outstanding shares of Company Common
Stock on or prior to December 31, 1997; (b) no suit, action or other proceeding
shall be pending by any Governmental Authority in which it is sought to
restrain or prohibit the performance of or to obtain damages in excess of
$250,000 or other relief in connection with the Merger Agreement or the
transactions contemplated thereby, and no temporary restraining order or
preliminary or permanent injunction or other order by any federal or state
court preventing consummation of the Merger shall have been issued and continue
in effect, and the Merger and the other transactions contemplated by the Merger
Agreement shall not have been prohibited under any applicable federal or state
law or regulation; (c) the Company Required Statutory Approvals and the
Purchaser Required Statutory Approvals shall have been obtained at or prior to
the Effective Time (or, in the case of the filings required, if any, under the
HSR Act, all applicable waiting periods and any extensions thereof shall have
expired or otherwise been terminated).

The obligation of Purchaser to effect the Merger is also subject to
the satisfaction at or prior to the Closing Date of the following conditions,
any or all of which may be waived in writing by Purchaser, in whole or in part:
(a) the Company shall have performed in all material respects its agreement and
covenants contained in or contemplated by the Merger Agreement required to be
performed by it at or prior to the Effective Time; (b) the representations and
warranties of the Company set forth in the Merger Agreement shall be true and
correct in all material respects as of the date of the Merger Agreement and as
of the Closing Date as if made on and as of the Closing Date, except as
otherwise contemplated by the Merger Agreement; (c) Purchaser shall have
received (i) a certificate signed by the Chief Executive Officer and Chief
Financial Officer of the Company, dated the Closing Date, to the effect that,
to each such officer's knowledge (having made inquiry), (x) the conditions set
forth in the Merger Agreement have been satisfied and (y) the number of shares
of Company Common Stock outstanding as of the Closing Date on a fully-diluted
basis represent all shares of Company Common Stock to be exchanged for the
Conversion Value, and (z) all statements, representations, warranties or
disclosures set forth in the schedules are true, correct and complete in all
respects as of the Closing Date, or listing deviation, if any, (ii) resolutions
of the Board approving and authorizing the Merger and the execution, delivery
and performance of the Merger Agreement, certified as of the Closing Date by
the corporate secretary or assistant corporate secretary of the Company as
being in full force and effect without modification or amendment, (iii)
signature and incumbency certificates of the officers of the Company and (iv)
good standing certificates (including verification of tax status) of recent
date of the Company and each of its Subsidiaries from their respective states
of incorporation and any other states in which failure to be qualified to do
business would result in a Company Material Adverse Effect, certified in each
case by the applicable Secretary of State of Texas or other authorized
governmental entity; (d) Purchaser shall have received an opinion of Jenkens &
Gilchrist, a Professional Corporation, in form and substance satisfactory to
Purchaser, addressed to Purchaser and dated the Closing Date; and (e) the
Company Required Consents shall have been obtained except those that in the
aggregate would not result in and would not reasonably be likely to result in a
Company Material Adverse Effect.

The obligation of the Company to effect the Merger is also subject to
the satisfaction at or prior to the Closing Date of the following conditions,
any or all of which may be waived in writing by the Company, in whole or in
part: (a) Purchaser shall have performed in all material respects its
agreements and covenants contained in or contemplated by the Merger Agreement
required to be performed by it at or prior to the Effective Time; (b) the
representations and warranties of Purchaser set forth in the Merger Agreement
shall be true and correct in all material respects as of the date of the Merger
Agreement and as of the Closing Date as if made on and as of the Closing Date,
except as otherwise contemplated by the Merger Agreement; (c) the Company shall
have received a certificate signed by the Chief Executive Officer and Chief
Financial Officer of Purchaser, date the Closing Date, to the effect that, to
each such officer's knowledge, the conditions set forth in the Merger Agreement
have been satisfied; (d) the Company shall have received an opinion of Cassell
& Stone, L.L.P., in form and substance satisfactory to the Company, addressed
to the Company and dated the Closing Date, which opinion may be based on
appropriate representations of Purchaser; (e) Sub shall have deposited with the
Exchange Agent by wire transfer in immediately available funds, an amount equal
to the product of the Conversion Value times the number of issued and
outstanding shares of Company Common Stock as of the Effective Date plus the
amount of the Option Consideration; (f) the opinion of Montgomery delivered and
addressed to the Board dated September 22, 1997 shall not

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have been withdrawn; and (g) to the extent Purchaser shall have obtained a
solvency opinion in connection with the financing of the transactions
contemplated by the Merger Agreement, such solvency opinion shall be addressed
jointly to Purchaser and to the Company.

There can be no assurance that all of the conditions to the Merger
will be satisfied.

REPRESENTATIONS AND WARRANTIES

The Merger Agreement contains various representations and warranties
of the Company, Sub and Purchaser relating to, among other things: (i) various
corporate organization and qualification matters, (ii) authorization matters in
connection with the approval of the Merger Agreement, (iii) the
non-contravention of the Merger Agreement with any of the Company's,
Purchaser's or Sub's corporate and financial documents, (iv) the Company
Required Statutory Approvals, (v) the Purchaser Required Statutory Approvals,
(vi) the ownership of Company Common Stock by Purchaser, (vii) the ownership of
any Subsidiaries by the Company and (viii) the capitalization of the Company
and Sub, and the Company makes further representations and warranties
concerning (ix) compliance with governmental and environmental requirements,
(x) the financial statements, financial reports and any reports filed by the
Company with the Commission, (xi) any undisclosed liabilities of the Company,
(xii) litigation, (xiii) this Proxy Statement, (xiv) certain tax matters, (xv)
employee matters, (xvi) labor matters, (xvii) environmental matters, (xviii)
the vote requirements for passage of the Merger Agreement, (xix) insurance,
(xx) material contracts and agreements, (xxi) state takeover statutes and the
absence of a super-majority provision in Texas, and (xxii) the absence of any
interests by the officers and directors of the Company in the Company or any of
its Subsidiaries. The representations and warranties expire at the Effective
Time.

CERTAIN COVENANTS; CONDUCT OF BUSINESS PRIOR TO THE MERGER

The Company has agreed that, prior to the Effective Time, the Company
will, and will cause its Subsidiaries to, conduct their respective businesses
in the usual, regular and ordinary course in substantially the same manner as
conducted prior to entering into the Merger Agreement and use all commercially
reasonable efforts to preserve their respective business organizations and
goodwill, preserve the goodwill and relationships with customers, suppliers,
distributors and others having business dealings with them and, subject to
prudent management of workforce needs and ongoing programs in force on the date
of the Merger Agreement, keep available the services of their officers and
employees on the date of the Merger Agreement. Between the date of the Merger
Agreement and the Closing Date, the Company will not hire any senior management
personnel without the consent of Purchaser, which consent will not be
reasonably withheld.

The Company has also agreed that, prior to the Effective Time, the
Company will not, nor will it permit any of its Subsidiaries to: (a) declare
or pay any dividends or make other distributions in respect of any of their
capital stock other than to the Company or its Subsidiaries; (b) split, combine
or reclassify any of their capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of, or in substitution
for, shares of their capital stock; or (c) redeem repurchase or otherwise
acquire any shares of their capital stock, other than (i) intercompany
acquisitions of capital stock, or (ii) in connection with the administration of
employee benefit and dividend reinvestment plans as in effect on the date of
the Merger Agreement in the ordinary course of the operation of such plans.

The Company has also agreed that prior to the Effective Time it will
not, and will not permit any of its Subsidiaries to, issue, agree to issue,
deliver or sell, or authorize or propose the issuance, delivery or sale of, any
shares of their capital stock or any class or any securities convertible into
or exchangeable for, or any rights, warrants or options to acquire, any such
shares or convertible or exchangeable securities except for: (a) the issuance
of common stock or other securities by the Company pursuant to the Stock Option
Plans, in each case in the ordinary course of the operation of such plans and
arrangements in accordance with their current terms; (b) existing outstanding
securities and rights to acquire securities of the Company; or (c) issuances by
a wholly owned Subsidiary of its capital stock to the Company.

35
<PAGE> 44

The Company has agreed that, prior to the Effective Time: (a) the
Company will not amend or propose to amend its Articles of Incorporation or
Bylaws in any way adverse to Purchaser; (b) except as required by law, the
Company will not, nor will it permit any of its Subsidiaries to, make any
capital expenditures, except for normal extensions to or replacements of
properties or in the ordinary course of business consistent with prior
practice; (c) the Company will not, nor will it permit any of its Subsidiaries
to, sell, lease, license, encumber or otherwise dispose of any assets that are
material, except for normal extensions to or replacements or dispositions of
properties in the ordinary course of business consistent with prior practice;
(d) the Company will not, nor will it permit any of its Subsidiaries to, incur
or guarantee any indebtedness (including any debt borrowed or guaranteed or
otherwise assumed, including, without limitation, the issuance of debt
securities), except for: (i) short-term indebtedness in the ordinary course of
business consistent with past practice, (ii) long-term indebtedness in
connection with the refinancing of existing indebtedness either at its stated
maturity or at a lower cost of funds, or (iii) borrowings or letters of credit
under existing credit facilities; (e) except as required by applicable law or
the provisions of any employee benefit plan, or as contemplated by the Merger
Agreement, the Company will not, nor will it permit any of its Subsidiaries to,
enter into, adopt or amend or increase the amount of or accelerate the payment
or vesting of any benefit or amount payable under any employee benefit plan or
any other contract, agreement, commitment, arrangement, plan or policy
maintained by, contributed to or entered into by the Company, as the case may
be, or their respective Subsidiaries, or increase, or enter into any contract,
agreement, commitment or arrangement to increase in any manner, the
compensation or fringe benefits, or otherwise to extend, expand or enhance the
engagement, employment or any related rights of any director, officer or other
employee of the Company, or its respective Subsidiaries, except for normal
increases in the ordinary course of business consistent with past practice
that, in the aggregate, do not result in a material increase in benefits or
compensation expense to Purchaser or the Company, as the case may be, or their
respective Subsidiaries, or enter into or amend any employment, severance, or
special pay arrangement with respect to the termination of employment or other
similar contract, agreement or arrangement with any director or officer or
senior management employee; (f) the Company will not, nor will it permit any of
its Subsidiaries to, make any material changes in its or their accounting
methods, except as required by law, rule, regulation or GAAP; (g) the Company
will, and will cause its Subsidiaries to, maintain with financially responsible
insurance companies (or through self-insurance not inconsistent with such
party's past practice) insurance in such amounts and against such risks and
losses as are customary for companies engaged in the same industry and such
other businesses as conducted by such party and its Subsidiaries; (h) the
Company will use commercially reasonable efforts to maintain in effect all
existing material permits pursuant to which the Company operates; and (i) the
Company shall not merge or consolidate with any other corporation or person or
enter into any similar transaction not in the ordinary course of its business.

NO SOLICITATION

The Merger Agreement provides that the Company will not, and will not
cause its Subsidiaries to, permit any of its Representatives to, and will use
its best efforts to cause such persons not to, directly or indirectly,
initiate, solicit or encourage, or take any action to facilitate the making of
any offer or proposal that constitutes or is reasonably likely to lead to any
Takeover Proposal with respect to the Company, or, in the event of any
unsolicited Takeover Proposal with respect to the Company, engage in
negotiations or provide any confidential information or data to any person
relating to any Takeover Proposal with respect to the Company. The Merger
Agreement further provides that the Company will notify Purchaser orally and in
writing of any such inquiries, offers or Takeovers Proposals (including,
without limitation, the terms and conditions of any such proposal and the
identity of the person making it) within 48 hours of the receipt thereof, and
that the Company will immediately cease and cause to be terminated all
discussions and negotiations existing on the date of the Merger Agreement, if
any, with any other persons conducted prior to the date of the Merger Agreement
with respect to any Takeover Proposal regarding the Company. Notwithstanding
anything stated above to the contrary, the Merger Agreement provides that: (i)
the Company may, prior to the vote of the shareholders of the Company for
approval of the Merger (and not thereafter if the Merger is approved thereby)
in response to an unsolicited request therefor, furnish information, including
non-public information, to any person or "group" (within the meaning of Section
13(d)(3) of the Exchange Act) pursuant to a confidentiality agreement on
substantially the same terms as provided in the Company Confidentiality
Agreement to the extent that the Board determines in good faith after
consultation with and based on the advice of outside counsel that such action
could reasonably be required by their fiduciary duties under applicable law;
and (ii) the Company may engage in discussions and negotiations (but may not
enter into any binding agreement regarding a Takeover Proposal other than the
confidentiality agreement referenced above) with any person or group that has
made an

36
<PAGE> 45
unsolicited Takeover Proposal, among other things, to determine whether such
proposal (as opposed to any further negotiated proposal) is a Superior Takeover
Proposal and the Company may take and disclose to its shareholders a position
contemplated by Rule 14e-2(a) following the Company's receipt of a Takeover
Proposal that is in the form of a tender offer under Section 14(e) of the
Exchange Act.

CERTAIN POST-MERGER MATTERS

Once the Merger is consummated, Sub will cease to exist as a
corporation, and the Company, as the surviving corporation, will succeed to all
of the assets, rights and obligations of Sub.

Pursuant to the Merger Agreement, Sub's Articles of Incorporation and
Bylaws, as in effect immediately prior to the Effective Time, will be the
Articles of Incorporation and Bylaws of the Company, as the surviving
corporation, until amended as provided therein and pursuant to the TBCA.

Pursuant to the Merger Agreement, the individuals who are members of
the board of directors of Sub immediately prior to the Effective Time shall
comprise the full Board of Directors of the Company, as the surviving
corporation, until the earlier of their resignation or removal or until their
respective successors are duly elected and qualified, as the case may be.

Pursuant to the Merger Agreement, the individuals who are officers of
Sub immediately prior to the Effective Time shall be the officers of the
Company, as the surviving corporation, until the earlier of their resignation
or removal or until their respective successors are duly elected and qualified.

TERMINATION OR AMENDMENT OF THE MERGER AGREEMENT

The Merger Agreement may be terminated at any time prior to the
Effective Time (i) by mutual written consent of the general partner of
Purchaser and the Board or (ii) by either party by written notice to the other,
if (a) the Effective Time has not occurred on or before January 31, 1998, (b)
any state or federal law, order, rule or regulation is adopted or issued that
shall prohibit consummation of the Merger or if any court of competent
jurisdiction in the United States or any State shall have issued an order,
judgment or decree permanently restraining, enjoining or otherwise prohibiting
the Merger, and such order, judgment or decree shall have become final and
nonappealable, (c) the required approvals of the shareholders of the Company
are not received at the Special Meeting, or (d) if the Company accepts a
Superior Takeover Proposal. See "Certain Terms of the Merger
Agreement--Expenses and Termination Fee."

By Purchaser. Purchaser may terminate the Merger Agreement, by
written notice to the Company (i) upon a material breach of any representation,
warranty, covenant or agreement on the part of the Company set forth in the
Merger Agreement, subject to a limited cure period under certain circumstances,
(ii) if the Board withdraws or modifies in a manner adverse to Purchaser, the
Board's recommendation of the Merger or approves or recommends to the
shareholders of the Company any Superior Takeover Proposal, or (iii) if there
has been a material adverse change affecting the Company since June 30, 1997,
subject to a limited cure period, and which has been remedied as of the Closing
Date.

By the Company. The Company may terminate the Merger Agreement, by
written notice to Purchaser, upon a breach of any material representation,
warranty, covenant or agreement on the part of Purchaser set forth in the
Merger Agreement, subject to a limited cure period.

By Purchaser or the Company. If the Merger Agreement is terminated as
the result of any material breach of any representation or warranty, or any
material breach of any covenant or agreement thereunder, or if there has been a
material adverse change affecting the Company, then the breaching party, or the
Company if there has been a material adverse change affecting the Company,
shall promptly pay to the other party, as liquidated damages, an amount in cash
equal to the out-of-pocket expenses and fees incurred by the other party
arising out of, or in connection with or related to, the

37
<PAGE> 46

Merger or the transactions contemplated by the Merger Agreement not in excess
of $1 million; provided, however, that if the Merger Agreement is terminated by
a party as a result of a willful breach of a representation, warranty, covenant
or agreement by the other party, the non-breaching party may pursue any
remedies available to it at law or in equity and shall, in addition, to the
amount of out-of-pocket expenses set forth above, be entitled to recover such
additional amounts as such non-breaching party may be entitled to receive at
law or in equity. Notwithstanding however, in the event of failure of the
closing of the Merger due to a material breach of the Merger Agreement by
Purchaser (other than as a result of Purchaser's inability to obtain financing
reasonably satisfactory to Purchaser), the Company will be entitled to receive
$2.5 million as liquidated damages under the terms of the Escrow Agreement
entered into between the parties pursuant to the Merger Agreement. In the
event of failure of the Closing of the Merger as a result of Purchaser's
inability to obtain financing reasonably satisfactory to Purchaser, the Company
will be entitled to recover $500,000 as liquidated damages under such Escrow
Agreement.

Subject to limited exceptions, including the survival of the Company's
agreement to pay a fee in the amount of $1.5 million (the "Termination Fee") to
Purchaser under certain circumstances, in the event of the termination of the
Merger Agreement, there will be no liability on the part of Purchaser or the
Company or any of their respective officers or directors except that no party
will be relieved from its obligations with respect to any willful breach of the
Merger Agreement.

The Merger Agreement may be amended by the parties thereto pursuant to
action of their respective boards of directors and the general partner of
Purchaser, at any time before or after approval thereof by the shareholders of
Purchaser or the Company and prior to the Effective Time, but after such
approvals, no such amendment shall alter or change the amount or kind of shares
to be received or exchanged for or on conversion of any class or series of
capital stock of either corporation, or alter or change any of the terms and
conditions of the Merger Agreement if any of the alterations or changes, alone
or in the aggregate, would materially and adversely affect the rights of
holders of shares of Company Common Stock or common stock of Purchaser. The
Merger Agreement may not be amended except by an instrument in writing signed
on behalf of each of the parties thereto.

EXPENSES AND TERMINATION FEE

Subject to certain provision enumerated in the Merger Agreement that
discuss the payment of liquidated damages upon breach by one of the parties
thereto, all costs and expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby shall be paid by the party
incurring such expenses, except that those expenses incurred in connection with
preparing, printing, and mailing of this Proxy Statement and related proxy
materials, as well as the filing fee relating hereto, shall be shared equally
by the Company and Purchaser.

In the event (i) the Company breaches its undertakings with regard to
its representation that it will generally not solicit a Takeover Proposal, (ii)
the Board withdraws its approval of the Merger Agreement and the transactions
contemplated thereby, (iii) the Merger Agreement and the transactions
contemplated thereby are not approved by the Company's shareholders at the
Special Meeting and the Company approves any Takeover Proposal within one year
of the date of the Merger Agreement, which Takeover Proposal is ultimately
consummated, whereby any party other than Purchaser or Sub would acquire
directly or indirectly, for consideration consisting of cash, securities or a
combination thereof, two-thirds (2/3rds) or more of the Company Common Stock
then outstanding or all or substantially all of the assets of the Company or
(iv) the Merger is abandoned because the Company accepted a Superior Takeover
Proposal, then, in each case, Purchaser and Sub may terminate the Merger
Agreement without liability on their respective parts and Purchaser shall be
entitled to receive from the Company the Termination Fee, payable in cash
within 10 business days following demand therefor.

If the Merger Agreement is terminated as the result of any material
breach of any representation or warranty, or any material breach of any
covenant or agreement thereunder, or if there has been a material adverse
change affecting the Company, then the breaching party, or the Company if there
has been a material adverse change affecting the Company, shall promptly pay to
the other party, as liquidated damages, an amount in cash equal to the
out-of-pocket expenses and fees incurred by the other party arising out of, or
in connection with or related to, the Merger or the transactions contemplated

38
<PAGE> 47

by the Merger Agreement not in excess of $1 million; provided, however, that if
the Merger Agreement is terminated by a party as a result of a willful breach
of a representation, warranty, covenant or agreement by the other party, the
non- breaching party may pursue any remedies available to it at law or in
equity and shall, in addition, to the amount of out-of-pocket expenses set
forth above, be entitled to recover such additional amounts as such
non-breaching party may be entitled to receive at law or in equity.
Notwithstanding, in the event of failure of the closing of the Merger due to a
material breach of the Merger Agreement by Purchaser (other than as a result of
Purchaser's inability to obtain financing reasonably satisfactory to
Purchaser), the Company will be entitled to receive $2.5 million as liquidated
damages under the terms of the Escrow Agreement entered into between the
parties pursuant to the Merger Agreement. In the event of failure of the
Closing of the Merger as a result of Purchaser's inability to obtain financing
reasonably satisfactory to Purchaser, the Company will be entitled to recover
$500,000 as liquidated damages under such Escrow Agreement.

INDEMNIFICATION

The Company will, and from and after the Effective Time, the surviving
corporation will, indemnify, defend, hold harmless and advance expenses to each
person who is at the time of the execution of the Merger Agreement, or has been
at any time prior to the date of execution of the Merger Agreement, the
Indemnified Parties to the same extent and in the same manner as is now
provided in the respective certificates or articles of incorporation or bylaws
of the Company and such Subsidiaries in effect on the date hereof with respect
to any Indemnified Liabilities. Any Indemnified Party wishing to claim
indemnification, upon learning of a claim, action, suit, proceeding or
investigation, shall notify the Company (or after the Effective Time, the
surviving corporation) (but the failure so to notify shall not relieve a party
from any liability for indemnification which it may have except to the extent
such failure materially prejudices such party's position with respect to such
claims). The Company, Purchaser and Sub agree that the foregoing rights to
indemnification existing in favor of the Indemnified Parties with respect to
matters occurring through the Effective Time shall survive the Merger and shall
continue in full force and effect until the disposition of such Indemnified
Liabilities. The Merger Agreement is intended to provide identical protection
to that now afforded by the Company's Articles of Incorporation and Bylaws on
the date of the Merger Agreement. Purchaser acknowledges in the Merger
Agreement that each of the Indemnified Parties is an intended third-party
beneficiary.

Purchaser shall, subject to the terms set forth in the Merger
Agreement, indemnify and hold harmless each Indemnified Party against any
Indemnified Liability incurred in connection with any claim, action, suit,
proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of or pertaining to the transactions contemplated by
the Merger Agreement.

For a period of four years after the Effective Time, the surviving
corporation shall cause to be maintained in effect the current policies of
directors' and officers' liability insurance maintained by the Company and its
Subsidiaries (provided that the surviving corporation may substitute therefor
policies of at least the same coverage and amounts containing terms and
conditions which are no less advantageous in any material respect to the
Indemnified Parties) with respect to matters arising before and omissions
occurring or existing at or prior to the Effective Time including the
transactions contemplated by the Merger Agreement. The Merger Agreement
further provides that, if the aggregate annual premiums for such insurance at
any time during such four-year period shall exceed 200% of the premiums paid by
the Company and its Subsidiaries for such insurance for the 12 calendar months
immediately preceding the date of the Merger Agreement, then the obligation of
the surviving corporation to provide insurance shall be limited to the maximum
coverage that shall then be available at an annual premium equal to 200% of the
premiums paid by the Company and its Subsidiaries for such insurance for the 12
calendar months immediately preceding the date of the Merger Agreement.

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<PAGE> 48
PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT

The following table sets forth as of the Record Date, unless otherwise
indicated, (i) the stock ownership of the persons or entities known by
management beneficially to own more than 5% of the Company Common Stock, (ii)
the number of shares of Company Common Stock beneficially owned by each
director (iii) the number of shares of Company Common Stock beneficially owned
by each executive officer, and (iv) the number of shares of Company Common
Stock beneficially owned by all directors and executive officers of the Company
as a group.

<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
NAME BENEFICIAL OWNERSHIP (1) OF CLASS
---- ------------------------ --------
<S> <C> <C>
Wallace A. Jones . . . . . . . . . . . . . . . . . . . . . . . . . 253,000 (2) 6.38%
Lawrence E. White . . . . . . . . . . . . . . . . . . . . . . . . . 78,259 (2) 2.06%
Charles A. Cooper . . . . . . . . . . . . . . . . . . . . . . . . . 81,193 (2) 2.14%
Susan R. Holland . . . . . . . . . . . . . . . . . . . . . . . . . 53,711 (2) 1.43%
Mark P. Lamm . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,145 (2) 1.20%
Joseph S. Thomson . . . . . . . . . . . . . . . . . . . . . . . . . 52,000 (2) 1.39%
Jack D. Knox . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,500 (2) *
Joseph V. Mariner, Jr. . . . . . . . . . . . . . . . . . . . . . . 27,296 (2) *
Grahame N. Clark, Jr. . . . . . . . . . . . . . . . . . . . . . . . 26,500(2) *
Robert Fleming, Inc. . . . . . . . . . . . . . . . . . . . . . . . 409,500 (3) 11.02%
Dimensional Fund Advisors, Inc. . . . . . . . . . . . . . . . . . . 305,400 (4) 8.22%
The TCW Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 253,300 (5) 6.81%
Fleet Financial Group, Inc. . . . . . . . . . . . . . . . . . . . . 233,600 (6) 6.28%
Brinson Partners, Inc. . . . . . . . . . . . . . . . . . . . . . . 227,300 (7) 6.11%
Greenbriar Partners, Ltd. . . . . . . . . . . . . . . . . . . . . . 187,300 (8) 5.04%
All directors and executive officers as a group (9 persons) . . . . 650,604 (2) 15.10%
</TABLE>

- --------------------

* Less than one percent.

(1) Beneficial ownership as reported in the above table has been
determined in accordance with Rule 13d-3 under the Exchange Act.
Except as noted, the listed individuals have sole investment power and
sole voting power as to all shares of stock of which they are
identified as being the beneficial owners.

(2) Includes shares which may be acquired within 60 days of the Record
Date pursuant to the exercise of Options as follows: Mr. Jones -
250,000 shares; Mr. White - 75,000 shares; Mr. Cooper - 75,000 shares;
Ms. Holland - 50,000 shares; Mr. Lamm - 42,500 shares; Mr. Thomson -
22,500 shares; Mr. Knox - 32,500 shares; Mr. Mariner - 22,500 shares;
Mr. Clark - 22,500 shares; and all directors and executive officers as
a group - 592,500 shares. As a result of the Merger, the terms of the
Stock Option Plans provide that all outstanding Options shall become
fully vested.

(3) The principal business address of Robert Fleming Inc. ("Fleming") is
320 Park Avenue, 11th Floor, New York, NY 10022. Based on a Schedule
13G filed by Fleming with the Commission on February 14, 1997, Fleming
has shared voting and shared dispositive power over 409,500 shares.

(4) The principal business address of Dimensional Fund Advisors, Inc.
("Dimensional") is 1299 Ocean Avenue, 11th Floor, Santa Monica, CA
90401. Based on a Schedule 13G filed by Dimensional with the
Commission on February 7, 1997, Dimensional, a registered investment
advisor, is deemed to have beneficial ownership of 305,400 shares of
Company Common Stock as of December 31, 1996, all of such shares are
held in portfolios of DFA Investment Trust Company, a Delaware
business trust, or the DFA Group Trust and DFA Participation Group

40
<PAGE> 49
Trust, investment vehicles for qualified employee benefit plans, for
all of which Dimensional serves as investment manager. Dimensional
disclaims beneficial ownership of all such shares.

(5) The principal business address of the TCW Group, Inc. ("TCW") is 865
South Figueroa Street, Los Angeles, CA 90017. Based on a Schedule 13G
filed by TCW and Mr. Robert Day with the Commission on February 12,
1997, TCW, a Parent Holding Company is deemed to have beneficial
ownership of 253,300 shares of Company Common Stock as of December 31,
1996. The Schedule 13G of TCW and Robert Day disclosed that TCW,
through its subsidiary, Trust Company of the West, has sole voting
power over 253,300 shares and sole dispositive power over 253,300
shares. In addition, the Schedule 13G discloses that Robert Day, and
individual who may be deemed to control TCW, has sole voting power
over 253,300 shares and sole dispositive power over 253,300 shares.
The address of Mr. Day is 200 Park Avenue, Suite 2200, New York, NY
10166. In addition, Mr. Day may be deemed to control certain entities
that are not subsidiaries of TCW, including Oakmont Corporation, a
registered investment advisor, and Cypress International Partners
Limited, also a registered investment adviser.

(6) The principal business address of Fleet Financial Group, Inc.
("Fleet") is One Federal Street, Boston, MA 02109. Based on a
Schedule 13G filed by Fleet with the Commission on February 13, 1997,
Fleet, a parent holding company, is deemed to have beneficial
ownership of 233,600 shares of Company Common Stock as of December 31,
1996. These shares were acquired by and for the benefit of three
subsidiaries of Fleet, Fleet Investment Advisors, Fleet Trust &
Investment Services Co. and Fleet National Bank. These subsidiaries
each have the right to receive dividends and proceeds from the sale of
such shares. The Schedule 13G of Fleet discloses that Fleet has sole
voting power over 218,600 shares, sole dispositive power over 230,100
shares and shared dispositive power over 3,500 shares.

(7) The principal business address of Brinson Partners, Inc. ("Brinson")
is 209 South Lasalle, Chicago, IL 60604- 1295. Brinson, a parent
holding company and an investment advisor, is deemed to have
beneficial ownership of 227,300 shares of Company Common Stock as of
December 31, 1996. Brinson's Schedule 13G, filed with the Commission
on February 12, 1997, reported that Brinson was filing the Schedule
13G on behalf of itself, Brinson Trust Company ("BTC"), Brinson
Holdings, Inc. ("BHI"), SBC Holdings (USA), Inc. (SBCUSA") and Swiss
Bank Corporation ("SBC"). BTC is a wholly-owned subsidiary of Brinson.
Brinson is a wholly-owned subsidiary of BHI. BHI is a wholly-owned
subsidiary of SBCUSA. SBCUSA is a wholly-owned subsidiary of SBC. As
reported on the Schedule 13G, Brinson has shared voting power over
227,300 shares and shared dispositive power over 227,300 shares; BTC
has shared voting power over 61,424 shares and shared dispositive
power over 61,424; BHI has shared voting power over 227,300 shares and
shared dispositive power over 227,300 shares; SBCUSA has shared voting
power over 227,300 shares and shared dispositive power over 227,300
shares; and SBC has shared voting power over 227,300 shares and shared
dispositive power over 227,300 shares;

(8) Based on a Schedule 13G filed by Greenbrier Partners, Ltd.
("Greenbrier") and Rowe Family Partnership, Ltd. ("Rowe") with the
Commission on February 14, 1997, Greenbrier has sole voting and
dispositive power over 181,300 shares and Rowe has sole voting and
dispositive power over 6,000 shares. Frederick E. Rowe, Jr. is the
general partner of both partnerships. The address of Greenbrier and
Rowe is 1901 North Akard, Dallas, Texas 75201.

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<PAGE> 50
INDEPENDENT ACCOUNTANTS

It is expected that representatives of KPMG Peat Marwick LLP be
present at the Special Meeting to respond to appropriate questions of
shareholders and to make a statement if they so desire.

SHAREHOLDER PROPOSALS

If the Merger is not consummated, any proposals of shareholders of the
Company intended to be presented at the Annual Meeting of Shareholders of the
Company to be held in 1998 must have been received by the Company, addressed to
the Secretary of the Company at 12200 Stemmons Freeway, Suite 100, Dallas,
Texas 75234, by no later than December 9, 1997, to be considered for inclusion
in the proxy statement and form of proxy relating to that meeting.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the
Exchange Act and, in accordance therewith, files reports and other information
with the Commission. Reports, proxy statements and other information filed by
the Company can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's Regional Offices at Seven World Trade Center, 13th
Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be
obtained by mail from the Public Reference Section of the Commission at 450
West Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission also maintains a Web Site (http://www.sec.gov) at which reports,
proxy statements and information statements and other information regarding the
Company may be accessed. In addition, such reports, proxy statements,
information statements and other information can also be inspected at the
office of The Nasdaq Stock Market, 1735 K Street, N.W., Washington D.C. 20006.
After the Merger, registration of the Company Common Stock under the Exchange
Act will be terminated. Copies of the documents referred to herein may also be
obtained from the Company, without charge, upon request to the Company, Susan
R. Holland, Secretary, 12200 Stemmons Freeway, Suite 100, Dallas, Texas 75234.

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<PAGE> 51

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed with the Commission by the Company (File
No. 000-12802) pursuant to the Exchange Act are incorporated by reference in
this Proxy Statement:

1. The Company's Annual Report on Form 10-K for the year ended
December 31, 1996;

2. The Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997;
3. The Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997;
4. The Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997;
5. The Company's Current Report on Form 8-K dated August 29,
1997;
6. The Company's Current Report on Form 8-K dated September 26,
1997;
7. The Company's Current Report on Form 8-K dated October 24,
1997; and
8. The Company's Current Report on Form 8-K dated November 4,
1997.

All documents filed by the Company pursuant to Sections 13(a), 13(c),
14, or 15(d) of the Exchange Act after the date of this Proxy Statement and
prior to the date of the Special Meeting shall be deemed to be incorporated by
reference into this Proxy Statement and to be a part hereof from the date of
filing of such documents. Any statement contained in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes hereof to the extent that the statement contained
herein (or in any other subsequently filed document that is or is deemed to be
incorporated by reference herein) modifies or supersedes such previous
statement. Any statement so modified or superseded shall not be deemed to
constitute a part hereof except as so modified or superseded. All information
appearing in this Proxy Statement is qualified in its entirety by the
information and financial statements (including the notes thereto) appearing in
the documents incorporated herein by reference.

THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN CERTAIN
EXHIBITS THERETO) ARE AVAILABLE WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST BY
ANY PERSON TO WHOM THIS PROXY STATEMENT HAS BEEN DELIVERED, FROM EL CHICO
RESTAURANTS, INC., 12200 STEMMONS FREEWAY, SUITE 100, DALLAS, TEXAS 75234,
ATTENTION: CORPORATE SECRETARY (TELEPHONE (972) 241-5500). IN ORDER TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY DECEMBER 15,
1997.

BY ORDER OF THE BOARD OF DIRECTORS

Susan R. Holland, Secretary

Dallas, Texas

November 28, 1997

PLEASE COMPLETE AND RETURN YOUR PROXY CARD PROMPTLY IN THE ENCLOSED
ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.

43
<PAGE> 52
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

EL CHICO RESTAURANTS, INC. AND SUBSIDIARIES

<TABLE>
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:

Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2

Consolidated Balance Sheets at December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . F-3

Consolidated Statements of Operations for the years ended
December 31, 1996, 1995, and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4

Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1996, 1995, and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . F-5

Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7

INTERIM CONSOLIDATED FINANCIAL STATEMENTS:

Consolidated Balance Sheet at September 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-15

Consolidated Statements of Operations for the nine months
ended September 30, 1997 and September 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . F-16

Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and September 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . F-17

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-18
</TABLE>

F-1
<PAGE> 53
INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
El Chico Restaurants, Inc.:

We have audited the consolidated financial statements of El Chico
Restaurants, Inc. and subsidiaries as listed in the accompanying index. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of El
Chico Restaurants, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.

KPMG Peat Marwick LLP

Dallas, Texas
February 6, 1997

F-2
<PAGE> 54

El Chico Restaurants, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Expect Par Value Amounts)

<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS

CURRENT ASSETS:
Cash and cash equivalents $ 216 $ 266
Accounts receivable 1,154 979
Income tax receivable -- 66
Inventories 976 1,100
Prepaid expenses and other 1,330 1,346
Deferred income taxes (Note I) 824 71
-------- --------
Total current assets 4,500 3,828

PROPERTY AND EQUIPMENT, NET (Note B) 40,535 46,209
OTHER ASSETS AND DEFERRED COSTS 681 1,002
DEFERRED INCOME TAXES (Note I) 1,946 --
-------- --------
TOTAL ASSETS $ 47,662 $ 51,039
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Current maturities of long-term debt (Note D) $ 27 $ 25
Trade accounts payable 4,459 4,384
Accrued liabilities (Note C) 5,114 4,115
Income taxes payable 570 --
-------- --------
Total current liabilities 10,170 8,524

LONG-TERM DEBT, less current maturities (Note D) 9,765 8,435
OTHER LONG-TERM LIABILITIES 1,442 1,240
DEFERRED INCOME TAXES (Note I) -- 343

COMMITMENTS AND CONTINGENCIES (Note E)

STOCKHOLDERS' EQUITY (Note F):
Preferred stock - authorized 1,000,000 shares
of $.10 par value; none issued -- --
Common stock - authorized 10,000,000 shares of $.10 par value;
issued 4,750,142 and 4,746,975 shares in 1996 and 1995, respectively 475 475
Additional paid-in capital 15,925 15,895
Retained earnings 18,876 21,938
Unamortized value of restricted stock issued (37) (59)
-------- --------
35,239 38,249
Less treasury stock - at cost 1,057,760 and 651,744 shares in
1996 and 1995, respectively (8,954) (5,752)
-------- --------
Total stockholders' equity 26,285 32,497
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 47,662 $ 51,039
======== ========
</TABLE>

The accompanying notes are an integral part of these
consolidated financial statements.

F-3
<PAGE> 55

El Chico Restaurants, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands of Dollars, Except per Share Amounts)

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Sales from Company-owned restaurants $ 101,698 $ 101,628 $ 94,901
Equipment sales 825 908 832
Franchise revenues 1,958 2,082 2,093
----------- ----------- -----------
104,481 104,618 97,826
----------- ----------- -----------
Costs and expenses:
Restaurant cost of sales - food and beverage 27,016 25,772 24,273
Restaurant cost of sales - labor 33,725 33,637 31,435
Restaurant operating expenses 29,794 29,084 26,881
Cost of equipment sales 700 782 590
General and administrative 9,468 9,227 8,967
Special Charge (Note G) 9,421 -- --
(Gain) loss on sale or disposition of assets
(Note H) (1,203) -- 41
Interest expense 686 602 146
Interest income (75) (78) (88)
----------- ----------- -----------
109,532 99,026 92,245
----------- ----------- -----------
Income (loss) before income taxes (5,051) 5,592 5,581
Income tax provision (benefit) (Note I) (1,989) 1,634 1,853
----------- ----------- -----------
NET EARNINGS (LOSS) $ (3,062) $ 3,958 $ 3,728
=========== =========== ===========
Net earnings (loss) per common share $ (0.79) $ 0.98 $ 0.88
=========== =========== ===========
Weighted average number of shares and share
equivalents outstanding 3,892,461 4,046,489 4,260,292
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these
consolidated financial statements.

F-4
<PAGE> 56

El Chico Restaurants, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(In Thousands of Dollars)

<TABLE>
<CAPTION>
Unamortized
Additional Value of
Common Stock Paid-In Retained Restricted Treasury
Shares Amount Capital Earnings Stock Issue Stock Total
----------- ---------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 4,719,973 $ 472 $ 14,263 $ 14,252 $ (67) $ (4,076) $ 24,844

Net earnings -- -- -- 3,728 -- -- 3,728
Issuance of common stock under
stock bonus plan, net -- -- 71 -- (57) (11) 3
Issuance of common stock pursuant
to stock option plan 23,667 2 249 -- -- -- 251
Amortization of restricted stock
issue -- -- -- -- 56 -- 56
----------- ---------- ----------- ----------- ----------- ---------- ----------
Balances at December 31, 1994 4,743,640 474 14,583 17,980 (68) (4,087) 28,882

Net earnings -- -- -- 3,958 -- -- 3,958
Purchase of treasury stock -- -- -- -- -- (2,174) (2,174)
Issuance of common stock under
stock bonus plan, net -- -- 52 -- (53) 9 8
Issuance of common stock pursuant
to stock option plan 3,335 1 1,260 -- -- 500 1,761
Amortization of restricted stock
issue -- -- -- -- 62 -- 62
----------- ---------- ----------- ----------- ----------- ---------- ----------
Balances at December 31, 1995 4,746,975 475 15,895 21,938 (59) (5,752) 32,497

Net loss -- -- -- (3,062) -- -- (3,062)
Purchase of treasury stock -- -- -- -- -- (3,208) (3,208)
Issuance of common stock under
stock bonus plan, net -- -- 16 -- (40) 6 (18)
Issuance of common stock pursuant
to stock option plan 3,167 -- 14 -- -- -- 14
Amortization of restricted stock
issue -- -- -- -- 62 -- 62
----------- ---------- ----------- ----------- ----------- ---------- ----------
Balances at December 31, 1996 4,750,142 $ 475 $ 15,925 $ 18,876 $ (37) $ (8,954) $ 26,285
=========== ========== =========== =========== =========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these
consolidated financial statements.

F-5
<PAGE> 57

El Chico Restaurants, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) earnings $ (3,062) $ 3,958 $ 3,728
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Special Charge 9,421 -- --
Depreciation and amortization of property and equipment 5,315 5,107 4,831
Amortization of deferred costs 697 1,333 1,257
(Gain) loss on sale or disposition of assets (1,203) -- 41
Deferred income taxes (3,042) 23 419
Increase in accounts receivable (175) (127) (155)
Decrease (increase) in income tax receivable 66 (66) 792
Decrease in inventories 124 89 120
Decrease (increase) in prepaid expenses and other 16 (103) (385)
Increase in other assets and deferred costs (401) (1,242) (1,133)
Increase (decrease) in trade accounts payable and accrued
liabilities (822) 376 (353)
Increase (decrease) in income taxes payable 570 (173) 173
Increase in other long-term liabilities 202 314 254
Other 238 412 125
-------- -------- --------
Net cash provided by operating activities 7,944 9,901 9,714
-------- -------- --------

Cash flows from investing activities:
Proceeds from sale of property and equipment 1,445 -- 1,449
Purchases of property and equipment (7,595) (13,015) (13,784)
-------- -------- --------
Net cash used in investing activities (6,150) (13,015) (12,335)
-------- -------- --------

Cash flows from financing activities:
Borrowings of long-term debt 1,355 2,925 2,250
Repayment of long-term debt (23) (20) (18)
Purchase of treasury stock (3,208) (2,174) --
Proceeds from note receivable -- 245 --
Issuance of common stock 32 1,677 273
-------- -------- --------
Net cash (used in) provided by financing activities (1,844) 2,653 2,505
-------- -------- --------
NET DECREASE IN CASH (50) (461) (116)

Cash and cash equivalents at beginning of year 266 727 843
-------- -------- --------
Cash and cash equivalents at end of year $ 216 $ 266 $ 727
======== ======== ========

Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 593 $ 551 $ 99
======== ======== ========
Income taxes $ 477 $ 1,911 $ 1,010
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these
consolidated financial statements.

F-6
<PAGE> 58

El Chico Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1996, 1995, and 1994

NOTE A - SUMMARY OF ACCOUNTING POLICIES

A summary of the significant accounting policies applied in the
preparation of the accompanying consolidated financial statements follows:

Principles of Consolidation

The consolidated financial statements include the accounts of El Chico
Restaurants, Inc. and its subsidiaries (the Company). All significant
intercompany accounts and transactions have been eliminated.

Cash Equivalents

The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.

Inventories

Inventories, which consist primarily of food products, are stated at the
lower of cost or market. Cost is determined using the first-in, first-out
method.

Property and Equipment

Property and equipment are recorded at cost. Depreciation and amortization
are provided in amounts sufficient to amortize the cost of depreciable
assets to operations over their estimated service lives of three to 30
years. Leasehold improvements are amortized over the lives of the
respective leases, including renewal periods when the Company intends to
exercise renewal options, or the service lives of the improvements,
whichever is shorter. The straight-line method of depreciation is followed
for substantially all assets for financial reporting purposes, while
accelerated methods are used for tax purposes.

Interest is capitalized with the construction of new restaurants as part
of the asset to which it relates. Interest capitalized during 1996, 1995
and 1994 was not material.

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, on January 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the estimated
fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or estimated fair value less costs to sell.

F-7
<PAGE> 59

El Chico Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Preopening Costs

Restaurant preopening costs, comprised primarily of the cost of hiring and
training restaurant employees, are amortized over the initial twelve
months of a restaurant's operations.

Franchise Fee Revenue

Franchise fee revenue is recognized when all material services or
conditions relating to the sale have been substantially performed or
satisfied by the Company, but no sooner than the commencement of
operations by the franchisee. Franchise revenues for each period presented
in the consolidated statement of operations relate substantially to
royalties paid by franchisees.

Income Taxes

The Company accounts for income taxes using the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.

Earnings Per Common Share

Earnings per common share are based on the weighted average number of
shares and common share equivalents outstanding during each period
determined using the treasury stock method. Primary common share
equivalents are determined based on the average market price exceeding the
exercise price of the stock options while fully diluted are determined
based on the higher of the average or the ending market price exceeding
the exercise price of the stock options.

Stock Option Plan

Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Company adopted SFAS
No. 123, Accounting for Stock-Based Compensation, which permits entities
to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years
as if the fair-value-based method defined in SFAS No. 123 has been
applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS
No. 123.

F-8
<PAGE> 60

El Chico Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued

Use of Estimates

Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenues and expenses
and the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.

NOTE B - PROPERTY AND EQUIPMENT

Property and equipment consists of:

<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
-------- --------
(In Thousands)
<S> <C> <C>
Land $ 7,125 $ 7,732
Buildings and improvements 16,918 16,136
Leasehold improvements 24,230 27,878
Equipment, furniture and fixtures 18,777 17,871
Construction in progress 492 438
-------- --------
67,542 70,055
Less accumulated depreciation
and amortization (27,007) (23,846)
-------- --------
$ 40,535 $ 46,209
======== ========
</TABLE>

NOTE C - ACCRUED LIABILITIES

Accrued liabilities consist of:

<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
-------- --------
(In Thousands)
<S> <C> <C>
Compensation and related taxes $ 1,119 $ 1,689
Special charge 1,638 --
Taxes, other than income and payroll 979 838
Insurance claims and administration 607 750
Rent 232 353
Other 539 485
-------- --------
$ 5,114 $ 4,115
======== ========
</TABLE>

F-9
<PAGE> 61

El Chico Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE D - LONG-TERM DEBT

Long-term debt consists of:

<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
--------- ---------
(In Thousands)
<S> <C> <C>
Note payable to a bank under credit facility (see below) $ 9,730 $ 8,375
Other 62 85
--------- ---------
9,792 8,460
Less current maturities (27) (25)
--------- ---------
$ 9,765 $ 8,435
========= =========
</TABLE>

The Company has an unsecured credit facility with a $16,000,000 commitment
comprised of a $15,000,000 revolving line of credit and a $1,000,000
letter of credit facility. The line of credit matures on December 31,
1997, and may be converted to a term loan, payable quarterly on a 10-year
amortization schedule, and maturing on December 31, 1999, and accordingly
has been classified as non-current in the accompanying balance sheet. Both
the line of credit and the term loan bear interest at the Company's option
of prime rate or up to six-month LIBOR plus .75 percent. Both rates are
subject to maintaining certain financial covenants, and interest is
payable upon maturity of the LIBOR advances or quarterly for prime rate
advances. Principally because of the special charge, the interest on the
line of credit has been at LIBOR plus 1.75 percent and/or prime plus 0.50
percent since August 14, 1996 until certain financial results are met. In
addition, the Company has entered into an interest rate swap (not for
trading purposes, but to manage well defined interest rate risks) on a
notional balance of $5 million, under which a fixed rate of 6.61 percent
is paid against a floating rate equal to three-month LIBOR. A commitment
fee of .25 percent is payable quarterly on any unused commitments.

As of December 31, 1996, the line of credit bore interest as follows:

<TABLE>
<S> <C> <C> <C> <C>
$5,000,000 8.34% LIBOR plus 1.75 percent plus 1.06 (SWAP)
4,000,000 7.28% LIBOR plus 1.75 percent
730,000 8.75% Prime plus 0.5 percent
----------
$9,730,000
==========
</TABLE>

Scheduled maturities of long-term debt as of December 31, 1996 are as
follows (in thousands):

<TABLE>
<CAPTION>
Fiscal Year
<S> <C> <C>
1997 $ 27
1998 1,001
1999 8,764
--------
$ 9,792
========
</TABLE>

F-10
<PAGE> 62

El Chico Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE E - COMMITMENTS AND CONTINGENCIES

The Company leases land, buildings and equipment under noncancellable
operating leases expiring at various dates through 2010. The following is
a schedule of minimum rental payments under such leases (in thousands):

<TABLE>
<S> <C> <C>
1997 3,622
1998 3,027
1999 2,748
2000 2,247
2001 1,890
Thereafter 6,288
--------
$ 19,822
========
</TABLE>

Most land and building lease agreements provide for contingent rentals
based on sales. Rental expense for all leases was as follows (in
thousands):

<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Minimum rentals $ 3,487 $ 3,262 $ 2,805
Contingent rentals 368 510 645
------- ------- -------
$ 3,855 $ 3,772 $ 3,450
======= ======= =======
</TABLE>

The Company is a defendant in various lawsuits arising in the ordinary
course of its business. The majority of these suits are covered by
insurance. In the opinion of management, none of these lawsuits will have a
material adverse effect, individually or in the aggregate, upon the
Company's financial position or results of operations.

F-11
<PAGE> 63

El Chico Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE F - STOCKHOLDERS' EQUITY

On May 2, 1996, the shareholders approved the El Chico Restaurants, Inc.
1995 Stock Plan ("the 1995 Plan"), which replaced and canceled all previous
shares and options available for grant and reserved 400,000 shares for
future grant. As of December 31, 1996 there were 207,062 shares available
for grant and options covering 366,609 were exercisable at prices ranging
from $3.16 to $12.13. Transactions during 1996, 1995, and 1994 were as
follows:

<TABLE>
<CAPTION>
Weighted
Shares Average
Exercise Price
--------- --------------
<S> <C> <C>
Options outstanding at December 31, 1993 825,670 $ 9.23
Granted 260,000 12.08
Exercised (23,667) 7.77
Forfeited (342,001) 9.62
--------- ---------

Options outstanding at December 31, 1994 720,002 10.12
Granted 98,500 10.46
Exercised (170,001) 9.50
Forfeited (10,000) 11.00
--------- ---------

Options outstanding at December 31, 1995 638,501 10.33
Granted 219,225 9.62
Exercised (3,167) 3.35
Forfeited (75,000) 9.99
--------- ---------
Options outstanding at December 31, 1996 779,559 $ 10.19
========= =========
</TABLE>

The per share weighted-average fair value of stock options granted during
1996 and 1995 was $4.56 and $4.90 on the date of grant using the Black
Scholes option-pricing model with the following weighted-average
assumptions: risk-free interest rate of 6.5 percent, an expected life of
10 years, no expected dividend yield and a forfeiture rate of 57.5 percent
based upon historic data.

The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its 1996
and 1995 stock options under SFAS No. 123, there would have been no
material impact on the consolidated financial statements. The compensation
cost for options granted prior to January 1, 1995 is not considered as it
is not required under SFAS No. 123.

F-12
<PAGE> 64

El Chico Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE F - STOCKHOLDERS' EQUITY - Continued

In February 1995, the Company's Board of Directors adopted a Shareholder
Rights Plan pursuant to which purchase rights (the "Rights") were issued
to holders of its common stock at the rate of one Right for each share of
common stock. The Rights will trade with the Company's common stock until
exercisable. The Rights become exercisable ten days after any person or
group acquires 20 percent or more of the Company's outstanding common
stock or announces a tender offer for 30 percent or more of the Company's
outstanding common stock. The Rights thereafter entitle the holder to
purchase one one-thousandth of a share of Preferred Stock for $48.00, and,
under certain circumstances, would be modified to entitle certain holders
to purchase additional Common Stock of the Company having a market value
of two times the $48.00 exercise price of the Right, or to purchase common
stock of an acquiring company having a market value of two times the
$48.00 exercise price of the Right. The Rights expire on December 31, 2004
and may be redeemed by the Company for one cent per Right under certain
circumstances.

NOTE G - SPECIAL CHARGE

During the second quarter of 1996 the Company incurred a special charge of
$9.4 million to provide for the impairment and exit plans of six units
slated for closing, the impairment of the carrying values of three other
stores that will continue operating as well as a write-down of certain
other assets. One of the six stores is an older store that was closed and
replaced with a new prototype which opened during the third quarter of
1996. The Company entered into agreements with two separate existing
franchisees to operate two of the impaired stores. The remaining three
impaired stores were closed and are held for sale. The effect of the
impairment during 1996, excluding the replaced store, reduced depreciation
and amortization expense by $452,000. Management reviews each restaurant
regularly to determine that expected undiscounted cash flows are adequate
to recover the related investment. When expected cash flows are
inadequate, the Company writes down the asset to its recoverable value.

NOTE H - SALE OR DISPOSITION OF ASSETS

During 1996, the Company sold three parcels of real estate including two
stores previously leased to two franchisees which were sold to those
franchisees and the sale of a vacant, underdeveloped piece of land
adjacent to a franchise store resulting in gains of $1,203,000. During
1994, asset values for two restaurants were written-down $220,000 as
future operations were not expected to provide sufficient cash flow to
recover the related investments. In addition, during 1994, the Company
closed six restaurants. One restaurant was sold resulting in a gain of
$439,000, one was closed at a loss of $202,000, one was closed with
minimal costs and the remaining three closings were provided for in 1993.

F-13
<PAGE> 65

El Chico Restaurants, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE I - INCOME TAXES

The provision for income taxes consists of the following (in thousands):

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Expense (Benefit)
Federal:
Current $ 934 $ 1,536 $ 1,258
Deferred (3,042) 23 419
State 119 75 176
---------- ---------- ----------
$ (1,989) $ 1,634 $ 1,853
========== ========== ==========
</TABLE>

The types of temporary differences between the tax and financial reporting
bases of assets and liabilities that give rise to the deferred income tax
assets (liabilities) and their related tax effects are as follows (in
thousands):

<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Special charge (Note G) $ 3,026 $ --
FICA tip credit 252 --
Insurance reserves 235 362
Deferred compensation 161 125
Provision for restaurant closings 65 65
Other 119 12
--------- ---------
Total deferred tax assets 3,858 564
--------- ---------

Deferred tax liabilities:
Property and equipment (1,073) (747)
Restaurant preopening costs (15) (89)
--------- ---------
Total deferred tax liabilities (1,088) (836)
--------- ---------
Net deferred tax asset (liability) $ 2,770 ($ 272)
========= =========
</TABLE>

The Company believes that the deferred tax assets at December 31,1996 and
1995 will be realized based upon historical levels of income and through
reversals of existing taxable temporary differences during the carryforward
period.

The Company's effective income tax rate differs from the expected federal
statutory income tax rate as a result of the following:

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Expected income tax provision (34.0)% 34.0% 34.0%
State income taxes 1.7 0.5 3.3
FICA tip and TJTC tax credits (7.0) (5.9) (5.1)
Other (0.1) 0.6 1.0
--------- --------- ---------
Income tax provision (39.4)% 29.2% 33.2%
========= ========= =========
</TABLE>

F-14
<PAGE> 66
EL CHICO RESTAURANTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars, Except Par Value Amounts)

<TABLE>
<CAPTION>
September 30,
1997
------------
(Unaudited)
<S> <C>
ASSETS

Current Assets:
Cash and Cash Equivalents $ 995
Accounts Receivable 668
Income Tax Receivable 63
Inventories 1,066
Prepaid Expenses and Other 1,245
Deferred Income Taxes 569
--------
Total Current Assets 4,606

Property and Equipment - Net 41,204
Other Assets and Deferred Costs 717
Deferred Income Taxes 2,146
--------
$ 48,673
========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Maturities of Long-Term Debt $ 732
Trade Accounts Payable 4,489
Accrued Liabilities 3,001
Income Taxes Payable --
--------
Total Current Liabilities 8,222

Long-Term Debt, Less Current Maturities 8,675

Other Long-Term Liabilities 3,359

Stockholders' Equity:
Preferred Stock - Authorized 1,000,000 Shares of
$.10 Par Value; None Issued --
Common Stock - Authorized 10,000,000 Shares of $.10 Par Value;
Issued 4,777,166 and 4,750,142 Shares in 1997 and 1996, respectively 479
Additional Paid-In Capital 16,067
Retained Earnings 20,842
Unamortized Value of Restricted Stock Issued (26)
--------
37,362
Less Treasury Stock - At Cost, 1,053,807 and 1,057,760
Shares in 1997 and 1996, respectively (8,945)
--------
28,417
--------
$ 48,673
========
</TABLE>

F-15
<PAGE> 67
EL CHICO RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands of Dollars, Except Per Share Amounts)
(Unaudited)

<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------------
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Revenues:
Sales from Company-Owned restaurants $ 74,765 $ 76,833
Equipment sales 590 445
Franchise revenues 1,427 1,501
----------- -----------
76,782 78,779
----------- -----------
Cost and Expenses:
Restaurant cost of sales - food and beverage 19,668 20,597
Restaurant cost of sales - labor 25,121 25,476
Restaurant operating expenses 21,475 22,689
Cost of equipment sales 514 373
General and administrative 7,261 7,174
Special Charge -- 9,421
Gain on sale of assets (529) (1,202)
Interest expense 577 490
Interest income (49) (53)
----------- -----------
74,038 84,965
----------- -----------

Income (loss) before income taxes 2,744 (6,186)
Income tax provision (benefit) 778 (2,306)
----------- -----------
NET EARNINGS (LOSS) $ 1,966 $ (3,880)
=========== ===========
Net earnings (loss) per common share $ 0.53 $ (0.98)
=========== ===========
Weighted average number of shares and
share equivalents outstanding 3,723,546 3,959,476
=========== ===========
</TABLE>

F-16
<PAGE> 68

EL CHICO RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)

<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Earnings (Loss) $ 1,966 $ (3,880)
Adjustments to Reconcile Net Earnings (Loss) to Net
Cash Provided by Operating Activities:
Special Charge -- 9,421
Gain on Sale of Property (529) 1,202
Depreciation and Amortization of Property and Equipment 3,904 4,049
Amortization of Deferred Costs 345 585
Decrease in Accounts Receivable 486 143
Decrease in Income Tax Receivable (63) (314)
Decrease (Increase) in Inventories (90) 124
Decrease (Increase) in Prepaid Expenses and Other 85 (113)
Increase in Other Assets and Deferred Costs (381) (275)
Decrease in Trade Accounts Payable and Accrued Liabilities (2,083) (860)
Decrease in Income Taxes Payable (570) --
Increase (Decrease) in Long-Term Liabilities 1,917 (45)
Deferred Income Taxes 55 (2,403)
Other 149 120
----------- -----------
Net Cash Provided by Operating Activities 5,191 5,350
----------- -----------

Cash Flows from Investing Activities:
Proceeds from Sale of Property 1,144 1,445
Purchase of Property and Equipment (5,299) (5,864)
----------- -----------
Net Cash Used in Investing Activities (4,157) (4,419)
----------- -----------

Cash Flows from Financing Activities:
(Repayment) Borrowings of Long-Term Debt (385) 1,855
Purchase of Treasury Stock -- (2,912)
Issuance of Common Stock 130 43
----------- -----------
Net Cash Used in Financing Activities (255) 1,014
----------- -----------

Net Decrease in Cash 779 (83)

Cash and Cash Equivalents at Beginning of Period 216 266
----------- -----------
Cash and Cash Equivalents at End of Period $ 995 $ 183
=========== ===========
</TABLE>

F-17
<PAGE> 69
EL CHICO RESTAURANTS, INC. AND SUBSIDIARIES

Note to Consolidated Condensed Financial Statements
(Unaudited)

1. Basis of presentation and other accounting information.

The consolidated condensed financial statements and information
included herein are unaudited; however, they reflect all adjustments which are,
in the opinion of Management, necessary for a fair statement of the results of
operations for the interim periods ended September 30, 1997 and September 30,
1996 and financial position at September 30, 1997. The adjustments consist only
of normal recurring items except for the special charge discussed below. The
results of operations for the nine months ended September 30, 1997 are not
necessarily indicative of the results to be expected for the full fiscal year.
The notes to the consolidated financial statements contained in the December 31,
1996 Annual Report on Form 10-K should be read in conjunction with the
consolidated condensed financial statements.

2. Special Charge.

During the quarter ended June 30, 1996, the Company incurred a special
charge of $9.4 million to provide for the impairment and exit plans of six
units slated for closing, the impairment of the carrying values of three other
stores that will continue operating as well as a write-down of certain other
assets. One of the six stores was an older store that was closed during the
quarter and was replaced with a new prototype which opened July 1996.
Subsequently, the Company entered into agreements with two separate existing
franchisees to operate two of the six impaired restaurants. The three remaining
impaired stores have been closed, two of which are subleased or under contract
to sublease and the Company is in the process of locating a sublessor for the
remaining closed store.

F-18
<PAGE> 70

APPENDIX A
<PAGE> 71

AGREEMENT AND PLAN OF MERGER

dated September 23, 1997

by and between

EL CHICO HOLDING COMPANY, L.P. and EL CHICO ACQUISITION, INC.
and

EL CHICO RESTAURANTS, INC.

<PAGE> 72

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - CERTAIN DEFINITIONS ........................................... A-1

ARTICLE II - THE MERGER ................................................... A-5
Section 2.1 The Merger ....................................... A-5
Section 2.2 Effective Time of the Merger ..................... A-5
Section 2.3 Articles of Incorporation ........................ A-6
Section 2.4 Bylaws ........................................... A-6
Section 2.5 Directors of the Surviving Corporation ........... A-6
Section 2.6 Officers of the Surviving Corporation ............ A-6
Section 2.7 Effects of Merger ................................ A-6

ARTICLE III - CONVERSION OF SHARES ........................................ A-6
Section 3.1 Effect Of Merger on Capital Stock ................ A-6
Section 3.2 Exchange of Certificates ......................... A-7
Section 3.3 Further Assurances ............................... A-8

ARTICLE IV - THE CLOSING ................................................. A-8
Section 4.1 Closing .......................................... A-8

ARTICLE V - REPRESENTATIONS AND WARRANTIES OF PARENT ...................... A-9
Section 5.1 Organization and Qualification ................... A-9
Section 5.2 Authority; Non-Contravention; Statutory
Approvals; Compliance ............................ A-9
Section 5.3 Ownership of Company Common Stock ................ A-10

ARTICLE VI - REPRESENTATIONS AND WARRANTIES OF THE COMPANY ................ A-11
Section 6.1 Organization and Qualification ................... A-11
Section 6.2 Subsidiaries ..................................... A-11
Section 6.3 Capitalization ................................... A-11
Section 6.4 Authority; Non-Contravention; Statutory
Approvals; Compliance ............................ A-12
Section 6.5 Reports and Financial Statements ................. A-14
Section 6.6 Absence of Certain Changes or Events; Absence of
Undisclosed Liabilities .......................... A-14
Section 6.7 Litigation ....................................... A-15
Section 6.8 Proxy Materials .................................. A-15
Section 6.9 Tax Matters ...................................... A-16
Section 6.10 Employee Matters ................................. A-16
Section 6.11 Environmental Matters ............................ A-17
Section 6.12 Vote Required .................................... A-17
Section 6.13 Insurance ........................................ A-18
SECTION 6.14 Material Contracts and Agreements ................ A-18
</TABLE>

i
<PAGE> 73
<TABLE>
<S> <C> <C>
Section 6.15 State Takeover Statutes; Absence of
Supermajority Provision .......................... A-18
Section 6.16 Certain Interest ................................. A-18

ARTICLE VII - REPRESENTATIONS AND WARRANTIES REGARDING SUB ................ A-19
Section 7.1 Organization and Standing ........................ A-19
Section 7.2 Capital Structure ................................ A-19
Section 7.3 Authority; Non-Contravention ..................... A-19

ARTICLE VIII - CONDUCT OF BUSINESS PENDING THE MERGER ..................... A-20
Section 8.1 Ordinary Course of Business ...................... A-20
Section 8.2 Dividends ........................................ A-20
Section 8.3 Issuance of Securities ........................... A-20
Section 8.4 Charter Documents ................................ A-21
Section 8.5 Capital Expenditures ............................. A-21
Section 8.6 No Dispositions .................................. A-21
Section 8.7 Indebtedness ..................................... A-21
Section 8.8 Compensation, Benefits ........................... A-21
Section 8.9 Accounting ....................................... A-22
Section 8.10 Insurance ........................................ A-22
Section 8.11 Permits .......................................... A-22
SECTION 8.12 Merger ........................................... A-22

ARTICLE IX - ADDITIONAL AGREEMENTS ........................................ A-22
Section 9.1 Cooperation, Notification ........................ A-22
Section 9.2 Third-Party Consents ............................. A-22
Section 9.3 Access to Information ............................ A-23
Section 9.4 Regulatory Matters ............................... A-23
Section 9.5 Shareholder Approval; Proxy Statement ............ A-24
Section 9.6 Indemnification; Directors' and Officers'
Insurance ........................................ A-24
Section 9.7 Schedules ........................................ A-25
Section 9.8 Public Announcements ............................. A-26
Section 9.9 Stock Option and Bonus Plans ..................... A-26
Section 9.10 No Solicitations ................................. A-26
Section 9.11 Cancellation Fee ................................. A-27
Section 9.12 No Withdrawal of Recommendation .................. A-27
Section 9.13 Expenses ......................................... A-28
Section 9.14 Employee Benefit Matters; Severance .............. A-28
SECTION 9.15 Escrow Agreement ................................. A-28
Section 9.16 Covenant to Satisfy Conditions ................... A-28

ARTICLE X - CONDITIONS .................................................... A-29
Section 10.1 Conditions to Each Party's Obligation to
Effect the Merger ................................ A-29
Section 10.2 Conditions to Obligation of Parent to
Effect Merger .................................... A-29
Section 10.3 Conditions to Obligation of the Company to
Effect the Merger ................................ A-30
</TABLE>

ii
<PAGE> 74

<TABLE>
<S> <C> <C>
ARTICLE XI - TERMINATION, AMENDMENT AND WAIVER ............................ A-31
Section 11.1 Termination ...................................... A-31
Section 11.2 Effect of Termination ............................ A-33
Section 11.3 Payments of Expenses ............................. A-33
Section 11.4 Amendment ........................................ A-34
Section 11.5 Waiver ........................................... A-34

ARTICLE XII - GENERAL PROVISIONS .......................................... A-34
Section 12.1 Non-Survival of Representations and
Warranties ...................................................... A-34
Section 12.2 Brokers .......................................... A-35
Section 12.3 Notices .......................................... A-35
Section 12.4 Miscellaneous .................................... A-36
Section 12.5 Interpretation ................................... A-36
Section 12.6 Counterparts; Effect ............................. A-36
Section 12.7 Parties in Interest .............................. A-36
Section 12.8 Specific Performance ............................. A-36
Section 12.9 Further Assurances ............................... A-37
</TABLE>

Company Schedules

Schedule 5.3 - Ownership of Company Common Stock
Schedule 6.2 - Subsidiaries
Schedule 6.4(d) - Compliance
Schedule 6.6(a) - Absence of Certain Changes or Events; Absence of
Undisclosed Liabilities
Schedule 6.6(b) - Financial Statement Disclosure
Schedule 6.7 - Litigation
Schedule 6.10(a) - Benefit Plans
Schedule 6.11 - Environmental Matters
Schedule 6.14 - Material Contracts and Agreements
Schedule 6.16 - Certain Interests
Schedule 8.6 - No Dispositions
Schedule 8.8 - Compensation Benefits
Schedule 9.9 - Stock Option and Bonus Plans

Exhibits

Exhibit A - Bylaw Excerpt

iii
<PAGE> 75

AGREEMENT AND PLAN OF MERGER

AGREEMENT AND PLAN OF MERGER, dated as of September 23, 1997 (this
"Agreement"), by and among EL CHICO HOLDING COMPANY, L.P., a limited
partnership formed under the laws of the State of Texas ("Parent"), EL CHICO
ACQUISITION, INC. , a corporation formed under the laws of the State of Texas
and a wholly-owned subsidiary of Parent ("Sub"), and EL CHICO RESTAURANTS,
Inc., a corporation formed under the laws of the State of Texas (the
"Company").

WHEREAS, Parent has executed a Confidentiality Agreement in favor of
Company in connection with an auction conducted by the Company; and

WHEREAS, the Company has relied upon such Confidentiality Agreement in
entering into this Agreement; and

WHEREAS, the General Partner of Parent and the respective Boards of
Directors of Sub and the Company have approved, and the Company has declared
advisable and in the best interests of its shareholders, the merger of Sub with
and into the Company (the "Merger"), pursuant to the terms and conditions set
forth in this Agreement;

WHEREAS, pursuant to the Merger, each issued and outstanding share of
Company Common Stock not owned directly or indirectly by Parent or the Company
will be converted into the right to receive the Conversion Value;

WHEREAS, Parent, Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger.

NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained in this Agreement, the parties
hereto, intending to be legally bound, hereby agree as follows:

ARTICLE I

CERTAIN DEFINITIONS

As used in this Agreement, the following terms shall have the following
meanings:

"Articles of Merger" shall have the meaning set forth in SECTION 2.2.

"Certificates" shall have the meaning set forth in SECTION 3.2(b).

"Closing" and "Closing Date" shall have the meaning set forth in SECTION
4.1.

A-1
<PAGE> 76

"Company Benefit Plans" shall have the meaning set forth in SECTION
6.10(a).

"Company Common Stock" shall mean the common stock, par value $0.10 per
share, of the Company (and the associated preferred stock purchase rights with
respect thereto under the Company's shareholder rights plan).

"Company Confidentiality Agreement" shall mean that certain
confidentiality agreement, dated as of September 22, 1997, by and between the
Company and Parent.

"Company Financial Statements" shall have the meaning set forth in SECTION
6.5(d).

"Company Material Adverse Change" or "Company Material Adverse Effect"
shall mean any change or effect that is or, so far as can reasonably be
determined, is likely to be materially adverse to the business, operations,
properties, assets, condition (financial or otherwise), or results of
operations of the Company and its Subsidiaries taken as a whole or on the
consummation of the transactions contemplated by this Agreement.

"Company Preferred Stock" shall mean the preferred stock, par value $0.10
per share, of the Company.

"Company Required Consents" shall mean all required third-party consents
or other approvals.

"Company Required Statutory Approvals" shall have the meaning set forth in
SECTION 6.4(c).

"Company SEC Reports" shall have the meaning set forth in SECTION 6.5(b).

"Company Special Committee" shall mean the Special Committee of the Board
of Directors of the Company appointed by the Board of Directors of the Company.

"Company Shareholders' Approval" shall have the meaning set forth in
SECTION 6.4(a)(i).

"Conversion Value" shall have the meaning set forth in SECTION 3.1(b).

"Converted Shares" shall have the meaning set forth in SECTION 3.2(b).

"Dissenting Shareholder" shall have the meaning set forth in SECTION
3.1(d).

"Effective Time" shall have the meaning set forth in SECTION 2.2.

"Environmental Claims" shall mean, with respect to any person, any and all
actions, causes of action, claims, investigations, demands or notices by any
person or entity alleging liability under or non-compliance with any
Environmental Law.

"Environmental Laws" shall mean all federal, state and local laws, rules,
regulations and guidances relating to pollution or protection of human health
or the environment (including, without

A-2
<PAGE> 77

limitation, ambient air, surface water, groundwater, land surface or subsurface
strata), including, without limitation, laws and regulations relating to
Releases or threatened Releases of Hazardous Materials or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials.

"Environmental Permits" shall mean all applicable environmental, health
and safety permits and authorizations.

"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.

"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.

"Exchange Agent" shall have the meaning set forth in SECTION 3.2(a).

"GAAP" shall mean generally accepted accounting principles.
"Governmental Authority" shall mean any court, governmental or regulatory
body (including a stock exchange or other self-regulatory body) or authority,
domestic or foreign.

"Hazardous Materials" shall mean (a) any petroleum or petroleum products,
radioactive materials, asbestos in any form that is or could become friable,
urea formaldehyde foam insulation, and transformers or other equipment that
contain dielectric fluid containing polychlorinated biphenyls, (b) any
chemicals, materials or substances which are now defined as or included in the
definition of "hazardous substances," "hazardous wastes," "hazardous
materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic
substances," "toxic pollutants," or words of similar import, under any
Environmental Law and (c) any other chemical, material, substance or waste,
exposure to which is now prohibited, limited or regulated under any
Environmental Law in a jurisdiction in which such person operates.

"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.

"Parent Material Adverse Change" or "Parent Material Adverse Effect" shall
mean any change or effect that is or, so far as can reasonably be determined,
is likely to be materially adverse to the business, operations, properties,
assets, condition (financial or otherwise), or results of operations of Parent
and its Subsidiaries taken as a whole or on the consummation of the
transactions contemplated by this Agreement.

"Parent Required Statutory Approvals" shall have the meaning set forth in
SECTION 5.2(c).

"Permitted Encumbrances" shall mean: with respect to the Company, the
Parent or any of their respective Subsidiaries, as the case may be, (a) liens
securing payments to mechanics and materialmen, not yet delinquent, and liens
securing payment of taxes and assessments not yet delinquent or, if delinquent,
that are being contested in good faith in the normal course of business; (b)
such title defects as the Company or the Parent, as the case may be, has
expressly waived in writing; (c) liens, encumbrances and claims to be released
at the Closing or which are described in

A-3
<PAGE> 78

the Schedules; (d) existing terms and provisions of Leases; and (e) all other
liens, charges, encumbrances, limitations, obligations, defects and
irregularities affecting any portion of the Company's assets ("Encumbrances")
which would not have a material adverse effect on the operation, value or use
of such assets.

"Proxy Materials" shall have the meaning set forth in SECTION 6.4(c).

"Release" shall mean any release, spill, emission, leaking, injection,
deposit, disposal, discharge, dispersal, leaching or mitigation into the
atmosphere, soil, subsurface, surface water, groundwater or property.

"Representatives" shall have the meaning set forth in SECTION 9.3.

"Rights Agreement" shall mean that certain Rights Agreement, dated as of
February 9, 1995, between the Company and Society National Bank (the "Rights
Agreement").

"Schedules" shall have the meaning set forth in SECTION 9.7.

"SEC" shall mean the Securities and Exchange Commission.

"Securities Act" shall mean the Securities Act of 1933, as amended.

"Stock Plan" shall have the meaning set forth in SECTION 9.9.

"Sub Material Adverse Effect" shall mean any change or effect that is or,
so far as can be reasonably determined, is likely to be materially adverse to
the business, operations, properties, assets, condition (financial or
otherwise), or results of operations of Sub taken as a whole or on the
consummation of the transactions contemplated by this Agreement.

"Subsidiary" shall mean, with respect to any person, any corporation or
other entity (including partnerships and other business associations) in which
a person directly or indirectly owns at least a majority of the outstanding
voting securities or other equity interests having the power, under ordinary
circumstances, to elect a majority of the directors, or otherwise to direct the
management and policies, of such corporation or other entity.

"Superior Takeover Proposal" means any bona fide Takeover Proposal on
terms that the Board of Directors of the Company determines in its good faith
reasonable judgment (after consultation with a financial advisor of nationally
recognized reputation) to be more favorable to the Company's shareholders than
the Merger.

"Surviving Corporation" shall have the meaning set forth in SECTION 2.1.

"Takeover Proposal," shall mean (i) any tender or exchange offer, proposal
for merger, consolidation or other business combination involving the Company
or any of its material Subsidiaries, (ii) any proposal to acquire, directly or
indirectly, for consideration consisting of cash, securities or a combination
thereof, all of the common stock of the Company then outstanding in a

A-4
<PAGE> 79

transaction or a series of transactions, or (iii) any proposal to acquire all
or substantially all of the assets of the Company; provided, however, that a
"Takeover Proposal" shall not mean the Merger or any alternative transaction
between the Company and Parent that may be proposed as contemplated hereby.

"Taxes" shall mean any federal, state, county, local or foreign taxes,
charges, fees, levies or other assessments, including, without limitation, all
net income, gross income, sales and use, ad valorem, transfer, gains, profits,
excise, franchise, real and personal property, gross receipts, capital stock,
production, business and occupation, disability, employment, payroll, license,
estimated, stamp, custom duties, severance or withholding taxes or charges
imposed by any governmental entity, and includes any interest and penalties
(civil or criminal) on or additions to any such taxes, charges, fees, levies or
other assessments, and any expenses incurred in connection with the
determination, settlement or litigation of any liability for any of the
foregoing.

"Tax Return" shall mean any report, return or other information required
to be supplied to a governmental entity with respect to Taxes, including, where
permitted or required, combined or consolidated returns for any group of
entities that includes Parent or any of its Subsidiaries on the one hand, or
the Company or any of its Subsidiaries on the other hand.

"TBCA" shall mean the Texas Business Corporation Act, as amended.

"Violation" shall have the meaning set forth in SECTION 5.2(b).

ARTICLE II

THE MERGER

SECTION 2.1 The Merger. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with the TBCA, Sub shall be merged
with and into the Company at the Effective Time. Following the Merger, the
separate corporate existence of Sub shall thereupon cease, and the Company
shall continue as the surviving corporation (the "Surviving Corporation") and
shall succeed to and assume all the rights and obligations of Sub in accordance
with the TBCA.

SECTION 2.2 Effective Time of the Merger. The parties acknowledge that it
is their mutual desire and intent to consummate the Merger as soon as
practicable after the date hereof. Accordingly, the parties shall use all
reasonable efforts to bring about the satisfaction as soon as practicable of
all the conditions specified in ARTICLE X and otherwise to effect the
consummation of the Merger as soon as practicable. Subject to the terms hereof,
as soon as practicable after all of the conditions set forth in ARTICLE X shall
have been satisfied or waived, the parties hereto will (i) file articles of
merger (the "Articles of Merger") executed in accordance with the relevant
provisions of the TBCA and (ii) make all other filings or recordings required
under the TBCA. The Merger shall become effective at such time as the Articles
of Merger are duly filed with the Secretary of State of Texas or at such other
time as Parent and the Company shall agree shall be specified in the Articles
of Merger (the "Effective Time").

A-5
<PAGE> 80
SECTION 2.3 Articles of Incorporation. The Articles of Incorporation of
Sub as in effect immediately prior to the Effective Time shall be the Articles
of Incorporation of the Surviving Corporation following the Effective Time,
until duly amended.

SECTION 2.4 Bylaws. The Bylaws of Sub as in effect immediately prior to
the Effective Time shall be the Bylaws of the Surviving Corporation following
the Effective Time, until duly amended.

SECTION 2.5 Directors of the Surviving Corporation. The individuals who
are members of the board of directors of Sub immediately prior to the Effective
Time shall comprise the full board of directors of the Surviving Corporation
following the Effective Time, until the earlier of their resignation or removal
or until their respective successors are duly elected and qualified, as the
case may be.

SECTION 2.6 Officers of the Surviving Corporation. The individuals who are
officers of Sub immediately prior to the Effective Time shall be the officers
of the Surviving Corporation following the Effective time, until the earlier of
their resignation or removal or until their respective successors are duly
elected and qualified, as the case may be.

SECTION 2.7 Effects of Merger. The Merger shall have the effects set forth
in the TBCA.

ARTICLE III

CONVERSION OF SHARES

SECTION 3.1 Effect Of Merger on Capital Stock. At the Effective Time, by
virtue of the Merger and without any action on the part of any holder of any
capital stock of the Company, Parent or Sub:

(a) Cancellation of Certain Company Common Stock. Each share of Company
Common Stock, if any, that is owned by Parent or Sub or any Subsidiary of
Parent or held in the treasury of the Company shall be canceled and cease to
exist and no capital stock of Parent or other consideration shall be delivered
in exchange therefor.

(b) Conversion of Company Common Stock. Each issued and outstanding share
of Company Common Stock (other than shares of Company Common Stock canceled
pursuant to SECTION 3.1(a)), which shall include the Right attached to each
share of Common Stock pursuant to the Rights Agreement, shall be converted into
$12.75 (the "Conversion Value"). Upon such conversion, all such shares of
Company Common Stock shall be canceled and cease to exist, and the holder of a
certificate representing such shares shall cease to have any rights with
respect thereto, except the right to receive the cash consideration specified
above upon the surrender of such certificate in accordance with SECTION 3.2
(or, in the case of shareholders perfecting their right to dissent in
accordance with the TBCA, the rights of Dissenting Shareholders under the
TBCA).

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(c) Treatment of Common Stock of Sub. Each issued and outstanding share of
common stock, par value $.01 per share, of Sub shall be converted into one
fully paid and nonassessable share of common stock, par value $.10 per share,
of the Surviving Corporation.

(d) Rights of Dissent. Holders of shares of Company Common Stock shall
have the right under Article 5.11 of the TBCA to dissent from the Merger. If
the Merger is consummated, each holder of Company Common Stock who has not
voted in favor of the Merger and who otherwise has perfected its right to
dissent under Article 5.12 of the TBCA (a "Dissenting Shareholder") shall be
entitled to such rights of a dissenting shareholder, and each share of Company
Common Stock in respect of which such rights to dissent shall have been
perfected shall not be converted into the Conversion Value unless such
appraisal rights shall cease as provided in Article 5.13 of the TBCA.

SECTION 3.2 Exchange of Certificates.

(a) Deposit with Exchange Agent. As soon as practicable after the date
hereof and in any case prior to the Effective Time, Parent and the Company
shall mutually agree on a bank or trust company to act as exchange agent for
the Merger (the "Exchange Agent"). On the Closing Date and prior to the filing
of the Articles of Merger, Parent shall deposit with the Exchange Agent a
sufficient amount of cash to pay to the shareholders of the Company the
consideration for the Merger specified in Section 3.1(b). Such cash will be
invested by the Exchange Agent in U.S. government securities maturing in 30
days or less and all interest which is earned thereon prior to the time the
cash is fully paid to the shareholders of the Company shall be paid over by the
Exchange Agent to the Surviving Corporation in accordance with the terms of the
agreement with the Exchange Agent on the first anniversary of the Closing Date
(if not otherwise required to satisfy obligations owing to the shareholders of
the Company).

(b) Exchange Procedures. As soon as practicable after the Effective Time,
the Exchange Agent shall mail to each holder of record of a certificate or
certificates that, immediately prior to the Effective Time, represented
outstanding shares of Company Common Stock (the "Certificates") that were
converted (collectively, the "Converted Shares") into cash pursuant to SECTION
3.1(b), (i) a form of letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to any Certificate shall pass,
only upon actual delivery of such Certificate to the Exchange Agent) and (ii)
instructions for use in effecting the surrender of Certificates in exchange for
such cash. Upon surrender of a Certificate to the Exchange Agent (or to such
other agent or agents as may be appointed by agreement of Parent and the
Company), together with a duly executed letter of transmittal and such other
documents as the Exchange Agent shall require, the holder of such Certificate
shall be entitled to receive in exchange therefor a check representing the
consideration that such holder has the right to receive pursuant to the
provisions of this ARTICLE III. In the event of a transfer of ownership of
Converted Shares that is not registered in the transfer records of the Company,
a check representing the consideration may be issued to the transferee if the
Certificate representing such Converted Shares is presented to the Exchange
Agent, accompanied by all documents required to evidence and effect such
transfer and by evidence satisfactory to the Exchange Agent that any applicable
stock transfer taxes have been paid. If any Certificate shall have been lost,
stolen, mislaid or destroyed, then upon receipt of (x) an affidavit of that
fact from the holder claiming such Certificate to be lost, mislaid, stolen or
destroyed, (y) such bond, security or indemnity, as Parent or the Exchange
Agent may reasonably require, and (z) any other

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documentation necessary to evidence and effect the bona fide exchange thereof,
the Exchange Agent shall issue to such holder a check representing the
consideration into which the shares represented by such lost, stolen, mislaid
or destroyed Certificate shall have been converted. Until surrendered as
contemplated by this SECTION 3.2, each Certificate shall be deemed at any time
after the Effective Time to represent only the right to receive upon such
surrender the consideration for the Merger contemplated by SECTION 3.1(b).

(c) Closing of Transfer Books. From and after the Effective Time, the
stock transfer books of the Company shall be closed and no transfer of any
Company Common Stock shall thereafter be made. If after the Effective Time any
certificates evidencing shares of Company Common Stock are presented for
transfer, they shall be canceled and exchanged for the consideration determined
in accordance with this ARTICLE III.

(d) Termination of Duties of Exchange Agent. All funds held by the
Exchange Agent for payment to the holders of unsurrendered Certificates and
unclaimed at the end of one year from the Effective Time shall be returned to
Parent whereupon any holder of unsurrendered Certificates shall look as a
general unsecured creditor only to Parent for payment of any funds to which
such holder may be entitled, subject to applicable law. None of Parent, the
Company or the Surviving Corporation shall be liable to any person for such
shares or funds delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.

SECTION 3.3 Further Assurances. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of the Company or Sub, any
deeds, bills of sale, assignments or assurances and to take and do, in the name
and on behalf of the Company or Sub, any other actions and things to vest,
perfect or conform of record or otherwise in the Surviving Corporation any and
all right, title and interest in, to and under any of the rights, properties or
assets acquired or to be acquired by the Surviving Corporation as a result of,
or in connection with, the Merger.

ARTICLE IV

THE CLOSING

SECTION 4.1 Closing. The closing of the Merger (the "Closing") shall take
place at the offices of Jenkens & Gilchrist, a Professional Corporation, 1445
Ross Avenue, Suite 3200, Dallas, Texas 75202 at 10:00 a.m., local time, on the
second business day immediately following the date on which the last of the
conditions set forth in ARTICLE X is fulfilled or waived, or at such other time
and date and place as Parent and the Company shall mutually agree (the "Closing
Date"). Either the Company or Parent may postpone the Closing Date fixed above
one time for a period not exceeding 15 days.

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ARTICLE V

REPRESENTATIONS AND WARRANTIES OF PARENT

Parent represents and warrants to the Company as follows:

SECTION 5.1 Organization and Qualification. Parent is a limited
partnership duly organized and validly existing under the laws of the State of
Texas, and Sub is a corporation duly organized, validly existing and in good
standing under the laws of the State of Texas. Each of Parent and Sub has all
requisite limited partnership or corporate power and authority, and is duly
authorized by all necessary regulatory approvals and orders, to own, lease and
operate its assets and properties and to carry on its business as it is now
being conducted, and is duly qualified and in good standing to do business in
each jurisdiction in which the nature of its business or the ownership or
leasing of its assets and properties makes such qualification necessary, other
than such failures which, individually or in the aggregate, will not have a
Parent Material Adverse Effect.

SECTION 5.2 Authority; Non-Contravention; Statutory Approvals; Compliance.

(a) Authority.

(i) The general partner of Parent has approved the Merger Agreement.
Parent has all requisite power and authority to enter into this Agreement
and, subject to the Parent Required Statutory Approvals, to consummate the
Merger and the other transactions contemplated hereby.

(ii) The execution and delivery of this Agreement and the
consummation by Parent of the transactions contemplated hereby have been
duly authorized by all necessary limited partnership action on the part of
Parent.

(iii) This Agreement has been duly and validly executed and delivered
by Parent and, assuming the due authorization, execution and delivery
hereof by the Company, constitutes a valid and binding obligation of
Parent, enforceable against Parent in accordance with its terms, except as
may be limited by applicable bankruptcy, insolvency, reorganization,
fraudulent conveyance or other similar laws affecting the enforcement of
creditors' rights generally, and except that the availability of equitable
remedies, including specific performance, may be subject to the discretion
of any court before which any proceedings may be brought.

(b) Non-Contravention. The execution and delivery of this Agreement by
Parent do not, and the consummation of the transactions contemplated hereby and
thereby will not, violate, conflict with or result in a breach of any provision
of, or constitute a default (with or without notice or lapse of time or both)
under, or result in the termination of, or accelerate the performance required
by, or result in a right of termination,

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cancellation or acceleration of any obligation or the loss of a material
benefit under, or result in the creation of any lien, security interest, charge
or encumbrance upon any of the properties or assets (any such violation,
conflict, breach, default, right of termination, cancellation or acceleration,
loss or creation, a "Violation") of Parent or any of its Subsidiaries, under
any provisions of:

(i) the limited partnership agreement, certificate of limited
partnership, articles of incorporation, bylaws or similar governing
documents of Parent or any of its Subsidiaries;

(ii) subject to obtaining the Parent Required Statutory Approvals,
any statute, law, ordinance, rule, regulation, judgment, decree, order or
injunction of any Governmental Authority applicable to Parent or any of
its Subsidiaries or any of their respective properties or assets or
business as presently conducted;

(iii) any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, concession, contract, lease or other instrument,
obligation or agreement of any kind to which Parent or any of its
Subsidiaries is now a party or by which it or any of its properties or
assets may be bound or affected;

excluding from the foregoing clauses (i), (ii) and (iii) such Violations as
would not, in the aggregate, have a Parent Material Adverse Effect.

(c) Statutory Approvals. Except for (i) filing by Parent of a pre-merger
notification report form under the HSR Act, (ii) the filing with the SEC of
such reports under Section 13(a) of the Exchange Act as may be required in
connection with this Agreement and the transactions contemplated hereby and
(iii) the filing of the Articles of Merger with the Texas Secretary of State
with respect to the Merger as provided in the TBCA and appropriate documents
with the relevant authorities in other states in which Parent is qualified to
do business, no declaration, filing, or registration with, or notice to or
authorization, consent or approval of, any Governmental Authority is necessary
for the execution and delivery of this Agreement by Parent or the consummation
by Parent of the transactions contemplated hereby, the failure to obtain, make
or give which would have a Parent Material Adverse Effect (the "Parent Required
Statutory Approvals"), it being understood that references in this Agreement to
"obtaining" such Parent Required Statutory Approvals shall mean making such
declarations, filings or registrations; giving such notice, obtaining such
consents or approvals; and having such waiting periods expire as are necessary
to avoid a violation of law.

SECTION 5.3 Ownership of Company Common Stock. Except as provided in
Schedule 5.3, Parent does not "beneficially own" (as such term is defined in
Rule 13d-3 under the Exchange Act) any shares of Company Common Stock, and no
entity or person "beneficially owning" any general or limited partnership
interest in Parent "beneficially owns" any shares of Company Common Stock.

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ARTICLE VI

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company represents and warrants to Parent as follows:

SECTION 6.1 Organization and Qualification. The Company is a corporation
duly organized, validly existing and in good standing, under the laws of the
State of Texas, and each of the Company's Subsidiaries is a corporation or
limited partnership duly organized, validly existing and in good standing,
under the laws of its jurisdiction of formation. Each of the Company and its
Subsidiaries has all requisite corporate power and authority, and is duly
authorized by all necessary regulatory approvals and orders, to own, lease and
operate its assets and properties and to carry on its business as it is now
being conducted, and is duly qualified and in good standing to do business in
each jurisdiction in which the nature of its business or the ownership or
leasing of its assets and properties makes such qualification necessary, other
than such failure which, individually or in the aggregate, will not have a
Company Material Adverse Effect. The copies of the respective articles or
certificates of incorporation, bylaws, limited partnership agreements and
certificates of limited partnership, as amended to date, of each of the Company
and its Subsidiaries which have been delivered to Parent are complete and
correct and in full force and effect at the date of this Agreement.

SECTION 6.2 Subsidiaries.

(a) Schedule 6.2 sets forth a description as of the date hereof of all
Subsidiaries of the Company, including the name of each such entity, the state
or jurisdiction of its formation, a brief description of the principal line or
lines of business conducted by each such entity and the Company's interest
therein. Schedule 6.2 includes each significant subsidiary, as such term is
defined in Rule 1-02 of Regulation S-X promulgated by the SEC, of the Company.

(b) All of the issued and outstanding shares of capital stock or other
equity interests of each Subsidiary of the Company are (i) validly issued,
fully paid, and, in the case of each Subsidiary that is a corporation,
nonassessable (ii) free of statutory preemptive rights and (iii) are owned
directly or indirectly by the Company free and clear of any liens, claims,
encumbrances, security interests, equities, charges and options of any nature
whatsoever, and there are no outstanding subscriptions, options, calls,
contracts, voting trusts, proxies or other commitments, understandings,
restrictions, arrangements, rights or warrants, including any right of
conversion or exchange under any outstanding security, instrument or other
agreement, obligating any such Subsidiary to issue, deliver or sell, or cause
to be issued, delivered or sold, additional shares of its capital stock or
other equity interests or obligating it to grant, extend or enter into any such
agreement or commitment.

SECTION 6.3 Capitalization.

(a) As of the date hereof, the authorized capital stock of the Company
consists of 10,000,000 shares of Company Common Stock and 1,000,000 shares of
Company Preferred Stock.

(b) As of September 22, 1997, 3,717,386 shares of Company Common Stock
were issued and outstanding and no shares of Company Preferred Stock were
issued and outstanding. As of September 22, 1997, 1,054,780 shares of Company
Common Stock and no shares of Company Preferred Stock are held by the Company
in its treasury. No shares of Company Common Stock or Company Preferred Stock
are owned by any of the Company's Subsidiaries.

(c) All of the issued and outstanding shares of the capital stock of the
Company are validly issued, fully paid, nonassessable and free of statutory
preemptive rights.

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(d) As of September 22, 1997, (i) 766,225 shares of Company Common Stock
were reserved for issuance pursuant to outstanding options under the employee
and director stock plans and (ii) 186,766 shares of Company Common Stock were
reserved for future awards under such plans. The sum of the numbers of shares
stated in Section 6.3(b) and this Section 6.3(d) is the total number of shares
of Company Common Stock outstanding as of the date hereof on a fully-diluted
basis and represents all shares of Company Common Stock to be exchanged for the
Conversion Value.

(e) Except as described in Section 6.3 (d) and the Rights Plan, there are
no outstanding subscriptions, options, calls, contracts, voting trusts, proxies
or other understandings, restrictions, arrangements, rights or warrants,
including any right of conversion or exchange under any outstanding security,
instrument or other agreement, obligating the Company to issue, deliver or
sell, or cause to be issued, delivered or sold, additional shares of the
capital stock of the Company or obligating the Company to grant, extend or
enter into any such agreement or commitment.

(f) The Merger shall be an "Approved Acquisition" as that term is defined
in the Rights Agreement, so that the entering into of this Agreement, the
Merger and the other transactions contemplated hereby and thereby will not
result in the grant of any rights to any person under the Rights Agreement or
enable or require any rights thereunder to be exercised, distributed or
triggered.

SECTION 6.4 Authority; Non-Contravention; Statutory Approvals; Compliance.

(a) Authority.

(i) The Company Special Committee has approved this Agreement and the
Merger and has recommended approval to the Board of Directors of the
Company. The Board of Directors of the Company has approved and declared
the Merger fair to and advisable and in the best interests of the
shareholders of the Company and has determined to recommend to such
shareholders that they vote in favor of the Merger. The Company has all
requisite power and authority to enter into this Agreement and, subject to
approval by the Company's shareholders in accordance with the TBCA (the
"Company Shareholders' Approval") and the Company Required Statutory
Approvals, to consummate the transactions contemplated hereby.

(ii) The execution and delivery of this Agreement and, subject to
obtaining the Company Shareholders' Approval, the consummation by the
Company of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of the Company.

(iii) This Agreement has been duly and validly executed and delivered
by the Company and, assuming the due authorization, execution and delivery
hereof by Parent and Sub, constitutes the valid and binding obligation of
the Company, enforceable against the Company in accordance with its terms,
except as would be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance or other similar laws affecting the
enforcement of creditors' rights generally and except that the
availability of equitable

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remedies, including specific performance, may be subject to the discretion
of any court before which any proceeding therefor may be brought.

(b) Non-Contravention. The execution and delivery of this Agreement by the
Company do not, and the consummation of the transactions contemplated hereby
and thereby will not, result in any Violation by the Company or any of its
Subsidiaries under any provisions of:

(i) the articles of incorporation, bylaws or similar governing
documents of the Company or any of its Subsidiaries;

(ii) subject to obtaining the Company Required Statutory Approvals,
any statute, law, ordinance, rule, regulation, judgment, decree, order or
injunction of any Governmental Authority applicable to the Company or any
of its Subsidiaries or any of their respective properties or assets;

(iii) subject to obtaining the Company Required Consents, any note,
bond, mortgage, indenture, deed of trust, license, franchise, permit,
concession, contract, lease or other instrument, obligation or agreement
of any kind to which the Company or any of its Subsidiaries is now a party
or by which it or any of its properties or assets may be bound or
affected;

excluding from the foregoing clauses (i), (ii) and (iii) such Violations as
would not, in the aggregate, reasonably likely have a Company Material Adverse
Effect.

(c) Statutory Approvals. Except for (i) filing by the Company of a
pre-merger Notification Report form under the HSR Act, (ii) the filing with the
SEC of (A) preliminary and definitive proxy materials with respect to the
Merger in accordance with Regulation 14A under the Exchange Act (the "Proxy
Materials") and (B) such reports under Section 13(a) of the Exchange Act as may
be required in connection with this Agreement and the transactions contemplated
hereby and (iii) the filing of the Articles of Merger with the Texas Secretary
of State with respect to the Merger as provided in the TBCA and appropriate
documents with the relevant authorities in other states in which the Company is
qualified to do business, no declaration, filing or registration with, or
notice to or authorization, consent or approval of, any Governmental Authority
is necessary for the execution and delivery of this Agreement by the Company or
the consummation by the Company of the transactions contemplated hereby, the
failure to obtain, make or give which would reasonably likely have a Company
Material Adverse Effect (the "Company Required Statutory Approvals"), it being
understood that references in this Agreement to "obtaining" such Company
Required Statutory Approvals shall mean making such declarations, filings or
registrations; giving such notice; obtaining such consents or approvals; and
having such waiting periods expire as are necessary to avoid a violation of
law.
(d) Compliance.

(i) Except as described in Schedule 6.4(d), neither the Company nor
any of its Subsidiaries is in violation of or under investigation with
respect to, or has been given notice or been charged with any violation
of, any law, statute, order, rule, regulation, ordinance or

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judgment (including, without limitation, any applicable Environmental Law)
of any Governmental Authority, except for violations that do not have,
and, would not reasonably likely have, a Company Material Adverse Effect.

(ii) The Company and its Subsidiaries have all permits, licenses,
franchises and other governmental authorizations, consents and approvals
necessary, to conduct their respective businesses as currently conducted,
except those the failure to obtain which would not reasonably likely have
a Company Material Adverse Effect.

SECTION 6.5 Reports and Financial Statements.

(a) Since December 31, 1996, the filings required to be made by the
Company and its Subsidiaries under the Securities Act or the Exchange Act have
been filed with the SEC as required by each such law or regulation, including
all forms, statements, reports, agreements and all documents, exhibits,
amendments and supplements appertaining thereto, and the Company and its
Subsidiaries have complied in all material respects with all applicable
requirements of the appropriate act and the rules and regulations thereunder.

(b) The Company has made available to Parent a true and complete copy of
each report, schedule, registration statement and definitive proxy statement
filed by the Company with the SEC since December 31, 1996 (such documents as
filed, and any and all amendments thereto, the "Company SEC Reports").

(c) The Company SEC Reports, including without limitation any financial
statements or schedules included therein, at the time filed, and all forms,
reports or other documents filed by the Company with the SEC after the date
hereof, did not and will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading.

(d) The audited consolidated financial statements and unaudited interim
financial statements of the Company included in the Company SEC Reports
(collectively, the "Company Financial Statements") have been prepared, and the
audited consolidated financial statements and unaudited interim financial
statements of the Company as included in all forms, reports or other documents
filed with the SEC after the date hereof will be prepared in accordance with
GAAP applied on a consistent basis (except as may be indicated therein or in
the notes thereto and except with respect to unaudited statements as permitted
by Form 10-Q) and fairly present in all material respects the financial
position of the Company as of the respective dates thereof or the results of
operations and cash flows for the respective periods then ended, as the case
may be, subject, in the case of the unaudited interim financial statements, to
normal, recurring audit adjustments.

SECTION 6.6 Absence of Certain Changes or Events; Absence of Undisclosed
Liabilities.

(a) Except as set forth in Schedule 6.6(a), from December 31, 1996 through
the date hereof, the Company and each of its Subsidiaries has conducted its
business only in the ordinary course of business consistent with past practice
and there has not been (i) any declaration, setting aside or payment of any
dividend (whether in cash, stock or property) with respect to any of the

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Company's capital stock, (ii) (A) any granting by the Company or any of its
Subsidiaries to any executive officer of the Company or any of its Subsidiaries
of any increase in compensation, except in the ordinary course of business
consistent with prior practice or as was required under employment agreements
in effect as of December 31, 1996, (B) any granting by the Company or any of
its Subsidiaries to any such executive officer of any increase in severance or
termination pay, except as was required under employment, severance or
termination agreements in effect as of December 31, 1996, or (C) any entry by
the Company or any of its Subsidiaries into any employment, severance or
termination agreement with any such executive officer, (iii) any damage,
destruction or loss, net of amounts recoverable from available insurance, that
would have a Company Material Adverse Effect, (iv) any direct or indirect
redemption, purchase or other acquisition of any shares of Company Common Stock
or any issuance of any shares of capital stock of the Company or grant of any
option to purchase or other right to acquire shares of capital stock of the
Company, or any acceleration of the date as of which any options to purchase or
other rights to acquire Company Common Stock become exercisable or (v) any
other fact or condition exists that would reasonably likely have a Company
Material Adverse Effect.

(b) Neither the Company nor any of its Subsidiaries has any liabilities or
obligations (whether absolute, accrued, determined or determinable, contingent
or otherwise) and no existing condition, situation or set of circumstances
known to the Company exists, in each case, of a nature required by GAAP to be
reflected in a consolidated corporate balance sheet, except liabilities,
obligations or contingencies (i) that are accrued or reserved against in the
consolidated financial statements of the Company or reflected in the notes
thereto for the year ended December 31, 1996, (ii) that have accrued or been
reserved against since December 31, 1996 in the consolidated interim financial
statements of the Company since December 31, 1996 or are disclosed on Schedule
6.6(b) or (iii) that were incurred after December 31, 1996 in the ordinary
course of business and would not reasonably likely have a Company Material
Adverse Effect.

SECTION 6.7 Litigation. Except as set forth in Schedule 6.7, there are no
(i) claims, suits, actions or proceedings, pending or, to the knowledge of the
Company, threatened against, relating to or affecting the Company or any of its
Subsidiaries, (ii), to the knowledge of the Company, investigations or reviews
pending or threatened against, relating to or affecting the Company or any of
its Subsidiaries (iii) judgments, decrees, injunctions, rules or orders of any
court, governmental department, commission, agency, instrumentality or
authority or any arbitrator applicable to the Company or any of its
Subsidiaries, or (iv) existing violations nor aggregates of existing violations
by the Company or any of its Subsidiaries of any federal, state or local laws,
regulations or orders that, individually or in the aggregate, would have, or
would reasonably likely have, a Company Material Adverse Effect. Without regard
to the Company Material Adverse Effect limitation contained in this Section
6.7, Schedule 6.7 will include all matters of the nature required to be
disclosed therein which expose or in reasonable likelihood would expose the
Company to liability in excess of $50,000.

SECTION 6.8 Proxy Materials.

(a) None of the information supplied or to be supplied by or on behalf of
the Company for inclusion or incorporation by reference in the Proxy Materials
will, at the date the definitive proxy statement filed with the SEC is mailed
to the shareholders of the Company and, as the same

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may be amended or supplemented, at the time of the meeting of such shareholders
to be held in connection with the Merger, contain any untrue statement of a
material fact or omit to state any material fact with respect to the Company or
its Subsidiaries necessary in order to make the statements therein with respect
to the Company or its Subsidiaries, in light of the circumstances under which
they are made, not misleading.

(b) The definitive proxy statement filed with the SEC
pursuant to Regulation 14A under the Exchange Act as of such respective dates,
will comply (with respect to the Company and its Subsidiaries) as to form in
all material respects with the applicable provisions of the Securities Act and
the Exchange Act and the rules and regulations thereunder.

SECTION 6.9 Tax Matters.

(a) The Company and each of its Subsidiaries has (i) filed within the time
and in the manner prescribed by law, all required Tax Returns calculated on or
with reference to income, profits, earnings or gross receipts and all other Tax
Returns required to be filed that would report a material amount of Tax, and
(ii) paid all Taxes that are shown on such Tax Returns as due and payable
within the time and in the manner prescribed by law except for those being
contested in good faith and for which adequate reserves have been established.
None of the filed Tax Returns is incomplete or inaccurate in any manner which
would have a Company Material Adverse Effect.

(b) As of the date hereof, there is no claim, assessment, audit,
deficiency, refund litigation, proposed adjustment, administrative or court
proceeding or matter in controversy with respect to any Taxes or Tax Returns,
and none of the Company or any of its Subsidiaries has executed any outstanding
waivers or comparable consents regarding the application of the statute of
limitations with respect to any Taxes or Tax Returns.

(c) The Company has established adequate accruals for Taxes and for any
liability for deferred Taxes in the Company Financial Statements in accordance
with GAAP.

SECTION 6.10 Employee Matters.

(a) Benefit Plans. With respect to all the employee benefit plans and
arrangements maintained for the benefit of any current or former employee,
officer or director of the Company or any of its Subsidiaries (collectively,
the "Company Benefit Plans"), except as set forth in Schedule 6.10(a) and
except, in the case of clauses (ii), (iii), (iv) and (v), as would not,
individually or in the aggregate, have a Company Material Adverse Effect: (i)
none of the Company Benefit Plans is a "multi-employer plan" within the meaning
of ERISA; (ii) none of the Company Benefit Plans promises or provides retiree
medical or life insurance benefits to any person, except as otherwise required
by law; (iii) each Company Benefit Plan intended to be qualified under Section
401(a) of the Code has received a favorable determination letter from the
Internal Revenue Service that it is so qualified and nothing has occurred since
the date of such letter that could reasonably be expected to affect the
qualified status of such Company Benefit Plan; (iv) each Company Benefit Plan
has been operated in all respects in accordance with its terms and the
requirements of applicable law; and (v) neither the Company nor any of its
Subsidiaries has incurred any direct or indirect liability under, arising out
of or by operation of Title IV of ERISA in connection with the termination of,
or

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withdrawal from, any Company Benefit Plan or other retirement plan or
arrangement, and no fact or event exists that could reasonably be expected to
give rise to any such liability. The aggregate accumulated benefit obligations
of any Company Benefit Plan subject to Title IV of ERISA do not exceed the fair
market value of the assets of such Company Benefit Plan. Except as set forth in
Schedule 6.10(a), neither the Company nor any of its Subsidiaries has any
Company Benefit Plan or any employment or severance agreement with any of its
employees.

(b) Labor Matters. (i) Neither the Company nor any of its Subsidiaries is
a party to any collective bargaining agreement or other material contract or
agreement with any labor organization or other representative of employees nor
is any such contract being negotiated; (ii) there is no material unfair labor
practice charge or complaint pending nor, to the knowledge of the executive
officers of the Company, threatened, with regard to employees of the Company or
any of its Subsidiaries; (iii) there is no labor strike, slowdown, work
stoppage or other labor controversy in effect, or, to the knowledge of the
executive officers of the Company, threatened against or involving the Company
or any of its Subsidiaries that has, or would be reasonably likely to have, a
Company Material Adverse Effect; (iv) as of the date hereof, no representation
question exists, nor to the knowledge of the executive officers of the Company,
are there any campaigns being conducted to solicit cards from the employees of
the Company or any of its Subsidiaries to authorize representation by any labor
organization; (v) neither the Company nor any of its Subsidiaries is a party
to, or is otherwise bound by, any consent decree with any governmental
authority relating to employees or employment practices of the Company or any
of its Subsidiaries; (vi) the Company and its Subsidiaries have not incurred
any liability under, and have complied in all respects with, the Worker
Adjustment Retraining Notification Act, and no fact or event exists that could
give rise to liability under such Act; and (vii) the Company and its
Subsidiaries are in compliance with all applicable agreements, contracts and
policies relating to employment, employment practices, wages, hours and terms
and conditions of employment of the employees, except where the failure to be
in compliance with each such agreement, contract and policy would not, either
individually or in the aggregate, have a Company Material Adverse Effect.

SECTION 6.11 Environmental Matters. Except as disclosed in Schedule 6.11,
and except as would not, individually or in the aggregate, be reasonably
expected to result in a Company Material Adverse Effect, (i) the Company and
each of its Subsidiaries are in compliance with all applicable Environmental
Laws and the terms and conditions of all applicable Environmental Permits,
which compliance includes, but is not limited to, the possession by the Company
and its Subsidiaries of all material permits and other governmental
authorizations required under applicable Environmental Laws and compliance with
the terms and conditions of such permits, (ii) there are no Environmental
Claims against the Company or any of its Subsidiaries and (iii) no Hazardous
Materials have been released, discharged or disposed of on any of the
properties owned or occupied by the Company or its Subsidiaries in any manner
or quantity which requires investigation, assessment, monitoring, remediation
or cleanup under currently applicable Environmental Laws.

SECTION 6.12 Vote Required. The approval of this Agreement by the holders
of at least two-thirds of the outstanding shares of Company Common Stock (the
"Company Shareholders' Approval") is the only vote of holders of any class or
series of the capital stock of the Company required to approve this Agreement,
the Merger and the other transactions contemplated hereby.

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SECTION 6.13 Insurance. The Company and each of its Subsidiaries is, and
has been continuously since December 31, 1996, insured in such amounts and
against such risks and losses as are customary for companies conducting the
respective businesses conducted by the Company and its Subsidiaries during such
time period. Neither the Company nor any of its Subsidiaries has received any
notice of cancellation or termination with respect to any material insurance
policy thereof. All material insurance policies of the Company and its
Subsidiaries are valid and enforceable policies.

SECTION 6.14 Material Contracts and Agreements.

(a) All material contracts of the Company or its Subsidiaries have been
included in the Company SEC Reports, except for those contracts not required to
be filed pursuant to the rules and regulations of the SEC.

(b) Schedule 6.14 sets forth a list as of the date hereof of all written
or oral contracts, agreements or arrangements to which the Company or any of
its Subsidiaries is a party or by which the Company or any of its Subsidiaries
or any of their respective assets is bound which (i) would be required to be
filed as exhibits to the Company's Annual Report on Form 10-K for the year
ending December 31, 1997, and which have not previously been included as
exhibits in the Company SEC Reports and (ii) are not required to be filed as
exhibits in the Company SEC Reports but under the terms of which the Company is
committed, or may be committed to pay amounts in excess of $100,000 to any
third party.

SECTION 6.15 State Takeover Statutes; Absence of Supermajority Provision.
The Company has taken all action to assure that no state takeover statute or
similar statute or regulation shall apply to the Merger or any of the other
transactions contemplated hereby. Except for the Company Shareholders'
Approval, no other shareholder action on the part of the Company is required
for approval of the Merger, this Agreement and the transactions contemplated
hereby. No provisions of the Company's Articles of Incorporation or By-laws or
other governing instruments of its subsidiaries or the terms of any rights plan
or other takeover defense mechanism of the Company would, directly or
indirectly, restrict or impair the ability of Parent to vote, or otherwise to
exercise the rights of a shareholder with respect to, securities of the Company
and its subsidiaries that may be acquired or controlled by Parent or permit any
shareholder to acquire securities of the Company on a basis not available to
Parent in the event that Parent were to acquire securities of the Company.

SECTION 6.16 Certain Interest. Within the 12-month period immediately
preceding the date of this Agreement, or as otherwise disclosed on Schedule
6.16 no executive officer or director of the Company or any of its Subsidiaries
has directly or indirectly acquired any interest in any property of the Company
or any of its Subsidiaries except as an executive officer, director or
stockholder or has entered into any business relationship with the Company or
any of its Subsidiaries of a nature which would be required to be disclosed in
a proxy statement relating to the election of directors filed under the
Exchange Act, except as an officer, director or stockholder.

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ARTICLE VII

REPRESENTATIONS AND WARRANTIES REGARDING SUB

Parent and Sub, jointly and severally, represent and warrant to the
Company as follows:

SECTION 7.1 Organization and Standing. Sub is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Texas. Sub was organized solely for the purpose of acquiring the Company and
engaging in the transactions contemplated by this Agreement and has not engaged
in any business since it was incorporated which is not in connection with the
Merger and this Agreement.

SECTION 7.2 Capital Structure. The authorized capital stock of Sub
consists of 1,000 shares of common stock, par value $0.01 per share, all of
which are validly issued and outstanding, fully paid and nonassessable, free of
preemptive rights and are owned by Parent free and clear of all liens, claims
and encumbrances.

SECTION 7.3 Authority; Non-Contravention. Sub has all requisite power and
authority to enter into this Agreement and to consummate the Merger and the
other transactions contemplated hereby. The execution and delivery of this
Agreement by Sub, the performance by Sub of its obligations hereunder and the
consummation of the transactions contemplated hereby have been duly authorized
by its Board of Directors and Parent as its sole shareholder, and, except for
the corporate filings required by state law, no other corporate proceedings on
the part of Sub are necessary to authorize this Agreement and the Merger and
the other transactions contemplated hereby. This Agreement has been duly and
validly executed and delivered by Sub and, assuming the due authorization,
execution and delivery hereof by the Company, constitutes a valid and binding
obligation of Sub enforceable against Sub in accordance with its terms, except
to the extent enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, fraudulent conveyance or other similar laws
affecting the enforcement of creditors' rights generally, and except that the
availability of equitable remedies, including specific performance, may be
subject to the discretion of any court before which any proceedings may be
brought. The execution and delivery of this Agreement do not, and the
consummation of the transactions contemplated hereby and compliance with the
provisions hereof will not, violate, conflict with or result in a breach of any
provision of, or constitute a default (with or without notice or lapse of time,
or both) under, or result in the termination of, or accelerate the performance
required by, or result in a right of termination, cancellation or acceleration
of any obligation or the loss of a material benefit under, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
properties or assets of Sub under, any provisions of (i) the articles of
incorporation or bylaws (true and complete copies of which as of the date
hereof have been delivered to the Company) of Sub, (ii) any loan or credit
agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise or license applicable to Sub or (iii)
any judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Sub or any of its properties or assets, other than, in the case
of clauses (ii) or (iii), any such conflicts, violations, defaults, rights,
losses, liens, security interests, charges or encumbrance that, individually or
in the aggregate, would not have a Sub Material Adverse Effect, materially
impair the ability of Sub to perform its obligations hereunder or prevent the
consummation of any of the transactions contemplated hereby.

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ARTICLE VIII

CONDUCT OF BUSINESS PENDING THE MERGER

After the date hereof and prior to the Effective Time or earlier
termination of this Agreement, the Company shall, and shall cause its
Subsidiaries to, comply with the provisions of this ARTICLE VIII.

SECTION 8.1 Ordinary Course of Business. The Company shall, and shall
cause its Subsidiaries to, conduct their respective businesses in the usual,
regular and ordinary course in substantially the same manner as heretofore
conducted and use all commercially reasonable efforts to preserve their
respective business organizations and goodwill, preserve the goodwill and
relationships with customers, suppliers, distributors and others having
business dealings with them and, subject to prudent
management of workforce needs and ongoing programs currently in force, keep
available the services of their present officers and employees. Between the
date hereof and the Closing Date, the Company will not hire any senior
management personnel without the consent of the Parent, which consent will not
be unreasonably withheld.

SECTION 8.2 Dividends. The Company shall not, nor shall it permit any of
its Subsidiaries to:

(a) declare or pay any dividends or make other distributions in respect of
any of their capital stock other than to the Company or its Subsidiaries.

(b) split, combine or reclassify any of their capital stock or issue or
authorize or propose the issuance of any other securities in respect of, in
lieu of, or in substitution for, shares of their capital stock; or

(i) intercompany acquisitions of capital stock, or

(ii) in connection with the administration of employee
benefit and dividend reinvestment plans as in effect on the date hereof in
the ordinary course of the operation of such plans.

SECTION 8.3 Issuance of Securities. The Company shall not, and shall not
permit any of its Subsidiaries to, issue, agree to issue, deliver or sell, or
authorize or propose the issuance, delivery or sale of, any shares of their
capital stock or any class or any securities convertible into or exchangeable
for, or any rights, warrants or options to acquire, any such shares or
convertible or exchangeable securities except for:

(a) the issuance of common stock or other securities by the Company
pursuant to the plans and arrangements listed in Schedule 6.10(a), in each case
in the ordinary course of the operation of such plans and arrangements in
accordance with their current terms,

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(b) existing outstanding securities and rights to acquire securities of
the Company, or

SECTION 8.4 Charter Documents. The Company shall not amend or propose to
amend its Articles of Incorporation or Bylaws in any way adverse to Parent.

SECTION 8.5 Capital Expenditures. Except as required by law, the Company
shall not, nor shall it permit any of its Subsidiaries to, make any capital
expenditures, except for normal extensions to or replacements of properties or
in the ordinary course of business consistent with prior practice.

SECTION 8.6 No Dispositions. Except as described in Schedule 8.6, the
Company shall not, nor shall it permit any of its Subsidiaries to, sell, lease,
license, encumber or otherwise dispose of any assets that are material, except
for normal extensions to or replacements or dispositions of properties in the
ordinary course of business consistent with prior practice.

SECTION 8.7 Indebtedness. The Company shall not, nor shall it permit any
of its Subsidiaries to, incur or guarantee any indebtedness (including any debt
borrowed or guaranteed or otherwise assumed, including, without limitation, the
issuance of debt securities), except for:

(a) short-term indebtedness in the ordinary course of business consistent
with past practice,

(b) long-term indebtedness in connection with the refinancing of existing
indebtedness either at its stated maturity or at a lower cost of funds, or

SECTION 8.8 Compensation, Benefits. Except as described in Schedule 8.8,
or as may be required by applicable law or the provisions of any employee
benefit plan, or as contemplated by this Agreement, the Company shall not, nor
shall it permit any of its Subsidiaries to, enter into, adopt or amend or
increase the amount of or accelerate the payment or vesting of any benefit or
amount payable under any employee benefit plan or any other contract,
agreement, commitment, arrangement, plan or policy maintained by, contributed
to or entered into by the Company, as the case may be, or their respective
Subsidiaries, or increase, or enter into any contract, agreement, commitment or
arrangement to increase in any manner, the compensation or fringe benefits, or
otherwise to extend, expand or enhance the engagement, employment or any
related rights of any director, officer or other employee of the Company, or
its respective Subsidiaries, except for normal, increases in the ordinary
course of business consistent with past practice that, in the aggregate, do not
result in a material increase in benefits or compensation expense to Parent or
the Company, as the case may be, or their respective Subsidiaries, or enter
into or amend any employment, severance, or special pay arrangement with
respect to the termination of employment or other similar contract, agreement
or arrangement with any director or officer or senior management employee.

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SECTION 8.9 Accounting. The Company shall not, nor shall it permit any of
its Subsidiaries to, make any material changes in its or their accounting
methods, except as required by law, rule, regulation or GAAP.

SECTION 8.10 Insurance. The Company shall, and shall cause its
Subsidiaries to, maintain with financially responsible insurance companies (or
through self-insurance not inconsistent with such party's past practice)
insurance in such amounts and against such risks and losses as are customary
for companies engaged in the same industry and
such other businesses as conducted by such party and its Subsidiaries.

SECTION 8.11 Permits. The Company shall use commercially reasonable
efforts to maintain in effect all existing material permits pursuant to which
the Company operates.

SECTION 8.12 Merger. The Company shall not merge or
consolidate with any other corporation or person or enter into any similar
transaction not in the ordinary course of its business.

ARTICLE IX

ADDITIONAL AGREEMENTS

SECTION 9.1 Cooperation, Notification. After the date hereof and prior to
the Effective Time or earlier termination of this Agreement, Parent shall, and
shall cause its Subsidiaries to, and the Company shall, and shall cause its
Subsidiaries to:

(a) confer on a regular and frequent basis with one or more
representatives of the other party to discuss matters pertinent to the proposed
business combination,

(b) promptly notify the other party of any change in the business,
properties, assets condition (financial or otherwise), prospects, results of
operations, or event that has had or, to the knowledge of such party, would
reasonably likely have a Parent Material Adverse Effect, a Sub Material Adverse
Effect or a Company Material Adverse Effect, and

(c) consult with each other prior to making any filings with any state or
federal court, administrative agency, commission or other Governmental
Authority in connection with this Agreement and the transactions contemplated
hereby, and promptly after each such filing provide the other with a copy
thereof.

SECTION 9.2 Third-Party Consents. Each of Parent and the Company shall,
and shall cause its Subsidiaries to, use all commercially reasonable efforts to
obtain all third-party consents necessary to consummate the Merger. Each party
shall promptly notify the other party of any failure or prospective failure to
obtain any such consents and, if requested by the other party, shall provide to
the other party copies of all such consents, as the case may be, obtained by
such party.

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SECTION 9.3 Access to Information.

(a) Upon reasonable notice, the Company shall, and shall cause its
Subsidiaries to, afford to the officers, directors, employees, accountants,
counsel, investment bankers, financial advisors, consultants and other
representatives (collectively, "Representatives") of the Parent reasonable
access, during normal business hours throughout the period prior to the
Effective Time, to all of the Company's and its Subsidiaries' plants,
properties, books, contracts, commitments, records, including, but not limited
to, Tax Returns, and such additional financial and operating data and other
information Representatives of the Parent may from time to time reasonably
request, but excluding (i) that information that is restricted by applicable
confidentiality and secrecy agreements, (ii) that information that a party may
be restricted from disclosing under applicable law, (iii) the corporate
proceedings of the Company in considering the Merger, and (iv) minutes of
meetings of the Company's Special Committee, and, during such period, the
Company shall, and shall cause its Subsidiaries to, furnish promptly to the
Representatives of the Parent:

(i) a copy of each report, schedule and other document filed by it or
any of its Subsidiaries with the SEC and any other document pertaining to
the transactions contemplated hereby filed with any Governmental Authority
that is not filed as an exhibit to an SEC filing or described in an SEC
filing, and

(ii) all information concerning itself, its Subsidiaries, directors,
officers and shareholders and such matters as may be reasonably requested
by Parent in connection with any filings, applications or approvals
required or contemplated by this Agreement.

(b) In connection with the refinancing by Parent and Sub of the
Company's current indebtedness, the Company agrees to provide all information
reasonably requested by and cause its officers to participate in meetings with
the lender or lenders.

SECTION 9.4 Regulatory Matters.

(a) HSR Filings. Each party hereto shall, in cooperation with the other,
file or cause to be filed with the Federal Trade Commission and the Department
of Justice any notifications required to be filed by their respective "ultimate
parent entities" under the HSR Act, and the rules and regulations promulgated
thereunder with respect to the transactions contemplated hereby. Each party
hereto shall notify the other immediately upon receiving any request for
additional information from either of such agencies with respect to such
filings and shall respond promptly to any such requests.

(b) Other Regulatory Approvals.

(i) Each party hereto shall cooperate and use its reasonable best
efforts promptly to prepare and file all necessary permits, consents,
approvals and authorizations of all Governmental Authorities and all other
persons necessary or advisable to consummate the transactions contemplated
by this Agreement, including, without limitation, the Company Required
Statutory Approvals.

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(ii) Parent shall have the right to review and approve in advance all
characterizations of the information relating to Parent, on the one hand,
and the Company shall have the right to review and approve in advance all
characterizations of the information relating to the Company, on the other
hand, in either case, which appear in any filing made in connection with
the transactions contemplated by this Agreement or the Merger.

(iii) The Company and Parent shall each consult with the other with
respect to the obtaining of all such necessary or advisable permits,
consents, approvals and authorizations of Governmental Authorities.

SECTION 9.5 Shareholder Approval; Proxy Statement.

(a) Company Shareholder Approval. The Company shall, as promptly as
reasonably practicable after the date hereof,

(i) take all steps reasonably necessary to duly call, give notice of,
convene and hold a special meeting of its shareholders (the "Company
Special Meeting") for the purpose of securing the Company Shareholders'
Approval,

(ii) distribute to its shareholders the Proxy Materials in accordance
with applicable federal and state laws, and its Articles of Incorporation
and Bylaws,

(iii)recommend to its shareholders the approval of the Merger, this
Agreement and the transactions contemplated hereby, and

(iv) cooperate and consult with Parent with respect to each of the
foregoing matters, provided that nothing contained in this Section 9.5(a)
shall require the Board of Directors of the Company to take any action or
refrain from taking any action that such Board determines in good faith
after consultation with and based on the advice of outside counsel could
reasonably be expected to result in a breach of its fiduciary duties under
applicable law.

(b) Cooperation. Parent shall furnish all information concerning itself
and its Subsidiaries that is required or customary for inclusion in the Proxy
Materials.

SECTION 9.6 Indemnification; Directors' and Officers' Insurance.

(a) The Company shall, and from and after the Effective Time, the
Surviving Corporation shall, indemnify, defend, hold harmless and advance
expenses to each person who is now, or has been at any time prior to the date
hereof, an officer, director, employee or agent of the Company or any of its
Subsidiaries (the "Indemnified Parties") to the same extent and in the same
manner as is now provided in the respective certificates or Articles of
Incorporation or Bylaws of the Company and such Subsidiaries in effect on the
date hereof (the relevant portions of which are attached hereto as Exhibit
"A"), with respect to any claim, liability, loss, damage, judgment, cost,
expense or amount paid in settlement arising in whole or in part out of (i) the
fact that such person is or was a director, officer, employee or agent of the
Company or any of its Subsidiaries and (ii) any matter existing or

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occurring at or prior to the Effective Time ("Indemnified Liabilities"). Any
Indemnified Party wishing to claim indemnification under this SECTION 9.6, upon
learning of a claim, action, suit, proceeding or investigation, shall notify
the Company (or after the Effective Time, the Surviving Corporation) (but the
failure so to notify shall not relieve a party from any liability which it may
have under this SECTION 9.6 except to the extent such failure materially
prejudices such party's position with respect to such claims). The Company,
Parent and Sub agree that the foregoing rights to indemnification existing in
favor of the Indemnified Parties with respect to matters occurring through the
Effective Time, shall survive the Merger and shall continue in full force and
effect until the disposition of such Indemnified Liabilities. This Agreement is
intended to provide identical protection to that now afforded by the Company's
Articles of Incorporation and Bylaws on the date hereof. Parent acknowledges
that each of the Indemnified Parties is an intended third-party beneficiary of
this SECTION 9.6. (b) Parent shall, subject to the terms set forth herein,
indemnify and hold harmless each Indemnified Party against any Indemnified
Liability incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative,
arising out of or pertaining to the transactions contemplated by this
Agreement. (For purposes of this Section 9.6, a finding of a breach by an
Indemnified Party of his duty of disclosure shall not be deemed to be a breach
of his duty of loyalty, unless found to be willful.)

(c) For a period of four years after the Effective Time, the Surviving
Corporation shall cause to be maintained in effect the current policies of
directors' and officers' liability insurance maintained by the Company and its
Subsidiaries (provided that the Surviving Corporation may substitute therefor
policies of at least the same coverage and amounts containing terms and
conditions which are no less advantageous in any material respect to the
Indemnified Parties) with respect to matters arising before and omissions
occurring or existing at or prior to the Effective Time including the
transactions contemplated by this Agreement; provided further that, if the
aggregate annual premiums for such insurance at any time during such four-year
period shall exceed 200% of the premiums paid by the Company and its
Subsidiaries for such insurance for the 12 calendar months immediately
preceding the date of this Agreement, then the obligation of the Surviving
Corporation to provide insurance under this SECTION 9.6(c) shall be limited to
the maximum coverage that shall then be available at an annual premium equal to
200% of the premiums paid by the Company and its Subsidiaries for such
insurance for the 12 calendar months immediately preceding the date of this
Agreement.

(d) The provisions of this SECTION 9.6 are for the benefit of, and shall
be enforceable by, each Indemnified Party, his heirs and his personal
representatives as if such Indemnified Party were a party hereto and shall be
binding on all successors and assigns of Parent, Sub, the Company and the
Surviving Corporation.

SECTION 9.7 Schedules.

(a) On or prior to the date of this Agreement, the Company shall have
delivered to Parent all Schedules referenced herein (the "Schedules").

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(b) The Schedules when so delivered, shall constitute an integral part of
this Agreement and each Schedule shall modify or otherwise affect only the
representations, warranties, covenants or agreements of the Company contained
in the section of this Agreement corresponding to the number of such Schedule.

(c) The Schedules when so delivered by the Company will be accompanied by
a certificate signed by the Chief Executive Officer and the Chief Financial
Officer of the Company, dated as of the date of delivery, certifying that to
each officer's knowledge (having made inquiry) all statements, representations,
warranties or disclosures set forth in the Schedules are true, correct and
complete in all respects and shall be deemed to have been made on and as of the
date of this Agreement.

SECTION 9.8 Public Announcements. The Company, on the one hand, and Parent
and Sub, on the other hand, shall cooperate with each other in the development
and distribution of all news releases and other public information disclosures
with respect to this Agreement or any of the transactions contemplated hereby
and shall not issue any public announcement or statement with respect thereto
prior to consultation with the other party, except that each party may respond
to questions from shareholders and may respond to inquiries from financial
analysts and media representatives in a manner consistent with its past
practice and each party may make such disclosure as may be required by
applicable law or by obligations pursuant to any listing agreement with any
national securities exchange or NASDAQ without prior consultation to the extent
such consultation is not reasonably practicable. The parties agree that the
initial press release or releases to be issued in connection with the execution
of this Agreement shall be mutually agreed upon prior to the issuance thereof.

SECTION 9.9 Stock Option and Bonus Plans. The following provisions shall
apply to each stock option plan, stock bonus plan and similar plans of the
Company under which the delivery of Company Common Stock is required to be used
for purposes of the payment of benefits, grant of awards or exercise of options
(each a "Stock Plan", and all of which are described in Schedule 6.10(a)). The
Company shall take such action as may be necessary so that from and after the
date hereof, except as set forth in Schedule 9.9, no further grants of stock,
options, or other rights shall be made under any Stock Plan, and that on or
before the Effective Time each outstanding option or restricted stock award
that remains unexercised or unvested under a Stock Plan as of the Effective
Time shall be canceled at or prior to the Effective Time .

SECTION 9.10 No Solicitations.

(a) The Company shall not, and shall cause its Subsidiaries not to, permit
any of its Representatives to, and shall use its best efforts to cause such
persons not to, directly or indirectly, initiate, solicit or encourage, or take
any action to facilitate the making of any offer or proposal that constitutes
or is reasonably likely to lead to any Takeover Proposal with respect to the
Company, or, in the event of any unsolicited Takeover Proposal with respect to
the Company, engage in negotiations or provide any confidential information or
data to any person relating to any Takeover Proposal with respect to the
Company.

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(b) The Company shall notify Parent orally and in writing of any such
inquiries, offers or Takeover Proposals (including, without limitation, the
terms and conditions of any such proposal and the identity of the person making
it) within 48 hours of the receipt thereof.

(c) The Company shall immediately cease and cause to be terminated all
existing discussions and negotiations, if any, with any other persons conducted
heretofore with respect to any Takeover Proposal regarding the Company.

(d) Notwithstanding anything in this SECTION 9.10 to the contrary:

(i) The Company may, prior to the vote of the shareholders of the
Company for approval of the Merger (and not thereafter if the Merger is
approved thereby) in response to an unsolicited request therefor, furnish
information, including non-public information, to any person or "group"
(within the meaning of Section 13(d)(3) of the Exchange Act) pursuant to a
confidentiality agreement on substantially the same terms as provided in
the Company Confidentiality Agreement to the extent that the Board of
Directors of the Company determines in good faith after consultation with
and based on the advice of outside counsel that such action could
reasonably be required by their fiduciary duties under applicable law.

(ii) The Company may engage in discussions and negotiations (but may
not enter into any binding agreement regarding a Takeover Proposal other
than the confidentiality agreement referenced in SECTION 9.10(d)(i) above)
with any Person or group that has made an unsolicited Takeover Proposal,
among other things, to determine whether such proposal (as opposed to any
further negotiated proposal) is a Superior Takeover Proposal and (ii) the
Company may take and disclose to its shareholders a position contemplated
by Rule 14e-2(a) following the Company's receipt of a Takeover Proposal
that is in the form of a tender offer under Section 14(e) of the Exchange
Act.

SECTION 9.11 Cancellation Fee. In the event (i) the Company breaches its
undertakings under SECTION 9.10 above, (ii) the board of directors of the
Company withdraws its approval of this Agreement and the transactions
contemplated hereby (whether or not in compliance with SECTION 9.12), (iii)
this Agreement and the transactions contemplated hereby are not approved by the
Company's shareholders at the meeting held for such purpose and the Company
approves any Takeover Proposal within one year of the date hereof, which
Takeover Proposal is ultimately consummated, whereby any party other than
Parent or Sub would acquire directly or indirectly, for consideration
consisting of cash, securities or a combination thereof, two-thirds (2/3rds) or
more of the common stock of the Company then outstanding or all or
substantially all of the assets of the Company or (iv) the Merger is abandoned
pursuant to SECTION 11.1(e), then, in each case, Parent and Sub may terminate
this Agreement without liability on their respective parts and Parent shall be
entitled to receive from the Company a cancellation fee in the amount of
$1,500,000, payable in cash within ten business days following demand therefor.

SECTION 9.12 No Withdrawal of Recommendation. Neither the Board of
Directors of the Company nor any committee thereof shall, except in connection
with the termination of this Agreement pursuant to SECTIONS 11.1(a), (b), (c),
(d) or (g), (i) withdraw or modify, or propose to withdraw or modify, in a
manner adverse to Parent or Sub the approval or recommendation by the

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Board of Directors of the Company or any such committee of this Agreement or
the Merger or take any action having such effect or (ii) approve or recommend,
or propose to approve or recommend, any Takeover Proposal. Notwithstanding the
foregoing, in the event the Board of Directors of the Company receives a
Takeover Proposal that, in the exercise of its fiduciary obligations (as
determined in good faith by the Board of Directors after consultation with and
based on the advice of outside counsel), it determines to be a Superior
Takeover Proposal, the Board of Directors of the Company may withdraw or modify
its approval or Recommendation of this Agreement or the Merger.

SECTION 9.13 Expenses. Subject to SECTION 11.3, all costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses, except that those
expenses incurred in connection with preparing, printing, and mailing the Proxy
Materials, as well as the filing fee relating thereto, shall be shared equally
by the Company and Parent.

SECTION 9.14 Employee Benefit Matters; Severance.

(a) Parent acknowledges that providing reasonable employee benefits to
employees of the Company is an important factor in retaining the services of
such employees following the Closing Date. Following the Closing, the Surviving
Corporation shall provide a level of benefits to the employees and former
employees of the Company and its Subsidiaries that, in the Surviving
Corporation's sole judgment, is appropriate. This Section 9.14 shall not,
however, give rise to third party beneficiary rights as to any person, and
further shall not restrain the Surviving Corporation from exercising the right,
in its sole discretion, to amend, modify, change, or terminate any benefit
plan, fund, policy or program in any manner as provided in such plan, fund,
policy or program and subject only to the provisions of ERISA or other
applicable law.

(b) Following the Closing, Parent shall maintain and give effect to each
employment severance policy of the Company that is in effect as of the date
hereof.

SECTION 9.15 Escrow Agreement. Parent and the Company are entering into an
Escrow Agreement of even date herewith, under the terms of which Parent has
deposited the amount of $2,500,000 to secure the performance of its obligations
hereunder, all upon the terms and subject to the conditions set forth and
described in such Escrow Agreement.

SECTION 9.16 Covenant to Satisfy Conditions.

(a) Each of Parent, Sub and the Company shall take all reasonable actions
necessary, to comply promptly with all legal requirements that may be imposed
on it with respect to this Agreement.

(b) Subject to the terms and conditions hereof, and taking into account
the circumstances and giving due weight to the materiality of the matter
involved or the action required, Parent, Sub and the Company shall each use
their reasonable best efforts to take or cause to be taken all actions, and to
do or cause to be done all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the Merger and
the other transactions contemplated

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hereby (subject to the Company Shareholders' Approval), including fully
cooperating with the other in obtaining the Company Required Statutory
Approvals and all other approvals and authorizations of any - Governmental
Authorities necessary or advisable to consummate the transactions contemplated
hereby.

ARTICLE X

CONDITIONS

SECTION 10.1 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligations of each party to effect the Merger or cause the
Merger to be effected shall be subject to the satisfaction on or prior to the
Closing Date of the following conditions, except, to the extent permitted by
applicable law, that such conditions may be waived in writing pursuant to
SECTION 11.5:

(a) Shareholder Approval. The Company Shareholders' Approval shall have
been obtained on or prior to December 31, 1997.

(b) No Injunction or Damages. No suit, action or other proceeding shall be
pending by any Governmental Authority in which it is sought to restrain or
prohibit the performance of or to obtain damages in excess of $250,000 or other
relief in connection with this Agreement or the transactions contemplated
hereby, and no temporary restraining order or preliminary or permanent
injunction or other order by any federal or state court preventing consummation
of the Merger shall have been issued and continue in effect, and the Merger and
the other transactions contemplated hereby shall not have been prohibited under
any applicable federal or state law or regulation.

(c) Statutory Approvals. The Company Required Statutory Approvals and the
Parent Required Statutory Approvals shall have been obtained at or prior to the
Effective Time (or, in the case of the filings required, if any, under the HSR
Act, all applicable waiting periods and any extensions thereof shall have
expired or otherwise been terminated).

SECTION 10.2 Conditions to Obligation of Parent to Effect Merger. The
obligation of Parent to effect the Merger or cause the Merger to be effected
shall be further subject to the satisfaction, on or prior to the Closing Date,
of the following conditions, except as may be waived by Parent in writing
pursuant to SECTION 11.5:

(a) Performance of Obligations of the Company. The Company shall have
performed in all material respects its agreements and covenants contained in or
contemplated by this Agreement required to be performed by it at or prior to
the Effective Time.

(b) Representations and Warranties. The representations and warranties of
the Company set forth in this Agreement shall be true and correct in all
material respects as of the date hereof and as of the Closing Date as if made
on and as of the Closing Date, except as otherwise contemplated by this
Agreement.

(c) Closing Certificates. Parent shall have received (i) a certificate
signed by the Chief Executive Officer and Chief Financial Officer of the
Company, dated the Closing Date, to the effect

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that, to each such officer's knowledge (having made inquiry), (A) the
conditions set forth in SECTIONS 10.2(a), (b), (e) and (f) have been satisfied,
(B) the number of shares of Company Common Stock outstanding as of the Closing
Date on a fully-diluted basis represent all shares of Company Common Stock to
be exchanged for the Conversion Value and (C) all statements, representations,
warranties or disclosures set forth in the Schedules are true, correct and
complete in all respects as of the Closing Date, or listing deviation, if any,
(ii) resolutions of the Board of Directors of the Company approving and
authorizing the Merger and the execution, delivery and performance of this
Agreement, certified as of the Closing Date by the corporate secretary or
assistant corporate secretary of the Company as being in full force and effect
without modification or amendment, (iii) signature and incumbency certificates
of the officers of the Company and (iv) good standing certificates (including
verification of tax status) of recent date of the Company and each of its
Subsidiaries from their respective states of incorporation and any other states
in which failure to be qualified to do business would result in a Company
Material Adverse Effect, certified in each case by the applicable Secretary of
State or other authorized governmental entity.

(d) Opinion of Jenkens & Gilchrist, a Professional Corporation. Parent
shall have received an opinion of Jenkens & Gilchrist, a Professional
Corporation, in form and substance satisfactory to Parent, addressed to Parent
and dated the Closing Date, to the effect that: (i) the Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Texas and has corporate power to own all of its properties
and assets and to carry on its business as it is now being conducted, and has
corporate power and authority to consummate the transactions contemplated by
this Agreement; (ii) this Agreement has been duly authorized, executed and
delivered by the Company and constitutes the valid and binding agreement of the
Company enforceable against it in accordance with its terms, except that
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws of general application now or
hereafter in effect relating to the enforcement of creditors rights generally
and except that the remedies of specific performance, injunction and other
forms of equitable relief are subject to certain tests of equity jurisdiction,
equitable defenses and the discretion of the court before which any proceeding
therefor may be brought, (iii) all corporate action by the Company required in
order to effect the transactions contemplated hereby has been taken; (iv) all
necessary action has been taken on behalf of the Company to make the Merger
effective; and (v) each of the domestic and foreign Subsidiaries of the Company
is a corporation or limited partnership duly incorporated or organized (as the
case may be), validly existing and in good standing under the laws of its
respective jurisdiction of incorporation or formation. In rendering the
foregoing opinion, Jenkens & Gilchrist may rely on certificates of public
authorities and, as to matters of fact, on certificates of officers of the
Company, and on opinions of counsel qualified to practice in jurisdictions
other than Texas as to matters involving the laws of those jurisdictions.

(e) Company Required Consents. The Company Required Consents shall have
been obtained except those that in the aggregate would not result in and would
not reasonably be likely to result in a Company Material Adverse Effect.

SECTION 10.3 Conditions to Obligation of the Company to Effect the Merger.
The obligation of the Company to effect the Merger or cause the Merger to be
effected shall be further subject to the satisfaction, on or prior to the
Closing Date, of the following conditions, except as may be waived by the
Company in writing pursuant to SECTION 11.5.

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(a) Performance of Obligations of Parent. Parent shall have performed in
all material respects its agreements and covenants contained in or contemplated
by this Agreement required to be performed by it at or prior to the Effective
Time.

(b) Representations and Warranties. The representations and warranties of
Parent set forth in this Agreement shall be true and correct in all material
respects as of the date hereof and as of the Closing Date as if made on and as
of the Closing Date, except as otherwise contemplated by this Agreement.

(c) Closing Certificates. The Company shall have received a certificate
signed by the Chief Executive Officer and Chief Financial Officer of Parent,
dated the Closing Date, to the effect that, to each such officer's knowledge,
the conditions set forth in SECTIONS 10.3(a), (b) and (e) have been satisfied.

(d) Opinion of Cassell & Stone, L.L.P.. The Company shall have received an
opinion of Cassell & Stone, L.L.P., in form and substance satisfactory to the
Company, addressed to the Company and dated the Closing Date, which opinion may
be based on appropriate representations of Parent.

(e) Merger Consideration Deposit. Parent and Sub shall have deposited with
the Exchange Agent by wire transfer in immediately available funds, an amount
equal to the product of the Conversion Value times the number of issued and
outstanding shares of Company Common Stock (other than shares of Company Common
Stock canceled pursuant to Section 3.1(a)) as of the Effective Date.

(f) Fairness Opinion. The opinion of Montgomery Securities delivered and
addressed to the Board of Directors of the Company dated September 22, 1997
(the "Montgomery Opinion") shall not have been withdrawn.

(g) Solvency Opinion. To the extent Parent shall have obtained a solvency
opinion in connection with the financing of the transactions contemplated by
this Agreement, such solvency opinion shall be addressed jointly to Parent and
to the Company.

ARTICLE XI

TERMINATION, AMENDMENT AND WAIVER

Section 11.1 Termination. This Agreement may be terminated and the Merger
abandoned at any time prior to the Closing Date, whether before or after
approval by the shareholders of the Company contemplated by this Agreement:

(a) by mutual written consent of the Board of Directors of the Company and
the general partner of the Parent;

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(b) by the Company or Parent, by written notice to the other, if the
Effective Time shall not have occurred on or before January 31, 1998;

(c) by the Company or Parent, by written notice to the other party if the
Company has failed to obtain the Company Shareholders' Approval at a duly held
Company Special Meeting, including any adjournments thereof, on or prior to
December 31, 1997;

(d) by the Company or Parent, if any state or federal law, order, rule or
regulation is adopted or issued, that has the effect, as supported by the
written opinion of outside counsel for such party, of prohibiting the Merger,
or by the Company or Parent, if any court of competent jurisdiction in the
United States or any State shall have issued an order, judgment or decree
permanently restraining, enjoining or otherwise prohibiting the Merger, and
such order, judgment or decree shall have become final and nonappealable;

(e) by the Company, upon ten (10) days' prior notice to the Parent, if as
a result of a Takeover Proposal with respect to the Company that the Board of
Directors of the Company has determined to be a Superior Takeover Proposal, and
the Board of Directors of the Company determines in good faith (after
consultation with and based on the advice of its outside counsel) that the
acceptance of such Superior Takeover Proposal could reasonably be required by
the fiduciary obligations of such directors under applicable law; provided,
however, that prior to any such termination, the Company shall advise Parent in
writing of the determination by the Board of Directors of the Company that the
Board of Directors of the Company has determined that such Takeover Proposal is
a Superior Takeover Proposal, which notice will include a copy of such Superior
Takeover Proposal. During such ten (10) day period (i) Parent shall have the
right to match the terms of such Superior Takeover Proposal and (ii) if it is
impossible due to the type of consideration offered in such Superior Takeover
Proposal for Parent to match the terms of such Superior Takeover Proposal,
Parent may propose to the Company an alternative transaction, and the Company
shall, and shall cause its respective financial and legal advisors to,
negotiate with Parent in good faith with respect to such adjustments in the
terms and conditions of this Agreement so that such Takeover Proposal would not
constitute a Superior Takeover Proposal and thereby enable the Company to
proceed with the transactions contemplated herein;

(f) by Parent, by written notice to the Company, if

(i) there shall have been any material breach of any representation
or warranty, or any material breach of any covenant or agreement, of the
Company hereunder, and such breach shall not have been remedied within ten
(10) business days after receipt by the Company of notice in writing from
Parent, specifying the nature of such breach and requesting that it be
remedied, or

(ii) the Board of Directors of the Company or any committee thereof
shall (i) withdraw or modify in a manner adverse to Parent or Sub the
approval or recommendation by the Board of Directors of the Company of
this Agreement or the Merger or take any action having such effect or (ii)
approve or recommend any Superior Takeover Proposal with respect to the
Company.

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<PAGE> 107

(g) by the Company, by written notice to Parent, if there shall have been
any material breach of any representation or warranty, or any material breach
of any covenant or agreement, of Parent hereunder, and such breach shall not
have been remedied within ten (10) business days after receipt by Parent of
notice in writing from the Company, specifying the nature of such breach and
requesting that it be remedied.

(h) by Parent, if there has been a Company Material Adverse Change since
June 30,1997 which has not been remedied by the Closing Date.

(i) by Parent or Sub in accordance with SECTION 9.11.

(j) by Parent or the Company, if within 30 days following the
date of this Agreement Parent shall not have received (i)
a commitment to purchase certain improved real properties
of the Company for a consideration of not less than $26
million and (ii) a financing commitment from a reliable
financial institution in the principal amount of not less
than $35 million bearing interest at an annual rate not
to exceed 11 1/2% with repayment amortized over not less
than 7 years to effect the Merger and the transactions
contemplated by this Agreement, refinance certain
existing indebtedness of the Company and pay related fees
and expenses; both of such commitments being on terms and
conditions reasonably satisfactory to Parent and Sub. In
the event Parent terminates this Agreement pursuant to
the provisions of this Section 11.1(j), upon such
termination, the Company shall be entitled to receive
$250,000 of the funds deposited by Parent pursuant to the
terms of the Escrow Agreement entered into between the
parties pursuant to SECTION 9.15 hereinabove.

SECTION 11.2 Effect of Termination. In the event of
termination of this Agreement by either the Company or Parent pursuant to
Section 11.1, there shall be no liability on the part of either the Company or
Parent or their respective officers or directors hereunder, except that

(a) SECTION 9.13, SECTION 11.3 and SECTION 12.2 shall survive,

(b) no such termination shall relieve any party from liability by reason
of any willful breach of any agreement, representation, warranty or covenant
contained in this Agreement and

SECTION 11.3 Payments of Expenses.

(a) Damages Payable Upon Termination. If this Agreement is terminated
pursuant to SECTION 11.1(f)(i), SECTION 11.1(g) or SECTION 11.1(h), then the
breaching party, or the Company if there has been a Company Material Adverse
Change since June 30, 1997 which has not been remedied by the Closing Date,
shall promptly (but in no event later than five business days after receipt of
notice that the amount is due from the other party) pay to the other party, as
liquidated damages, an amount in cash equal to the out-of-pocket expenses and
fees incurred by the other party arising out of, or in connection with or
related to, the Merger or the transactions contemplated by this

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Agreement not in excess of $1,000,000 (the "Out-of-Pocket Expenses"); provided,
however, that if this Agreement is terminated by a party as a result of a
willful breach of a representation, warranty, covenant or agreement by the
other party, the non-breaching party may pursue any remedies available to it at
law or in equity and shall, in addition, to the amount of Out-of-Pocket
Expenses set forth above, be entitled to recover such additional amounts as
such non-breaching party may be entitled to receive at law or in equity.

(b) Expenses. The parties agree that the agreements contained in this
SECTION 11.3 are an integral part of the transactions contemplated by this
Agreement and constitute liquidated damages and not a penalty.

SECTION 11.4 Amendment.

(a) This Agreement may be amended by the parties hereto pursuant to action
of their respective Boards of Directors, at any time before or after approval
hereof by the shareholders of Parent or the Company and prior to the Effective
Time, but after such approvals, no such amendment shall

(i) alter or change the amount or kind of shares to be received or
exchanged for or on conversion of any class or series of capital stock of
either corporation as provided under ARTICLE II, or

(ii) alter or change any of the terms and conditions of this
Agreement if any of the alterations or changes, alone or in the aggregate,
would materially and adversely affect the rights of holders of Company
Common Stock or Parent Common Stock.

(b) This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto.

SECTION 11.5 Waiver. At any time prior to the Effective Time, to the
extent permitted by applicable law, the parties hereto may (i) extend the time
for the performance of any of the obligations or other acts of the other
parties hereto, (ii) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto and
(iii) waive compliance with any of the agreements or conditions contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed by a
duly authorized officer of such party.

ARTICLE XII

GENERAL PROVISIONS

SECTION 12.1 Non-Survival of Representations and Warranties. The
representations and warranties in this Agreement shall terminate at the
Effective Time. This Section 12.1 shall not limit any covenant or agreement of
the parties hereto that by its terms contemplates performance after the
Effective Time.

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SECTION 12.2 Brokers.

(a) The Company represents and warrants that, except for Montgomery, no
broker, finder or investment bank is entitled to any brokerage, finder's or
other fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of the Company.

(b) Parent represents and warrants that no broker, finder or investment
bank is entitled to any brokerage, finder's or other fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Parent.

SECTION 12.3 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given (a) if delivered personally, or (b) if
sent by overnight courier service (receipt confirmed in writing), or (c) if
delivered by facsimile transmission (with receipt confirmed), or (d) five (5)
days after being mailed by registered or certified mail (return receipt
requested) to the parties, in each case to the following addresses (or at such
other address for a party as shall be specified by like notice):

(i) if to the Company:

El Chico Restaurants, Inc.
12200 Stemmons Freeway
Suite 100
Dallas, Texas 75234
Attention: Wallace A. Jones, President
Fax: (972) 888-8198

with a copy to:

Jenkens & Gilchrist, a Professional Corporation
1445 Ross Avenue, Suite 3200
Dallas, Texas 75202
Attention: Ronald J. Frappier, Esq.
Fax: (214) 855-4300

(ii) if to Parent or Sub:

El Chico Holding Company, LP.
5956 Sherry Lane, Suite 1401
Dallas, Texas 75225
Attention: Cracken, Harkey, Street & Co., L.L.C.
Fax: (214) 750-7086

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<PAGE> 110
with a copy to:
Cassell & Stone, L.L.P.
5956 Sherry Lane, Suite 1400
Dallas, Texas 75225
Attention: Dennis R. Cassell, Esq.
Fax: (214) 696-0377

SECTION 12.4 Miscellaneous.

(a) This Agreement, including the documents and instruments referred to
herein, (i) constitutes the entire agreement and supersedes all other prior
agreements and understandings, both written and oral, among the parties, or any
of them, with respect to the subject matter hereof other than the
Confidentiality Agreement, (ii) shall not be assigned by operation of law or
otherwise, except that with the Company's prior written consent, which consent
shall not be unreasonably conditioned or withheld, Parent may assign its rights
and obligations hereunder to U.S. Restaurant Properties Master, L.P., and (iii)
shall be governed by and construed in accordance with the laws of the State of
Texas applicable to contracts executed in and to be fully performed in such
State, without giving effect to its conflicts of laws statutes, rules or
principles.

(b) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect. The parties hereto
shall negotiate in good faith to replace any provision of this Agreement so
held invalid or unenforceable with a valid provision that is as similar as
possible in substance to the invalid or unenforceable provision.

SECTION 12.5 Interpretation. When reference is made in this Agreement to
Articles, Sections or Exhibits, such reference shall be to an Article, Section
or Exhibit of this Agreement, as the case may be, unless otherwise indicated.
The table of contents and headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include", "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation." Whenever "or" is used in this Agreement it
shall be construed in the nonexclusive sense.

SECTION 12.6 Counterparts; Effect. This Agreement may be executed in one
or more counterparts, each of which shall be deemed to be an original, but all
of which shall constitute one and the same agreement.

SECTION 12.7 Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and, except for rights of
Indemnified Parties and their heirs and representatives as set forth in SECTION
9.6 and rights of the persons specified in SECTION 9.14, nothing in this
Agreement, express or implied, is intended to confer upon any person any rights
or remedies of any nature whatsoever under or by reason of this Agreement.

SECTION 12.8 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties hereto

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<PAGE> 111

shall be entitled to an injunction or injunctions to prevent breaches of this
Agreement and to enforce specifically the terms and provisions hereof in any
court of the United States or any state having jurisdiction, this being in
addition to any other remedy to which they are entitled at law or in equity.

SECTION 12.9 Further Assurances. Each party hereto shall execute such
further documents and instruments and take such further actions as may
reasonably be requested by any other party hereto in order to consummate the
Merger in accordance with the terms hereof.

IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement
to be signed by their respective officers thereunto duly authorized as of the
date first written above.

EL CHICO HOLDING COMPANY, L.P.

By : Cracken, Harkey, Street & Co.,L.L.C.,
General Partner

By: /s/ JOHN D. HARKEY, JR.
--------------------------------------
John D. Harkey, Jr., Manager

EL CHICO ACQUISITION, INC.

By: /s/ JOHN D. HARKEY, JR.
--------------------------------------
John D. Harkey, Jr., President

EL CHICO RESTAURANTS, INC..

By: /s/ WALLACE A. JONES
--------------------------------------
Wallace A. Jones, President and Chief
Executive Officer

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<PAGE> 112

FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER

This First Amendment to Agreement and Plan of Merger (this "Amendment") is
dated as of October 23, 1997, and is by and among EL CHICO HOLDING COMPANY,
L.P., a limited partnership formed under the laws of the State of Texas
("Parent"), EL CHICO ACQUISITION, INC., a corporation formed under the laws of
the State of Texas and a wholly-owned subsidiary of Parent ("Sub"), and EL
CHICO RESTAURANTS, INC., a corporation formed under the laws of the State of
Texas (the "Company").

RECITALS

o Parent, Sub, and the Company entered into that certain Agreement and Plan of
Merger, dated as of September 23, 1997 (the "Agreement").

o Parent, Sub, and the Company desire to amend the Agreement as
hereinafter set forth.

NOW, THEREFORE, in consideration of the premises, the agreements contained
in this Amendment, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound, hereby agree as follows:

1. The second sentence of Section 3.2(a) of the Agreement is amended to read in
its entirety as follows:

"On the Closing Date and prior to the filing of the Articles of Merger, Sub
shall deposit with the Exchange Agent a sufficient amount of cash to pay
to the shareholders of the Company the consideration for the Merger
specified in SECTION 3.1(b)."

2. The first sentence of Section 3.2(d) of the Agreement is amended to read in
its entirety as follows:

"All funds held by the Exchange Agent for payment to the holders of
unsurrendered Certificates and unclaimed at the end of one year from the
Effective Time shall be returned to the Surviving Corporation whereupon
any holder of unsurrendered Certificates shall look as a general unsecured
creditor only to the Surviving Corporation for payment of any funds to
which such holder may be entitled, subject to applicable law."

FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER - PAGE 1

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<PAGE> 113
3. The second sentence of Section 9.9 of the Agreement is amended to read in
its entirety as follows:

"The Company shall take such action as may be necessary so that from and
after the date hereof, except as set forth in Schedule 9.9, no further
grants of stock, options, or other rights shall be made under any Stock
Plan. The Company shall also take such actions as are appropriate to
provide that, at the Effective Time, (a) all options or restricted stock
awards then outstanding under any Stock Plan, whether or not then
exercisable or vested, shall become fully exercisable and vested; (b) each
option or restricted stock award then outstanding under any Stock Plan
shall be cancelled and (c) in consideration of such cancellation and in
full satisfaction of all rights of the holder under such option or
restricted stock award, each such stock option or restricted stock award
shall be converted into an amount in cash in respect thereof equal to the
product of (i), in the case of an option, the excess of the Conversion
Value over the exercise price of such option or, in the case of a
restricted stock award, the Conversion Value, multiplied by (ii) the
number of shares of Company Common Stock subject to such option or
restricted stock award (such payment to be net of applicable withholding
taxes) (collectively, the "Option Consideration)."

3. Section 10.3(e) of the Agreement is amended to read in its entirety as
follows:

"(e) Merger Consideration Deposit. Sub shall have deposited with the
Exchange Agent by wire transfer in immediately available funds an amount
equal to the product of the Conversion Value times the number of issued
and outstanding shares of Company Common Stock (other than shares of
Company Common Stock canceled pursuant to SECTION 3.1(a)) as of the
Effective Date, plus the Option Consideration."

4. Section 11.1(j) of the Agreement is amended to read in its entirety as
follows:

"(j) by Parent or the Company, if within 38 DAYS following the date of this
Agreement, Parent shall not have received either (i)(x) a commitment to
purchase certain improved real properties of the Company for a
consideration of not less than $25.6 million and (y) a financing
commitment from a reliable financial institution in the principal amount
of not less than $35 million bearing interest at an annual rate not to
exceed 11 1/2% with repayment amortized over not less than 7 years, or
(ii) a financing commitment from a reliable financial institution in the
principal amount of not less than $58 million bearing interest at an
annual rate not to exceed 11 1/2% with repayment

FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER - PAGE 2

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amortized over not less than 7 years to effect the Merger and the
transactions contemplated by this Agreement, refinance certain existing
indebtedness of the Company and pay related fees and expenses; such
commitments or commitment being on terms and conditions reasonably
satisfactory to Parent and Sub. In the event Parent terminates this
Agreement on or before OCTOBER 31, 1997 AT 11:59 P.M. C.S.T. pursuant to
the provisions of this SECTION 11.1(j), upon such termination, the Company
shall only be entitled to receive $250,000 of the fund deposited by Parent
pursuant to the Escrow Agreement entered into between the parties pursuant
to SECTION 9.15 hereinabove."

5. The reliable financial institution referenced in Section 4 of this
Amendment (the "Lender") may require, as a condition to its provision of
financing at the Closing (as defined in the Agreement), that each landlord,
lessor and/or sublessor of real property leased by the Company execute various
agreements (including, but not limited to, a landlord consent for leasehold
mortgage, a landlord consent for change of control, an estoppel certificate, a
memorandum of lease, and a lease renewal option) requested by the Lender
(collectively, the "Consents"). Any failure by the Lender to provide
financing at the Closing in accordance with the terms and conditions set forth
in the Lender's financing commitment issued on or before and in effect October
31, 1997, A CAUSE for which is the failure of the Company to obtain any or all
of the Consents, shall entitle Parent (a) to the return of all but $500,000
(which $500,000 shall be payable to the Company) of the escrow funds placed
into escrow by Parent pursuant to that certain Escrow Agreement executed
September 23, 1997, by the Company, as seller; Parent, as buyer; and Texas
Bank, as escrow agent (the "Escrow Agreement") and (b) to terminate the
Agreement; and, the Company, Parent and Sub shall have no liability for the
failure to obtain the Consents. The terms of this Section 5 of this Amendment
shall supersede the terms of all prior or contemporaneous written or oral
agreements between the Company and any or all of Parent, Sub and/or Cracken,
Harkey & Co., L.L.C., including, but not limited to, the terms of the
Agreement, the terms of the Escrow Agreement, or both.

* * * * * *

FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER - PAGE 3

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IN WITNESS WHEREOF, Parent, Sub, and the Company have caused this Amendment
to be signed by their respective officers thereunto duly authorized as of the
date first written above.

EL CHICO HOLDING COMPANY, L.P.

By: Cracken, Harkey, Street & Co., L.L.C.
General Partner

By: /s/ JOHN D. HARKEY, JR.
-----------------------------------
John D. Harkey, Jr.
Manager

EL CHICO ACQUISITION, INC.

By: /s/ JOHN D. HARKEY, JR.
-----------------------------------
John D. Harkey, Jr.
President

EL CHICO RESTAURANTS, INC.

By: /s/ WALLACE A. JONES
-----------------------------------
Wallace A. Jones
President and Chief Executive Officer

FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER - PAGE 4

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SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER
AND ESCROW AGREEMENT

This Second Amendment to Agreement and Plan of Merger and Escrow Agreement
(this "Second Amendment") is dated as of October 31, 1997, and is by and among
EL CHICO HOLDING COMPANY, L.P., a limited partnership formed under the laws of
the State of Texas ("Parent"), EL CHICO ACQUISITION, INC., a corporation formed
under the laws of the State of Texas and a wholly-owned subsidiary of Parent
("Sub"), and EL CHICO RESTAURANTS, INC., a corporation formed under the laws of
the State of Texas (the "Company").

RECITALS

o Parent, Sub, and the Company entered into that certain Agreement and Plan
of Merger, dated as of September 23, 1997 (the "Agreement").

o Parent, Sub, and the Company entered into the First Amendment to Agreement
and Plan of Merger, dated as of October 23, 1997 ("First Amendment").

o Parent, Sub, and the Company desire to further amend the Agreement as
hereinafter set forth.

1. Section 11.1(j) of the Agreement is amended to read in its entirety as
follows:

"(j) by Parent, if on or before the earlier of JANUARY 31, 1998 or the
Closing Date, Parent shall not have received either (i)(x) a commitment to
purchase certain improved real properties of the Company for a consideration
of not less than $25.6 million and (y) a financing commitment from a
reliable financial institution in the principal amount of not less than $35
million bearing interest at an annual rate not to exceed 11 1/2% with
repayment amortized over not less than 7 years, or (ii) a financing
commitment from a reliable financial institution in the principal amount of
not less than $58 million bearing interest at an annual rate not to exceed
11 1/2% with repayment amortized over not less than 7 years to effect the
Merger and the transactions contemplated by this Agreement, refinance
certain existing indebtedness of

SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER AND ESCROW AGREEMENT - PAGE 1

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the Company and pay related fees and expenses; such commitments or
commitment being on terms and conditions reasonably satisfactory to Parent
and Sub. In the event Parent terminates this Agreement on or before the
earlier of JANUARY 31, 1998 AT 11:59 P.M. C.S.T. or the Closing Date
pursuant to the provisions of this Section 11.1(j), upon such termination,
the Company shall only be entitled to receive $500,000 of the fund
deposited by Parent pursuant to the Escrow Agreement entered into between
the parties pursuant to SECTION 9.15 hereinabove."

2. Paragraph 5 of the First Amendment is rendered moot by the amendment to
SECTION 11.1(j) made herein.

3. The terms of this Second Amendment shall supersede all inconsistent terms
of all prior or contemporaneous written or oral agreements between the
Company and any or all of Parent, Sub and/or Cracken, Harkey & Co.,
L.L.C., including, but not limited to, the terms of the Agreement, the
terms of the First Amendment, and the terms of the Escrow Agreement, or
both.

* * * * * *

SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER AND SECOND ESCROW AGREEMENT
- PAGE 2

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<PAGE> 118

IN WITNESS WHEREOF, Parent, Sub, and the Company have caused this Amendment
to be signed by their respective officers thereunto duly authorized as of the
date first written above.

EL CHICO HOLDING COMPANY, L.P.

By: Cracken, Harkey, Street & Co., L.L.C.
General Partner

By: /s/ JOHN D. HARKEY, JR.
--------------------------------------
John D. Harkey, Jr.
Manager

EL CHICO ACQUISITION, INC.

By: /s/ JOHN D. HARKEY, JR.
---------------------------------------
John D. Harkey, Jr.
President

EL CHICO RESTAURANTS, INC.

By: /s/ WALLACE A. JONES
--------------------------------------
Wallace A. Jones
President and Chief Executive
Officer

SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER AND ESCROW AGREEMENT - PAGE 3

A-44
<PAGE> 119

APPENDIX B
<PAGE> 120
NationsBanc Montgomery Securities, Inc.

September 22, 1997

Board of Directors
El Chico Restaurants, Inc.
12200 Stemmons Freeway, #100
Dallas, Texas 75234

Gentlemen:

We understand that El Chico Holding Company, L.P. ("Buyer"), El Chico
Acquisition, Inc. ("Sub") and El Chico Restaurants, Inc. ("Seller") will enter
into an Agreement and Plan of Merger dated September 23, 1997 (the "Merger
Agreement"), pursuant to which Sub will be merged with and into Seller, which
will be the surviving entity (the "Merger"), and Seller will become a
wholly-owned subsidiary of Buyer. Pursuant to the Merger, as more fully
described in the Merger Agreement, we understand that each outstanding share of
the common stock, $0.10 par value per share ("Seller Common Stock"), of Seller
will be converted into the right to receive $12.75 in cash (the
"Consideration"). The terms and conditions of the Merger are set forth in more
detail in the existing draft of the Merger Agreement.

You have asked for our opinion as investment bankers as to whether the
Consideration to be received by the shareholders of Seller pursuant to the
Merger is fair to such shareholders from a financial point of view, as of the
date hereof.

In connection with our opinion, we have, among other things: (i)
reviewed certain publicly available financial and other data with respect to
Seller, including the consolidated financial statements for recent years and
interim periods to June 30, 1997, and certain other relevant financial and
operating data relating to Seller made available to us from published sources
and from the internal records of Seller; (ii) reviewed the financial terms and
conditions of the Merger Agreement; (iii) reviewed certain publicly available
information concerning the trading of, and the trading market for, Seller
Common Stock; (iv) compared Seller from a financial point of view with certain
other companies in the restaurant industry which we deemed to be relevant; (v)
considered the financial terms, to the extent publicly available, of selected
recent business combinations of companies in the restaurant industry which we
deemed to be comparable, in whole or in part, to the Merger; (vi) assisted
Seller in soliciting indications of interest and bids from third parties
seeking to enter into a transaction with Seller similar to, or as an
alternative to, the Merger; (vii) reviewed and discussed with representatives
of the management of Seller certain information of a business and financial
nature regarding Seller, furnished to us by management of Seller, including
financial forecasts and related assumptions of Seller; (viii) made inquiries
regarding and discussed the Merger and the Merger Agreement and other matters
related thereto with Seller's counsel; and (ix) performed such other analyses
and examinations as we have deemed appropriate.

In connection with our review, we have not assumed any obligation
independently to verify the foregoing information and have relied on its being
accurate and complete in all material respects. With respect to the financial
forecasts for Seller provided to us by management of Seller, upon your advice
and with your consent we have assumed for purposes of our opinion that the
forecasts have been reasonably prepared on bases reflecting the best available
estimates and judgments of management of Seller as to the future financial
performance of Seller and that they provide a reasonable basis upon which we
can form our opinion. We have also assumed that there have been no material
changes in Seller's assets, financial condition, results of operations,
business or prospects since the respective dates of its last financial
statements made available to us. We have relied on advice of the counsel and
the independent accountants to Seller as to all legal and financial reporting
matters with respect to Seller, the Merger and the Merger Agreement. We have
assumed that the Merger will be consummated in a manner that complies in all
respects with the applicable provisions of the Securities Act of 1933, the
Securities Exchange Act of 1934 and all other applicable federal and state
statutes, rules and regulations. In addition, we have not assumed
responsibility for making an independent evaluation, appraisal or physical
inspection of any of the assets or liabilities (contingent or otherwise) of
Seller, nor have we been furnished with any such appraisals. Finally, our
opinion

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Board of Directors
El Chico Restaurants, Inc.
September 22, 1997
Page 2

is based on economic, monetary and market and other conditions as in effect on,
and the information made available to us as of, the date hereof. Accordingly,
although subsequent developments may affect this opinion, we have not assumed
any obligation to update, revise or reaffirm this opinion.

We have further assumed with your consent that the Merger will be
consummated in accordance with the terms described in the Merger Agreement,
without any amendments thereto, and without waiver by Seller of any of the
conditions to its obligations thereunder.

Based upon the foregoing and in reliance thereon, it is our opinion as
investment bankers that the Consideration to be received by the shareholders of
Seller pursuant to the Merger is fair to such shareholders from a financial
point of view, as of the date hereof.

This opinion is directed only to the Board of Directors of Seller in
connection with its consideration of the Merger and is not a recommendation to
any shareholder as to how such shareholder should vote with respect to the
Merger. Further, this opinion addresses only the financial fairness of the
Consideration to the shareholders and does not address any other aspect of the
Merger including, without limitation, the relative merits of the Merger, any
alternatives to the Merger or Seller's underlying decision to proceed with or
effect the Merger. This opinion may not be used or referred to by Seller, or
quoted or disclosed to any person in any manner, without our prior written
consent, which consent is hereby given to the inclusion of this opinion in any
proxy statement filed with the Securities and Exchange Commission in connection
with the Merger that requires a description of the factors considered by the
Board of Directors of Seller in connection with its approval of the Merger
Agreement.

Very truly yours,

NATIONSBANC MONTGOMERY
SECURITIES, INC.

B-2
<PAGE> 122

APPENDIX C
<PAGE> 123

ART. 5.11 RIGHTS OF DISSENTING SHAREHOLDERS IN THE EVENT OF CERTAIN
CORPORATE ACTIONS

A. Any shareholder of a domestic corporation shall have the right
to dissent from any of the following corporate actions:

(1) Any plan of merger to which the corporation is a
party if shareholder approval is required by Article 5.03 or 5.16 of this Act
and the shareholder holds shares of a class or series that was entitled to vote
thereon as a class or otherwise;

(2) Any sale, lease, exchange or other disposition (not
including any pledge, mortgage, deed of trust or trust indenture unless
otherwise provided in the articles of incorporation) of all, or substantially
all, the property and assets, with or without good will, of a corporation if
the special authorization of the shareholders is required by this Act and the
shareholders hold shares of a class or series that was entitled to vote thereon
as a class or otherwise;

(3) Any plan of exchange pursuant to Article 5.02 of this
Act in which the shares of the corporation of the class or series held by the
shareholder are to be acquired.

B. Notwithstanding the provisions of Section A of this Article, a
shareholder shall not have the right to dissent from any plan of merger in
which there is a single surviving or new domestic or foreign corporation, or
from any plan of exchange, if: (1) the shares held by the shareholder are part
of a class or series of shares which are on the record date fixed to determine
the shareholders entitled to vote on the plan of merger or plan of exchange:
(a) listed on a national securities exchange; (b) listed on the NASDAQ stock
market (or successor quotation system) or designated as a national market
security on an interdealer quotation system by the National Association of
Securities Dealers, Inc., or successor entity; or (c) held of record by not
less than 2,000 holders; (2) the shareholder is not required by the terms of
the plan of merger or plan of exchange to accept for the shareholder's shares
any consideration that is different than the consideration (other than cash in
lieu of fractional shares that the shareholder would otherwise be entitled to
receive) to be provided to any other holder of shares of the same class or
series of shares held by such shareholder; and (3) the shareholder is not
required by the terms of the plan of merger or the plan of exchange to accept
for the shareholder's shares any consideration other than: (a) shares of a
domestic or foreign corporation that, immediately after the effective time of
the merger or exchange, will be part of a class or series, shares of which are:
(i) listed, or authorized for listing upon official notice of issuance, on a
national securities exchange; (ii) approved for quotation as a national market
security on an interdealer quotation system by the National Association of
Securities Dealers, Inc., or successor entity; or (iii) held of record by not
less than 2,000 holders; (b) cash in lieu of fractional shares otherwise
entitled to be received; or (c) any combination of the securities and cash
described in subdivisions (a) and (b) of this subsection.

ART. 5.12 PROCEDURE FOR DISSENT BY SHAREHOLDERS AS TO SAID CORPORATE
ACTIONS

A. Any shareholder of any domestic corporation who has the right
to dissent from any of the corporate actions referred to in Article 5.11 of
this Act may exercise that right to dissent only by complying with the
following procedures:

(1)(a) With respect to proposed corporate action that is
submitted to a vote of shareholders at a meeting, the shareholder shall file
with the corporation, prior to the meeting, a written objection to the action,
setting out that the shareholder's right to dissent will be exercised if the
action is effective and giving the shareholder's address, to which notice
thereof shall be delivered or mailed in that event. If the action is effected
and the shareholder shall not have voted in favor of the action, the
corporation, in the case of action other than a merger, or the surviving or new
corporation (foreign or domestic) or other entity that is liable to discharge
the shareholder's right of dissent, in the case of a merger, shall, within ten
(10) days after the action is effected, deliver or mail to the shareholder
written notice that the action has been effected, and the shareholder may,
within ten (10) days from the delivery or mailing of the notice, make written
demand on the existing, surviving, or new corporation (foreign or domestic) or
other entity, as the case may be, for payment of the fair value of the
shareholder's shares. The fair value of the shares shall be the value thereof
as of the day immediately preceding the

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meeting, excluding any appreciation or depreciation in anticipation of the
proposed action. The demand shall state the number and class of the shares
owned by the shareholder and the fair value of the shares as estimated by the
shareholder. Any shareholder failing to make demand within the ten (10) day
period shall be bound by the action.

(b) With respect to proposed corporate action that is
approved pursuant to Section A of Article 9.10 of this Act, the corporation, in
the case of action other than a merger, and the surviving or new corporation
(foreign or domestic) or other entity that is liable to discharge the
shareholder's right of dissent, in the case of a merger, shall, within ten (10)
days after the date the action is effected, mail to each shareholder of record
as of the effective date of the action notice of the fact and date of the
action and that the shareholder may exercise the shareholder's right to dissent
from the action. The notice shall be accompanied by a copy of this Article and
any articles or documents filed by the corporation with the Secretary of State
to effect the action. If the shareholder shall not have consented to the
taking of the action, the shareholder may, within twenty (20) days after the
mailing of the notice, make written demand on the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, for
payment of the fair value of the shareholder's shares. The fair value of the
shares shall be the value thereof as of the date the written consent
authorizing the action was delivered to the corporation pursuant to Section A
of Article 9.10 of this Act, excluding any appreciation or depreciation in
anticipation of the action. The demand shall state the number and class of
shares owned by the dissenting shareholder and the fair value of the shares as
estimated by the shareholder. Any shareholder failing to make demand within
the twenty (20) day period shall be bound by the action.

(2) Within twenty (20) days after receipt by the existing,
surviving, or new corporation (foreign or domestic) or other entity, as the
case may be, of a demand for payment made by a dissenting shareholder in
accordance with Subsection (1) of this Section, the corporation (foreign or
domestic) or other entity shall deliver or mail to the shareholder a written
notice that shall either set out that the corporation (foreign or domestic) or
other entity accepts the amount claimed in the demand and agrees to pay that
amount within ninety (90) days after the date on which the action was effected,
and, in the case of shares represented by certificates, upon the surrender of
the certificates duly endorsed, or shall contain an estimate by the corporation
(foreign or domestic) or other entity of the fair value of the shares, together
with an offer to pay the amount of that estimate within ninety (90) days after
the date on which the action was effected, upon receipt of notice within sixty
(60) days after that date from the shareholder that the shareholder agrees to
accept that amount and, in the case of shares represented by certificates, upon
the surrender of the certificates duly endorsed.

(3) If, within sixty (60) days after the date on which the
corporate action was effected, the value of the shares is agreed upon between
the shareholder and the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, payment for the shares shall be
made within ninety (90) days after the date on which the action was effected
and, in the case of shares represented by certificates, upon surrender of the
certificates duly endorsed. Upon payment of the agreed value, the shareholder
shall cease to have any interest in the shares or in the corporation.

(B) If, within the period of sixty (60) days after the date on
which the corporate action was effected, the shareholder and the existing,
surviving, or new corporation (foreign or domestic) or other entity, as the
case may be, do not so agree, then the shareholder or the corporation (foreign
or domestic) or other entity may, within sixty (60) days after the expiration
of the sixty (60) day period, file a petition in any court of competent
jurisdiction in the county in which the principal office of the domestic
corporation is located, asking for a finding and determination of the fair
value of the shareholder's shares. Upon the filing of any such petition by the
shareholder, service of a copy thereof shall be made upon the corporation
(foreign or domestic) or other entity, which shall, within ten (10) days after
service, file in the office of the clerk of the court in which the petition was
filed a list containing the names and addresses of all shareholders of the
domestic corporation who have demanded payment for their shares and with whom
agreements as to the value of their shares have not been reached by the
corporation (foreign or domestic) or other entity. If the petition shall be
filed by the corporation (foreign or domestic) or other entity, the petition
shall be accompanied by such a list. The clerk of the court shall give notice
of the time and place fixed for the hearing of the petition by registered mail
to the corporation (foreign or domestic) or other entity and to the
shareholders named on the list at the addresses therein stated. The forms of
the notices by mail shall be approved by the court. All shareholders thus
notified and the corporation (foreign or domestic) or other entity shall
thereafter be bound by the final judgment of the court.

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C. After the hearing of the petition, the court shall determine
the shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The
appraisers shall have power to examine any of the books and records of the
corporation the shares of which they are charged with the duty of valuing, and
they shall make a determination of the fair value of the shares upon such
investigation as to them may seem proper. The appraisers shall also afford a
reasonable opportunity to the parties interested to submit to them pertinent
evidence as to the value of the shares. The appraisers shall also have such
power and authority as may be conferred on Masters in Chancery by the Rules of
Civil Procedure or by the order of their appointment.

D. The appraisers shall determine the fair value of the shares of
the shareholders adjudged by the court to be entitled to payment for their
shares and shall file their report of that value in the office of the clerk of
the court. Notice of the filing of the report shall be given by the clerk to
the parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall be its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for those shares. Upon payment of the judgment, the
dissenting shareholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a reasonable fee as
court costs, and all court costs shall be allotted between the parties in the
manner that the court determines to be fair and equitable.

E. Shares acquired by the existing, surviving, or new corporation
(foreign or domestic) or other entity, as the case may be, pursuant to the
payment of the agreed value of the shares or pursuant to payment of the
judgment entered for the value of the shares, as in this Article provided,
shall, in the case of a merger, be treated as provided in the plan of merger
and, in all other cases, may be held and disposed of by the corporation as in
the case of other treasury shares.

F. The provisions of this Article shall not apply to a merger if,
on the date of the filing of the articles of merger, the surviving corporation
is the owner of all the outstanding shares of the other corporations, domestic
or foreign, that are parties to the merger.

G. In the absence of fraud in the transaction, the remedy
provided by this Article to a shareholder objecting to any corporate action
referred to in Article 5.11 of this Act is the exclusive remedy for the
recovery of the value of his shares or money damages to the shareholder with
respect to the action. If the existing, surviving, or new corporation (foreign
or domestic) or other entity, as the case may be, complies with the
requirements of this Article, any shareholder who fails to comply with the
requirements of this Article shall not be entitled to bring suit for the
recovery of the value of his shares or money damages to the shareholder with
respect to the action.

ART. 5.13 PROVISIONS AFFECTING REMEDIES OF DISSENTING SHAREHOLDERS

A. Any shareholder who has demanded payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act shall not thereafter be
entitled to vote or exercise any other rights of a shareholder except the right
to receive payment for his shares pursuant to the provisions of those articles
and the right to maintain an appropriate action to obtain relief on the ground
that the corporate action would be or was fraudulent, and the respective shares
for which payment has been demanded shall not thereafter be considered
outstanding for the purposes of any subsequent vote of shareholders.

B. Upon receiving a demand for payment from any dissenting
shareholder, the corporation shall make an appropriate notation thereof in its
shareholder records. Within twenty (20) days after demanding payment for his
shares in accordance with either Article 5.12 or 5.16 of this Act, each holder
of certificates representing shares so demanding payment shall submit such
certificates to the corporation for notation thereon that such demand has been
made. The failure of holders of certificated shares to do so shall, at the
option of the corporation, terminate such shareholder's rights under Articles
5.12

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and 5.16 of this Act unless a court of competent jurisdiction for good and
sufficient cause shown shall otherwise direct. If uncertificated shares for
which payment has been demanded or shares represented by a certificate on which
notation has been so made shall be transferred, any new certificate issued
therefor shall bear similar notation together with the name of the original
dissenting holder of such shares and a transferee of such shares shall acquire
by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making demand for the payment of the
fair value thereof.

C. Any shareholder who has demanded payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act may withdraw such
demand at any time before payment for his shares or before any petition has
been filed pursuant to Article 5.12 or 5.16 of this Act asking for a finding
and determination of the fair value of such shares, but no such demand may be
withdrawn after such payment has been made or, unless the corporation shall
consent thereto, after any such petition has been filed. If, however, such
demand shall be withdrawn as hereinbefore provided, or if pursuant to Section B
of this Article the corporation shall terminate the shareholder's rights under
Article 5.12 or 5.16 of this Act, as the case may be, or if no petition asking
for a finding and determination of fair value of such shares by a court shall
have been filed within the time provided in Article 5.12 or 5.16 of this Act,
as the case may be, or if after the hearing of a petition filed pursuant to
Article 5.12 or 5.16, the court shall determine that such shareholder is not
entitled to the relief provided by those articles, the, in any such case, such
shareholder and all persons claiming under him shall be conclusively presumed
to have approved and ratified the corporate action from which he dissented and
shall be bound thereby, the right of such shareholder to be paid the fair value
of his shares shall cease, and his status as a shareholder shall be restored
without prejudice to any corporate proceedings which may have been taken during
the interim, and such shareholder shall be entitled to receive any dividends of
other distributions made to shareholders in the interim.

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PRELIMINARY COPY

EL CHICO RESTAURANTS, INC.
12200 STEMMONS
SUITE 100
DALLAS, TEXAS 75234

PROXY FOR SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON DECEMBER 30, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned hereby appoints Clayton Killam and Susan Holland and
each of them, as Proxies, each with the power to appoint substitutes, and
hereby authorizes each of them to represent and to vote, as designated below,
all of the shares of the Common Stock, par value $0.10 per share, of El Chico
Restaurants, Inc. (the "Company") held of record by the undersigned at the
close of business on November 24, 1997, that the undersigned is entitled to
vote, at the Special Meeting of Shareholders of the Company to be held at The
Texas Commerce Bank Tower, 2200 Ross Avenue, 7th Floor, Dallas, Texas 75234,
on December 30, 1997, at 10:00 a.m. Dallas time, or any adjournments thereof.

(1) Adoption of Agreement and Plan of Merger and approval of Merger.

/ / FOR / / AGAINST / / ABSTAIN

(2) As such proxies may in their discretion determine upon such other
matters as may properly come before the meeting.

/ / FOR / / AGAINST / / ABSTAIN

PLEASE NOTE

THIS PROXY IS TO BE VOTED AS DIRECTED. IN THE ABSENCE OF SPECIFIC DIRECTION, IT
IS INTENDED TO VOTE THE SHARES REPRESENTED BY THIS PROXY FOR EACH OF THE
PROPOSALS.

You are urged to sign and return your proxy without delay in the return
envelope provided for that purpose, which requires no postage if mailed in the
United States or Canada.

When signing this proxy, please date it and take care to have the signature
conform to the shareholder's name as it appears on this side of the proxy. If
shares are registered in the names of two or more persons, each person should
sign. Executors, administrators, trustees and guardians should so indicate
their full title or capacity when signing.

PLEASE SEND IN YOUR PROXY

In order that there may be proper representation at the Special Meeting, each
shareholder, whether he or she owns one or more shares, is requested to sign
this proxy and return it promptly in the enclosed envelope.

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR EACH OF THE
PROPOSALS.

<PAGE> 128

This Proxy, when properly executed, will be voted in the manner
directed herein by the undersigned shareholder(s). IF NO DIRECTION IS MADE,
THIS PROXY WILL BE VOTED FOR THE PROPOSALS SET FORTH ABOVE, AND IN THE
DISCRETION OF THE PROXIES WITH RESPECT TO ANY OTHER MATTER THAT IS PROPERLY
BROUGHT BEFORE THE MEETING.

Dated: , 1997.
-------------------------

-------------------------------------
Signature

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Signature if Held Jointly

Please execute this Proxy as your name
appears hereon. When shares are
held by joint tenants, both should
sign. When signing as attorney,
executor, administrator, trustee or
guardian, please give full title as
such. If a corporation, please sign
in full corporate name by the
president or other authorized
officer. If a partnership, please
sign in partnership name by
authorized person. PLEASE MARK,
SIGN, DATE AND RETURN THIS PROXY
PROMPTLY USING THE ENCLOSED
ENVELOPE.