UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Mark One
X Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended
December 28, 1997
Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Commission File Number 0-20716
TACO CABANA, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2201241
(State or other jurisdiction (IRS employer identification no.)
of incorporation or organization)
8918 Tesoro Drive, Suite 200
San Antonio, Texas 78217
(Address of principal executive offices, including ZIP Code)
(210) 804-0990
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Each Class
Common Stock, $0.01 par value
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
As of February 27, 1998, the aggregate market value of the
voting stock held by non-affiliates of the Registrant, based on
the last sale price of the Common Stock of the Registrant as
quoted on the NASDAQ National Market was $77,427,725 (for
purposes of calculating this amount, only directors, officers,
and beneficial owners of 5% or more of the capital stock of the
Registrant have been deemed affiliates).
The number of shares of the Common Stock of the Registrant
outstanding as of February 27, 1998 was 14,824,600.
FORM 10-K INDEX
PART I
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 9
ITEM 3. LEGAL PROCEEDINGS 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS 11
ITEM 6. SELECTED FINANCIAL DATA 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 26
ITEM 11. EXECUTIVE COMPENSATION 29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 36
PART I
ITEM 1. BUSINESS
General
Taco Cabana, Inc., a Delaware corporation (the "Company"),
pioneered the Mexican patio cafe concept with its first restaurant
in 1978 and, as of December 28, 1997, operates and franchises a
total of 109 such restaurants system-wide. Of these, the Company
owns and operates 96 Taco Cabana restaurants, and two mall-unit Two
Pesos restaurants. Franchisees of the Company own and operate the
remaining 11 Taco Cabana restaurants. The Company's restaurants
(including franchises) are located primarily in Texas, and are also
located in Georgia, Indiana, New Mexico, and Oklahoma.
Taco Cabana restaurants feature generous portions of fresh,
premium quality Tex-Mex and traditional Mexican style food at an
exceptional value. The restaurants provide interior, semi-enclosed
and patio dining areas with a festive Mexican theme. Menu items
include flame-grilled beef and chicken fajitas served on sizzling
iron skillets, "Chicken Flameante"TM (a marinated rotisserie
chicken), quesadillas, traditional Mexican and American
breakfasts, other Tex-Mex dishes, fresh, hot flour tortillas, and
lighter items such as a variety of salad entrees. Unlike many of
its competitors, the Company makes most menu items fresh daily in
each of its restaurants.
Taco Cabana Food and Pricing Philosophy
The Company is committed to selling premium food which it
believes to be among the highest quality of any chain in the
restaurant industry. This process begins with the selection of the
freshest available ingredients. The Company's menu items are
prepared strictly in accordance with authentic and well-tested
recipes. Taco Cabana restaurants also offer a variety of beverage
choices, including margaritas and beer. Alcoholic beverages
currently account for approximately 5% of gross sales.
The Ingredients. The Company has implemented a purchasing
program structured to ensure that all of the ingredients used in
the preparation of the Taco Cabana menu items are of the highest
quality. The Company regularly inspects its vendors to ensure both
that the products purchased by the Company conform to its
standards, and that the prices offered are competitive. The meat
used in making fajitas as well as certain other principal
ingredients are purchased through supply contracts to ensure
availability and minimize the risks of price fluctuation.
The Preparation. The menu items offered at any Taco Cabana
restaurant are prepared at that restaurant from fresh meat and
produce ingredients delivered by suppliers at least three times
each week to each restaurant. The Company is committed to
differentiating itself from other quick service competitors by
utilizing fresh, high quality ingredients as well as the
preparation of most items "from scratch". The Company is currently
testing several pre-prepared items to simplify the kitchen
operations.
Pricing Philosophy. The Company offers value by pricing its
menu items below the price of comparable menu items in sit-down
Mexican restaurants. Although Taco Cabana's food costs (as a
percentage of sales) are generally higher than quick service chains
as a result of the premium quality of ingredients used, the Company
believes that this point of differentiation contributes to the
achievement of average unit volumes in excess of most quick service
restaurants.
Taco Cabana Restaurants
Restaurant Layout. Taco Cabana restaurants average
approximately 3,200 square feet (exclusive of the exterior dining
area) and provide seating for approximately 80 customers, with
additional patio seating for approximately 50 customers.
Taco Cabana restaurants are typically a vivid pink color (with
painted and neon accents), conveying a distinctive Mexican theme
and permitting easy identification by passing motorists. Inside,
exposed elements of the kitchen display the freshness of Taco
Cabana's food and the authenticity of its preparation. Taco
Cabana's restaurant design enables customers to observe fresh
fajitas cooking on a charcoal grill, a machine making fresh, hot
flour tortillas, Chicken FlameanteTM rotating on spits and the
preparation of other food items. Upon entry, the customer places
an order selected from an overhead menu board, proceeds down a
service line to where the order is picked up, and then passes a
Salsa Bar en route to the dining area. The distinctive Salsa Bar
offers Taco Cabana customers freshly prepared, authentic Tex-Mex
ingredients such as Salsa de Fuego (made with charred peppers and
tomatoes), pico de gallo and salsa (all "made from scratch"
throughout the day at each restaurant), and cilantro, pickled
jalapeno slices, crisp chopped onions, and fresh sliced limes.
According to the season, time of day and personal preference, the
customer may choose to dine either in the restaurant's brightly
colored and festive interior dining area or the semi-enclosed or
outdoor patio areas. The addition of traditional and contemporary
Latin music, tropical landscaping, and authentic decorative
artifacts create an overall dining environment which the Company
believes is both attractive and festive. Most Taco Cabana
restaurants also offer drive-thru service.
The Company began constructing its new prototype restaurant in
1996. The prototype incorporates several new and different features
that set it apart from Taco Cabana restaurants previously
constructed. The new prototype features a rounded front, as well
as Southwest accents such as a clay tile roof, heavy wood beams and
a trellis that shades the patio area, and adds the use of bright
colors outside and inside, including colored tiles, doors, windows,
and awnings. Corrugated metal wall panels, aged wood finishes, and
distressed stainless steel counter tops are featured inside, all of
which are intended to replicate an old Mexican cafe. Bright neon
on the exterior of the building broadcasts the unique menu items
served at Taco Cabana. Favorite features retained from the
original Taco Cabana restaurants include working garage doors that
open up the dining area to the outside when weather permits,
display cooking where the guest can see the food being prepared,
liberal use of the Taco Cabana's signature pink color, and the self-
serve fresh Salsa Bar. The prototype was designed to reduce
overall construction costs, improve functional efficiency, allow
for better guest service, and to enhance Taco Cabana's unique patio
cafe image.
During 1997, the Company initiated a re-image program for
existing restaurants which incorporates many of the features of the
new prototype design. During 1997, eight restaurants were re-imaged
to the new prototype design and the Company expects to re-image 20
to 25 restaurants during 1998.
Restaurant Locations. The following table sets forth the
number of restaurants as of December 28, 1997 by area of dominant
influence ("ADI") for television and radio advertising:
ADI* Company-OwnedFranchised(1) Total
San Antonio 32 0 32
Houston 26(2) 0 26
Austin 14 0 14
Dallas/Fort Worth 14 0 14
El Paso 7 0 7
Rio Grande Valley 2 0 2
Lubbock 2 0 2
Atlanta, Georgia 0 1(3) 1
Bryan/College Station 0 2 2
Tulsa, Oklahoma 1 0 1
Waco 0 1 1
Albuquerque, New Mexico 0 2 2
Amarillo 0 2 2
Corpus Christi 0 1 1
Ft. Wayne, Indiana 0 1 1
Killeen 0 1 1
--- --- ---
Total 98 11 109
=== === ===
___________________________________________________________________
* All of the ADIs are located in Texas except as otherwise
indicated.
(1) Represents franchised Taco Cabana restaurants, except as
otherwise indicated. Does not
include licensed Two Pesos franchises.
(2) Includes two mall-unit Taco Cabana restaurants and two mall-
unit Two Pesos restaurant.
(3) Represents a joint-venture
Customer Convenience
The Company operates its restaurants to enable customers to
dine-in or take-out, as they choose. In most cases, the
restaurants also provide the convenience of drive-thru windows
which, in the aggregate, account for approximately 40% of the
Company's sales. A majority of the restaurants are open 24 hours a
day. This strategy is continually evaluated for economic viability
on a restaurant by restaurant basis.
Customer Service
The Company is committed to consistently providing personal,
attentive and efficient service in order to attract repeat
customers. Restaurant and shift managers are encouraged to follow
a "front of the house" style of management, which requires that the
managers spend most of their time attending to customers at the
register, drive-thru windows or in the dining areas.
Marketing
The Company utilizes an integrated, multi-level marketing
approach which includes periodic company-wide promotions, direct
mail, in-store promotions, local store marketing, and other
strategies, including the use of radio advertising in its major
markets. The Company will execute this plan utilizing a marketing
budget of approximately 3.75% of sales.
Expansion
The Company's near-term strategy is to achieve a dominant or
leading position among Mexican food restaurants in each of its
targeted principal markets in order to obtain marketing and
operating efficiencies. The Company seeks to implement this
strategy by selectively adding restaurants in existing markets in
order to expand its existing market share. In accordance with this
strategy, the Company may locate new restaurants in close proximity
to existing Taco Cabana restaurants in order to provide the Company
with increased market penetration and market profitability, even if
this may result in a reduction in comparable store sales volumes of
certain restaurants.
The Company's 1998 objective is to open eight to ten
freestanding restaurants, all of which will be in existing markets.
The Company believes the site selection process is very
important in determining the potential success of a particular
restaurant and senior management devotes substantial time and
resources to analyzing each prospective site. The Company focuses
on selecting locations which clear stringent hurdles with regards
to the return on initial investment. A variety of factors are
considered in the site selection process, including local market
demographics, site visibility and accessibility (including drive-by
traffic and ease of drive-thru accessibility), proximity to
competitive operations, and proximity to generators of potential
customers, such as major retailers, retail centers, medical or
hospital facilities, office complexes, hotel concentrations, and
stadiums, arenas, theaters or other entertainment centers. The
Company currently uses a software model to assist in the evaluation
of potential locations. The software model was developed by the
Company using the services of a consulting firm during 1996.
Restaurant Operations and Management
The Company seeks to maintain quality and consistency in its
restaurant operations by carefully training and supervising
personnel and establishing exacting standards relating to food
quality, friendliness of service and cleanliness of the restaurant
facility. It is the Company's policy to ensure that customers are
served quickly and that customers receive orders correctly filled
and delivered in a courteous manner.
The Company maintains financial and accounting controls for
each of its restaurants through use of centralized accounting and
management information systems. The Company has installed
throughout all of its company-owned restaurants an in-store
computer-based management support system that allows for daily
polling of sales and labor information. Additionally, a separate
management information system has been developed and implemented in
all company-owned restaurants which provides for daily polling of
food costs. This system records the receipt of inventory through
the scanning of bar-codes and integrates with the point of sale
system thus providing immediate cost of sales data and inventory
records. The system is designed to improve food cost management,
provide corporate management quicker access to financial data and
reduce the time devoted by its restaurant managers to
administrative responsibilities.
Operations are managed by restaurant general managers who
complete an intensive training program during which they are
instructed in all areas of Taco Cabana's restaurant operations.
Such areas of training include food preparation, customer service,
cost controls, facility maintenance, communications skills and
employee relations. Restaurant general managers are overseen by
division leaders (individuals with responsibility for the operation
of multiple restaurants within a market) and by regional Vice
Presidents of Operations. An incentive plan has been established
in which all restaurant and division leaders participate. Awards
under the incentive plan are tied to the achievement of specified
sales, profitability and qualitative performance goals.
Franchising Program
At December 28, 1997, the Company had four franchisees and one
joint venture partner operating a total of 11 Taco Cabana
restaurants. The Company did not enter into any new franchise
agreements during 1997 and does not currently anticipate new
franchisee signings during 1998.
Competition
Taco Cabana's restaurants compete both with fast food
operations and with traditional sit-down Mexican restaurants.
Management believes that the Company's combination of freshly
prepared food, distinctive ambiance, and superior service help to
distinguish Taco Cabana restaurants from fast food operations,
while Taco Cabana's price-value relationship differentiates its
restaurants from more expensive sit-down or casual dining
restaurants.
The food service industry is intensely competitive with
respect to price, service, location and food quality, and there are
many well-established national, regional and locally-owned
competitors in the Company's market areas, some of which have
greater financial and other resources than the Company. Some of
such competitors have also been in existence longer than the
Company and are better established in areas where Taco Cabana's
restaurants are or will be located. The restaurant business is
often affected by changes in consumer tastes, economic conditions,
population, traffic patterns, availability of employees and cost
increases.
Employees
At December 28, 1997, the Company employed approximately 3,000
persons, of whom approximately 2,900 were operations employees and
the remainder were corporate personnel. Most employees, other than
restaurant management and corporate personnel, are paid on an
hourly basis. The Company believes that it provides working
conditions and wages that are comparable with those of other
companies in the restaurant industry operating in its market area.
The Company's employees are not covered by a collective bargaining
agreement.
The Company does not subscribe to any workers' compensation
insurance program in the State of Texas, where the great majority
of its company-owned restaurants are currently located. As such,
it is subject to negligence actions by its employees and is not
able to assert contributory negligence and certain other defenses.
In addition, employees might be able to recover certain types of
damages that would not be available to them if the Company
subscribed to a workers' compensation insurance program. The
Company self-insures a portion of such risk, and carries excess
liability coverage that it believes is adequate. This practice has
not had any material adverse effect upon the Company's operations
or financial position since it was adopted in November 1988.
Trademarks, Service Marks and Trade Dress
The Company regards its trademarks, service marks and trade
dress as having significant value and as being important to its
marketing efforts. The Company has registered its principal Taco
Cabana logo and design with the United States Patent and Trademark
Office on the Principal Register as a service mark for its
restaurant services, has secured or has applied for state and
federal registrations of several other advertising or promotional
marks, including variations of its principal mark and the service
mark "Get Real," and has applied for registrations in foreign
countries of its principal mark and several other marks. The
Company's policy is to pursue registration of its principal marks
and to oppose strenuously any infringement of its marks or trade
dress.
Government Regulation
Each company-owned and franchised restaurant is subject to
regulation by federal agencies and to licensing and regulation by
state and local health, sanitation, safety, fire and other
departments relating to the development and operation of
restaurants, including regulations relating to alcoholic beverage
sales, environmental, building and zoning requirements, preparation
and sale of food, and laws governing the Company's relationship
with its employees, including minimum wage requirements, overtime,
working conditions and citizenship requirements. Difficulties or
failures in obtaining the required licenses or approvals could
delay or prevent the opening of new restaurants.
The Company is subject to Federal Trade Commission ("FTC")
regulation and state laws which regulate the offer and sales of
franchises. The Company may also become subject to state laws
which regulate substantive aspects of the franchisor-franchisee
relationship. The FTC requires the Company to furnish to
prospective franchisees a franchise offering circular containing
prescribed information. A number of states in which the Company
might consider franchising also regulate the offer and sale of
franchises and require registration of the franchise offering with
state authorities. State laws that regulate the
franchisor-franchisee relationship presently exist in a substantial
number of states and bills have been introduced in Congress and
other states from time to time which would provide for regulation
of the franchisor-franchisee relationship in certain respects.
Certain of such laws may restrict a franchisor in the termination
of a franchise agreement, although these provisions have not had a
significant effect on the Company's operations.
The Company is subject to the Fair Labor Standards Act and
various state laws governing such matters as minimum wage
requirements, overtime and other working conditions and citizenship
requirements. A significant number of the Company's food service
personnel are paid at rates related to the federal minimum wage and
increases in the minimum wage will increase the Company's labor
costs. The Company is subject to the Texas "dram-shop" laws and may
be subject to the "dram-shop" laws of certain other states.
Dram-shop laws provide a person injured by an intoxicated person
the right to recover damages from an establishment that wrongfully
served alcoholic beverages to the intoxicated person. The Company
is also subject to the Americans with Disabilities Act of 1990,
which, among other things, may require certain minor further
renovations to existing restaurants to meet federally mandated
access and use requirements. The cost of these renovations is not
expected to be material to the Company.
The Company believes that it is operating in substantial
compliance with applicable laws and regulations governing its
operations.
Geographic Concentration
During fiscal 1997, approximately 93% of the Company's net
sales were derived from restaurants located in the State of Texas.
As a result, the Company's results of operations may be materially
affected by weather, economic or business conditions within these
markets. Also, given the Company's present geographic
concentration, adverse publicity relating to Taco Cabana
restaurants could have a more pronounced adverse effect on the
Company's overall sales than might be the case if the Company's
restaurants were more broadly dispersed.
ITEM 2. PROPERTIES
The Company currently owns 42 of its restaurant buildings, 31
of its sites, and leases the remaining restaurant locations. The
Company may purchase a number of its current and future restaurant
locations where it is cost effective to do so. Substantially all
of Taco Cabana's restaurants are free-standing buildings. The
Company has typically needed 120 days after the signing of a lease
and obtaining required permits to complete construction and open a
new restaurant. Additional time is sometimes needed to obtain
certain government approvals and licenses, such as liquor licenses.
Land leased by the Company is typically leased under "triple
net" leases that require the Company to pay real estate taxes and
utilities and maintain insurance with respect to the premises and,
in many cases, to pay contingent rentals based on sales in excess
of specified amounts. The leases have initial terms of 10 to 20
years with options to renew for additional periods which range from
5 to 15 years. Approximately 95% of the Company's current leases
have remaining terms or renewal options extending more than five
years from December 28, 1997.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to franchise, routine negligence or
employment-related litigation in the ordinary course of its
business. No such pending matters, individually or in the
aggregate, are deemed to be material to the results of operations
or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter during the fourth
quarter of the Company's fiscal year ended December 28, 1997 to a
vote of the Company's stockholders, through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Common Stock, $.01 par value, of the Company ("Common
Stock") began trading on the NASDAQ National Market on October 16,
1992, the effective date of the Company's initial public offering.
Prior to October 16, 1992, there was no public market for the
Common Stock.
The table below sets forth, for the periods indicated, the
reported high and low last sale prices of the Company's Common
Stock, as reported on the NASDAQ National Market:
High Low
Fiscal Year Ended December 28, 1997
Quarter Ended December 28, 1997 $5 11/16 $4 1/16
Quarter Ended September 28, 1997 5 3/4 4
Quarter Ended June 29, 1997 5 1/2 3 15/16
Quarter Ended March 30, 1997 7 3/8 4 3/4
Fiscal Year Ended December 29, 1996
Quarter Ended December 29, 1996 $7 3/4 $5 5/16
Quarter Ended September 29, 1996 8 3/16 5 9/16
Quarter Ended June 30, 1996 8 7/8 7
Quarter Ended March 31, 1996 6 11/16 5
As of February 27, 1998, the last reported sale price of the
Common Stock on the NASDAQ National Market System was $6.25 per
share. As of February 27, 1998, there were approximately 1,000
record holders of Common Stock.
On June 9, 1995 the Board of Directors declared a dividend
distribution of Preferred Share Purchase Rights. The Rights may be
redeemed by the Board of Directors for one cent per Right prior to
the close of the tenth day (subject to extension by the Board of
Directors to the 30th day) after a person or group acquires (or has
obtained the right to acquire or announces an intent to acquire)
through open-market purchases, a tender offer or otherwise, 15% or
more of the Company's shares. For a 120-day period after any date
of a change (resulting from a proxy or consent solicitation) in a
majority of the Board of Directors in office at the time the
solicitation was commenced, the Rights may only be redeemed if
there are directors then in office who are continuing directors and
the Board of Directors of the Company, with the concurrence of a
majority of such continuing directors, determine that the
redemption is in the best interest of the Company and its
stockholders.
The Rights were issued on June 20, 1995 to stockholders of
record on that date and will expire in ten years. The Rights are
not currently exercisable and automatically trade with the common
shares. However, upon the earlier of (i) ten days after a person or
group acquires or has obtained the right to acquire 15% or more of
the Company's shares, or (ii) ten business days after a person or
group commences or discloses an intent to commence a tender or
exchange offer the consummation of which would result in such
person or group owning 15% or more of the shares, and subject to
the Board's right to set a later date (which date will not be later
than the 30th day after an event described in (i) or (ii)), the
Rights will become exercisable and separate certificates
representing the Rights will be distributed.
When the Rights first become exercisable, a holder will be
entitled to buy from the Company one one-thousandth of a share of a
new series of participating cumulative preferred stock for $37.50.
If the Company is involved in a merger or other business
combination with, or 50% or more of its assets or earning power are
sold to, a publicly-traded person or group that has acquired 15% or
more of the Company's shares, the "flip-over" provision of the
Rights will be triggered and the Rights will entitle a holder to
buy a number of shares of common stock of the acquiring company
having a market value of twice the exercise price of each Right.
If the acquiring person or group is not publicly traded, the "flip-
over" provision of the Rights will be triggered and the Rights will
entitle the holder to buy at the exercise price, at the holder's
option (i) the number of shares of the surviving company having a
book value of twice the exercise price, (ii) the number of shares
of the acquiring company having a book value of twice the exercise
price, or (iii) the number of shares of any publicly traded
affiliate of the acquiring company having a market value of twice
the exercise price.
If any person or group acquires or has obtained the right to
acquire 15% or more of the Company's outstanding Common Stock, the
"flip-in" provision of the Rights will be triggered and the Rights
will entitle a holder (other than such person or any member of such
group) to buy that number of one one-thousandths of a preferred
share equivalent to the number of shares of Common Stock of the
Company having a market value of twice the exercise price of each
Right.
Following the acquisition by any person or group of 15% or
more of the Company's Common Stock, the Board of Directors will
also have the ability to exchange the Rights, in whole or in part,
for consideration per Right consisting of one-half of the
securities that would be issuable at such time upon the exercise of
one Right or cash equal to the exercise price of the Right.
In addition to authorizing the Stockholder Rights Plan, the
Board authorized a new series of participating cumulative preferred
stock purchasable upon exercise of the Rights. The shares of the
new series of participating cumulative preferred stock will be
nonredeemable. Each preferred share will be entitled to a
quarterly dividend equal to the greater of $.01 per share or 1,000
times any dividend declared on the common shares during such
quarter. In the event of liquidation, the holders of the preferred
shares will be entitled to receive an aggregate liquidation payment
equal to the greater of $.01 per whole share or an amount per share
equal to 1,000 times the payment made per share of Common Stock.
Each preferred share will have 1,000 votes, voting together with
the common shares. Finally, in the event of any merger,
consolidation or other transaction in which common shares are
exchanged, each preferred share will be entitled to receive 1,000
times the amount received per common share. These rights are
protected by customary anti-dilution provisions. In the event of
issuance of preferred shares upon exercise of the Rights, in order
to facilitate trading a depository receipt may be issued for each
one one-thousandth of a preferred share. The dividend, liquidation
and voting rights, and the non-redemption feature, of the preferred
shares are designed so that the value of the one-thousandth
interest in a preferred share purchasable with each right will
approximate the value of one share of Common Stock.
The Company has never declared or paid cash dividends on the
Common Stock or any of its other securities. The Company presently
intends to retain all earnings for the operation and development of
its business and does not anticipate paying any cash dividends on
the Common Stock in the foreseeable future. Any future
determination as to the payment of cash dividends will depend on a
number of factors, including future earnings, capital requirements,
the financial condition and prospects of the Company and present
restrictions under credit facilities, as well as such other factors
as the Board of Directors may deem relevant. There can be no
assurance that the Company will pay any dividends in the future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data, which set forth certain
financial information with respect to the Company, have been
derived from the financial statements of the Company. The
financial statements of the Company for each of the fiscal years in
the five-year period ended December 28, 1997 have been audited by
Deloitte & Touche LLP, independent certified public accountants.
The following selected financial data should be read in conjunction
with the Consolidated Financial Statements and the notes thereto
included elsewhere in this report.
January 1, January 1, December 31, December 29,December 28,
1994 (1) 1995 (2) 1995 1996 1997
---------- --------- ------------- ----------- ------------
(in thousands, except per share data)
Income Statement Data:
REVENUES:
Restaurant sales $95,290 $124,826 $137,191 $131,680 $131,857
Franchise fees
and royalty income 1,582 2,424 1,342 516 346
------- -------- -------- -------- --------
Total revenues 96,872 127,250 138,533 132,196 132,203
COSTS AND EXPENSES:
Restaurant cost of
sales and operating
costs 77,871 102,236 115,195 107,703 110,440
General and
administrative 3,393 4,818 6,068 6,445 6,964
Depreciation and
amortization 4,705 7,112 10,301 9,245 9,659
Special charges (4) - - 8,100 2,497 78,738
Litigation
settlement (3) - - - 3,400 -
Reserve for notes
and other
receivables (5) - - 3,500 - -
Total costs
and expenses 85,969 114,166 143,164 129,290 205,801
------- ------- ------- ------- -------
INCOME (LOSS)
FROM OPERATIONS 10,903 13,084 (4,631) 2,906 (73,598)
------- ------- ------- ------- -------
NON-OPERATING
INCOME (EXPENSE): 3 220 (1,397) (1,348) (1,137)
------- ------- ------- ------- -------
INCOME (LOSS) BEFORE
INCOME TAXES 10,906 13,3040 (6,028) 1,558 (74,735)
BENEFIT (PROVISION
FOR INCOME TAXES (3,850) (4,784) 2,230 (854) 1,537
------ ------ ------ ------ -------
NET INCOME (LOSS) $7,056 $8,520 $(3,798) $ 704 $(73,198)
====== ======= ======= ===== ========
BASIC EARNINGS (LOSS)
PER SHARE (6) $ 0.58 $ 0.56 $(0.24) $ 0.04 $(4.78)
====== ====== ====== ====== =======
DILUTED EARNINGS (LOSS)
PER SHARE (6) $ 0.55 $ 0.55 $(0.24) $ 0.04 $(4.78)
====== ====== ====== ====== ======
Balance Sheet Data:
Total assets $118,747 $152,222 $148,578 $142,706 $76,260
Line of credit,
long-term debt and capital
leases, including
current maturities 4,730 12,945 19,290 13,668 19,323
Stockholders'
equity 100,964 115,652 112,327 113,172 36,413
Dividends per
common share - - - - -
(1) Includes results of operations of the acquired Two Pesos
restaurants and five acquired franchised restaurants since
their respective dates of acquisition.
(2) Includes results of eight acquired franchised restaurants
since their respective dates of acquisition.
(3) Includes the 1996 litigation settlement for $3.4 million pre-
tax, as described in Note 15 to the Consolidated Financial
Statements.
(4) Includes the charge related to the 1995 operations review of
$8.1 million, the 1996 write-down of the Company's
investment in a joint venture and the accrual of related
exit costs of $2.5 million and the 1997 charge for the write
down of impaired assets and the closure of seventeen
restaurants as described in Note 2 to the Consolidated
Financial Statements.
(5) Reserve resulted from the 1995 operations review as
described in Note 3 to the Consolidated Financial
Statements.
(6) The earnings per share amounts prior to 1997 have been
restated as required to comply with Statement of Financial
Standards No. 128, Earnings Per Share. For further
discussion of earnings per share and the impact of Statement
No. 128, see Note 12 to the consolidated financial
statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
The Company commenced operations in 1978 with the opening of
its first Taco Cabana restaurant in San Antonio. As of December
28, 1997, the Company had 98 company-owned restaurants, and 11
franchised restaurants including one joint venture owned
restaurant. The Company's revenues are derived primarily from
sales by company-owned restaurants, with franchise fees and
royalty income contributing less than 1% of total revenues for
the 1997 fiscal year.
Since April 1992, the Company has acquired a total of 58
restaurants. These acquisitions were accounted for under the
purchase method of accounting. Goodwill aggregating
approximately $47.7 million recognized in connection with these
acquisitions is being amortized on a straight-line basis over
periods ranging from 25 to 40 years. In conjunction with the
special charge that was recorded in the fourth quarter of 1997,
goodwill in the amount of $33.1 million was determined to be
impaired in accordance with Statement of Financial Accounting
Standards No. 121 (FAS 121). See discussion of the special
charge hereunder in "Results of Operations - Fiscal 1997 Compared
to Fiscal 1996" and Note 2 to the Consolidated Financial
Statements.
During the fiscal year ended December 28, 1997, the Company
opened seven restaurants, acquired one restaurant from a
franchisee and closed fourteen restaurants. Additionally,
franchisees of the Company closed five restaurants.
Results of Operations
The following table sets forth the percentage relationship
to total revenues, unless otherwise indicated, of certain income
statement data. The table also sets forth certain restaurant
data for the periods indicated.
Fiscal Year Ended
December 31, December 29, December 28,
1995 1996 1997
Income Statement Data:
REVENUES:
Restaurant sales 99.0% 99.6% 99.7%
Franchise fees and
royalty income 1.0 0.4 0.3
----- ----- -----
Total revenues 100.0 100.0 100.0
===== ===== =====
COSTS AND EXPENSES:
Restaurant cost of sales (1) 32.1 31.4 30.8
Labor (1) 26.4 26.3 27.4
Occupancy (1) 6.0 6.2 6.2
Other restaurant
operating costs (1) 19.4 17.9 19.3
General and
administrative costs 4.4 4.9 5.3
Depreciation and amortization 7.4 7.0 7.3
Special charges 5.8 1.9 59.6
Litigation settlement - 2.6 -
Reserve for notes and
other receivables 2.5 - -
----- ----- -----
INCOME (LOSS) FROM OPERATIONS (3.3) 2.2 (55.7)
INTEREST EXPENSE, NET (1.0) (1.0) (0.9)
----- ----- -----
INCOME (LOSS) BEFORE
INCOME TAXES (4.3) 1.2 (56.5)
INCOME TAXES 1.6 (0.6) 1.2
----- ----- -----
NET INCOME (LOSS) (2.7)% 0.5% (55.4)%
===== ===== =====
Restaurant Data:
COMPANY-OWNED RESTAURANTS:
Beginning of period 104 106 104
Opened 12 1 8
Acquired 1 - -
Sold (Refranchised) (3) - -
Closed (8) (3) (14)
--- --- ---
End of period 106 104 98
FRANCHISED RESTAURANTS (2): 21 17 11
--- --- ---
TOTAL RESTAURANTS: 127 121 109
______________ === === ===
(1) As a percentage of restaurant sales.
(2) Excludes Two Pesos licensed restaurants.
Fiscal 1997 Compared to Fiscal 1996
Restaurant Sales. Restaurant sales increased $177,000, or
0.1%, to $131.9 million for fiscal 1997 from $131.7 million for
fiscal 1996. The increase in sales is due to an increase in the
number of store operating weeks during 1997 compared to 1996.
The increase was offset by a decrease in comparable store sales
in 1997 compared to 1996. In the aggregate, the number of
operating weeks increased 1.6% in 1997 compared to 1996.
Comparable store sales, defined as Taco Cabana restaurants that
have been open 18 months or more at the beginning of each
quarter, decreased 2.9% during 1997. Much of the decline in
comparable store sales occurred during the first six months of
the year. Comparable stores sales for the first six months of
fiscal 1997 decreased 4.8%, while comparable store sales for the
last six months of the year decreased only 0.8%. Management
attributes much of the decline during the first six months to
unfavorable weather conditions, significant declines in the
Colorado market (which was closed in November 1997), and a
promotional strategy which highlighted higher priced, premium
products in an intensely price competitive landscape. This
strategy was changed during the second half of the year to a
promotional strategy which continually highlights various meals
at a competitive price.
Franchise Fees and Royalty Income. Franchise and royalty
fees decreased $170,000 to $346,000 for 1997, from $516,000 for
1996, due primarily to a decrease in the number of franchises
open during 1997 compared to 1996.
Restaurant Cost of Sales. Restaurant cost of sales,
calculated as a percentage of restaurant sales, decreased to
30.8% in 1997 from 31.4% in 1996. The decrease was due primarily
to continued improvements in the management of food costs through
utilizing increased controls and improved purchasing programs,
including the continued negotiation of favorable commodity
pricing.
Labor. Labor costs, calculated as a percentage of sales,
increased to 27.4% for the year ended December 28, 1997 compared
to 26.3% in 1996. The increase is due to lower average unit
volumes as well as management's commitment to increase staffing
levels at the restaurant level in order to provide a consistent
guest experience. In addition, approximately 15% of this
increase in percentage of sales amount is due to increased labor
costs associated with the Colorado market. During January 1997,
the Company announced its plans to commit additional resources,
primarily in marketing and restaurant level staffing, in an
attempt to reverse the negative sales trends and operating losses
of this market. The restaurants in the market were closed during
November 1997.
Occupancy. Occupancy costs increased slightly during 1997
compared to 1996. The increase is due to an increase in the
number of restaurants open during fiscal 1997 compared to fiscal
1996.
Other Restaurant Operating Costs. Other restaurant operating
costs increased by $1.9 million for the year ended December 28,
1997 compared to the same period of 1996. As a percentage of
restaurant sales, other restaurant operating costs increased to
19.3% for the year ended December 28, 1997 compared to 17.9% in
the same period of 1996, primarily due to decreased sales at the
restaurant level and additional marketing expenditures during the
year ended December 28, 1997. Total marketing expenditures
accounted for 4.7% of sales in 1997 versus 3.8% in 1996.
Approximately $600,000, or 0.5% of sales, of this increase was
due to increased marketing in the Colorado market. It is
currently anticipated that marketing expenditures will amount to
3.75% of sales during 1998.
General and Administrative. General and administrative
expenses increased to $7.0 million from $6.4 million, and
increased as a percentage of total revenues to 5.3% for the year
ended December 28, 1997 from 4.9% for the comparable period in
1996. This increase was primarily attributable to the addition of
corporate support staff, as well as an increased level of
expenditures to support the Company's operations, offset by lower
bonus accruals.
Depreciation and Amortization. Depreciation and
amortization expense consisted of the following:
Year Ended
----------
December 29, December 28,
1996 1997
------------ -----------
Depreciation of property
and equipment $7,079,000 $7,942,000
Amortization of intangible
assets 1,651,000 1,313,000
Amortization of pre-opening
costs 515,000 404,000
Depreciation expense increased by approximately $863,000 for
fiscal 1997 compared to fiscal 1996. The increase was due
primarily to restaurant openings during 1997, as well as capital
expenditures on existing restaurants during 1997 and 1996. The
increase was partially offset by a reduction in depreciation due
to the closure of 14 restaurants and the write-down of certain
depreciable assets during the fourth quarter of 1997.
Amortization of intangible costs decreased by $338,000 primarily
due to the write-off of goodwill and other intangible costs
during the fourth quarter of 1997. Amortization of pre-opening
costs decreased by approximately $111,000 during fiscal 1997
compared to fiscal 1996, due to the decrease in the number of
restaurants opened during the most recent twelve-month period
compared to the twelve-month period ended December 29, 1996.
Special Charge. During the fourth quarter of fiscal 1997,
management made the decision to close the seven restaurants in
its Colorado market. As previously announced, the Company
committed substantial resources to this market during 1997 in an
attempt to reverse trends of poor sales and losses. The desired
results from the implementation of the plan were not achieved and
the decision to close the market was made. These seven
restaurants had total sales of approximately $3.0 million and
operating losses of $2.1 million during the approximately eleven
months of 1997 that they were in operation.
Additionally, the Company continued to experience
unfavorable sales trends during 1997, concluding the year with
comparable restaurant sales declining 2.9%. However, during the
first six months of 1997, comparable restaurant sales declined
4.8%. This trend compelled management to continue its evaluation
of the operating model of the Company. During this evaluation,
management concluded that certain volumes must be achieved in
order to operate individual restaurants in accordance with
Company standards. These standards include food quality,
cleanliness, speed of service, and profitability. Management
reviewed all existing restaurants to determine which restaurants
could not reasonably be expected to achieve these volume levels,
generally annual revenues of at least $1 million. This led to
the decision to close an additional ten restaurants.
Due to the significance of the closures described above,
management performed an evaluation of the recoverability of all
remaining assets as described in Statement of Financial
Accounting Standards No. 121 (FAS 121). Management concluded
from the results of this evaluation that a significant impairment
of intangible as well as long-lived assets was required to be
recognized. The impairment was reflective of a market value
determined to be less than the carrying value of approximately 40
restaurants, 31 of which were acquired. The assets were tested
for impairment by projecting cash flows for individual
restaurants based on recent results and trends specific to that
restaurant. The undiscounted projected cash flows for each
restaurant were compared to the carrying value for that
restaurant, including allocated goodwill, where applicable. If
the undiscounted cash flows were less than the carrying value, an
impairment was deemed to have occurred. The amount of the
impairment was determined by calculating the difference between
the present value of the projected cash flows and the carrying
value attributable to the specific restaurant. The cash flows
were discounted using the rate of return the Company utilizes for
approving new restaurant construction. Such discounted cash
flows are, in management's opinion, the best estimate of the
assets current value. Considerable management judgment is
necessary to estimate future discounted cash flows. Accordingly,
actual results could vary significantly from management's
estimates.
The process described above resulted in the Company's
recording a special charge during the fourth quarter of 1997 of
$78.7 million pre-tax, $75.7 million after-tax, or $4.94 per
share. This amount had the following components:
Impairment of intangible assets of $33.1 million and
impairment of long-lived assets of $22.1 million for restaurants
that will continue in operation, based on the FAS 121 analysis
described above;
A provision of $23.3 million for the closure of seventeen
restaurants, including all of the restaurants in the Colorado
market. The amount was determined in accordance with FAS 121 and
is comprised of:
$13.3 million for the carrying value of the assets, net of
estimated proceeds of $1.5 million for the sale of restaurant
properties;
$9.0 million to record the estimated lease related
obligations for closed restaurants. This amount was determined
as the lesser of the present value of the monthly lease
commitments, net of expected sublease receipts, or lease
termination provisions;
$500,000 for severance and relocation benefits paid to
employees displaced by the restaurant closures;
$500,000 for the probable settlement of a franchisee lawsuit
related to the Colorado market
The write-off of other assets totaling $200,000.
During 1997, the seventeen restaurants contributed a total
of $9.6 million in sales, and had operating losses totaling $2.5
million. In addition, the total amount of depreciation an
amortization recorded during 1997 relating to assets which were
impaired was approximately $3.2 million.
A total of approximately $473,000 of the amounts accrued had
been paid prior to December 28, 1997. It is currently
anticipated that payments of approximately $1.5 million will be
made under the lease obligations during 1998. It is also
anticipated that proceeds of approximately $1.5 million will be
realized due to the sale of closed restaurants, although there
can be no assurance of the particular price at which any of such
properties will be sold.
Interest Expense, net. Interest expense, net of interest
income and interest capitalized on construction costs, decreased
to $1.1 million in fiscal 1997 from $1.3 million in fiscal 1996.
The difference is due to lower interest expense due to a decrease
in the average debt outstanding during 1997 compared to 1996, a
reduction in interest income and an increase in interest
capitalized on construction cost. The Company earned $76,000 of
interest income during 1997, compared to $201,000 of interest
income earned during the 1996. The decrease was due to a
reduction in short-term investments. In addition the Company
capitalized $147,000 of interest during 1997. No interest was
capitalized during 1996.
Net Income (Loss) and Net Income (Loss) Per Share. The
Company recorded a net loss of $73,198,000 for 1997 compared to
net income of $704,000 for 1996. Net loss per share was $4.78
for 1997 compared to net income per share of $0.04 in 1996. The
loss recorded in 1997 includes special charges totaling $78.7
million pretax ($75.7 million after-tax, or $4.94 per share).
Excluding these charges, the Company would have reported net
income of $2.5 million equal to $0.16 per share in fiscal 1997.
Net income in 1996 included charges totaling $5.9 million pretax
($4.0 million after-tax, or 26 cents per share). Excluding these
charges, the Company would have reported net income of $4.7
million equal to $0.30 per share for fiscal 1996. Disregarding
these charges, management believes that the decrease in income is
largely due to declining sales, and increased labor and marketing
expenditures. Management has taken steps to address these issues
as outlined in the description of the special charge.
Fiscal 1996 Compared to Fiscal 1995
Restaurant Sales. Restaurant sales decreased by $5.5
million, or 4.0%, to $131.7 million for fiscal 1996 from $137.2
million for fiscal 1995. The decrease in sales was due to a
decrease in the number of restaurants open during 1996 compared
to 1995 and due to a decrease in comparable store sales in 1996
compared to 1995. In the aggregate, the number of operating weeks
declined 2.9% in 1996 compared to 1995. Comparable store sales,
defined as Taco Cabana restaurants that have been open 18 months
or more at the beginning of each quarter, decreased 2.1% during
1996. Comparable store sales in the Company's core markets of
San Antonio, Austin, Houston, and Dallas, which represent over
90% of the Company's sales volume, increased 0.1% during 1996.
Management attributes much of the decline in sales to the adverse
economic conditions in the Texas - Mexico border market. The
Company also experienced a decrease in sales in its Colorado
market during 1996.
Franchise Fees and Royalty Income. Franchise and royalty
fees decreased by approximately $826,000 to $516,000 for 1996,
compared to approximately $1.3 million for 1995, due primarily to
a decrease in fees from new franchise development agreements and
related franchise royalties and due to a decrease in the number
of franchises open during 1996 compared to 1995.
Restaurant Cost of Sales. Restaurant cost of sales,
calculated as a percentage of restaurant sales, decreased to
31.4% in 1996 from 32.1% in 1995. The decrease was due primarily
to improvements in the management of food costs through utilizing
increased controls and improved purchasing programs, including
the negotiation of favorable commodity pricing at the beginning
of 1996.
Labor. Labor costs calculated as a percentage of restaurant
sales improved slightly to 26.3% during 1996 from 26.4% in 1995.
The labor costs were negatively impacted due to an increase in
salaried restaurant management and a relatively high rate of
restaurant management turnover. The turnover was part of the
Company's continuing process of raising the standards and
accountability within the management ranks of the Company.
Occupancy. Occupancy costs decreased slightly during 1996
compared to 1995. The decrease is due to a decrease in the
number of restaurants open during fiscal 1996 compared to fiscal
1995. As a percentage of restaurant sales, occupancy costs
increased to 6.2% in 1996 compared to 6.0% in 1995. The increase
was due to decreased sales at the restaurant level.
Other Restaurant Operating Costs. Other restaurant
operating costs as a percentage of restaurant sales decreased to
17.9% in 1996 from 19.4% for 1995. This decrease was due
primarily to management's increased focus on unit level
operations.
General and Administrative. General and administrative
expenses increased to $6.4 million from $6.1 million, and
increased as a percentage of total revenues to 4.9% for fiscal
1996 from 4.4% for fiscal 1995. This increase was primarily
attributable to the addition of management, as well as an
increased level of expenditures to support the Company's
operations.
Depreciation and Amortization. Depreciation and
amortization expense consisted of the following:
Year Ended
----------
December 31, December 29,
1995 1996
------------ ------------
Depreciation of property and
equipment $6,209,000 $7,079,000
Amortization of intangible
assets 1,663,000 1,651,000
Amortization of pre-opening
costs 2,429,000 515,000
Depreciation expense increased by approximately $870,000 for
the year ended December 29, 1996 compared to the year ended
December 31, 1995. The increase was due primarily to restaurant
openings during 1995, as well as capital expenditures on existing
restaurants during 1996. Amortization of pre-opening costs
decreased by approximately $1.9 million in the year ended
December 29, 1996 compared to the year ended December 31, 1995,
due to the decrease in the number of stores opened during fiscal
1996 compared to fiscal 1995.
Litigation Settlement. On July 24, 1996, the Company
approved the settlement of A.L. Park, et al v. Taco Cabana, Inc.,
et al., a suit originally filed in September 1995 seeking status
as a class action. As a result thereof, the Company recorded a
charge of $3.4 million pre-tax, $2.2 million after-tax, or $0.14
per share, during the second quarter of fiscal 1996. Under the
terms of the settlement, the plaintiffs received a total of $6.0
million of which the Company's insurance carrier paid $3.05
million. Additionally, the Company has paid approximately
$450,000 for legal and related expenses incurred in connection
with the settlement
Special Charge. The Company has a 50% interest in a joint
venture which operated three restaurants in the Atlanta market.
During the fourth quarter of 1996, the Company decided to write-
down its investment in the joint venture and accrue for certain
costs associated with the closing of two of the three restaurants
operated by the joint venture. This decision resulted in a
special charge of approximately $2.5 million pre-tax, $1.7
million after-tax or $0.11 per share. The special charge was
comprised of the following:
Write-down of investment in joint venture $ 1,191,000
Reserve for notes and accounts receivable 268,000
Estimated lease obligations 632,000
Legal and professional fees 245,000
Other costs 161,000
Two of the three restaurants in the Atlanta market were closed
during the first quarter of 1997. It is currently anticipated
that the third restaurant will remain in operation.
Interest Income (Expense). Interest expense, net of
interest capitalized on construction costs, decreased to $1.1
million in 1996 from $1.2 million in 1995 as a result of the
repayment of a substantial portion of the Company's outstanding
borrowings during 1996. The Company earned $201,000 of interest
income during 1996 on cash balances compared to $310,000 of
interest income earned during 1995. The decrease was due to a
reduction in short-term investments during 1996.
Net Income (Loss) and Net Income (Loss) Per Share. The
Company recorded net income of $704,000 for 1996 compared to a
net loss of $3.8 million for 1995. The recorded net income was
0.5% as a percentage of total revenues for 1996 compared to net
loss of 2.7% as a percentage of total revenues for 1995. Income
per share was $0.04 for 1996 compared to loss per share of $0.24
in 1995. Disregarding the litigation settlement, the reserve for
notes and other receivables and the special charges, the Company
would have reported net income of $4.7 million, equal to $0.30
per share or 3.6% as a percentage of revenues, for 1996 compared
to $3.5 million, equal to $0.22 per share or 2.5% as a percentage
of total revenues, for 1995. Disregarding the litigation
settlement and the special charges, management believes that the
remaining increase was largely due to better cost controls at the
restaurant level as well as a substantial decrease in
amortization of pre-opening costs.
Liquidity and Capital Resources
Historically, the Company has financed business and
expansion activities by using funds generated from operating
activities, build-to-suit leases, equity financing, short and
long-term debt and capital leases. The Company maintains credit
facilities totaling $30 million, including a $5 million unsecured
revolving line of credit. As of February 27, 1998, approximately
$16.4 million had been used under these commitments.
Net cash provided by operating activities was $12.9 million
for 1997, compared to $12.2 million for 1996. Net cash used in
investing activities was $15.4 million for 1997, representing
primarily capital expenditures for improvements to existing
restaurants, the construction of five free-standing and two non-
traditional restaurants, and the conversion of two Sombrero Rosa
and two Two Pesos restaurants to the Taco Cabana concept. This
compared to $8.7 million for 1996, representing primarily capital
expenditures for improvements to existing restaurants, the
construction of one restaurant, and the purchase of two pieces of
land for future development. Net cash provided by financing
activities was $2.1 million for 1997 representing primarily net
borrowings under the Company's credit facilities, offset in part
by the purchase of $3.6 million of the Company's stock in market
transactions, which is held as treasury stock. This compared to
net cash used by financing activities of $5.5 million in 1996
representing primarily repayment of the Company's line of credit
and long term debt.
On April 16, 1997, the Company's Board of Directors approved
a plan to repurchase up to 1,500,000 shares of the Company's
Common Stock. As of December 28, 1997 the Company had repurchased
871,937 shares at an average cost of $4.08 per share. The
timing, price, quantity and manner of remaining purchases, if
any, will be made at the discretion of management and will be
dependent upon market conditions. The Company has funded the
repurchases through available bank credit facilities, as well as
the liquidation of the Company's short term investment portfolio.
Remaining purchases, if any, will be funded through a combination
of cash provided by operations and available bank credit
facilities.
The special charge recorded in the fourth quarter of 1997
included an accrual of approximately $9.0 million for closed
restaurant liabilities. A total of approximately $473,000 of the
amounts accrued had been paid prior to December 28, 1997. It is
currently anticipated that payments of approximately $1.5 million
will be made under lease and other obligations during 1998. It
is also anticipated that proceeds of approximately $1.5 million
will be realized due to the sale of closed restaurants, although
there can be no assurance of the particular price at which any of
such properties will be sold.
The special charge recorded during the fourth quarter of 1996
included an accrual of approximately $1.0 million for the
estimated lease obligations, legal and professional costs and
other costs associated with the closing of two of the three
restaurants operated by a joint venture in which the Company has
a 50% interest. Cash requirements for this accrual were
approximately $35,000 for the year ended December 28, 1997.
The special charge recorded in the second quarter of 1995
included an accrual of approximately $1.2 million to record the
estimated monthly lease payments, net of expected sublease
receipts, associated with certain restaurants which have been
closed. Cash requirements for this accrual were approximately
$333,000 in 1997. During 1997, the Company sold properties
relating to the 1995 special charge which resulted in proceeds of
$603,000, which approximated the carrying value of the assets
sold. Subsequent to December 28, 1997, the company sold
properties relating to the special charge which resulted in
proceeds of $1.3 million, which approximated the carrying value
of the assets sold. The Company currently has one closed
restaurant property for sale which was covered by the 1995
special charge. Although there can be no assurance of the
particular price at which such property will be sold, the
Company expects to receive funds equal to or in excess of the
carrying value upon the actual disposition of this property. In
addition, certain acquisition and accrued liabilities related to
the Two Pesos acquisition were reduced by payments of
approximately $900,000 during 1997.
The Company believes that existing cash balances, funds
generated from operations, its ability to borrow, and the
possible use of lease financing will be sufficient to meet the
Company's capital requirements through 1998, including the
planned opening of eight to ten restaurants and the reimaging of
20 to 25 restaurants. Total capital expenditures related to new
restaurants are estimated to be $12.0 to $15.0 million. The
total for other capital expenditures, including the cost of the
reimagings, is estimated to be $7.5 to $8.5 million. Total
capital expenditures for 1998 are expected to approximate $19.5
to $23.5 million.
Impact of Inflation
Although increases in labor, food or other operating costs
could adversely affect the Company's operations, management does
not believe that inflation has had a material adverse effect on
the Company's operations to date.
Seasonality and Quarterly Results
The Company's sales fluctuate seasonally. Historically, the
Company's highest sales and earnings occur in the second and
third quarters. In addition, quarterly results are affected by
the timing of the opening of new stores, and the Company's growth
may offset the impact of seasonal influences. Therefore,
quarterly results are not indicative of results for the entire
year.
Year 2000 Issue
The Company relies to a large extent on computer technology
to carry out its day-to-day operations. Many software products
in the marketplace are only able to recognize a two digit year
date and therefore will recognize a date using "00" as the year
1900 instead of the year 2000 (the "Year 2000 Issue"). This
problem could result in a system failure or miscalculations
causing disruptions of operations, including, among other things,
a temporary inability to process transactions or engage in
similar normal business activities.
Based on a recent assessment, the Company has determined
that it will be required to modify or replace significant
portions of its software so that its systems will properly
utilize dates beyond December 31, 1999. The Company presently
believes that with modifications to existing software and
conversions to new software, the effects of the Year 2000 Issue
upon its operations can be mitigated. However, if such
modifications and conversions are not made, or are not completed
timely, the Year 2000 Issue could have a material impact on the
operations of the Company.
The Company has initiated formal communications with all
significant suppliers to determine the extent to which the
Company is vulnerable to those third parties' failure to
remediate Year 2000 Issue effects upon their own operations,
products or services. The Company's total Year 2000 Issue project
cost and estimates to complete include estimated costs and time
associated with the impact of a third party's Year 2000 Issue,
and are based on presently available information. However, there
can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a
failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a
material adverse effect on the Company.
The Company will use both internal and external resources to
reprogram, or replace, and test software for Year 2000 Issue
modifications. The Company plans to complete the Year 2000 Issue
project by December 31, 1998. The total cost of the Year 2000
Issue project is estimated to be $600,000, of which the Company
has incurred $400,000 relating to the purchase of new software.
The costs relating to the Year 2000 Issue are being financed
through operating cash flows and borrowings from the Company's
available credit facilities. Of the total project cost, the
majority is attributable to the purchase of new software which
will be capitalized. The remaining amount, which will be
expensed as incurred over the next two years, is not expected to
have a material effect on the results of operations. To date,
the costs the Company has incurred and expensed relating to the
assessment of, and preliminary efforts in connection with, its
Year 2000 Issue and the development of a remediation plan have
not had a material effect on the results of operations.
The costs of the project and the date on which the Company
plans to complete the Year 2000 Issue project are based on
management's best estimates, which were derived utilizing
numerous assumptions of future events including the continued
availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these
estimates will be achieved and actual results could differ from
those plans. Specific factors that that might cause such
material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer code, and
similar uncertainties.
Forward-Looking Statements
Statements in this Annual Report, including those contained
in the foregoing discussion and other items herein, concerning
the Company which are (a) projections of revenues, capital
expenditures, costs and expenses or other financial items, (b)
statements of plans and objectives for future operations, (c)
statements of future economic performance, or (d) statements of
assumptions or estimates underlying or supporting the foregoing
are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities
Act of 1934. The ultimate accuracy of forward-looking statements
is subject to a wide range of business risks and changes in
circumstances, and actual results and outcomes often differ from
expectations. Any number of important factors could cause actual
results to differ materially from those in the forward-looking
statements herein, including the following: the timing and
extent of changes in prices; actions of our customers and
competitors; state and federal environmental, economic, safety
and other policies and regulations, any changes therein, and any
legal or regulatory delays or other factors beyond the Company's
control; execution of planned capital projects; weather
conditions affecting the Company's operations or the areas in
which the Company's products are marketed; natural disasters
affecting operations; and adverse rulings, judgments, or
settlements in litigations or other legal matters. The Company
undertakes no obligation to publicly release the result of any
revisions to any such forward-looking statements that may be made
to reflect events or circumstances after the date hereof or to
reflect the occurrence of unantincipated events.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are set
forth in this annual report on Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The directors and executive officers of the Company and
their respective ages are as follows:
Name Age Position
Stephen V. Clark 44 Chief Executive Officer,
President and Director
James A. Eliasberg 40 Executive Vice President
and General Counsel
David G. Lloyd 34 Senior Vice President -
Finance, Chief Financial
Officer, Secretary
and Treasurer
Douglas Gammon 51 Senior Vice President -
Human Resources and People
Development
William J. Nimmo 43 Director
Richard Sherman 54 Director
Cecil Schenker 55 Director
Lionel Sosa 58 Director
Mr. Clark has served as the Company's Chief Executive
Officer since November 1996, and as the President, Chief
Operating Officer, and as a Director since April 1995. Prior to
that, Mr. Clark was with Church's Chicken, a division of
America's Favorite Chicken, for eighteen years with his final
title having been Senior Vice President and Concept General
Manager. He also served on the executive committee of America's
Favorite Chicken and was on the Board of Directors of Church's
Operators Purchasing Association. In his final position with
America's Favorite Chicken, Mr. Clark was primarily responsible
for the day-to-day operations of over 1100 company-owned and
franchised units with aggregate sales volume in excess of $600
million.
Mr. Eliasberg has served as the Company's Executive Vice
President and General Counsel since April 1995. From January
1991 to April 1995, Mr. Eliasberg served as the Company's Senior
Vice President and General Counsel. Prior to that, Mr. Eliasberg
was engaged in the private practice of law in Southern California
at the law firms of Fierstein & Sturman (March 1989 to January
1991), Hill, Wynne, Troop & Meisinger (May 1986 to February 1989)
and Jones, Day, Reavis & Pogue (October 1984 to March 1986). In
addition to supervising all of the Company's legal affairs, Mr.
Eliasberg's responsibilities include real estate, construction
and franchise development. Mr. Eliasberg is a graduate of the
University of Chicago law school.
Mr. Lloyd joined the Company in October 1994 as Vice
President - Finance, Chief Financial Officer, Secretary and
Treasurer and was promoted to Senior Vice President in May 1996.
From August 1985 to October 1994, Mr. Lloyd served in various
capacities with Deloitte & Touche (the Company's independent
auditors), with his last position being Senior Audit Manager.
Mr. Lloyd is a certified public accountant.
Mr. Gammon joined the Company in March 1997 as Senior Vice
President, Human Resources and People Development. From December
1989 to March 1997, Mr. Gammon served as Vice President of Human
Resources at Marriott International which has over 15,000
employees in 50 states. Mr. Gammon has over 18 years of
experience in the human resources field as well as over six years
experience in restaurant operations. He was the past President
for the Council of Hotel and Restaurant Trainers.
Mr. Nimmo has served as a director of the Company since
November 1991. Since May 1997, Mr. Nimmo has been a Partner with
Halpern, Denny & Co., a venture capital firm in Boston
Massachusetts. Prior to that, Mr. Nimmo served as Managing
Director of Cornerstone Equity Investors, Inc., and its
predecessor firm, Prudential Equity Investors, Inc., since
September 1989.
Mr. Sherman has been a director of the Company since
November 1991. Mr. Sherman is a private investor and retail
consultant. Mr. Sherman served as President and Chief Executive
Officer of Rally's, Inc. from September 1987 to January 1991.
From August 1989 to January 1991, he also served as Chairman of
the Board of Rally's, Inc. Mr. Sherman currently serves as a
member of the Board of Trustees of Paul Quinn College in Dallas,
Texas and as a director of Reed's Jewelers, Inc., Papa John's
International, Inc., and PJ America, Inc.
Mr. Schenker has been a director of the Company since
January 1992. Mr. Schenker is a corporate securities attorney
and is the managing partner of the San Antonio, Texas office of
the law firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P., of
which Mr. Schenker has been a partner through his professional
corporation since January of 1984. Akin, Gump, Strauss, Hauer &
Feld, L.L.P. has regularly performed legal services for the
Company. Mr. Schenker is also a director of LOT$OFF
Corporation, formerly 50-Off Stores, Inc.
Mr. Sosa has been a director of the Company since August,
1997. Mr. Sosa has served as the Chief Executive Officer of KJS
Marketing Agency since January 1996. From 1994 to 1996 he served
as Chairman of DMB&B/Americas, a network of advertising agencies
in the U.S. and Latin America. In 1980 Mr. Sosa founded the
agency of Sosa, Bromley, Aguilar, Noble & Associates, an
advertising agency specializing in Hispanic marketing in the U.S.
Mr. Sosa sold Sosa, Bromley, Aguilar, Noble & Associates in 1994.
Mr. Sosa is currently a Director of the Children's Television
Workshop Network.
The Board of Directors has a compensation and stock option
committee which currently consists of William J. Nimmo, Richard
Sherman and Lionel Sosa. The Board of Directors also has an audit
committee which currently consists of William J. Nimmo, Richard
Sherman, Lionel Sosa and Cecil Schenker. The Board of Directors
does not currently have a nominating committee. All directors
serve for a term of one year and until their successors are duly
elected. Each director who is not also an employee of the
Company receives an annual retainer of $25,000, and an attendance
fee of $2,500 per Board meeting for up to four meetings each
year. All non-employee directors are reimbursed for their
expenses.
Compliance with Section 16(a) of the Securities Exchange Act of
1934
Section 16(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") requires each director and executive
officer of the Company, and each person who owns more than 10% of
a registered class of the Company's equity securities to file by
specific dates with the Securities and Exchange Commission (the
"SEC") initial reports of ownership and reports of change in
ownership of Common Stock and other equity securities of the
Company. Officers, directors and 10% stockholders are required
by SEC regulation to furnish the Company with copies of all
Section 16(a) forms they file. The Company is required to report
in this report any failure of its directors and executive
officers to file by the relevant due date any of these reports
during the Company's fiscal year.
To the Company's knowledge, all Section 16(a) filing
requirements applicable to the Company's officers, directors, and
10% stockholders were complied with, except for one late filing
as to a Form 3 for Douglas Gammon.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth
certain information concerning the compensation earned during the
Company's last three fiscal years by the Company's Chief
Executive Officer and the Company's other executive officers
(collectively the "named executive officers"):
Summary Compensation Table
Annual Compensation Long-Term Compensation
-------------------- ------------------------
Pay-
Awards outs
------------------- ------
Other Securites All
Annual Restricted Underlying LTIP Other
Name and Compen- Stock Options/ Pay- Compen-
Principal Fiscal Salary Bonus sation Award(s) SARs outs sation
Position Year ($) ($) ($)(1) ($) (#) ($) ($)
Stephen V. 1997 255,420 - - - - - -
Clark,
Chief 1996 233,404 - - - - - -
Executive
Officer, 1995 152,455(2) 50,000 - - 200,000 - -
President ,
Chief
Operating
Officer
James A. 1997 191,877 - - - - - -
Eliasberg,
Executive 1996 189,235 - - - - - -
Vice
President 1995 175,025 - - - 200,000 - -
and General
Counsel
David G. 1997 143,528 - - - - - -
Lloyd,
Senior Vice 1996 135,138 - - - - - -
President,
Chief 1995 117,605 - - - 75,000 - -
Financial
Officer,
Secretary
and
Treasurer
Douglas 1997 113,820(3) - 55,135(4) - 75,000 - -
Gammon
Senior Vice
President -
Human
Resources
and
People
Development
__________________
(1) Certain of the Company's executive officers receive personal
benefits in addition to salary; however, the Company has
concluded that the aggregate amounts of such personal benefits do
not exceed the lesser of $50,000 or 10% of annual salary and
bonus reported for any named executive officer.
(2) Mr. Clark joined the Company in April 1995.
(3) Mr. Gammon joined the Company in March 1997.
(4) Represents relocation expense reimbursements.
Employment Agreements. The Company has written employment
agreements with Stephen Clark and James Eliasberg. The Company's
agreement with Mr. Clark expires in April 1998. Mr. Clark
receives a base salary of not less than $200,000 per year during
the term of his contract. Additionally, Mr. Clark can be paid a
bonus based on the Company's achievement of certain performance
goals. Pursuant to such agreement, Mr. Clark has agreed not to
participate in any manner, during his term of employment and for
two years thereafter, in any business which owns a Mexican fast
food restaurant or Mexican "quick service" restaurant in the
Continental United States.
The Company's agreement with Mr. Eliasberg expires in April
1998. Mr. Eliasberg receives a base salary of $185,000 per year
during the term of his contract. Additionally, Mr. Eliasberg
will be paid a bonus based on the Company's achievement of
certain performance goals. Pursuant to such agreement, Mr.
Eliasberg has agreed not to participate in any manner, during his
term of employment and for two years thereafter, in any business
which owns a Mexican fast food restaurant or Mexican "quick
service" restaurant in the Continental United States.
Stock Option Plans and Directors' Options
Under the Taco Cabana, Inc. 1990 Stock Option Plan (the
"1990 Option Plan"), amended in August 1992, and the 1994 Stock
Option Plan (the "1994 Option Plan"), amended in August 1997,
options to purchase up to 1,500,000 and 1,250,000 shares,
respectively, of Common Stock may be granted to employees,
outside directors and consultants and advisers of the Company or
any subsidiary corporation or entity. The stock is intended to
permit the Company to retain and attract qualified individuals
who will contribute to its overall success. Shares that by
reason of the expiration of an option (other than by reason of
exercise) or which are no longer subject to purchase pursuant to
an option granted under an Option Plan may be reoptioned
thereunder. The 1990 and 1994 Option Plans are administered by a
committee of outside directors (the "Committee"). The Committee
sets specific terms and conditions of options granted under the
1990 and 1994 Option Plans and administers the 1990 and 1994
Option Plans, as well as the Company's other employee benefit
plans which may be in effect from time to time. The Committee
currently consists of William J. Nimmo, Lionel Sosa, and Richard
Sherman.
The Company's employees are eligible to receive either
incentive stock options or nonqualified stock options or a
combination of both, as the Committee determines. Non-employee
participants may be granted only nonqualified stock options.
Stock options may be granted for a term not to exceed ten years
(five years with respect to a holder of 10% or more of the
Company's shares in the case of an incentive stock option) and
are not transferable other than by will or the laws of descent
and distribution. Each option may be exercised within the term
of the option pursuant to which it is granted (so long as the
optionee, if an employee, continues to be employed by the
Company). In addition, an incentive option may be exercised
within 90 days after the termination of employment of the
optionee (subject to any limitations in the particular option),
within one year after termination in case of termination because
of disability, or throughout the term of the option in the event
of the optionee's death, to the extent in each case the option
was exercisable at the termination date. A nonqualified stock
option may be exercised for such period, but not later than the
expiration date, after termination of employment, disability or
death, as may be specified in the particular option.
The exercise price of all incentive stock options must be at
least equal to the fair market value of the Common Stock on the
date of grant, or 110% of fair market value with respect to any
incentive stock option issued to a holder of 10% or more of the
Company's shares. Stock options may be exercised by payment in
cash of the exercise price with respect to each share to be
purchased, by delivering Common Stock of the Company already
owned by such optionee with a market value equal to the exercise
price, or by a method in which a concurrent sale of the acquired
stock is arranged, with the exercise price payable in cash from
such sale proceeds.
The 1994 Option Plan provides that each outside director
will automatically receive a grant of 3,000 nonqualified stock
options each year on the fifth business day following the first
public release of the Company's audited earnings report on
results of operations for the preceding fiscal year. Each such
option will become exercisable in whole or in part on the first
anniversary of the award through the balance of its ten-year
term. Subject to availability of shares allocated to the 1994
Option Plan and not already reserved for other outstanding stock
options, outside directors who join the Board in the future will
in addition receive an initial grant of options for 20,000
shares, which will become exercisable in five equal increments
beginning on the first anniversary of the award and on each of
the next four succeeding anniversary dates. Such options will be
exercisable for a term of ten years. Such options will be
awarded upon their appointment or election to the Board.
Options, once granted and to the extent exercisable, will remain
exercisable throughout their term, regardless of whether the
holder continues as a director. The exercise price of the
options is equal to 100% of the fair market value of a share of
Common Stock at the time of grant.
The 1990 Option Plan will terminate on October 14, 2000.
The 1994 Option Plan will terminate on October 17, 2004. The
Board of Directors may, however, terminate the 1990 and 1994
Option Plans at any time prior to such respective dates.
Termination of the 1990 and 1994 Option Plans will not alter or
impair, without the consent of the optionee, any of the rights or
obligations pursuant to any option granted under the Option
Plans.
As of December 28, 1997, options for 635,158 shares of
common stock had been granted under the 1990 Option Plan and were
outstanding, with a weighted average exercise price of $6.11 per
share, and no additional shares were available for issuance upon
exercise of options which may be granted in the future. As of
December 28, 1997, options for 864,842 shares had been exercised.
As of December 28, 1997, options for 715,717 shares of
common stock had been granted under the 1994 Option Plan and were
outstanding, with a weighted average exercise price of $5.23 per
share, and 534,283 additional shares were available for issuance
upon exercise of options which may be granted in the future. As
of December 28, 1997, no options had been exercised.
Stock Option Grant Table. The following table sets forth
certain information concerning options granted to the named
executive officers during the Company's fiscal year ended
December 28, 1997:
Option Grants in Last Fiscal Year
Potential Realizable
Percent of Value at Assumed
Total Options Annual Rates of
Granted to Stock Price
Employees Excercise Appreciation
Options in or Base Expir- for Option Term(2)
Granted Fiscal Price ation -------------------
Name #(1) Year ($/Sh) Date 5%($) 10%($)
- -----------------------------------------------------------------------
Stephen V.
Clark - - - - - -
James A.
Eliasberg - - - - - -
David G.
Lloyd - - - - - -
Douglas
Gammon 50,000(3) 13% $5.25 3/10/07 $165,085 $418,357
25,000(3) 7% 4.5 11/17/07 74,681 189,257
- -----------------------------------------------------------------------
(1) All such stock options were granted for the number of shares
indicated at an exercise price equal to the fair market value of
the Common Stock on the date of grant as determined by the
Company's Board of Directors. All such stock options noted
above were granted 10 years prior to the noted expiration date.
The options become exercisable beginning one year after the
date of grant in five equal annual installments. The Company's
current Option Plans do not make provision for the award of
stock appreciation rights ("SARs") and the Company has no SARs
currently outstanding.
(2) As required by rules of the Securities and Exchange Commission
("SEC"), potential values stated are based on the assumption
that the Company's Common Stock will appreciate in value from
the date of grant to the end of the option term (ten years from
the date of grant) at annualized rates of 5% and 10% (total
appreciation of approximately 63% and 159%), respectively, and
therefore are not intended to forecast possible future
appreciation, if any, in the price of the Common Stock.
(3) Upon occurrence of a change of control of Taco Cabana, as
defined in the related Stock Option Agreements, all outstanding
options, to the extent not exercisable, will immediately become
exercisable.
Stock Option Exercises and Holdings Table. The following table
provides information concerning the exercise of options and value
of unexercised options held by the named executive officers at
December 28, 1997:
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
Shares
Aquired Value
on Real- Number of Unexercised Value of Unexercised
Exercise ized Options In-the-Money Options
(#) ($) at Fiscal Year End(#) at Fiscal Year End($)(1)
- -----------------------------------------------------------------------------
Exercis- Unexercis- Exercis- Unexercis-
able able able able
- -----------------------------------------------------------------------------
Stephen V. Clark - - 80,000 120,000 - -
James A. Elisaberg - - 104,000 120,000 $35,640 -
David G. Lloyd - - 45,000 55,000 - -
Douglas Gammon - - - 75,000 - -
(1) Values stated are based on the last sale price of $4.63 per
share of the Company's Common Stock on the NASDAQ National
Market System on December 26, 1997, the last trading day of the
fiscal year, and equal the aggregate amount by which the market
value of the option shares exceeds the exercise price of such
options at the end of the fiscal year.
Compensation Committee Interlocks and Insider Participation
None.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information
concerning the beneficial ownership of the Company's Common Stock
as of March 1, 1998, by: (i) each person known by the Company to
be the beneficial owner of more than 5% of its Common Stock, (ii)
each named executive officer of the Company, (iii) each director
of the Company, and (iv) all directors and officers as a group.
Unless otherwise indicated, each of the stockholders has sole
voting and investment power with respect to the shares
beneficially owned.
Shares Beneficially Owned
Name Number Percent
Stephen V. Clark (1) 88,063 *
James A. Eliasberg (2) 188,750 1.2%
David G. Lloyd (3) 52,800 *
Douglas Gammon (4) 10,000 *
William J. Nimmo (5) 3,817 *
Richard Sherman (6) 77,003 *
Cecil Schenker (7) 97,503 *
Lionel Sosa (8) 20,000 *
Massachusetts Financial
Services Co. (9) 1,310,970 8.6%
Dimensional Fund
Advisors, Inc. (10) 1,000,764 6.6%
All directors and
officers as
a group (8 persons(11) 537,936 3.5%
___________________________
* Less than 1%.
(1) Includes 80,000 shares subject to presently exercisable
options (or those exercisable within 60 days). Excludes
120,000 shares issuable pursuant to options which are not
currently exercisable (or exercisable within 60 days).
(2) Includes 104,000 shares subject to presently exercisable
options (or those exercisable within 60 days). Excludes
120,000 shares issuable pursuant to options which are not
currently exercisable (or exercisable within 60 days).
(3) Includes 45,000 shares issuable pursuant to presently
exercisable options (or those exercisable within 60 days).
Excludes 55,000 shares issuable pursuant to options which
are not currently exercisable (or exercisable within 60
days).
(4) Represents shares issuable pursuant to presently exercisable
options (or those exercisable within 60 days). Excludes
65,000 shares issuable pursuant to options which are not
currently exercisable (or exercisable within 60 days).
(5) Excludes 23,000 shares issuable pursuant to options which
are not currently exercisable (or exercisable within 60
days).
(6) Represents shares subject to presently exercisable options
(or those exercisable within 60 days). Excludes 13,000
shares issuable pursuant to options which are not currently
exercisable (or exercisable within 60 days).
(7) Represents shares subject to presently exercisable options
(or those exercisable within 60 days). Excludes 13,000
shares issuable pursuant to options which are not currently
exercisable (or exercisable within 60 days).
(8) Excludes 23,000 shares issuable pursuant to options which
are not currently exercisable (or exercisable within 60
days).
(9) Based upon Schedule 13G, filed jointly in February 1996, and
amended in February 1998, indicating beneficial ownership as
stated in the table, and shared dispositive power as to all
shares beneficially owned. Included in the joint filing were
Massachusetts Financial Services Company ("MFS"), indicating
beneficial ownership of 1,310,970 shares and sole dispositive
power as to 1,310,970 shares and MFS Series Trust II - MFS
Emerging Growth Fund ("MEG"), indicating 962,395 shares
beneficially owned by MFS as well as MEG. Address: 500 Boylston
Street, Boston, Massachusetts 02116.
(10) Based on Schedule 13G, filed in February 1997, and
amended in February 1998, indicating beneficial ownership and
sole dispositive power as stated in the table and sole voting
power as to 665,464 shares. Address: 1299 Ocean Avenue, 11th
Floor, Santa Monica, CA 90401.
(11) Includes 413,506 shares subject to presently exercisable
options (or those exercisable within 60 days). Excludes
432,000 shares issuable pursuant to options which are not
currently exercisable (or exercisable within 60 days).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Compensation Committee Interlocks and Insider
Participation" for certain relationships and related party
transactions.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this
report:
Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets at December 29, 1996 and December 28,1997
Consolidated Statements of Operations for the years ended
December 31, 1995, December 29, 1996 and December 28, 1997
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1995, December 29, 1996 and December 28, 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, December 29, 1996 and December 28, 1997
Notes to Consolidated Financial Statements
Financial Statement Schedules
No financial statement schedules are submitted because of the
absence of the conditions under which they are required or
because the required information is included in the Consolidated
Financial Statements or notes thereto.
Exhibits
3.1 Restated Certificate of Incorporation, filed on
December 29, 1993. (b)
3.2 Bylaws of Registrant. (a)
4.1 Form of Common Stock Certificate. (a)
4.2 Rights Agreement dated as of June 9, 1995, between Taco
Cabana, Inc. and Society National Bank, as Rights
Agent. (d)
10.1* Employment Agreement dated April 24, 1995 between
the Registrant and Stephen V. Clark. (c)
10.5 Sample Franchise Agreement. (a)
10.6 Sample Franchise Development Agreement. (a)
10.7 Sample Beverage Sublease Agreement. (a)
10.8 Sample Concessionaire Management Agreement. (a)
10.9* Amended and Restated Stock Option Plan. (a)
10.14* 1994 Stock Option Plan. (b)
10.15 Employment Agreement dated April 24, 1995 between the
Registrant and James Eliasberg. (e)
10.16 Second Amended Loan Agreement with International
Bank of Commerce. (e)
21. Subsidiaries of the Registrant. (f)
23. Consent of Deloitte & Touche LLP. (f)
24. Powers of attorney to sign amendments to this report.
Reference is made to the signature page of this report.
27. Financial Data Schedule. (f)
________________________
* Executive compensation plan or arrangement.
(a) Filed as an exhibit to Form S-1 Registration
Statement No. 33-51430, effective October 16, 1992.
(b) Filed as an exhibit to Form 10-K for the fiscal year
ended January 1, 1995.
(c) Filed as an exhibit to Form 10-K for the fiscal year
ended December 31, 1995.
(d) Filed as an exhibit to Form 8-A Registration
Statement No. 0-20716, effective June 9, 1995.
(e) Filed as an exhibit to Form 10-K for the fiscal year
ended December 29, 1996.
(f) Filed herewith.
(b) Reports on Form 8-K
Press release relating to the closure of Colorado
market and Special Charge filed December 24, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TACO CABANA, INC.
By: STEPHEN V. CLARK
----------------
Stephen V. Clark
Chief Executive Officer and President
Date: March 27, 1998
Each person whose signature appears below authorizes Stephen
V. Clark and David G. Lloyd or either of them, each of whom may
act without joinder of the other, to execute in the name of each
such person who is then an officer or director of the Registrant
and to file any amendments to this annual report on Form 10-K
necessary or advisable to enable the Registrant to comply with
the Securities Exchange Act of 1934, as amended, and any rules,
regulations and requirements of the Securities and Exchange
Commission in respect thereof, which amendments may make such
changes in such report as such attorney-in-fact may deem
appropriate.
Pursuant to the requirements of the Securities Exchange Act
of 1934, as amended, this report has been signed by the following
persons in the capacities and on the dates indicated.
Signature Title Date
STEPHEN V. CLARK Chief Executive Officer, March 27, 1998
---------------- President and Direcor
Stephen V. Clark (Principal Executive Officer)
DAVID G. LLOYD Senior Vice President - March 27, 1998
-------------- Finance, Chief Financial
David G. Lloyd Officer, Secretary and Treasurer
(Principal Financial and
Accounting Officer)
WILLIAM J. NIMMO Director March 27, 1998
----------------
William J. Nimmo
RICHARD SHERMAN Director March 27, 1998
---------------
Richard Sherman
CECIL SCHENKER Director March 27, 1998
--------------
Cecil Schenker
LIONEL SOSA Director March 27, 1998
-----------
Lionel Sosa
TACO CABANA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Financial Statements:
Independent Auditors' Report F-2
Consolidated Balance Sheets at December 29, 1996 and
December 28, 1997 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1995, December 29, 1996 and December 28, 1997 F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1995, December 29, 1996 and
December 28, 1997 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, December 29, 1996 and December 28, 1997 F-6
Notes to Consolidated Financial Statements F-8
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Taco Cabana, Inc.
We have audited the accompanying consolidated balance sheets of
Taco Cabana, Inc. and subsidiaries as of December 28, 1997 and
December 29, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the
three years in the period ended December 28, 1997. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Taco
Cabana, Inc. and subsidiaries at December 28, 1997 and December
29, 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December
28, 1997 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
San Antonio, Texas
February 2, 1998
TACO CABANA, INC.
CONSOLIDATED BALANCE SHEETS
December 29, December 28,
ASSETS 1996 1997
CURRENT ASSETS:
Cash and cash equivalents $ 748,000 $ 339,000
Receivables, net 792,000 502,000
Inventory 1,858,000 2,105,000
Prepaid expenses 1,482,000 1,704,000
Federal income taxes receivable 363,000 200,000
Deferred income taxes 1,827,000 -
------------- -------------
Total current assets 7,070,000 4,850,000
PROPERTY AND EQUIPMENT, net 88,963,000 59,540,000
NOTES RECEIVABLE, net 738,000 344,000
INTANGIBLE ASSETS, net 45,394,000 11,293,000
OTHER ASSETS 541,000 233,000
------------- -------------
TOTAL ASSETS $ 142,706,000 $ 76,260,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,181,000 $ 4,430,000
Accrued liabilities 3,171,000 6,266,000
Current maturities of long-term debt 2,409,000 1,573,000
and capital leases
Line of credit 625,000 4,223,000
------------- -------------
Total current liabilities 10,386,000 16,492,000
LONG-TERM OBLIGATIONS, net of current
maturities:
Capital leases 4,041,000 2,357,000
Long-term debt 6,593,000 11,170,000
------------- -------------
Total long-term obligations 10,634,000 13,527,000
ACQUISITION AND CLOSED RESTAURANT 4,212,000 9,126,000
LIABILITIES
DEFERRED LEASE PAYMENTS 657,000 702,000
DEFERRED INCOME TAXES 3,645,000 -
STOCKHOLDERS' EQUITY:
Preferred stock, series A; $.01 par - -
value, 100,000 shares authorized
Common stock; $.01 par value,
30,000,000 shares
authorized15,706,537 and 14,834,600
shares issued and outstanding at
December 29, 1996 and December 28,
1997, respectively -
157,000 157,000
Additional paid-in capital 97,095,000 97,095,000
Retained earnings (deficit) 15,920,000 (57,278,000)
Treasury stock, at cost - 871,937
shares - (3,561,000)
------------- -------------
Total stockholders' equity 113,172,000 36,413,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 142,706,000 $ 76,260,000
============= =============
See notes to consolidated financial statements.
TACO CABANA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
----------
December 31, December 29, December 28,
1995 1996 1997
REVENUES:
Restaurant sales $137,191,000 $131,680,000 $131,857,000
Franchise fees and
royalty income 1,342,000 516,000 346,000
------------ ------------ ------------
Total revenues 138,533,000 132,196,000 132,203,000
------------ ------------ ------------
COSTS AND EXPENSES:
Restaurant cost of sales 44,083,000 41,336,000 40,668,000
Labor 36,262,000 34,653,000 36,169,000
Occupancy 8,192,000 8,161,000 8,185,000
Other restaurant
operating costs 26,658,000 23,553,000 25,418,000
General and
administrative 6,068,000 6,445,000 6,964,000
Depreciation and
amortization 10,301,000 9,245,000 9,659,000
Special charges 8,100,000 2,497,000 78,738,000
Litigation settlement - 3,400,000 -
Reserve for notes and
other receivables 3,500,000 - -
------------ ----------- ------------
Total costs and
expenses 143,164,000 129,290,000 205,801,000
------------ ----------- ------------
INCOME (LOSS) FROM
OPERATIONS (4,631,000) 2,906,000 (73,598,000)
INTEREST EXPENSE, NET (1,397,000) (1,348,000) (1,137,000)
------------ ------------ -----------
INCOME (LOSS) BEFORE
INCOME TAXES (6,028,000) 1,558,000 (74,735,000)
BENEFIT (PROVISION) FOR
INCOME TAXES 2,230,000 (854,000) 1,537,000
------------ ------------ ------------
NET INCOME (LOSS) $(3,798,000) $ 704,000 $(73,198,000)
============ ============ ============
BASIC AND DILUTED
EARNINGS PER SHARE $ (0.24) $ 0.04 $ (4.78)
============ ============ ============
See notes to consolidated financial statements.
TACO CABANA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Additional
Stock Common Stock Additional Treasury Stock
--------- --------------- Paid-in Retained -----------------
Amount Shares Amount Capital Earnings Shares Amount
BALANCE,
January 2,
1995 $- 15,561,162$156,000 $96,482,000 $19,014,000 - $ -
Options
exercised - 120,000 1,000 375,000 - - -
Tax
benefit
from stock
options - - - 97,000 - - -
Net loss - - - - (3,798,000) - -
--- ---------- -------- ---------- ----------- ------- ----------
BALANCE,
December 31,
1995 - 15,681,162 157,000 96,954,000 15,216,000 - -
Options
exercised - 25,375 - 119,000 - - -
Tax
benefit
from stock
options - - - 22,000 - - -
Net income - - - - 704,000 - -
--- ---------- ------- --------- ----------- ------- ---------
BALANCE,
December 29,
1996 - 15,706,537 157,000 97,095,000 15,920,000 - -
Purchase
of stock - - - - - 871,937 (3,561,000)
Net loss - - - - (73,198,000) - -
--- ---------- ------- ---------- ---------- -------- ----------
BALANCE,
December 28,
1997 $- 15,706,537$157,000 $97,095,000 $(57,278,000)871,937$(3,561,000)
=== ========== ======= ========== =========== ======= ===========
See notes to consolidated financial statements.
TACO CABANA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
----------
December 31, December 29, December 28,
1995 1996 1997
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $(3,798,000) $ 704,000 $(73,198,000)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and amortization 10,301,000 9,245,000 9,659,000
Deferred income taxes 386,000 450,000 (1,818,000)
Special charges 8,100,000 2,497,000 78,738,000
Reserve for notes and other
receivables 3,500,000 - -
Capitalized interest (117,000) (12,000) (147,000)
Deferred income and lease
payments (687,000) (278,000) (157,000)
(Increase) decrease in assets:
Receivables (953,000) 291,000 634,000
Inventory 2,000 (12,000) (656,000)
Prepaid expenses and other
assets (780,000) 203,000 (1,018,000)
Federal income taxes receivable
(2,415,000) 2,414,000 163,000
Other assets 526,000 393,000 58,000
Increase (decrease) in
liabilities:
Accounts payable and accrued
liabilities (5,237,000) (3,009,000) 2,328,000
Acquisition and closed
restaurant liabilities (3,052,000) (676,000) (1,656,000)
------------ ----------- -----------
Net cash provided by operating
activities 5,776,000 12,210,000 12,930,000
------------ ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and
equipment (18,738,000) (9,188,000) (16,812,000)
Proceeds from sales of property
and equipment 1,179,000 846,000 1,379,000
Investment in joint venture (186,000) (388,000) -
------------ ----------- -----------
Net cash used by investing
activities (17,745,000) (8,730,000) (15,433,000)
------------ ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of long-
term debt and draws on line of
credit 19,038,000 - 18,423,000
Principal payments under long-
term debt and line of credit (11,823,000) (5,398,000) (11,074,000)
Principal payments under capital
leases (148,000) (224,000) (1,694,000)
Purchase of treasury stock - - (3,561,000)
Exercise of stock options 376,000 141,000 -
------------ ----------- -----------
Net cash provided (used) by
financing activities 7,443,000 (5,481,000) 2,094,000
------------ ----------- -----------
NET DECREASE IN CASH (4,526,000) (2,001,000) (409,000)
CASH AND CASH EQUIVALENTS,
beginning of period 7,275,000 2,749,000 748,000
------------ ----------- ----------
CASH AND CASH EQUIVALENTS, end
of period $2,749,000 $ 748,000 $ 339,000
============ =========== ==========
(Continued)
TACO CABANA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUMMARY OF NON-CASH TRANSACTIONS
During 1996, the Company closed one restaurant and charged its
net book value of $139,000 to acquisition and closed restaurant
liabilities.
During 1995, the Company closed four restaurants and charged
their net book value of $2.1 million to acquisition and closed
restaurant liabilities. Also, the Company sold three restaurants
to various franchisees in exchange for $1.2 million in notes
receivable during 1995. Capital leases in the amount of $405,000
were terminated due to the sale of one of these restaurants.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Year Ended
----------
December 31, December 29, December 28,
1995 1996 1997
Cash paid for interest, net
of interest capitalized $ 1,672,000 $ 1,144,000 $1,171,000
Cash received for income
taxes 1,126,000 2,504,000 4,000
Cash paid for income taxes 580,000 477,000 74,000
(Concluded)
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS
Nature of Operations - Taco Cabana, Inc. (the "Company")
operates a chain of Mexican patio style fast food restaurants
located primarily in the Southwestern United States. At
December 28, 1997, the Company owned and operated a total of
98 units, 96 under the "Taco Cabana" name and two under the
"Two Pesos" name. There were also 11 Taco Cabana franchise
units.
Principles of Consolidation - The consolidated financial
statements include all accounts of the Company and its
wholly-owned subsidiaries. All significant inter-company
balances and transactions have been eliminated.
Fiscal Year - The Company's accounting period is based upon a
52 or 53 week fiscal year ending on the Sunday closest to
December 31. The fiscal years 1995, 1996 and 1997 were
comprised of the 52 weeks ending December 31, 1995, December
29, 1996, and December 28, 1997, respectively.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Liquor Sales - To conform to state liquor laws, liquor
licenses are maintained and liquor sales are accounted for by
a separate liquor corporation. The liquor corporation pays
the Company a management fee based on liquor sales,
reimburses the Company for its share of operating costs, and
pays base and additional rent based on liquor sales. In
order to more accurately reflect restaurant operations, all
revenues and expenses relating to liquor sales have been
included in the consolidated financial statements of the
Company.
Inventory - Inventory is stated at the lower of cost using
the first-in, first-out method or market, and consists
primarily of food products, beverages and paper supplies.
Property and Equipment - Property and equipment is stated at
cost. Equipment and buildings under capital leases are stated
at the lower of the present value of minimum lease payments
or fair market value of the asset at the inception of the
lease. Depreciation and amortization are provided using the
straight-line method over the estimated useful lives of the
assets or the applicable lease term, if less.
The estimated useful lives used in computing depreciation and
amortization are as follows:
Furniture, fixtures and equipment 2-10 years
Buildings 20-30 years
Leasehold improvements 5-30 years
Maintenance and repairs are charged to expense as incurred;
improvements which increase the value of the property and
extend the useful life are capitalized.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS (Continued)
Intangible Assets - Goodwill, or the excess of acquisition
costs over the fair market value of the assets acquired and
liabilities assumed, is amortized using the straight-line
method over 25 to 40 years. The trade name and the rights to
the Taco Cabana name are amortized using the straight-line
method over 40 years. Non-compete agreements are amortized
using the straight-line method over their estimated useful
lives, ranging from five to fifteen years. Management
assesses the recoverability of goodwill on the basis of
actual and undiscounted, projected cash flows from the
restaurants acquired. Should projected cash flows not be
sufficient to recover the Company's investment, including any
recorded goodwill, management utilizes either a discounted
cash flow basis or other determination of current fair value,
in order to determine the amount of the impairment.
Franchise Income - The Company has sold franchises that give
the franchisees the right to operate Taco Cabana restaurants
in specified areas. Generally, each franchisee acquires the
right to open three or more restaurants. A development fee
is recognized as income when the agreement is signed, while
the franchise fee on each restaurant is deferred until the
opening of the franchised restaurant. In addition, the
franchise agreement requires a franchise royalty fee and an
advertising fee on gross sales; such fees are recorded as
income when earned. In some markets, franchisees pay an
additional percentage of gross sales for expanded media
coverage in their respective areas.
Concentrations of Credit Risk - Financial instruments that
potentially subject the Company to concentrations of credit
risk consisted principally of amounts due from franchisees
and receivables from credit card sales. These risks are
limited due to their geographic dispersion. The Company has
no significant concentrations of credit risk.
Income Taxes - Income taxes are recorded using a liability
approach based upon currently enacted tax rates. The effect
of future changes in tax laws will be recorded, when the laws
are enacted.
Earnings (Loss) Per Share - In February 1997, the Financial
Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per
Share", which requires presentation of basic and diluted
earning per share. Basic earnings per share is computed by
dividing income available to common shareholders by the
weighted average number of common shares outstanding for the
reporting period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted
into common stock. As required, the Company adopted the
provisions of SFAS No. 128 in the year ended December 28,
1997. All prior year weighted average and per share
information has been restated in accordance with SFAS No.
128. Outstanding stock options issued by the Company
represent the only dilutive effect reflected in diluted
weighted average shares.
Statements of Cash Flows - For purposes of reporting cash
flows, the Company considers all highly liquid debt
instruments with a remaining maturity at the date of purchase
of three months or less to be cash equivalents.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF
OPERATIONS (Continued)
Commitments and Contingencies - The Company does not
subscribe to worker's compensation insurance in its Texas
market. The Company accrues for claims based on historical
actual payments made for such claims and expenses, as well as
an evaluation of current and anticipated claims and expenses.
The Company does maintain an excess liability coverage which
management believes is adequate to cover any substantial
claims.
Stock-Based Compensation - The Company accounts for
stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board ("APB") No. 25,
Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted
market price of the Company's common stock at the date of
grant over the amount an employee must pay to acquire the
stock. The Company has adopted the disclosure requirements
of Statement of Financial Accounting Standards ("SFAS")
No. 123, Accounting for Stock-Based Compensation, as included
in Note 13.
Reclassifications - Certain reclassifications have been made
to the prior year's consolidated financial statements to
conform to the presentation and classification used in fiscal
1997.
2. SPECIAL CHARGES
During fiscal 1995, 1996 and 1997, the following special
charges are included in the Company's consolidated financial
statements:
Year Ended
----------
December 31, December 29, December 28,
1995 1996 1997
Special charge $8,100,000 $2,497,000 $78,738,000
Income tax benefit (3,000,000) (747,000) (3,018,000)
Impact on net income
(loss) 5,100,000 1,750,000 75,720,000
Impact on net income
(loss) per share $ 0.33 $ 0.11 $ 4.94
Fiscal 1997 - During the fourth quarter of fiscal 1997,
management made the decision to close the seven restaurants
in its Colorado market. As previously announced, the Company
committed substantial resources to this market during 1997 in
an attempt to reverse trends of poor sales and losses. The
desired results from the implementation of the plan were not
achieved and the decision to close the market was made.
These seven restaurants had total sales of approximately $3.0
million and operating losses of $2.1 million during the
approximately eleven months of 1997 that they were in
operation.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SPECIAL CHARGES (Continued)
Additionally, the Company continued to experience unfavorable
sales trends during 1997, concluding the year with comparable
restaurant sales declining 2.9%. However, during the first
six months of 1997, comparable restaurant sales declined
4.8%. This trend compelled management to continue its
evaluation of the operating model of the Company. During
this evaluation, management concluded that certain volumes
must be achieved in order to operate individual restaurants
in accordance with Company standards. These standards
include food quality, cleanliness, speed of service, and
profitability. Management reviewed all existing restaurants
to determine which restaurants could not reasonably be
expected to achieve these volume levels, generally annual
revenues of at least $1 million. This led to the decision to
close an additional ten restaurants.
Due to the significance of the closures described above,
management performed an evaluation of the recoverability of
all remaining assets as described in Statement of Financial
Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". Management concluded from the results of
this evaluation that a significant impairment of intangible
as well as long-lived assets was required to be recognized.
The impairment was reflective of a market value determined to
be less than the carrying value of approximately 40
restaurants, 31 of which were acquired. The assets were
tested for impairment by projecting cash flows for individual
restaurants based on recent results and trends specific to
that restaurant. The undiscounted projected cash flows for
each restaurant were compared to the carrying value for that
restaurant, including allocated goodwill, where applicable.
If the undiscounted cash flows were less than the carrying
value, an impairment was deemed to have occurred. The amount
of the impairment was determined by calculating the
difference between the present value of the projected cash
flows and the carrying value attributable to the specific
restaurant. The cash flows were discounted using the rate of
return the Company utilizes for approving new restaurant
construction. Such discounted cash flows are, in
management's opinion, the best estimate of the assets current
value. Considerable management judgment is necessary to
estimate future discounted cash flows. Accordingly, actual
results could vary significantly from management's estimates.
The process described above resulted in the Company's
recording a special charge during the fourth quarter of 1997
of $78.7 million pre-tax, $75.7 million after-tax, or $4.94
per share. This amount had the following components:
Impairment of intangible assets of $33.1 million and
impairment of long-lived assets of $22.1 million for restaurants
that will continue in operation, based on the SFAS 121 analysis
described above;
A provision of $23.3 million for the closure of seventeen
restaurants, including all of the restaurants in the Colorado
market. The amount was determined in accordance with SFAS 121
and is comprised of:
$13.3 million for the carrying value of the assets, net of
estimated proceeds of $1.5 million for the sale of restaurant
properties;
$9.0 million to record the estimated lease related
obligations for closed restaurants. This amount was determined
as the lesser of the present value of the monthly lease
commitments, net of expected sublease receipts, or lease
termination provisions;
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SPECIAL CHARGES (Continued)
$500,000 for severance and relocation benefits paid to
employees displaced by the restaurant closures;
$500,000 for the probable settlement of a franchisee lawsuit
related to the Colorado market.
The write-off of other assets totaling $200,000.
During 1997, the seventeen restaurants contributed a total of
$9.6 million in sales, and had operating losses totaling $2.5
million. In addition, the total amount of depreciation
recorded during 1997 relating to assets which were impaired
was approximately $2.5 million.
A total of approximately $473,000 of the amounts accrued had
been paid prior to December 28, 1997. It is currently
anticipated that payments of approximately $1.5 million will
be made under the lease obligations during 1998. It is also
anticipated that proceeds of approximately $1.5 million will
be realized due to the sale of closed restaurants, although
there can be no assurance of the particular price at which
any of such properties will be sold.
Fiscal 1996 - The Company has a 50% interest in a joint
venture which operated three restaurants in the Atlanta
market. During the fourth quarter of 1996, the Company
decided to write-down its investment in the joint venture and
accrue for certain costs associated with the closing of two
of the three restaurants operated by the joint venture. This
decision resulted in a special charge for $2.5 million
pre-tax, $1.7 million after-tax or $0.11 per share. The
special charge was comprised of the following:
Write-down of investment in joint venture $ 1,191,000
Reserve for notes and accounts receivable 268,000
Estimated lease obligations 632,000
Estimated legal and professional fees 245,000
Other costs 161,000
-----------
Total $ 2,497,000
===========
Subsequent to December 29, 1996, two of the three restaurants
in the Atlanta market were closed.
Fiscal 1995 - During the second quarter of 1995, a review of
all operations of the Company was performed. The review was
precipitated by a change in the Company's core markets,
including a decline in average unit volumes and
profitability, as well as a change in the Company's senior
management.
Comparable restaurant sales trends softened in the third and
fourth quarters of 1994, declining by about 2.9% in the third
quarter and 5.9% in the fourth quarter. The decrease
continued in the first quarter of 1995, when comparable
restaurant sales declined by approximately 10.1%. The
decline continued into the second quarter of 1995, which
finished with a decline of approximately 7.7%. This decline
in sales led to a decline in profitability.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SPECIAL CHARGES (Continued)
In late April 1995, Stephen Clark was hired as President and
Chief Operating Officer of the Company. After several weeks
of analyzing the trends and personnel, Mr. Clark led a
comprehensive review of the Company's operations. The
review, which took place during May and June 1995, included a
detailed review of the existing restaurants including their
sales and profitability trends, recent and future marketing
plans, development plans for new Company restaurants as well
as for franchisees; relationships with current franchisees;
and overhead components, including middle and senior level
management, office space, non-restaurant assets and bonus pay-
outs.
To reverse the adverse trends in operating results,
management began implementing a plan to improve the unit
level economics of the Company's restaurants. In particular,
the Company created several operations-related positions to
design and implement comprehensive labor management and
restaurant operating systems; increased the number of
operations supervisory positions thus lowering the average
number of restaurants each supervisor is responsible for, in
order to increase the effectiveness of such positions;
redirected its marketing program to increase focus on local
store marketing efforts and promotional-based advertising;
performed market research to enhance the effectiveness of the
Company's marketing programs and to provide improved market
data to aid in the design and location of future restaurants;
and revised its development criteria, including the
construction costs, design factors, menu strategy, and began
reviewing the possibility of alternative development (e.g.,
in-line and other non-traditional construction versus stand-
alone restaurants).
The review described above resulted in the decision to close
several restaurants, allow several franchise restaurants to
close or revert back to the Company's control, restructure or
forgive several franchise-related receivables, make several
management personnel changes, sell certain non-restaurant
assets, pay certain discretionary bonuses which related to
the prior year but were not going to be paid by prior
management, restructure the Company's marketing efforts, slow
all current Company and franchise development, and write-off
certain prepaid costs determined to no longer have future
value due to the changes that management planned to make.
These decisions resulted in the Company's recording a special
charge during the second quarter of 1995 of $8.1 million pre-
tax , $5.1 million after tax or $0.33 per share which was
comprised of:
Market valuation adjustments totaling $2.7 million resulting
from the decision to close six Company-owned restaurants and
dispose of those restaurant assets;
A provision of $1.2 million to record the estimated monthly
lease obligation, net of expected sublease receipts, for certain
other restaurants which have been closed or were to be closed;
Market valuation adjustments totaling $1.2 million to allow
for the disposition of certain non-restaurant capital assets,
including the Company's principal office and corporate airplanes
(most of which assets are owned by the Company, so that the
disposition of such assets will generate cash);
The accrual of $980,000 related to the severance of certain
contractual employment and consulting agreements and the payment
of relocation expenses for Mr. Clark and other new members of
management;
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SPECIAL CHARGES (Continued)
The write-off of $810,000 related to certain capitalized
media production assets which will no longer be utilized or were
deemed to no longer have value due to the change in the Company's
marketing philosophy described above;
The write-off of $370,000 in development costs associated
with the sites which were under development at the time of the
decision to slow development;
An accrual of $300,000 for the payment of certain
operational bonuses which are described above;
An accrual of $420,000 for certain employee litigation
claims;
An accrual of $120,000 for miscellaneous expenses.
As of December 28, 1997, the Company had closed all of the
six restaurants identified in the review above and paid costs
of approximately $1.3 million and $283,000 during 1996 and
1997, respectively, that were applied against amounts accrued
in the special charge. In addition, the Company sold a
portion of the non-restaurant assets discussed above charging
a loss of approximately $752,000 in 1996 to the related
accrual and generating cash of $788,000 and $603,000 in 1996
and 1997, respectively.
3. RESERVE FOR NOTES AND OTHER RECEIVABLES
During the second quarter of 1995, the decision was made to
reserve for notes and other receivables of $3.5 million pre-
tax. This reserve included $2.0 million for notes receivable
which were outstanding in connection with the sales of
restaurants to franchisees. The decision to reserve for
these notes was based on discussions held with the
franchisees during the second quarter of 1995 and a review of
their financial position. Three notes totaling $1.3 million
of this amount were reserved due to the fact that the
franchisee approached the Company during the second quarter
of 1995 and indicated that the devaluation of the Mexican
Peso in December 1994 had permanently harmed its restaurants
to an extent that they were going to close the restaurants.
These restaurants were all closed during 1995. The remaining
amount relates to a restaurant whose sales trends continue to
erode and there is substantial doubt as to the recoverability
of the balance. The reserve amounts were calculated by
reducing the outstanding note balances to the estimated value
of the underlying collateral and reserving the remaining
balance. The restaurants were all in Texas.
The remaining $1.5 million primarily relates to franchisee
receivables. Approximately $250,000 of this amount relates
to periodic franchise and royalty fees owed by the
franchisees noted above, including interest. An additional
$500,000 was reserved due to a franchisee's failure to meet a
contractual obligation and make payment on a development
agreement during the second quarter of 1995. Approximately
$350,000 of the amount relates to periodic royalty fees and
franchise fees from a franchisee with whom the Company had
been in discussions to acquire its restaurants. Due to the
Company's decision to slow all development, the Company broke
off these negotiations. The remaining balances, totaling
$400,000, include various types of receivables including
other franchise amounts, employee receivables and other
miscellaneous receivables.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consisted of the following:
December 29, December 28,
1996 1997
Trade receivables:
Royalties $ 668,000 $ 84,000
Other 451,000 356,000
Notes receivable - current
portion 250,000 109,000
Employees 18,000 2,000
------------- -----------
Total 1,387,000 551,000
Less allowance for doubtful
accounts (595,000) (49,000)
------------- -----------
Receivables, net $ 792,000 $ 502,000
============= ===========
Notes receivable - noncurrent:
Franchisees $ 1,470,000 $ 344,000
Other 4,000 -
------------- -----------
Total 1,474,000 344,000
Less allowance for
uncollectible notes (736,000) -
------------- -----------
Notes receivable, net $ 738,000 $ 344,000
============= ===========
Notes receivable from franchisees approximate fair value
because the underlying instruments have an interest rate that
approximates current market rates. The Company's allowance
for doubtful accounts is reflected as a reduction of
receivables in the consolidated balance sheets.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of the following:
December 29, December 28,
1996 1997
Property and equipment:
Land $20,507,000 $18,759,000
Furniture, fixtures and
equipment 48,504,000 39,627,000
Leasehold improvements 19,048,000 8,335,000
Buildings 16,587,000 13,159,000
Construction in progress 178,000 1,195,000
----------- -----------
104,824,000 81,075,000
Less accumulated depreciation
and amortization (20,348,000) (24,525,000)
----------- ----------
Total 84,476,000 56,550,000
----------- ----------
Property and equipment held
under capital leases:
Buildings 5,780,000 4,254,000
Less accumulated amortization (1,293,000) (1,264,000)
----------- -----------
Total 4,487,000 2,990,000
----------- -----------
Property and equipment, net $88,963,000 $59,540,000
=========== ===========
At December 28, 1997, the Company had five restaurants and
one office building held for sale. The total carrying amount
of these assets are $2.2 million which management estimates
to be the net proceeds from the disposition of these assets.
See Note 2.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consisted of the following:
December 29, December 28,
1996 1997
Intangible assets:
Goodwill $48,048,000 $ 16,270,000
Noncompetition agreements 2,500,000 1,421,000
Trade name 1,571,000 1,580,000
----------- ------------
52,119,000 19,271,000
Less accumulated
amortization (6,725,000) (7,978,000)
------------ ------------
Intangible assets, net $45,394,000 $ 11,293,000
=========== ============
Other assets:
Deposits $ 290,000 $ 214,000
Prepaid leases 208,000 -
Other 43,000 19,000
----------- ------------
Other assets $ 541,000 $ 233,000
=========== ============
7. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
December 29, December 28,
1996 1997
Closed restaurant obligations $ 845,000 $2,827,000
Payroll related 1,251,000
1,468,000
Property taxes 429,000 627,000
Employee injury 200,000 138,000
Restaurant expenses 91,000 297,000
Legal 188,000 332,000
Other 167,000 577,000
---------- ----------
Total $3,171,000 $6,266,000
========== ==========
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LEASES
Operating Leases - The Company leases restaurant facilities
under non-cancelable operating leases with initial terms
ranging from ten to twenty years with options to renew. The
future minimum lease commitments under all non-cancelable
lease obligations as of December 28, 1997 were as follows:
Years ending:
1998 $ 7,973,000
1999 7,753,000
2000 7,787,000
2001 7,763,000
2002 7,286,000
Thereafter 44,289,000
--------------
Total $ 82,851,000
==============
The total rental expense for operating leases was
approximately $6.9 million for 1995, 1996 and 1997, including
additional rents of approximately $467,000, $376,000 and
$354,000 for 1995, 1996 and 1997, respectively.
The Company remains contingently liable on two operating
leases which were assigned to the purchasers of units
previously sold or closed. Future minimum lease commitments
under these contingent obligations approximate $216,000 in
1998, and $936,000 in 1999 through 2002. Thereafter, the
total minimum lease payments are approximately $2.2 million.
The Company assesses the probability of its having to assume
primary liability under these assignments as part of its
ongoing assessment of franchisee relationships.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LEASES (Continued)
Capital Leases - The Company leases certain buildings under
capital lease agreements with third parties. The leases have
fifteen and twenty year terms. Future minimum lease payments
under the capital leases and the net present value of the
minimum lease payments at December 28, 1997 were:
Years ending:
1998 $ 441,000
1999 445,000
2000 445,000
2001 446,000
2002 446,000
Thereafter 1,660,000
-------------
Total minimum lease payments 3,883,000
Less amount representing interest at 9% to 13% 1,337,000
-------------
Net present value of minimum lease payments 2,546,000
Less current portion 189,000
-------------
Long-term portion of capital leases $ 2,357,000
=============
In addition to the minimum lease payments, several of the
leases have a contingent rental based on 5% to 6% of gross
sales, if such amounts exceed minimum rent. No payments have
been made under these agreements. Furthermore, certain
leases have been guaranteed by a stockholder of the Company.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. LONG-TERM DEBT
Long-term debt consisted of the following notes payable
bearing interest at the prime rate of 8.50% at December 28,
1997:
December 29, December 28,
1996 1997
Notes payable to a bank,
collateralized by certain
restaurant assets, due in
monthly installments of
principal and interest
through August 2004 $ 6,101,000 $ 10,521,000
Note payable to a bank,
unsecured, due in monthly
installments of principal
and interest through April
2000 2,189,000 1,777,000
Note payable to a
corporation, collateralized
by certain restaurants, due
in monthly installments of
principal and interest
through September 1998 513,000 256,000
----------- ------------
Total 8,803,000 12,554,000
Less current maturities 2,210,000 1,384,000
----------- ------------
Long-term debt, net $ 6,593,000 $ 11,170,000
=========== ============
The future minimum payments of long-term debt outstanding at
December 28, 1997 were as follows:
Years ending:
1998 $1,384,000
1999 1,188,000
2000 1,798,000
2001 922,000
2002 1,004,000
Thereafter 6,258,000
-----------
Total $12,554,000
===========
The amounts stated in the Company's consolidated balance
sheets for long-term debt approximate fair value because the
underlying note payable balance fluctuates frequently or it
is at a rate approximating current market rates.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. LINE OF CREDIT
During 1995, the Company signed two secured credit facilities
totaling $20.0 million including a $5.0 million revolving
line of credit. The commitments were initially due to expire
on January 31, 1999. Interest on funds borrowed under the
facilities are charged at the New York prime rate which was
8.50% at December 28, 1997. The credit facilities are
secured by the stock of a subsidiary company. The facilities
contain certain covenants, including cash flow to fixed
charges ratio, minimum net worth, debt to tangible net worth
ratio, and intangible assets to net worth ratio requirements.
During the year ended December 28, 1997, the Company was in
compliance with all such covenants. At December 28, 1997,
the Company had approximately $5.1 million available for cash
borrowings under these credit facilities.
On December 30, 1997, the credit facilities were amended and
increased to a total of $30.0 million. As part of the
amendment, the commitments were extended until December 31,
1999.
11. ACQUISITION AND CLOSED RESTAURANT LIABILITIES
The Company establishes acquisition liabilities, as
necessary, in connection with the purchase method of
accounting for restaurants and other assets it acquires.
Such liabilities are primarily related to leases that were at
terms less favorable than market rates prevailing at the
acquisition date and anticipated restaurant closure costs, if
any.
The liability established for leases in excess of the
prevailing market were based on current market rental rates
at the date of acquisition as compared to the terms of the
leases acquired. This liability is being amortized as a
reduction of occupancy expense over the remaining term of the
applicable leases. The total amount of this reserve was $1.8
million and $1.4 million, at December 29, 1996 and December
28, 1997, respectively. During 1996 and 1997, approximately
$157,000 and $203,000, respectively, of the balance was
amortized in this manner.
Acquisition liabilities includes reserves established for the
closure of certain acquired restaurants. These restaurants
were anticipated to be closed at the time of acquisition.
The amounts reserved were equal to the value assigned to the
building and equipment acquired, less any anticipated salvage
value, plus an amount estimated to terminate the lease prior
to its expiration date. The total amount of this reserve was
$2.4 million and $1.5 million at December 29, 1996 and
December 28, 1997, respectively. During 1996 and 1997,
approximately $1.7 million and $900,000, respectively, of
this reserve was utilized in the closure of restaurants. No
gain or loss was recorded in any of these transactions.
In 1997, as part of the special charge, the Company reserved
approximately $9.0 million for closed restaurant liabilities.
The amounts reserved were equal to the lesser of the present
value of the monthly lease commitments, net of expected
sublease receipts, or lease termination provisions. It is
currently anticipated that payments of approximately $1.5
million will be made under lease and other obligations during
1998. During 1997, approximately $473,000 of this reserve
was utilized in the closure of restaurants. No additional
gain or loss was recorded in connection with these closures
beyond amounts previously reserved.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and
diluted earnings per share:
Year Ended
----------
December 31, December 29, December 28,
1995 1996 1997
Numerator for basic
and diluted earnings
per share - net income
(loss) $(3,798,000) $ 704,000 $(73,198,000)
Denominator:
Denominator for basic
earnings per share -
weighted-average
shares 15,648,624 15,694,757 15,314,665
Effect of dilutive
securities -
Employee stock
options - 251,923 -
---------- ---------- ----------
Denominator for
diluted earnings per
share - adjusted
weighted-average and
assumed conversions 15,648,624 15,946,680 15,314,665
========== ========== ==========
Basic and diluted
earnings per share $ (0.24) $ 0.04 $ (4.78)
========== ========== ==========
For additional disclosures regarding outstanding employee
stock options, see Note 13.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCKHOLDERS' EQUITY AND STOCK OPTIONS
Stock Options - The Company has stock option plans (the
"Plans") for employees, outside directors, and advisors of
the Company covering 2,750,000 shares of the Company's common
stock. Options under such plans principally are exercisable
beginning one to ten years from the grant date. The Plans
terminate in 2000 and in 2004. The Plans are administered by
a committee of outside members of the Board of Directors. In
addition, certain directors were awarded non-qualified stock
options pursuant to the terms of separate compensation
agreements. At December 28, 1997, there were 534,283 shares
available for issuance upon exercise of options that may be
granted in the future. Options outstanding are as follows:
Weighted
Total Average
Options Exercise
Outstanding Price
Options outstanding, January 1, 1995 927,000 $ 11.80
Granted 938,125 5.41
Exercised (120,000) 3.14
Expired or canceled (692,000) 13.20
---------
Options outstanding, December 31, 1995 1,053,125 $ 6.40
Granted 231,250 6.30
Exercised (25,375) 4.85
Expired or canceled (147,500) 5.36
---------
Options outstanding, December 29, 1996 1,111,500 $ 6.18
Granted 379,750 4.63
Exercised - -
Expired or canceled (140,375) 8.57
---------
Options outstanding, December 28,1997 1,350,875 $ 5.64
=========
Options exercisable, December 28, 1997 979,756 $ 5.69
=========
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (Continued)
For the options outstanding at December 28, 1997, the
weighted average remaining life and exercise price of these
outstanding options were 14 months and $5.51, respectively.
In addition, the weighted average exercise price of options
granted during 1997 was $4.63.
SFAS No. 123, Accounting for Stock-Based Compensation, allows
entities to continue to use Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to
Employees. The Company has evaluated SFAS No. 123 and intends
to continue following APB Opinion No. 25. The pro-forma
compensation expense, net income (loss) and earnings (loss)
per share which were calculated as if SFAS No. 123 had been
applied are as follows:
Year Ended
----------
December 31, December 29,December 28,
Pro Forma 1995 1996 1997
Compensation expense $ 669,000 $ 741,000 $ 555,000
Net income (loss) (4,220,000) 237,000 (73,548,000)
Income (loss) per share $ (0.27) $ 0.01 $ (4.80)
The Black-Scholes option pricing model was used to determine
the above pro-forma information. The calculations relied upon
estimates of the volatility of the Company's stock and
expected dividends, as well as determinations of a risk-free
interest rate and expected life of the options. A volatility
rate of 49.0% was used for options granted prior to 1994,
37.5% was used for options granted during 1994, 36.0% was
used for options granted during 1995 through 1996 and 34.0%
was used for options granted during 1997. Dividends were
estimated at zero. The discount rate charged on loans to
depository institutions by the Federal Reserve Bank was used
as the risk-free interest rate. The discount rate was 5.0%
for all of 1997. The life of the Company's options range
from two to five years.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (Continued)
Preferred Stock Purchase Rights - In June 1995, the Company's
Board of Directors declared a distribution of one preferred
stock purchase right for each share of the Company's common
stock. The rights were distributed on June 20, 1995 to
stockholders of record as of the close of business on that
day. Each right will entitle the holder to buy 1/100 of a
share of a newly authorized Series A preferred stock at an
exercise price of $37.50 per right. The rights become
exercisable on the tenth day after public announcement that a
person or group has acquired 15% or more of the Company's
common stock. The rights may be redeemed by the Company
prior to becoming exercisable by action of the Board of
Directors at a redemption price of $0.01 per right. If the
Company is acquired in a merger or other business combination
transaction in which it is not the surviving corporation,
each right will entitle its holder to purchase stock of the
acquiring company having a market value of twice the exercise
price. In the event that the Company is the surviving
corporation, each right will entitle its holder to purchase
the Company's common stock having a market value of twice the
exercise price of each right. At December 28, 1997, there
were 14,834,600 rights outstanding.
Preferred Stock - In June 1995, the Company authorized
100,000 shares of Series A, preferred stock with a par value
of $0.01 per share. As of December 28, 1997, there were no
shares outstanding.
Treasury Stock - In April 1997, the Board of Directors
authorized the purchase in the open market of up to 1,500,000
shares of the Company's outstanding common stock. During
1997 the Company purchased 871,937 shares of its common stock
at a cost of $3,561,000, which are being held as treasury
stock.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. INCOME TAXES
The provision (benefit) for income taxes differs from the
amount computed using statutory rates as shown below:
Year Ended
----------
December 31, December 29, December 28,
1995 1996 1997
Federal income tax at
statutory rate $(2,049,000) $ 530,000 $(25,410,000)
State income taxes (87,000) 39,000 48,000
Goodwill and other (94,000) 285,000 4,819,000
Valuation allowance
on net deferred tax
asset - - 19,006,000
------------ ---------- -----------
Total $(2,230,000) $ 854,000 $(1,537,000)
============ ========== ===========
The provision (benefit) for income taxes is comprised of the
following:
Year Ended
----------
December 31, December 29, December 28,
1995 1996 1997
Current $(1,844,000) $ 404,000 $ 281,000
Deferred (386,000) 450,000 (1,818,000)
----------- ---------- -----------
Total $(2,230,000) $ 854,000 $(1,537,000)
=========== ========== ===========
Deferred income taxes and benefits are provided for
differences between the financial statement carrying amount
of existing assets and liabilities and their respective tax
bases. Significant deferred tax assets and liabilities are
as follows:
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. INCOME TAXES (Continued)
December 29, December 28,
1996 1997
Current:
Deferred Federal Tax Assets:
Workmen's compensation claims $ 194,000 $ 494,000
Investment in joint venture 879,000 718,000
Accounts receivable 211,000 17,000
Charitable contributions 32,000 34,000
Net operating loss carryforward 558,000 -
Accrued vacation - 38,000
-------------- -----------
Total 1,874,000 1,301,000
-------------- -----------
Deferred Federal Tax Liabilities-
Pre-opening costs (46,000) (119,000)
State taxes (1,000) -
-------------- -----------
Total (47,000) (119,000)
-------------- -----------
Net Current Deferred Tax Asset $ 1,827,000 $1,182,000
============== ===========
Noncurrent:
Deferred Federal Tax Assets:
Net operating loss carryforward $ 1,598,000 $5,601,000
Tax credit carryforward 627,000 627,000
Notes receivable 261,000 -
Media and production 202,000 194,000
Closed stores (83,000) 916,000
State taxes 160,000 -
Alternative minimum tax 1,056,000 1,258,000
Production costs - 79,000
Deferred rent (1,505,000) 791,000
Other - Special charge - 12,713,000
------------- -----------
Total 2,316,000 22,179,000
------------- -----------
Deferred Federal Tax
Liabilities:
Fixed and intangible assets (5,961,000) (4,312,000)
Other reserves - (43,000)
------------- ----------
Total (5,961,000) (4,355,000)
------------ ----------
Net Noncurrent Deferred Tax
Asset (Liability) (3,645,000) 17,824,000
Valuation Allowance - (19,006,000)
------------- ----------
Net Deferred Tax Liability $(1,818,000) $ -
============= ==========
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. INCOME TAXES (Continued)
At December 28, 1997, the Company had net operating loss,
alternative minimum tax and general business tax credit carry-
forwards of approximately $16 million, $1.3 million and
$627,000, respectively. A portion of the above carry-
forwards resulted from the acquisition of Two Pesos; the
Company was allowed to utilize the net operating loss of $5.4
million and tax credit carry-forwards of $178,000 of Two
Pesos that existed at the date of acquisition. However,
these carry-forwards may only offset the post-acquisition
taxable income and tax liability of the Company's subsidiary
that acquired Two Pesos. In addition, because of the change
in ownership, the net operating loss carry-forward
utilization is further limited to approximately $953,000 per
year, and the tax credit carry-forward acquired from Two
Pesos is limited each year to the tax equivalent of any
remaining portion of the net operating loss limitation. The
net operating loss and tax credit carry-forwards begin to
expire in 2003 and 2000, respectively.
The alternative minimum tax credit carry-over and the
remaining general business credit carry-over resulted from
prior-year losses which were carried back three preceding tax
years. These credits are available to offset future taxable
income. The general business credit begins to expire in
2007. The alternative minimum tax credit has no expiration
date.
The above amounts are included as deferred tax assets within
this footnote and have been fully reserved in accordance with
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes".
15. LITIGATION SETTLEMENT AND LEGAL PROCEEDINGS
On July 24, 1996, the Company approved the settlement of A.L.
Park, et al v. Taco Cabana, Inc., et al., a suit originally
filed in September 1995 seeking status as a class action. As
a result thereof, the Company recorded a charge of $3.4
million pre-tax, $2.2 million after-tax, or $0.14 per share,
during the second quarter of fiscal 1996. Under the terms of
the settlement, the plaintiffs received a total of $6.0
million of which the Company's insurance carrier paid $3.05
million. Additionally, the Company has paid approximately
$450,000 for legal and related expenses incurred in
connection with the settlement
In addition, the Company is a party to routine negligence or
employment-related litigation in the ordinary course of its
business. No such pending matters, individually or in the
aggregate, are deemed to be material to the results of
operations or financial condition of the Company.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. QUARTERLY FINANCIAL DATA (Unaudited)
Quarter Ended
-------------
March 31, June 30, September 29, December 29,
1996 1996 (1) 1996 1996 (1)
Total
revenues $31,264,000 $35,308,000 $33,810,000 $31,814,000
Gross profit 21,562,000 24,234,000 23,040,000 22,024,000
Net income
(loss)
applicable
to common
stock 734,000 (553,000) 1,220,000 (698,000)
Basic and
diluted
earnings per
share (2) 0.05 (0.04) 0.08 (0.04)
Quarter Ended
-------------
March 30, June 29, September 28, December 28.
1997 1997 1997 1997 (1)
Total
revenues $30,186,000 $34,200,000 $35,051,000 $32,765,000
Gross profit 21,024,000 23,628,000 24,178,000 22,704,000
Net income
(loss)
applicable
to common
stock 556,000 876,000 562,000 (75,193,000)
Basic and
diluted
earnings per
share (2) $ 0.04 $ 0.06 $ 0.04 $ (5.07)
(1) See Notes ,2, 3 and 15 for discussion of charges recorded in these
quarters.
(2) The earnings per share amounts have been restated as required to
comply with Statment of Financial Standards No. 128 (SFAS 128),
"Earnings Per Share". For further discussion of earnings per share
and the impact of SFAS 128, see Note 12.
EXHIBIT INDEX
Exhibit
No.
21. Subsidiaries of the Registrant
23. Consent of Deloitte & Touche LLP
27. Financial Data Schedule
Subsidiaries of Registrant Exhibit 21
TP Acquisition Corp., a Texas corporation
Get Real, Inc., a Delaware corporation
Texas Taco Cabana, L.P., a Texas limited partnership
T. C. Management Inc., a Delaware corporation
T.C Lease Holdings III, V and VI, Inc., a Texas corporation
Taco Cabana Multistate, Inc., a Delaware corporation
Colorado Cabana, Inc., a Colorado corporation
Taco Cabana Atlanta, Inc., a Delaware corporation
Taco Cabana Investments, Inc., a Delaware corporation
Taco Cabana Management, Inc., a Texas corporation
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration
Statements No. 33-56438 and No. 33-98124 of Taco Cabana,
Inc. on Form S-8 of our report dated February 2, 1998
appearing in this Annual Report on Form 10-K of Taco Cabana,
Inc. for the year ended December 28, 1997.
DELOITTE & TOUCHE LLP
San Antonio, Texas
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> DEC-28-1997
<CASH> 339,000
<SECURITIES> 0
<RECEIVABLES> 895,000
<ALLOWANCES> 595,000
<INVENTORY> 2,105,000
<CURRENT-ASSETS> 4,850,000
<PP&E> 85,329,000
<DEPRECIATION> 25,789,000
<TOTAL-ASSETS> 76,260,000
<CURRENT-LIABILITIES> 16,492,000
<BONDS> 0
0
0
<COMMON> 157,000
<OTHER-SE> 36,256,000
<TOTAL-LIABILITY-AND-EQUITY> 76,260,000
<SALES> 131,857,000
<TOTAL-REVENUES> 132,203,000
<CGS> 40,668,000
<TOTAL-COSTS> 76,837,000
<OTHER-EXPENSES> 122,000,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,137,000
<INCOME-PRETAX> (74,735,000)
<INCOME-TAX> 1,537,000
<INCOME-CONTINUING> (73,198,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (73,198,000)
<EPS-PRIMARY> (4.78)
<EPS-DILUTED> (4.78)
</TABLE>
