UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Mark One
X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended January 3, 1999
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-20716
TACO CABANA, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2201241
(State or other jurisdiction (IRS employer identification no.)
of incorporation or organization)
8918 Tesoro Drive, Suite 200
San Antonio, Texas 78217
(Address of principal executive offices, including ZIP Code)
(210) 804-0990
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Each Class
Common Stock, $0.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __
As of March 1, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant, based on the last sale price of the Common
Stock of the Registrant as quoted on the NASDAQ National Market was $84,015,553
(for purposes of calculating this amount, only directors, officers, and
beneficial owners of 5% or more of the capital stock of the Registrant have been
deemed affiliates).
The number of shares of the Common Stock of the Registrant outstanding as
of March 1, 1999 was 13,354,200.
FORM 10-K INDEX
PART I
ITEM 1. BUSINESS............................................ 3
ITEM 2. PROPERTIES.......................................... 10
ITEM 3. LEGAL PROCEEDINGS................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS................................. 11
ITEM 6. SELECTED FINANCIAL DATA............................. 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................. 15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK................................................ 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......... 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................. 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.. 27
ITEM 11. EXECUTIVE COMPENSATION.............................. 30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.......................................... 35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...... 36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K................................. 37
PART I
ITEM 1. BUSINESS
General
Taco Cabana, Inc., a Delaware corporation (the "Company"), pioneered the
Mexican patio cafe concept with its first restaurant in 1978 and, as of January
3, 1999, operates and franchises a total of 112 such restaurants system-wide.
Of these, the Company owns and operates 102 Taco Cabana restaurants and
franchisees of the Company own and operate the remaining 10 Taco Cabana
restaurants. The Company's restaurants (including franchises) are located
primarily in Texas, and are also located in Georgia, Indiana, New Mexico, and
Oklahoma.
Taco Cabana restaurants feature generous portions of fresh, premium quality
Tex-Mex and traditional Mexican style food at an exceptional value. The
restaurants provide interior, semi-enclosed and patio dining areas with a
festive Mexican theme. Menu items include flame-grilled beef and chicken
fajitas served on sizzling iron skillets, "Chicken Flameante"TM (a marinated
rotisserie chicken), quesadillas, traditional Mexican and American breakfasts,
other Tex-Mex dishes and fresh, hot flour tortillas. Unlike many of its
competitors, the Company makes most menu items fresh daily in each of its
restaurants.
Taco Cabana Food and Pricing Philosophy
The Company is committed to selling premium food which it believes to be
among the highest quality of any chain in the restaurant industry. This process
begins with the selection of the freshest available ingredients. The Company's
menu items are prepared strictly in accordance with authentic and well-tested
recipes. Taco Cabana restaurants also offer a variety of beverage choices,
including margaritas and beer. Alcoholic beverages currently account for less
than 5% of gross sales.
The Ingredients. The Company has implemented a purchasing program
structured to ensure that all of the ingredients used in the preparation of the
Taco Cabana menu items are of the highest quality. The Company regularly
inspects its vendors to ensure both that the products purchased by the Company
conform to its standards, and that the prices offered are competitive. The meat
used in making fajitas as well as most other principal ingredients are purchased
through supply contracts to ensure availability and minimize the risks of price
fluctuation.
The Preparation. The menu items offered at any Taco Cabana restaurant are
prepared at that restaurant from fresh meat and produce ingredients delivered by
suppliers to most restaurants at least three times each week. The Company is
committed to differentiating itself from other quick service competitors by
utilizing fresh, high quality ingredients as well as the preparation of most
items "from scratch". The Company uses a number of pre-prepared items and is
currently testing other pre-prepared items in order to simplify restaurant
operations.
Pricing Philosophy. The Company offers value by pricing its menu items
below the price of comparable menu items in sit-down Mexican restaurants.
Although Taco Cabana's food costs (as a percentage of sales) are generally
higher than quick service chains as a result of the premium quality of
ingredients used, the Company believes that this point of differentiation
contributes to the achievement of average unit volumes in excess of most quick
service restaurants.
Taco Cabana Restaurants
Restaurant Layout. Taco Cabana restaurants average approximately 3,200
square feet (exclusive of the exterior dining area) and provide seating for
approximately 80 customers, with additional patio seating for approximately 50
customers.
Taco Cabana restaurants are typically a vivid pink color (with painted and
neon accents), conveying a distinctive Mexican theme and permitting easy
identification by passing motorists. Inside, exposed elements of the kitchen
display the freshness of Taco Cabana's food and the authenticity of its
preparation. Taco Cabana's restaurant design enables customers to observe fresh
fajitas cooking on a charcoal grill, a machine making fresh, hot flour
tortillas, Chicken FlameanteTM rotating on spits and the preparation of other
food items. Upon entry, the customer places an order selected from an overhead
menu board, proceeds down a service line to where the order is picked up, and
then passes a Salsa Bar en route to the dining area. The distinctive Salsa Bar
offers Taco Cabana customers freshly prepared, authentic Tex-Mex ingredients
such as Salsa de Fuego (made with charred peppers and tomatoes), pico de gallo
and salsa (all "made from scratch" throughout the day at each restaurant), and
cilantro, pickled jalapeno slices, crisp chopped onions, and fresh sliced limes.
According to the season, time of day and personal preference, the customer may
choose to dine either in the restaurant's brightly colored and festive interior
dining area or the semi-enclosed or outdoor patio areas. The addition of
traditional and contemporary Latin music, tropical landscaping, and authentic
decorative artifacts create an overall dining environment which the Company
believes is both attractive and festive. Most Taco Cabana restaurants also
offer drive-thru service.
The Company began constructing its new prototype restaurant in 1996. The
prototype incorporates several new and different features that set it apart from
Taco Cabana restaurants previously constructed. The new prototype features a
rounded front, as well as Southwest accents such as a clay tile roof, heavy wood
beams and a trellis that shades the patio area, and adds the use of bright
colors outside and inside, including colored tiles, doors, windows, and awnings.
Corrugated metal wall panels, aged wood finishes, and distressed stainless steel
counter tops are featured inside, all of which are intended to replicate an old
Mexican cafe. Bright neon on the exterior of the building broadcasts the unique
menu items served at Taco Cabana. Favorite features retained from the original
Taco Cabana restaurants include working garage doors that open up the dining
area to the outside when weather permits, display cooking where the guest can
see the food being prepared, liberal use of the Taco Cabana's signature pink
color, and the self-serve fresh Salsa Bar. The prototype was designed to reduce
overall construction costs, improve functional efficiency, allow for better
guest service, and enhance Taco Cabana's unique patio cafe image. Since November
1996, the Company has opened 17 restaurants under this new design.
During 1997, the Company initiated a re-image program for existing
restaurants which incorporates many of the features of the new prototype design.
As of January 3, 1999, 41 restaurants were re-imaged or converted to the new
prototype design, bringing a system-wide total of 57 restaurants with the new
design. The Company expects to re-image 30 to 35 restaurants during 1999.
Restaurant Locations. The following table sets forth the number of
restaurants as of January 3, 1999 by area of dominant influence ("ADI") for
television and radio advertising:
ADI* Company-OwnedFranchised(1) Total
San Antonio 32(2) 0 32
Houston 28(3) 0 28
Austin 15 0 15
Dallas/Fort Worth 18 0 18
El Paso 7 0 7
Lubbock 1 0 1
Atlanta, Georgia 0 1 1
Bryan/College Station 0 2 2
Tulsa, Oklahoma 1 0 1
Waco 0 1 1
Albuquerque, New Mexico 0 2 2
Amarillo 0 2 2
Corpus Christi 0 1 1
Ft. Wayne, Indiana 0 1 1
--- --- ---
Total 102 10 112
=== === ===
___________________________________________________________________________
* All of the ADIs are located in Texas except as otherwise indicated.
(1) Represents franchised Taco Cabana restaurants. Does not include
licensed Two Pesos franchises.
(2) Includes one HEB grocery store unit.
(3) Includes three mall-unit Taco Cabana restaurants.
Customer Convenience
The Company operates its restaurants to enable customers to dine-in or
take-out, as they choose. In most cases, the restaurants also provide the
convenience of drive-thru windows which, in the aggregate, account for
approximately 40% of the Company's sales. A majority of the restaurants are
open 24 hours a day. This strategy is continually evaluated for economic
viability on a restaurant by restaurant basis.
Customer Service
The Company is committed to consistently providing personal, attentive and
efficient service in order to attract repeat customers. Restaurant and shift
managers are encouraged to follow a "front of the house" style of management,
which requires that the managers spend most of their time attending to customers
at the register, drive-thru windows or in the dining areas.
Marketing
The Company utilizes an integrated, multi-level marketing approach which
includes periodic company-wide promotions, direct mail, in-store promotions,
local store marketing, and other strategies, including the use of radio
advertising in its major markets. The Company expects to execute this plan
utilizing a marketing budget of approximately 3.75% of sales.
Expansion
The Company's near-term strategy is to achieve a dominant or leading
position among quick service Mexican food restaurants in each of its targeted
principal markets in order to obtain marketing and operating efficiencies. The
Company seeks to implement this strategy by selectively adding restaurants in
existing markets in order to expand its existing market share. In accordance
with this strategy, the Company may locate new restaurants in close proximity to
existing Taco Cabana restaurants in order to provide the Company with increased
market penetration and market profitability, even if this may result in a
reduction in comparable store sales volumes of certain restaurants.
Additionally, the Company is planning to expand into new markets, beginning with
the Oklahoma City market in 1999. The Company's 1999 objective is to open ten to
twelve freestanding restaurants in existing markets and in Oklahoma City.
The Company believes the site selection process is very important in
determining the potential success of a particular restaurant and senior
management devotes substantial time and resources to analyzing each prospective
site. The Company focuses on selecting locations which clear stringent hurdles
with regards to the projected return on initial investment. A variety of
factors are considered in the site selection process, including local market
demographics, site visibility and accessibility (including drive-by traffic and
ease of drive-thru accessibility), proximity to competitive operations, and
proximity to generators of potential customers, such as major retailers, retail
centers, medical or hospital facilities, office complexes, hotel concentrations,
and stadiums, arenas, theaters or other entertainment centers. The Company
currently uses a software model to assist in the evaluation of potential
locations. The software model was developed by the Company using the services
of a consulting firm during 1996, and significantly upgraded and enhanced during
1998.
Restaurant Operations and Management
The Company seeks to maintain quality and consistency in its restaurant
operations by carefully training and supervising personnel and establishing
exacting standards relating to food quality, friendliness of service and
cleanliness of the restaurant facility. It is the Company's policy to ensure
that customers are served quickly and that customers receive orders correctly
filled and delivered in a courteous manner.
The Company maintains financial and accounting controls for each of its
restaurants through use of centralized accounting and management information
systems. The Company has installed throughout all of its company-owned
restaurants an in-store computer-based management support system that allows for
daily polling of sales and labor information. Additionally, a separate
management information system has been developed and implemented in all
company-owned restaurants which provides for daily polling of food costs. This
system records the receipt of inventory through the scanning of bar-codes and
integrates with the point of sale system thus providing immediate cost of sales
data and inventory records. The system is designed to improve food cost
management, provide corporate management quicker access to financial data and
reduce the time devoted by its restaurant managers to administrative
responsibilities.
Operations are managed by restaurant general managers who complete an
intensive training program during which they are instructed in all areas of Taco
Cabana's restaurant operations. Such areas of training include food
preparation, customer service, cost controls, facility maintenance,
communications skills and employee relations. Restaurant general managers are
overseen by division leaders (individuals with responsibility for the operation
of multiple restaurants within a market) and by regional Vice Presidents of
Operations. An incentive plan has been established in which all restaurant and
division leaders participate. Awards under the incentive plan are tied to the
achievement of specified sales, profitability and qualitative performance goals.
Franchising Program
At January 3, 1999, the Company had five franchisees operating a total of
10 Taco Cabana restaurants. The Company did not enter into any new franchise
agreements during 1998 and does not currently anticipate new franchisee signings
during 1999.
Competition
Taco Cabana's restaurants compete both with fast food operations and with
traditional sit-down Mexican restaurants. Management believes that the
Company's combination of freshly prepared food, distinctive ambiance, and
superior service help to distinguish Taco Cabana restaurants from fast food
operations, while Taco Cabana's price-value relationship differentiates its
restaurants from more expensive sit-down or casual dining restaurants.
The food service industry is intensely competitive with respect to price,
service, location and food quality, and there are many well-established
national, regional and locally-owned competitors in the Company's market areas,
some of which have greater financial and other resources than the Company. Some
of such competitors have also been in existence longer than the Company and are
better established in areas where Taco Cabana's restaurants are or will be
located. The restaurant business is often affected by changes in consumer
tastes, economic conditions, population, traffic patterns, availability of
employees and cost increases.
Employees
At January 3, 1999, the Company employed approximately 3,200 persons, of
whom approximately 3,100 were operations employees and the remainder were
corporate personnel. Most employees, other than restaurant management and
corporate personnel, are paid on an hourly basis. The Company believes that it
provides working conditions and wages that are comparable with those of other
companies in the restaurant industry operating in its market area. The
Company's employees are not covered by a collective bargaining agreement.
The Company does not subscribe to any workers' compensation insurance
program in the State of Texas, where the great majority of its company-owned
restaurants are currently located. As such, it is subject to negligence actions
by its employees and is not able to assert contributory negligence and certain
other defenses. In addition, employees might be able to recover certain types of
damages that would not be available to them if the Company subscribed to a
workers' compensation insurance program. The Company self-insures a portion of
such risk, and carries excess liability coverage that it believes is adequate.
This practice has not had any material adverse effect upon the Company's
operations or financial position since it was adopted in November 1988.
Trademarks, Service Marks and Trade Dress
The Company regards its trademarks, service marks and trade dress as having
significant value and as being important to its marketing efforts. The Company
has registered its principal Taco Cabana logo and design with the United States
Patent and Trademark Office on the Principal Register as a service mark for its
restaurant services, has secured or has applied for state and federal
registrations of several other advertising or promotional marks, including
variations of its principal mark and the service mark "Get Real", and has
applied for registrations in foreign countries of its principal mark and several
other marks. The Company's policy is to pursue registration of its principal
marks and to oppose strenuously any infringement of its marks or trade dress.
Government Regulation
Each company-owned and franchised restaurant is subject to regulation by
federal agencies and to licensing and regulation by state and local health,
sanitation, safety, fire and other departments relating to the development and
operation of restaurants, including regulations relating to alcoholic beverage
sales, environmental, building and zoning requirements, preparation and sale of
food, and laws governing the Company's relationship with its employees,
including minimum wage requirements, overtime, working conditions and
citizenship requirements. Difficulties or failures in obtaining the required
licenses or approvals could delay or prevent the opening of new restaurants.
The Company is subject to Federal Trade Commission ("FTC") regulation and
state laws which regulate the offer and sales of franchises. The Company may
also become subject to state laws which regulate substantive aspects of the
franchisor-franchisee relationship. The FTC requires the Company to furnish to
prospective franchisees a franchise offering circular containing prescribed
information. A number of states in which the Company might consider franchising
also regulate the offer and sale of franchises and require registration of the
franchise offering with state authorities. State laws that regulate the
franchisor-franchisee relationship presently exist in a substantial number of
states and bills have been introduced in Congress and other states from time to
time which would provide for regulation of the franchisor-franchisee
relationship in certain respects. Certain of such laws may restrict a
franchisor in the termination of a franchise agreement, although these
provisions have not had a significant effect on the Company's operations.
The Company is subject to the Fair Labor Standards Act and various state
laws governing such matters as minimum wage requirements, overtime and other
working conditions and citizenship requirements. A significant number of the
Company's food service personnel are paid at rates related to the federal
minimum wage and increases in the minimum wage will increase the Company's labor
costs. The Company is subject to the Texas "dram-shop" laws and may be subject
to the "dram-shop" laws of certain other states. Dram-shop laws provide a
person injured by an intoxicated person the right to recover damages from an
establishment that wrongfully served alcoholic beverages to the intoxicated
person. The Company is also subject to the Americans with Disabilities Act of
1990, which, among other things, may require certain minor further renovations
to existing restaurants to meet federally mandated access and use requirements.
The cost of these renovations is not expected to be material to the Company.
The Company believes that it is operating in substantial compliance with
applicable laws and regulations governing its operations.
Geographic Concentration
During fiscal 1998, approximately 99% of the Company's net sales were
derived from restaurants located in the State of Texas. As a result, the
Company's results of operations may be materially affected by weather, economic
or business conditions within these markets. Also, given the Company's present
geographic concentration, adverse publicity relating to Taco Cabana restaurants
could have a more pronounced adverse effect on the Company's overall sales than
might be the case if the Company's restaurants were more broadly dispersed.
ITEM 2. PROPERTIES
The Company currently owns 31 of its restaurant sites and owns an
additional nine buildings on properties with ground leases. The Company leases
its remaining restaurant locations. The Company may purchase a number of its
current and future restaurant locations where it is cost effective to do so.
Substantially all of Taco Cabana's restaurants are free-standing buildings. The
Company has typically needed 120 days after the signing of a lease and obtaining
required permits to complete construction and open a new restaurant. Additional
time is sometimes needed to obtain certain government approvals and licenses,
such as liquor licenses.
Land leased by the Company is typically leased under "triple net" leases
that require the Company to pay real estate taxes and utilities and maintain
insurance with respect to the premises and, in many cases, to pay contingent
rentals based on sales in excess of specified amounts. The leases have initial
terms of 10 to 20 years with options to renew for additional periods which range
from 5 to 15 years. Approximately 92% of the Company's current leases have
remaining terms or renewal options extending more than five years from January
3, 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to franchise, routine negligence or
employment-related litigation in the ordinary course of its business. No such
pending matters, individually or in the aggregate, are deemed to be material to
the results of operations or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter during the fourth quarter of the
Company's fiscal year ended January 3, 1999 to a vote of the Company's
stockholders, through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock, $.01 par value, of the Company ("Common Stock") began
trading on the NASDAQ National Market on October 16, 1992, the effective date of
the Company's initial public offering. Prior to October 16, 1992, there was no
public market for the Common Stock.
The table below sets forth, for the periods indicated, the reported high
and low last sale prices of the Company's Common Stock, as reported on the
NASDAQ National Market:
High Low
Fiscal Year Ended January 3, 1999
Quarter Ended January 3, 1999 $ 7 3/4 $ 4 7/8
Quarter Ended September 27, 1998 6 5/8 4 7/8
Quarter Ended June 28, 1998 7 1/8 5 3/4
Quarter Ended March 29, 1998 7 1/16 4 7/16
Fiscal Year Ended December 28, 1997
Quarter Ended December 28, 1997 $ 5 11/16 $ 4 1/16
Quarter Ended September 28, 1997 5 3/4 4
Quarter Ended June 29, 1997 5 1/2 3 15/16
Quarter Ended March 30, 1997 7 3/8 4 3/4
As of March 1, 1999, the last reported sale price of the Common Stock on
the NASDAQ National Market System was $8 11/16 per share. As of March 1, 1999,
there were approximately 900 record holders of Common Stock.
On June 9, 1995 the Board of Directors declared a dividend distribution of
Preferred Share Purchase Rights. The Rights may be redeemed by the Board of
Directors for one cent per Right prior to the close of the tenth day (subject to
extension by the Board of Directors to the 30th day) after a person or group
acquires (or has obtained the right to acquire or announces an intent to
acquire) through open-market purchases, a tender offer or otherwise, 15% or more
of the Company's shares. For a 120-day period after any date of a change
(resulting from a proxy or consent solicitation) in a majority of the Board of
Directors in office at the time the solicitation was commenced, the Rights may
only be redeemed if there are directors then in office who are continuing
directors and the Board of Directors of the Company, with the concurrence of a
majority of such continuing directors, determine that the redemption is in the
best interest of the Company and its stockholders.
The Rights were issued on June 20, 1995 to stockholders of record on that
date and will expire in ten years. The Rights are not currently exercisable and
automatically trade with the common shares. However, upon the earlier of (i) ten
days after a person or group acquires or has obtained the right to acquire 15%
or more of the Company's shares, or (ii) ten business days after a person or
group commences or discloses an intent to commence a tender or exchange offer
the consummation of which would result in such person or group owning 15% or
more of the shares, and subject to the Board's right to set a later date (which
date will not be later than the 30th day after an event described in (i) or
(ii)), the Rights will become exercisable and separate certificates representing
the Rights will be distributed.
When the Rights first become exercisable, a holder will be entitled to buy
from the Company one one-thousandth of a share of a new series of participating
cumulative preferred stock for $37.50.
If the Company is involved in a merger or other business combination with,
or 50% or more of its assets or earning power are sold to, a publicly-traded
person or group that has acquired 15% or more of the Company's shares, the
"flip-over" provision of the Rights will be triggered and the Rights will
entitle a holder to buy a number of shares of common stock of the acquiring
company having a market value of twice the exercise price of each Right. If the
acquiring person or group is not publicly traded, the "flip-over" provision of
the Rights will be triggered and the Rights will entitle the holder to buy at
the exercise price, at the holder's option (i) the number of shares of the
surviving company having a book value of twice the exercise price, (ii) the
number of shares of the acquiring company having a book value of twice the
exercise price, or (iii) the number of shares of any publicly traded affiliate
of the acquiring company having a market value of twice the exercise price.
If any person or group acquires or has obtained the right to acquire 15% or
more of the Company's outstanding Common Stock, the "flip-in" provision of the
Rights will be triggered and the Rights will entitle a holder (other than such
person or any member of such group) to buy that number of one one-thousandths of
a preferred share equivalent to the number of shares of Common Stock of the
Company having a market value of twice the exercise price of each Right.
Following the acquisition by any person or group of 15% or more of the
Company's Common Stock, the Board of Directors will also have the ability to
exchange the Rights, in whole or in part, for consideration per Right consisting
of one-half of the securities that would be issuable at such time upon the
exercise of one Right or cash equal to the exercise price of the Right.
In addition to authorizing the Stockholder Rights Plan, the Board
authorized a new series of participating cumulative preferred stock purchasable
upon exercise of the Rights. The shares of the new series of participating
cumulative preferred stock will be nonredeemable. Each preferred share will be
entitled to a quarterly dividend equal to the greater of $.01 per share or 1,000
times any dividend declared on the common shares during such quarter. In the
event of liquidation, the holders of the preferred shares will be entitled to
receive an aggregate liquidation payment equal to the greater of $.01 per whole
share or an amount per share equal to 1,000 times the payment made per share of
Common Stock. Each preferred share will have 1,000 votes, voting together with
the common shares. Finally, in the event of any merger, consolidation or other
transaction in which common shares are exchanged, each preferred share will be
entitled to receive 1,000 times the amount received per common share. These
rights are protected by customary anti-dilution provisions. In the event of
issuance of preferred shares upon exercise of the Rights, in order to facilitate
trading a depository receipt may be issued for each one one-thousandth of a
preferred share. The dividend, liquidation and voting rights, and the non-
redemption feature, of the preferred shares are designed so that the value of
the one-thousandth interest in a preferred share purchasable with each right
will approximate the value of one share of Common Stock.
The Company has never declared or paid cash dividends on the Common Stock
or any of its other securities. The Company presently intends to retain all
earnings for the operation and development of its business and does not
anticipate paying any cash dividends on the Common Stock in the foreseeable
future. Any future determination as to the payment of cash dividends will
depend on a number of factors, including future earnings, capital requirements,
the financial condition and prospects of the Company and present restrictions.
under credit facilities, as well as such other factors as the Board of Directors
may deem relevant. There can be no assurance that the Company will pay any
dividends in the future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data, which set forth certain financial
information with respect to the Company, have been derived from the financial
statements of the Company. The financial statements of the Company for each of
the fiscal years in the five-year period ended January 3, 1999 have been audited
by Deloitte & Touche LLP, independent certified public accountants. The
following selected financial data should be read in conjunction with the
Consolidated Financial Statements and the notes thereto included elsewhere in
this report.
January 1, December 31, December 29, December 28, January 3,
1995 (1) 1995 1996 1997 1999
52 Weeks 52 Weeks 52 Weeks 52 Weeks 53 Weeks
(in thousands,except per share data)
Income Statement Data:
REVENUES:
Restaurant
sales $124,826 $137,191 $131,680 $ 131,857 $142,592
Franchise fees and
royalty income 2,424 1,342 516 346 358
-------- -------- -------- --------- --------
Total revenues 127,250 138,533 132,196 132,203 142,950
COSTS AND EXPENSES:
Restaurant cost of
sales and
operating costs 102,236 115,195 107,703 110,440 114,111
General and
administrative 4,818 6,068 6,445 6,964 7,829
Depreciation and
amortization 7,112 10,301 9,245 9,659 7,990
Special charges
(reversal) (3) - 8,100 2,497 78,738 (2,665)
Litigation
settlement (2) - - 3,400 - -
Reserve for notes and other
receivables - 3,500 - - -
-------- -------- -------- -------- --------
Total costs
and expenses 114,166 143,164 129,290 205,801 127,265
-------- -------- -------- -------- --------
INCOME (LOSS) FROM
OPERATIONS 13,084 (4,631) 2,906 (73,598) 15,685
NON-OPERATING INCOME
(EXPENSE): 220 (1,397) (1,348) (1,137) (1,951)
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE
INCOME TAXES 13,304 (6,028) 1,558 (74,735) 13,734
(PROVISION) BENEFIT FOR
INCOME TAXES (4,784) 2,230 (854) 1,537 -
-------- -------- -------- -------- -------
NET INCOME
(LOSS) $ 8,520 $(3,798) $ 704 $(73,198) $13,734
======== ======== ======== ========= =======
BASIC EARNINGS (LOSS) PER
SHARE (5) $ 0.56 $ (0.24) $ 0.04 $ (4.78) $ 0.96
========= ======== ======== ========= =======
DILUTED EARNINGS (LOSS)
PER SHARE (5) $ 0.55 $ (0.24) $ 0.04 $ (4.78) $ 0.95
======== ======== ======== ======== =======
Balance Sheet Data:
TOTAL ASSETS $152,222 $148,578 $142,706 $ 76,260 $ 90,202
LINE OF CREDIT, LONG-TERM DEBT
AND CAPITAL LEASES,
INCLUDING CURRENT
MATURITIES 12,945 19,290 13,668 19,323 30,324
STOCKHOLDERS'
EQUITY 115,652 112,327 113,172 36,413 40,777
DIVIDENDS PER
COMMON SHARE - - - - -
(1) Includes results of eight acquired franchised restaurants since their
respective dates of acquisition.
(2) Includes the 1996 litigation settlement for $3.4 million pre-tax, as
described in Note 14 to the Consolidated Financial Statements.
(3) Includes the charge related to the 1995 operations review of $8.1 million,
the 1996 write-down of the Company's investment in a joint venture and the
accrual of related exit costs of $2.5 million, the 1997 charge for the
write down of impaired assets and the closure of seventeen restaurants and
the reversal of special charges in 1998 as described in Note 2 to the
Consolidated Financial Statements.
(4) Reserve resulted from the 1995 operations review.
(5) The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Standards No. 128, Earnings Per
Share. For further discussion of earnings per share and the impact of
Statement No. 128, see Notes 1 and 11 to the consolidated financial
statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
The Company commenced operations in 1978 with the opening of its first Taco
Cabana restaurant in San Antonio. As of January 3, 1999, the Company had 102
company-owned restaurants, and 10 franchised restaurants. The Company's
revenues are derived primarily from sales by company-owned restaurants, with
franchise fees and royalty income contributing less than 1% of total revenues
for the 1998 fiscal year.
During the fiscal year ended January 3, 1999, the Company opened nine
restaurants and closed five restaurants. Additionally, a franchisee of the
Company closed one restaurant.
Results of Operations
The following table sets forth the percentage relationship to total
revenues, unless otherwise indicated, of certain income statement data. The
table also sets forth certain restaurant data for the periods indicated.
Fiscal Year Ended
----------------------------------
December 29, December 28, January 3,
1996 1997 1999
Income Statement Data:
REVENUES:
Restaurant sales 99.6% 99.7% 99.7%
Franchise fees and royalty income 0.4 0.3 0.3
----- ----- -----
Total revenues 100.0 100.0 100.0
===== ===== =====
COSTS AND EXPENSES:
Restaurant cost of sales (1) 31.4 30.8 30.4
Labor (1) 26.3 27.4 26.8
Occupancy (1) 6.2 6.2 5.5
Other restaurant
operating costs (1) 17.9 19.3 17.3
General and administrative
costs 4.9 5.3 5.5
Depreciation and amortization 7.0 7.3 5.6
Special charges 1.9 59.6 (1.9)
Litigation settlement 2.6 - -
----- ----- -----
INCOME (LOSS) FROM OPERATIONS 2.2 (55.7) 11.0
INTEREST EXPENSE, NET (1.0) (0.9) (1.4)
----- ----- -----
INCOME (LOSS) BEFORE INCOME
TAXES 1.2 (56.5) 9.6
INCOME TAXES (0.6) 1.2 -
----- ----- -----
NET INCOME (LOSS) 0.5% (55.4)% 9.6%
===== ===== =====
Restaurant Data:
COMPANY-OWNED RESTAURANTS:
Beginning of period 106 104 98
Opened 1 7 9
Acquired - 1 -
Closed (3) (14) (5)
----- ----- -----
End of period 104 98 102
FRANCHISED RESTAURANTS (2): 17 11 10
----- ----- -----
TOTAL RESTAURANTS: 121 109 112
===== ===== =====
______________
(1) As a percentage of restaurant sales.
(2) Excludes Two Pesos licensed restaurants.
Fiscal 1998 Compared to Fiscal 1997
Restaurant Sales. Restaurant sales increased $10.7 million, or 8.1%, to
$142.6 million for fiscal 1998 from $131.9 million for fiscal 1997. The
increase in sales is due to an increase in sales at existing restaurants, an
additional week of sales in 1998 compared to 1997 and the opening of new
restaurants during 1998, offset by a decrease in sales from restaurant closures.
Comparable store sales, defined as Taco Cabana restaurants that have been open
18 months or more at the beginning of each quarter, increased 4.7% during 1998.
Management attributes much of the increase in comparable store sales to several
factors including a more consistent marketing program featuring a value meal
message, a commitment to increased staffing levels at existing restaurants and
the ongoing reimage program. The additional week of sales in 1998 was due to
the fact the Company's fiscal year is a 52 - 53 week year ending on the closest
Sunday to December 31. Fiscal year 1998 contained 53 weeks and fiscal year 1997
contained 52 weeks. The additional week accounted for approximately $2.6 million
in additional sales for 1998 compared to 1997. Sales from restaurants opened
after December 29, 1997 accounted for an increase of $8.3 million. This increase
was offset by restaurants closed during 1997 which accounted for sales of $7.1
million during 1997.
Franchise Fees and Royalty Income. Franchise and royalty fees remained
relatively constant for the fiscal 1998 compared to fiscal 1997. There were no
new franchisee openings and one franchisee closing during 1998.
Restaurant Cost of Sales. Restaurant cost of sales, calculated as a
percentage of restaurant sales, decreased to 30.4% in 1998 from 30.8% in 1997.
The decrease was due primarily to a price increase taken in the first quarter of
1998 and continued improvements in the management of food costs through
utilizing increased controls and improved purchasing programs, including the
continued negotiation of favorable commodity pricing. Management expects cost of
sales to stay flat or slightly decrease as a percentage of sales in 1999 due to
a price increase in December 1998 and the continued negotiation of favorable
commodity contracts.
Labor. Labor costs, calculated as a percentage of sales, decreased to
26.8% for the year ended January 3, 1999 compared to 27.4% in 1997. Adjusting
for restaurants closed during 1997, comparable labor as a percentage of
restaurant sales during 1997 was 26.5%. The increase in comparable labor costs
is due to an increase in the minimum wage in September 1997 and management's
commitment to increased staffing levels at the restaurant in order to provide a
consistent guest experience as well as higher than normal labor costs at newer
restaurants. New restaurants generally have higher than normal costs for the
first four to six months of operations. Management expects that labor costs as a
percentage of sales will be flat to slightly higher in 1999.
Occupancy. Occupancy costs decreased by $345,000 during 1998 compared to
1997. The decrease was primarily due to the closure of underperforming
restaurants during 1997. As a percentage of restaurant sales, occupancy costs
decreased to 5.5% in the year ended January 3, 1999 compared to 6.2% in 1997.
The decrease is due to an increase in average unit sales volumes during 1998,
which was in turn attributable to the closure of underperforming restaurants,
the opening of new restaurants with higher volumes and increased sales at
existing restaurants.
Other Restaurant Operating Costs. Other restaurant operating costs decreased
by $679,000 to $24.7 million for the year ended January 3, 1999 compared to
$25.4 million in the same period of 1997. As a percentage of restaurant sales,
other restaurant operating costs decreased to 17.3% for the year ended January
3, 1999 compared to 19.3% in the same period of 1997. The decrease was due to
decreased marketing and promotional activities and an increase in average unit
sales volumes. The decrease in marketing and promotional costs is attributed
to the management's decision to exit the underperforming Colorado market in
December 1997, as well as the decision to move to a radio only media
strategy in 1998. Management expects this amount, as a percentage of sales, to
be flat or slightly lower in 1999.
General and Administrative. General and administrative expenses increased
to $7.8 million from $7.0 million, and increased as a percentage of total
revenues to 5.5% for the year ended January 3, 1999 from 5.3% for the comparable
period in 1997. This increase was primarily attributable to an increased level
of expenditures to support the Company's operations, and an increase in the
bonus accrual during 1998.
Depreciation, Amortization and Restaurant Opening Costs. Depreciation,
amortization and restaurant opening expenses consisted of the following:
Year Ended
--------------------------
December 28, January 3,
1997 1999
Depreciation of property and
equipment .........................$ 7,942,000 $ 6,816,000
Amortization of intangible
assets ............................ 1,313,000 569,000
Restaurant opening costs .......... 404,000 605,000
Depreciation expense decreased by approximately $1.1 million for fiscal
1998 compared to fiscal 1997. The decrease was due primarily to the closure of
restaurants and writedown of assets in conjunction with the special charge
recorded in the fourth quarter of 1997, offset by new restaurants opened after
December 28, 1997, as well as continued capital improvements to existing
restaurants. Amortization of intangible assets decreased by approximately
$744,000 primarily due to the writedown of goodwill and other intangible assets
during the fourth quarter of 1997. Restaurant opening costs increased by
approximately $201,000 during fiscal 1998 compared to fiscal 1997, due to the
increase in the number of restaurants opened during 1998 compared to 1997.
Management expects these amounts to increase during 1999 due to the ongoing
reimage program as well as the opening of new restaurants.
Special Charge Reversal. As part of the special charges recorded in the
fourth quarter of 1996 and 1997, the Company reduced the carrying value of
assets and established reserves for the estimated lease liabilities associated
with restaurants that were closed. During 1998, the Company successfully
completed sales of several of these properties to third parties or negotiated
favorable lease terminations. The amount of the proceeds in excess of the
carrying value of the assets and the remaining lease liabilities was
approximately $2.7 million. This amount was recorded as a special charge
reversal during the fourth quarter of 1998.
Interest Expense, net. Interest expense, net of interest income and
interest capitalized on construction costs, increased to $2.0 million in fiscal
1998 from $1.1 million in fiscal 1997, primarily as a result of additional
borrowings under the Company's debt facilities. In addition, the Company
capitalized $117,000 of interest during 1998 compared to $147,000 during 1997.
Net Income (Loss) and Net Income (Loss) Per Share. The Company recorded
net income of $13.7 million for 1998 compared to a net loss of $73.2 million for
1997. Diluted earnings per share was $0.95 for 1998 compared to a loss per
share of $4.78 in 1997. The net income recorded in 1998 includes the reversal
of a portion of the special charges recorded during 1996 and 1997 totaling $2.7
million. Also, net income recorded in 1998 does not include any income tax
expense due to the utilization of previously unrecognized net operating loss
carryforwards relating to the special charge recorded in 1997. Including a pro-
forma income tax expense utilizing the same rate as the prior year, and
excluding the special charge reversal in 1998, the Company would have reported
net income of approximately $7.0 million, or $0.48 per share (diluted). The
loss recorded in 1997 includes special charges totaling $78.7 million pretax
($75.7 million after-tax, or $4.94 per share). Excluding these charges, the
Company would have reported net income of $2.5 million equal to $0.16 per share
in fiscal 1997. In summary, the increase in net income and diluted earnings per
share in 1998 is attributable to several factors including an increase in sales
at existing restaurants, continued strong cost controls, the closing of
underperforming restaurants and an extra week of operations in 1998 compared to
1997.
Fiscal 1997 Compared to Fiscal 1996
Restaurant Sales. Restaurant sales increased $177,000, or 0.1%, to $131.9
million for fiscal 1997 from $131.7 million for fiscal 1996. The increase in
sales was due to an increase in the number of store operating weeks during 1997
compared to 1996. The increase was offset by a decrease in comparable store
sales in 1997 compared to 1996. In the aggregate, the number of operating weeks
increased 1.6% in 1997 compared to 1996. Comparable store sales decreased 2.9%
during 1997. Much of the decline in comparable store sales occurred during the
first six months of the year. Comparable stores sales for the first six months
of fiscal 1997 decreased 4.8%, while comparable store sales for the last six
months of the year decreased only 0.8%. Management attributes much of the
decline during the first six months to unfavorable weather conditions,
significant declines in the Colorado market (which was closed in November 1997),
and a promotional strategy which highlighted higher priced, premium products in
an intensely price competitive landscape. This strategy was changed during the
second half of the year to a promotional strategy which continually highlights
various meals at a competitive price.
Franchise Fees and Royalty Income. Franchise and royalty fees decreased
$170,000 to $346,000 for 1997, from $516,000 for 1996, due primarily to a
decrease in the number of franchises open during 1997 compared to 1996.
Restaurant Cost of Sales. Restaurant cost of sales, calculated as a
percentage of restaurant sales, decreased to 30.8% in 1997 from 31.4% in 1996.
The decrease was due primarily to continued improvements in the management of
food costs through utilizing increased controls and improved purchasing
programs, including the continued negotiation of favorable commodity pricing.
Labor. Labor costs, calculated as a percentage of sales, increased to
27.4% for the year ended December 28, 1997 compared to 26.3% in 1996. The
increase was due to lower average unit volumes as well as management's
commitment to increase staffing levels at the restaurant level in order to
provide a consistent guest experience. In addition, approximately 15% of this
increase in percentage of sales amount was due to increased labor costs
associated with the Colorado market. During January 1997, the Company announced
its plans to commit additional resources, primarily in marketing and restaurant
level staffing, in an attempt to reverse the negative sales trends and operating
losses of this market. The restaurants in the market were closed during
November 1997.
Occupancy. Occupancy costs increased slightly during 1997 compared to
1996. The increase was due to an increase in the number of restaurants open
during fiscal 1997 compared to fiscal 1996.
Other Restaurant Operating Costs. Other restaurant operating costs increased
by $1.9 million for the year ended December 28, 1997 compared to the same period
of 1996. As a percentage of restaurant sales, other restaurant operating costs
increased to 19.3% for the year ended December 28, 1997 compared to 17.9% in the
same period of 1996, primarily due to decreased sales at the restaurant level
and additional marketing expenditures during the year ended December 28, 1997.
Total marketing expenditures accounted for 4.7% of sales in 1997 versus 3.8% in
1996. Approximately $600,000, or 0.5% of sales, of this increase was due to
increased marketing in the Colorado market.
General and Administrative. General and administrative expenses increased
to $7.0 million from $6.4 million, and increased as a percentage of total
revenues to 5.3% for the year ended December 28, 1997 from 4.9% for the
comparable period in 1996. This increase was primarily attributable to the
addition of corporate support staff, as well as an increased level of
expenditures to support the Company's operations, offset by lower bonus
accruals.
Depreciation and Amortization. Depreciation and amortization expense
consisted of the following:
Year Ended
----------------------------
December 29, December 28,
1996 1997
Depreciation of property and
equipment ......................... $ 7,079,000 $ 7,942,000
Amortization of intangible
assets ............................ 1,651,000 1,313,000
Amortization of pre-opening
costs ............................. 515,000 404,000
Depreciation expense increased by approximately $863,000 for fiscal 1997
compared to fiscal 1996. The increase was due primarily to restaurant openings
during 1997, as well as capital expenditures on existing restaurants during 1997
and 1996. The increase was partially offset by a reduction in depreciation due
to the closure of 14 restaurants and the write-down of certain depreciable
assets during the fourth quarter of 1997. Amortization of intangible assets
decreased by $338,000 primarily due to the write-off of goodwill and other
intangible assets during the fourth quarter of 1997. Amortization of pre-opening
costs decreased by approximately $111,000 during fiscal 1997 compared to fiscal
1996, due to the decrease in the number of restaurants opened during the most
recent twelve-month period compared to the twelve-month period ended December
29, 1996.
Special Charge. During the fourth quarter of fiscal 1997, management made
the decision to close the seven restaurants in its Colorado market. The Company
committed substantial resources to this market during 1997 in an attempt to
reverse trends of poor sales and losses. The desired results from the
implementation of the plan were not achieved and the decision to close the
market was made. These seven restaurants had total sales of approximately $3.0
million and operating losses of $2.1 million during the approximately eleven
months of 1997 that they were in operation.
Additionally, the Company continued to experience unfavorable sales
trends during 1997, concluding the year with comparable restaurant sales
declining 2.9%. However, during the first six months of 1997, comparable
restaurant sales declined 4.8%. This trend compelled management to continue
its evaluation of the operating model of the Company. During this
evaluation, management concluded that certain volumes must be achieved in order
to operate individual restaurants in accordance with Company standards. These
standards include food quality, cleanliness, speed of service, and
profitability. Management reviewed all existing restaurants to determine which
restaurants could not reasonably be expected to achieve these volume levels,
generally annual revenues of at least $1 million. This led to the decision to
close an additional ten restaurants.
Due to the significance of the closures described above,
management performed an evaluation of the recoverability of all remaining
assets as described in Statement of Financial Accounting Standards No. 121
("FAS 121"). Management concluded from the results of this evaluation that
a significant impairment of intangible as well as long-lived assets was
required to be recognized. The impairment was reflective of a market value
determined to be less than the carrying value of approximately 40 restaurants,
31 of which were acquired. The assets were tested for impairment by
projecting cash flows for individual restaurants based on recent results and
trends specific to that restaurant. The undiscounted projected cash flows
for each restaurant were compared to the carrying value for that
restaurant, including allocated goodwill, where applicable. If the
undiscounted cash flows were less than the carrying value, an impairment was
deemed to have occurred. The amount of the impairment was determined by
calculating the difference between the present value of the projected cash
flows and the carrying value attributable to the specific restaurant. The
cash flows were discounted using the rate of return the Company utilizes for
approving new restaurant construction. Such discounted cash flows are, in
management's opinion, the best estimate of the assets' current value.
Considerable management judgment is necessary to estimate future discounted cash
flows. Accordingly, actual results could vary significantly from
management's estimates.
The process described above resulted in the Company's recording a
special charge during the fourth quarter of 1997 of $78.7 million pre-tax, $75.7
million after-tax, or $4.94 per share. This amount had the following
components:
. Impairment of intangible assets of $33.1 million and impairment of long-lived
assets of $22.1 million for restaurants that will continue in operation,
based on the FAS 121 analysis described above;
. A provision of $23.3 million for the closure of seventeen restaurants,
including all of the restaurants in the Colorado market. The amount was
determined in accordance with FAS 121 and was comprised of:
. $13.3 million for the carrying value of the assets, net of estimated
proceeds of $1.5 million for the sale of restaurant properties;
. $9.0 million to record the estimated lease related obligations for
closed restaurants. This amount was determined as the lesser of the
present value of the monthly lease commitments, net of expected sublease
receipts, or lease termination provisions;
. $500,000 for severance and relocation benefits paid to employees
displaced by the restaurant closures;
. $500,000 for the probable settlement of a franchisee lawsuit related to
the Colorado market.
. The write-off of other assets totaling $200,000.
During 1997, the seventeen restaurants contributed a total of $9.6 million
in sales, and had operating losses totaling $2.5 million. In addition, the
total amount of depreciation and amortization recorded during 1997 relating to
assets which were impaired was approximately $3.2 million.
Interest Expense, net. Interest expense, net of interest income and
interest capitalized on construction costs, decreased to $1.1 million in fiscal
1997 from $1.3 million in fiscal 1996. The difference was due to lower interest
expense due to a decrease in the average debt outstanding during 1997 compared
to 1996, a reduction in interest income and an increase in interest capitalized
on construction cost. The Company earned $76,000 of interest income during
1997, compared to $201,000 of interest income earned during the 1996. The
decrease was due to a reduction in short-term investments. In addition the
Company capitalized $147,000 of interest during 1997. No interest was
capitalized during 1996.
Net Income (Loss) and Net Income (Loss) Per Share. The Company recorded a
net loss of $73,198,000 for 1997 compared to net income of $704,000 for 1996.
Net loss per share was $4.78 for 1997 compared to net income per share of $0.04
in 1996. The loss recorded in 1997 includes special charges totaling $78.7
million pretax ($75.7 million after-tax, or $4.94 per share). Excluding these
charges, the Company would have reported net income of $2.5 million equal to
$0.16 per share in fiscal 1997. Net income in 1996 included charges totaling
$5.9 million pretax ($4.0 million after-tax, or 26 cents per share). Excluding
these charges, the Company would have reported net income of $4.7 million equal
to $0.30 per share for fiscal 1996. Disregarding these charges, management
believes that the decrease in income was largely due to declining sales, and
increased labor and marketing expenditures.
Liquidity and Capital Resources
Historically, the Company has financed business and expansion activities by
using funds generated from operating activities, build-to-suit leases, equity
financing, short and long-term debt and capital leases. The Company currently
maintains credit facilities totaling $40 million, including a $5 million
unsecured revolving line of credit. As of March 1, 1999, approximately $29.5
million had been used under these commitments.
Net cash provided by operating activities was $15.7 million for 1998,
compared to $12.9 million for 1997. Net cash used in investing activities was
$17.0 million for 1998, representing the construction of nine Company owned
restaurants, the reimaging of twenty-seven restaurants and capital expenditures
for improvements to existing restaurants. This was offset by the sale of assets
generating $4.3 million in proceeds. This compared to $15.4 million for 1997,
representing primarily capital expenditures for improvements to existing
restaurants, the construction of five free-standing and two non-traditional
restaurants, and the conversion of two Sombrero Rosa and two Two Pesos
restaurants to the Taco Cabana concept.
Net cash provided by financing activities was $1.6 million for 1998
representing primarily net borrowings under the Company's credit facilities,
offset in part by the purchase of $10.3 million of the Company's stock in market
transactions, which is held as treasury stock. This compared to net cash
provided by financing activities of $2.1 million in 1997 representing primarily
net borrowings under the Company's credit facilities, offset in part by the
purchase of $3.6 million in treasury stock.
The Company's Board of Directors previously approved plans to repurchase up
to a total of 4,000,000 shares of the Company's Common Stock. As of March 1,
1999, the Company had repurchased 2,585,000 shares at an average cost of $5.39
per share. The Company has funded the repurchases primarily through available
bank credit facilities. The timing, price, quantity and manner of future
purchases will be made at the discretion of management and will depend upon
market conditions. The Company intends to fund the repurchase program through
available credit under its bank credit facilities and current cash flows from
operations.
The special charges recorded in 1997 and 1995 included accruals totaling
approximately $10.2 million to record the estimated monthly lease payments, net
of expected sublease receipts, associated with certain restaurants which have
been closed. Cash requirements for this accrual were approximately $1.7 million
during year ended January 3, 1999. During the year ended January 3, 1999, the
Company sold properties relating to the special charges which resulted in
proceeds of $4.3 million. Subsequent to January 3, 1999 the Company sold one
property relating to the special charges which resulted in proceeds of $458,000
which approximated the carrying value of the property. The Company currently has
two closed restaurant property for sale which were covered by the special
charges. Although there can be no assurance of the particular price at which
such property will be sold, the Company expects to receive funds equal to or in
excess of the carrying value upon the actual disposition of this property. In
addition, certain acquisition and accrued liabilities related to the Two Pesos
acquisition were reduced by payments of approximately $262,000 during the year
ended January 3, 1999.
The Company believes that existing cash balances, funds generated from
operations, its ability to borrow, and the possible use of lease financing will
be sufficient to meet the Company's capital requirements through 1999, including
the planned opening of ten to twelve restaurants and the reimaging of 30 to 35
restaurants. Total capital expenditures related to new restaurants are
estimated to be $12.0 to $15.0 million. The total for other capital
expenditures, including the cost of the reimagings, is estimated to be $6.0 to
$8.0 million. Total capital expenditures for 1999 are expected to approximate
$18.0 to $23.0 million.
Impact of Inflation
Although increases in labor, food or other operating costs could adversely
affect the Company's operations, management does not believe that inflation has
had a material adverse effect on the Company's operations to date.
Seasonality and Quarterly Results
The Company's sales fluctuate seasonally. Historically, the Company's
highest sales and earnings occur in the second and third quarters. In addition,
quarterly results are affected by the timing of the opening of new stores, and
the Company's growth may offset the impact of seasonal influences. Therefore,
quarterly results are not indicative of results for the entire year.
Year 2000 Issue
Description. The Company relies to a large extent on computer technology
to carry out its day-to-day operations. Many software products in the
marketplace are only able to recognize a two digit year date and therefore will
recognize a date using "00" as the year 1900 instead of the year 2000 (the "Year
2000 Issue"). This problem could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions or engage in similar normal business
activities.
State Of Readiness. The Company has established a plan to prepare its
systems for the Year 2000 Issue as well as to reasonably assure that its
critical business partners are prepared. To date, the Company has completed its
assessment of all internal systems that could be significantly affected by the
Year 2000 Issue. Based upon its assessment, the Company determined that it was
required to modify or replace portions of its software supporting Human
Resources, Payroll, Accounting, Labor Analysis and the Point of Sale. The
Company believes that with modifications or replacements of the identified
software programs, the Year 2000 Issue can be mitigated. However, if all
additional phases of the Year 2000 plan are not completed on time, the Year 2000
Issue could have a material impact on the operations of the Company.
As of March 1, 1999, the Company has substantially completed the
remediation of the identified systems and expects to complete software
reprogramming and replacement no later than June 1, 1999. Once the software is
reprogrammed or replaced with a Year 2000 compliant version, the Company will
test and implement the software Completion of the testing phase for all
significant systems is expected by June 30, 1999. Many hardware upgrades were
necessary but no further hardware replacement has been identified as a result of
the Year 2000 issue. As such, the Company is not currently remediating
additional hardware. However, the existence of embedded technology is by nature
more difficult to identify. While the Company believes that all significant
systems are Year 2000 compliant, the Company plans to continue testing its
operating equipment.
The Company has deferred other information technology projects due to the
Year 2000 issue. The deferral of these projects is not expected to have a
material effect on the Company's financial position or results of operations.
Significant Third Parties. The Company's significant third party business
partners consist of suppliers, banks, and service providers. The Company has
significant system interfaces with banks, credit card processors and tax filing
services. An initial inventory of significant third party business partners has
been completed and letters mailed requesting information regarding each parties'
Year 2000 compliance status. Additionally, the Company has identified key
suppliers and distributors which it intends to meet with and discuss their Year
2000 readiness. The Company intends to develop contingency plans by June 30,
1999 for third party business partners that appear to have substantial Year 2000
operational risks, which may include the change of some suppliers to minimize
such risks.
Costs. The Company will use both internal and external resources to
reprogram, or replace, and test software for Year 2000 Issue modifications. The
total cost of the Year 2000 Issue project is estimated to be approximately
$600,000, of which the Company has incurred $500,000 relating to the purchase of
new software. The costs relating to the Year 2000 Issue are being financed
through operating cash flows and borrowings from the Company's available credit
facilities. Of the total project cost, the majority is attributable to the
purchase of new software, which will be capitalized. The remaining amount,
which will be expensed as incurred over the next year, is not expected to have a
material effect on the results of operations. To date, the costs the Company
has incurred and expensed relating to the assessment of, and preliminary efforts
in connection with, its Year 2000 Issue and the development of a remediation
plan have not had a material effect on the results of operations.
Risks And Contingency Plans. Management believes it has an effective plan
in place to resolve the Year 2000 Issue in a timely manner. However, due to the
forward-looking nature and lack of historical experience with Year 2000 issues,
it is difficult to predict with certainty what will happen after December 31,
1999. Despite the Year 2000 remediation efforts being made, it is likely that
there will be disruptions and unexpected business problems during the early
months of 2000. The Company plans to make diligent efforts to assess the Year
2000 readiness of its significant business partners and will develop contingency
plans for all critical systems where it believes its exposure to Year 2000 risk
is the greatest. However, despite the Company's efforts, it may encounter
unanticipated third party failures, public infrastructure failures or a failure
to successfully conclude its remediation efforts as planned. If the remaining
Year 2000 plan is not completed timely, in addition to the implications noted
above, the Company may be required to utilize manual processing of certain
otherwise automated processes. Any one of these unforeseen events could have a
material adverse impact on the Company's results of operations, financial
condition, or cash flows in 1999 and beyond.
Forward-Looking Statements
Statements in this annual report concerning Taco Cabana which are (a)
projections of revenues, costs, including trends in cost of sales, operating
costs, labor and general and administrative costs or other financial items, (b)
statements of plans and objectives for future operations, specifically
statements regarding planned restaurant openings and reimages as well as share
repurchases and cash flows (c) statements of future economic performance, or (d)
statements of assumptions or estimates underlying or supporting the foregoing
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
The ultimate accuracy of forward-looking statements is subject to a wide range
of risks, uncertainties and other factors which may cause actual results and
outcomes to differ, often materially, from expectations. Any number of
important factors could cause actual results to differ materially from those in
the forward-looking statements herein, including the following: the timing and
extent of changes in prices of commodities and supplies that the Company
utilizes; cost and availability of labor; actions of our customers and
competitors; changes in state and federal environmental, economic, safety and
other policies and regulations and any legal or regulatory delays or other
factors beyond the Company's control; execution of planned capital projects;
weather conditions affecting the Company's operations; natural disasters
affecting operations; and adverse rulings, judgments, or settlements in
litigation or other legal matters. The Company disclaims any intention or
obligation to update or revise any such forward-looking statements, whether as a
result of new information, future events or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on
debt and changes in commodity prices.
The Company's exposure to interest rate risk currently consists of its
notes payable and outstanding line of credit. The Company has notes payable and
a line of credit which bear interest at the lesser of the London Interbank Offer
Rate plus 2.25% or the prime rate. The aggregate balance outstanding of these
notes and the line of credit as of March 1, 1999 was $27.2 million. The Company
also has a note payable which bears interest at the prime rate. The outstanding
balance of this note as of March 1, 1999 was $1.3 million. The impact on the
Company's results of operations of a one-point interest rate change on the
outstanding balances under the notes payable and line of credit as of March 1,
1999 would be immaterial.
The Company purchases certain commodities such as beef, chicken, flour,
produce and dairy products. These commodities are generally purchased based
upon market prices established with vendors. These purchase arrangements may
contain contractual features that limit the price paid by establishing price
floors or caps. The Company does not use financial instruments to hedge
commodity prices because these purchase arrangements help control the ultimate
cost and any commodity price aberrations are generally short term in nature.
This market risk discussion contains forward-looking statements. Actual
results may differ materially from this discussion based upon general market
conditions and changes in financial markets.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are set forth in this
annual report on Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The directors and executive officers of the Company and their respective
ages are as follows:
Name Age Position
Stephen V. Clark 45 Chief Executive Officer,
President and Director
Douglas Gammon 52 Senior Vice President - Human
Resources and People
Development
Dennis Greenia 49 Senior Vice President - Marketing
David G. Lloyd 35 Senior Vice President - Finance,
Chief Financial Officer, Secretary
and Treasurer
William J. Nimmo 44 Director
Rod Sands 50 Director
Cecil Schenker 56 Director
Richard Sherman 55 Director
Lionel Sosa 59 Director
Mr. Clark has served as the Company's Chief Executive Officer since
November 1996, and as the President, Chief Operating Officer, and as a Director
since April 1995. Prior to that, Mr. Clark was with Church's Chicken, a
division of America's Favorite Chicken, for seventeen years with his final title
having been Senior Vice President and Concept General Manager. He also served
on the executive committee of America's Favorite Chicken and was on the Board of
Directors of Church's Operators Purchasing Association. In his final position
with America's Favorite Chicken, Mr. Clark was primarily responsible for the
day-to-day operations of over 1100 company-owned and franchised units with
aggregate sales volume in excess of $600 million.
Mr. Gammon joined the Company in March 1997 as Senior Vice President, Human
Resources and People Development. From December 1989 to March 1997, Mr. Gammon
served as Vice President of Human Resources at Marriott International which has
over 15,000 employees in 50 states. Mr. Gammon has over 18 years of experience
in the human resources field as well as over six years experience in restaurant
operations. He was the past President for the Council of Hotel and Restaurant
Trainers.
Mr. Greenia joined the Company in July 1998 as Senior Vice President -
Marketing. From January 1989 to July 1998, Mr. Greenia served as President of
the Merrill Group, a marketing consulting firm in Atlanta GA., whose clients
included the Coca-Cola Company, Dominos Pizza, Bally's Total Fitness and
Hardee's Foods. Mr. Greenia has over 19 years experience both nationally and
internationally in the food service industry holding positions with Burger King
Corporation, J. Walter Thompson Advertising and Coca Cola USA. Mr. Greenia is
also a majority partner in Mobile Media Network of Atlanta, Inc.
Mr. Lloyd joined the Company in October 1994 as Vice President - Finance,
Chief Financial Officer, Secretary and Treasurer and was promoted to Senior Vice
President in May 1996. From August 1985 to October 1994, Mr. Lloyd served in
various capacities with Deloitte & Touche (the Company's independent auditors),
with his last position being Senior Audit Manager. Mr. Lloyd is a certified
public accountant.
Mr. Nimmo has served as a director of the Company since November 1991.
Since May 1997, Mr. Nimmo has been a Partner with Halpern, Denny & Co., a
venture capital firm in Boston, Massachusetts. Prior to that, Mr. Nimmo served
as Managing Director of Cornerstone Equity Investors, Inc., and its predecessor
firm, Prudential Equity Investors, Inc., since September 1989.
Mr. Sands has been a director of the Company since February 1998. Since
July 1997, Mr. Sands has served as the Managing Director of Silver Venture
Capital Management, a private equity investment fund. From August 1992 to July
1997, Mr. Sands served as the President and Chief Operating Officer of Pace
Foods, a food manufacturer with revenues in excess of $200 million. Mr. Sands
currently serves on the board of directors of Orval Kent Holdings, Packaged Ice,
Inc., Texas Commerce Bank/Chase-San Antonio and Benefit Planners, Inc. He is
also a member of St. Mary's University Business Advisory Board.
Mr. Schenker has been a director of the Company since January 1992. Mr.
Schenker is a corporate securities attorney and is the managing partner of the
San Antonio, Texas office of the law firm of Akin, Gump, Strauss, Hauer & Feld,
L.L.P., of which Mr. Schenker has been a partner through his professional
corporation since January of 1984. Akin, Gump, Strauss, Hauer & Feld, L.L.P.
has regularly performed legal services for the Company. Mr. Schenker is also a
director of LOT$OFF Corporation, formerly 50-Off Stores, Inc.
Mr. Sherman has been a director of the Company since November 1991. Mr.
Sherman is a private investor and retail consultant. Mr. Sherman served as
President and Chief Executive Officer of Rally's, Inc. from September 1987 to
January 1991. From August 1989 to January 1991, he also served as Chairman of
the Board of Rally's, Inc. Mr. Sherman currently serves as a member of the
Board of Trustees of Paul Quinn College in Dallas, Texas and as a director of
Reed's Jewelers, Inc., Papa John's International, Inc., and PJ America, Inc.
Mr. Sosa has been a director of the Company since August 1997. Mr. Sosa has
served as the Chief Executive Officer of KJS Marketing Agency since January
1996. From 1994 to 1996 he served as Chairman of DMB&B/Americas, a network of
advertising agencies in the U.S. and Latin America. In 1980 Mr. Sosa founded the
agency of Sosa, Bromley, Aguilar, Noble & Associates, an advertising agency
specializing in Hispanic marketing in the U.S. Mr. Sosa sold Sosa, Bromley,
Aguilar, Noble & Associates in 1994. Mr. Sosa is currently a Director of the
Children's Television Workshop Network.
The Board of Directors has a compensation and stock option committee which
currently consists of William J. Nimmo, Richard Sherman, Lionel Sosa and Rod
Sands. The Board of Directors also has an audit committee which currently
consists of William J. Nimmo, Richard Sherman, Lionel Sosa, Cecil Schenker and
Rod Sands. The Board of Directors does not currently have a nominating
committee. All directors serve for a term of one year and until their
successors are duly elected. Each director who is not also an employee of the
Company receives an annual retainer of $25,000, and an attendance fee of $2,500
per Board meeting for up to four meetings each year. All non-employee directors
are reimbursed for their expenses.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires each director and executive officer of the Company, and
each person who owns more than 10% of a registered class of the Company's equity
securities to file by specific dates with the Securities and Exchange Commission
(the "SEC") initial reports of ownership and reports of change in ownership of
Common Stock and other equity securities of the Company. Officers, directors
and 10% stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file. The Company is required to report
in this report any failure of its directors and executive officers to file by
the relevant due date any of these reports during the Company's fiscal year.
To the Company's knowledge, all Section 16(a) filing requirements
applicable to the Company's officers, directors, and 10% stockholders were
complied with except one late filing each as to a Form 4 for Lionel Sosa and Rod
Sands.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain
information concerning the compensation earned during the Company's last three
fiscal years by the Company's Chief Executive Officer and the Company's other
executive officers (collectively the "named executive officers"):
Summary Compensation Table
Annual Compensation Long-Term Compensation
--------------------- ---------------------------
Awards Payouts
-------------------- -------
Other Securities
Annual Restricted Underlying All Other
Name and Compen- Stock Options/ LTIP Compen-
Principal Fiscal Salary Bonus sation Award(s) SARs Payouts sation
Position Year ($) ($) ($)(1) ($) (#) ($) ($)
Stephen V. 1998 281,882 163,846 - - 100,000 - -
Clark, 1997 255,420 - - - - - -
Chief 1996 233,404 - - - - - -
Executive
Officer,
President ,
Chief
Operating
Officer
David G. 1998 157,004 61,845 - - 50,000 - -
Lloyd, 1997 143,528 - - - - - -
Senior Vice 1996 135,138 - - - - - -
President,
Chief
Financial
Officer,
Secretary
and Treasurer
Douglas 1998 142,469 53,577 38,393 - 25,000 - -
Gammon 1997 113,820 - (3) - 75,000 - -
Senior Vice (2) 55,135
President - (3)
Human
Resources and
People
Development
Dennis 1998 61,060 26,000 - - 75,000 - -
Greenia (4)
Senior Vice
President -
Marketing
James A. 1998 204,256 - - - - - -
Eliasberg (5)
Senior Vice 1997 191,877 - - - - - -
President 1996 189,235 - - - - - -
and General
Counsel
__________________
(1) Certain of the Company's executive officers receive personal benefits in
addition to salary; however, the Company has concluded that the
aggregate amounts of such personal benefits do not exceed the lesser of
$50,000 or 10% of annual salary and bonus reported for any named
executive officer.
(2) Mr. Gammon joined the Company in March 1997.
(3) Represents relocation expense reimbursements.
(4) Mr. Greenia joined the Company in July 1998.
(5) Mr. Eliasberg served as Senior Vice President and General Counsel
until September 1998.
Employment Agreements. The Company has a written employment agreement with
Stephen Clark which expires in April 1999. Under the agreement, Mr. Clark
receives a base salary of $280,000 per year. Additionally, Mr. Clark is
eligible for a bonus based on the Company's achievement of certain performance
goals. Pursuant to such agreement, Mr. Clark has agreed not to participate in
any manner, during his term of employment and for two years thereafter, in any
business which owns a Mexican fast food restaurant or Mexican "quick service"
restaurant in the Continental United States.
Stock Option Plans and Directors' Options
Under the Taco Cabana, Inc. 1990 Stock Option Plan (the "1990 Option
Plan"), amended in August 1992, and the 1994 Stock Option Plan (the "1994 Option
Plan"), amended in August 1997, options to purchase up to 1,500,000 and
1,250,000 shares, respectively, of Common Stock may be granted to employees,
outside directors and consultants and advisers of the Company or any subsidiary
corporation or entity. The stock is intended to permit the Company to retain
and attract qualified individuals who will contribute to its overall success.
Shares that by reason of the expiration of an option (other than by reason of
exercise) or which are no longer subject to purchase pursuant to an option
granted under an Option Plan may be reoptioned thereunder. The 1990 and 1994
Option Plans are administered by a committee of outside directors (the
"Committee"). The Committee sets specific terms and conditions of options
granted under the 1990 and 1994 Option Plans and administers the 1990 and 1994
Option Plans, as well as the Company's other employee benefit plans which may be
in effect from time to time. The Committee currently consists of William J.
Nimmo, Lionel Sosa, Richard Sherman and Rod Sands.
The Company's employees are eligible to receive either incentive stock
options or nonqualified stock options or a combination of both, as the Committee
determines. Non-employee participants may be granted only nonqualified stock
options. Stock options may be granted for a term not to exceed ten years (five
years with respect to a holder of 10% or more of the Company's shares in the
case of an incentive stock option) and are not transferable other than by will
or the laws of descent and distribution. Each option may be exercised within
the term of the option pursuant to which it is granted (so long as the optionee,
if an employee, continues to be employed by the Company). In addition, an
incentive option may be exercised within 90 days after the termination of
employment of the optionee (subject to any limitations in the particular
option), within one year after termination in case of termination because of
disability, or throughout the term of the option in the event of the optionee's
death, to the extent in each case the option was exercisable at the termination
date. A nonqualified stock option may be exercised for such period, but not
later than the expiration date, after termination of employment, disability or
death, as may be specified in the particular option.
The exercise price of all incentive stock options must be at least equal to
the fair market value of the Common Stock on the date of grant, or 110% of fair
market value with respect to any incentive stock option issued to a holder of
10% or more of the Company's shares. Stock options may be exercised by payment
in cash of the exercise price with respect to each share to be purchased, by
delivering Common Stock of the Company already owned by such optionee with a
market value equal to the exercise price, or by a method in which a concurrent
sale of the acquired stock is arranged, with the exercise price payable in cash
from such sale proceeds.
The 1994 Option Plan provides that each outside director will automatically
receive a grant of 3,000 nonqualified stock options each year on the fifth
business day following the first public release of the Company's audited
earnings report on results of operations for the preceding fiscal year. Each
such option will become exercisable in whole or in part on the first anniversary
of the award through the balance of its ten-year term. Subject to availability
of shares allocated to the 1994 Option Plan and not already reserved for other
outstanding stock options, outside directors who join the Board in the future
will in addition receive an initial grant of options for 20,000 shares, which
will become exercisable in five equal increments beginning on the first
anniversary of the award and on each of the next four succeeding anniversary
dates. Such options will be exercisable for a term of ten years. Such options
will be awarded upon their appointment or election to the Board. Options, once
granted and to the extent exercisable, will remain exercisable throughout their
term, regardless of whether the holder continues as a director. The exercise
price of the options is equal to 100% of the fair market value of a share of
Common Stock at the time of grant.
The 1990 Option Plan will terminate on October 14, 2000. The 1994 Option
Plan will terminate on October 17, 2004. The Board of Directors may, however,
terminate the 1990 and 1994 Option Plans at any time prior to such respective
dates. Termination of the 1990 and 1994 Option Plans will not alter or impair,
without the consent of the optionee, any of the rights or obligations pursuant
to any option granted under the Option Plans.
As of January 3, 1999, options for 471,342 shares of common stock had been
granted under the 1990 Option Plan and were outstanding, with a weighted average
exercise price of $6.05 per share, and no additional shares were available for
issuance upon exercise of options which may be granted in the future. As of
January 3, 1999, options for 1,028,658 shares had been exercised.
As of January 3, 1999, options for 1,070,767 shares of common stock had
been granted under the 1994 Option Plan and were outstanding, with a weighted
average exercise price of $5.43 per share, and 179,233 additional shares were
available for issuance upon exercise of options which may be granted in the
future. As of January 3, 1999, 120,584 options had been exercised.
Stock Option Grant Table. The following table sets forth certain
information concerning options granted to the named executive officers during
the Company's fiscal year ended January 3, 1999:
Option Grants in Last Fiscal Year
Percent
of
Total Potential Realizable
Options Value at Assumed
Granted Annual Rates of
to Stock Price
Employees Exercise Appreciation
Options in or for Option Term (2)
Granted Fiscal Base Price Expiration --------------------
Name #(1) (3) Year ($/Sh) Date 5% ($) 10% ($)
- -------------------------------------------------------------------------------
Stephen 100,000 21% 6.125 4/24/2008 385,198 976,167
V. Clark
David G. 50,000 10% 6.1875 6/09/2008 194,564 493,064
Lloyd
Douglas 25,000 5% 6.125 11/16/2008 96,299 244,042
Gammon
Dennis 75,000 16% 6.25 7/26/2008 294,794 747,067
Greenia
James A. - - - - - -
Eliasberg
- -------------------------------------------------------------------------------
(1)All such stock options were granted for the number of shares indicated at
exercise price equal to the fair market value of the Common Stock on the date
of grant as determined by the Company's Board of Directors. All such stock
options noted above were granted 10 years prior to the noted expiration date
The options become exercisable beginning one year after the date of grant in
five equal annual installments.The Company's current Option Plans do not make
provision for the award of stock appreciation rights ("SARs") and the Company
has no SARs currently outstanding.
(2)As required by rules of the Securities and Exchange Commission ("SEC"),
potential values stated are based on the assumption that the Company's Common
Stock will appreciate in value from the date of grant to the end of the
option term (ten years from the date of grant) at annualized rates of 5%
and 10% (total appreciation of approximately 63% and 159%), respectively, and
therefore are not intended to forecast possible future appreciation, if any,
in the price of the Common Stock.
(3)Upon occurrence of a change of control of Taco Cabana, as defined in the
related Stock Option Agreements, all outstanding options, to the extent not
exercisable, will immediately become exercisable.
Stock Option Exercises and Holdings Table. The following table provides
information concerning the exercise of options and value of unexercised
options held by the named executive officers at January 3, 1999:
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
Shares
Acquired Number of Value of Unexercised
on Value Unexercised Options In-the-Money Options
Name Exercise Realized at Fiscal Year End at Fiscal Year End
(#) ($) (#) ($)(1)
- ------------------------------------------------------------------------------
Exercis- Unexercis- Exercis- Unexercis-
able able able able
- ------------------------------------------------------------------------------
Stephen V. - - 120,000 180,000 315,000 372,500
Clark
David G. - - 65,000 85,000 84,375 134,375
Lloyd
Douglas - - 15,000 85,000 41,250 205,625
Gammon
Dennis - - - 75,000 - 112,500
Greenia
James A. - - - - - -
Eliasberg
- -------------------------------------------------------------------------------
(1) Values stated are based on the last sale price of $7.75 per share of the
Company's Common Stock on the NASDAQ National Market System on December 31, 1998
the last trading day of the fiscal year, and equal the aggregate amount by which
the market value of the option shares exceeds the exercise price of such options
at the end of the fiscal year.
(2) Mr. Eliasberg served as Senior Vice President and General Counsel until
September 1998.
Compensation Committee Interlocks and Insider Participation
None.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the
beneficial ownership of the Company's Common Stock as of March 1, 1999, by: (i)
each person known by the Company to be the beneficial owner of more than 5% of
its Common Stock, (ii) each named executive officer of the Company, (iii) each
director of the Company, and (iv) all directors and officers as a group. Unless
otherwise indicated, each of the stockholders has sole voting and investment
power with respect to the shares beneficially owned.
Shares Beneficially Owned
Name Number Percent
Stephen V. Clark (1) 130,063 *
David G. Lloyd (2) 76,000 *
Douglas Gammon (3) 30,000 *
Dennis Greenia (4) - -
William J. Nimmo (5) 11,817 *
Richard Sherman (6) 87,003 *
Cecil Schenker (7) 107,503 *
Lionel Sosa (8) 8,000 *
Rod Sands (9) 70,000 *
Sawtooth Capital
Management LP (10) 1,383,200 10.1%
Massachusetts Financial
Services Co. (11) 1,199,301 8.7%
Dimensional Fund Advisors,
Inc. (12) 982,764 7.1%
All directors and officers as
a group (9 persons) (13)520,386 3.8%
___________________________
* Less than 1%.
(1) Includes 120,000 shares subject to presently exercisable options (or those
exercisable within 60 days). Excludes 180,000 shares issuable pursuant to
options which are not currently exercisable (or exercisable within 60
days).
(2) Includes 65,000 shares subject to presently exercisable options (or those
exercisable within 60 days). Excludes 85,000 shares issuable pursuant to
options which are not currently exercisable (or exercisable within 60
days).
(3) Includes 25,000 shares issuable pursuant to presently exercisable options
(or those exercisable within 60 days). Excludes 75,000 shares issuable
pursuant to options which are not currently exercisable (or exercisable
within 60 days).
(4) Excludes 75,000 shares issuable pursuant to options which are not currently
exercisable (or exercisable within 60 days).
(5) Includes 8,000 shares issuable pursuant to presently exercisable options
(or those exercisable within 60 days). Excludes 18,000 shares issuable
pursuant to options which are not currently exercisable (or exercisable
within 60 days).
(6) Represents shares subject to presently exercisable options (or those
exercisable within 60 days). Excludes 6,000 shares issuable pursuant to
options which are not currently exercisable (or exercisable within 60
days).
(7) Represents shares subject to presently exercisable options (or those
exercisable within 60 days). Excludes 6,000 shares issuable pursuant to
options which are not currently exercisable (or exercisable within 60
days).
(8) Represents shares subject to presently exercisable options (or those
exercisable within 60 days). Excludes 18,000 shares issuable pursuant to
options which are not currently exercisable (or exercisable within 60
days).
(9) Includes 5,000 shares subject to presently exercisable options (or those
exercisable within 60 days). Excludes 18,000 shares issuable pursuant to
options which are not currently exercisable (or exercisable within 60
days).
(10) Based upon Schedule 13G, filed jointly in February 1999, indicating
beneficial ownership as stated in the table and shared dispositive power as
to all shared beneficially owned. Included in the joint filing were
Sawtooth Capital Management LP, indicating beneficial ownership as to
721,640 shares, Sawtooth Partners LP indicating beneficial ownership as to
1,383,200 shares and Bartley Boyd Blount indicating beneficial ownership as
to 1,383,200 shares. Address: 100 Wilshire Boulevard, 15th floor, Santa
Monica, California 90401.
(11) Based upon Schedule 13G, filed jointly in February 1996, and amended in
February 1999, indicating beneficial ownership as stated in the table, and
shared dispositive power as to all shares beneficially owned. Included in
the joint filing were Massachusetts Financial Services Company ("MFS"),
indicating beneficial ownership and sole dispositive power of 1,199,301
shares and MFS Series Trust II - MFS Emerging Growth Fund ("MEG"),
indicating 770,000 shares beneficially owned by MFS as well as MEG.
Address: 500 Boylston Street, Boston, Massachusetts 02116.
(12) Based upon Schedule 13G, filed in February 1999, indicating beneficial
ownership, sole dispositive power and sole voting power as stated in the
table. Address: 1299 Ocean Avenue, 11th Floor, Santa Monica, CA 90401.
(13) Includes 425,506 shares subject to presently exercisable options (or those
exercisable within 60 days). Excludes 481,000 shares issuable pursuant to
options which are not currently exercisable (or exercisable within 60
days).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets at December 28, 1997 and January 3, 1999.
Consolidated Statements of Operations for the years ended December 29, 1996,
December 28, 1997 and January 3, 1999
Consolidated Statements of Stockholders' Equity for the years ended December 29,
1996, December 28, 1997 and January 3, 1999
Consolidated Statements of Cash Flows for the years ended December 29, 1996,
December 28, 1997 and January 3, 1999
Notes to Consolidated Financial Statements
Financial Statement Schedules
No financial statement schedules are submitted because of the absence of the
conditions under which they are required or because the required information is
included in the Consolidated Financial Statements or notes thereto.
Exhibits
3.1 Restated Certificate of Incorporation, filed on December 29, 1993.
(b)
3.2 Bylaws of Registrant. (a)
4.1 Form of Common Stock Certificate. (a)
4.2 Rights Agreement dated as of June 9, 1995, between Taco Cabana, Inc.
and Society National Bank, as Rights Agent. (d)
10.1* Employment Agreement dated April 24, 1995 between the Registrant and
Stephen V. Clark. (c)
10.5 Sample Franchise Agreement. (a)
10.6 Sample Franchise Development Agreement. (a)
10.7 Sample Beverage Sublease Agreement. (a)
10.8 Sample Concessionaire Management Agreement. (a)
10.9* Amended and Restated Stock Option Plan. (a)
10.14* 1994 Stock Option Plan. (b)
10.16 Second Amended Loan Agreement with International Bank of Commerce.
(e)
10.17 Third Amended Loan Agreement with International Bank of Commerce. (f)
10.18 Extension and Amendment to Employment Agreement between Taco Cabana,
Inc. and Steve Clark. (g)
10.19 Fourth Amended Loan Agreement with International Bank of Commerce.
(h)
21. Subsidiaries of the Registrant. (h)
23. Consent of Deloitte & Touche LLP. (h)
24. Powers of attorney to sign amendments to this report. Reference is
made to the signature page of this report.
27. Financial Data Schedule. (h)
________________________
* Executive compensation plan or arrangement.
(a) Filed as an exhibit to Form S-1 Registration Statement No. 33-51430,
effective October 16, 1992.
(b) Filed as an exhibit to Form 10-K for the fiscal year ended January 1,
1995.
(c) Filed as an exhibit to Form 10-K for the fiscal year ended December
31, 1995.
(d) Filed as an exhibit to Form 8-A Registration Statement No.0-
20716, effective June 9, 1995.
(e) Filed as an exhibit to Form 10-K for the fiscal year ended December
29, 1996.
(f) Filed as an exhibit to Form 10-Q for the quarter ended March 29, 1998.
(g) Filed as an exhibit to Form 10-Q for the quarter ended June 28, 1998.
(h) Filed herewith.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
TACO CABANA, INC.
By: STEPHEN V. CLARK
Stephen V. Clark
Chief Executive Officer and President
Date: March 24, 1999
Each person whose signature appears below authorizes Stephen V. Clark and
David G. Lloyd or either of them, each of whom may act without joinder of the
other, to execute in the name of each such person who is then an officer or
director of the Registrant and to file any amendments to this annual report on
Form 10-K necessary or advisable to enable the Registrant to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission in respect thereof, which
amendments may make such changes in such report as such attorney-in-fact may
deem appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the dates indicated.
Signature Title Date
STEPHEN V. CLARK Chief Executive Officer, March 24, 1999
Stephen V. Clark President and Director
(Principal Executive Officer)
DAVID G. LLOYD Senior Vice President - March 24, 1999
David G. Lloyd Finance, Chief Financial
Officer, Secretary and
Treasurer (Principal Financial and
Accounting Officer)
WILLIAM J. NIMMO Director March 24, 1999
William J. Nimmo
ROD SANDS Director March 24, 1999
Rod Sands
CECIL SCHENKER Director March 24, 1999
Cecil Schenker
RICHARD SHERMAN Director March 24, 1999
Richard Sherman
LIONEL SOSA Director March 24, 1999
Lionel Sosa
EXHIBIT INDEX
Exhibit
No.
10.19Fourth Amended Loan Agreement with International Bank of
Commerce.
21. Subsidiaries of the Registrant
23. Consent of Deloitte & Touche LLP
27. Financial Data Schedule
EXHIBIT 21
Subsidiaries of Registrant
TP Acquisition Corp., a Texas corporation
Get Real, Inc., a Delaware corporation
Texas Taco Cabana, L.P., a Texas limited partnership
T. C. Management Inc., a Delaware corporation
T.C Lease Holdings III, V and VI, Inc., a Texas corporation
Taco Cabana Multistate, Inc., a Delaware corporation
Colorado Cabana, Inc., a Colorado corporation
Taco Cabana Atlanta, Inc., a Delaware corporation
Taco Cabana Investments, Inc., a Delaware corporation
Taco Cabana Management, Inc., a Texas corporation
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No. 33-
56438 and No. 33-98124 of Taco Cabana, Inc. on Form S-8 of our report dated
February 4, 1999 appearing in this Annual Report on Form 10-K of Taco Cabana,
Inc. for the year ended January 3, 1999.
DELOITTE & TOUCHE LLP
San Antonio, Texas
March 24, 1999
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Financial Statements:
Independent Auditors' Report F-2
Consolidated Balance Sheets at December 28, 1997
and January 3, 1999 F-3
Consolidated Statements of Operations for the Years Ended
December 29, 1996, December 28, 1997, and January 3, 1999 F-4
Consolidated Statements of Stockholders' Equity for
the Years Ended
December 29, 1996, December 28, 1997 and January 3, 1999 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 29, 1996, December 28, 1997 and January 3, 1999 F-6
Notes to Consolidated Financial Statements F-8
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Taco Cabana, Inc.
We have audited the accompanying consolidated balance sheets of Taco Cabana,
Inc. and subsidiaries ("the Company") as of January 3, 1999 and December 28,
1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended January 3,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Taco Cabana, Inc. and subsidiaries
at January 3, 1999 and December 28, 1997, and the results of their operations
and their cash flows for each of the three years in the period ended January 3,
1999 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Antonio, Texas
February 4, 1999
TACO CABANA, INC.
CONSOLIDATED BALANCE SHEETS
December 28, January 3,
ASSETS 1997 1999
CURRENT ASSETS:
Cash and cash equivalents $ 339,000 $ 719,000
Receivables, net 502,000 438,000
Inventory 2,105,000 2,273,000
Prepaid expenses 1,704,000 3,128,000
Federal income taxes receivable 200,000 200,000
-------------- --------------
Total current assets 4,850,000 6,758,000
PROPERTY AND EQUIPMENT, net 59,540,000 72,250,000
NOTES RECEIVABLE 344,000 258,000
INTANGIBLE ASSETS, net 11,293,000 10,724,000
OTHER ASSETS 233,000 212,000
-------------- --------------
TOTAL ASSETS $ 76,260,000 $ 90,202,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,430,000 $ 5,362,000
Accrued liabilities 6,266,000 5,265,000
Current maturities of long-term debt and
capital leases 1,573,000 5,704,000
Line of credit 4,223,000 3,550,000
-------------- --------------
Total current liabilities 16,492,000 19,881,000
LONG-TERM OBLIGATIONS, net of current
maturities:
Capital leases 2,357,000 2,140,000
Long-term debt 11,170,000 18,930,000
-------------- --------------
Total long-term obligations 13,527,000 21,070,000
ACQUISITION AND CLOSED RESTAURANT 9,126,000 7,713,000
LIABILITIES
DEFERRED LEASE PAYMENTS 702,000 761,000
STOCKHOLDERS' EQUITY:
Preferred stock, series A; $.01 par value,
100,000 shares authorized - -
Common stock; $.01 par value, 30,000,000
shares authorized -
15,706,537 and 15,907,937 shares issued
at December 28, 1997
and January 3, 1999, respectively 157,000 159,000
Additional paid-in capital 97,095,000 98,056,000
Retained deficit (57,278,000) (43,544,000)
Treasury stock, at cost - 871,937 shares at
December 28, 1997 and 2,576,937 shares
at January 3, 1999 (3,561,000) (13,894,000)
-------------- --------------
Total stockholders' equity 36,413,000 40,777,000
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 76,260,000 $ 90,202,000
============== ==============
See notes to consolidated financial statements.
TACO CABANA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
---------------------------------------------
December 29, December 28, January 3,
1996 1997 1999
(52 Weeks) (52 Weeks) (53 Weeks)
REVENUES:
Restaurant sales $ 131,680,000 $ 131,857,000 $ 142,592,000
Franchise fees and royalty
income 516,000 346,000 358,000
--------------- --------------- --------------
Total revenues 132,196,000 132,203,000 142,950,000
--------------- --------------- --------------
COSTS AND EXPENSES:
Restaurant cost of sales 41,336,000 40,668,000 43,347,000
Labor 34,653,000 36,169,000 38,185,000
Occupancy 8,161,000 8,185,000 7,840,000
Other restaurant operating costs 23,553,000 25,418,000 24,739,000
General and administrative 6,445,000 6,964,000 7,829,000
Depreciation, amortization and
restaurant opening costs 9,245,000 9,659,000 7,990,000
Special charges (reversal) 2,497,000 78,738,000 (2,665,000)
Litigation settlement 3,400,000 - -
--------------- --------------- --------------
Total costs and expenses 129,290,000 205,801,000 127,265,000
--------------- --------------- --------------
INCOME (LOSS) FROM OPERATIONS 2,906,000 (73,598,000) 15,685,000
INTEREST EXPENSE, NET (1,348,000) (1,137,000) (1,951,000)
--------------- --------------- --------------
INCOME (LOSS) BEFORE INCOME
TAXES 1,558,000 (74,735,000) 13,734,000
(PROVISION) BENEFIT FOR
INCOME TAXES (854,000) 1,537,000 -
--------------- --------------- --------------
NET INCOME (LOSS) $ 704,000 $ (73,198,000)$ 13,734,000
=============== =============== ==============
BASIC EARNINGS (LOSS) PER SHARE $ 0.04 $ (4.78)$ 0.96
=============== =============== ==============
DILUTED EARNINGS (LOSS) PER
SHARE $ 0.04 $ (4.78)$ 0.95
=============== =============== ==============
See notes to consolidated financial statements.
TACO CABANA, INC.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
Preferred
Stock Common Stock Additional Retained Treasury Stock
-------- ----------------- Paid-in Earnings -------------------
Amount Shares Amount Capital (Deficit) Shares Amount
BALANCE,
January 1,
1996 $ - 15,681,162 $157,000 $96,954,000 $15,216,000 - $ -
Options
exercised - 25,375 - 119,000 - - -
Tax benefit from stock
options - - - 22,000 - - -
Net income - - - - 704,000 - -
---- --------- -------- ----------- ----------- --------- ----------
BALANCE,
December 29,
1996 - 15,706,537 157,000 97,095,000 15,920,000 - -
Purchase of
stock - - - - 871,937 (3,561,000)
Net loss - - - -(73,198,000) - -
---- ---------- -------- ------------ ---------- --------- ----------
BALANCE,
December 28,
1997 - 15,706,537 157,000 97,095,000(57,278,000) 871,937 (3,561,000)
Options
exercised - 201,400 2,000 961,000 - - -
Purchase of
stock - - - - - 1,705,000(10,333,000)
Net income - - - - 13,734,000 - -
---- ---------- -------- ------------ ---------- --------- ----------
BALANCE,
January 3,
1999 $ - 15,907,937 $159,000 $98,056,000$(43,544,000)2,576,937$(13,894,000)
==== ========== ======== ============ =========== ========= ===========
See notes to consolidated financial statements.
TACO CABANA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
---------------------------------------
December 29, December 28, January 3,
1996 1997 1999
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 704,000 $(73,198,000) $ 13,734,000
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities:
Depreciation and amortization 9,245,000 9,659,000 7,385,000
Deferred income taxes 450,000 (1,818,000) -
Special charges 2,497,000 78,738,000 (2,665,000)
Capitalized interest (12,000) (147,000) (117,000)
Deferred income and lease payments (278,000) (157,000) 59,000
Decrease (increase) in assets:
Receivables 291,000 634,000 150,000
Inventory (12,000) (656,000) (168,000)
Prepaid expenses and other assets 203,000 (1,018,000) (1,424,000)
Federal income taxes receivable 2,414,000 163,000 -
Other assets 393,000 58,000 21,000
(Decrease) increase in liabilities:
Accounts payable and accrued
liabilities (3,009,000) 2,328,000 (103,000)
Acquisition and closed restaurant
liabilities (676,000) (1,656,000) (1,194,000)
------------ ------------- -------------
Net cash provided by operating
activities 12,210,000 12,930,000 15,678,000
------------ ------------- -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and equipment (9,188,000) (16,812,000) (21,259,000)
Proceeds from sales of property and
equipment 846,000 1,379,000 4,330,000
Investment in joint venture (388,000) - -
------------ ------------- -------------
Net cash used by investing activities (8,730,000) (15,433,000) (16,929,000)
------------ ------------- -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of long-term
debt and draws on line of credit - 18,423,000 14,469,000
Principal payments under long-term
debt and line of credit (5,398,000) (11,074,000) (3,276,000)
Principal payments under capital
leases (224,000) (1,694,000) (192,000)
Purchase of treasury stock - (3,561,000) (10,333,000)
Exercise of stock options 141,000 - 963,000
------------ ------------- -------------
Net cash (used) provided by
financing activities (5,481,000) 2,094,000 1,631,000
------------ ------------- -------------
NET (DECREASE) INCREASE IN CASH (2,001,000) (409,000) 380,000
CASH AND CASH EQUIVALENTS, beginning
of period 2,749,000 748,000 339,000
------------ -------------- ------------
CASH AND CASH EQUIVALENTS, end of
period $ 748,000 $ 339,000 $ 719,000
============ ============== ============
(Continued)
TACO CABANA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUMMARY OF NON-CASH TRANSACTIONS:
During 1996, the Company closed one restaurant and charged its net book value of
$139,000 to acquisition and closed restaurant liabilities.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Year Ended
---------------------------------------
December 29, December 28, January 3,
1996 1997 1999
Cash paid for interest, net of
interest capitalized $ 1,144,000 $ 1,171,000 $ 1,848,000
Cash received for income taxes 2,504,000 4,000 9,000
Cash paid for income taxes 477,000 74,000 -
(Concluded)
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
Nature of Operations - Taco Cabana, Inc. (the "Company") operates a chain of
Tex-Mex patio style quick service restaurants located primarily in the
Southwestern United States. At January 3, 1999, the Company owned and
operated a total of 102 units. There were also 10 Taco Cabana franchised
units.
Principles of Consolidation - The consolidated financial statements include
all accounts of the Company and its wholly-owned subsidiaries. All
significant inter-company balances and transactions have been eliminated.
Fiscal Year - The Company's accounting period is based upon a 52 or 53 week
fiscal year ending on the Sunday closest to December 31. The fiscal years
1996, 1997 and 1998 were comprised of the 52 weeks ending December 29, 1996
and December 28, 1997 and the 53 weeks ending January 3, 1999, respectively.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Liquor Sales - To conform to state liquor laws, liquor licenses are
maintained and liquor sales are accounted for by a separate liquor
corporation. The liquor corporation pays the Company a management fee based
on liquor sales, reimburses the Company for its share of operating costs,
and pays base and additional rent based on liquor sales. In order to more
accurately reflect restaurant operations, all revenues and expenses relating
to liquor sales have been included in the consolidated financial statements
of the Company.
Inventory - Inventory is stated at the lower of cost using the first-in,
first-out method or market, and consists primarily of food products,
beverages and paper supplies.
Property and Equipment - Property and equipment is stated at cost. Equipment
and buildings under capital leases are stated at the lower of the present
value of minimum lease payments or fair market value of the asset at the
inception of the lease. Depreciation and amortization are provided using the
straight-line method over the estimated useful lives of the assets or the
applicable lease term, if less.
The estimated useful lives used in computing depreciation and amortization
are as follows:
Furniture, fixtures and equipment 2-10 years
Buildings 20-30 years
Leasehold improvements 5-30 years
Maintenance and repairs are charged to expense as incurred; improvements
which increase the value of the property and extend the useful life are
capitalized.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(Continued)
Intangible Assets - Goodwill, or the excess of acquisition costs over the
fair market value of the assets acquired and liabilities assumed, is
amortized using the straight-line method over 25 to 40 years. The trade
name and the rights to the Taco Cabana name are amortized using the
straight-line method over 40 years. Management assesses the recoverability
of goodwill on the basis of actual and undiscounted, projected cash flows
from the restaurants acquired. Should projected cash flows not be
sufficient to recover the Company's investment, including any recorded
goodwill, management utilizes either a discounted cash flow basis or other
determination of current fair value, in order to determine the amount of the
impairment.
Franchise Income - The Company has sold franchises that give the franchisees
the right to operate Taco Cabana restaurants in specified areas. Generally,
each franchisee acquires the right to open three or more restaurants. A
development fee is recognized as income when the agreement is signed, while
the franchise fee on each restaurant is deferred until the opening of the
franchised restaurant. In addition, the franchise agreement requires a
franchise royalty fee and an advertising fee on gross sales; such fees are
recorded as income when earned. In some markets, franchisees pay an
additional percentage of gross sales for expanded media coverage in their
respective areas.
Concentrations of Credit Risk - Financial instruments that potentially
subject the Company to concentrations of credit risk consisted principally
of amounts due from franchisees and receivables from credit card sales.
These risks are limited due to their geographic dispersion. The Company has
no significant concentrations of credit risk.
Income Taxes - Income taxes are recorded using a liability approach based
upon currently enacted tax rates. The effect of future changes in tax laws
will be recorded, when the laws are enacted.
Earnings (Loss) Per Share - In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128
("SFAS No. 128"), "Earnings Per Share", which requires presentation of basic
and diluted earning per share. Basic earnings per share is computed by
dividing income available to common shareholders by the weighted average
number of common shares outstanding for the reporting period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. As required, the Company adopted the
provisions of SFAS No. 128 in the year ended December 28, 1997. All prior
year weighted average and per share information has been restated in
accordance with SFAS No. 128. Outstanding stock options issued by the
Company represent the only dilutive effect reflected in diluted weighted
average shares.
Statements of Cash Flows - For purposes of reporting cash flows, the Company
considers all highly liquid debt instruments with a remaining maturity at
the date of purchase of three months or less to be cash equivalents.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(Continued)
Commitments and Contingencies - The Company does not subscribe to worker's
compensation insurance in its Texas market. The Company accrues for claims
based on historical actual payments made for such claims and expenses, as
well as an evaluation of current and anticipated claims and expenses. The
Company does maintain an excess liability coverage which management believes
is adequate to cover any substantial claims.
Stock-Based Compensation - The Company accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
("APB") No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
common stock at the date of grant over the amount an employee must pay to
acquire the stock. The Company has adopted the disclosure requirements of
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, as included in Note 12.
Reclassifications - Certain reclassifications have been made to the prior
year's consolidated financial statements to conform to the presentation and
classification used in fiscal 1998.
2. SPECIAL CHARGES (REVERSAL)
During fiscal 1996, 1997 and 1998, the following special charges are
included in the Company's consolidated financial statements:
December 29, December 28, January 3,
1996 1997 1999
Special charge (reversal) $ 2,497,000 $ 78,738,000 $(2,665,000)
Pro forma income tax (benefit)
provision (747,000) (3,018,000) 986,000
Decrease (increase) on net
income 1,750,000 75,720,000 (1,679,000)
Decrease (increase) per share $ 0.11 $ 4.94 $ (0.12)
Fiscal 1998 - As part of the special charges recorded in the fourth quarter
of 1996 and 1997, the Company reduced the carrying value of assets and
established reserves for the estimated lease liabilities associated with
restaurants that were closed. During 1998, the company successfully
completed sales of several of these properties to third parties or
negotiated favorable lease terminations. The amount of the proceeds in
excess of the carrying value of the assets and the remaining lease
liabilities was approximately $2.7 million. This amount was recorded as a
special charge reversal during the fourth quarter of 1998.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SPECIAL CHARGES (Continued)
Fiscal 1997 - During the fourth quarter of fiscal 1997, management made the
decision to close the seven restaurants in its Colorado market. The Company
committed substantial resources to this market during 1997 in an attempt to
reverse trends of poor sales and losses. The desired results from the
implementation of the plan were not achieved and the decision to close the
market was made. These seven restaurants had total sales of approximately
$3.0 million and operating losses of $2.1 million during the approximately
eleven months of 1997 that they were in operation.
Additionally, the Company continued to experience unfavorable sales trends
during 1997, concluding the year with comparable restaurant sales declining
2.9%. However, during the first six months of 1997, comparable restaurant
sales declined 4.8%. This trend compelled management to continue its
evaluation of the operating model of the Company. During this evaluation,
management concluded that certain volumes must be achieved in order to
operate individual restaurants in accordance with Company standards. These
standards include food quality, cleanliness, speed of service, and
profitability. Management reviewed all existing restaurants to determine
which restaurants could not reasonably be expected to achieve these volume
levels, generally annual revenues of at least $1 million. This led to the
decision to close an additional ten restaurants.
Due to the significance of the closures described above, management
performed an evaluation of the recoverability of all remaining assets as
described in Statement of Financial Accounting Standards No. 121 ("SFAS
121"), "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of ". Management concluded from the results of
this evaluation that a significant impairment of intangible as well as long-
lived assets was required to be recognized. The impairment was reflective
of a market value determined to be less than the carrying value of
approximately 40 restaurants, 31 of which were acquired. The assets were
tested for impairment by projecting cash flows for individual restaurants
based on recent results and trends specific to that restaurant. The
undiscounted projected cash flows for each restaurant were compared to the
carrying value for that restaurant, including allocated goodwill, where
applicable. If the undiscounted cash flows were less than the carrying
value, an impairment was deemed to have occurred. The amount of the
impairment was determined by calculating the difference between the present
value of the projected cash flows and the carrying value attributable to the
specific restaurant. The cash flows were discounted using the rate of
return the Company utilizes for approving new restaurant construction. Such
discounted cash flows are, in management's opinion, the best estimate of the
assets current value. Considerable management judgment is necessary to
estimate future discounted cash flows. Accordingly, actual results could
vary significantly from management's estimates.
The process described above resulted in the Company's recording a special
charge during the fourth quarter of 1997 of $78.7 million pre-tax, $75.7
million after-tax, or $4.94 per share. This amount had the following
components:
. Impairment of intangible assets of $33.1 million and impairment of long-
lived assets of $22.1 million for restaurants that will continue in
operation, based on the SFAS 121 analysis described above;
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SPECIAL CHARGES (Continued)
. A provision of $23.3 million for the closure of seventeen restaurants,
including all of the restaurants in the Colorado market. The amount was
determined in accordance with FAS 121 and was comprised of:
. $13.3 million for the carrying value of the assets, net of estimated
proceeds of $1.5 million for the sale of restaurant properties;
. $9.0 million to record the estimated lease related obligations for
closed restaurants. This amount was determined as the lesser of the
present value of the monthly lease commitments, net of expected
sublease receipts, or lease termination provisions;
. $500,000 for severance and relocation benefits paid to employees
displaced by the restaurant closures;
. $500,000 for the probable settlement of a franchisee lawsuit related to
the Colorado market.
. The write-off of other assets totaling $200,000.
During 1997, the seventeen restaurants contributed a total of $9.6 million
in sales, and had operating losses totaling $2.5 million. In addition, the
total amount of depreciation recorded during 1997 relating to assets which
were impaired was approximately $2.5 million.
Fiscal 1996 - The Company has a 50% interest in a joint venture which
operated three restaurants in the Atlanta market. During the fourth quarter
of 1996, the Company decided to write-down its investment in the joint
venture and accrue for certain costs associated with the closing of two of
the three restaurants operated by the joint venture. This decision resulted
in a special charge of $2.5 million pre-tax, $1.7 million after-tax or $0.11
per share. The special charge was comprised of the following:
Write-down of investment in joint venture $ 1,191,000
Reserve for notes and accounts receivable 268,000
Estimated lease obligations 632,000
Estimated legal and professional fees 245,000
Other costs 161,000
-------------
Total $ 2,497,000
=============
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consisted of the following:
December 28, January 3,
1997 1999
Trade receivables:
Royalties $ 84,000 $ 97,000
Other 356,000 365,000
Notes receivable - current portion 109,000 78,000
Employees 2,000 -
----------- -----------
Total 551,000 540,000
Less allowance for doubtful accounts (49,000) (102,000)
----------- -----------
Receivables, net $ 502,000 $ 438,000
=========== ===========
Notes receivable - noncurrent:
Franchisees $ 344,000 $ 258,000
=========== ===========
Notes receivable from franchisees approximate fair value because the
underlying instruments have an interest rate that approximates current
market rates. The Company's allowance for doubtful accounts is reflected as
a reduction of receivables in the consolidated balance sheets.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of the following:
December 28, January 3,
1997 1999
Property and equipment:
Land $ 18,759,000 $ 20,384,000
Furniture, fixtures and equipment 39,627,000 48,245,000
Leasehold improvements 8,335,000 13,820,000
Buildings 13,159,000 17,322,000
Construction in progress 1,195,000 920,000
-------------- --------------
81,075,000 100,691,000
Less accumulated depreciation and
amortization (24,525,000) (31,424,000)
-------------- --------------
Total 56,550,000 69,267,000
-------------- --------------
Property and equipment held under
capital leases:
Buildings 4,254,000 4,401,000
Less accumulated amortization (1,264,000) (1,418,000)
-------------- --------------
Total 2,990,000 2,983,000
-------------- --------------
Property and equipment, net $ 59,540,000 $ 72,250,000
============== ==============
At January 3, 1999, the Company had three restaurants held for sale. The
total carrying amount of these assets is $1.1 million which management
estimates to be the net proceeds from the disposition of these assets. See
Note 2.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consisted of the following:
December 28, January 3,
1997 1999
Intangible assets:
Goodwill $ 16,154,000 $ 16,154,000
Trade name 1,575,000 1,576,000
-------------- --------------
17,729,000 17,730,000
Less accumulated amortization (6,436,000) (7,006,000)
-------------- --------------
Intangible assets, net $ 11,293,000 $ 10,724,000
============== ==============
Other assets:
Deposits $ 214,000 $ 177,000
Other 19,000 35,000
-------------- ---------------
Other assets $ 233,000 $ 212,000
============== ===============
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
December 28, January 3,
1997 1999
Closed restaurant obligations $ 2,827,000 $ 740,000
Payroll related 1,468,000 2,380,000
Property taxes 627,000 557,000
Employee injury 138,000 271,000
Restaurant expenses 297,000 433,000
Legal 332,000 168,000
Other 577,000 716,000
------------- --------------
Total $ 6,266,000 $ 5,265,000
============= ==============
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LEASES
Operating Leases - The Company leases restaurant facilities under non-
cancelable operating leases with initial terms ranging from ten to twenty
years with options to renew. The future minimum lease commitments under all
non-cancelable operating lease obligations as of January 3, 1999 were as
follows:
Years ending:
1999 $ 6,432,000
2000 6,426,000
2001 6,348,000
2002 6,290,000
2003 6,387,000
Thereafter 36,733,000
--------------
Total $ 68,616,000
==============
The total rental expense for operating leases was approximately $6.6 million
for both 1996 and 1997, and $6.2 million for 1998, including additional
rents of approximately $308,000, $291,000 and $185,000 for 1996, 1997 and
1998, respectively.
The Company remains contingently liable on eight operating leases which were
assigned to the purchasers of units previously sold or closed. Future
minimum lease commitments under these contingent obligations approximate
$597,000 in 1999, and a total of $2.4 million in 2000 through 2003.
Thereafter, the total minimum lease payments are approximately $2.6 million.
The Company assesses the probability of its having to assume primary
liability under these assignments as part of its ongoing assessment of
franchisee relationships.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LEASES (Continued)
Capital Leases - The Company leases certain buildings under capital lease
agreements with third parties. The leases have fifteen and twenty year
terms. Future minimum lease payments under the capital leases and the net
present value of the minimum lease payments at January 3, 1999 were:
Years ending:
1999 $ 445,000
2000 445,000
2001 446,000
2002 446,000
2003 439,000
Thereafter 1,220,000
-------------
Total minimum lease payments 3,441,000
Less amount representing interest at 9% to 13% 1,086,000
-------------
Net present value of minimum lease payments 2,355,000
Less current portion 215,000
-------------
Long-term portion of capital leases $ 2,140,000
=============
In addition to the minimum lease payments, several of the leases have a
contingent rental based on 5% to 6% of gross sales, if such amounts exceed
minimum rent. No payments have been made under these agreements.
Furthermore, certain leases have been guaranteed by a stockholder of the
Company.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT
Long-term debt consisted of the following notes payable bearing interest at
the prime rate of 7.75% at January 3, 1999:
December 28, January 3,
1997 1999
Notes payable to a bank, collateralized
by certain restaurant
assets, due in monthly installments of
principal and interest
through August 2004 $ 10,521,000 $ 19,754,000
Notes payable to a bank, collateralized
by certain restaurant
assets, due in January 1999,
subsequently refinanced - 3,300,000
Note payable to a bank, unsecured, due
in monthly installments
of principal and interest through April 2000 1,777,000 1,365,000
Note payable to a corporation,
collateralized by certain
restaurants, due in monthly
installments of principal
and interest through September 1998 256,000 -
--------------- --------------
Total 12,554,000 24,419,000
Less current maturities 1,384,000 5,489,000
--------------- --------------
Long-term debt, net $ 11,170,000 $ 18,930,000
=============== ==============
The future minimum payments of long-term debt outstanding at January 3, 1999
were as follows:
Years ending:
1999 $ 5,489,000
2000 2,761,000
2001 1,996,000
2002 2,444,000
2003 2,437,000
Thereafter 9,292,000
--------------
Total $ 24,419,000
==============
The amounts stated in the Company's consolidated balance sheets for
long-term debt approximate fair value because the underlying note payable
balance fluctuates frequently or it is at a rate approximating current
market rates.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. LINE OF CREDIT
During 1998 the Company had in place two secured credit facilities totaling
$30 million, including a $5 million revolving line of credit. Interest on
funds borrowed under the facilities are charged at the prime rate which was
7.75% at January 3, 1999. On December 31, 1998 the credit facilities were
amended and increased to a total of $40 million. As a part of the
amendment, the commitments were extended to December 31, 2000. Interest on
funds borrowed under the amended facility are charged at the prime rate
or, at the Company's choice, 2.25% over the London Interbank Offered
Rate (LIBOR), adjusted quarterly. The credit facilities are secured by
property and equipment. The facilities contain certain covenants, including
cash flow to fixed charges ratio, minimum net worth, debt to tangible net
worth ratio, and intangible assets to net worth ratio requirements. During
the year ended January 3, 1999, the Company was in compliance with all such
covenants. At January 3, 1999, the Company had approximately $11.5 million
available for cash borrowings under these credit facilities.
10.ACQUISITION AND CLOSED RESTAURANT LIABILITIES
The Company establishes acquisition liabilities, as necessary, in connection
with the purchase method of accounting for restaurants and other assets it
acquires. Such liabilities are primarily related to leases that were at
terms less favorable than market rates prevailing at the acquisition date
and anticipated restaurant closure costs, if any.
The liability established for leases in excess of the prevailing market were
based on current market rental rates at the date of acquisition as compared
to the terms of the leases acquired. This liability is being amortized as a
reduction of occupancy expense over the remaining term of the applicable
leases. The total amount of this reserve was $1.4 million and $1.2 million,
at December 28, 1997 and January 3, 1999, respectively. During 1997 and
1998, approximately $203,000 and $181,000, respectively, of the balance was
amortized in this manner.
Acquisition liabilities includes reserves established for the closure of
certain acquired restaurants. These restaurants were anticipated to be
closed at the time of acquisition. The amounts reserved were equal to the
value assigned to the building and equipment acquired, less any anticipated
salvage value, plus an amount estimated to terminate the lease prior to its
expiration date. The total amount of this reserve was $1.5 million and
$261,000 at December 28, 1997 and January 3, 1999, respectively. During
1997 and 1998, approximately $900,000 and $1.0 million, respectively, of
this reserve was utilized in the closure of restaurants. As part of the
special charge reversal recorded in 1998, the Company reversed $200,000 of
this reserve.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10.ACQUISITION AND CLOSED RESTAURANT LIABILITIES (continued)
In 1997, as part of the special charge, the Company reserved amounts for
closed restaurant liabilities. The amounts reserved were equal to the
lesser of the present value of the monthly lease commitments, net of
expected sublease receipts, or lease termination provisions. These reserves
were approximately $7.1 million and $6.2 million at December 28, 1997 and
January 3, 1999, respectively. It is currently anticipated that payments of
approximately $740,000 will be made under lease and other obligations during
1999. During 1997 and 1998, approximately $1.9 million and $2.7 million,
respectively, of this reserve was utilized in the closure of restaurants.
During 1998, the Company received proceeds of approximately $4.3 million
from the sales of closed restaurant properties. As part of the special
charge reversal recorded in 1998, the Company re-evaluated lease obligations
for closed restaurants and reversed approximately $2.5 million of the lease
liability reserves for such restaurants.
11.EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
December 29, December 28, January 3,
1996 1997 1999
Numerator for basic and diluted
earnings
per share - net income (loss) $ 704,000 $ (73,198,000) $13,734,000
Denominator:
Denominator for basic
earnings per
share - weighted-average 15,694,757 15,314,665 14,336,526
shares
Effect of dilutive securities-
Employee stock options 251,923 - 140,067
-------------- ------------- -----------
Denominator for diluted
earnings per share - adjusted
weighted-average and assumed
conversions 15,946,680 15,314,665 14,476,593
============== ============= ===========
Basic earnings (loss) per share $ 0.04 $ (4.78) $ 0.96
============== ============= ==========
Diluted earnings (loss) per share $ 0.04 $ (4.78) $ 0.95
============== ============= ==========
For additional disclosures regarding outstanding employee stock options, see
Note 12.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12.STOCKHOLDERS' EQUITY AND STOCK OPTIONS
Stock Options - The Company has stock option plans (the "Plans") for employees,
outside directors, and advisors of the Company covering 2,750,000 shares of the
Company's common stock. Options under such plans generally become exercisable
ratably over a two to five year period. All options expire at the earlier of
termination of employment or ten years after the date of grant. The Plans
terminate in 2000 and in 2004. The Plans are administered by a committee of
outside members of the Board of Directors. In addition, certain directors were
awarded non-qualified stock options pursuant to the terms of separate
compensation agreements. At January 3, 1999, there were 179,233 shares
available for issuance upon exercise of options that may be granted in the
future. Options outstanding are as follows:
Weighted
Average
Total Options Exercise
Outstanding Price
Options outstanding, December 31, 1995 1,053,125 $ 6.40
Granted 231,250 6.30
Exercised (25,375) 4.85
Expired or canceled (147,500) 5.36
---------
Options outstanding, December 29, 1996 1,111,500 $ 6.18
Granted 379,750 4.63
Exercised - -
Expired or canceled (140,375) 8.57
---------
Options outstanding, December 28, 1997 1,350,875 $ 5.64
Granted 480,050 6.17
Exercised (201,400) 4.78
Expired or canceled (125,000) 5.24
---------
Options outstanding, January 3, 1999 1,504,525 $ 5.76
=========
Options exercisable, January 3, 1999 635,195 $ 5.95
=========
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12.STOCKHOLDERS' EQUITY AND STOCK OPTIONS (Continued)
For the options outstanding at January 3, 1999, the weighted average
remaining life and exercise price of these outstanding options were 26
months and $5.79, respectively. In addition, the weighted average exercise
price of options granted during 1998 was $6.17.
SFAS No. 123, Accounting for Stock-Based Compensation, allows entities to
continue to use Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees. The Company has evaluated SFAS
No. 123 and intends to continue following APB Opinion No. 25. The pro-forma
compensation expense, net income (loss) and earnings (loss) per share which
were calculated as if SFAS No. 123 had been applied are as follows:
Year Ended
--------------------------------------------
December 29, December 28, January 3,
Pro Forma 1996 1997 1999
Compensation expense $ 741,000 $ 555,000 $ 329,000
Net income (loss) 237,000 (73,548,000) 13,405,000
Diluted earnings
(loss) per share $ 0.01 $ (4.80) $ 0.93
The Black-Scholes option pricing model was used to determine the above pro-
forma information. The calculations relied upon estimates of the volatility
of the Company's stock and expected dividends, as well as determinations of
a risk-free interest rate and expected life of the options. A volatility
rate of 49.0% was used for options granted prior to 1994, 37.5% was used for
options granted during 1994, 36.0% was used for options granted during 1995
through 1996, 34.0% was used for options granted during 1997, and 33.0% was
used for options granted during 1998. Dividends were estimated at zero.
The discount rate charged on loans to depository institutions by the Federal
Reserve Bank was used as the risk-free interest rate. The discount rate was
approximately 5.0% for all of 1998. The life of the Company's options range
from two to five years.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12.STOCKHOLDERS' EQUITY AND STOCK OPTIONS (Continued)
Preferred Stock Purchase Rights - In June 1995, the Company's Board of
Directors declared a distribution of one preferred stock purchase right for
each share of the Company's common stock. The rights were distributed on
June 20, 1995 to stockholders of record as of the close of business on that
day. Each right will entitle the holder to buy 1/1000 of a share of a newly
authorized Series A preferred stock at an exercise price of $37.50 per
right. The rights become exercisable on the tenth day after public
announcement that a person or group has acquired 15% or more of the
Company's common stock. The rights may be redeemed by the Company prior to
becoming exercisable by action of the Board of Directors at a redemption
price of $0.01 per right. If the Company is acquired in a merger or other
business combination transaction in which it is not the surviving
corporation, each right will entitle its holder to purchase stock of the
acquiring company having a market value of twice the exercise price. In the
event that the Company is the surviving corporation, each right will entitle
its holder to purchase the Company's common stock having a market value of
twice the exercise price of each right. At January 3, 1999, there were
13,331,000 rights outstanding.
Preferred Stock - In June 1995, in connection with its implementation of the
stockholders' rights plan discussed above, the Company authorized 100,000
shares of Series A, preferred stock with a par value of $0.01 per share,
which would become issuable only at such time, if ever, as the rights become
exercisable. As of January 3, 1999 there were no shares outstanding.
Treasury Stock - The Company's Board of Directors previously authorized the
purchase in the open market of up to 4,000,000 shares of the Company's
outstanding common stock. At December 28, 1997 and January 3, 1999, the
Company held treasury stock of 871,937 shares and 2,576,937 shares of its
common stock at a cost of $3,561,000 and $13,894,000, respectively.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13.INCOME TAXES
The provision (benefit) for income taxes differs from the amount computed
using statutory rates as shown below:
December 29, December 28, January 3,
1996 1997 1999
Federal income tax at
statutory rate $ 530,000 $(25,410,000) $ 4,670,000
State income taxes 39,000 48,000 -
Goodwill and other 285,000 4,819,000 (15,000)
Valuation allowance on net
deferred tax asset - 19,006,000 (4,655,000)
------------ ------------ -------------
Total $ 854,000 $ (1,537,000) $ -
============ ============ ============
The provision (benefit) for income taxes is comprised of the following:
Year Ended
-------------------------------------------
December 29, December 28, January 3,
1996 1997 1999
Current $ 404,000 $ 281,000 $ -
Deferred 450,000 (1,818,000) -
------------ --------------- -----------
Total $ 854,000 $ (1,537,000) $ -
============ ============== ===========
Deferred income taxes and benefits are provided for differences between the
financial statement carrying amount of existing assets and liabilities and
their respective tax bases. Significant deferred tax assets and liabilities
are as follows:
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13.INCOME TAXES (Continued)
December 28, January 3,
1997 1999
Current:
Deferred Federal Tax Assets:
Workmen's compensation claims $ 494,000 $ 337,000
Investment in joint venture 718,000 -
Accounts receivable 17,000 35,000
Charitable contributions 34,000 -
Accrued vacation 38,000 21,000
----------- -----------
Total 1,301,000 393,000
----------- -----------
Deferred Federal Tax Liabilities -
Pre-opening costs (119,000) -
----------- -----------
Total (119,000) -
----------- -----------
Net Current Deferred Tax Asset $ 1,182,000 $ 393,000
=========== ===========
Noncurrent:
Deferred Federal Tax Assets:
Net operating loss carryforward $ 5,601,000 $ 6,955,000
General busines tax credit carryforward 627,000 590,000
Closed stores 916,000 1,400,000
Alternative minimum tax credit carryforward 1,258,000 1,277,000
Production costs 79,000 -
Deferred rent 791,000 2,416,000
Other - Special charge 12,907,000 6,071,000
Charitable Contributions - 51,000
------------ ------------
Total 22,179,000 18,760,000
------------ ------------
Deferred Federal Tax Liabilities:
Fixed and intangible assets (4,312,000) (4,802,000)
Other reserves (43,000) -
------------ ------------
Total (4,355,000) (4,802,000)
============ ============
Net Noncurrent Deferred Tax Asset 17,824,000 13,958,000
============ ============
Net Deferred Tax Asset before valuation
allowance 19,006,000 14,351,000
Valuation Allowance (19,006,000) (14,351,000)
------------ ------------
Net Deferred Tax Asset $ - $ -
============ ============
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13.INCOME TAXES (Continued)
At January 3, 1999, the Company had net operating loss, alternative minimum
tax and general business tax credit carry-overs of approximately $20
million, $1.3 million and $590,000, respectively. A portion of the above
carry-overs resulted from the acquisition of Two Pesos; the Company was
allowed to utilize the net operating loss of $5.4 million and tax credit
carry-overs of $178,000 of Two Pesos that existed at the date of
acquisition. However, these carry-overs may only offset the
post-acquisition taxable income and tax liability of the Company's
subsidiary that acquired Two Pesos. In addition, because of the change in
ownership, the net operating loss carry-over utilization is further limited
to approximately $953,000 per year, and the tax credit carry-over acquired
from Two Pesos is limited each year to the tax equivalent of any remaining
portion of the net operating loss limitation. The net operating loss and
tax credit carry-overs begin to expire in 2003 and 2000, respectively.
The alternative minimum tax credit carry-over and the remaining general
business credit carry-overs are available to offset future regular tax
liabilities. The general business credit begins to expire in 2007. The
alternative minimum tax credit has no expiration date.
14.LITIGATION SETTLEMENT AND LEGAL PROCEEDINGS
On July 24, 1996, the Company approved the settlement of A.L. Park, et al v.
Taco Cabana, Inc., et al., a suit originally filed in September 1995 seeking
status as a class action. As a result thereof, the Company recorded a
charge of $3.4 million pre-tax, $2.2 million after-tax, or $0.14 per share,
during the second quarter of fiscal 1996. Under the terms of the settlement,
the plaintiffs received a total of $6.0 million of which the Company's
insurance carrier paid $3.05 million. Additionally, the Company paid
approximately $450,000 for legal and related expenses incurred in connection
with the settlement.
In addition, the Company is a party to routine negligence or
employment-related litigation in the ordinary course of its business. No
such pending matters, individually or in the aggregate, are deemed to be
material to the results of operations or financial condition of the Company.
TACO CABANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15.QUARTERLY FINANCIAL DATA (Unaudited)
Quarter Ended
-------------------------------------------------------
March 30, June 29, September 28, December 28,
1997 1997 1997 1997 (1)
Total revenues $ 30,186,000 $ 34,200,000 $ 35,051,000 $ 32,765,000
Gross profit 21,024,000 23,628,000 24,178,000 22,704,000
Net income (loss)
applicable to
common stock 556,000 876,000 562,000 (75,193,000)
Basic and diluted
earnings (loss)
per share (2) $ 0.04 $ 0.06 $ 0.04 $ (5.07)
Quarter Ended
-------------------------------------------------------
March 29, June 28, September 27, January 3,
1998 1998 1998 1999 (1)
Total revenues $32,407,000 $36,292,000 $ 36,270,000 $ 37,981,000
Gross profit 22,615,000 25,463,000 25,168,000 26,357,000
Net income applicable
to common stock 1,857,000 3,297,000 2,895,000 5,686,000
Basic earnings per share $ 0.13 $ 0.22 $ 0.20 $ 0.42
Diluted earnings per
share $ 0.12 $ 0.22 $ 0.20 $ 0.41
(1) See Note 2 for discussion of
charges recorded in these quarters.
(2) The earnings per share amounts have been restated as
required to comply with Statement of Financial Standards No. 128 (SFAS 128),
"Earnings Per Share". For further discussion of earnings per share and the
impact of SFAS 128, see Note 11.
FOURTH AMENDED LOAN AGREEMENT
This Fourth Amended Loan Agreement (this "Agreement"), dated as of the
31st day of December, 1998, is entered into by and among TACO CABANA, INC., a
Delaware corporation, TEXAS TACO CABANA, L.P., a Texas limited partnership, TP
ACQUISITION CORP., a Texas corporation, T.C. MANAGEMENT, INC., a Delaware
corporation, TACO CABANA MANAGEMENT, INC., a Texas corporation, COLORADO CABANA,
INC., a Colorado corporation and TACO CABANA MULTISTATE, INC., a Delaware
corporation (collectively the "Borrower"), and INTERNATIONAL BANK OF COMMERCE, a
state banking association (the "Lender").
For good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties agree as follows:
SECTION 1. THE LOANS.
1.1 Loan Commitment. Subject to the terms and conditions hereof, the
Lender agrees to lend and advance to Borrower, from time to the time until
December 31, 2000 (the "Loan Commitment Period"), such sums as the Borrower may
request, but which shall not exceed, in the aggregate principal amount at any
one time outstanding, the amount of $35,000,000.00 ("Loan Commitment").
1.2 The Loans. Each borrowing under the Loan Commitment shall be referred
to herein as a "Loan", (and such borrowings shall be collectively referred to
as the "Loans"), shall be deemed a separate and independent loan, and shall
be evidenced and secured as set forth below. The loans (the "Existing Loans")
evidenced by the following described promissory notes (each a "Note" as such
term is used and defined herein) are Loans governed by this Agreement: (i) that
certain real estate lien note in the original principal amount of Ten Million
and No/100 Dollars ($10,000,000.00) dated May 15, 1995, executed by Borrower and
being payable to the order of Lender; and (ii) that certain real estate lien
note in the original principal amount of Three Million Seven Hundred Thousand
and No/100 Dollars ($3,700,000.00) dated August 8, 1997, executed by Borrower
and being payable to the order of Lender; (iii) that certain real estate lien
note in the original principal amount of $11,000,000.00, dated December 23,
1997, executed by Borrower and being payable to the order of Lender; and (iv)
that certain real estate lien note in the original principal amount of
$13,300,000, dated of even date herewith, executed by Borrower and being payable
to the order of the Lender.
1.3 Interest. Subject to Section 7, interest on the Loans shall be
calculated in accordance with the following:
a. All of the Loans shall bear interest at the Applicable Rate (as
defined below). For purposes hereof "Applicable Rate" shall mean, at any time,
the rate of interest per annum equal to the lessor of (i) at Borrower's option
exercised as set forth below, (A) the LIBOR Rate (as herein after defined) then
in effect plus two and 25/100th percent (2.25%), to be recomputed as of each
Interest Adjustment Date, or (B) the New York Prime Rate (as hereinafter
defined), or (ii) the maximum rate of interest allowed by applicable law, as now
or hereafter in effect (the "Maximum Rate"). The term "Interest Adjustment
Date" shall mean each of March 31, 19999, June 30, 1999, September 30, 1999,
December 31, 1999, March 31, 2000, June 30, 2000, September 30, 2000 and
December 31, 2000. The "New York Prime Rate" shall mean the floating annual
lending rate of interest announced from time to time by the Chase Manhattan
Bank, N.A., New York, New York, as its prime rate; if a prime rate is not
announced by Chase Manahattan Bank, N.A., then the term "New York Prime Rate"
shall mean the floating annual lending rate of interest announced from time to
time by Lender as its prime rate less one percent (1%). The term "LIBOR Rate"
shall mean, as of a particular date, the per annum rate of interest identified
as the three months London Interbank Offered Rate in the "Money Rates" Section
of the edition of the Southwest Edition of the Wall Street Journal most
recently published as of Interest Adjustment Date immediately previous to such
date; provided, however, that if the Wall Street Journal shall discontinue or
shall fail to regularly publish such rate in its "Money Rates" section or should
the LIBOR Rate become for any other reason unascertainable or be construed by a
court of competent jurisdiction as not constituting an index or formula by which
the foregoing described rate of interest can be determined, then the LIBOR Rate
option will no longer be available hereunder. Borrower acknowledges that Lender
makes no warranty or representation that the New York Prime Rate, LIBOR Rate or
Lender's prime rate are more favorable than another rate or index, or that rates
on other loans or credit facilities may not be based on other indices, or that
rates on loans to others may not be made below such rates. Installments of
principal and interst under each Loan shall be payable quarterly and amortized
over a ten (10) year period, and have a term specified by Lender which will not
exceed seven (7) years from the date of such Loan.
b. Upon at least two (2) Business Days' prior to written notice from
Borrower to Lender in substantially the form attached hereto as Exhibit "A",
Borrower may, on any Interest Adjustment Date elect to use either the New York
Prime Rate, the LIBOR Rate for the calculation of the Applicable Rate; provided,
however, that the rate of interest as elected in this section must be the same
rate of interest as elected in Section 1.3 of that certain Third Amended
Revolving Loan Agreement dated of even date herewith by and between Borrower
and Lender.
c. To the extend Borrower has not made an effective elective under
and in accordance with this Section 1.3, the Applicable Rate shall be calculated
using the New York Prime Rate.
1.4 Commitment Fee. During the Loan Commitment Period, Borrower agrees to
pay to Lender a commitment fee computed at the rate of one-quarter of one
percent (0.25%) per annum on the daily average unused amount of the Loan
Commitment during each Quarterly Cycle (as hereinafter defined). Such
commitment fee shall be payable quarterly, in arrears, on the last day of each
March, June, September and December during the Loan Commitment Period,
commencing December 31, 1998 and continuing in consecutive quarterly payments
thereafter until the date of expiration of the Loan Commitment Period, on which
date any accrued and unpaid fee computed in accordance with the provisions of
this Section shall be due and payable. For purposes of this Section 1.4, the
term "Quarterly Cycle" shall refer to each calendar quarter during the Loan
Commitment Period.
1.5 Replaces Prior Commitment. This Fourth Amended Loan Agreement replaces
entirely that certain Third Amended Loan Agreement dated October 15, 1998 (the
"Prior Loan Agreement") which governed the terms of a $25,000,000.00 loan
commitment from Lender to Borrower ("Prior Commitment"). The Borrower and
Lender acknowledge that the Prior Commitment is null and void and of no further
force or effect.
1.6 Revolving Loan Agreement. The Borrower and Lender have entered into a
Third Amended Revolving Loan Agreement of even date herewith ("Revolving Loan
Agreement"). The term "Revolving Loan Documents" as used in this Fourth Amended
Loan Agreement shall have the meaning provided in the Revolving Loan Agreement.
SECTION 2. SECURITY AND COLLATERAL.
2.1 Composition of the Collateral. The Loans shall be secured primarily
with first liens and security interests upon those tracts of Borrower's real
property which are agreed upon between Borrower and Lender ("Security Tracts"),
together with the improvements, furniture, fixtures, equipment, accounts and
inventory located on, attributable to or used in connection with the Security
Tracts, as specifically set out in, and together with such other mortgages,
liens and security interests as set out in the Loan Documents (as defined in
Section 3.2). The security granted by the Loan Documents shall constitute
collateral for the indebtedness established by the Loans and as otherwise
established and set out in the Loan Documents (cumulatively the "Secured
Indebtedness"). All of the mortgages, liens, security interests, and rights
granted to Lender by the Loan Documents shall secure any and all Secured
Indebtedness. Lender shall not be required to release any of the liens,
security interests, and rights granted or given to Lender by any of the Loan
Documents unless and until all of the Secured Indebtedness has been paid in
full. The Loan Documents shall provide, and Borrower hereby agrees, that a
default under any Loan Document shall constitute a default under the Loan
Documents for all Loans and under each of the Revolving Loan Documents, and a
default under any of the Revolving Loan Documents shall constitute a default
under each of the Loan Documents.
2.2 Priority of Liens. The liens, security interests, and rights granted
to Lender to secure the Secured Indebtedness shall be first and prior except for
(i) liens for ad valorem taxes not yet delinquent, and (ii) those matters
expressly approved by Lender, in advance and in writing, which approval Lender
is under no obligation to provide.
2.3 Perfection and Preservation of Liens. Borrower will (i) execute and
deliver to Lender from time to time at the request of Lender such documents or
instruments as Lender shall deem necessary or appropriate, and will take such
other and further actions as Lender may from time to time request, in order to
perfect, continue, protect and preserve the liens, security interests and rights
granted to Lender by the Loan Documents; and (ii) pay or reimburse the Lender
for all costs and taxes of filing or recording the same in such public offices
as the Lender may designate.
SECTION 3. CONDITIONS PRECEDENT.
The obligation of the Lender to make a Loan hereunder is subject to the
following conditions precedent:
3.1 Certain Events. The following conditions precedent must be fully
satisfied as of the date of any Loan:
a. No Event of Default (as defined below) under this Agreement or
any Loan Document, as defined below, shall have occurred, and no event shall
have occurred and be continuing that, with the giving of notice or passage of
time, or both, would be such an Event of Default.
b. Lender shall have received an appraisal of the fair market value
of the real property and improvements thereon to be granted as security for the
Loan, in a form, and prepared by an appraiser, approved by Lender, which
indicates that the amount of the proposed Loan is no greater than eighty
percent (80%) of the lesser of (i) the appraised fair market value of such
property, or (ii) the purchase price paid by Borrower for such property.
3.2 Documents Required for the Closing. Prior to any disbursement of any
Loan (the "Closing"), the following documents ("Loan Documents", such term
including all loan documents, other than the Prior Loan Agreement, executed
and/or delivered in connection with the Existing Loans) shall have been
delivered to Lender, fully executed and acknowledged where required and all in
form and substance acceptable to Lender:
a. This Agreement.
b. A Real Estate Lien Note ("Note").
c. A Security Agreement between Borrower and Lender, granting to
Lender a security interest in, among other property, all of Borrower's right,
title and interest, whether now or hereafter acquired, in all accounts,
inventory and equipment, and all proceeds thereof, located on, attributable to
or used in connection with the Security Tracts.
d. A Deed of Trust, Assignment of Rents, Security Agreement and
Financing Statement from Borrower to Thomas L. Travis, Trustee for the benefit
of Lender, granting a first lien upon the real property and improvements thereon
to secure the respective Loan.
e. Financing Statements as Lender shall deem necessary to file from
time to time in order to perfect and preserve the security interests granted by
the Loan Documents.
f. A Commitment and Policy for Mortgagee Title Insurance issued by a
title company acceptable to Lender and for the aggregate amount of the
respective Loan.
g. A survey of the real property and improvement thereon prepared by
a surveyor acceptable to Lender.
h. Engineering and other information evidencing the absence of
pollution or contamination on the property being acquired and the suitability of
such property for Borrower's intended restaurant operation.
i. Tax Certificates evidencing that there are no ad valorem taxes or
assessments which are past due or payable.
j. Liability and casualty insurance coverage in an amount and issued
by carriers approved by Lender.
k. For the first Loan made hereunder, certified (as of the date of
Closing) copies of (i) resolutions of the Borrower's board of directors (for
each Borrower which is a corporation) or a consent of all general partners (for
each Borrower which is a partnership) authorizing the execution, delivery, and
performance of this Agreement and the Loan Documents, and each other document to
be delivered pursuant hereto including a certification (dated the date of the
Closing) of the Borrower's secretary or its managing or general partner, as the
case may be, as to the incumbency and signatures of the officers of the Borrower
signing the Loan Documents, and each other document to be delivered pursuant
hereto; (ii) Borrower's bylaws, or partnership agreement, including all
amendments thereto; (iii) Borrower's articles of incorporation, including any
and all amendments thereto; and (iv) certificates of existence and certificates
as to the good standing of Borrower from applicable governmental authorities.
For each Loan after the first Loan, Borrower shall deliver to Lender and the
applicable title insurer (i) a current written statement of the Borrower's
corporate secretary or managing partner, as the case may be, stating that each
of the documents listed in this Section 3.2(k) delivered in conjunction with the
first Loan remains valid, unamended and effective and applicable to the
particular Loan to be made (or, if such statement cannot truthfully be given
then a current written statement of Borrower's corporate secretary stating the
particular reasons why such statement cannot be truthfully given, together with
any amended documents), and (ii) any of the documents listed in this Section
3.2(k) which are required by the title insurer for a particular Loan, in order
to issue the required mortgagees title insurance policy.
l. Any and all other documents or instruments as may be required by
Lender.
m. Prior to the first Loan, and thereafter at the request of Lender,
a true and complete list of all legal actions, claims, proceedings,
investigations and notices thereof, against or affecting Borrower.
SECTION 4. REPRESENTATIONS AND WARRANTIES.
4.1 Original. To induce the Lender to enter into this Agreement, and to
fund the [Loans to be made hereunder], each Borrower represents and warrants to
the Lender as follows:
a. Borrower is a corporation or general partnership or limited
partnership, as applicable, duly organized, validly existing, and in good
standing under the laws of the state under which it was organized; Borrower has
the lawful power to own its properties and to engage in the business it
conducts, and is duly qualified and in good standing as a foreign corporation or
foreign partnership in the jurisdictions wherein the nature of the business
transacted by it or property owned by it makes such qualification necessary.
b. Borrower is not in default with respect to any of its existing
indebtedness, and the making and performance of the Loan Documents will not
immediately or with the passage of time, or the giving of notice, or both: (i)
violate the charter or bylaw or partnership provisions of Borrower, or (ii)
violate any laws or result in a default under any contract, agreement, or
instrument to which Borrower is a party or by which Borrower or its property is
bound.
c. Borrower has the power and authority to enter into and perform
each of the Loan Documents to which it is a party, and to incur the obligations
herein and therein provided for, and has taken all corporate or partnership
action necessary to authorize the execution, delivery, and performance of this
Agreement and such other Loan Documents.
d. The Loan Documents are, and each Note when delivered will be,
valid, binding, and enforceable in accordance with their respective terms.
e. There is no pending order, notice, claim, litigation, proceeding,
or investigation against or affecting Borrower, whether or not covered by
insurance, that would materially and adversely affect the business of Borrower
if adversely determined.
f. All financial information given to Lender, including any
schedules and notes pertaining thereto, have been prepared in accordance with
generally accepted accounting principles consistently applied, fully and fairly
present the financial condition of Borrower at the dates thereof and the results
of' operations for the periods covered thereby, and there have been no material
adverse changes in the consolidated financial condition or business of Borrower
set forth therein, to the date hereof.
g. Except as otherwise permitted herein, Borrower has filed and paid
all federal, state, and local tax returns and other required reports and all
taxes, assessments, and other governmental charges that are due and payable
prior to the date hereof.
h. Except to the extent that the failure to comply would not
materially interfere with the conduct of the business of the Borrower, Borrower
has complied, and shall comply, with all applicable laws and regulations.
i. No representation or warranty by the Borrower contained herein or
in any Loan Document or certificate or other document furnished by the Borrower
contains any untrue or misleading statement of material fact or omits to state a
material fact necessary to make such representation or warranty not misleading
in light of the circumstances under which it was made.
j. Each consent, approval or authorization of, or filing,
registration, or qualification required to be obtained by Borrower in connection
with the execution and delivery of this Agreement, the Loan Documents, or the
undertaking or performance of any obligation hereunder or thereunder, has been
duly obtained.
4.2 Survival. All of the representations and warranties set forth in
Section 4.1 shall survive until all Secured Indebtedness is satisfied in full.
SECTION 5. COVENANTS OF BORROWER.
Borrower does hereby covenant and agree with the Lender that, so long as
any of the Secured Indebtedness remains unpaid, Borrower will comply with the
following covenants:
5.1 Affirmative Covenants.
a. Taco Cabana, Inc. will furnish to Lender within one hundred
twenty (120) days after the close of each fiscal year (or, in the event an
extension of the deadline for filing such information with the Securities and
Exchange Commission ("SEC") is required or authorized by the SEC, then within
one hundred eighty (180) days after the close of each fiscal year), for such
fiscal year, the following independently audited and prepared financial
information for itself and its subsidiaries prepared on a consolidated basis:
(i) a statement of stockholders' or partners' equity and a statement of changes
of cash flows; (ii) income statements; and (iii) balance sheets; all in
reasonable detail, including all supporting schedules and comments, and
certified by an independent certified public accountant auditor, approved by
Lender, to have been prepared in accordance with generally accepted accounting
principles consistently applied.
b. Taco Cabana, Inc. will furnish to Lender within fifty (50) days
after the close of each quarterly accounting period in each fiscal year of each
Borrower and its subsidiaries, for such quarter, prepared on a consolidated
basis: (i) a statement of stockholders' or partners' equity and a statement of
changes in financial position; (ii) income statements; and (iii) balance sheets
as of the end of such quarterly period, all in reasonable detail, Subject to
year-end audit adjustments, and certified by Taco Cabana Inc.'s secretary to
have been prepared in accordance with generally accepted accounting principles
consistently applied.
c. Borrower will furnish to Lender such other financial statements
or reports as Lender may reasonably and periodically require, including without
limitation balance sheets and income statements for each Borrower on an
individual basis.
d. Borrower will maintain its inventory, equipment, real estate, and
other properties in good condition and repair (normal wear and tear excepted);
will pay and discharge, or cause to be paid and discharged when due, the cost of
repairs to or maintenance of the same; and will pay or cause to be paid all
rental or mortgage payments due on such real estate. The Borrower hereby agrees
that, in the event Borrower fails to pay or cause to be paid any such payment,
the Lender may do so and on demand be reimbursed therefor by the Borrower.
e. In addition to any requirements in the Loan Documents, Borrower
will maintain, or cause to be maintained, public liability insurance and fire
and extended coverage insurance on all assets owned by them, all in such form
and amounts, and with such insurers, as are reasonable satisfactory to Lender.
Such policies shall contain a provision whereby they cannot be canceled except
after thirty (30) days' written notice to the Lender, and shall name Lender as
an additional insured. Borrower will furnish to the Lender such evidence of
insurance as the Lender may require. Borrower hereby agrees that, in the event
any Borrower fails to pay or cause to be paid the premium on any such insurance,
the Lender may do so and on demand be reimbursed therefor by the Borrower.
f. Borrower will pay or cause to be paid when due all taxes,
assessments or fees imposed upon it or on any of its property or that it is
required to withhold and pay over, except when, prior to impending foreclosure,
such taxes, assessments or fees are contested in good faith by appropriate
proceedings, with adequate reserves therefor having been set aside on its books.
g. Borrower will, when requested so to do, make available for
inspection by duly authorized representatives of the Lender any of their books
and records, and will furnish the Lender any information regarding their
business affairs and financial condition within a reasonable time after written
request therefor.
h. Borrower will take all necessary steps to preserve its corporate
or partnership existence and franchises and will comply with all present and
future laws applicable to them in the operation of their respective businesses
and all material agreements to which they are subject.
i. Within ten (10) days after the Lender's request therefor,
Borrower will furnish the Lender with copies of federal income tax returns filed
by the Borrower.
j. Borrower will pay when due (or within applicable grace periods)
all indebtedness due third parties. If any Borrower defaults in the payment of
any principal (or installment thereof) of, or interest on, any such
indebtedness, the Lender shall have the right, but not the obligation, to pay
such interest or principal for the account of Borrower and be reimbursed by
Borrower therefor on demand.
k. Borrower will notify the Lender immediately if it becomes aware
of the occurrence of any Event of Default, as defined below, or of any fact,
condition, or event that, with the giving of notice or passage of time, or both,
could become an Event of Default hereunder, or of the failure of Borrower to
observe any of its undertakings hereunder.
l. The Borrower's shareholders' or partners' equity (as determined
in accordance with generally accepted accounting principals consistently
applied) less the value of any intangible assets (as determined in accordance
with generally accepted accounting principles consistently applied) shall at
all times equal or exceed 90% of Tangible Net Worth of Borrower and Borrower's
Subsidiaries.
m. All cash, cash equivalents and funds derived from operations of
the Borrower shall be the property of the Borrower at the close of each business
day, unless such cash, cash equivalents and funds are utilized by other entities
for the payment of obligations in compliance with applicable law. This
provision is not intended to restrict Borrower's use of funds or usual and
regular course of business.
n. The Borrower and its Subsidiaries have (i) initiated and will
pursue to completion a review and assesment of all areas within Borrower and
each of its Subsidiaries' business and operations (including those affected by
information received from suppliers and vendors) that could reasonably be
expected to be adversely affected by the Year 2000 Problem, (ii) developed and
will pursue to completion a plan and timeline for addressing the Year 2000
Problem on a timely basis, and (iii) to date, implemented that plan
substantially in accordance with that timetable. The Borrower reasonably
believes that all computer applications (including those affected by information
received from its suppliers and vendors) that are material to Borrower or any
of its Subsidiaries' business and operations will on a timely basis be Year 2000
Compliant, except to the extend that a failure to do so could not reasonably be
expected to have Material Adverse Effect.
o. The Borrower will promptly notify the Lender in the event the
Borrower discovers or determines that any computer application (including those
affected by information received from its suppliers and vendors) that is
material to Borrower or any of its Subsidiaries' business and operations will
not be Year 2000 Compliant on a timely basis, except to the extent that such
failure could not reasonably be expected to have a Material Adverse Effect.
p. Borrower will maintain Quarterly Cash Flow (as defined) for
the immediately preceding four fiscal quarters in an amount equal to, or in
excess of, $4,000,000.00.
5.2 Negative Covenants.
a. For so long as any Indebtedness under the Loans remains
outstanding, Borrower shall not without the prior written consent of the holder
of the Notes:
(1) Permit the ratio of Consolidated Cash Flow to Consolidated
Fixed Charges for the immediatly preceding four fiscal quarters of Borrower
to be less than 2.0:1.0.(1) Permit Consolidated Net Worth at any time to be
less than the Minimum Consolidated Net Worth (as defined below) then in effect;
(2) Permit the ratio of Debt to Consolidated Net Worth to be
greater than 1.00:1.00 at any time; provide, however, that all treasury stock
purchases shall be excluded when calculating Consolidated Net Worth; or
(3) Permit the ratio of Intangible Assets to Consolidated Net
Worth to be greater than 0.40: 1.0 at any time; or
(4) Incur Capital Expenditures: (i) in excess of $25,000,000.00
during the 1999 fiscal year of Borrower; (ii) in excess of $30,000,000.00 during
the 2000 fiscal year of Borrower.
For purposes of subsections 5.1(l) (n),(o) and (p_) and this subsection
5.2(a), the following terms shall have the following meanings:
"Capital Expenditures" as to Borrower shall mean the aggregate amount paid
or accrued by Borrower and its Subsidiaries for the rental, lease, purchase
(including by way of the acquisition of securities of another person or entity),
construction or use of any property the value or cost of which, in accordance
with generally accepted accounting principles consistently applied would appear
on Borrower's balance sheet in the category of property, plant or equipment.
"Consolidated Cash Flow" for any period shall mean the consolidated net
income of the Borrower and all Subsidiaries for such period (after having taken
into account the effects of income tax), plus (without duplication) interest
expense, depreciation, amortization and all other non-cash charges, all as
determined in accordance with generally accepted accounting principles
consistently applied.
"Consolidated Fixed Charges" for any period shall mean (i) consolidated
interest expense, and obligations under capitalized leases for such period, plus
(ii) matured debt and any additional debt maturing within one year of the date
of determination, plus (iii) dividends and distributions to partners in respect
of their partnership interest, for the Borrower and all Subsidiaries, all as
determined in accordance with generally accepted accounting principles
consistently applied.
"Consolidated Net Worth" shall mean consolidated shareholders' or partners'
equity of the Borrower and all Subsidiaries as determined in accordance with
generally accepted accounting principles consistently applied.
"Debt" means, with respect to the Borrower and its Subsidiaries, on a
consolidated basis: (i) indebtedness for borrowed money or for the deferred
purchase price of property or services, (ii) obligations as lessee under leases
which shall have been or should be, in accordance with generally accepted
accounting principles, recorded as capital leases, (iii) obligations under
direct or indirect guaranties in respect of, and obligations (contingent or
otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor
against loss in respect of, indebtedness or obligations of others of the kinds
referred to in clause (i) or (ii) above, and (iv) liabilities in respect of
unfunded vested benefits under plans covered by Title IV of the Employee
Retirement Income Security Act of 1974, as amended.
"Intangible Assets" means, with respect to the Borrower and its
Subsidiaries, on a consolidated basis, goodwill, organizational expenses,
trademarks, tradenames, and any other items which are treated as intangibles in
conformity with generally accepted accounting principles consistently applied.
"Material Adverse Effect" means a material adverse effect on (i) the
business, properties, prospects, operations or condition, financial or
otherwise, of the Borrower and its Subsidiaries, taken as a whole, (ii) the
ability of the Borrower to pay or perform its respective obligations,
liabilities and indebtedness under the Loan Documents as such payment or
performance becomes due in accordance with terms thereof, or (iii) the rights,
powers and remedies of the Lender under any Loan Document or the validity,
legality or enforceability thereof.
"Minimum Consolidated Net Worth" means, during any calendar year,
$40,000,000.00 minus the amount paid by Borrower in any allowed purchase of
capital stock consummated pursuant to Section 5.25b,plus 50% of the consolidated
net income of Borrower (as determined in accordance with generally accepted
accounting principles, consistently applied) for the period commencing
(January 1, 1998), to December 31 of the calendar year immediately prior to the
calendar year in which the determination of Minimum Tangible Net Worth is being
made.
"Quarterly Cash Flow" shall mean for any fiscal quarter of Borrower the
consolidated net income of Borrower and its Subsidiaries for such period (after
having taken into account the effects of income tax) plus (without duplication)
interest expense, depreciation, amortization and all other non-cash charges, all
as determined in accordance with generally accepted accounting principles
consistently applied.
"Subsidiaries" means all corporations or partnerships of which at least 99%
of the partnership interests, or of the shares of stock of every class of which,
outstanding at the time as of which any determination is being made, is owned by
the Borrower, either directly or through a Subsidiary. "Subsidiary" means each
of the Subsidiaries.
"Tangible Net Worth" means, with respect to the Borrower and its
Subsidiaries, on a consolidated basis, Consolidated Net Worth less the value of
any intangible assets as determined in accordance with generally accepted
accounting principles consistently applied.
"Year 2000 Compliant" means, all computer applications (including those
affected by information received from its suppliers and vendors) that are
material to the Borrower's or any of its Subsidiaries' business and operations
will on a timely basis be able to perform properly data-sensitive functions
involving all dates on and after January 1, 2000.
"Year 2000 Problem" means the risk that computer applications used by the
Borrower and any of its Subsidiaries (including those affected by information
received from its suppliers and vendors) may be unable to recognize and perform
properly data-sensitive functions involving certain dates on and after January
1, 2000.
b. No Borrower shall change its name, enter into any merger,
consolidation, reorganizations or recapitalization, or reclassify its capital
stock without the prior written consent of Lender, which consent shall not be
unreasonably withheld, except that Borrower shall be permitted to purchase
common stock of Borrower in an aggregate amount expended in the purchase
thereof after September 30, 1998, not to exceed $12,500,000.00.
c. No Borrower shall sell, transfer, lease, or otherwise dispose of
all, or (except in the ordinary course of business) any material part of, its
assets, without the prior written consent of Lender, which consent shall not be
unreasonably withheld.
d. No Borrower shall mortgage, pledge, grant, or permit to exist a
security interest in or lien upon any of the security given for the Loans, other
than pursuant to the Loan Documents and Revolving Loan Documents and statutory
liens in the ordinary course of its business.
e. Borrower shall not furnish the Lender with any certificate or
other document that will contain any untrue statement of material fact or that
will omit to state a material fact necessary to make it not misleading in light
of the circumstances under which it was furnished.
f. No Borrower shall transfer, alienate, sell, assign, or encumber
any of its capital stock or partnership interests in any Subsidiary.
g. No Borrower shall incur, create, assume, or permit any
indebtedness other than (i) under the Revolving Loan Documents and the Loan
Documents; (ii) obligations under leases for real or personal property used in
Borrower's business; (iii) loans between Borrowers; (iv) loans between Borrowers
and nonborrower Subsidiaries not exceeding the aggregate principal amount of
$100,000.00 without the consent of the Lender, which consent shall not be
unreasonably withheld; (v) normal accruals and trade accounts payable incurred
in the ordinary course of business, or otherwise become liable, directly or
indirectly, as guarantor or otherwise for any obligation (other than the
endorsement of commercial paper for deposit or collection in the ordinary course
of business and guaranties of affiliate transactions made in the ordinary course
of business).
h. Borrower shall not make any loans or advances to any officer,
shareholder, director, or employee of Borrower or of any Subsidiary which, at
any time, exceed the outstanding aggregate principal amount of $300,000.00.
SECTION 6. DEFAULT.
6.1 Events of Default. The occurrence of any one or more of the following
events shall constitute an "Event of Default" hereunder:
a. Any installment of principal and/or interest on the Loans or any
other sums due by Borrower under the Loan Documents shall not be paid when due
and payable.
b. Any Borrower shall breach any of the affirmative or negative
covenants contained herein and the breach is not cured within five days after
written notice of the breach is given by the Lender to the Borrower.
c. Any Borrower shall fail to perform, keep or otherwise observe any
other obligation, term, provision, covenant, warranty or representation
contained herein or in any of the Loan Documents and such failure is not cured
within five days after written notice of the breach is given by the Lender to
the Borrower.
d. Any financial statement or report, representation, warranty, or
certificate made or furnished by any Borrower to the Lender hereunder or in
connection with this Agreement, any Loan or any Loan Documents, or in any
separate statement or document to be delivered under the Loan Documents to the
Lender, shall be materially false, incorrect, or incomplete when made or
furnished.
e. Any Borrower shall admit its inability to pay its debts as they
mature, or shall make an assignment for the benefit of its or any of its
creditors.
f. Proceedings in bankruptcy, or for the dissolution, full or
partial liquidation or reorganization of any Borrower, or for the readjustment
of any of their respective debts, under the Bankruptcy Code, as amended, or any
part thereof, or under any other laws, whether state or federal, for the relief
of debtors, now or hereafter existing, shall be commenced by Borrower.
g. If an application is made by any Borrower for the appointment of
a receiver, trustee, or custodian for Borrower or for any substantial part of
their respective assets, or any Borrower shall discontinue business or
materially change the nature of its business.
h. If a receiver, trustee, or custodian shall be appointed for any
Borrower or for any part of their respective assets, and shall not be discharged
within 30 days of such appointment.
i. If all or any of any borrower's assets are attached, seized,
subjected to a writ, or are levied upon, or come within the possession of any
receiver, trustee, custodian or assignee for the benefit of creditors.
j. If any Borrower is permanently enjoined, restrained or in any way
prevented by court order from conducting any material part of its business
affairs.
k. If a notice of lien, levy or assessment is filed of record with
respect to all or any of Borrower's assets by the United States or any
department, agency or instrumentality thereof, or by any state, county,
municipality or other governmental agency, or if any taxes or debts owing at any
time or times hereafter to any one or more of them becomes a lien, upon all or
any material portion of Borrower's assets.
l. A judgment creditor of any Borrower shall obtain possession of
any of the collateral securing repayment of the Loans by any means, including,
but without limitation, levy, distraint, replevin, or self-help.
m. Any Event of Default occurs under the terms of any of the Loan
Documents or under the terms of any of the Revolving Loan Documents.
n. Any Borrower shall dissolve, liquidate, or otherwise terminate
its existence, or take any action to effect such termination.
o. Any Borrower shall suffer a final judgment in excess of
$250,000.00, and shall not discharge the same within thirty (30) days.
p. Any Borrower furnishes the Lender with any certificate or other
document that contains any untrue statement of material fact or that omits to
state a material fact necessary to make it not misleading in light of the
circumstances under which it was furnished.
q Any material nonborrower Subsidiary shall have failed to pay
when due all taxes, assessments or fees imposed upon it or on any of its
property or that it is required to withhold and pay over, except when, prior to
impending foreclosure, such taxes, assessments or fees are contested in good
faith by appropriate proceedings, with adequate reserves therefor having been
set aside on its books.
r. Any material nonborrower Subsidiary fails to take all necessary
steps to preserve its corporate or partnership existence and franchises, or
fails to comply with all present and future laws applicable to it in the
operation of its business and all material agreements to which it is subject.
s. Lender, at its discretion and after five days written notice
given to Borrower, deems itself to be adversely affected and/or insecure by
reason of any material change in any of Borrower's (including any endorsers
and/or guarantors) net worth, or by reason of any other material change of
condition whether or not described herein.
6.2 Remedies. Upon the occurrence of an Event of Default, Lender, at its
option, may:
a. Terminate any obligation to make any further Loans and declare
the entire principal balance of the Secured Indebtedness and all interest,
unpaid accrued and earned thereon to be immediately due and payable without
demand for payment, presentment for payment, notices of intention to accelerate
maturity, notices of election to accelerate maturity, protest and notice of
protest or any other notice whatsoever, all of which are hereby expressly
waived.
b. Enforce or avail itself of any and all rights and remedies given
to it by any or all of the Loan Documents.
c. Enforce or avail itself of all rights and remedies allowed by all
applicable laws.
SECTION 7. INTEREST LIMITATION.
7.1 Limitation. Interest on the debt evidenced by the Notes or otherwise
in connection with the Loans shall not exceed the maximum amount of nonusurious
interest that may be contracted for, taken, reserved, charged, or received under
law; any interest in excess of that maximum amount shall be credited on the
principal of the debt or, if that has been paid, refunded. On any acceleration
or required or permitted prepayment, any such excess shall be canceled
automatically as of the acceleration or prepayment or, if already paid, credited
on the principal of the debt or, if the principal of the debt has been paid,
refunded. This provision overrides other provisions in this and all other
instruments concerning the debt. All sums paid or agreed to be paid for the
use, forbearance or detention of the indebtedness of Borrower to Lender shall,
to the extent permitted by applicable law, be amortized, prorated, allocated and
spread throughout the full stated term of such indebtedness until payment in
full so that the rate or amount of interest on account of such indebtedness does
not exceed the maximum rate of interest allowed by law for so long as such
indebtedness is outstanding, and to the extent that Chapter 303 of the Texas
Finance Code, as amended, and Chapter 10 of the Texas Credit Title, as amended,
is applicable to such indebtedness, the quarterly rate ceiling from time to time
in effect under such article shall be the applicable ceiling. This provision
overrides other provisions in this and all other instruments concerning the
debt.
SECTION 8. MISCELLANEOUS.
8.1 No Permanent Waivers. No waiver at any time of the provisions or
conditions of this Agreement or of any of the other Loan Documents shall be
construed as a waiver of any of the other provisions or conditions hereof or
thereof nor be construed as a right to a subsequent waiver or any other
provisions or conditions.
8.2 Severability. Unenforceability for any reason against any person or
persons of any provision of this Loan Agreement, or of any of the other Loan
Documents or other Agreements between Borrower and the Lender, shall not limit
or impair the operation or validity of any other provisions of this Agreement or
any of the other Loan Documents.
8.3 Descriptive Headings and Defined Terms. The descriptive headings of
the various sections and subsection of this Agreement and the Loan Documents and
any schedule, agreement or other instrument, executed with reference hereto are
inserted for convenience of reference only, do not constitute a part of any such
document and no inference is to be drawn from such headings. Whenever the
context shall require, words of any gender shall be deemed to include the other
gender and either the singular or the plural shall include the other, including
with respect to terms defined herein.
8.4 Further Assurance. From time to time, Borrower will execute and
deliver to the Lender such additional documents and will provide such additional
information as the Lender may reasonably require to carry out the terms of this
Agreement and be informed of the Borrower's status and affairs.
8.5 Enforcement and Waiver by the Lender. All rights and remedies of the
Lender are cumulative and concurrent, and the exercise of one right or remedy
shall not be deemed a waiver or release of any other right or remedy. The
Lender shall have the right at all times to enforce the provisions of this
Agreement and the Loan Documents in strict accordance with the terms hereof and
thereof, notwithstanding any conduct or custom on the part of the Lender in
refraining from so doing at any time or times. The failure of the Lender at any
time or times to enforce its rights under such provisions, strictly in
accordance with the same, shall not be construed as having created a custom in
any way or manner contrary to specific provisions of this Agreement or such Loan
Documents or as having in any way or manner modified or waived the same.
8.6 Expenses of the Lender. The Borrower will, on demand, pay, or
reimburse the lender, for all reasonable expenses, including the reasonable fees
and expenses of legal counsel for the Lender, incurred by the Lender in
connection with the preparation, administration, amendment, modification, or
enforcement of this Agreement and the Loan Documents, and the collection or
attempted collection of any and all Notes. All reasonable costs, including but
not limited to reasonable attorney's fees of Borrower, Lender, or other
interested parties, other professional fees, appraiser's and surveyor's fees,
taxes and all expenses of all kinds incurred in connection with the Loans, shall
be borne by Borrower, and Borrower agrees to indemnify the Lender and save it
harmless from the payment, defense and/or expense of any claim or demand for
such fees, costs, taxes and expenses.
8.7 Notices. Any notices or consents required or permitted by this
Agreement shall be in writing and shall be deemed given when delivered in
person, or upon deposit in the U.S. Mail, if
sent by certified mail, postage prepaid, return receipt requested, as
follows, unless such address is changed by written notice hereunder:
a. If to Borrower:
Taco Cabana, Inc.
Texas Taco Cabana, L.P.
TP Acquisition Corp.
T.C. Management, Inc.
Taco Cabana Management, Inc.
Taco Cabana Multistate, Inc.
Colorado Cabana, Inc.
8918 Tesoro Drive, Suite 200
San Antonio, Texas 78217
b. If to the Lender:
International Bank of Commerce
130 East Travis
San Antonio, Texas 78205
Attention: Mr. Steve E. Edlund
8.8 RELEASE BY THE BORROWER. TO THE MAXIMUM EXTENT PERMITTED BY
APPLICABLE LAWS, BORROWER RELEASES THE LENDER AND ITS DIRECTORS, OFFICERS,
ATTORNEYS, AGENTS, AND EMPLOYEES FROM ALL CLAIMS, CAUSES, DAMAGES, LIABILITY AND
RELATED EXPENSES ARISING OUT OF ANY ACT OR OMISSION ON THE PART OF ANY OF THEM,
WITH REGARD TO THIS AGREEMENT, WHICH DOES NOT INVOLVE FRAUD, BAD FAITH OR
NEGLIGENCE BY LENDER OR ITS DIRECTORS, OFFICERS, ATTORNEYS, AGENTS OR EMPLOYEES.
8.9 Governing Law. This Agreement is made and accepted, and the
obligations of the parties set forth herein shall be performable, in the County
of Bexar and State of Texas, and this Agreement and all the Loan Documents shall
be governed by, and construed in accordance with the laws of the State of Texas
except to the extent that such laws may be preempted by laws of the United
States of America. The parties hereby agree that this Agreement and the Loans
to be made pursuant hereto shall not be subject to the provisions of (Chapter 15
of the Texas Credit Code).
8.10 Lender's Relationship to Other. Lender is not a partner or joint
venturer in any manner whatsoever with any Borrower.
8.11 Waiver, Modification. Neither this Agreement nor any provision hereof
may be changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against whom enforcement of the
change, waiver, discharge or termination is sought.
8.12 Cumulative Remedies. The right and remedies of the Lender under the
Loan Documents shall be cumulative and the exercise, or partial exercise, of any
such right or remedy shall not preclude the exercise of any other right or
remedy.
8.13 Binding Effect. This Loan Agreement shall be binding upon and inure
to the benefit of Borrower and Lender and their respective successors and
assigns, provided that no Borrower may assign its rights or obligations
hereunder. If more than one party executes this Agreement a Borrower, the term
"Borrower" shall mean and refer to each such party, jointly and severally.
8.14 Survival of Agreement. The provisions thereof shall survive the
execution of all instruments herein mentioned, and shall continue in full force
until the Secured Indebtedness is paid in full and shall prevail and control
over any conflicting provision contained elsewhere in the Loan Documents.
8.15 Entire Agreement. The Loan Documents embody the entire agreement
between the parties and supersedes all prior agreements and understandings, if
any, relating to the subject matter hereof. There are no oral agreements or
understandings between the parties which are not evidenced by the Loan
Documents.
8.16 Subsidiaries. Except where otherwise specified herein, the term
"Subsidiary" shall mean every entity of which more than fifty percent (50%) of
the outstanding voting stock or other ownership interests shall, at the time of
determination, be owned directly or indirectly by the named Borrower or through
one or more intermediaries of Borrower.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.
WITNESS: BORROWER:
TACO CABANA, INC.
By:
Name: Name:
Title:
TEXAS TACO CABANA, L.P., a Texas
limited partnership
By: Taco Cabana Management, Inc., a Texas
Corporation, General Partner
By:
Name: Name:
Title:
TP ACQUISITION CORP.
By:
Name: Name:
Title:
T.C. MANAGEMENT, INC.
By:
Name: Name:
Title:
TACO CABANA MANAGEMENT, INC.
By:
Name: Name:
Title:
TACO CABANA MULTISTATE, INC.
By:
Name: Name:
Title:
COLORADO CABANA, INC.
By:
Name: Name:
Title:
LENDER:
INTERNATIONAL BANK OF COMMERCE
By:
Name: Steve E. Edlund,
Executive Vice President
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0
0
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