<PAGE> 1
CONFORMED COPY
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
-----------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission file number 333-57925
---------
The Restaurant Company
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 62-1254388
- --------------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
6075 Poplar Avenue, Suite 800, Memphis, Tennessee 38119-4709
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(901) 766-6400
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by [X] 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 [ ]
1
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- ------------------------
1998 1997 1998 1997
--------- ---------- ---------- --------
REVENUES:
<S> <C> <C> <C> <C>
Food sales $ 72,798 $ 66,400 $ 203,980 $ 185,069
Franchise revenues and other 5,988 5,360 16,628 15,117
--------- --------- --------- ---------
Total Revenues 78,786 71,760 220,608 200,186
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales:
Food cost 20,251 19,165 57,607 53,099
Labor and benefits 25,553 22,200 70,974 62,645
Operating expenses 14,440 13,198 40,855 37,540
General and administrative 7,562 6,797 21,626 19,825
Depreciation and amortization 5,072 4,002 14,750 11,900
Interest, net 4,352 1,148 11,990 3,672
Loss on/Provision for disposition of assets, net - - 295 -
Asset writedown (SFAS No. 121) - - 500 -
Tax related reorganization costs - - - 650
Other, net (350) (302) (923) (741)
--------- --------- --------- ---------
Total Costs and Expenses 76,880 66,208 217,674 188,590
--------- --------- --------- ---------
Income from continuing operations 1,906 5,552 2,934 11,596
Minority interest in net earnings of subsidiaries - (2,896) - (6,107)
--------- --------- --------- ---------
Income from continuing operations before
income taxes and extraordinary item 1,906 2,656 2,934 5,489
Provision for income taxes (633) (951) (986) (2,008)
--------- --------- --------- ---------
Income from continuing operations 1,273 1,705 1,948 3,481
Discontinued operations: Income from
discontinued operations of Restaurant Insurance
Corporation, net of income taxes of $50 - - - 93
--------- --------- --------- ---------
NET INCOME $ 1,273 $ 1,705 $ 1,948 $ 3,574
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
September 30,
1998 December 31,
(Unaudited) 1997
------------ ------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 2,299 $ 16,027
Receivables, less allowance for
doubtful accounts of $766 and $846 8,147 9,482
Inventories, at the lower of first-
in, first-out cost or market 4,999 4,236
Prepaid expenses and other current assets 1,777 2,047
Deferred income taxes 470 470
-------- --------
Total current assets 17,692 32,262
-------- --------
PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization 131,788 127,410
INTANGIBLE AND OTHER ASSETS, net of
accumulated amortization of $29,715 and $27,591 45,004 47,303
OTHER ASSETS 4,080 1,087
-------- --------
$198,564 $208,062
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
<PAGE> 4
THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
September 30,
1998 December 31,
(Unaudited) 1997
------------- -------------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
<S> <C <C>
CURRENT LIABILITIES:
Current maturities of capital lease obligations $ 1,219 $ 1,301
Accounts payable 12,284 11,415
Accrued expenses 22,214 36,302
--------- ---------
Total current liabilities 35,717 49,018
--------- ---------
CAPITAL LEASE OBLIGATIONS, less
current maturities 6,071 6,999
LONG-TERM DEBT 152,808 130,000
DEFERRED INCOME TAXES AND OTHER 7,233 9,977
STOCKHOLDERS' INVESTMENT:
Common stock $.01 par value, 100,000 shares authorized, 11,640
and 17,550 issued and outstanding 1 1
Additional paid-in capital 969 18,252
Accumulated deficit (4,235) (6,185)
--------- ---------
Total stockholders' investment (deficit) (3,265) 12,068
--------- ---------
$ 198,564 $ 208,062
========= =========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE> 5
THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- -------------------------
1998 1997 1998 1997
-------- ---------- -------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income $ 1,273 $ 1,705 $ 1,948 $ 3,574
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,072 4,002 14,750 11,900
Minority interest in net earnings of subsidiaries - 2,896 - 6,107
Loss on/Provision for disposition of assets, net - - 295 -
Asset writedown (SFAS No. 121) - - 500 -
Other non cash income and expense items, net (370) 447 (771) 1,135
Earnings from discontinued operations - - - (93)
Net changes in other operating assets and liabilities 2,625 3,861 1,193 466
-------- -------- -------- --------
Total adjustments 7,327 11,206 15,967 19,515
-------- -------- -------- --------
Net cash provided by operating activities 8,600 12,911 17,915 23,089
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for property and equipment (6,488) (4,908) (18,260) (10,329)
Proceeds from the sale of Restaurant Insurance Corp. - - - 2,300
Other, net 226 (1,662) 337 (931)
-------- -------- -------- --------
Net cash used in investing activities (6,262) (6,570) (17,923) (8,960)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 2,000 6,700 49,559 36,900
Principal payments on long-term debt (5,500) (9,400) (27,550) (45,802)
Principal payments under capital lease obligations (322) (391) (1,010) (1,379)
Repurchase of limited partnership units (55) - (16,296) -
Purchase of minority interest - - (17,282) -
Deferred financing costs (118) - (1,141) -
Distributions to unitholders of PFR - (1,770) - (5,307)
-------- -------- -------- --------
Net cash used in financing activities (3,995) (4,861) (13,720) (15,588)
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents (1,657) 1,480 (13,728) (1,459)
CASH AND CASH EQUIVALENTS:
Balance, beginning of period 3,956 931 16,027 3,870
-------- -------- -------- --------
Balance, end of period $ 2,299 $ 2,411 $ 2,299 $ 2,411
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
THE RESTAURANT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Organization
The Restaurant Company ("TRC" or the "Company") is a holding company whose
primary subsidiary is Perkins Family Restaurants, L.P. ("PFR"), which is
indirectly wholly-owned by TRC. TRC is the sole stockholder of Perkins
Restaurants, Inc. ("PRI"), which is a limited partner and the indirect owner of
100% of PFR and the parent corporation of PFR's general partner, Perkins
Management Company ("PMC"). TRC is also the sole stockholder of TRC Realty Co.
TRC has no significant assets other than its direct and indirect equity
interests in its subsidiaries. Except as the context otherwise requires,
references to the "Company" refer to TRC together with its subsidiaries,
including, without limitation, PFR.
Basis of Presentation
The accompanying unaudited consolidated financial statements of TRC have been
prepared in accordance with the instructions to Form 10-Q and therefore do not
include all information and notes necessary for complete financial statements in
conformity with generally accepted accounting principles. The results for the
periods indicated are unaudited but reflect all adjustments (consisting only of
normal recurring adjustments) which management considers necessary for a fair
presentation of the operating results. Results of operations for the interim
periods are not necessarily indicative of a full year of operations. The notes
to the financial statements contained in the Company's September 1998 Form S-4
Registration Statement should be read in conjunction with these statements.
Certain prior year amounts have been reclassified to conform to current year
presentation.
Going Private Transaction
PFR is a limited partnership that currently is indirectly wholly-owned
(including its general partner's interest) by TRC. Until December 1997, PFR's
units of limited partnership interest ("Units") were traded on the New York
Stock Exchange under the symbol "PFR." In December 1997, PFR, TRC and a
subsidiary of TRC completed a series of transactions pursuant to which PFR's
operating subsidiary was eliminated through a merger and PFR became an indirect
wholly-owned subsidiary of TRC and the approximately 5.44 million Units held by
persons other than TRC and its subsidiaries were converted into the right to
receive $14.00 in cash per Unit (the "Going Private Transaction"). There has not
been, nor is there anticipated to be, a change in PFR's management or business
strategy as a result of the Going Private Transaction.
6
<PAGE> 7
The following unaudited pro forma results of operations for the third quarter
and nine months ended September 30, 1997 give effect to the Going Private
Transaction as if it had occurred on January 1, 1997. This pro forma information
does not necessarily represent what the results would have been had the Going
Private Transaction occurred at the beginning of the period presented.
<TABLE>
<CAPTION>
(Unaudited)
-------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
1997 1997
------------- -------------
<S> <C> <C>
Revenues $ 71,966 $ 200,804
Net Income $ 1,613 $ 1,691
</TABLE>
The Reorganization
On May 7, 1998, TRC and Harrah's Entertainment, Inc. (Harrah's) entered into an
agreement calling for the redemption by TRC of Harrah's 33.3% interest in the
Company for $17.0 million in cash (the "Reorganization"). Subsequent to the
Reorganization, the Company's common stock is owned 50.0% by Donald N. Smith,
the Company's Chairman and Chief Executive Officer, 42.3% by The Equitable Life
Assurance Society of the United States and 7.7% by others. There has not been,
nor is there anticipated to be, a change in the Company's management or business
strategy as a result of the Reorganization.
Contingencies
The Company is a party to various legal proceedings in the ordinary course of
business. Management does not believe it is likely that these proceedings,
either individually or in the aggregate, will have a material adverse effect on
the Company's financial position or results of operations.
In the past, PFR has sponsored financing programs offered by certain lending
institutions to assist its franchisees in procuring funds for the construction
of new franchised restaurants and to purchase and install in-store bakeries. PFR
provides a limited guaranty of the funds borrowed. At September 30, 1998, there
were approximately $3,427,000 in borrowings outstanding under these programs.
PFR has guaranteed $1,142,000 of these borrowings. No additional borrowings are
available under these programs.
On February 26, 1998, PFR entered into a separate two year limited guaranty of
$1,200,000 in borrowings of a franchisee which were used to construct a new
franchise restaurant. As of September 30, 1998, the outstanding balance on the
loan was $1,200,000.
PFR's largest franchisee operates 35 restaurants, the majority of which are
leased from unaffiliated lessors, pursuant to a temporary license agreement
which expires November 30, 1998. In May 1998, the franchisee filed a petition
for reorganization under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the Western District of New York. PFR and the
franchisee have entered into a Stipulation and Order Authorizing Standstill and
Extension Agreement which has been approved by the Bankruptcy Court authorizing
the continuing temporary operation of the franchisee's restaurants.
7
<PAGE> 8
The franchisee has advised PFR that it has entered into an agreement in
principle with an operator of truck stops and travel plazas for the acquisition
of a majority of the franchisee's assets related to its Perkins Family
Restaurants. If approved by the Bankruptcy Court, the acquiror will become a
franchisee of PFR and provide funds for remodeling existing restaurants. PFR has
been informed that the acquiror intends to operate 29 to 33 restaurants. The
balance of the franchisee's restaurants will be closed. During the past three
years, the franchisee's average net royalty payments to PFR were approximately
$1.8 million and at September 30, 1998, the franchisee was delinquent in its
royalty obligations in the amount of approximately $530,000, of which $300,000
had been reserved.
TRC is a holding company which has no significant assets other than its direct
and indirect equity interest in its subsidiaries. Accordingly, TRC must rely
entirely upon distributions from its subsidiaries to generate the funds
necessary to meet its obligations. The ability of PFR to distribute funds to TRC
is restricted by the Senior Notes Indenture related to its Unsecured Senior
Notes. See "Capital Resources and Liquidity".
8
<PAGE> 9
Supplemental Cash Flow Information
The increase or decrease in cash and cash equivalents due to changes in
operating assets and liabilities for the three months ended September 30,
consisted of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ------------------------
1998 1997 1998 1997
------------- ------------- ------------- ---------
(Increase) Decrease in:
<S> <C> <C> <C> <C>
Receivables $ (681) $(1,210) $(1,555) $(2,160)
Inventories (352) (79) (763) 78
Prepaid expenses and
other current assets 111 (629) (275) (460)
Other assets 80 495 (23) (747)
Increase (Decrease) in:
Accounts payable 810 5,653 873 5,138
Accrued expenses 3,095 1,115 2,893 410
Other liabilities (438) (1,484) 43 (1,793)
------- ------- ------- -------
$ 2,625 $ 3,861 $ 1,193 $ 466
======= ======= ======= =======
</TABLE>
Other supplemental cash flow information was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
------ ----- -------- -------
<S> <C> <C> <C> <C>
Cash paid for interest $ 361 $1,376 $7,249 $4,031
Income taxes paid 1,385 710 2,250 2,131
Income tax refunds received - 100 690 170
</TABLE>
9
<PAGE> 10
Asset Writedown (SFAS No. 121)
As required by Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," the Company evaluates the recoverability of assets (including
intangibles) based upon their related undiscounted estimated future cash flows
when events and circumstances indicate that assets might be impaired. During the
first quarter of 1998, as a result of this review, the Company identified five
restaurant properties which were not expected to generate undiscounted future
cash flows sufficient to cover the carrying value of the underlying assets
related to these properties. As required under SFAS No. 121, the carrying
amounts of the assets associated with these restaurant properties were written
down to their estimated fair market values. The resulting non-cash charge
reduced first quarter 1998 pre-tax income by $500,000.
Long-Term Debt
On May 18, 1998, TRC issued $31,100,000 of 11.25% Senior Discount Notes (the
"TRC Notes") maturing on May 15, 2008. The TRC Notes were issued at a discount
to their principal amount at maturity and generated gross proceeds to TRC of
approximately $18,009,000. The proceeds were used to purchase the shares of TRC
owned by Harrah's and pay expenses of the Reorganization.
New Accounting Pronouncements
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for fiscal years beginning after December 15, 1997
with restatement of all prior periods shown if not impracticable to do so. SFAS
No. 131 requires the disclosure of certain information about the operating
segments of the Company in the financial statements. The Company will implement
SFAS No. 131 during 1998; however, reporting of segment information in interim
financial statements is not required in the initial year of application.
In April 1998, The American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," which the Company is required to adopt in 1999, with earlier
application permitted. SOP 98-5 requires the costs of start-up activities to be
expensed as incurred. Upon adoption of SOP 98-5, the Partnership will be
required to record a cumulative effect of a change in accounting principle to
write off any unamortized preopening costs that exist on the balance sheet at
that date. As of September 30, 1998, the Company had unamortized preopening
costs of approximately $403,000.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THIRD QUARTER AND NINE MONTHS ENDED
SEPTEMBER 30, 1998
RESULTS OF OPERATIONS
Overview:
The Company through its primary subsidiary, PFR, is a leading operator and
franchisor of full-service mid-scale restaurants located primarily in the
Midwest, Pennsylvania, upstate New York, and central Florida. As of September
30, 1998, the Company owned and operated 139 full-service restaurants and
franchised 355 full-service restaurants. The Company also manufactures and
distributes bakery products which are sold to Company-operated restaurants,
franchisees, third-party bakers and food distributors. The business of Perkins
was founded in 1958, and since then Perkins has continued to adapt its menus,
product offerings, building designs and decor to meet changing consumer
preferences. Perkins is a highly recognized brand in the geographic areas it
serves.
The Company's revenues are derived primarily from the operation of full-service
restaurants, the sale of bakery products produced by its manufacturing division,
Foxtail Foods ("Foxtail"), and franchise fees. Foxtail offers cookie dough,
muffin batters, pancake mixes, pies and other food products to Company-operated
and franchised restaurants through food service distributors in order to ensure
consistency and availability of Perkins' proprietary products to each unit in
the system. Additionally, Foxtail manufactures certain proprietary and
non-proprietary products for sale to non-Perkins operations. Sales to
Company-operated restaurants are eliminated in the accompanying statements of
operations. In the nine months ended September 30, 1998, revenues from
Company-operated restaurants, Foxtail and franchise fees accounted for 83.9%,
8.6% and 7.3% of total revenues, respectively.
TRC leases an executive aircraft through TRC Realty Co. The aircraft is operated
for the benefit of, and all operating costs are reimbursed by, PFR and Friendly
Ice Cream Corporation.
The Company's revenues have increased steadily over the last five years.
System-wide sales (including franchised restaurants) have increased 21.0% from
$587,755,000 in 1993 to $710,962,000 in 1997. Revenues from Company-operated
restaurants have increased 22.9% from $183,416,000 to $225,486,000 and franchise
revenues have increased 24.4% from $15,544,000 to $19,333,000, over the same
period. Average revenue per Company-operated restaurant has increased 13.8%,
from $1,478,000 to $1,682,000 over the same period. Net loss in 1993 was
$14,530,000 compared to a net loss of $291,000 in 1997. Net income from
continuing operations was $2,374,000 in 1993 compared to a net loss from
continuing operations in 1997 of $384,000. Earnings before interest, taxes,
depreciation, amortization, provision for disposition of assets and Going
Private Transaction expenses for the same periods were $31,695,000 and
$36,291,000, representing a 14.5% increase. Company-operated restaurants have
achieved comparable restaurant sales increases in each of the last twenty-eight
quarters.
11
<PAGE> 12
A summary of the Company's results for the third quarter and nine months ended
September 30 are presented in the following table. All revenues, costs and
expenses are expressed as a percentage of total revenues.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ ----------------------
1998 1997 1998 1997
----------- ------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Food sales 92.4% 92.5% 92.5% 92.4%
Franchise revenues 7.6 7.5 7.5 7.6
----- ----- ----- -----
Total Revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Costs and Expenses:
Cost of sales:
Food cost 25.7 26.7 26.1 26.5
Labor and benefits 32.4 30.9 32.2 31.3
Operating expenses 18.3 18.4 18.5 18.8
General and administrative 9.6 9.5 9.8 9.9
Depreciation and amortization 6.4 5.6 6.7 5.9
Interest, net 5.6 1.6 5.5 1.8
Loss on/Provision for disposition of assets - - 0.1 -
Asset writedown (SFAS No. 121) - - 0.2 -
Tax related reorganization costs - - - 0.3
Other, net (0.4) (0.4) (0.4) (0.4)
----- ----- ----- -----
Total costs and expenses 97.6 92.3 98.7 94.1
----- ----- ----- -----
2.4 7.7 1.3 5.9
Minority interest in net earnings of
subsidiaries - (4.0) - (3.1)
Provision for income taxes (0.8) (1.3) (0.4) (1.0)
Income from discontinued operations - - - -
----- ----- ----- -----
Net Income 1.6% 2.4% 0.9% 1.8%
===== ===== ===== =====
</TABLE>
Net income for the third quarter of 1998 was $1,273,000 versus net income of
$1,705,000 for the same period in 1997. For the nine months ended September 30,
1998, net income was $1,948,000 compared to $3,574,000. Lower income is
primarily the result of the effects in 1998 of additional interest expense,
depreciation and amortization related to the Going Private Transaction and the
Reorganization.
12
<PAGE> 13
Revenues:
Total revenues for the third quarter and first nine months of 1998 increased
approximately 9.5% and 9.9% over the same periods last year due primarily to
higher comparable restaurant sales and increased Foxtail sales. Same store
comparable sales increased approximately 7.2% and 8.4% over the third quarter
and first nine months of 1997, respectively, due primarily to an increase in
comparable guest visits, selective menu price increases and guest trends toward
higher-priced entrees. The shift in customer preference to higher-priced entrees
can be attributed to the Company's development and promotion of higher-priced
menu items. Three Company-operated restaurants opened after the second quarter
of 1997 and the opening of three new Company-operated restaurants in the current
year contributed to the increase in restaurant food sales during the quarter and
nine months ended September 30, 1998. These increases were offset by the
refranchising of one Company-operated restaurant during 1997. Management
believes remodeling of Company-operated restaurants, enhanced promotional events
and implementation of new products resulted in the increased customer counts.
Revenues from Foxtail increased approximately 9.1% and 13.1% over the three and
nine months ended September 30, 1997, and constituted approximately 8.6% of the
Company's revenues year-to-date. The increase in sales is primarily due to
growth in the number of stores in the Perkins system.
Franchise and other revenues, which consist primarily of franchise royalties and
sales fees, increased 7.6% over the third quarter of 1997 and 5.7% over the
first nine months of 1997. This increase is due primarily to the opening of 31
new franchised restaurants and the sale of one Company-operated restaurant to a
franchisee since September 30, 1997. This increase is partially offset by the
closing of nine underperforming franchised restaurants during the same period.
Costs and Expenses:
Food cost:
In terms of total revenues, food cost for the three and nine months ended
September 30, 1998 decreased 0.9 and 0.3 percentage points over the same periods
in 1997. These decreases during the current year were primarily due to menu
price increases effective in January, May and August 1998. Lower commodity costs
on pork, coffee and red meat contributed to the decrease in food cost percentage
as well. In addition, Foxtail had lower commodity food costs and experienced a
sales trend toward higher gross margin products.
Labor and benefits:
Labor and benefits expense, as a percentage of total revenues, increased 1.6 and
1.0 percentage points for the third quarter and nine months ended September 30,
1998, respectively. Labor costs have increased over the prior year due to higher
minimum wage rates, a highly competitive labor market and slightly lower
productivity. Employee insurance costs rose over the prior year due to a change
in the provider network effective October 1, 1997. Many health care providers
within the network began to withdraw during the year depriving the Company of
anticipated discounts. Effective October 1, 1998, the Company changed provider
networks.
13
<PAGE> 14
The wage rates of PFR's hourly employees are impacted by Federal and state
minimum wage laws. Legislation enacted during 1996 which raised the Federal
minimum wage rate in 1996 and 1997 has had an impact on the Company's labor
costs. These increases have resulted in the Federal minimum wage rate increasing
from $4.25 per hour in 1996 to $5.15 per hour today. Certain states do not allow
tip credits for servers which results in higher payroll costs as well as greater
exposure to increases in minimum wage rates. In the past, the Company has been
able to offset increases in labor costs through selective menu price increases
and improvements in labor productivity. The Company anticipates that it can
offset the majority of the recent increases through selective menu price
increases. However, there is no assurance that future increases can be mitigated
through raising menu prices.
Operating expenses:
Operating expenses, expressed as a percentage of total revenues, equal the third
quarter 1997 and decreased 0.2 percentage points from the nine months ended
September 30, 1997. For the quarter, a decrease in franchise service fees was
offset by higher new franchise store opening costs. The year-to-date decrease is
primarily due to lower utilities expense and lower franchise service fees
partially offset by increased franchise opening costs. Franchise service fees
decreased due to the termination of two service fee agreements during 1997.
Franchise opening costs increased due to the opening of 5 additional restaurants
during the quarter and 15 additional restaurants year-to-date compared to the
same periods in 1997.
General and administrative:
General and administrative expenses increased 11.3% and 9.1% over the three and
nine months ended September 30, 1997, respectively. This increase is primarily
due to higher incentive compensation costs, restaurant development costs, field
administration costs, human resources costs and administrative costs at Foxtail.
In addition, payroll expense for corporate administrative staff has increased
over the prior year. These were planned increases deemed necessary as the
Company continues to increase the number of franchise and Company-operated
restaurants.
Depreciation and amortization:
Depreciation and amortization for the three and nine months ended September 30,
1998, increased approximately 26.7% and 24.0% over the same periods last year
due primarily to increases in fixed assets and intangibles resulting from
purchase accounting adjustments recorded in December 1997 in connection with the
Going Private Transaction. Additionally, the Company's continuing refurbishment
program to upgrade and maintain existing restaurants and the addition of new
Company-operated restaurants contributed to this increase.
Interest, net:
Interest expense for the three and nine months ended September 30, 1998,
increased 279.1% and 226.5%, respectively, over the same periods last year due
to debt incurred in December 1997 and May 1998 which was used to consummate the
Going Private Transaction and the Reorganization. Interest expense associated
with capital lease obligations has decreased.
Income from operations of discontinued division:
Income from operations of discontinued division represents the income, net of
income tax expense, of Restaurant Insurance Corporation ("RIC"). RIC was sold on
March 19, 1997.
14
<PAGE> 15
Other:
Results of operations for the nine months ended September 30, 1998, reflect a
$500,000 non-cash charge against earnings related to the writedown of certain
assets impaired under SFAS No. 121 recorded during the first quarter. In
addition, the Company recorded a net loss of $295,000 related to the disposition
of assets; this amount includes a loss of approximately $740,000 on the disposal
of two properties during the first quarter and the recognition of a previously
deferred gain of approximately $445,000 under SFAS No. 66, "Accounting for Sales
of Real Estate," related to the sale of property in 1994.
YEAR 2000
The year 2000 presents a critical business issue due to the possibility that
many computerized systems will not be able to process information including
dates beginning in the Year 2000. In recent years, the Company has upgraded
computer hardware and software in the normal course of business to Year 2000
compliant technology. The Company has established a plan to assess its readiness
for the Year 2000. A review of computer systems and software, including
non-information technology systems, has been substantially completed. No
material costs associated with achieving Year 2000 compliance internally are
anticipated based on this review.
The nature of the Company's business is such that the ability of outside vendors
to supply the Company's restaurants and Foxtail with food and related products
and preparedness of the Company's franchisees to appropriately assess and
address Year 2000 business risks represent the primary risks to the Company from
third parties. In response to these risks, questionnaires have been sent to all
of the Company's primary vendors to obtain reasonable assurances that adequate
plans are being developed to address the Year 2000 issue. The returned
questionnaires are being assessed by the Company, and are being categorized
based upon readiness for the Year 2000 issues and prioritized in order of
significance to the business of the Company. In the case of outside vendors
which provide inadequate assurance of their readiness to handle Year 2000
issues, appropriate contingency plans will be developed. The Company's
franchisees have been provided with information regarding the potential business
risks associated with the Year 2000 issue. The Year 2000 readiness of
significant franchisees will be assessed and action plans will be created to
address the identified risks.
Based on information currently available, management believes the most
reasonably likely worst case scenario related to Year 2000 compliance would not
have a material impact on its financial position or results of operations.
However, unanticipated failures by critical vendors or franchisees, as well as
unidentified internal failures, could result in a material adverse effect on the
Company's operations. As a result, management cannot reasonably predict what
impact, if any, Year 2000 issues will have on the Company.
CAPITAL RESOURCES AND LIQUIDITY
Principal uses of cash during the third quarter and first nine months ended
September 30, 1998, were capital expenditures, the purchase of publicly owned
Units, purchase of Harrah's interest in the Company and payment of Going Private
Transaction and Reorganization expenses. Capital expenditures consisted
primarily of costs related to land, building and equipment for new
Company-operated restaurants and remodels of existing restaurants. Remodels and
unit upgrades, new restaurant development and equipment upgrades at Foxtail
constituted approximately 83% of the capital expenditures during the first nine
months of 1998. The Company's primary sources of funding were cash provided by
operations, proceeds from the Notes issued in December 1997 (see below),
proceeds from the TRC Notes issued May 1998 (see below) and revolving credit
borrowings.
15
<PAGE> 16
The following table summarizes capital expenditures for each of the years in the
three-year period ended December 31, 1997 and the nine months ended September
30, 1998 and 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31 SEPTEMBER 30
----------------------- ----------------------
1997 1996 1995 1998 1997
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Maintenance $ 3,453 $ 2,987 $ 3,435 $ 2,590 $ 2,673
Renovation 2,790 4,064 8,431 2,785 2,486
New restaurant development 6,193 1,947 12,626 8,805 3,324
Manufacturing 714 651 859 980 328
Other 1,936 2,209 3,580 3,100 1,518
------- ------- ------- ------- -------
Total Capital Expenditures $15,086 $11,858 $28,931 $18,260 $10,329
======= ======= ======= ======= =======
</TABLE>
The Company's capital budget for 1998 has been increased to $26.3 million from
$21.4 million. The primary source of funding for capital projects is expected to
be cash provided by operations and borrowings under the Company's revolving
credit facility.
During 1998, the Company has opened three new full-service Company-operated
restaurants and a Perkins Cafe Bakery, which is an embellishment of the core
concept with significant enhancements to menu, decor, service and exterior and
interior building design. The Company's capital budget was increased to cover
the cost of prototype development for the Perkins Cafe Bakery, purchasing rather
than leasing restaurant sites, acquisition of sites for 1999 development and
upgrading restaurant smallwares in all Company-operated restaurants.
A revised capital expenditures plan anticipates the opening of seven new
Company-operated restaurants in 1998 including the Perkins Cafe Bakery. Funds
not used to build new restaurants will be primarily applied to the acquisition
of restaurant sites to be developed in 1999, remodels of existing restaurants,
restaurant maintenance and upgrades at Foxtail.
On December 22, 1997, PFR issued $130,000,000 of 10.125% Unsecured Senior Notes
(the "Notes") due December 15, 2007. The proceeds were used to repay outstanding
senior notes and borrowings under the Partnership's revolving line of credit,
purchase Units from the public and pay expenses relative to the Going Private
Transaction.
On December 22, 1997, PFR obtained a secured $50,000,000 revolving line of
credit facility (the "Credit Facility") with a sublimit for up to $5,000,000 of
letters of credit. The Credit Facility matures on January 1, 2003, at which time
all amounts become payable. All amounts under the Credit Facility bear interest
at floating rates based on the agent's base rate or Eurodollar rates as defined
in the agreement. As of September 30, 1998, $4,000,000 in borrowings and
approximately $1,790,000 of letters of credit were outstanding under the Credit
Facility.
On May 18, 1998, TRC issued $31,100,000 of 11.25% Senior Discount Notes (the
"TRC Notes") maturing on May 15, 2008. The TRC Notes were issued at a discount
to their principal amount at maturity and generated gross proceeds to TRC of
approximately $18,009,000. The proceeds were used to purchase the shares of TRC
owned by Harrah's and pay expenses of the Reorganization.
16
<PAGE> 17
Cash interest will not accrue or be payable on the TRC Notes prior to May 15,
2003, provided that on any semi-annual accrual date prior to May 15, 2003, TRC
may elect to begin accruing cash interest on the TRC Notes (the "Cash Interest
Election"). Cash interest on the TRC Notes will accrue at a rate of 11.25% per
annum from the earlier of May 15, 2003 or the semi-annual accrual date with
respect to which the Cash Interest Election is made, and will be payable
thereafter on each May 15 and November 15.
The TRC Note Indenture restricts TRC's ability to pay distributions or dividends
to its stockholders.
Prior to the earlier of May 15, 2003 or the semi-annual accrual date with
respect to which the Cash Interest Election is made, interest on the TRC Notes
will accrue at a rate of 11.25% per annum on each semi-annual accrual date and
the principal amount of each TRC Note will accrete up by the amount of such
accrued interest (the "Accreted Value"). On May 15, 2003, TRC will be required
to pay all accrued but unpaid interest on the TRC Notes by redeeming an amount
per note equal to the Accreted Value of such TRC Note as of such date, less the
issue price of such TRC Note at a redemption price of 105.625% of the amount
redeemed. Assuming TRC does not make the Cash Interest Election, the aggregate
Accreted Value of the TRC Notes on May 15, 2003 will be $31,100,000 and the
amount required to be redeemed will be approximately $13,091,000.
Prior to the fourth quarter of 1997, PFR had paid quarterly cash distributions
to Unitholders. Following the consummation of the Going Private Transaction, PFR
plans to pay distributions to its partners from available cash flow in amounts
sufficient to satisfy any tax liabilities of the partners arising out of the
allocation of taxable income or gain from PFR and other amounts permitted under
the Note Indenture and Credit Facility. Pursuant to both the Notes and the
Credit Facility, PFR must maintain specified financial ratios and is subject to
certain restrictions which limit additional indebtedness. At September 30, 1998,
PFR was in compliance with all such requirements.
The Notes and the Credit Facility restrict the ability of PFR to pay dividends
or distributions to its equity holders. If no default or event of default
exists, these restrictions generally allow PFR to make distributions:
1. sufficient to pay its equity holders' estimated federal, state and local
income taxes on the holders' share of the taxable income of PFR (Tax
Distributions).
2. in an aggregate amount after December 22, 1997 equal to 50% of positive
net income, after Tax Distributions, from January 1, 1998 through the end
of the most recently ended fiscal quarter.
3. up to an aggregate of an additional $5 million after December 22, 1997.
In the nine months ended September 30, 1998, PFR made tax distributions totaling
approximately $1,726,000 to its equity holders, all of whom are direct or
indirect wholly-owned subsidiaries of TRC. Under the above restrictions, other
than tax distributions, PFR was unrestricted in its ability to make
distributions to its equity holders up to approximately $6,143,000 as of
September 30, 1998.
17
<PAGE> 18
The Company's ability to make scheduled payments of principal of, or to pay the
interest or liquidated damages, if any, on, or to refinance, its indebtedness
(including the Notes and the TRC notes), or to fund planned capital expenditures
will depend on its future performance, which, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond its control. Based upon the current level of operations,
management believes that cash flow from operations and available cash, together
with available borrowings under the Credit Facility, will be adequate to meet
the Company's liquidity needs for the foreseeable future. The Company and PFR
may, however, need to refinance all or a portion of the principal of the Notes
and/or the TRC Notes on or prior to maturity. There can be no assurance that the
Company will generate sufficient cash flow from operations, or that future
borrowings will be available under the Credit Facility in an amount sufficient
to enable the Company to service its indebtedness, including the Notes and the
TRC Notes, or to fund its other liquidity needs. In addition, there can be no
assurance that the Company and PFR will be able to effect any such refinancing
on commercially reasonable terms or at all.
SEASONALITY
The Company's revenues are subject to seasonal fluctuations. Customer traffic,
and consequently revenues, are highest in the summer months and lowest during
the winter months because of the high proportion of restaurants located in
states where inclement weather adversely affects guest visits.
FORWARD-LOOKING STATEMENTS
This discussion contains forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are based on current expectations that are subject to known and
unknown risks, uncertainties and other factors that could cause actual results
to differ materially from those contemplated by the forward-looking statements.
Such factors include, but are not limited to, the following: general economic
conditions, competitive factors, consumer taste and preferences and adverse
weather conditions. The Company does not undertake to publicly update or revise
the forward-looking statements even if the experience or future changes make it
clear that the projected results expressed or implied therein will not be
realized.
18
<PAGE> 19
PART II - OTHER INFORMATION
Item 5. Other Information
On October 19, 1998, Basil P. Livanos was elected to the Board of Directors of
The Restaurant Company filling a vacancy created by the resignation of Steven L.
Ezzes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Reference is made to the Index of Exhibits attached hereto
as page 20 and made a part hereof.
(b) Reports on Form 8-K - A report on Form 8-K was filed on October 2,
1998, documenting the resignation of Richard K. Arras as President and
Chief Operating Officer of Perkins Family Restaurants, L.P. on
September 22, 1998.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE RESTAURANT COMPANY
DATE: November 16, 1998 BY: /s/ Steven R. McClellan
------------------ ---------------------------
Steven R. McClellan
Vice President,
Chief Financial Officer
BY: /s/ Michael P. Donahoe
--------------------------
Michael P. Donahoe
Vice President, Controller
Chief Accounting Officer
19
<PAGE> 20
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.1 Airplane purchase agreement dated September 3, 1998
between TRC Realty Company and Learjet.
27 Financial Data Schedule (for SEC use only)
</TABLE>
<PAGE> 1
EXHIBIT 10.1
LEARJET 45
AIRPLANE PURCHASE AGREEMENT
This Agreement is made by and between Learjet Inc., a Delaware corporation
with its principal offices in Wichita, Kansas ("Learjet"), and TRC REALTY CO.
("Buyer") and shall be effective as of the date of its acceptance by Learjet.
In consideration of the mutual covenants made herein and subject to the
following terms and conditions, Learjet agrees to sell and Buyer agrees to buy
the new Learjet airplane (the "Airplane") described below.
SECTION I. AIRPLANE DESCRIPTION
A. The Airplane is a new Learjet 45, Serial Number 119, more fully
described in the Specification and Description dated 09-97 (the
"Specification") attached hereto as Exhibit "A" and made a part hereof by
reference, together with the avionics, other equipment, and interior and
exterior installations and finishings ("Options") selected by Buyer.
B. The Options are described and the price of the Options is set forth in
the Optional Equipment Description & Pricing List dated 05-97 attached hereto
Exhibit "F". Buyer agrees to specify the Options that are in addition to or
different from those specified on Exhibit "C" to be installed on the Airplane on
or before 180 days prior prior to the "Anticipated Delivery Date" (the "Option
Date").
SECTION II. PRICE AND PAYMENT AND DELIVERY SCHEDULE
A. Subject to adjustments of any deleted options or additional options (as
hereinafter defined) selected by Buyer after the date hereof, the purchase
price of the Airplane shall be:
Base Price $7,200,000.00 U.S.
-------------
B. Optional Equipment and Miscellaneous items:
Exhibits "B" (Special Conditions); "C" (Aircraft Profile); "D" (Warranty
Bill of Sale); "E" (Aircraft Acceptance Certificate) are attached hereto and
made a part of this Agreement. TBD = To Be Determined _______________
Total Optional Equipment and Miscellaneous Items: $262,100.00 U.S.
------------
C. Total Purchase Price: $7,462,100.00 U.S.
-------------
D. The Purchase Price shall be payable in U.S. Dollars as follows: See
Exhibit "B" Item #2
E. See Exhibit "B" Item #3
EXCEPT FOR THE EXPRESS TERMS OF THE LEARJET AIRPLANE WARRANTY POLICY SET FORTH
IN THE SPECIFICATION, LEARJET MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS
OR IMPLIED, OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR OTHERWISE.
SUCH WRITTEN WARRANTY IS MADE IN LIEU OF ALL OTHER WARRANTIES, OBLIGATIONS OR
LIABILITIES OR LEARJET WITH RESPECT TO THE MANUFACTURE, SALE, LEASE, OPERATION
OR USE OF THE AIRPLANE AND, EXCEPT AS SET FORTH THEREIN, LEARJET SHALL NOT BE
LIABLE IN WARRANTY, NEGLIGENCE, OR STRICT LIABILITY FOR ANY DEFECTS, FAILURES
OR MALFUNCTIONS IN PERFORMANCE, DESIGN, MANUFACTURE OR OTHERWISE, WHETHER
PATENT OR LATENT. THE EXTENT OF LEARJET'S LIABILITY UNDER SUCH WARRANTY IS
LIMITED TO THE REPAIR OR REPLACEMENT OR DEFECTS IN THE MANNER DESCRIBED IN SUCH
WARRANTY, AND ALL OTHER REMEDIES AGAINST LEARJET FOR INCIDENTAL, CONSEQUENTIAL
OR OTHER DAMAGES ARISING OUT OF THE MANUFACTURE, SALE, LEASE, OPERATION OR USE
OF THE AIRPLANE ARE EXPRESSLY EXCLUDED.
In the event the Buyer is a natural person or sole proprietorship then,
notwithstanding anything herein to the contrary, the limits on warranties or on
remedies for breach shall not apply to the extent (but only to the extant) such
limitations are prohibited by New York Law.
Buyer and Learjet agree that this transaction is governed solely by the
terms and conditions set forth (1) above, (2) on the reverse side hereof, (3) in
the exhibits referenced and incorporated herein, and (4) in all amendments
hereto, all of which together constitute the complete agreement between Buyer
and Learjet with respect to the Airplane. Buyer acknowledges that Buyer has read
and understands the complete agreement, and that this Agreement shall be not
binding upon Learjet until it has been executed by both an authorized officer of
Learjet and an authorized representative of Learjet's Marketing Administration
Department at the address set forth below.
BUYER HEREBY ACKNOWLEDGES AND AGREES THAT NONE OF LEARJET'S SALESMEN ARE
AUTHORIZED TO WAIVE OR ALTER ANY TERM, PROVISION OR CONDITION OF THIS
AGREEMENT, OR TO MAKE ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THIS
AGREEMENT OR THE AIRPLANE.
BUYER LEARJET
Name: D. M. Smith One Learjet Way
--------------------------------- P.O. Box 7707
8-31-98 Wichita KS, 67277-7707
Address: One Pierce Place, Suite 100E
------------------------------
Itasca, Illinois 60143-1246
- --------------------------------------
By:
---------------------------------
Title: Vice President Sales N.D.
------------------------------
By: Donald N. Smith By: Linda Merse - Daly
---------------------------------- ---------------------------------
Title: Chief Executive Officer Title: Director - Contracts
------------------------------- ------------------------------
Date: 8/31/98 Date: 9/3/98
------------------------------- -------------------------------
1
<PAGE> 2
LEARJET 45
AIRPLANE PURCHASE AGREEMENT
SECTION IV. DELIVERY
A. DELIVERY PERIOD. Learjet may tender delivery of the Airplane
anytime within the Delivery Period; provided, however, that in the event (1)
Buyer fails to specify the Options by the Option Date; (2) Buyer selects, with
the approval of Learjet, additional or alternative avionics, other equipment,
interior or exterior installations or furnishings or other changes in the
Airplane after the Option Date ("Additional Options"); (3) installation of any
of the Options and/or Additional Options affects Learjet's ability to timely
deliver the Airplane; (4) delivery is delayed due to causes beyond Learjet's
control; or (5) defects are noted during the inspection and acceptance flight
provided for under Section V.A. hereof, then the Delivery Period shall be
extended for the period of time reasonably necessary, under the circumstances,
to permit Learjet to deliver the Airplane. If delivery of the Airplane can be
made prior to the Anticipated Delivery Date, and Learjet elects to make such
prior delivery, then Learjet agrees to give Buyer at least ten (10) days prior
written notice of the date upon which delivery will be made.
B. PLACE OF DELIVERY. Delivery of the Airplane to Buyer shall be
F.A.F. Windsor Locks, Connecticut or Wichita, Kansas, at Buyer's option, at
Learjet's expense, unless a different location is agreed upon in writing by
Buyer and Learjet.
SECTION V. LEARJET'S OBLIGATIONS
A. DELIVERY AND ACCEPTANCE. Learjet will notify Buyer when the
Airplane is ready for delivery and permit Buyer to inspect the Airplane and
participate in an acceptance flight of not more than two (2) hours duration
which shall be controlled by Learjet. If no defects are noted during the
inspection and acceptance flight, Buyer shall accept and pay for the Airplane
on the Delivery Date. If any defects are noted during such inspection and
acceptance flight, Learjet shall correct the same within a reasonable time and,
if necessary, and as provided in Section VI.C. hereof, the Delivery Period
shall be extended to permit Learjet to correct such defects. ALL EXPENSES FOR
THE ACCEPTANCE AND DELIVERY FLIGHTS SHALL BE AT LEARJET'S EXPENSE. ALL AIRPLANE
SYSTEMS WILL BE FULLY OPERATIONAL, ALL AIRWORTHINESS DIRECTIVES AND ALL
MANDATORY AND RECOMMENDED MANUFACTURER'S SERVICE BULLETINS MUST BE FULLY
COMPLIED WITH, AND MAINTENANCE CHAPTER 5 ITEMS WILL BE COMPLIED WITH.
B. TRANSFER OF TITLE. At the time of delivery, Learjet shall transfer,
or cause to be transferred, title to the Airplane to Buyer, free and clear of
all liens and encumbrances, by means of a Bill of Sale duly prepared and
executed on the appropriate U. S. Federal Aviation Administration ("FAA") form
and Warranty Bill of Sale in the form of Exhibit "D".
C. CERTIFICATE OF AIRWORTHINESS. At the time of delivery, Learjet
shall furnish the Buyer with a Standard Airworthiness Certificate issued by the
FAA certifying that, as of the date of issuance, the Airplane has been
inspected and found to conform in all respects to the applicable FAA Type
Certificate. The airworthiness certificate shall have no restrictions or
limitations except for those restrictions or limitations set forth in the
Flight Manual and or the Type Certificate.
D. PUBLICATIONS. Learjet shall furnish the Buyer with one copy each of
the applicable Flight Manual, Maintenance Manual, Parts Catalog, and Wiring
Manual and, for a period of one (1) year after delivery of the Airplane,
Learjet shall furnish to the Buyer, without charge, any revisions to such
publications.
E. TRAINING. The price of the Airplane includes, and Learjet shall
make available to Buyer, ground school, simulator, flight training, and type
rating check ride for THREE (3) qualified pilots in accordance with the terms
of the Crew Training Agreement set forth in the Specification.
SECTION VI. BUYER'S OBLIGATIONS
A. PAYMENTS. Buyer agrees to make all deposits and payments required
to be made pursuant to Section II. hereof as and when the same are due. Late
payments shall be subject to interest charges from the date due until paid a
rate equal to the PRIME RATE as reported from time to time by the Wall Street
Journal.
B. SPECIFICATION OF OPTIONS AND CHANGES. Buyer agrees to specify the
Options on or before the Option Date in accordance with Section I. hereof. Any
Additional Options requested by Buyer after the Option Date shall be subject to
Learjet's approval. Buyer understands and agrees that such changes may result
in additional charges and/or delays in the Delivery Date.
C. INSPECTION. Within three (3) business days after Learjet notifies
Buyer that the Airplane is ready for delivery, Buyer agrees to inspect the
Airplane, and if the Airplane meets the Specification and the terms of this
Airplane Purchase Agreement to accept and pay for the Airplane on the Delivery
Date. If Buyer has not accepted the Airplane within seven business (7) days
after the date Learjet notifies Buyer that the Airplane is ready for delivery,
then Buyer agrees to immediately notify Learjet, in writing, of the reasons for
Buyer's failure to accept the Airplane. The unpaid balance of the Purchase
Price shall be subject to interest charges from the date the Airplane is ready
for delivery until paid at the rate described in Paragraph A. of this Section
VI; provided, however, that if Buyer's failure to accept and pay for the
Airplane is due to the fact that the Airplane does not meet the Specification,
then no interest shall accrue unless and until such time as the Airplane meets
the Specification and is tendered for delivery by Learjet and Buyer refuses
acceptance.
If for any reason the Airplane tendered for delivery by Learjet does
not meet the Specification, and Buyer refuses to accept delivery thereof, Buyer
agrees to specify, in writing, the basis of Buyer's refusal to accept delivery
and to give Learjet a reasonable opportunity or opportunities to cure any
defect and thereafter, deliver the Airplane to Buyer. If defects in the
Airplane are discovered by Buyer subsequent to delivery, Buyer agrees to
immediately notify Learjet, in writing, of such defects and further agrees to
provide Learjet a reasonable opportunity or opportunities to cure the same in
accordance with the terms of the Learjet Airplane Warranty Policy set forth in
the Specification.
D. TAXES. At the time of delivery of the Airplane, Buyer shall remit
to Learjet (or furnish satisfactory evidence of direct payment by Buyer), in
addition to any other amounts due Learjet hereunder, (1) any and all federal,
state, or local sales or other taxes
2
<PAGE> 3
LEARJET 45
AIRPLANE PURCHASE AGREEMENT
applicable to the sale and delivery of the Airplane, (2) any and all import
duties, import taxes, or other import charges levied by other than the United
States Government. Buyer hereby agrees to indemnify and hold Learjet harmless
from and against any and all applicable sales, use or other taxes which,
inadvertently or for any other reason, are not collected by Learjet at the time
delivery.
SECTION VII. GENERAL TERMS AND CONDITIONS
A. LOSS, DAMAGE OR DESTRUCTION OF THE AIRPLANE. In the event of loss,
damage or destruction of the Airplane prior to delivery, Learjet shall be
excused from and not be liable for any delay or failure in the performance of
this Agreement. In such event Buyer shall have the right to accept delivery of
the next available airplane, as determined by Learjet, or to terminate this
Agreement. Buyer shall notify Learjet of its decision within fifteen (15) days
from the date of receipt of notice from Learjet of the loss, damage or
destruction of the Airplane and the anticipated delivery date and price of the
next available Learjet 45 priced as per this agreement. In the event of
termination of this Agreement hereunder. Buyer shall be entitled to recover all
amounts paid to Learjet on account of the Airplane together with interest
thereon at the PRIME RATE as reported from time to time by the Wall Street
Journal.
B. TITLE AND RISK OF LOSS. Title and risk of loss to the Airplane
shall pass to Buyer at the time of delivery and upon the execution of an
Aircraft Acceptance Certificate in the form of Exhibit "E".
C. FAILURE OR DELAY IN DELIVERY. Learjet shall not be liable for any
failure to deliver or delay in delivery of the Airplane due to causes beyond
its control and the Delivery Period shall be extended by a period of time equal
to such delay. Such causes include, but are not limited to, acts of God or
public enemy, war, civil commotion, insurrection, riot, embargo, fire,
explosion, earthquake, lightning, flood, drought, windstorm, tornado, other
action of the elements, epidemics, governmental acts, regulations or
directives, labor strikes or work stoppages or slowdown, delays in vendor
deliveries, failure after due diligence to obtain type approval or
airworthiness certification, or any other cause beyond Learjet's control or not
attributable to Learjet's negligence.
D. TERMINATION.
(1) Learjet may terminate this Agreement immediately at any time
prior to delivery of the Airplane by written notice to the Buyer in the event
(a) Buyer makes an assignment for the benefit of creditors, admits an inability
to pay its debts as they become due, (b) a receiver or trustee is appointed for
Buyer or for substantially all of Buyer's assets and, if appointed without
Buyer's consent, such appointment is not discharged or stayed within thirty
(30) days, or (c) proceeding under any law of bankruptcy, insolvency, or
reorganization or relief of debtors is instituted by or against Buyer and, if
not contested by Buyer, not dismissed or stayed within thirty (30) days.
(2) Learjet may terminate this Agreement immediately upon
written notice to Buyer in the event Buyer (a) fails to make any payment
required to be made by Buyer hereunder when due, (b) fails to specify the
Options within fifteen (15) days after the Option Date, or (c) fails or refuses
to accept delivery of the Airplane within seven (7) days (i) after the date the
Airplane is ready for delivery or (ii) after Learjet has cured, within a
reasonable time, any defects noted during Buyer's inspection of the Airplane.
In the event of termination of this Agreement by Learjet under either
subparagraph (1) or subparagraph (2) of this Paragraph D. of Section VII., all
of Buyer's right, title and interest in, to and under this Agreement and the
Airplane shall be extinguished, and Learjet shall retain all payments therefore
made by the Buyer as liquidated damages and not as a penalty and as Learjet's
sole and exclusive remedy, and the parties shall thenceforth be released from
all further obligations. Such damages may include, but are not limited to, loss
of profit on this sale, direct and indirect costs incurred as a result of
disruption in production, training expense advances, and selling expenses in
effecting resale of the Airplane. The parties agree that the amount of
liquidated damages set forth herein is a reasonable forecast of anticipated or
actual loss in view of the difficulty of estimating the actual damages.
(3) Buyer may terminate this Agreement at any time prior to
delivery of the Airplane by giving not less than ten (10) days written notice
to Learjet in the event Learjet (a) fails to tender delivery of the Airplane
within the Delivery Period and such failure is not excused pursuant to
Paragraph C. of this Section VII. or (b) Learjet fails for any reason
whatsoever to tender delivery of the Airplane within three (3) months after the
end of the Delivery Period. In the event of termination of this Agreement by
Buyer under subparagraph (3) of this Paragraph D. of Section VII. Learjet shall
promptly refund all amounts paid by Buyer on account of the Airplane, together
with interest thereon at the PRIME RATE as reported from time to time by the
Wall Street Journal, from the date of deposit to the date of refund, which
shall be Buyer's sole and exclusive remedy for Learjet's failure to deliver the
Airplane as set forth in subparagraph (3) of this Paragraph D. of Section VII.
(4) Buyer recognizes, understands and agrees that Buyer shall
not have the right to terminate this Agreement because of any change or
fluctuation in the value of any currency.
E. ASSIGNMENT. Buyer may until the delivery date of the Airplane and
upon 30 days prior written notice to Learjet, assign all of its rights and
obligations under this Airplane Purchase Agreement (i) without Learjet's prior
written consent, to a subsidiary or to other affiliate owned, or controlled by,
or under common control or ownership with, Buyer, or (ii) without Learjet's
prior written consent, to a bank or other financial institution as lender or
lessor under a lease or financing of the Airplane by Buyer. BUYER GUARANTEES
FULL PAYMENT ON AIRCRAFT AT DELIVERY. Learjet reserves the right to assign and
transfer its rights under this Agreement to a financing institution for
financial and accounting purposes. Buyer agrees to acknowledge its consent
thereto by executing and delivering such documents or instruments as Learjet
may reasonably request.
3
<PAGE> 4
LEARJET 45
AIRPLANE PURCHASE AGREEMENT
F. NOTICES. Any notice to be given hereunder shall be sent by certified
or registered mail, commercial courier, telegram, or telecopier to the party to
which such notice is to be given at the address set forth above or such other
address as the party to receive such notice shall designate in writing. Notice
so sent shall be deemed to be received upon actual receipt.
G. ENTIRE AGREEMENT. This Agreement and the matters referred to herein
constitute the entire agreement of Learjet and Buyer with respect to the
Airplane and supersede and cancel all prior statements, representations,
negotiations, understandings, agreements, undertakings, and communications,
whether verbal or written, with respect to or in connection with the subject
matter hereof. This Agreement may only be amended or changed by a written
instrument signed by both parties hereto.
H. APPLICABLE LAW. This Agreement shall be governed by and interpreted
in accordance with the laws of the State of New York.
I. ARBITRATION. All disputes arising under this Agreement which cannot
be settled amicably between Learjet and Buyer shall be resolved by arbitration
conducted in Wichita, Kansas, in accordance with the rules of the American
Arbitration Association. The decision of the arbitrators shall be final and
binding upon both parties.
J. SEVERABILITY. If any of the terms or provisions of this Agreement
are determined or held to be illegal or unenforceable under applicable law,
such terms and provisions shall be deemed to be ineffective and severed from
the remaining terms and provisions hereof which shall be unimpaired and remain
in full force and effect.
K. ACCEPTANCE IN WICHITA. This Agreement shall become a binding
contract upon its acceptance and execution by Learjet at its principal offices
in Wichita, Kansas.
4
<PAGE> 5
[BOMBARDIER LOGO]
BOMBARDIER
AEROSPACE
Learjet Inc.
EXHIBIT "B"
SPECIAL CONDITIONS
1. Base Price shall be adjusted by the percentage difference in the Consumer
Price Index, Wage Earners and Clerical Workers (CPI-W) 1982-1984=100 as
published by the U.S. Department of Labor, Bureau of Labor Statistics, for
the month of October, 1997 (158.5) and up to and including the scheduled
month of delivery.
2. Section II, Paragraph D, of this Airplane Purchase Agreement is amended to
read as follows:
a) Prior to the execution of this Airplane Purchase Agreement Buyer
has provided Seller a fully refundable deposit of $500,000.
b) The balance of the Purchase Price in the amount of $6,962,100,
plus applicable taxes and other charges, shall be paid by
cashier's check drawn on a U.S. bank or wire transfer at the time
of delivery of the Airplane.
3. The Airplane will be delivered to Buyer, or its assigns, between April 1,
1999 and September 30, 1999 (the "Delivery Period"). On or before October
21, 1998, Seller shall identify the serial number of the Airplane and its
scheduled date of delivery to Buyer (the "Anticipated Delivery Date"). In
the event that the Airplane is not so identified by such date, the $500,000
Deposit shall be promptly returned to Buyer. The Buyer may, at its option,
on or before October 21, 1998, determine to accept delivery of Learjet 45
Serial Number 119 (currently scheduled for delivery in May 2000), which for
purposes of this Airplane Purchase Agreement, shall then become the
Airplane.
4. Should an earlier delivery position for a Learjet 45 become available,
Buyer will be notified with pertinent information as it relates to block
changes and the improvements on or round that serial number by Learjet and
may transfer the Airplane Purchase Agreement one time to such earlier
delivery position within 48 hours after such notification from Learjet.
5. On the date of delivery, the Flight Management system of the Airplane shall
be equipped with the latest software then available.
Page 1
Buyer's Initial ___
Learjet's Initial ___
<PAGE> 6
[BOMBARDIER LOGO]
BOMBARDIER
AEROSPACE
Learjet Inc.
EXHIBIT "B"
SPECIAL CONDITIONS
6. Without additional charge, Learjet shall furnish Buyer a two year
subscription to LASER.
7. Warranty Labor includes labor access to remove and install aircraft parts
during the warranty period.
8. Learjet will ensure that AlliedSignal will provide to the Buyer 400 flight
hours of free MSP (Maintenance Service Plan) or the reduced rate, if the
Buyer chooses to enroll for a five year term.
9. The Airplane shall have no more than 25 hours of flight time and all
calendar limited components shall be fresh within 30 days of delivery.
10. Learjet agrees that Buyer shall have the option to trade-in Learjet 45-TBD
on a new, greater value Bombardier Business aircraft provided that the
Buyer's new aircraft delivers within the following years of operation on
said trade-in:
- Three (3) years, credit 85% of the purchase price of the aircraft
and not-to-exceed 1,200 hours
- Four (4) years, credit 80% of the purchase price of the aircraft
and not-to-exceed 1,600 hours
- Five (5) years, credit 75% of the purchase price of the aircraft
and to not-to-exceed 2,000 hours
Buyer's Initial ___
Learjet's Initial ___
Page 2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND FROM THE STATEMENT OF
OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,299
<SECURITIES> 0
<RECEIVABLES> 9,660
<ALLOWANCES> 973
<INVENTORY> 4,999
<CURRENT-ASSETS> 17,692
<PP&E> 246,865
<DEPRECIATION> 115,077
<TOTAL-ASSETS> 198,564
<CURRENT-LIABILITIES> 35,717
<BONDS> 158,879
0
0
<COMMON> 0
<OTHER-SE> (3,265)
<TOTAL-LIABILITY-AND-EQUITY> 198,564
<SALES> 203,980
<TOTAL-REVENUES> 220,608
<CGS> 57,607
<TOTAL-COSTS> 169,869
<OTHER-EXPENSES> 47,805
<LOSS-PROVISION> 321
<INTEREST-EXPENSE> 11,990
<INCOME-PRETAX> 2,934
<INCOME-TAX> 986
<INCOME-CONTINUING> 2,934
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,948
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
