<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
SPAGHETTI WAREHOUSE, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
N/A
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[X] Fee computed below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: Common
Stock, $.01 par value, of Spaghetti Warehouse, Inc.
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies: 5,742,000
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): $8.00; Cash
Merger Consideration
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction: $45,936,000
- --------------------------------------------------------------------------------
(5) Total fee paid: $0
- --------------------------------------------------------------------------------
[_] Fee paid previously by written preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $9,188
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.: Schedule 14A
- --------------------------------------------------------------------------------
(3) Filing Party: Registrant
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(4) Date Filed: November 12, 1998
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<PAGE>
SPAGHETTI WAREHOUSE, INC.
402 West I-30
Garland, Texas 75043
November 17, 1998
To our Shareholders:
You are cordially invited to attend a Special Meeting of Shareholders (the
"Special Meeting") of Spaghetti Warehouse, Inc. (the "Company") to be held at
10:00 a.m., local time, on December 17, 1998 at 1815 N. Market Street, Dallas,
Texas, on the second floor.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to adopt the Agreement and Plan of Merger dated as of September 18,
1998 ( the "Merger Agreement") and to approve the merger of Spaghetti Warehouse
Acquisition, Inc., a Texas corporation and a wholly owned subsidiary of
Consolidated Restaurant Companies, Inc., a Delaware corporation ("Purchaser")
with and into the Company (the "Merger") as contemplated by the Merger
Agreement. Cracken, Harkey, Street & Hartnett, L.L.C., a Delaware limited
liability company ("CHC") indirectly controls Purchaser. John D. Harkey, Jr., E.
Gene Street and Stephen P. Hartnett each beneficially own equity interests in
CHC. John R.W. Cracken is the sole beneficiary of a trust that also owns an
equity interest in CHC. Subject to the terms and conditions of the Merger
Agreement, at the effective time of the Merger (the "Effective Time") each share
of common stock, par value $.01 per share, of the Company ("Company Common
Stock") outstanding immediately prior to the Effective Time (other than shares
held in treasury by the Company or owned by Purchaser, or any subsidiary of the
Company or Purchaser, and shares held by shareholders of the Company who have
validly exercised and perfected appraisal rights under Texas law) will be
converted into the right to receive $8.00 in cash. Please note that for federal
income tax purposes, an individual holder of shares of Company Common Stock who
exchanges such shares for cash pursuant to the Merger or who receives cash in
exchange for such shares pursuant to the exercise of appraisal rights will be
treated as having sold his or her shares of Company Common Stock for cash in a
taxable transaction. See "Certain Federal Income Tax Consequences" in the Proxy
Statement.
In connection with the Merger, holders of shares of Company Common Stock
who comply with certain requirements and procedures set forth in Articles 5.11,
5.12 and 5.13 of the Texas Business Corporation Act (the "TBCA") may be entitled
to seek an appraisal of their shares and to obtain the "fair value" of their
shares. To exercise appraisal rights, holders of shares of Company Common Stock
must not vote in favor of the Merger and must comply strictly with the
procedural requirements of Articles 5.11, 5.12 and 5.13 of the TBCA, a
description of which is set forth under "The Merger--Rights of Dissenting
Shareholders," in the Proxy Statement and the full text of which is included as
Appendix C to the Proxy Statement.
The Board of Directors of the Company (the "Board") has carefully reviewed
and considered the terms and conditions of the proposed Merger and the other
factors described in the attached Proxy Statement (the "Proxy Statement") under
"The Merger--The Company's Reasons for the such description of factors
considered by the Board, the Board requested and received a written opinion
dated as of September 17, 1998 from NationsBanc Montgomery Securities LLC
("NMS"), the Company's financial advisor, with respect to the fairness from a
financial point of view (as of such date) of the consideration to be received by
the holders of shares of Company Common Stock pursuant to the Merger. Several
other important factors were considered by the Board, along with the opinion of
NMS, and these are more fully described in the Proxy Statement under "The
Merger--The Company's Reasons for the Merger; Recommendation of the Board of
Directors." You are urged to read, understand and consider the discussions of
all of these factors in the Proxy Statement in connection with your analysis of
whether to vote for or against the Merger.
FOR THE REASONS SET FORTH IN THE PROXY STATEMENT, THE BOARD BELIEVES THAT
THE MERGER IS FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY AND ITS
SHAREHOLDERS, AND RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" ADOPTION OF THE
MERGER AGREEMENT AND APPROVAL OF THE MERGER.
<PAGE>
Details of the proposed Merger and other material information are included
in the Proxy Statement. Please review the Proxy Statement carefully. The
affirmative vote of the holders of at least two-thirds of the outstanding shares
of Company Common Stock is required to adopt the Merger Agreement and approve
the Merger, so failure to vote will have the same effect as a vote against the
Merger Agreement and the Merger. Accordingly, we urge you to complete, sign and
date the enclosed proxy or voting instruction card and return it in the enclosed
return envelope, whether or not you plan to attend the Special Meeting. Your
vote is important regardless of the number of shares you own.
If you have any questions prior to the Special Meeting or need further
assistance, please call the undersigned at (972) 226-6000.
Sincerely,
/s/ Robert R. Hawk
--------------------------------------
Robert R. Hawk
Chairman of the Board of Directors,
President and Chief Executive Officer
<PAGE>
SPAGHETTI WAREHOUSE, INC.
402 West I-30
Garland, Texas 75043
---------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 17, 1998
-----------
To the Shareholders of Spaghetti Warehouse, Inc.:
A Special Meeting of Shareholders (the "Special Meeting") of Spaghetti
Warehouse, Inc., a Texas corporation (the "Company"), will be held on December
17, 1998 at 10:00 a.m., local time, at 1815 N. Market Street, Dallas, Texas, on
the second floor, for the following purposes:
1. To consider and vote upon a proposal to (a) adopt the Agreement
and Plan of Merger, dated as of September 18, 1998 (the "Merger
Agreement"), by and among Consolidated Restaurant Companies, Inc., a
Delaware corporation ("Purchaser"), Spaghetti Warehouse Acquisition, Inc.,
a Texas corporation and a wholly owned subsidiary of Purchaser ("Sub"), and
the Company, and (b) approve the merger of Sub with and into the Company
(the "Merger") as contemplated by the Merger Agreement. Purchaser is
indirectly controlled by Cracken, Harkey, Street & Hartnett, L.L.C., a
Delaware limited liability company ("CHC"). John D. Harkey, Jr., E. Gene
Street and Stephen P. Hartnett each beneficially own equity interests in
CHC. John R.W. Cracken is the sole beneficiary of a trust that also owns an
equity interest in CHC. Subject to the terms and conditions of the Merger
Agreement, at the effective time of the Merger (the "Effective Time") each
share of common stock, par value $.01 per share, of the Company ("Company
Common Stock") outstanding immediately prior to the Effective Time (other
than shares held in treasury by the Company or owned by Purchaser, or any
subsidiary of the Company or Purchaser, and shares held by shareholders of
the Company who have validly exercised and perfected appraisal rights under
Texas law) will be converted into the right to receive $8.00 in cash. For
federal income tax purposes, an individual holder of shares of Company
Common Stock who exchanges such shares for cash pursuant to the Merger or
who receives cash in exchange for such shares pursuant to the exercise of
appraised rights will be treated as having sold his or her shares of
Company Common Stock for cash in a taxable transaction. See "Material
Federal Income Tax Consequences" in the Proxy Statement. Upon completion of
the Merger, the Company will be a wholly owned subsidiary of Purchaser, all
as more fully set forth in the attached Proxy Statement (the "Proxy
Statement") and in the Merger Agreement, a copy of which is included as
Appendix A thereto; and
----------
2. To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
The board of Directors has fixed the close of business on November 13,
1998, as the record date (the "Record Date") for the determination of
shareholders entitled to notice of, and to vote at, the Special Meeting or any
adjournment thereof. Only holders of record of shares of Company Common Stock at
the close of business on the Record Date are entitled to notice of, and to vote
at, the Special Meeting.
In connection with the Merger, holders of shares of Company Common Stock
who comply with certain requirements and procedures set forth in Articles 5.11,
5.12 and 5.13 of the Texas Business Corporation Act (the "TBCA") may be entitled
to seek an appraisal of their shares and to obtain the "fair value" of their
shares. To exercise appraisal rights, holders of shares of Company Common Stock
must not vote in favor of the Merger and must comply strictly with the
procedural requirements of Articles 5.11, 5.12 and 5.13 of the TBCA, a
description of which is set forth under "The Merger--Rights of Dissenting
Shareholders," in the Proxy Statement and the full text of which is included as
Appendix C to the Proxy Statement.
- ----------
Your vote is important. The affirmative vote of at least two-thirds of the
holders of the outstanding shares of Company Common Stock is required for
adoption of the Merger Agreement and approval of the Merger. Even if you plan to
attend the Special Meeting in person, we request that you sign and return the
enclosed proxy or voting
<PAGE>
instruction card and thus ensure that your shares will be represented at the
Special Meeting if you are unable to attend. If you do attend the Special
Meeting and wish to vote in person, you may withdraw your proxy and vote in
person.
PLEASE DO NOT SEND ANY CERTIFICATES REPRESENTING YOUR SHARES OF COMPANY
COMMON STOCK AT THIS TIME. You will receive instructions regarding the surrender
of your share certificate(s) and receive payment for your shares of Company
Common Stock after the Effective Time.
By Order of the Board of Directors
Robert E. Bodnar
Secretary
Garland, Texas
November 17, 1998
<PAGE>
SPAGHETTI WAREHOUSE, INC.
402 West I-30
Garland, Texas 75043
-----------
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 17, 1998
-----------
This Proxy Statement relates to the proposed merger of Spaghetti Warehouse
Acquisition, Inc., a Texas corporation and wholly owned subsidiary ("Sub") of
Consolidated Restaurant Companies, Inc., a Delaware corporation ("Purchaser"),
with and into Spaghetti Warehouse, Inc., a Texas corporation (the "Company"),
pursuant to the Agreement and Plan of Merger dated as of September 18, 1998, by
and among Purchaser, Sub and the Company (the "Merger Agreement"). The merger
contemplated by the Merger Agreement is referred to herein as the "Merger."
Subject to the terms and conditions of the Merger Agreement, at the
effective time of the Merger (the "Effective Time"), (i) each share of common
stock, par value $.01 per share, of the Company's outstanding common stock
("Company Common Stock") immediately prior to the Effective Time (other than
shares held in treasury by the Company or owned by Purchaser, or any subsidiary
of the Company or Purchaser, and shares held by shareholders of the Company who
have validly exercised and perfected appraisal rights under Texas law) will be
converted into the right to receive $8.00 in cash, (ii) Sub will be merged with
and into the Company, and (iii) the Company will become a wholly owned
subsidiary of Purchaser.
This Proxy Statement is being furnished to holders of shares of Company
Common Stock in connection with the solicitation of proxies by the Board of
Directors of the Company (the "Board") for use at a special meeting of
shareholders of the Company (the "Special Meeting") to be held on December 17,
1998. This Proxy Statement and the accompanying forms of proxy are first being
mailed to shareholders of the Company on or about November 17, 1998.
At the Special Meeting, holders of shares of Company Common Stock will be
asked to adopt the Merger Agreement and approve the Merger. THE BOARD HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE MERGER AND UNANIMOUSLY
RECOMMENDS THAT YOU VOTE "FOR" THE ADOPTION OF THE MERGER AGREEMENT AND APPROVAL
OF THE MERGER.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN CONNECTION
WITH THE SOLICITATION OF PROXIES MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY OTHER PERSON.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY........................................................................................1
The Special Meeting.......................................................................1
The Parties...............................................................................1
Conflicts of Interest.....................................................................2
The Merger and the Merger Agreement.......................................................2
Terms of the Merger.......................................................................3
Material Federal Income Tax Consequences..................................................7
Rights of Dissenting Shareholders.........................................................7
Market Price Data.........................................................................7
Dividend Policy...........................................................................7
INTRODUCTION...................................................................................8
MARKET FOR COMPANY COMMON STOCK
AND RELATED SHAREHOLDER MATTERS..........................................................14
SELECTED FINANCIAL DATA.......................................................................15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................................16
THE SPECIAL MEETING...........................................................................24
Date, Time and Place.....................................................................24
Purposes of the Special Meeting..........................................................24
Record Date and Outstanding Shares.......................................................24
Voting and Revocation of Proxies.........................................................24
Vote Required............................................................................24
Solicitation of Proxies..................................................................24
Other Matters............................................................................25
THE MERGER....................................................................................26
General Description of the Merger........................................................26
Background...............................................................................26
The Company's Reasons for the Merger; Recommendation of the Board of Directors..........28
Opinion of Financial Advisor to the Company..............................................29
Material Federal Income Tax Consequences.................................................33
Accounting Treatment.....................................................................34
Existing Relationships with Purchaser....................................................34
Rights of Dissenting Shareholders........................................................34
CERTAIN TERMS OF THE MERGER AGREEMENT.........................................................36
Effective Time of the Merger.............................................................36
Manner and Basis of Converting Shares....................................................36
Stock Options............................................................................37
Conditions to the Merger.................................................................37
Representations and Warranties...........................................................38
Certain Covenants Relating to Conduct of Business Prior to the Merger....................39
No Solicitation..........................................................................40
Certain Post-Merger Matters..............................................................41
Termination or Amendment of the Merger Agreement.........................................41
Expenses and Termination Fee.............................................................42
Indemnification..........................................................................43
</TABLE>
<PAGE>
<TABLE>
<S> <C>
PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT......................................44
INDEPENDENT ACCOUNTANTS.......................................................................46
SHAREHOLDER PROPOSALS.........................................................................46
AVAILABLE INFORMATION.........................................................................46
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS....................................................F-1
APPENDIX A....................................................................................A-1
APPENDIX B....................................................................................B-1
APPENDIX C....................................................................................C-1
</TABLE>
ii
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement. Reference is made to, and this summary is qualified in its
entirety by, the more detailed information contained in or incorporated by
reference in this Proxy Statement and the appendices hereto. Shareholders of the
Company are urged to read carefully this Proxy Statement and the appendices
hereto in their entirety. As used in this Proxy Statement, unless otherwise
required by the context, the term "Purchaser" means Consolidated Restaurant
Companies, Inc. and its subsidiaries, the term "Sub" means Spaghetti Warehouse
Acquisition, Inc. and its subsidiaries and the term "Company" means Spaghetti
Warehouse, Inc. and its subsidiaries. Capitalized terms used herein without
definition are, unless otherwise indicated, defined in the Merger Agreement and
used herein with such meanings.
The Special Meeting
Date, Time and Place. The Special Meeting will be held on December 17, 1998
at 1815 N. Market Street, Dallas, Texas, on the second floor, commencing at
10:00 a.m. local time.
Purposes of the Special Meeting. At the Special Meeting, the Company's
shareholders will consider and vote upon a proposal to adopt the Merger
Agreement and approve the Merger. The Company's shareholders will also consider
and vote upon such other matters as may properly come before the Special
Meeting.
Record Date; Shares Entitled to Vote. Only holders of record of shares of
Company Common Stock at the close of business on November 13, 1998 (the "Record
Date") are entitled to notice of and to vote at the Special Meeting. On such
date, there were 5,689,301 shares of Company Common Stock outstanding, each of
which is entitled to one vote on each matter to be acted upon at the Special
Meeting.
Quorum; Vote Required. The presence, in person or by proxy, at the Special
Meeting of the holders of a majority of shares of Company Common Stock
outstanding and entitled to vote at the Special Meeting is necessary to
constitute a quorum at the Special Meeting. The affirmative vote of at least
two-thirds of the holders of shares of Company Common Stock outstanding and
entitled to vote thereon at the Special Meeting is required under the Texas
Business Corporation Act (the "TBCA") to adopt the Merger Agreement and to
approve the Merger. Abstentions and broker non-votes will have the same effect
as a vote against adoption of the Merger Agreement and against approval of the
Merger.
Security Ownership of Management. As of the Record Date, the directors and
executive officers of the Company and their affiliates owned 208,399 shares of
Company Common Stock, or approximately 3.7% of the shares entitled to vote at
the Special Meeting (which does not include 272,600 shares of Company Common
Stock subject to vested options or options that will vest as a result of the
Merger).
The Parties
The Company
Spaghetti Warehouse, Inc. (the "Company"), incorporated in Texas in
June 1972, operates as a holding company and conducts substantially all of its
operations through its subsidiaries. The Company's principal executive offices
are located at 402 West I-30, Garland, Texas 75043. The Company operates 31
restaurants and franchises three restaurants in 13 states under two concepts
using the names "The Spaghetti Warehouse" and "Spaghetti Warehouse Italian
Grill." The Spaghetti Warehouse and Spaghetti Warehouse Italian Grill concepts
are full-service restaurants serving high-quality, value-priced, classic Italian
food in a casual atmosphere. The Company also operates two joint-venture
restaurants and franchises five restaurants in Canada under the name "The Old
Spaghetti Factory." Each of the Company's restaurants offers a memorable dining
experience by serving freshly prepared authentic Italian recipes in a casual and
relaxing atmosphere. The Company owns Old Spaghetti Factory Canada Ltd., the
franchisor of Old Spaghetti Factory restaurants in Canada, and the trademark
rights to the Old Spaghetti Factory concept in Canada. These Canadian
restaurants have a similar restaurant concept and menu to the Company's
Spaghetti Warehouse restaurant concept and menu in the United States. Old
Spaghetti Factory Canada Ltd. is not related to OSF International, which
operates restaurants under the name "The Old Spaghetti Factory" in the United
States, Japan and Germany.
<PAGE>
Purchaser
Purchaser filed its Certificate of Incorporation with the Secretary of
State of Delaware on September 8, 1998 and was incorporated primarily for the
purposes of acquiring and holding the outstanding securities of various
restaurant businesses throughout the United States, consummating the Merger and
holding the outstanding securities of the Company after the Merger. Purchaser's
principal address is 5956 Sherry Lane, Suite 1450, Dallas, Texas 75225.
Purchaser is indirectly controlled by Cracken, Harkey, Street & Hartnett, L.L.C.
a Delaware limited liability company ("CHC"). John D. Harkey, Jr., E. Gene
Street and Stephen P. Hartnett each beneficially own equity interests in CHC.
John R.W. Cracken is the sole beneficiary of a trust that also owns an equity
interest in CHC.
Sub
Sub was incorporated under the laws of the State of Texas on September 18,
1998, for the purpose of consummating the Merger. Sub's principal address is
5956 Sherry Lane, Suite 1450, Dallas, Texas 75225. The assets of Sub consist of
$1,000 of paid-in capital.
Conflicts of Interest
After the Merger it is anticipated that several of the executive officers
of the Company will continue their employment with the surviving corporation in
their present positions. While Purchaser has entered into discussions with
several of the executive officers regarding employment agreements, no definitive
arrangements have been made at this time. Any employment terms offered by
Purchaser to such executive officers are not expected to be materially different
than the terms of the officers' existing employment arrangements. Additionally,
the executive officers are beneficiaries of a Company severance plan that will
be invoked should their employment be terminated by Purchaser within the first
six months following the Merger. Pursuant to the terms of such severance plan,
if all of the executive officers are terminated by Purchaser within the first
six months following the Merger, the Company would be obligated to compensate
such executive officers an aggregate of approximately $380,000.
In considering the recommendation of the Board with respect to the Merger,
the Company's shareholders should be aware that the Merger Agreement contains
certain provisions with respect to indemnification of the Company's directors
and officers. See "Certain Terms of the Merger Agreement--Indemnification."
The Merger and the Merger Agreement
Terms of the Merger. At the Effective Time (as defined below), Sub will
merge with and into the Company, with the Company being the surviving
corporation (the "Surviving Corporation") and becoming a wholly owned subsidiary
of Purchaser. Subject to the terms and conditions of the Merger Agreement, at
the Effective Time, each share of Company Common Stock outstanding at the
Effective Time will be converted into the right to receive $8.00 in cash (the
"Merger Consideration").
Recommendation of the Board of Directors. THE BOARD HAS UNANIMOUSLY
DETERMINED THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, THE
SHAREHOLDERS OF THE COMPANY AND RECOMMENDS THAT THE SHAREHOLDERS OF THE COMPANY
ADOPT THE MERGER AGREEMENT AND APPROVE THE MERGER. See "The Merger--Background"
and "--The Company's Reasons for the Merger; Recommendation of the Board of
Directors."
Opinion of Financial Advisor to the Company. NationsBanc Montgomery
Securities LLC ("NMS") was retained by the Company to render an opinion to the
Board with respect to the fairness, from a financial point of view, to the
holders of shares of Company Common Stock of the consideration to be received by
such holders in connection with the Merger. That opinion is addressed solely to
the Board; and under the terms of the engagement of NMS by the Board, only the
Board (as addressee) may rely on the opinion. The full text of the written
opinion of NMS, dated as of September 17, 1998, which sets forth certain
important qualifications, assumptions made, matters considered, areas of
reliance on others, and limitations on the review undertaken is attached as
Appendix B to this Proxy Statement. NMS's opinion is directed only to the
- ----------
fairness from a financial point of view of the consideration to be received by
holders of shares of Company Common Stock pursuant to the Merger, does not
address any other aspect of the Merger or related transactions and does not
constitute a
2
<PAGE>
recommendation to any shareholder as to how such shareholder should vote at the
Special Meeting. See "The Merger--Opinion of Financial Advisor to the Company."
Terms of the Merger
Effective Time of the Merger. The Merger will become effective upon the
filing of Articles of Merger with the Secretary of State of the State of Texas.
Assuming all conditions to the Merger contained in the Merger Agreement are
satisfied or, to the extent susceptible to waiver, waived prior thereto, it is
anticipated that the Effective Time of the Merger will occur as soon as
practicable following the Special Meeting subject to the Company's and
Purchaser's right to agree, in writing, to another date, time or place (the
"Effective Time").
Certain Conditions to the Consummation of the Merger. The obligations of
Purchaser, Sub and the Company to consummate the Merger are subject to the
satisfaction of certain conditions including the following: (i) adoption of the
Merger Agreement and approval of the Merger by the shareholders of the Company;
(ii) procurement of satisfactory financing by Purchaser; (iii) the absence of
any suit, action, or other proceeding or order by any Governmental Authority (as
that term is defined in the Merger Agreement) making the Merger illegal or
otherwise prohibiting consummation of the Merger; (iv) the absence of certain
regulatory conditions; and (v) the receipt of all Company Required Statutory
Approvals (as that term is defined in the Merger Agreement) and Purchaser
Required Statutory Approvals (as that term is defined in the Merger Agreement).
In addition, the obligations of each of Purchaser, Sub and the Company are
subject to the accuracy of the representations and warranties of the other
parties and to compliance with all agreements and covenants on the part of the
other parties contained in the Merger Agreement. Each of Purchaser, Sub or the
Company may extend the time for performance of any of the obligations of the
other parties or waive compliance with those obligations at its discretion. See
"Certain Terms of the Merger Agreement--Conditions to the Merger."
Governmental Approvals. With respect to the Merger, a filing and
notification is required with the Federal Trade Commission or the Antitrust
Division of the Department of Justice under the Hart- Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act"), as amended. Both Purchaser and the
Company have filed the forms required by the HSR Act and have requested early
termination of the waiting period with respect to the approval of such filings.
While these filings are currently pending, the Company anticipates that the
Federal Trade Commission and the Antitrust Division of the Department of Justice
will approve the transaction prior to the Special Meeting.
Manner and Basis of Converting Shares. At the Effective Time, by virtue of
the Merger and without any action on the part of any holder of any capital stock
of the Company, Purchaser or Sub, each share of Company Common Stock, if any,
that is owned by Purchaser or Sub or any subsidiary of Purchaser or held by the
Company as treasury shares will be canceled and cease to exist and no
consideration will be delivered or deliverable in exchange therefor. Each issued
and outstanding share of Company Common Stock (other than shares of Company
Common Stock canceled pursuant to the previous sentence), will be converted into
the right to receive, upon surrender and exchange of the Certificate
representing such share of Company Common Stock (collectively, the
"Certificates"), the per share amount of $8.00.
Prior to the Effective Time, Sub will appoint a United States bank or trust
company to act as exchange and paying agent (the "Paying Agent") for the Merger.
Prior to the Effective Time, Sub will deposit with the Paying Agent, in a
separate fund established for the benefit of the holders of Company Common
Stock, for payment through the Paying Agent, a sufficient amount of cash to pay
to the shareholders of the Company the Merger Consideration, which shall be paid
by Paying Agent. Such cash will be invested by the Paying Agent in U.S.
government securities maturing in 30 days or less or mutual funds that invest
solely in U.S. government securities and all interest that is earned thereon
prior to the time the cash is fully paid to the shareholders of the Company
shall be paid over by the Paying Agent to the Surviving Corporation in
accordance with the terms of the agreement with the Paying Agent six months
after the Effective Time (if not otherwise required to satisfy obligations owing
to the shareholders of the Company).
Stock Options. At the Effective Time, each outstanding option or right to
purchase or receive shares of Company Common Stock under any of the Company's
stock option plans, stock purchase plans or deferred compensation plans or
arrangements (collectively, the "Stock Plans"), whether or not then exercisable
or vested (collectively, the "Options"), shall be terminated and automatically
converted into the right to receive for each share subject to such Option an
amount of Merger Consideration equal to the difference between the amount paid
in the Merger and the per share price of such Option to the extent such
difference is a positive number (the "Option Consideration"). The receipt by
each Option holder of his Option Consideration shall constitute a release of any
and all rights the holder had or may have had with respect to such Option. Prior
to the Effective Time, the Company shall obtain all necessary consents or
releases from holders
3
<PAGE>
of Options under the Stock Plans and take all such other lawful action as may be
reasonably necessary to give effect to these transactions. The Stock Plans shall
terminate as of the Effective Time, and the provisions in the Company's pension,
profit sharing, stock option, stock purchase, stock bonus, employee stock
ownership, incentive, bonus, life, health, disability or accident plans,
deferred compensation plans, and any other employee compensation or benefit
plans, agreements, practices, policies, customs, contracts, arrangements or
commitments (collectively, the "Company Benefit Plans") shall be canceled as of
the Effective Time. Prior to the Effective Time, the Company shall take all
action necessary (including causing the Board to take such actions as are
allowed by the Stock Plans) to (i) ensure that, following the Effective Time, no
participant in the Stock Plans or any other plans, programs or arrangements
shall have any right thereunder to acquire equity securities of the Company or
any subsidiary thereof and (ii) terminate all such plans, programs and
arrangements.
No Solicitation. The Merger Agreement provides that the Company will not,
and will not cause its subsidiaries to, permit any of its representatives to,
and will use its best efforts to cause such persons not to, directly or
indirectly, initiate, solicit or encourage, or take any action to facilitate the
making of any inquiry, offer or proposal that constitutes or in reasonable
probability will lead to any Takeover Proposal (as that term is defined in the
Merger Agreement) with respect to the Company. The Merger Agreement further
provides that the Company will notify Purchaser orally and in writing of any
such inquiries, offers or Takeovers Proposals (including, without limitation,
the terms and conditions of any such proposal and the identity of the person
making it) within one business day of the receipt thereof, and that the Company
will immediately cease and cause to be terminated all existing activities,
discussions and negotiations on the date of the Merger Agreement, if any, with
any other persons conducted prior to the date of the Merger Agreement with
respect to any Takeover Proposal regarding the Company. Notwithstanding anything
stated above to the contrary, the Merger Agreement provides that: (i) the
Company may, prior to the vote of the shareholders of the Company for approval
of the Merger (and not thereafter if the Merger is approved thereby) in response
to an unsolicited request therefor, furnish information, including non-public
information, to any person or "group" (within the meaning of Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) pursuant
to a confidentiality agreement on substantially the same terms as provided in
the Company Confidentiality Agreement (as that term is defined in the Merger
Agreement) to the extent and only to the extent that the Board determines that
the offer is a Superior Takeover Proposal (as that term is defined in the Merger
Agreement); (ii) the Company may engage in discussions and negotiations with any
person or group that has made an unsolicited Takeover Proposal, among other
things, to determine whether such proposal (as opposed to any further negotiated
proposal) is a Superior Takeover Proposal and the Company may take and disclose
to its shareholders a position contemplated by Rule 14e-2(a) following the
Company's receipt of a Takeover Proposal that is in the form of a tender offer
under Section 14(e) of the Exchange Act; (iii) the Company may withdraw,
adversely modify or take a public position materially inconsistent with its
recommendation (which may include making any statement required by Rule 14e-2
under the Exchange Act) (a "Recommendation Modification/Withdrawal") if there
exists a Takeover Proposal and the Board determines that it is a Superior
Takeover Proposal; and (iv) the Company may make a "stop-look-and-listen"
communication with respect to a Takeover Proposal or the Merger Agreement of the
nature contemplated in, and otherwise in compliance with, Rule 14d-9 under the
Exchange Act as a result of receiving a Takeover Proposal.
Termination or Amendment of the Merger Agreement. The Merger Agreement may
be terminated at any time prior to the Effective Time (i) by mutual written
consent of the Company and Purchaser or (ii) by either party by written notice
to the other, so long as the Company or Purchaser (as the case may be) is not
then in material breach of its obligations, if (a) the Effective Time has not
occurred on or before 100 days after the date of the Merger Agreement, subject
to a possible extension, (b) any state or federal law, order, rule or regulation
is adopted or issued that shall prohibit consummation of the Merger or if any
court of competent jurisdiction in the United States or any State shall have
issued an order, judgment or decree permanently restraining, enjoining or
otherwise prohibiting the Merger, and such order, judgment or decree shall have
become final and nonappealable, or (c) if the Company accepts a Superior
Takeover Proposal and has paid the requisite termination fee.
The Company may terminate the Merger Agreement, so long as it is not then
in material breach of its obligations, by written notice to Purchaser, upon a
breach of any material representation, warranty, covenant or agreement on the
part of Purchaser set forth in the Merger Agreement, subject to a limited cure
period.
Purchaser may terminate the Merger Agreement, by written notice to the
Company (i) so long as it is not then in material breach of its obligations,
upon a material breach of any representation, warranty, covenant or agreement on
the part of the Company set forth in the Merger Agreement, subject to a limited
cure period under certain circumstances, (ii)
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if the amount of the Net Adverse Effects (as defined below) from breaches of the
Company's representations and warranties and statements identified by Purchaser
or Sub prior to the consummation of the Merger (the "Closing"), if any, exceeds
$1,000,000, or (iii) the Board makes a Recommendation Modification/Withdrawal or
the Company enters into a definitive agreement for a Superior Takeover Proposal
or any other Takeover Proposal. "Net Adverse Effects" means the net aggregate
adverse effects on the reasonably determined valuation by Purchaser of the
business operations, properties (including intangible properties), condition
(financial or otherwise), assets, obligations or liabilities (whether absolute,
contingent or otherwise and whether due or to become due) of the Company and its
subsidiaries or the transactions contemplated by the Merger Agreement.
Termination In Connection with Certain Financing Events. Prior to the date
of the Merger Agreement, Purchaser received the draft funding commitment letter
from AMRESCO Commercial Finance, Inc. ("AMRESCO") and the proposal from U.S.
Restaurant Properties, Inc. ("USRP") (the "AMRESCO Letter" and the "USRP
Letter," respectively). Concurrent with the date of the Merger Agreement,
Purchaser deposited $250,000 and agreed to deposit an additional $250,000 on Day
60 (as defined below) (the aggregate amount of such $500,000 being termed the
"Escrow Fund") into escrow with Texas Bank. Purchaser shall use its commercially
reasonable best efforts to cause AMRESCO (on or prior to the 30th day after the
date of the Merger Agreement ("Day 30")) to (a) remove from the AMRESCO Letter,
as conditions to AMRESCO's funding commitment thereunder, the conditions that
AMRESCO (i) receive a satisfactory valuation report from its appraisers
regarding the collateral securing AMRESCO's loan, (ii) receive all material
required by it to complete its due diligence and (iii) find such material to be
in all things satisfactory and then (b) execute and deliver to Purchaser and Sub
the AMRESCO Letter as so modified (such events being termed the "AMRESCO Day 30
Events"). In accordance with the Merger Agreement, Purchaser shall use its
commercially reasonable best efforts to cause USRP (on or prior to Day 30) to
remove from the USRP Letter, as conditions to USRP's funding, the conditions
that USRP (i) retain an inspection and review period, (ii) receive all material
required by it to complete its due diligence and (iii) find such material to be
in all things satisfactory; and then execute and deliver to Purchaser and Sub a
funding commitment on the terms outlined in the USRP Letter as so modified (such
events being termed the "USRP Day 30 Events"). In accordance with the Merger
Agreement, Purchaser shall use its commercially reasonably best efforts to cause
(on or prior to the 60th day after the date of this Agreement ("Day 60")) each
of AMRESCO and USRP to deliver to Purchaser and Sub a firm funding commitment
(containing the financial terms of the AMRESCO Letter and the USRP Letter,
respectively) that is conditioned only on the delivery of closing documentation
and the accuracy, in all material respects, of the Company's representations and
warranties under the Merger Agreement (a "Firm Commitment").
In addition, the Merger Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time by the Company, (i) at any
time during the five business days immediately following Day 30, as long as the
Company is not then in material breach of its obligations under the Merger
Agreement and as long as the amount of the Net Adverse Effects from breaches of
the Company's representations and warranties and statements does not exceed
$1,000,000, if either the AMRESCO Day 30 Events or the USRP Day 30 Events have
not occurred on or prior to the date of such termination; and (ii) at any time
during the five business days immediately following Day 60, as long as the
Company is not then in material breach of its obligations under the Merger
Agreement and as long as the amount of the Net Adverse Effects from breaches of
the Company's representations and warranties and statements does not exceed
$1,000,000, if either AMRESCO or USRP has not delivered to Purchaser a Firm
Commitment on or prior to the date of such termination.
Payment of Expenses and Damages Payable Upon Termination. If the Merger
Agreement is terminated upon a party's breach, then the breaching party shall
promptly pay to the other party, as liquidated damages, an amount in cash equal
to the out-of-picket expenses and fees incurred by the other party after the
date of the Merger Agreement arising out of, or in connection with or related
to, the Merger or the transactions contemplated by the Merger Agreement not in
excess of $500,000 (the "Out-of-Pocket Expenses"); provided, however, that if
the Merger Agreement is terminated by a party as a result of a willful breach of
a representation, warranty, covenant or agreement by the other party, the non-
breaching party may pursue any remedies available to it at law or in equity and
shall, in addition to the amount of Out-of- Pocket Expenses set forth above, be
entitled to recover such additional amounts as such non-breaching party may be
entitled to receive at law or in equity; provided, further, that the payment by
Purchaser of any Out-of-Pocket Expenses and any amounts required under the
Escrow Agreement shall constitute the Company's sole and exclusive remedy
against Purchaser or Sub for any failure by the parties (or any party) to
consummate the Merger.
Termination Fee. In the event that (a) the Merger Agreement is terminated
by the Company upon acceptance of a Superior Takeover Proposal, (b) the Merger
Agreement is terminated by Purchaser upon a Recommendation
5
<PAGE>
Modification/Withdrawal, or (c) the Company accepts any Takeover Proposal (or
Superior Takeover Proposal) within two years after the Merger Agreement is
terminated by Purchaser pursuant to the Company's breach, then, in each such
case, the Company shall pay Purchaser a fee equal to the sum of (i) $1,500,000
and (ii) Purchaser's Out-of-Pocket Expenses, which such aggregate amount shall
be payable by wire transfer of same day funds within five business days after
the date of such termination (or in the case of (c) above, the amount of
$1,500,000 shall be paid within five days after the Company accepts any Takeover
Proposal or Superior Takeover Proposal, the Out-of-Pocket Expenses having
already been paid).
Indemnification. The Company will, and from and after the Effective Time,
the Surviving Corporation will, indemnify, defend and hold harmless each person
who is at the time of the execution of the Merger Agreement, or has been at any
time prior to the date of execution of the Merger Agreement, an Indemnified
Party (as that term is defined in the Merger Agreement) to the same extent and
in the same manner as is provided in the respective certificates or Articles of
Incorporation or bylaws of the Company and such subsidiaries in effect on June
28, 1998 with respect to any Indemnified Liabilities (as that term is defined in
the Merger Agreement). Any Indemnified Party wishing to claim indemnification,
upon learning of a claim, action, suit, proceeding or investigation, shall
notify the Company (or after the Effective Time, the Surviving Corporation). The
Company, Purchaser and Sub have agreed that the foregoing rights to
indemnification existing in favor of the Indemnified Parties with respect to
matters occurring through the Effective Time shall survive the Merger and shall
continue in full force and effect until the disposition of such Indemnified
Liabilities. The Merger Agreement provides identical protection to that which is
currently afforded by the Company's Articles of Incorporation and Bylaws on the
date of the Merger Agreement.
For a period of six years after the Effective Time, the Surviving
Corporation shall cause to be maintained in effect the current policies of
directors' and officers' liability insurance maintained by the Company and its
subsidiaries (provided that the Surviving Corporation may substitute therefor
policies of at least the same coverage and amounts containing terms and
conditions that are no less advantageous in any material respect to the
Indemnified Parties) with respect to matters arising before and omissions
occurring or existing at or prior to the Effective Time including the
transactions contemplated by the Merger Agreement.
6
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Material Federal Income Tax Consequences
The receipt of cash for shares of Company Common Stock pursuant to the
Merger or pursuant to the exercise of appraisal rights with respect to shares of
Company Common Stock will be a taxable transaction for federal income tax
purposes and may also be a taxable transaction under state, local and other tax
laws. In general, a shareholder will recognize gain or loss for federal income
tax purposes to the extent of the difference between the cash received and the
holder's basis in the shares of Company Common Stock exchanged for cash. For a
discussion of these and other federal income tax considerations in connection
with the Merger, see "The Merger--Material Federal Income Tax Consequences."
HOLDERS OF SHARES OF COMPANY COMMON STOCK ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE TAX CONSEQUENCES OF THE MERGER PARTICULAR TO THEM, INCLUDING
THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND OTHER TAX LAWS.
Rights of Dissenting Shareholders
In connection with the Merger, holders of shares of Company Common Stock
who comply with certain requirements and procedures set forth in Articles 5.11,
5.12 and 5.13 of the TBCA may be entitled to seek an appraisal of their shares
and to obtain the "fair value" of their shares. To exercise appraisal rights,
holders of shares of Company Common Stock must not vote in favor of the Merger
and must comply strictly with the procedural requirements of Articles 5.11, 5.12
and 5.13 of the TBCA (the "Appraisal Rights Statutes"), a description of which
is set forth under "The Merger--Rights of Dissenting Shareholders," and the full
text of which is included as Appendix C hereto.
----------
Market Price Data
The Company Common Stock is traded on the New York Stock Exchange, Inc.
(the "NYSE") under the symbol "SWH." On September 17, 1998, the last trading day
prior to the date of the announcement by Purchaser and the Company that they had
executed the Merger Agreement, the closing per share sales price of the Company
Common Stock, as reported by the NYSE, was $5.75. On November 13, 1998, the
closing per share sales price of the Company Common Stock, as reported by the
NYSE, was $______. See "Market for Company Common Stock and Related Shareholder
Matters." Shareholders are urged to obtain current market quotations for Company
Common Stock.
Dividend Policy
The Company has never paid cash dividends on Company Common Stock. The
Company presently intends to retain earnings to finance the expansion of its
business and, therefore, does not expect to pay any cash dividends in the
foreseeable future. Any future determination as to the payment of dividends will
depend upon results of operations, capital requirements, the financial condition
of the Company and such other factors as the Board of Directors of the Company
may consider. See "Market for Company Common Stock and Related Shareholder
Matters."
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INTRODUCTION
General Development and Scope of Business
Spaghetti Warehouse, Inc., incorporated in Texas in June 1972, operates as
a holding company and conducts substantially all of its operations through its
subsidiaries. The Company's principal executive offices are located at 402 West
I-30, Garland, Texas 75043.
The Company operates 31 restaurants and franchises three restaurants in 13
states under two concepts using the names "The Spaghetti Warehouse" and
"Spaghetti Warehouse Italian Grill." The Spaghetti Warehouse and Spaghetti
Warehouse Italian Grill concepts are full-service restaurants serving
high-quality, value-priced, classic Italian food in a casual atmosphere. The
Company also operates two joint-venture restaurants and franchises five
restaurants in Canada under the name "The Old Spaghetti Factory." Each of the
Company's restaurants offers a memorable dining experience by serving freshly
prepared authentic Italian recipes in a casual and relaxing atmosphere.
The Company owns Old Spaghetti Factory Canada Ltd., the franchisor of Old
Spaghetti Factory restaurants in Canada, and the trademark rights to the Old
Spaghetti Factory concept in Canada. These Canadian restaurants have a similar
restaurant concept and menu to the Company's Spaghetti Warehouse restaurant
concept and menu in the United States. Old Spaghetti Factory Canada Ltd. is not
related to OSF International, which operates restaurants under the name "The Old
Spaghetti Factory" in the United States, Japan and Germany.
Many of the Company's restaurants are located in distinctive, older,
restored buildings in urban locations. Dining room seating capacity in downtown
Spaghetti Warehouse restaurants range from approximately 300 to 600 persons,
with an average dining room seating capacity of approximately 450. The typical
downtown Company restaurant has approximately 15,200 square feet devoted to
restaurant use, including kitchen and storage. The Company also operates 10
restaurants in suburban markets. The typical suburban Company restaurant ranges
from 6,500 to 9,600 square feet in size with seating capacity for 275 to 300
persons.
Full alcoholic beverage service is available at the Company's restaurants.
Because of the family orientation of Spaghetti Warehouse restaurants, alcoholic
beverages are served primarily at the dining table with meal service. A bar area
is located adjacent to the dining area, primarily to accommodate customers
waiting for dining tables. The Company adheres to a strict program requiring
moderation in the service and consumption of alcoholic beverages. During the
fiscal years ended June 28, 1998, June 29, 1997, and June 30, 1996, sales of
alcoholic beverages accounted for approximately 8%, 9% and 9% of the Company's
revenues, respectively.
The following table sets forth, for the periods indicated, selected restaurant
information:
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------------------
July 3, July 2, June 30, June 29, June 28,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales per restaurant open for full year:
Average.................................. $2,246 $2,109 $2,173 $2,217 $2,226
High..................................... $4,300 $4,494 $4,546 $4,620 $4,425
Low...................................... $1,234 $1,048 $1,514 $1,418 $1,376
Check average per customer, including
alcoholic beverages (all stores):
Lunch.................................... $6.19 $6.40 $6.73 $6.98 $7.17
Dinner................................... $8.41 $8.32 $8.64 $8.90 $9.14
Restaurants open for full year.............. 31 36 29 28 28
Restaurants open at year-end................ 36 37 30 28 30
</TABLE>
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Restaurant Concepts
The Spaghetti Warehouse
Spaghetti Warehouse restaurants are full-service, family-oriented
restaurants serving high quality, value-priced, classic Italian food in a casual
atmosphere. The Company currently operates nine Spaghetti Warehouse restaurants.
Each of the Company's Spaghetti Warehouse restaurants offers a memorable dining
experience amid a decor of authentic, unusual and eclectic antiques and
memorabilia. The Company's first Spaghetti Warehouse restaurant opened in
Dallas, Texas, in 1972.
The Spaghetti Warehouse menu includes spaghetti entrees with a choice of 12
sauces and five pastas, meat and vegetable lasagna, ravioli, cannelloni,
manicotti, baked ziti, fettucini alfredo, hand-rolled meatballs, Italian
sausage, veal, chicken and eggplant parmigiana, sandwiches and combination
platters. The menu also includes soups, appetizers, house and Caesar salads,
desserts, soft drinks, alcoholic beverages, including many locally available
imported beers and fresh-baked sourdough bread. The Company endeavors to serve a
uniformly high-quality product by preparing most menu items fresh daily. In
order to provide maximum customer value perception, emphasis is placed on
serving substantial portions of quality food at modest prices. Entree
selections, which include soup or salad and sourdough bread, currently range in
price from $3.99 to $8.99 during lunch and $4.59 to $9.59 during dinner.
The decor of a typical Spaghetti Warehouse restaurant features authentic,
unusual and eclectic artifacts and memorabilia, including stained glass windows,
advertising signs, taxidermy, chandeliers, antique furniture and a dine-on
trolley car. The Company's restaurants feature quick, efficient and friendly
table service designed to minimize customer waiting time and facilitate table
turnover, while at the same time making the customer feel at ease in a relaxed
atmosphere.
Spaghetti Warehouse Italian Grill
The Spaghetti Warehouse Italian Grill is an updated version of the
Company's existing Spaghetti Warehouse concept. Thus far, the Company has opened
three new units and converted 19 existing Spaghetti Warehouse restaurants to the
Italian Grill format. The Italian Grill features updated decor, an expanded menu
and improved customer value. The Italian Grill's expanded menu features grilled
meats and fish, pizza and a larger selection of appetizers. Traditional
Spaghetti Warehouse menu items have been improved to enhance taste profiles and
presentations. Additionally, various portion sizes have been increased to
improve the price/value relationship.
Entree prices at the Italian Grill currently range from $4.29 to $9.59 at
lunch and $4.59 to $12.99 at dinner. Both lunch and dinner entrees include a
"Bottomless Warehouse Salad" and fresh-baked bread. In addition to traditional
Spaghetti Warehouse menu items, the Italian Grill offers grilled chicken,
halibut and New York strip steak, oven-baked pizza, and grilled shrimp alfredo
and marinara.
The first Italian Grill conversion was completed at the Company's Marietta,
Georgia, location on November 1, 1995. Due to favorable sales results and
customer response, the Company converted an additional 18 units to the Italian
Grill format subsequent to the Marietta conversion. The Company plans to convert
additional units on a periodic basis in fiscal 1999. Italian Grill development
plans beyond fiscal 1999 will be made based on operating results achieved in the
current and newly converted Italian Grill units.
Future Expansion
The Company intends to open one to two new Company-operated Italian Grill
restaurants during fiscal 1999. The Company opened a new unit in Corpus Christi,
Texas, in the second quarter of fiscal 1999. The Company anticipates additional
new store openings in the future in markets where it currently has operations,
thereby increasing certain supervisory and marketing efficiencies.
9
<PAGE>
The Company plans to open Italian Grill units predominantly in the Midwest,
Southwest, Central and Eastern United States. The Company also intends to expand
Old Spaghetti Factory restaurants within Canada by means of joint-venture owned
or franchised Old Spaghetti Factory restaurants. There can be no assurance,
however, that the Company will be able to achieve these objectives.
Franchising
The Company has developed a franchise program under which it has attracted
two franchisees in the United States. Currently operating franchise units
include those located in Wichita, Kansas; Newport News (Norfolk), Virginia; and
Glen Allen (Richmond), Virginia. All franchise units operate under the Italian
Grill format.
Franchisees pay an initial franchise fee of $35,000 per unit, and pay
ongoing royalty fees and marketing fees of 3.5% and 0.5% of restaurant sales,
respectively. The Company currently does not plan to grant any additional
franchises in the United States.
Restaurant Operations
All Spaghetti Warehouse and Italian Grill restaurants are operated under
uniform standards and specifications set forth in the Company's operating manual
and internal procedures memoranda. The standards govern the restaurants'
operation of the kitchen, dining room and bar area; repair and maintenance of
premises and equipment; and the administration, training and conduct of
restaurant personnel. The Company also emphasizes uniform standards for product
quality, facility maintenance, portion control, sanitation and customer service.
The Company requires franchisees to maintain these same uniform standards. The
Company maintains financial, accounting and management controls for its
restaurants through the use of centralized accounting and information systems.
Restaurant Management
The Company emphasizes both quality and efficiency in its operations.
Operational standards are set through the development of annual business plans
and are maintained by restaurant management personnel and regional operations
directors. Each operations director is generally responsible for seven to eight
restaurants. Each restaurant staff consists of a general manager, a senior
kitchen manager, three to five assistant managers and 65 to 150 hourly
employees. Restaurant managers are responsible for day-to-day operations,
including customer relations, food preparation and quality control, cost
control, restaurant maintenance and human resource functions. In order to
control labor costs, the managers use customer count forecasts and employee
work-schedule systems designed to match employee work hours to anticipated
customer traffic. Each restaurant also has an inventory control system designed
to aid the manager in food cost and waste control, as well as in the evaluation
of purchasing needs. A restaurant manager receives a fixed salary plus a bonus
based upon the sales and profitability of the restaurant under his or her
supervision. Regional operations directors and general managers who exhibit
superior performance are also eligible for stock options.
Purchasing
The Company uses its own standardized recipes for menu items in all of its
restaurants to ensure uniform quality and freshness. The Company's ability to
maintain consistent product quality throughout its chain of restaurants depends
upon acquiring specified food products and related items from reliable sources,
and involves negotiating purchases directly from manufacturers to obtain
favorable pricing. The Company has a contract with a national wholesale
distributor to deliver the majority of the nonperishable and frozen food
products used in its Spaghetti Warehouse and Italian Grill restaurants. The use
of a national distributor has helped to reduce average restaurant inventory
levels. Food products and related restaurant supplies not purchased through the
national wholesale distributor are purchased from independent wholesale food
distributors and manufacturers, while other items, including fresh produce,
dairy and some meat products, are purchased locally by each restaurant. The
Company does not maintain a central product warehouse or commissary. Management
believes that all essential food and beverage products are available from
several qualified suppliers in all cities in which the Company's restaurants are
located.
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Advertising and Marketing
The Company's primary markets are the business trade for lunch and the
family trade for dinner. In addition to word-of-mouth advertising, the Company
relies primarily on radio, print, television (in certain markets) and billboard
advertising and special promotions to increase customer traffic and sales. The
Company's marketing department develops and implements Company-wide and local
promotions emphasizing value, menu variety, food quality and fun. Emphasis is
also placed on local community involvement. During the fiscal year ended June
28, 1998, the Company's expenditures for advertising (including local promotions
and production costs) were approximately 4.0% of revenues.
Government Regulation
The Company is subject to various Federal, state and local laws affecting
its business. The Company's restaurants are subject to health, sanitation and
safety standards, as well as state and local licensing and regulations with
respect to the sale and service of alcoholic beverages. The sale and service of
alcoholic beverages is material to the business of the Company, and as such, the
failure or delay in receiving or retaining a liquor license in a particular
location could adversely affect the Company's operations in that location and
could impair the Company's ability to obtain licenses elsewhere. Typically,
licenses must be renewed annually and may be revoked or suspended for cause at
any time. The Company has not encountered any material problems relating to
alcoholic beverage licenses and permits to date. In certain states, the Company
is subject to "dram-shop" statutes, which generally give a person injured by an
intoxicated person the right to recover damages from an establishment that
wrongfully served alcoholic beverages to such person. The Company carries liquor
liability insurance coverage as part of its existing comprehensive general
liability insurance.
Management is not aware of any Federal or state environmental regulations
that have had a material effect on the Company's operations to date. However,
more stringent and varied requirements of local governmental bodies with respect
to waste disposal, zoning, construction and land use have increased both the
cost of and the time required for construction of new restaurants and the cost
of operating existing Company restaurants.
The Company is also subject to the Fair Labor Standards Act, which governs
such matters as minimum wages, overtime and other working conditions. Because a
number of the Company's food service personnel are paid at rates related to the
Federal minimum wage, the recent increases in the Federal minimum, which became
effective October 1, 1996 and September 1, 1997, have caused a corresponding
increase in the Company's labor costs. Furthermore, the Company also operates in
states with minimum wage rates in excess of the Federal minimum requirement,
thus causing the Company to incur higher labor costs in those markets.
The Company's franchising program is subject to a substantial number of
laws, rules and regulations governing the sale and operation of franchises. In
recent years, many states have enacted laws that require detailed disclosure in
the offer and sale of franchises and the registration of the franchisor with
state administrative agencies. The Company is also subject to Federal Trade
Commission regulations relating to disclosure requirements in the sale of
franchises. Certain states have enacted, and others may enact, legislation
governing the termination or nonrenewal of a franchise and other aspects of the
franchise relationship that are intended to protect franchisees. The laws
applicable to franchise operations and relationships is rapidly developing and
the Company is unable to predict the effect on its franchising program of
additional requirements or restrictions that may be enacted or promulgated or of
court decisions that may be adverse to franchisors.
Service Marks and Patents
The Company has registered "SPAGHETTI WAREHOUSE & Design," "THE SPAGHETTI
WAREHOUSE & Design," "PASTA POWER & Design," "THE SPAGHETTI WAREHOUSE,"
"OCTOBERFEAST," "THE SPAGHETTI WAREHOUSE GREAT ITALIAN FOOD. ALL-AMERICAN FUN.
& DESIGN," "THE SPAGHETTI WAREHOUSE RESTAURANT & Design" and "THE SPAGHETTI
WAREHOUSE ITALIAN GRILL & Design" service marks with the U.S. Patent and
Trademark office. The Company also has 10 registered state service marks. The
range of expiration dates of the initial terms of the Company's federally
registered service marks is from 2000 to 2010. The Company intends to renew
these service mark registrations.
The range of initial and renewal terms of the Company's Canadian service
mark registrations in connection with the Old Spaghetti Factory restaurant
concept in Canada is from 2003 to 2006. The Company intends to renew these
service mark registrations.
11
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The Company currently has 40 registered service marks and five applications
pending for service marks in 18 foreign countries. The Company does not
currently anticipate that it will be using its service marks in foreign
countries other than Canada during the next 12 months. The Company generally
intends to renew the terms of those registered service marks that it deems of
value at the time of renewal.
The Company regards its service marks and trademarks as having significant
value and being an important factor in the marketing of its restaurants. The
Company's policy is to pursue registrations of its service marks wherever
practicable and to oppose vigorously any infringement of its marks. The laws of
some foreign countries, however, do not protect the Company's proprietary rights
to the same extent as do the laws of the United States.
Employees
The Company presently employs approximately 1,030 persons on a full-time
basis, 41 of whom are corporate management and staff personnel while the
remainder are restaurant management and staff. The Company also employs
approximately 2,450 part-time restaurant employees. Except for corporate and
restaurant management personnel, employees are generally paid on an hourly
basis. Company restaurants employ an average of 30 full-time and 80 part-time
hourly employees. None of the Company's employees are covered by collective
bargaining agreements and the Company has never experienced a major work
stoppage, strike or labor dispute. The Company believes that its working
conditions and compensation arrangements compare favorably with its competition
and considers relations with its employees to be good. Restaurant managers are
paid a base salary, plus incentive compensation, that is contingent upon
achieving certain objectives. The Company believes that managers who produce
superior economic results and deliver quality customer experiences earn more at
the Company than the average compensation in the industry for similar positions
and experience levels.
Competition
The restaurant business is highly competitive, and competition in the
Italian restaurant segment has increased in recent years. The Company believes
that the primary competitive concerns in its business are the variety, quality
and price of the food offered, the quality of the service provided by the
restaurant's employees and the location and atmosphere of the restaurant. The
business of the Company is also affected by general economic conditions, changes
in consumer tastes, population, traffic patterns and spending habits of
consumers. The Company competes with various food service operations in each of
its markets, including locally owned restaurants, as well as national and
regional restaurant chains, some of which operate more restaurants and have
greater financial resources than the Company. The Company believes that its
competitive position depends upon its ability to offer and maintain its quality
food, unusual decor, a moderately priced menu and a comfortable full-service,
family-oriented dining atmosphere. There is also active competition for quality
management personnel and desirable commercial real estate sites suitable for
restaurants. Management believes that financial resources and size are important
factors in obtaining suitable sites, and that such factors, as well as
compensation, are important in attracting quality management personnel.
12
<PAGE>
Properties
The Company owns 21 and leases space for 10 of its Company-operated
restaurants. Three of the currently operating Company-owned units are subject to
ground leases. The Company also owns its corporate office headquarters and
warehouse facilities, comprised of two buildings containing a combined total of
28,000 square feet of space. These buildings are situated on two separate
properties totaling approximately two acres of land in Garland, Texas, a suburb
of Dallas. None of the Company's properties are encumbered by mortgage
indebtedness. The Company believes that its corporate office and warehouse
facilities are adequate to meet its requirements through at least fiscal 1999
and that suitable additional space will be available, as needed, to accommodate
further physical expansion of corporate operations.
The Company's restaurant leases, including renewal options, expire at
various times from 2007 to 2029, and generally provide for minimum annual
rentals and, in five cases, for payment of additional rent based on a percentage
of restaurant sales. Five of the Company's leases provide for a preferential
right of first refusal upon sale of the property. One lease provides for a
bargain purchase option at the end of the lease term. The Company is required to
pay real estate taxes, insurance, maintenance expenses and utilities under
substantially all of its leases. The Company depends on short-term leases for
parking at eight of its 30 restaurants. There can be no assurance that adequate
parking will continue to be available, or that the lack of such parking will not
have an adverse impact on the operations of the respective restaurants.
Legal Proceedings
As discussed in the Company's Form 10-K for the fiscal year ended June
29, 1997, Bright-Kaplan International Corporation ("BK") submitted a claim
against the Company to the American Arbitration Association ("AAA") in Dallas,
Texas. BK, a former franchisee, claimed that the Company misrepresented and
concealed numerous material facts in order to induce BK to enter into a
franchise agreement, failed to provide a variety of services in support of BK's
franchise, engaged in deceptive trade practices and violated Federal Trade
Commission disclosure rules. BK sought damages in excess of $9.0 million. In
1996, the AAA arbitration panel heard the evidence presented to the arbitration
proceeding, and in a unanimous opinion delivered in January 1997, ruled that the
Company had no liability to BK, and awarded no damages to BK. Subsequent to the
conclusion of the arbitration case, the Circuit Court of Hamilton County,
Tennessee, dismissed a lawsuit filed by Elizabeth Bright and Thomas C. Bright,
the principal shareholders of BK, attempting to litigate the same claims decided
by the arbitration panel. Elizabeth Bright and Thomas C. Bright appealed the
Circuit Court's dismissal to the Court of Appeals of Tennessee at Knoxville, and
on April 29, 1998, that appellate court unanimously affirmed the trial court's
decision in favor of the Company. The judgement of the Court of Appeals became
final on June 30, 1998, without further appeal of the plaintiffs, thus
effectively ending the lawsuit and claim against the Company.
The Company is involved in routine litigation from time to time. Such
litigation in which the Company is currently involved is not material to the
Company's consolidated financial condition or results of operations.
13
<PAGE>
MARKET FOR COMPANY COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
The Company's common stock is quoted on the NYSE under the symbol
"SWH." The following table sets forth the high and low closing sale prices as
reported on the NYSE for the periods indicated.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal year ending June 29, 1997:
First Quarter................................................. 5 5/8 4 3/4
Second Quarter................................................ 6 5
Third Quarter................................................. 5 3/8 5
Fourth Quarter................................................ 6 4 3/4
Fiscal year ending June 28, 1998:
First Quarter................................................. 7 1/8 5 1/4
Second Quarter................................................ 7 3/8 5 5/8
Third Quarter................................................. 7 5 1/2
Fourth Quarter................................................ 8 3/8 5 15/16
Fiscal year ending July 4, 1999:
First Quarter................................................. 8 5 3/4
Second Quarter (through November 13).......................... -- --
</TABLE>
The Company has never paid cash dividends. Management presently intends
to retain any earnings for the operation and expansion of the Company's business
and does not anticipate paying cash dividends in the foreseeable future. Any
future determination as to the payment of dividends will depend upon results of
operations, capital requirements, the financial condition of the Company and
such other factors as the Board of Directors of the Company may consider.
As of November 13, 1998, the number of record holders of Company Common
Stock was approximately ___, and the Company estimates that as of that date
there were ______ beneficial owners of its stock.
14
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data regarding the
Company's results of operations and financial position for, and as of the end
of, each of the fiscal years in the five-year period ended June 28, 1998, which
are derived from the Consolidated Financial Statements of the Company and its
subsidiaries, which have been audited. The Consolidated Financial Statements as
of June 29, 1997 and June 28, 1998, and for each of the years in the three-year
period ended June 28, 1998, and the independent auditors' reports thereon, are
included elsewhere in this Proxy Statement. The information below should be read
in conjunction with Management's Discussion and Analysis of Financial Condition
and Results of Operations and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------------------
July 3, July 2, June 30, June 29, June 28,
1994 1995 1996 1997 1998
(In thousands, except per share amounts and Restaurant Data)
<S> <C> <C> <C> <C> <C>
Operations Statement Data:
Revenues............................................ $ 78,384 $ 78,956 $ 70,957 $ 64,904 $ 66,027
--------- ---------- ----------- --------- ----------
Costs and expenses:
Cost of sales................................... 19,749 20,036 17,965 16,516 17,054
Operating expenses.............................. 44,221 44,768 41,122 36,222 36,419
General and administrative...................... 5,447 5,619 5,767 5,279 6,480
Depreciation and amortization................... 5,843 5,251 4,871 3,954 3,822
Restructuring charges (reversals) (1)........... -- -- 13,875 (740) --
Impairment of long-lived assets (2)............. -- -- -- 2,009 --
Unusual charge (3).............................. -- 600 -- -- --
Loss (gain) on asset scheduled for divestiture.. 50 -- (47) -- --
--------- ---------- ----------- --------- ----------
Total costs and expenses.................... 75,310 76,274 83,553 63,240 63,775
--------- ---------- ----------- --------- ----------
Income (loss) from operations....................... 3,074 2,682 (12,596) 1,644 2,252
Net interest expense................................ 904 1,198 1,045 691 343
--------- ---------- ----------- --------- ----------
Income (loss) before income tax expense (benefit)... 2,170 1,484 (13,641) 973 1,909
Income tax expense (benefit)........................ 461 234 (5,308) 314 716
--------- ---------- ----------- --------- ----------
Net income (loss)................................... $ 1,709 $ 1,250 $ (8,333) $ 659 $ 1,193
========= ========== =========== ========= ==========
Net income (loss) per common share (4):
Basic........................................... $ .28 $ .22 $ (1.48) $ .12 $ .21
========= ========== =========== ========= ==========
Diluted......................................... $ .28 $ .22 $ (1.48) $ .11 $ .20
========= ========== =========== ========= ==========
Weighted average common shares outstanding (4):
Basic........................................... 6,013 5,618 5,612 5,658 5,604
========= ========== =========== ========= ==========
Diluted......................................... 6,131 5,698 5,612 5,769 5,828
========= ========== =========== ========= ==========
Balance Sheet Data:
Cash and cash equivalents....................... $ 1,918 $ 1,873 $ 8,065 $ 1,917 $ 943
Working capital deficit (5)..................... (3,154) (2,602) (3,405) (2,235) (3,546)
Total assets.................................... 78,648 75,511 71,368 58,630 57,739
Long-term debt.................................. 18,584 15,548 19,762 7,883 5,439
Stockholders' equity............................ 52,482 53,436 45,250 45,934 47,195
Restaurant Data:
Company-owned restaurants open for full year.... 31 36 29 28 28
Company-owned restaurants open at end of year... 36 37 30 28 30
</TABLE>
(1) See Note 8 of Notes to Consolidated Financial Statements.
(2) See Note 1 (i) of Notes to Consolidated Financial Statements.
(3) The Company recorded a $600,000 write-down of its one-third investment in
F.P. Corporation PTY Ltd. and F.P. Restaurants PTY Ltd. in fiscal 1995. The
write-down of this investment was the result of an alleged misappropriation
of assets by the joint-venture's former managing director.
(4) See Note 1 (m) of Notes to Consolidated Financial Statements.
15
<PAGE>
(5) See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations-Liquidity and Capital Resources."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The following table presents, for the fiscal periods indicated, certain
selected financial data as a percentage of total revenues.
<TABLE>
<CAPTION>
Percentage of total revenues
fiscal year ended
--------------------------------------------------
June 30, June 29, June 30,
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Revenues.................................................... 100.0% 100.0% 100.0%
----------- ----------- ------------
Costs and expenses:
Cost of sales............................................ 25.3 25.4 25.8
Operating expenses....................................... 58.0 55.8 55.2
General and administrative............................... 8.1 8.1 9.8
Depreciation and amortization............................ 6.9 6.1 5.8
Restructuring charges (reversals)........................ 19.6 (1.1) --
Impairment of long-lived assets.......................... -- 3.1 --
Gain on asset scheduled for divestiture.................. (0.1) -- --
----------- ----------- ------------
Total costs and expenses............................... 117.8 97.4 96.6
----------- ----------- ------------
Income (loss) from operations .............................. (17.8) 2.6 3.4
Net interest expense........................................ 1.4 1.1 0.5
----------- ----------- ------------
Income (loss) before income tax expense (benefit) (19.2) 1.5 2.9
Income tax expense (benefit)................................ (7.5) 0.5 1.1
---------- ----------- ------------
Net income (loss)........................................... (11.7%) 1.0% 1.8%
========== =========== ============
</TABLE>
1998 Compared to 1997
Revenues
Fiscal 1998 revenues increased $1.1 million, or 1.7%, in comparison to
fiscal 1997. This increase is attributable to the opening of two new units
during the fiscal year and a 0.4% sales increase experienced by the 28 stores
that were open for the full year in both fiscal 1998 and 1997 ("same-stores").
These increases were partially offset by a reduction in U.S. franchise income
and a decline in revenue from the sale of the Company's Richmond, Virginia, unit
to a franchisee in November 1996 and the closure of the Company's Cappellini's
unit in December 1996.
The increase in same-store sales was the result of a 2.6% increase in
check averages partially offset by a 2.1% decline in customer counts. The
increase in check averages was primarily the result of new menu items introduced
over the past year and increased check averages associated with the Company's
repositioned Italian Grill units. Additionally, modest menu price adjustments
made during the last year also contributed to the increase in check averages.
Fiscal 1998 sales in the Company's Italian Grill units, during current year
periods while operating under the Italian Grill format, increased 5.1% over
comparable periods in fiscal 1997, while sales in the Company's traditional
Spaghetti Warehouse concept declined 2.5% in fiscal 1998. Due to the favorable
sales
16
<PAGE>
results in the Italian Grill units, the Company plans to convert
additional units to the Italian Grill format in fiscal 1999.
17
<PAGE>
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of total revenues increased from 25.4% in
fiscal 1997 to 25.8% in fiscal 1998. This increase was due to higher food costs
associated with the Italian Grill format and higher commodity prices incurred on
certain meat and poultry products. Due to the higher food costs associated with
the Italian Grill, management anticipates that cost of sales as a percentage of
total revenues will increase modestly in fiscal 1999 as additional units are
converted to the Italian Grill format.
Operating Expenses
Operating expenses as a percentage of total revenues decreased from
55.8% in fiscal 1997 to 55.2% in fiscal 1998. This decrease was due primarily to
lower workers' compensation costs and unemployment taxes relative to the
previous year. These declines were partially offset by increases in hourly labor
costs and rent expense in comparison to the prior year. Management anticipates
that operating expenses as a percentage of total revenues will increase modestly
in fiscal 1999 due to higher kitchen labor costs associated with the Italian
Grill format.
General and Administrative Expenses (G&A)
G&A expenses as a percentage of total revenues increased from 8.1% in
fiscal 1997 to 9.8% in fiscal 1998. The current year increase was due largely to
a noncash, pre-tax charge of approximately $975,000 relating to stock option
exercises. Current year severance costs and costs associated with the Company's
auction process also contributed to the increase in G&A as a percentage of total
revenues. These increases were partially offset by a reduction in the Company's
corporate bonus expense.
Depreciation and Amortization (D&A)
D&A as a percentage of total revenues decreased from 6.1% in fiscal
1997 to 5.8% in fiscal 1998. This decrease was primarily due to certain
information system equipment becoming fully depreciated, certain equipment items
still in use becoming fully depreciated and the aforementioned increase in
same-store sales.
Net Interest Expense
Net interest expense decreased from $691,000 in fiscal 1997 to $343,000
in fiscal 1998. This decrease is primarily attributable to decreases in the
average debt outstanding under the Company's credit facilities. Subject to
provisions of the Company's credit facilities, management intends to incur
additional long-term debt to the extent that future cash flow from operations is
insufficient to cover planned restaurant openings, Italian Grill conversions and
capital expenditures.
Income Taxes
The Company's effective income tax rate increased from 32.3% in fiscal
1997 to 37.5% in fiscal 1998. The increase is primarily attributable to the fact
that a lower proportion of the Company's consolidated pre-tax earnings was
generated by the Company's Canadian operations in fiscal 1998 as compared to
fiscal 1997. These Canadian earnings are taxed at a substantially lower rate
than U.S. earnings, thereby increasing the Company's overall tax rate.
1997 Compared to 1996
Revenues
Fiscal 1997 revenues declined $6.1 million, or 8.5%, in comparison to
fiscal 1996. This decrease was attributable to the closure of seven
under-performing restaurants in February 1996 and the sale of the Company's
Richmond, Virginia, operation and the closing of Cappellini's in fiscal 1997.
These declines were partially offset by a 0.7% increase in fiscal 1997
same-store sales and a $0.2 million increase in U.S. franchise income.
18
<PAGE>
The increase in fiscal 1997 same-store sales was the result of a 3.0%
increase in check averages partially offset by a 2.3% decline in customer
counts. The increase in check averages was primarily the result of new menu
items introduced over the year and increased check averages associated with the
Company's repositioned Italian Grill units. Additionally, modest menu price
adjustments made during the last 18 months also contributed to the increase in
check averages. Fiscal 1997 sales in the Company's eight Italian Grill units,
during fiscal 1997 periods operating under the Italian Grill format, increased
6.4% over comparable periods in fiscal 1996, while sales in traditional
Spaghetti Warehouse units declined 0.6% in fiscal 1997.
Costs and Expenses
Cost of Sales
Cost of sales as a percentage of total revenues increased from 25.3% in
fiscal 1996 to 25.4% in fiscal 1997. This increase was due to higher food costs
associated with the Italian Grill and higher commodity prices incurred on
certain meat, dairy and pasta products in fiscal 1997.
Operating Expenses
Operating expenses as a percentage of total revenues decreased from
58.0% in fiscal 1996 to 55.8% in fiscal 1997. Much of this decrease is due to
the closure of the seven low-volume units in February 1996. These units
generally incurred higher operating expenses as a percentage of revenues than
typical Company restaurants. Improved controls over restaurant labor and reduced
marketing expenditures also contributed to the fiscal 1997 decrease. These
decreases were partially offset by an increase in group medical costs in
comparison to fiscal 1996.
General and Administrative Expenses (G&A)
G&A expenses as a percentage of total revenues were 8.1% in both fiscal
1997 and 1996. The fixed nature of certain G&A costs, relative to the decline in
fiscal 1997 total revenues, put upward pressure on G&A as a percentage of total
revenues; however, reductions in recruitment expenses and legal fees, coupled
with the fiscal 1996 write-off of costs incurred in the preparation of the
Addison property for its conversion to Cappellini's, caused G&A as a percentage
of total revenues to remain flat in fiscal 1997.
Depreciation and Amortization (D&A)
D&A as a percentage of total revenues decreased from 6.9% in fiscal
1996 to 6.1% in fiscal 1997. This decrease was primarily due to the elimination
of depreciation expense on the seven low-volume units closed in February 1996.
Restructuring Charges (Reversals)
In the third quarter of fiscal 1996, the Company implemented a
restructuring plan intended to strengthen its competitive position and improve
cash flow and profitability. In conjunction with the plan, the Company closed
seven under-performing restaurants in February 1996 and identified one
additional restaurant to be sold as an operating unit. The Company recorded a
pre-tax charge of $13.9 million in the third quarter of fiscal 1996 to cover
costs related to the execution of this plan, including the write-down of
property and equipment to its estimated net realizable value, severance packages
and various other store closing and corporate obligations.
As a result of obtaining more favorable disposal terms on the seven
restaurant properties closed in the restructuring plan, total costs relating to
this plan were less than the initially recorded charge. Therefore, the Company
reversed $740,000 in pre-tax restructuring charges in fiscal 1997. See Note 8 of
Notes to Consolidated Financial Statements for further information.
Impairment of Long-Lived Assets
19
<PAGE>
The Company adopted Financial Accounting Standards Board Statement No.
121 ("SFAS No. 121") during fiscal 1997, resulting in pre-tax, noncash
impairment charges of $2,009,526. These charges relate to the write-down of the
Company's Cappellini's restaurant in Addison, Texas, to its estimated fair
market value. See Note 1 (i) of Notes to Consolidated Financial Statements for
further information.
Net Interest Expense
Net interest expense decreased from $1.0 million in fiscal 1996 to $0.7
million in fiscal 1997. This decrease was primarily attributable to decreases in
the average debt outstanding under the Company's credit facilities.
Income Taxes
The Company's effective income tax rate decreased from a 38.9% benefit
in fiscal 1996 to a 32.3% provision in fiscal 1997. The decline is primarily
attributable to the fact that a higher proportion of the Company's consolidated
pre-tax earnings was generated by the Company's Canadian operations in fiscal
1997 as compared to fiscal 1996. These Canadian earnings are taxed at a lower
rate thereby reducing the Company's overall tax rate. The reduction in fiscal
1997 U.S. pre-tax earnings as a percentage of consolidated pre-tax earnings was
attributable to the $2.0 million in asset impairment charges recorded in that
year. See Note 4 of Notes to Consolidated Financial Statements for further
information.
Liquidity and Capital Resources
The Company's working capital deficit increased from $2.2 million on
June 29, 1997 to $3.5 million on June 28, 1998. This increase is primarily
attributable to a reduction of cash and cash equivalents on hand in comparison
to the prior year. The Company is currently operating with a working capital
deficit, which is common in the restaurant industry since restaurant companies
do not normally require significant investment in either accounts receivable or
inventory.
Net cash provided by operating activities decreased from $7.4 million
in fiscal 1997 to $6.4 million in fiscal 1998. The decline is attributed to the
fiscal 1997 receipt of prior year income tax refunds.
Long-term debt outstanding on June 28, 1998, consisted of a $5.4
million term loan borrowed under the Company's existing bank credit facility.
The Company has an additional $5.0 million available under its bank revolving
credit facility as of June 28, 1998, subject to meeting a certain funded debt to
cash flow requirement prior to borrowing any additional funds.
In fiscal 1994, the Company's Board of Directors authorized a program
for the repurchase of up to 1,000,000 shares of the Company's common stock for
investment purposes. As of June 28, 1998, the Company had repurchased 996,041
shares of common stock under this program, including 185,000 shares purchased in
fiscal 1998.
Capital expenditures were $5.8 million in fiscal 1998 as compared to
$2.6 million in fiscal 1997. Fiscal 1998 expenditures relate primarily to the
purchase and construction of the Mesquite and Irving, Texas, restaurants, and
the conversion of nine traditional Spaghetti Warehouse restaurants to the
Italian Grill format.
During fiscal 1998, the Company converted nine of its traditional
Spaghetti Warehouse restaurants to the Italian Grill format. The Italian Grill
concept is an updated version of the traditional Spaghetti Warehouse concept and
features new decor, an expanded menu and even greater customer value. Based on
favorable sales and operating results achieved in previously converted units,
the Company plans to convert additional units to the Italian Grill format during
fiscal 1999.
In addition to Italian Grill conversions, the Company plans to open one
to two new units and to continue to make necessary replacements and upgrades to
its existing restaurants and information systems during fiscal 1999. Total
planned capital expenditures relating to fiscal 1999 projects are $5.0 million.
Cash flow from operations, current cash balances and amounts available under the
Company's bank revolving credit facility are
20
<PAGE>
expected to be sufficient to fund planned capital expenditures and payment of
required term loan maturities in fiscal 1999.
Year 2000 Compliance
In the past, a number of computer software programs were written using two
digits rather than four to determine the applicable year. As a result,
date-sensitive computer software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in major system failures or
miscalculations, and is generally referred to as the "Year 2000" problem. An
extensive review of the Company's information systems has been completed and a
comprehensive program is currently in process to modify or replace those systems
that are not Year 2000 compliant. Management believes that all Company systems
are compliant, or will be compliant by June 1999. Additional validation of the
Company's systems will be conducted through testing throughout 1999.
In addition to the assessment of in-house systems, the Company is currently
assessing the readiness of its vendors for the Year 2000 issue. To determine the
status of third parties, letters inquiring as to their readiness have been sent
to substantially all of the Company's vendors. The Company is currently
assessing the vendors' responses and prioritizing them in order of significance
to the business of the Company. Contingency plans will be developed in the event
that business- critical vendors do not provide the Company with satisfactory
evidence of their readiness to handle Year 2000 issues. The Company intends to
make every reasonable effort to assess the Year 2000 readiness of these critical
business partners and to create action plans to address the identified risks.
The Company anticipates that it will have substantially completed an
assessment of the Year 2000 compliance status of all information technology and
non-information technology by December 31, 1998, and will then address the Year
2000 compliance of such equipment.
All maintenance and modification costs will be expensed as incurred, while
the cost of new software, if material is being capitalized and depreciated over
its expected useful life. Testing and remediation of all of the Company's
systems and applications is expected to cost approximately $275,000 from
inception in fiscal 1998 through completion in fiscal 2000. Of these costs,
approximately $55,000 was incurred through June 28, 1998 with the remaining
$220,000 to be incurred in fiscal 1999. All estimated costs have been budgeted
and are expected to be funded by cash flows from operations.
The Company does not believe the costs related to the Year 2000 compliance
project will be material to its financial position or results of operation.
However, the cost of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans, and
other factors. Unanticipated failures by critical vendors as well as the failure
by the Company to execute its own remediation efforts could have a material
adverse effect on the cost of the project and its completion date. As a result,
there can be no assurance that these forward-looking estimates will be achieved
and the actual cost and vendor compliance could differ materially from those
plans, resulting in material financial risk.
Effect of Inflation
Management does not believe inflation has had a significant effect on
the Company's operations during the past several years. The Company has
historically been able to pass on increased costs through menu price increases;
however, due to the competitive environment of the restaurant industry, there
can be no assurance that the Company will be able to pass on such cost increases
in the future.
Seasonality
The Company's business is subject to seasonality, with revenues
generally being highest during the months of July and August and lowest during
the months of September through January. This seasonality is due to the
dining-out patterns of the Company's customers.
New Financial Accounting Pronouncements
21
<PAGE>
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128 ("SFAS No. 128"), "Earnings Per Share." This statement
establishes new standards for computing and presenting earnings per share
("EPS"). SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods, and earlier
application is not permitted. The Company adopted SFAS No. 128 in fiscal 1998
and thus has restated reported EPS data for all prior periods presented.
In June 1997, the FASB issued Statement No. 130 ("SFAS No. 130"),
"Reporting Comprehensive Income." SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components in the
financial statements. SFAS No. 130 is effective for the Company's first quarter
financial statements in fiscal 1999.
In June 1997, the FASB issued Statement No. 131 ("SFAS No. 131"),
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the way public business enterprises report
information about operating segments in annual financial statements and requires
those enterprises to report selected information about operating segments in
interim financial reports. SFAS No. 131 is effective for the Company's fiscal
1999 annual financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting of the Costs of
Start-up Activities." SOP 98-5 is effective for financial statements issued for
years beginning after December 15, 1998; therefore, the Company will be required
to implement its provisions by the first quarter of fiscal 2000. At that time,
the Company will be required to change the method currently used to account for
pre-opening costs. The application of SOP 98-5 will result in pre-opening costs
on the Company's Consolidated Balance Sheet as of the date of adoption, net of
related tax effects, being charged to operations as the cumulative effect of a
change in accounting principle. Under the new requirements for accounting for
pre-opening costs, the subsequent costs of start-up activities will be expensed
as incurred.
In June 1998, the FASB issued Statement No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 is effective for the Company's first quarter
financial statements in fiscal 2000. The Company is currently not involved in
derivative instruments or hedging activities and, therefore, will measure the
impact of this statement as it becomes necessary.
The Company does not expect that the adoption of the above standards
will have a significant impact on its consolidated results of operations,
financial position or cash flows.
Forward-Looking Information
Statements contained in this Proxy Statement that are not historical
facts, including, but not limited to, statements found in this section,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, are forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 that involve
a number of risks and uncertainties. The actual results of the future events
described in such forward-looking statements in this Proxy Statement could
differ materially from those stated in such forward-looking statements. The
following factors, among others, could cause actual results to differ
materially: adverse retail industry conditions, industry competition and other
competitive factors, government regulation and possible future litigation,
seasonality of business, as well as the risks and uncertainties discussed in
this Proxy Statement.
QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 relates to variable rate
revolving credit loans that are benchmarked to US and European short-term
interest rates. The Company does not use derivative financial instruments to
manage overall borrowing costs or reduce exposure to adverse fluctuations in
interest rates. The
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impact on the Company's results of operations of a one-point interest rate
change on the outstanding balance of the variable rate debt as of June 28, 1998
Would be immaterial.
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THE SPECIAL MEETING
Date, Time and Place
The Special Meeting will be held December 17, 1998, at 1815 N. Market
Street, Dallas, Texas, on the second floor, commencing at 10:00 a.m. local time.
Purposes of the Special Meeting
The purposes of the Special Meeting are to consider and vote upon (i) a
proposal to adopt the Merger Agreement and approve the Merger and (ii) such
other matters as may properly be brought before the Special Meeting.
Record Date and Outstanding Shares
Only holders of record of Company Common Stock at the close of business on
the Record Date are entitled to notice of, and to vote at, the Special Meeting.
On the Record Date, there were approximately _____ holders of record of the
5,689,301 shares of Company Common Stock then issued and outstanding. Each share
of Company Common Stock entitles the holder thereof to one vote on each matter
submitted for shareholder approval. See "Principal Shareholders and Stock
Ownership of Management" for information regarding persons known to management
of the Company to be the beneficial owners of more than 5% of the outstanding
shares of Company Common Stock. A complete list of the shareholders entitled to
notice of, and to vote at, the Special Meeting will be available for examination
at the offices of the Company in Garland, Texas during normal business hours by
any of the Company's shareholders, for any purpose germane to the Special
Meeting, for a period of 10 days prior to the Special Meeting.
Voting and Revocation of Proxies
A form of proxy for use by shareholders of the Company at the Special
Meeting accompanies this Proxy Statement. All properly executed proxies that are
received prior to or at the Special Meeting and not revoked will be voted at the
Special Meeting in accordance with the instructions contained therein. IF A
HOLDER OF COMPANY COMMON STOCK EXECUTES AND RETURNS A PROXY AND DOES NOT SPECIFY
OTHERWISE, THE SHARES REPRESENTED BY SUCH PROXY WILL BE VOTED "FOR" ADOPTION OF
THE MERGER AGREEMENT AND APPROVAL OF THE MERGER IN ACCORDANCE WITH THE
RECOMMENDATION OF THE BOARD. A shareholder of the Company who has executed and
returned a proxy may revoke it at any time before it is voted at the Special
Meeting by (i) executing and returning a proxy bearing a later date, (ii) filing
written notice of such revocation with the Secretary of the Company stating that
the proxy is revoked or (iii) attending the Special Meeting and voting in
person.
Vote Required
The presence at the Special Meeting, in person or by proxy, of the holders
of a majority of the outstanding shares of Company Common Stock entitled to vote
thereat will constitute a quorum for the transaction of business. Adoption of
the Merger Agreement and approval of the Merger requires the affirmative vote of
at least two-thirds of the issued and outstanding shares of Company Common Stock
entitled to vote thereon. On the Record Date, there were 5,689,301 shares of
Company Common Stock outstanding and entitled to vote at the Special Meeting. In
determining whether the Merger Agreement and the Merger have received the
requisite number of affirmative votes, abstentions and broker non-votes will
have the same effect as a vote against the Merger.
Solicitation of Proxies
In addition to solicitation by mail, the directors, officers, employees and
agents of the Company may solicit proxies from the shareholders of the Company
by personal interview, telephone, telegram or otherwise. The Company will bear
the costs of the solicitation of proxies from its shareholders. Arrangements
will also be made with brokerage firms and other custodians, nominees and
fiduciaries who hold of record voting securities of the Company for the
forwarding of solicitation materials to the beneficial owners thereof. The
Company will reimburse such brokers, custodians, nominees and fiduciaries for
the reasonable out-of-pocket expenses incurred by them in connection therewith.
In addition, the Company will retain Corporate Investor Communications, Inc., a
proxy solicitation firm, to assist it in the solicitations of proxies from
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shareholders. The Company anticipates that costs for such solicitation services
will be $5,000 plus reimbursement of out-of-pocket expenses.
Other Matters
At the date of this Proxy Statement, the Board does not know of any
business to be presented at the Special Meeting other than as set forth in the
notices attached to this Proxy Statement. If any other matters should properly
come before the Special Meeting, it is intended that the shares represented by
proxies will be voted with respect to such matters in accordance with the
judgment of the persons voting such proxies.
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THE MERGER
General Description of the Merger
The Merger Agreement provides that, at the Effective Time, Sub will merge
with and into the Company, with the Company being the surviving corporation,
and, subject to the terms and conditions of the Merger Agreement and the
provisions of the TBCA concerning dissenting shareholders' right of appraisal,
each outstanding share of Company Common Stock will be converted into the right
to receive $8.00 in cash. As a consequence of the Merger, the Company will
become a wholly owned subsidiary of Purchaser.
Background
From time to time during 1998, the Company received certain unsolicited
exploratory inquires from interested third parties about possible combinations
with or acquisitions of the Company. In March 1998, the Company received a
verbal expression of interest from an interested party seeking a potential
merger between such party and the Company. On April 3, 1998, the Company
received an unsolicited offer from an additional interested party seeking to
acquire the Company's Common Stock and offering to assume the long-term debt of
the Company in connection with any such acquisition. On April 6, 1998, the Board
met to discuss the offer from the second interested party and to request
management to prepare a valuation analysis of the Company to assist the Board in
analyzing such offer. This interested party made a public announcement on April
23, 1998, regarding its offer to the Company. The valuation analysis was
presented to the Board at the April 29, 1998 meeting of the Board.
On April 17, 1998, the Company received a written offer from the initial
interested party seeking a merger between the Company and such party. On April
21, 1998, the Company received an unsolicited offer from a third interested
party seeking to acquire the Company's Common Stock and offering to assume the
long-term debt of the Company in connection with any such acquisition. The Board
met on April 22, 1998 to discuss these two offers and decided at that time to
table any further discussion of the Company's acquisition or merger
opportunities until the regularly scheduled meeting of the Board to be held on
April 29, 1998.
At the April 29, 1998 meeting, the Board reviewed the Company's financial
condition and certain projections, noted the market price of the Company Common
Stock and discussed recent developments. The Board determined at that time that
it did not then want to pursue a sale of the Company without further examining
its strategic alternatives; and if a sale of the Company were to be pursued as
the best strategic alternative, the Board wanted to further investigate whether
the foregoing proposals reflected the best and highest price available for a
sale of the Company. At this meeting the Board voted to authorize management to
engage an investment bank to advise the Board about its alternatives for
maximizing shareholder value.
Each of the interested third parties described above submitted offers to
the Company based solely on public information gathered by such parties. As a
result, the offers submitted to the Company, ranging from $8.50 to $8.75, were
subject to the performance of additional due diligence reviews by
these interested parties and contingent upon arranging the financing necessary
to consummate the Merger. During the primary and secondary bid process discussed
below, where each of these parties were afforded the opportunity to submit
additional offers to the Company based on additional due diligence, the bids
originally submitted to the Company by these interested parties were
significantly reduced. During the open-market auction process discussed below,
none of these interested third parties submitted bids superior to the bid
ultimately submitted by Purchaser.
On May 12, 1998, the Company engaged NMS as a financial advisor to identify
opportunities for maximizing shareholder value, advise the Company concerning
such opportunities and participate on the Company's behalf in negotiations
resulting from these opportunities. The Board requested NMS to make a
preliminary analysis of the recent expressions of interest and to report on
possible courses of action for the Company.
At a Board meeting held on May 27, 1998, NMS presented various strategic
alternatives to the Company. Such presentation included (i) an analysis of the
Company's current situation, (ii) analyses of the Company's stock price and
shareholder ownership, and (iii) management's business plan. NMS reviewed
strategic alternatives the Company might pursue and their possible outcomes,
time frames to achieve these outcomes and possible risks associated with those
outcomes. The strategic alternatives included potential acquisitions by the
Company, financial restructurings such as share
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repurchases or a special dividend to shareholders, a potential sale of the
Company and maintenance of the existing strategy. As to the possible sale of the
Company, NMS discussed a list of potential strategic and financial buyers and a
list of specific firms that had expressed interest or that might be interested
in buying the Company. NMS did not express an opinion as to a recommended
alternative, but rather described the key elements of each alternative, as
discussed above.
On June 2, 1998, the Board, after review of the alternatives presented by
NMS and discussions with its largest institutional shareholders, voted to pursue
an auction of the Company. The Board believed that a full auction of all or part
of the Company presented the most effective way to enhance shareholder value, in
addition to providing immediate liquidity for all shareholders and providing the
Company with a structure and process with which to evaluate the buyer interest
that had been expressed. On June 2, 1998, the Company issued a press release
announcing that the Board had voted to investigate the Company's valuation in
the open-market through an auction process to be conducted by NMS. An open-
market auction is a process pursuant to which a wide range of logical, potential
buyers are targeted based upon the likelihood of those buyers paying a fair and
adequate price in the sale and their financial ability to consummate a
transaction. In addition, the Board believed that an open-market auction of the
Company would stimulate a sense of competition among potential buyers. This type
of sale is in contrast to a closed negotiation, whereby an extremely limited
number of contacts are made and discussions are held only with those parties
that had previously expressed interest in a transaction. The Board then
specifically directed NMS to assist in soliciting bids or indications of
interest from strategic and financial buyers and to provide information to
potential buyers signing an appropriate confidentiality agreement. The Board
further requested that NMS conduct a full market test in connection with the
sale process, whereby NMS would assist the Company in the preparation of a
confidential offering memorandum concerning the Company, which would be made
available to, and used in discussions with, prospective purchasers of the
Company. NMS also developed and prepared for the Board a list of potential
strategic and financial buyers that could be interested in acquiring the
Company.
The Board met on July 17, 1998 to discuss the bids that were received in
the first round of the auction process described above. Through the open-market
auction, the Board sought to attract any and all bids. Each of the five first
round bids consisted solely of cash. NMS described the process used, the parties
contacted and their response. Each of the interested parties received a
confidential offering memorandum, including those entities that had previously
made unsolicited exploratory inquiries to the Company or delivered expressions
of interest. NMS further described the number of investors contacted, the number
of confidential offering memorandums sent to those parties, the remarks and
concerns expressed to NMS regarding the Company, the Company's reputation within
the restaurant industry, the potential for synergies and the portability of the
Company's concept. NMS reviewed the purchase price per share of each bid, the
form of the transaction that was proposed (stock purchase versus asset
purchase), the conditions to closing (necessary board of directors and
shareholder approvals), due diligence requirements and financing contingencies.
The bids, the bidders, their finances, and their indicated due diligence
requirements were analyzed by NMS, but NMS did not express an opinion regarding
the recommendation of any particular bid or bidder. NMS also reviewed any
available financing documentation that supported the offer. Because the initial
round of bidding was based solely on information presented in the offering
materials prepared by NMS and because the bids submitted were non-binding bids
subject to the completion of more detailed due diligence by the bidders, the
Board unanimously determined that a second round of bidding should be conducted
based on information gathered through due diligence of the Company performed on-
site and with members of management present. All bidders submitting preliminary
non-binding bids at or in excess of $7.50 per share were invited to participate
in the second round of bids. Each bid made in the first round of bids in excess
of $8.00 was subsequently reduced in the second round of bids so that in the
second round of bids there were no bids in excess of Purchaser's $8.00 per
share bid.
Arrangements were made for the bidders to have access to additional
confidential Company material and to meet with senior members of management for
their due diligence review. Counsel for the Company was directed to draft a form
of acquisition agreement to be used in negotiating with bidders.
The Board met with NMS again on August 19, 1998. After discussing the bids
received in the second round of the sale process, the Board determined that it
should continue negotiations with Purchaser. The form of consideration of
Purchaser's bid was all cash, subject to available financing. Of the bids
received, Purchaser's offer was the highest. Purchaser's bid, finances, due
diligence requirements and terms and conditions were discussed by the Board and
NMS. NMS reviewed the financing contingencies for the bid, including preliminary
commitment letters received from lenders to Purchaser. Counsel to the Company
reviewed Purchaser's proposed form of definitive agreement and discussed with
the Board in detail the revisions to the form of definitive agreement that had
been circulated to the bidders. After comparing Purchaser's bid
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with all others received, the Board unanimously determined that Purchaser's bid
was superior to all others received with respect to conditions and the nature
and amount of the consideration offered.
After further consideration and negotiations with Purchaser, the Board
unanimously approved Purchaser's agreement. On September 17, 1998, the Board
considered the form of consideration, purchase price per share, the proposed
form of the transaction and the conditions to closing and gave its final
approval of the Merger on September 17, 1998. The Merger Agreement was executed
on September 18, 1998 and the transaction was publicly announced on the same
date.
The Company's Reasons for the Merger; Recommendation of the Board of Directors
At a meeting held on September 17, 1998, the Board concluded that the
Merger was fair to and in the best interests of the shareholders of the Company,
unanimously approved the Merger Agreement and the Merger, and recommended that
the shareholders of the Company adopt the Merger Agreement and approve the
Merger. After considering the conditions prevailing in the restaurant industry
generally, as well as the strengths and weaknesses of the Company, the Board
then discussed the Company's full range of strategic alternatives, including an
acquisition by the Company of another restaurant entity or concept, the
extension by the Company of its brand equity through other means, a sale of the
Company to a strategic or financial buyer, the payment by the Company of a cash
dividend or the repurchase by the Company of a portion of its shares, and the
continuation by the Company of its current operations without pursuit of a
strategic transaction. After reviewing these alternatives, and taking into
account the continuing challenges facing the Company, the Board determined that
it was in the best interest of the shareholders of the Company to consider a
sale of the Company. In reaching its determination, the Board considered the
matters discussed above in this paragraph and the oral opinion of NMS rendered
to the Board on September 17, 1998 (subsequently confirmed by delivery of a
written opinion dated as of such date) to the effect that, as of such date and
based upon and subject to certain matters stated in such opinion, the
consideration to be received by the holders of shares of Company Common Stock
was fair to such holders, from a financial point of view, as of such date. The
September 17, 1998 written opinion rendered by NMS to the Board is the same in
all material respects as the oral opinion delivered by NMS to the Board on the
same date. See "--Opinion of Financial Advisor to the Company." The Board
considered such opinion in the total mix of information regarding the proposed
Merger that was available to, and evaluated by, the Board. See "--
Background."
The Board believes that all of the factors described above supported its
conclusion that the Merger is in the best interests of the Company and its
shareholders. Because the Board believes that the Merger is in the best
interests of all of the shareholders and that no material conflicts of interest
exist between the Board and nonaffiliated shareholders, an independent
representative to represent the interests of any shareholder was not retained.
The Board also recognized that the possibility of a Superior Takeover
Proposal was not precluded by the Merger Agreement. Notwithstanding this
possibility, the Merger Agreement contains a customary "no solicitation" clause
to ensure Purchaser that the Company is not negotiating the transaction in bad
faith. However, under the no solicitation clause, the Company may provide
information to, and engage in discussions with, those parties whom the Company
believes may submit a Superior Takeover Proposal. Additionally, the Company must
notify Purchaser orally and in writing of any third party inquiries concerning
the acquisition of the Company.
In analyzing the proposed Merger, the Board evaluated the factors and
considerations described above and consulted with its financial and legal
advisors and with the Company's management. In evaluating the Merger versus
other alternatives, the Board considered the factors noted above, and the
following factors: (i) an analysis of the Company's current situation, which
reflected the Company's slow historical growth rate in restaurants opened, (ii)
analyses of the Company's stock price and shareholder ownership, which reflected
the small market capitalization of the Company and the fact that the Company's
stock had little retail float and was not actively traded, and (iii)
management's business plan, which reflected the long term operating strategy of
the Company. The Board further reviewed strategic alternatives the Company might
pursue and their possible outcomes, the time frame to achieve these outcomes and
the possible risks associated with those outcomes. Throughout the Board's
analysis, they did not view any one such factor as determinative and did not
assign particular weight to any one such factor. Based upon the information
presented to the directors, the members of the Board unanimously adopted the
Merger Agreement and recommended that the shareholders of the Company vote "FOR"
the adoption of the Merger Agreement and approval of the Merger.
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Opinion of Financial Advisor to the Company
Pursuant to an engagement letter dated May 12, 1998 (the "Engagement
Letter"), the Board retained NMS to act as its financial advisor in connection
with the consideration by the Company of various strategic alternatives
available to it to maximize shareholder value, including the possible
acquisition of one or more entities by the Company, or the possible sale of all
or a portion of the Company. The Company selected and retained NMS for this
assignment on the basis of NMS's experience and expertise in merger
transactions, and its reputation in the restaurant industry and the investment
banking community. NMS is a nationally recognized investment banking and
financial advisory firm and, as part of its investment banking activities, is
regularly engaged in the valuation of businesses and their securities in
connection with merger transactions and other types of acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes.
In connection with the consideration by the Board of the merits of the
Merger, NMS was asked under the terms of the Engagement Letter to perform
various financial analyses and deliver to the Board its opinion based on such
analyses, which opinion is more fully described below. THE OPINION OF NMS WAS
DIRECTED SOLELY TO THE BOARD FOR ITS CONSIDERATION IN CONNECTION WITH THE
MERGER, AND IS NOT A RECOMMENDATION TO ANY HOLDER OF COMPANY COMMON STOCK AS TO
WHETHER THE MERGER IS IN SUCH HOLDER'S BEST INTERESTS OR AS TO WHETHER HOLDERS
OF COMPANY COMMON STOCK SHOULD VOTE FOR OR AGAINST THE MERGER. THE FULL TEXT OF
SUCH WRITTEN OPINION OF NMS, DATED SEPTEMBER 17, 1998, IS ATTACHED HERETO AS
APPENDIX B AND SETS FORTH CERTAIN IMPORTANT QUALIFICATIONS, ASSUMPTIONS MADE,
- ----------
MATTERS CONSIDERED, AREAS OF RELIANCE ON OTHERS, AND LIMITATIONS ON THE REVIEW
UNDERTAKEN IN CONNECTION WITH SUCH OPINION.
The summary description of NMS's opinion set forth below is qualified in
its entirety by the full text of the opinion attached hereto as Appendix B.
----------
In connection with its opinion, NMS among other things: (i) reviewed
certain publicly available financial and other data with respect to the Company,
including the consolidated financial statements for recent years and interim
periods to June 28, 1998, and certain other relevant financial and operating
data relating to the Company made available to NMS from published sources and
from the internal records of the Company; (ii) reviewed the financial terms and
conditions of the Merger Agreement; (iii) reviewed certain publicly available
information concerning the trading of, and the trading market for, Company
Common Stock; (iv) compared the Company from a financial point of view with
certain other companies in the restaurant industry which NMS deemed to be
relevant; (v) considered the financial terms, to the extent publicly available,
of selected recent business combinations involving companies in the restaurant
industry which NMS deemed to be comparable, in whole or in part, to the Merger;
(vi) assisted the Company in soliciting indications of interest and bids from
third parties seeking to enter into a transaction with the Company similar to,
or as an alternative to, the Merger; (vii) reviewed and discussed with
representatives of the management of the Company certain information of a
business and financial nature regarding the Company furnished to NMS by
management of the Company, including financial forecasts and related assumptions
of the Company; (viii) made inquiries regarding and discussed the Merger, the
Merger Agreement and other matters related thereto with the Company's counsel;
and (ix) performed such other analyses and examinations as NMS deemed
appropriate.
Based upon its review of the foregoing, but subject to the limitations set
forth below and in reliance upon the assumptions set forth below, NMS provided
the Board with its opinion as investment bankers that as of the date of their
opinion (September 17, 1998), the aggregate consideration to be received by the
holders of Company Common Stock pursuant to the Merger was fair to such holders
of shares of Company Common Stock from a financial point of view. The terms of
the Merger and the amount of the consideration to be received by shareholders of
the Company thereunder was determined pursuant to negotiations between the
Company and Purchaser and not pursuant to recommendations of NMS. No limitations
were imposed by the Company on NMS with respect to the investigations made or
procedures followed in rendering its opinion.
In connection with its review, NMS did not assume any obligation
independently to verify the foregoing information and relied on its being
accurate and complete in all material respects. With respect to the financial
forecasts of the Company provided to NMS by management of the Company, upon its
advice and with its consent, NMS assumed for purposes of its opinion that the
forecasts had been reasonably prepared on bases reflecting the best currently
available estimates and judgments of management of the Company as to the future
financial performance of the Company and that they provided a
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reasonable basis upon which NMS could form its opinion. NMS also assumed that
there were no material changes in the Company's assets, financial condition,
results of operations, business or prospects since the respective dates of its
last financial statements made available to NMS. NMS relied on advice of the
counsel and the independent accountants to the Company as to all legal, tax and
financial reporting matters with respect to the Company, the Merger and the
Merger Agreement. NMS assumed that the Merger would be consummated in a manner
that complies in all respects with the applicable provisions of the Securities
Act of 1933, as amended (the "Securities Act") and all other applicable federal
and state statutes, rules and regulations. In addition, NMS did not assume
responsibility for making an independent evaluation, appraisal or physical
inspection of any of the assets or liabilities (contingent or otherwise) of the
Company, nor was NMS furnished with any such appraisals. Finally, NMS's opinion
was based on economic, monetary and market and other conditions as in effect on,
and the information made available to it as of, the date of the opinion
(September 17, 1998). Accordingly, although subsequent developments may affect
its opinion, NMS did not assume any obligation to update, revise or reaffirm its
opinion.
NMS also assumed with the consent of the Board that the Merger will be
consummated in accordance with the terms described in the Merger Agreement,
without any amendments thereto, and without waiver by the Company of any of the
conditions to its obligations thereunder. The full text of the Merger Agreement
is attached hereto as Appendix A and the terms described in the Merger Agreement
and the conditions to the Company's obligations thereunder should be reviewed
and understood by holders of shares of Company Common Stock in connection with
their consideration of the Merger.
Set forth below is a brief summary of the analyses presented by NMS to the
Board on September 17, 1998 in connection with its opinion described above.
Premiums Paid Analysis. NMS reviewed the consideration paid in 68
comparable U.S. acquisitions involving cash consideration of between $50 million
and $100 million that have been announced since January 1, 1997. These 68
transactions, announced since January 1, 1997, did not include transactions in
the technology and biotechnology industries as the market price of securities in
those industries is more volatile generally than is the case in the restaurant
industry. NMS calculated the premiums paid in these transactions over the
applicable stock prices of the target companies one day, one week, and thirty
days prior to the announcement of the acquisition offer, and then calculated the
mean and median of those premiums (which were 17.1% and 15.3%, 18.6% and 16.6%,
and 26.7% and 20.7%, respectively). NMS then applied the mean and median
premiums so derived to the Company's closing share prices on June 1, 1998
($5.94), May 25, 1998 ($7.38) and May 2, 1998 ($7.75). The share price of the
Company as of June 1, 1998, was selected for this analysis because on the
following day (June 2) the Board announced its intention to auction the Company.
This analysis in which NMS used the median premiums one day and one week prior
to such announcement for purposes of its opinion indicated an equity value of
the Company of between approximately $7.00 and $8.60 per share of Company Common
Stock. The market premiums and closing stock price data for 30 days prior to
June 2, 1998, were not used by NMS in this analysis because NMS believed the
trading price on May 2, 1998, already reflected market expectations of a
potential transaction involving the Company following the April 23, 1998,
announcement by ConQuest Partners described above (NMS believed the one week
prior data from May 25, 1998, partially reflected these market expectations as
well, but to a lesser extent than the thirty days prior data).
Comparable Public Company Analysis. Using public and other available
information, NMS calculated a range of implied values for the Company based on a
comparison of the last twelve months' earnings before interest, taxes,
depreciation and amortization ("LTM EBITDA"), the last twelve months' earnings
before interest and taxes ("LTM EBIT") and the projected calendar 1998 earnings
per share ("1998P EPS"), of the Company and 16 other publicly traded comparable
growth restaurant companies with recent performance issues (the "Comparable
Restaurants"). The Comparable Restaurants used in this analysis were Applebee's,
Au Bon Pain, Boston Chicken, Inc., Cooker Restaurant Corp., Einstein/Noah Bagel
Corp., Friendly Ice Cream Corp., Lone Star Steakhouse, NPC International, Planet
Hollywood, Quality Dining, Inc., Rock Bottom Restaurants, Ryan's Family
Steakhouse, Shoneys, Inc., Sbarro, Inc., Taco Cabana, and Uno Restaurant Corp.
The September 15, 1998 stock prices of the Comparable Restaurants reflected mean
and median multiples of 5.9x and 5.8x LTM EBITDA, 12.2x and 9.3x LTM EBIT and
15.9x and 11.2x 1998P EPS, respectively. NMS applied the mean and median
multiples for the Comparable Restaurants of LTM EBITDA, LTM EBIT and 1998P EPS
to the applicable results and estimates for the Company to determine the implied
equity value of the Company. The range of values produced from these
calculations was then weighted by NMS to reflect its assessment of the
appropriate reasonable range for the implied equity value of the Company. This
analysis indicated an equity value (defined as imputed aggregate value minus
estimated net debt of $4.5 million) of the Company of between $7.00 to $8.00 per
share of Company Common Stock.
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Comparable M&A Transaction Analysis. NMS also reviewed the consideration
paid in comparable merger and acquisition transactions in the restaurant
industry that have been announced since February 1992. NMS analyzed the
consideration paid in these transactions as a multiple of the aggregate value to
the target companies' LTM Revenues, LTM EBITDA and LTM Net Income, respectively.
Such analysis yielded a range of mean and median multiples of 1.0x and 0.8x LTM
Revenues, 6.9x and 6.6x LTM EBITDA and 22.0x to 20.1x LTM Net Income,
respectively. NMS then applied the foregoing multiples to the Company's 1998
Revenues, 1998 EBITDA and 1998 Net Income to determine the implied equity value
of the Company. The range of values produced from these calculations was then
weighted by NMS to reflect its assessment of the appropriate reasonable range of
the implied equity value of the Company. This analysis indicated an equity value
(defined as aggregate value minus estimated net debt of $4.5 million for 1998
Revenue and 1998 EBITDA calculations) of the Company of between $7.50 and $8.50
per share of Company Common Stock.
No other company or transaction used in the comparable company analysis,
the comparable transactions analysis or the premiums paid analysis as a
comparison is identical to the Company or the Merger. Accordingly, an analysis
of the results of the foregoing is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading value of the companies to which the Company and the Merger are being
compared.
Discounted Cash Flow Analysis. NMS applied a discounted cash flow analysis
using financial forecasts for 1999 through 2003 provided by the Company's
management. The Company did not provide NMS with any financial forecasts for
periods beyond 2003. In conducting this discounted cash flow analysis, NMS first
calculated the estimated future streams of free cash flows that the Company
would produce through 2003, as well as a terminal value of cash flows beyond
2003 by applying a range of exit multiples from 6.0x to 8.0x to the Company's
estimated EBITDA in 2003 (which multiples are in line with historical comparable
mergers and acquisitions multiples paid in the restaurant industry). Such cash
flow streams and terminal values were discounted to present values using
discount rates ranging from 13% to 14%, chosen to reflect assumptions regarding
the Company's weighted average cost of capital ("WACC"), which was calculated by
applying the required market rate of return of each of the Company's securities
(e.g., equity, bank debt, public notes, etc.) weighted by each security's
relative contribution to the Company's total capital structure. The range of
values produced from such calculations was approximately $43.0 million to $59.5
million which corresponds to range of implied equity values (after subtracting
estimated net debt of $4.5 million) of approximately $6.50 to $9.30 per share of
Company Common Stock. The range of values so produced from these calculations
was then weighted and narrowed by NMS, primarily by emphasizing exit multiples
in the 6.0x to 7.0x range, to reflect its assessment of the appropriate
reasonable range for the implied equity value of the Company based on the
discounted cash flow analysis methodology ($7.00 to $8.00 per share of the
Company Common Stock).
While the foregoing summary describes all analyses and examinations that
NMS deemed material to the preparation of its opinion to the Board, it does not
purport to be a comprehensive description of all analyses and examinations
actually conducted by NMS. The preparation of a fairness opinion necessarily is
not susceptible to partial analysis or summary description; and selecting
portions of the analyses and of the factors considered by NMS, without
considering all analyses and factors, would create an incomplete or misleading
view of the process underlying the analyses set forth in the presentation of NMS
to the Board on September 17, 1998. In addition, NMS may have given some
analyses more or less weight than other analyses, and may have deemed various
assumptions more or less probable than other assumptions. The Board did not
specifically ask for the weightings NMS applied to its analyses; however, the
Board noted, for example, that NMS more heavily weighted the premium offered by
Purchaser over the market price the day prior to the announcement of the auction
of the Company (versus the market price 30 days prior to such announcement) and
more heavily weighted certain exit multiple assumptions in its discounted cash
flow analysis. In accordance with the foregoing, the ranges of valuations
resulting from any particular analysis described above should not be taken to be
NMS's view of the actual value of the Company or Company Common Stock. To the
contrary, NMS expressed no opinion on the actual value of the Company or Company
Common Stock, and its opinion that is addressed and limited to the Board extends
only to the belief expressed by NMS that the immediate value to holders of
Company Common Stock, from a financial point of view under the Merger, is within
the range of values that might fairly be ascribed to the Company Common Stock as
of the date of the opinion of NMS (September 17, 1998).
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In performing its analyses, NMS made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of the Company. The analyses
performed by NMS are not necessarily indicative of actual values or actual
future results, which may be significantly more or less favorable than those
suggested by such analyses. Such analyses were prepared solely as part of NMS's
analysis for the Board of the fairness of the Merger to the Company's
shareholders from a financial point of view, and were provided solely to the
Board in connection with the Board's consideration of the Merger. The analyses
do not purport to be appraisals or to reflect the prices at which any company
might actually be sold or the prices at which any securities may trade at any
time in the future. NMS used in its analyses various projections of future
performance prepared by or adopted by the management of the Company. The
projections are based on numerous variables and assumptions which are inherently
unpredictable and in large part are beyond the control of the Company and its
advisors. Accordingly, actual results could vary significantly from those set
forth in such projections, and none of the Company, NMS or any other person
assumes any responsibility if future results are materially different from those
projected.
As described above, the opinion of NMS and the presentation to the Board
summarized above were among the many factors taken into consideration by the
Board in making its determination to approve and adopt, and to recommend that
its shareholders approve and adopt, the Merger. NMS, however, does not make any
recommendation to holders of shares of Company Common Stock (or to any other
person or entity) as to whether the Merger is in such shareholders' best
interests.
In accordance with the Engagement Letter, the opinion of NMS is addressed
solely to the Board for the personal use of the directors (in their capacity as
members of the Board) in connection with their review and evaluation of the
Merger and neither the opinion nor NMS's underlying financial analysis may be
relied upon by any person other than the directors (in their capacity as members
of the Board) without the prior written consent of NMS. Accordingly, under the
terms of the Engagement Letter no shareholder of the Company may rely or allege
any reliance on NMS's opinion or analysis in connection with such shareholder's
consideration of the merits of the Merger or otherwise. It is NMS's position
that its duties in connection with its fairness opinion are solely to the Board,
and that it has no legal responsibility to any other persons, including the
Company's shareholders, under New York state law (the governing law of the
Engagement Letter). NMS would likely assert the substance of the foregoing
disclaimer as a defense to claims (if any) that might be brought against it by
holders of Company Common Stock with respect to its fairness opinion. However,
since no New York court has definitively ruled on the availability to a
financial advisor of such a defense to shareholder liability with respect to its
fairness opinion, this issue necessarily would have to be resolved by a court of
competent jurisdiction. Furthermore, there can be no assurance that a court of
competent jurisdiction would apply New York state law to the resolution of this
issue if it were ever to be presented. In any event, the availability or
non-availability of such a defense will have no effect on NMS's rights and
responsibilities under the federal securities laws, or the rights and
responsibilities of the Board under governing state law or under the federal
securities laws.
Pursuant to the Engagement Letter, if the Merger is effected on the terms
set forth in the Merger Agreement, the Company will pay NMS a fee of
approximately $1.0 million (the "Contingent Fee"). The Company will be obligated
to pay the Contingent Fee only if the Merger (or any other transaction described
in the Engagement Letter) is consummated. Accordingly, the payment of
substantially all of NMS's total fee under the Engagement Letter is subject to
the consummation of the Merger. The Board was aware of this fee structure and
took it into account in considering NMS's opinion and in approving the Merger
Agreement and the transactions contemplated thereby. Pursuant to a separate
letter agreement, the Company has agreed to indemnify NMS, its affiliates, and
their respective partners, directors, officers, agents, consultants, employees
and controlling persons against certain liabilities, including liabilities under
the federal securities laws, relating to or arising out of NMS's engagement.
In the ordinary course of its business, NMS trades equity securities of the
Company for its own account and for the accounts of customers and, accordingly,
may at any time hold a long or short position in such securities.
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Material Federal Income Tax Consequences
The following is a general summary of the material federal income tax
consequences of the Merger to holders of shares of Company Common Stock. This
discussion is based on the Internal Revenue Code of 1986, as amended (the
"Code"), existing and proposed regulations thereunder, Internal Revenue Service
("IRS") rulings and pronouncements, reports of congressional committees,
judicial decisions and current administrative rulings and practice, all as in
effect on the date hereof. Any change to the foregoing sources could be
retroactive and, accordingly, could modify the tax consequences discussed
herein. No ruling from the IRS with respect to the matters discussed herein has
been requested and there is no assurance that the IRS will agree with the
conclusions set forth in this discussion. In addition, no tax opinion has been
requested or received by the Company with respect to the federal income tax
consequences of the Merger.
The discussion below does not address all of the federal income tax
consequences that may be relevant to particular shareholders in light of their
personal circumstances or to certain types of shareholders (such as dealers in
securities, corporations, insurance companies, foreign individuals and entities,
financial institutions and tax-exempt entities) who may be subject to special
treatment under the federal income tax laws. This discussion also does not
address the federal income tax consequences to shareholders who acquired their
shares of Company Common Stock through the exercise of employee stock options or
otherwise as compensation. Furthermore, this discussion does not address any tax
consequences under state, local or foreign laws. This summary assumes that the
shares of the Company Common Stock are held as "capital assets" within the
meaning of Section 1221 of the Code. Pursuant to Section 1221, capital assets
are those assets that are generally held for investment.
For federal income tax purposes, an individual holder of shares of Company
Common Stock who exchanges such shares for cash pursuant to the Merger or who
receives cash in exchange for such shares pursuant to the exercise of appraisal
rights will be treated as having sold his or her shares of Company Common Stock
for cash in a taxable transaction. Gain or loss will be recognized on the
exchange in an amount equal to the difference between the cash received and the
holder's adjusted tax basis in the shares of Company Common Stock exchanged
therefor. Such gain or loss will be a capital gain or loss if the holder of the
shares of Company Common Stock held such shares as a capital asset at the
Effective Time, and may qualify as long-term capital gain or loss if such holder
held the shares of Company Common Stock for a period greater than 12 months at
the Effective Time. For certain non-corporate holders of Company Common Stock
(including individuals), any such long-term capital gain will be taxed at a
maximum federal income tax rate of 20 percent. For corporate holders of Company
Common Stock, long-term capital gain will continue to be subject to ordinary
income tax rates applicable to corporations.
Holders of Company Common Stock or other payees generally will be required
to provide the Exchange Agent (as defined in "Certain Terms of the Merger
Agreement--Manner and Basis of Converting Shares") with their correct taxpayer
identification numbers (certified under penalties of perjury) on the Substitute
Forms W-9 included as part of the transmittal forms sent to such shareholders
pursuant to the Merger. The taxpayer identification number of an individual is
his or her social security number. A holder of Company Common Stock or other
payee who does not provide the Exchange Agent with a correct taxpayer
identification number may be subject to a $50 fine imposed by the IRS.
Furthermore, payments made to a holder of Company Common Stock or other payee
may be subject to backup withholding if: (i) the Company shareholder or other
payee fails to furnish a correct taxpayer identification number, (ii) the
Company shareholder or other payee furnishes an incorrect taxpayer
identification number, (iii) the Company, Purchaser, or the Exchange Agent is
notified by the IRS that such Company shareholder or other payee failed to
report interest or (iv) under certain circumstances, the Company shareholder
fails to provide a certified statement, signed under penalty of perjury, that
the taxpayer identification number provided is the correct number and that the
Company shareholder is not subject to backup withholding.
If backup withholding applies, the Exchange Agent is required to and will
withhold 31 percent of any payment made to a holder of Company Common Stock or
other payee. Backup withholding is not an additional tax but is credited against
the federal income tax liability of the taxpayer subject to the withholding. If
backup withholding results in an overpayment of a taxpayer's federal income
taxes, that taxpayer may obtain a refund from the IRS.
Generally, a holder of Company Common Stock or other payee may avoid backup
withholding by completing the Substitute Form W-9 included as part of the
transmittal forms and certifying that the taxpayer identification number
included therein is correct and that the holder of Company Common Stock or other
payee is not subject to backup withholding. Certain types of taxpayers
(including corporations and certain foreign individuals) are not subject to
these reporting or withholding requirements.
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SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR
TAX CONSEQUENCES TO THEM OF PARTICIPATING IN THE MERGER, INCLUDING THE
APPLICABILITY OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, CHANGES IN APPLICABLE TAX
LAWS AND ANY PENDING OR PROPOSED LEGISLATION.
Accounting Treatment
The Merger will be accounted for as a purchase under generally accepted
accounting principles ("GAAP").
Existing Relationships with Purchaser
The Company has never conducted business with nor has it had any business
relationship with Purchaser prior to the transactions described in the Merger
Agreement. The Company's activities have been limited to providing due diligence
information and reasonable accommodation with respect to Purchaser's information
needs in its efforts to secure financing commitments.
Rights of Dissenting Shareholders
If the Merger is consummated, shareholders of the Company who did not vote
in favor of the Merger will have certain rights to dissent and demand the
appraisal of and payment in cash for the "fair value" of their shares of Company
Common Stock pursuant to Articles 5.11, 5.12 and 5.13 of the TBCA. Under the
Appraisal Rights Statutes, if the statutory procedures are complied with, a
judicial determination of the fair value (excluding any depreciation or
appreciation in anticipation of the Merger) required to be paid in cash to such
dissenting holders for their shares will be made. The value so determined could
be more or less than the purchase price per share pursuant to the Merger
Agreement.
ANY SHAREHOLDER CONTEMPLATING THE EXERCISE OF APPRAISAL RIGHTS IS URGED TO
REVIEW CAREFULLY THE PROVISIONS OF ARTICLES 5.11, 5.12 AND 5.13 OF THE TBCA (A
COPY OF WHICH IS ATTACHED AS APPENDIX C TO THIS PROXY STATEMENT), PARTICULARLY
WITH RESPECT TO THE PROCEDURAL STEPS REQUIRED TO PERFECT THE RIGHT OF APPRAISAL.
IF THE RIGHT OF APPRAISAL IS LOST DUE TO THE SHAREHOLDER'S FAILURE TO COMPLY
WITH THE PROCEDURAL REQUIREMENTS OF THE APPRAISAL RIGHTS STATUTES, THE
SHAREHOLDER WILL RECEIVE THE MERGER CONSIDERATION WITHOUT INTEREST FOR EACH
SHARE OWNED. SET FORTH BELOW IS A SUMMARY OF THE PROCEDURES RELATING TO THE
EXERCISE OF THE RIGHT OF APPRAISAL, WHICH SHOULD BE READ IN CONJUNCTION WITH THE
FULL TEXT OF ARTICLES 5.11, 5.12 AND 5.13 OF THE TBCA.
Article 5.12 of the TBCA provides that a shareholder wishing to exercise
such shareholder's rights for appraisal with respect to the Merger must file,
prior to the Special Meeting, a written objection to the Merger stating that its
right to dissent will be exercised if the Merger becomes effective and giving
the shareholder's address, to which notice of the approval of the Merger shall
be delivered or mailed in such event. If the Merger is effected and the
shareholder did not vote in favor of the Merger, the surviving corporation will,
within 10 days after the Effective Time, deliver or mail to the shareholder
written notice that the Merger has been effected. In order to exercise his or
her right of appraisal, a shareholder must, within ten days from the delivery or
mailing of the notice from the surviving corporation, make written demand
("Demand") on the surviving corporation for payment of the fair value of the
shareholder's shares. The Demand must state the number of shares owned by such
shareholder, and the shareholder's estimate of the fair value of such shares.
Any shareholder failing to make Demand within the 10-day period will be bound by
the Merger.
The Demand should be executed by or for such shareholder of record, fully
and correctly, as such shareholder's name appears on the certificate(s) formerly
representing the shares. If shares are owned of record in a fiduciary capacity,
such as by a trustee, guardian or custodian, execution of the Demand should be
made in such capacity. If shares are owned of record by more than one person, as
in a joint tenancy or tenancy in common, the Demand should be executed by or for
all joint owners. Any shareholder who has made a Demand may withdraw the Demand
at any time before payment for the shares is made or before any petition asking
for a determination of the fair value of the shares is filed.
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Within 20 days after making a Demand, the shareholder must submit the
certificates representing the shares to the surviving corporation for notation
thereon that a Demand has been made. The failure of a shareholder to submit the
certificates will terminate the shareholder's rights of appraisal.
Within 20 days after receipt of a Demand, the surviving corporation must
deliver or mail to the shareholder a written notice that either (i) accepts the
amount claimed in the Demand and agrees to pay such amount within 90 days after
the Effective Time upon the surrender of the duly endorsed certificates formerly
representing such shareholder's shares, or (ii) contains an estimate by the
surviving corporation of the fair value of the shares together with an offer to
pay such amount within 90 days after the Effective Time. If the surviving
corporation responds to the Demand with an estimate of the fair value of the
shares and the shareholder wishes to accept the surviving corporation's
estimate, the surviving corporation must receive written notice from the
shareholder accepting such estimate within 60 days after the shareholder
receives the estimate from the surviving corporation and surrendering the duly
endorsed certificates formerly representing such shareholder's shares. If,
within 60 days after the Effective Time, the value of the shares is agreed upon
between the shareholder and the surviving corporation, payment for the shares
will be made within 90 days after the Effective Time and upon surrender of the
certificates duly endorsed. Upon payment of the agreed value, the shareholder
will cease to have any interest in the shares or the company.
If, within the period of 60 days after the Effective Time, the shareholder
and the surviving corporation do not agree on the fair value of the Shares, then
the shareholder or the surviving corporation may, within 60 days following the
expiration of such 60-day period, file a petition in any court of competent
jurisdiction in the county in which the principal office of the surviving
corporation is located, to obtain a judicial finding and determination of the
fair value of the shareholder's shares. Upon filing such petition, the
shareholder must serve the surviving corporation with a copy of such petition.
Within 10 days after being served with a copy of the petition, the surviving
corporation must file with the court a list of shareholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached. All shareholders will be notified as to the time
and place of the hearing of the petition. All shareholders thus notified and the
surviving corporation will then be bound by the final judgement of the court.
After the hearing of the petition, the court will appoint one or more qualified
appraisers who will determine the fair value of the shares and will file a
report of that value with the clerk of the court. Each party will have
reasonable opportunity to submit to the appraisers pertinent evidence as to the
value of the shares. Either party may make exceptions to the appraiser's report.
The court will then determine the fair value of the shares and will direct the
surviving corporation, upon receipt of the duly endorsed certificates formerly
representing such Shares, to pay the value together with interest thereon
beginning on the 91st day after the Effective Time to the date of the judgment
to such shareholders entitled to payment. Upon payment of the judgment, the
dissenting shareholders will cease to have any interest in the shares or the
company.
The TBCA provides that, in the absence of fraud, the foregoing procedures
represent the exclusive remedy under Texas law for a shareholder objecting to
the Merger Agreement for the recovery of the value of such holder's shares or of
money damages to such shareholder with respect to the Merger.
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CERTAIN TERMS OF THE MERGER AGREEMENT
The following description does not purport to be complete and is qualified
in its entirety by reference to the Merger Agreement, a copy of which is
attached as Appendix A to this Proxy Statement and is incorporated herein by
----------
reference.
Effective Time of the Merger
The Merger Agreement provides that, as soon as practicable after the
satisfaction or waiver of the conditions to effecting the Merger, the parties
shall cause the Merger to be consummated by filing Articles of Merger with the
Secretary of State of the State of Texas, in such form as required by, and
executed in accordance with, the relevant provisions of the TBCA and making any
and all other filings or recordings required under the TBCA. It is anticipated
that, if the Merger Agreement is approved and adopted at the Special Meeting and
all other conditions to the Merger have been satisfied or waived, the Effective
Time will occur on the date of the Special Meeting or as soon thereafter as
practicable.
Manner and Basis of Converting Shares
At the Effective Time, by virtue of the Merger and without any action on
the part of any holder of any capital stock of the Company, Purchaser or Sub,
each share of Company Common Stock, if any, that is owned by Purchaser or Sub or
any subsidiary of Purchaser or held by the Company as treasury shares will be
canceled and cease to exist and no consideration will be delivered or
deliverable in exchange therefor. Each issued and outstanding share of Company
Common Stock (other than shares of Company Common Stock canceled pursuant to the
previous sentence), will be converted into the right to receive, upon surrender
and exchange of the Certificate representing such share of Company Common Stock,
the Merger Consideration, or $8.00 per share. Upon such conversion, all such
shares of Company Common Stock will be canceled and will cease to exist, and the
holder of a Certificate will cease to have any rights with respect thereto,
except the right to receive the Merger Consideration upon the surrender of such
Certificate (or, in the case of shareholders perfecting their right to dissent
in accordance with the TBCA, the rights of dissenting shareholders under the
TBCA). Each issued and outstanding share of common stock, par value $.01 per
share, of Sub will be converted into one fully paid and nonassessable share of
common stock, par value $.01 per share, of the Surviving Corporation.
Holders of shares of Company Common Stock have the right under Article 5.11
of the TBCA to dissent from the Merger. If the Merger is consummated, each
holder of Company Common Stock who has not voted in favor of the Merger and who
otherwise has perfected his right to dissent under Article 5.12 of the TBCA will
be entitled to such rights of a dissenting shareholder, including the right to
receive payment of the appraised value of such shares, and each share of Company
Common Stock with respect to which such rights to dissent shall have been
perfected shall not be converted into the Merger Consideration unless such
appraisal rights cease as provided in Article 5.13 of the TBCA.
Prior to the Effective Time, Sub will appoint the Paying Agent for the
Merger. Prior to the Effective Time, Sub will deposit with the Paying Agent, in
a separate fund established for the benefit of the holders of Company Common
Stock, for payment through the Paying Agent, a sufficient amount of cash to pay
to the shareholders of the Company the Merger Consideration, which shall be paid
by Paying Agent. Such cash will be invested by the Paying Agent in U.S.
government securities maturing in 30 days or less or mutual funds that invest
solely in U.S. government securities and all interest that is earned thereon
prior to the time the cash is fully paid to the shareholders of the Company
shall be paid over by the Paying Agent to the Surviving Corporation in
accordance with the terms of the agreement with the Paying Agent six months
after the Effective Time (if not otherwise required to satisfy obligations owing
to the shareholders of the Company).
As soon as reasonably practicable after the Effective Time, Purchaser will
instruct the Paying Agent to mail to each holder of record of a Certificate or
Certificates immediately prior to the Effective Time. (i) a form of letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon proper delivery of the
Certificates to the Paying Agent) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for payment of the Merger
Consideration. Upon surrender of a Certificate for cancellation to the Paying
Agent together with a duly executed letter of transmittal and such other
documents as the Paying Agent requires, the holder of such Certificate will be
entitled to receive the Merger Consideration, and the surrendered Certificate
will be canceled. No interest shall be paid or accrued on the Merger
Consideration payable upon the surrender of any Certificate. If payment is to be
made to a person other than the person in whose name the surrendered Certificate
is registered, it shall be a condition of payment that the Certificate so
surrendered shall be properly endorsed or otherwise in proper form for transfer
and that the person
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requesting such payment shall pay any transfer or other taxes required by reason
of the payment to a person other than the registered holder of the surrendered
Certificate or established to the satisfaction of the Surviving Corporation that
such tax has been paid or is not applicable. Until surrendered as contemplated
by this paragraph, each Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender the
Merger Consideration.
At the Effective Time, the stock transfer books of the Company will be
closed and no transfer of any Company Common Stock will thereafter be made. If,
after the Effective Time, any Certificates are presented to the Paying Agent for
transfer, they will be canceled and exchanged for the Merger Consideration.
All funds held by the Paying Agent for payment that remain undistributed to
the holders of Company Common Stock for six months after the Effective Time
shall be returned to the Surviving Corporation whereupon any holders of
unsurrendered Certificates shall look only to the Surviving Corporation for
payment of Merger Consideration to which they are entitled, subject to
applicable law. None of the Purchaser, Sub, the Company nor the Surviving
Corporation shall be liable to any person for such shares or funds delivered to
a public official pursuant to any applicable abandoned property, escheat or
similar law.
At and after the Effective Time, the officers and directors of the
Surviving Corporation will be authorized to execute and deliver, in the name and
on behalf of the Company or Sub, any deeds, bills of sale, assignments or
assurances and to take and do, in the name and on behalf of the Company or Sub,
any other actions and things to vest, perfect or conform of record or otherwise
in the surviving corporation any and all right, title and interest in, to and
under any of the rights, properties or assets acquired or to be acquired by the
Surviving Corporation as a result of, or in connection with, the Merger.
Stock Options
At the Effective Time, each holder of a then outstanding Option, whether or
not then exercisable or vested, shall be terminated and automatically converted
into the right to receive the Option Consideration. The receipt by each Option
holder of his Option Consideration shall constitute a release of any and all
rights the holder had or may have had with respect to such Option. Prior to the
Effective Time, the Company shall obtain (without paying amounts per share that
are greater than the relevant Option Consideration) all necessary consents or
releases from holders of Options under the Stock Plans and take all such other
lawful action as may be reasonably necessary to give effect to these
transactions. The Stock Plans shall terminate as of the Effective Time, and the
provisions in the Company Benefit Plans of the Company or any subsidiary thereof
shall be canceled as of the Effective Time. Prior to the Effective Time, the
Company shall take all action necessary (including causing the Board to take
such actions as are allowed by the Stock Plans) to (i) ensure that, following
the Effective Time, no participant in the Stock Plans or any other plans,
programs or arrangements shall have any right thereunder to acquire equity
securities of the Company, the Surviving Corporation or any subsidiary thereof
and (ii) terminate all such plans, programs and arrangements. The total number
of Options subject to the provisions of the Merger Agreement on the date of the
Merger Agreement (assuming full vesting) is (i) 461,343 under the Company's
stock option plans, at a weighted average exercise price of $5.28, (ii) 56,345
under the Company's employee stock purchase plan, and (iii) 25,459 under the
Company's deferred compensation plan.
Conditions to the Merger
The respective obligations of each party to consummate the Merger are
subject to the satisfaction of the following conditions, any or all of which may
be waived in writing by the Company and Purchaser to the extent permitted by
applicable law: (a) the Company's Shareholder Approval (as that term is defined
in the Merger Agreement) shall have been obtained on or prior to 90 days after
the date of the Merger Agreement, and no temporary restraining order or
preliminary or permanent injunction or other order by any federal or state court
preventing consummation of the Merger shall have been issued and continue in
effect; provided, however, that prior to invoking this condition, each party
shall use commercially reasonable best efforts to have any such decree, ruling,
injunction or order vacated; and (b) the Company Required Statutory Approvals
and the Purchaser Required Statutory Approvals shall have been obtained at or
prior to the Effective Time (or, in the case of the filings required, if any,
under the HSR Act, all applicable waiting periods and any extensions thereof
shall have expired or otherwise been terminated).
The obligation of Purchaser to effect the Merger is also subject to the
satisfaction at or prior to the Closing Date of the following conditions, any or
all of which may be waived in writing by Purchaser, in whole or in part: (a) the
Company shall have performed in all material respects its agreement and
covenants contained in or contemplated by the Merger Agreement
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required to be performed by it at or prior to the Effective Time; (b) the
representations and warranties of the Company set forth in the Merger Agreement
shall be true and correct in all material respects as of the date of the Merger
Agreement and as of the Closing Date, except as otherwise contemplated by the
Merger Agreement; (c) Purchaser shall have received a certificate signed by the
Chief Executive Officer and Chief Financial Officer of the Company, dated the
date of Closing (the "Closing Date"), to the effect that, to each such officer's
knowledge, certain conditions set forth in the Merger Agreement have been
satisfied; (d) there shall have been no event that has occurred that caused or
would cause a Material Adverse Effect (as that term is defined in the Merger
Agreement); (e) Purchaser shall have received an opinion of Jenkens & Gilchrist,
a Professional Corporation, in form and substance reasonably satisfactory to
Purchaser, addressed to Purchaser and dated as of the Closing Date relating to
the Company's incorporation, existence, good standing, corporate power and
authority and the due authorization, execution and delivery of the Merger
Agreement; (f) the Company Required Consents (as that term is defined in the
Merger Agreement) shall have been obtained except those that in the aggregate
would not result in and would not reasonably be likely to result in a Material
Adverse Effect; (g) there shall not have been threatened, instituted or pending
any suit, action, investigation, inquiry or other proceeding by or before any
court or governmental or other regulatory or administrative agency or commission
requesting or looking toward an order, judgment or decree that, individually or
in the aggregate, would in reasonable probability have a Material Adverse Effect
on the Surviving Corporation; (h) Purchaser and/or Sub shall have obtained
secured senior debt financing for the transactions contemplated in the Merger
Agreement in an aggregate amount not less than $30,000,000; (i) each outstanding
option or restricted stock award (or any other right to stock) that remains
unexercised or unvested under the Stock Plans shall have been terminated under
the provisions of the Merger Agreement; (j) all documents to be delivered by the
Company to Purchaser and Sub at the Closing shall be duly executed and in form
and substance reasonably satisfactory to Purchaser and Sub; and (k) Purchaser
and Sub shall have received such other documents or certificates as Purchaser
and Sub may reasonably have requested.
The obligation of the Company to effect the Merger is also subject to the
satisfaction at or prior to the Closing Date of the following conditions, any or
all of which may be waived in writing by the Company, in whole or in part: (a)
Purchaser shall have performed in all material respects its agreements and
covenants contained in or contemplated by the Merger Agreement required to be
performed by it at or prior to the Effective Time; (b) the representations and
warranties of Purchaser set forth in the Merger Agreement shall be true and
correct in all material respects as of the Closing Date as if made on and as of
the Closing Date, except as otherwise contemplated by the Merger Agreement; (c)
the Company shall have received a certificate signed by the Chief Executive
Officer and Chief Financial Officer of Purchaser, dated the Closing Date, to the
effect that, to each such officer's knowledge, the conditions set forth in the
Merger Agreement have been satisfied; (d) the Company shall have received an
opinion of Andrews & Kurth, L.L.P., in form and substance reasonably
satisfactory to the Company, addressed to the Company and dated the Closing Date
relating to Purchaser's incorporation, existence, good standing, corporate power
and authority and the due authorization, execution and delivery of the Merger
Agreement, which opinion may be based on appropriate representations of
Purchaser and Sub; (e) the opinion of NMS delivered and addressed to the Board
shall not have been withdrawn; (f) all documents to be delivered by Purchaser or
Sub to the Company at the Closing shall be duly executed and in form and
substance reasonably satisfactory to the Company; and (g) the Company shall have
received such other documents or certificates as the Company may reasonably have
requested.
There can be no assurance that all of the conditions to the Merger will be
satisfied.
Representations and Warranties
The Merger Agreement contains various representations and warranties of the
Company, Sub and Purchaser relating to, among other things: (a) various
corporate organization and qualification matters, (b) authorization matters in
connection with the approval of the Merger Agreement, (c) the non-contravention
of the Merger Agreement with any of the Company's, Purchaser's or Sub's
corporate and financial documents, (d) the Company Required Statutory Approvals
and the Purchaser Required Statutory Approvals, (e) the ownership of Company
Common Stock by Purchaser, (f) the truthfulness and accuracy of certain
information supplied by the Purchaser, (g) the ownership of any subsidiaries by
the Company, (h) the capitalization of the Company and Sub; and the Company
makes further representations and warranties concerning (i) compliance with
governmental and licensing requirements, (j) the financial statements, financial
reports and reports filed by the Company with the Securities and Exchange
Commission (the "Commission"), (k) any undisclosed liabilities of the Company,
(l) real property, (m) Company equipment, (n) intellectual property, (o)
litigation, (p) employee matters, (q) collective bargaining and employee
agreements and other compensation matters, (r) labor matters, (s) environmental
matters, (t) the vote requirements for passage of the Merger Agreement, (u)
insurance, (v) material contracts and commitments, (w) tax matters and (x) state
takeover statutes and the absence of a super-majority provision in Texas.
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<PAGE>
Certain Covenants Relating to Conduct of Business Prior to the Merger
The Company has agreed that, prior to the Effective Time, the Company will,
and will cause its subsidiaries to, conduct their respective businesses in the
usual, regular and ordinary course in substantially the same manner as conducted
prior to entering into the Merger Agreement and use all commercially reasonable
best efforts to preserve their respective business organizations and goodwill,
preserve the goodwill and relationships with customers, suppliers, distributors
and others having business dealings with them and, subject to prudent management
of workforce needs and ongoing programs in force on the date of the Merger
Agreement, keep available the services of their officers and employees employed
on the date of the Merger Agreement.
The Company has also agreed that, prior to the Effective Time, the Company
will not, nor will it permit any of its subsidiaries to: (a) declare or pay any
dividends or make other distributions in respect of any of their capital stock
other than to the Company or its subsidiaries; (b) split, combine or reclassify
any of their capital stock or issue or authorize or propose the issuance of any
other securities in respect of, in lieu of, or in substitution for, shares of
their capital stock; or (c) redeem repurchase or otherwise acquire any shares of
their capital stock, other than (i) intercompany acquisitions of capital stock,
or (ii) in connection with the administration of employee benefit and dividend
reinvestment plans as in effect on the date of the Merger Agreement in the
ordinary course of the operation of such plans.
The Company has also agreed that prior to the Effective Time it will not,
and will not permit any of its subsidiaries to, issue, agree to issue, deliver
or sell, or authorize or propose the issuance, delivery or sale of, any shares
of their capital stock or any class or any securities convertible into or
exchangeable for, or any rights, warrants or options to acquire, any such shares
or convertible or exchangeable securities except for: (a) the issuance of common
stock or other securities by the Company pursuant to the Stock Plans, in each
case in the ordinary course of the operation of such plans and arrangements in
accordance with their current terms; (b) shares issued in conversion, exchange
or exercise of existing outstanding securities of the Company in connection with
rights currently existing under such outstanding securities; or (c) issuances by
a wholly owned subsidiary of its capital stock to the Company.
The Company has agreed that, prior to the Effective Time: (a) the Company
will not amend or propose to amend its Articles of Incorporation or Bylaws in
any way adverse to Purchaser; (b) except as required by law, the Company will
not, nor will it permit any of its subsidiaries to, make any capital
expenditures, except for normal extensions to or replacements of properties or
in the ordinary course of business consistent with prior practice not in excess
of $100,000 in the aggregate, or merge or consolidate with any other person or
acquire, except in the ordinary course of business consistent with prior
practice, a material amount of assets of any other person; (c) the Company will
not, nor will it permit any of its subsidiaries to, sell, lease, license,
encumber or otherwise dispose of any assets that are material, except for normal
extensions to or replacements or dispositions of properties in the ordinary
course of business consistent with prior practice; (d) the Company will not, nor
will it permit any of its subsidiaries to, incur or guarantee any indebtedness
(including any debt borrowed or guaranteed or otherwise assumed, including,
without limitation, the issuance of debt securities), except for: (i) short-term
indebtedness in the ordinary course of business consistent with past practice,
(ii) long-term indebtedness in connection with the refinancing of existing
indebtedness either at its stated maturity or at a lower cost of funds, (iii)
borrowings or letters of credit under existing credit facilities, or (iv)
borrowings or letters of credit, not to exceed $2,500,000, required to finance
construction and/or finish out of the New Restaurant (as defined below), nor
will the Company cancel, or permit any of its subsidiaries to cancel, any
aggregate amount of indebtedness in excess of $10,000 or waive any claims or
rights of value in excess of $10,000, or increase or change any assumptions
underlying, or methods of calculating, any bad debt contingency or other
reserves; (e) except as required by applicable law or the provisions of any
employee benefit plan, or as contemplated by the Merger Agreement, the Company
will not, nor will it permit any of its subsidiaries to, enter into, adopt or
amend or increase the amount of or accelerate the payment or vesting of any
benefit or amount payable under any employee benefit plan or any other contract,
agreement, commitment, arrangement, plan or policy maintained by, contributed to
or entered into by the Company, as the case may be, or their respective
subsidiaries, or increase, or enter into any contract, agreement, commitment or
arrangement to increase in any manner, the compensation or fringe benefits, or
otherwise to extend, expand or enhance the engagement, employment or any
related rights of any director, officer or other employee of the Company, or its
respective subsidiaries, except for normal increases in the ordinary course of
business consistent with past practice that, in the aggregate, do not result in
a material increase in benefits or compensation expense to Purchaser or the
Company, as the case may be, or their respective subsidiaries, or enter into or
amend any employment, severance, or special pay arrangement with respect to the
termination of employment or other similar contract, agreement or arrangement
with any director or officer or other employee other than in the ordinary course
of business consistent with past practice; (f) the Company will not, nor will it
permit any of its subsidiaries to, make any material changes in its or their
accounting methods,
39
<PAGE>
except as required by law, rule, regulation or GAAP; (g) the Company will, and
will cause its subsidiaries to, maintain with financially responsible insurance
companies (or through self-insurance not inconsistent with such party's past
practice) insurance in such amounts and against such risks and losses as are
customary for companies engaged in the same industry and such other businesses
as conducted by such party and its subsidiaries; (h) the Company will use
commercially reasonable efforts to maintain in effect all existing material
permits pursuant to which the Company operates; (i) the Company shall not, nor
shall it permit any of its subsidiaries to, enter into any collective bargaining
or labor agreement; (j) the Company shall not, nor shall it permit any of its
subsidiaries to, pay, loan or advance certain amounts to its officers, directors
or shareholders, or to those of its subsidiaries or their affiliates; (k) the
Company will not, nor will it permit any of its subsidiaries to, dispose of or
permit to lapse any right to use any patent, trademark, assumed name, service
mark, trade name, copyright, license or application therefor or dispose of or
disclose to any person other than representatives of Purchaser and Sub any trade
secret, recipe, formula, process or know-how not theretofore a matter of public
knowledge that is currently used or in reasonable probability will be used in
the Company's business; (l) the Company will not, nor will it permit any of its
subsidiaries to, voluntarily incur any liabilities or obligations of any nature
whatsoever (whether absolute, accrued, contingent or otherwise and whether due
or to become due), except for (i) liabilities or obligations incurred in the
usual, regular and ordinary course of business and (ii) liabilities or
obligations incurred in connection with the construction and operation of the
Company's restaurant that is being constructed at the following location: 4201
South Padre Island Drive, Corpus Christi, Texas 78411 (the "New Restaurant");
(m) the Company will not, nor will it permit any of its subsidiaries to, pay,
discharge or satisfy any claim, encumbrance, liability or obligation (whether
absolute, accrued, contingent or otherwise and whether due or to become due),
other than the payment, discharge or satisfaction of liabilities and obligations
in the usual, regular and ordinary course of business; (n) the Company will not,
nor will it permit any of its subsidiaries to, permit the expiration of, any
Lease option or option to purchase any property; (o) the Company will not, nor
will it permit any of its subsidiaries to, omit to do any act, or permit any act
or omission to act, that may cause a breach of any contract, commitment or
obligation of the Company or of any subsidiary of the Company, or any breach of
any representation, warrant, covenant or agreement made by the Company in the
Merger Agreement; (p) the Company will not, nor will it permit any of its
subsidiaries to, pre-pay any party for amounts not yet due (except in the
ordinary course of the Company's business and consistent with past practice), or
pay any party in a non-timely manner; (q) the Company shall not merge or
consolidate with any other corporation or person or enter into any similar
transaction not in the ordinary course of its business.
No Solicitation
The Merger Agreement provides that the Company will not, and will not cause
its subsidiaries to, permit any of its Representatives (as that term is defined
in the Merger Agreement) to, and will use its best efforts to cause such persons
not to, directly or indirectly, initiate, solicit or encourage, or take any
action to facilitate the making of any inquiry, offer or proposal that
constitutes or in reasonable probability will lead to any Takeover Proposal with
respect to the Company. The Merger Agreement further provides that the Company
will notify Purchaser orally and in writing of any such inquiries, offers or
Takeovers Proposals (including, without limitation, the terms and conditions of
any such proposal and the identity of the person making it) within one business
day of the receipt thereof, and that the Company will immediately cease and
cause to be terminated all existing activities, discussions and negotiations on
the date of the Merger Agreement, if any, with any other persons conducted prior
to the date of the Merger Agreement with respect to any Takeover Proposal
regarding the Company. Notwithstanding anything stated above to the contrary,
the Merger Agreement provides that: (i) the Company may, prior to the vote of
the shareholders of the Company for approval of the Merger (and not thereafter
if the Merger is approved thereby) in response to an unsolicited request
therefor, furnish information, including non-public information, to any person
or "group" (within the meaning of Section 13(d)(3) of the Exchange Act) pursuant
to a confidentiality agreement on substantially the same terms as provided in
the Company Confidentiality Agreement (as that term is defined in the Merger
Agreement) to the extent and only to the extent that the Board determines that
the offer is a Superior Takeover Proposal; (ii) the Company may engage in
discussions and negotiations with any person or group that has made an
unsolicited Takeover Proposal, among other things, to determine whether such
proposal (as opposed to any further negotiated proposal) is a Superior Takeover
Proposal and the Company may take and disclose to its shareholders a position
contemplated by Rule 14e-2(a) following the Company's receipt of a Takeover
Proposal that is in the form of a tender offer under Section 14(e) of the
Exchange Act; (iii) the Company may withdraw, adversely modify or take a public
position materially inconsistent with its recommendation (which may include
making any statement required by Rule 14e-2 under the Exchange Act) if there
exists a Takeover Proposal and the Board determines that it is a Superior
Takeover Proposal; and (iv) the Company may make a "stop-look-and-listen"
communication with respect to a Takeover Proposal or the Merger Agreement of the
nature contemplated in, and otherwise in compliance with, Rule 14d-9 under the
Exchange Act as a result of receiving a Takeover Proposal.
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<PAGE>
Certain Post-Merger Matters
Once the Merger is consummated, Sub will cease to exist as a corporation,
and the Company, as the Surviving Corporation, will succeed to all of the
assets, rights and obligations of Sub.
Pursuant to the Merger Agreement, the Company's Articles of Incorporation
and the Sub's Bylaws, as in effect immediately prior to the Effective Time, will
be the Articles of Incorporation and Bylaws of the Surviving Corporation, until
duly amended.
Pursuant to the Merger Agreement, the individuals who are members of the
board of directors of Sub immediately prior to the Effective Time shall comprise
the full Board of Directors of the Surviving Corporation, until the earlier of
their death, resignation or removal or until their respective successors are
duly elected and qualified.
Pursuant to the Merger Agreement, the individuals who are officers of Sub
immediately prior to the Effective Time shall be the initial officers of the
Company, as the Surviving Corporation, until the earlier of their death,
resignation or removal or until their respective successors are duly elected and
qualified.
Termination or Amendment of the Merger Agreement
The Merger Agreement may be terminated at any time prior to the Effective
Time (i) by mutual written consent of the Company and Purchaser or (ii) by
either party by written notice to the other, so long as the Company or Purchaser
(as the case may be) is not then in material breach of its obligations, if (a)
the Effective Time has not occurred on or before 100 days after the date of the
Merger Agreement, subject to a possible extension, (b) any state or federal law,
order, rule or regulation is adopted or issued that shall prohibit consummation
of the Merger or if any court of competent jurisdiction in the United States or
any State shall have issued an order, judgment or decree permanently
restraining, enjoining or otherwise prohibiting the Merger, and such order,
judgment or decree shall have become final and nonappealable, (c) if the Company
accepts a Superior Takeover Proposal and has paid the requisite termination fee.
By the Company. The Company may terminate the Merger Agreement, so long as
it is not then in material breach of its obligations, by written notice to
Purchaser, upon a breach of any material representation, warranty, covenant or
agreement on the part of Purchaser set forth in the Merger Agreement, subject to
a limited cure period.
By Purchaser. Purchaser may terminate the Merger Agreement, by written
notice to the Company (i) so long as it is not then in material breach of its
obligations, upon a material breach of any representation, warranty, covenant or
agreement on the part of the Company set forth in the Merger Agreement, subject
to a limited cure period under certain circumstances, (ii) if the amount of the
Net Adverse Effects from breaches of the Company's representations and
warranties and statements identified by Purchaser or Sub prior to the Closing,
if any, exceeds $1,000,000, or (iii) the Board makes a Recommendation
Modification/Withdrawal or the Company enters into a definitive agreement for a
Superior Takeover Proposal or any other Takeover Proposal.
Termination In Connection with Certain Financing Events. Prior to the date
of the Merger Agreement, Purchaser received the AMRESCO Letter and the USRP
Letter. Concurrent with the date of the Merger Agreement, Purchaser deposited
the Escrow Fund into escrow with Texas Bank. Purchaser shall use its
commercially reasonable best efforts to cause AMRESCO to (on or prior to Day 30)
(a) remove from the AMRESCO Letter, as conditions to AMRESCO's funding
commitment thereunder, the conditions that AMRESCO (i) receive a satisfactory
valuation report from its appraisers regarding the collateral securing AMRESCO's
loan, (ii) receive all material required by it to complete its due diligence and
(iii) find such material to be in all things satisfactory and then (b) execute
and deliver to Purchaser and Sub the AMRESCO Letter as so modified (such events
being termed the "AMRESCO Day 30 Events"). Purchaser shall use its commercially
reasonable best efforts to cause USRP (on or prior to Day 30) to remove from the
USRP Letter, as conditions to USRP's funding, the conditions that USRP (i)
retain an inspection and review period, (ii) receive all material required by it
to complete its due diligence and (iii) find such material to be in all things
satisfactory; and then execute and deliver to Purchaser and Sub a funding
commitment on the terms outlined in the USRP Letter as so modified (such events
being termed the "USRP Day 30 Events"). Purchaser shall use its commercially
reasonably best efforts to cause (on or prior to day 60) each of AMRESCO and
USRP to deliver to Purchaser and Sub a firm funding commitment (containing the
financial terms of the AMRESCO Letter and the USRP Letter, respectively) that is
conditioned only on the delivery of closing documentation
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<PAGE>
and the accuracy, in all material respects, of the Company's representations and
warranties under the Merger Agreement (a "Firm Commitment").
In addition, the Merger Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time by the Company, (i) at any
time during the five business days immediately following Day 30, as long as the
Company is not then in material breach of its obligations under the Merger
Agreement and as long as the amount of the Net Adverse Effects from breaches of
the Company's representations and warranties and statements does not exceed
$1,000,000, if either the AMRESCO Day 30 Events or the USRP Day 30 Events have
not occurred on or prior to the date of such termination; and (ii) at any time
during the five business days immediately following Day 60, as long as the
Company is not then in material breach of its obligations under the Merger
Agreement and as long as the amount of the Net Adverse Effects from breaches of
the Company's representations and warranties and statements does not exceed
$1,000,000, if either AMRESCO or USRP has not delivered to Purchaser a Firm
Commitment on or prior to the date of such termination.
In the event of termination of the Merger Agreement by either the Company
or Purchaser, the Merger Agreement shall forthwith become void and there shall
be no liability or obligation on the part of Purchaser, Sub or the Company or
their respective affiliates, officers, directors or shareholders except (i) with
respect to certain provisions of the Escrow Agreement, and (ii) that no such
termination will relieve any party from liability for any willful breach
thereof. Purchaser will continue to be bound under all of the terms and
conditions contained in the Confidentiality Agreement.
Subject to applicable law, the Merger Agreement may be amended, modified or
supplemented only by written agreement of Purchaser, Sub and the Company at any
time prior to the Effective Date with respect to any of the terms contained
therein.
Expenses and Termination Fee
Payment of Expenses and Damages Payable Upon Termination. If the Merger
Agreement is terminated upon a party's breach, then the breaching party shall
promptly pay to the other party, as liquidated damages, an amount in cash equal
to the out-of-pocket expenses and fees incurred by the other party after the
date of the Merger Agreement arising out of, or in connection with or related
to, the Merger or the transactions contemplated by the Merger Agreement not in
excess of $500,000 (the "Out-of-Pocket Expenses"); provided, however, that if
the Merger Agreement is terminated by a party as a result of a willful breach of
a representation, warranty, covenant or agreement by the other party, the
non-breaching party may pursue any remedies available to it at law or in equity
and shall, in addition to the amount of Out-of-Pocket Expenses set forth above,
be entitled to recover such additional amounts as such non-breaching party may
be entitled to receive at law or in equity; provided, further, that the payment
by Purchaser of any Out-of-Pocket Expenses and any amounts required under the
Escrow Agreement shall constitute the Company's sole and exclusive remedy
against Purchaser or Sub for any failure by the parties (or any party) to
consummate the Merger.
Termination Fee. In the event that (a) the Merger Agreement is terminated
by the Company upon acceptance of a Superior Takeover Proposal, (b) the Merger
Agreement is terminated by Purchaser upon a Recommendation
Modification/Withdrawal, or (c) the Company accepts any Takeover Proposal (or
Superior Takeover Proposal) within two years after the Merger Agreement is
terminated by Purchaser pursuant to the Company's breach, then, in each such
case, the Company shall pay Purchaser a fee equal to the sum of (i) $1,500,000
and (ii) Purchaser's Out-of-Pocket Expenses, which aggregate amount shall be
payable by wire transfer of same day funds within five business days after the
date of such termination (or in the case of (c) above, the amount of $1,500,000
shall be paid within five days after the Company accepts any Takeover Proposal
or Superior Takeover Proposal, the Out-of-Pocket Expenses having already been
paid).
Indemnification
The Company will, and from and after the Effective Time, the Surviving
Corporation will, indemnify, defend and hold harmless each person who is at the
time of the execution of the Merger Agreement, or has been at any time prior to
the date of execution of the Merger Agreement, an Indemnified Party to the same
extent and in the same manner as is provided in the respective certificates or
articles of incorporation or bylaws of the Company and such subsidiaries in
effect on June 28, 1998 with respect to any Indemnified Liabilities. Any
Indemnified Party wishing to claim indemnification, upon learning of a claim,
action, suit, proceeding or investigation, shall notify the Company (or after
the Effective Time, the Surviving Corporation). The Company, Purchaser and Sub
have agreed that the foregoing rights to indemnification existing in favor of
the Indemnified Parties with respect to matters occurring through the Effective
Time shall survive the Merger and shall continue in full force and effect until
the disposition of such Indemnified Liabilities. The Merger Agreement provides
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<PAGE>
identical protection to that which is currently afforded by the Company's
Articles of Incorporation and Bylaws on the date of the Merger Agreement.
For a period of six years after the Effective Time, the Surviving
Corporation shall cause to be maintained in effect the current policies of
directors' and officers' liability insurance maintained by the Company and its
subsidiaries (provided that the Surviving Corporation may substitute therefor
policies of at least the same coverage and amounts containing terms and
conditions that are no less advantageous in any material respect to the
Indemnified Parties) with respect to matters arising before and omissions
occurring or existing at or prior to the Effective Time including the
transactions contemplated by the Merger Agreement.
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<PAGE>
PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of Common Stock as of the Record Date by (i) each director of the
Company; (ii) each executive officer; (iii) all present executive officers and
directors of the Company as a group; and (iv) each other person known to the
Company to own beneficially more than five percent (5%) of the Common Stock.
<TABLE>
<CAPTION>
Beneficial Ownership (1)
-----------------------------------------------
Name of Beneficial Owner Number of Shares Percentage
------------------------ ---------------- ----------
<S> <C> <C> <C>
Private Capital Management, Inc. (2) 634,200 (3) 11.1%
Bruce S. Sherman 634,200 (3) 11.1%
Wachovia Corporation (4) 352,300 6.2%
Dimensional Fund Advisors Inc. (5) 443,552 (6) 7.8%
Fleet Financial Group, Inc. (7) 355,100 6.2%
First Manhattan Co. (8) 309,735 (9) 5.4%
Franklin Resources, Inc. (10) 550,000 9.7%
Robert R. Hawk 8,300 *
Robert E. Bodnar 18,269 (11) *
K. Dieter Esch 49,896 (12) *
Garry J. Gay 26,147 (13) *
C. Cleave Buchanan, Jr. 7,036 (14) *
Frank Cuellar, Jr. 16,005 (15) *
John T. Ellis 175,581 (16)(17) 3.1%
Peter L. Hnatiw 13,037 (18) *
James F. Moore 7,036 (19) *
Cynthia I. Pharr 12,067 (20) *
William B. Rea, Jr. 29,761 (21) *
All executive officers and directors
as a group (15 persons) 417,432 (16)(22) 7.1
</TABLE>
*Less than 1%
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<PAGE>
(1) Unless otherwise indicated, each person or group has sole voting and
investment power with respect to all such shares.
(2) Private Capital Management, Inc. forms part of a group that consists of
Private Capital Management, Inc. and The Entrepreneurial Value Fund L.P.
The business address of both Private Capital Management, Inc. and The
Entrepreneurial Value Fund, L.P. is 3003 Tamiami Trail North, Suite 360,
Naples, Florida 34102.
(3) Includes 634,200 shares of which Private Capital Management, Inc. shares
investment power with Mr. Bruce S. Sherman.
(4) The business address of Wachovia Corporation is 301 North Main Street,
Winston-Salem, North Carolina 27150-3099.
(5) The business address of Dimensional Fund Advisors Inc. ("Dimensional") is
1299 Ocean Avenue, 11th Floor, Santa Monica, California 90401.
Dimensional, a registered investment advisor, is deemed to have beneficial
ownership of 443,552 shares of the Company's Common Stock as of September
30, 1998, all of which shares are held in portfolios of DFA Investment
Dimensions Group Inc., a registered open-end investment company, or in
series of The DFA Investment Trust Company, a Delaware business trust, or
the DFA Group Trust and the DFA Participating Group Trust, investment
vehicles for qualified employee benefit plans, all of which Dimensional
Fund Advisors Inc. serves as investment manager. Dimensional disclaims
beneficial ownership of all such shares.
(6) Persons who are officers of Dimensional also serve as officers of DFA
Investment Dimensions Group Inc. (the "Fund"), and The DFA Investment
Trust Company (the "Trust"), each an open-end management investment
company registered under the Investment Company Act of 1940. In their
capacity as officers of the Fund and the Trust, these persons vote 52,400
shares which are owned by the Fund and 101,100 shares which are owned by
the Trust.
(7) The business address of Fleet Financial Group, Inc. ("Fleet") is One
Federal Street, Boston, Massachusetts 02211.
(8) The business address of First Manhattan Co. is 437 Madison Avenue, New
York, New York 10022.
(9) Includes 4,000 shares owned by family members of General Partners of First
Manhattan Co.
(10) Franklin Resources, Inc. forms a group consisting of Franklin Resources,
Inc. and Franklin Advisory Services, Inc. The business address of Franklin
Resources, Inc. is 777 Mariners Island Boulevard, San Mateo, California
94404 and the address of Franklin Advisory Services, Inc. is One Parker
Plaza, 16th Floor, Fort Lee, New Jersey 07024.
(11) Includes 15,834 shares issuable pursuant to the exercise of stock options
exercisable within 60 days of the Record Date.
(12) Includes 47,025 shares issuable pursuant to the exercise of stock options
exercisable within 60 days of the Record Date.
(13) Includes 25,200 shares issuable pursuant to the exercise of stock options
exercisable within 60 days of the Record Date.
(14) Includes 7,036 shares issuable pursuant to the exercise of stock options
exercisable within 60 days of the Record Date.
(15) Includes 14,537 shares issuable pursuant to the exercise of stock options
exercisable within 60 days of the Record Date.
(16) Includes 81,758 and 82,984 shares held by the John T. Ellis Trust of 1989
and the Nancy M. Ellis Trust of 1989, respectively, of which Mr. John T.
Ellis is trustee.
(17) Includes 10,839 shares issuable pursuant to the exercise of stock options
exercisable within 60 days of the Record Date.
(18) Includes 11,037 shares issuable pursuant to the exercise of stock options
exercisable within 60 days of the Record Date.
(19) Includes 7,036 shares issuable pursuant to the exercise of stock options
exercisable within 60 days of the Record Date.
(20) Includes 12,037 shares issuable pursuant to the exercise of stock options
exercisable within 60 days of the Record Date.
(21) Includes 9,761 shares issuable pursuant to the exercise of stock options
exercisable within 60 days of the Record Date.
(22) Includes an aggregate of 209,033 shares issuable pursuant to the exercise
of stock options exercisable within 60 days of the Record Date.
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<PAGE>
INDEPENDENT ACCOUNTANTS
The Company's independent public accountants since February 3, 1998, have
been the firm of KPMG Peat Marwick LLP. It is expected that one or more
representatives of such firm will attend the Special Meeting and will be
available to respond to any questions. Such representatives will be given an
opportunity to make statements at the Annual Meeting, if they so desire, and are
expected to be available to respond to appropriate questions.
Effective February 3, 1998, Arthur Andersen LLP resigned as auditors of the
Company. In connection with the audits for the fiscal years ended June 29, 1997,
and June 30, 1996, and during the period from June 30, 1997 through February 3,
1998, there were no disagreements with Arthur Andersen LLP on matters of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure which would require disclosure under the regulations. Arthur
Andersen LLP's reports on the financial statements of the Company for the years
ended June 29, 1997, and June 30, 1996, did not contain any adverse opinion or
disclaimer of opinion nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles.
On February 3, 1998, the Company notified KPMG Peat Marwick LLP of its
intention to retain such firm as independent public accountants for the audit of
its financial statements for the year ending June 28, 1998. Prior to its
engagement, the Company did not consult with KPMG Peat Marwick LLP on either the
application of accounting principles to a completed or proposed specific
transaction, or the type of audit opinion that might be rendered on the
Company's financial statements. The change in the independent accountants was
approved by the Audit Committee of the Board of Directors.
SHAREHOLDER PROPOSALS
If the Merger is not consummated, any proposals of shareholders of the
Company intended to be presented at the Annual Meeting of Shareholders of the
Company to be held in 1999 must have been received by the Company, addressed to
the Secretary of the Company at 402 West I-30, Garland, Texas 75043, by no later
than June 29, 1999, to be considered for inclusion in the proxy statement and
form of proxy relating to that meeting.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports and other information with the
Commission. Reports, proxy statements and other information filed by the Company
can be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices at Seven World Trade Center, 13th Floor, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661- 2511. Copies of such material can be obtained by mail
from the Public Reference Section of the Commission at 450 West Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Commission also maintains
a Web Site (http://www.sec.gov) at which reports, proxy statements and
information statements and other information regarding the Company may be
accessed. In addition, such reports, proxy statements, information statements
and other information can also be inspected at the office of New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005. After the Merger,
registration of the Company Common Stock under the Exchange Act will be
terminated. Copies of the documents referred to herein may also be obtained from
the Company, without charge, upon request to the Company, Robert E. Bodnar,
Secretary, 402 West I-30, Garland, Texas 75043.
46
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Company (File No.
001-10291) pursuant to the Exchange Act are incorporated by reference in this
Proxy Statement:
1. The Company's Annual Report on Form 10-K for the year ended June 28,
1998;
2. The Company's Definitive Proxy Statement on Schedule 14A dated
September 23, 1998; and
3. The Company's Current Report on Form 8-K dated
September 24, 1998;
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that the statement contained herein modifies
or supersedes such previous statement. Any statement so modified or superseded
shall not be deemed to constitute a part hereof except as so modified or
superseded. All information appearing in this Proxy Statement is qualified in
its entirety by the information contained in the financial statements (including
the notes thereto).
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN CERTAIN
EXHIBITS THERETO) ARE AVAILABLE WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST BY
ANY PERSON TO WHOM THIS PROXY STATEMENT HAS BEEN DELIVERED, FROM SPAGHETTI
WAREHOUSE, INC., 402 WEST I-30, GARLAND, TEXAS 75043, ATTENTION: CORPORATE
SECRETARY (TELEPHONE (972) 226-6000). IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE BY NOVEMBER 30, 1998.
BY ORDER OF THE BOARD OF DIRECTORS
Robert E. Bodnar
Garland, Texas
November 17, 1997
PLEASE COMPLETE AND RETURN YOUR PROXY CARD PROMPTLY IN THE
ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED
STATES.
47
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Reports of Independent Auditors ......................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 29, 1997 and June 28, 1998 .... F-4
Consolidated Statements of Operations for each of the years in the
three-year period ended June 28, 1998 .............................. F-5
Consolidated Statements of Stockholders' Equity for each of the
years in the three-year period ended June 28, 1998 ................. F-6
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended June 28, 1998 .............................. F-7
Notes to Consolidated Financial Statements ........................... F-8
All schedules are omitted as the required information is inapplicable or the
information is presented in the financial statements or related notes.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors of
Spaghetti Warehouse, Inc.:
We have audited the accompanying consolidated balance sheet of Spaghetti
Warehouse, Inc. (a Texas Corporation) and subsidiaries as of June 28, 1998, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the fiscal year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Spaghetti
Warehouse, Inc. and subsidiaries as of June 28, 1998, and the results of their
operations and their cash flows for the fiscal year then ended in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
August 7, 1998, except as for
Note 10, which is as of September 18, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors of
Spaghetti Warehouse, Inc.:
We have audited the accompanying consolidated balance sheet of Spaghetti
Warehouse, Inc. (a Texas Corporation) and subsidiaries as of June 29, 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the fiscal years in the two-year period ended June 29, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Spaghetti
Warehouse, Inc. and subsidiaries as of June 29, 1997 and the consolidated
results of operations and cash flows for each of the fiscal years in the
two-year period ended June 29, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
August 14, 1997
F-3
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 29, 1997 and June 28, 1998
<TABLE>
<CAPTION>
ASSETS 1997 1998
------ ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................................... $ 1,916,983 $ 942,622
Accounts receivable ................................................ 637,803 569,349
Inventories ........................................................ 616,253 642,379
Prepaid expenses ................................................... 274,111 333,779
Deferred income taxes (Note 4) ..................................... 469,145 273,934
------------ ------------
Total current assets ............................................. 3,914,295 2,762,063
------------ ------------
Property and equipment, net (Note 2) .................................. 45,732,390 47,923,834
Assets scheduled for divestiture (Note 8) ............................. 1,534,714 --
Trademark and franchise rights, net (Note 1) .......................... 2,942,852 2,641,235
Pre-opening costs, net ................................................ -- 109,977
Deferred income taxes (Note 4) ........................................ 3,961,274 3,553,571
Other assets .......................................................... 544,342 747,936
------------ ------------
$ 58,629,867 $ 57,738,616
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt (Note 3) ......................... $ 1,478,127 $ 1,359,837
Accounts payable ................................................... 2,082,150 2,451,987
Accrued payroll and bonuses ........................................ 1,673,336 1,683,173
Other accrued liabilities (Note 1) ................................. 915,226 813,428
------------ ------------
Total current liabilities ........................................ 6,148,839 6,308,425
------------ ------------
Long-term debt, less current portion (Note 3) ......................... 6,405,226 4,079,507
Deferred compensation ................................................. 141,901 155,641
Commitments and contingencies (Note 6) ................................ -- --
Stockholders' equity (Note 5):
Preferred stock of $1.00 par value; authorized 1,000,000 shares;
no shares issued ................................................. -- --
Common stock of $.01 par value; authorized 20,000,000 shares; issued
6,527,835 shares in 1997 and 6,717,759 shares in 1998 ............ 65,278 67,178
Additional paid-in capital ......................................... 36,246,849 37,508,055
Cumulative translation adjustment .................................. (611,499) (829,325)
Retained earnings .................................................. 16,753,859 17,946,524
------------ ------------
52,454,487 54,692,432
Less cost of 872,341 shares in 1997 and 1,057,341 shares in 1998 of
common stock held in treasury .................................... (6,520,586) (7,497,389)
------------ ------------
45,933,901 47,195,043
------------ ------------
$ 58,629,867 $ 57,738,616
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30, 1996, June 29, 1997 and June 28, 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Restaurant sales .................................... $ 69,662,500 $ 63,372,287 $ 64,599,577
Franchise ........................................... 705,876 932,355 670,501
Other ............................................... 588,243 598,931 756,796
------------ ------------ ------------
Total revenues ...................... 70,956,619 64,903,573 66,026,874
------------ ------------ ------------
Costs and expenses:
Cost of sales ....................................... 17,964,938 16,515,660 17,054,112
Operating expenses .................................. 41,121,545 36,221,808 36,418,811
General and administrative .......................... 5,766,812 5,278,589 6,480,367
Depreciation and amortization ....................... 4,871,376 3,954,334 3,821,440
Restructuring charges (reversals) (Note 8) .......... 13,875,248 (740,000) --
Impairment of long-lived assets (Note 1) ............ -- 2,009,526 --
Gain on asset scheduled for divestiture (Note 2) .... (47,178) -- --
------------ ------------ ------------
Total costs and expenses ........................ 83,552,741 63,239,917 63,774,730
------------ ------------ ------------
Income (loss) from operations ................... (12,596,122) 1,663,656 2,252,144
------------ ------------ ------------
Interest income (expense):
Interest income ..................................... 192,080 189,357 145,962
Interest expense .................................... (1,236,740) (879,925) (489,208)
------------ ------------ ------------
(1,044,660) (690,568) (343,246)
------------ ------------ ------------
Income (loss) before income tax expense (benefit) (13,640,782) 973,088 1,908,898
Income tax expense (benefit) (Note 4) .................. (5,307,324) 314,153 716,233
------------ ------------ ------------
Net income (loss) ................... $ (8,333,458) $ 658,935 $ 1,192,665
============ ============ ============
Net income (loss) per common share (Note 1):
Basic ............................................. $ (1.48) $ .12 $ .21
============ ============ ============
Diluted ........................................... $ (1.48) $ .11 $ .20
============ ============ ============
Weighted average common shares outstanding:
Basic ............................................. 5,612,193 5,657,782 5,604,334
============ ============ ============
Diluted ........................................... 5,612,193 5,769,261 5,827,962
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common stock Treasury stock
-------------------- Additional Cumulative ------------------------- Total
Number of paid-in translation Retained Number stockholders'
shares Amount capital adjustment earnings of shares Amount equity
---------- -------- ------------ ---------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at July 2, 1995 ... 6,409,666 $ 64,097 $ 35,747,731 $ (575,874) $ 24,428,382 (812,457) $ (6,228,563) $ 53,435,773
Employee ESP plan purchases
and stock option
exercises ............... 65,709 657 244,030 -- -- -- -- 244,687
Stock options issued as
compensation (Note 5) ... -- -- 21,000 -- -- -- -- 21,000
Purchase of treasury
shares, at cost ............ -- -- -- -- -- (29,795) (142,776) (142,776)
Foreign currency translation
adjustment .............. -- -- -- 25,232 -- -- -- 25,232
Net loss ................... -- -- -- -- (8,333,458) -- -- (8,333,458)
---------- -------- ------------ ---------- ------------ ---------- ------------ ------------
Balances at June 30, 1996 .. 6,475,375 64,754 36,012,761 (550,642) 16,094,924 (842,252) (6,371,339) 45,250,458
Employee ESP plan purchases
and stock option
exercises ............... 52,460 524 216,088 -- -- -- -- 216,612
Stock options issued as
compensation (Note 5) ... -- -- 18,000 -- -- -- -- 18,000
Purchase of treasury
shares, at cost ............ -- -- -- -- -- (30,089) (149,247) (149,247)
Foreign currency translation
adjustment .............. -- -- -- (60,857) -- -- -- (60,857)
Net income ................. -- -- -- -- 658,935 -- -- 658,935
---------- -------- ------------ ---------- ------------ ---------- ------------ ------------
Balances at June 29, 1997 .. 6,527,835 65,278 36,246,849 (611,499) 16,753,859 (872,341) (6,520,586) 45,933,901
Employee ESP plan purchases
and stock option
exercises ............... 189,924 1,900 1,243,206 -- -- -- -- 1,245,106
Stock options issued as
compensation (Note 5) ... -- -- 18,000 -- -- -- -- 18,000
Purchase of treasury
shares, at cost ......... -- -- -- -- -- (185,000) (976,803) (976,803)
Foreign currency translation
adjustment .............. -- -- -- (217,826) -- -- -- (217,826)
Net income ................. -- -- -- -- 1,192,665 -- -- 1,192,665
---------- -------- ------------ ---------- ------------ ---------- ------------ ------------
Balances at June 28, 1998 .. 6,717,759 $ 67,178 $ 37,508,055 $ (829,325) $ 17,946,524 (1,057,341) $ (7,497,389) $ 47,195,043
========== ======== ============ ========== ============ ========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1996, June 29, 1997 and June 28, 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................. $ (8,333,458) $ 658,935 $ 1,192,665
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization expense ................... 4,871,376 3,954,334 3,821,440
(Gain) loss on disposal of property and equipment ....... 144,972 36,150 (59,878)
Restructuring charges (reversals) ....................... 13,875,248 (740,000) --
Impairment of long-lived assets ......................... -- 2,009,526 --
Stock compensation expense .............................. -- -- 975,063
Deferred income taxes ................................... (5,336,983) 1,599,585 607,035
Other, net .............................................. 151,718 89,719 33,920
Changes in assets and liabilities:
Accounts receivable .............................. (55,619) 20,213 63,165
Inventories ...................................... 2,400 70,742 (26,126)
Prepaid expenses ................................. 36,215 67,600 (59,668)
Other assets ..................................... (766,550) (55,183) (440,151)
Accounts payable ................................. (807,087) 157,845 373,832
Accrued payroll and bonuses ...................... (437,702) 222,524 9,837
Other accrued liabilities ........................ (319,400) (572,262) (101,799)
Accrued restructuring charges .................... (759,901) (138,512) --
------------ ------------ ------------
Net cash provided by operating activities ............... 2,265,229 7,381,216 6,389,335
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment .............................. (4,045,220) (2,552,683) (5,842,463)
Proceeds from sales of property and equipment ................... 3,654,513 854,734 1,647,783
Collection of notes receivable .................................. 6,092 -- --
------------ ------------ ------------
Net cash used in investing activities ..................... (384,615) (1,697,949) (4,194,680)
------------ ------------ ------------
Cash flows from financing activities:
Net borrowings from (payments on) long-term debt ................ 4,214,000 (11,878,647) (2,444,009)
Purchase of treasury shares ..................................... (142,776) (149,247) (976,803)
Proceeds from employee stock plans .............................. 244,687 216,612 270,043
------------ ------------ ------------
Net cash provided by (used in) financing activities ....... 4,315,911 (11,811,282) (3,150,769)
------------ ------------ ------------
Effects of exchange rates on cash and cash equivalents ............. (4,080) (20,366) (18,247)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ............... 6,192,445 (6,148,381) (974,361)
Cash and cash equivalents at beginning of year ..................... 1,872,919 8,065,364 1,916,983
------------ ------------ ------------
Cash and cash equivalents at end of year ........................... $ 8,065,364 $ 1,916,983 $ 942,622
============ ============ ============
Supplemental information:
Interest paid (net of amounts capitalized) ...................... $ 1,111,677 $ 1,145,638 $ 514,324
============ ============ ============
Income taxes paid (net of refunds) .............................. $ 15,238 $ (1,291,952) $ 113,319
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Spaghetti
Warehouse, Inc. and its wholly-owned subsidiaries (collectively, the "Company").
All significant intercompany balances and transactions have been eliminated in
consolidation.
The preparation of the 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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from these estimates.
(b) Fiscal Year
The Company's fiscal year ends on the Sunday nearest July 1.
(c) Foreign Currency Translation
The accounts of the Company's operations in Canada are translated into
United States dollars in accordance with Statement of Financial Accounting
Standards Statement No. 52. Assets and liabilities are translated at the rate of
exchange on the balance sheet date. Income and expense items are translated at
average monthly rates of exchange. Adjustments resulting from the translation
are reported as a separate component of stockholders' equity.
(d) Reclassifications
Certain prior years' balances have been reclassified to conform with the
current year presentation. These reclassifications had no effect on previously
reported net income (loss) or stockholders' equity.
(e) Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents. The Company held cash equivalents
of $696,899 and $857,888 at June 29, 1997 and June 28, 1998, respectively.
(f) Accounts Receivable
Accounts receivable primarily consist of credit card receivables and
franchise royalty fees.
(g) Inventories
Inventories, which primarily consist of food and beverages, are stated at
the lower of cost (first-in, first-out method) or market.
(h) Pre-opening Costs
The costs of hiring and training personnel, supplies and certain general
and administrative costs relating to new restaurants are capitalized and
amortized over the restaurant's first 12 months of operations. Amortization of
F-8
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
pre-opening costs was approximately $180,000, $170,000 and $75,000 for fiscal
years 1996, 1997 and 1998, respectively.
(i) Property and Equipment
Property and equipment are recorded at cost, including interest
capitalized during the construction period. Total interest of $0, $0 and $26,699
was capitalized in fiscal years 1996, 1997 and 1998, respectively.
Buildings, equipment, furniture and fixtures are depreciated using the
straight-line method over the estimated useful lives of the related assets,
which range from 3 to 40 years. Amortization of leasehold improvements is
provided by the straight-line method over the lesser of the term of the lease,
including renewal options, or the estimated useful lives of the assets, which
range from 18 to 25 years. Depreciation and amortization expense of property and
equipment was approximately $4,500,000, $3,780,000 and $3,600,000, for fiscal
years 1996, 1997, and 1998 respectively.
In March 1995, the Financial Accounting Standard Board issued Statement No.
121 ("SFAS No. 121") on accounting for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to assets to be held and
used. SFAS No. 121 also established accounting standards for long-lived assets
and certain identifiable intangibles to be disposed of. The Company adopted SFAS
No. 121 in the first quarter of fiscal 1997.
Adoption of SFAS No. 121 requires the Company to review its long-lived
assets and certain identifiable intangibles to be held and used for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset or group of assets may not be recoverable. The Company groups and
evaluates its assets for impairment at the individual restaurant level. The
Company considers each restaurant's historical operating losses as a primary
indicator of potential impairment. The Company deems a restaurant's assets to be
impaired if a forecast of undiscounted future cash flows directly related to the
assets, including disposal value, if any, is less than its carrying amount. If a
restaurant's assets are deemed to be impaired, the loss is measured as the
amount by which the carrying amount of the assets exceeds their estimated fair
market value.
The Company recorded a pre-tax, noncash charge of $1,759,526 during the
first quarter of fiscal 1997 as a result of adopting SFAS No. 121. This charge
related to the write-down of the Company's Cappellini's restaurant in Addison,
Texas, to its estimated fair market value at that time. Due to unfavorable
operating results, the Company subsequently made the decision to cease
Cappellini's operations, and closed the restaurant on December 31, 1996. The
Company recorded an additional $250,000 pre-tax charge in the fourth quarter of
fiscal 1997 to write-down the former Cappellini's property to its estimated fair
market value based on current real estate market conditions.
(j) Trademark and Franchise Rights
The costs of the Canadian operation's trademark (approximately
$2,200,000) and franchise rights (approximately $1,700,000) are being amortized
using the straight-line method over 40 years and 20 years, respectively.
Amortization of trademark and franchise rights was approximately $130,000 per
year in fiscal years 1996, 1997 and 1998. Accumulated amortization was $624,586
and $703,374 as of June 29, 1997, and June 28, 1998, respectively.
The Company assesses the recoverability of these intangible assets by
determining whether the amortization of the asset balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of impairment, if any, is measured based on
projected discounted future
F-9
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
operating cash flows. The Company believes that no impairment or adjustment of
estimated useful lives is warranted as of June 28, 1998.
(k) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating losses and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(l) Other Accrued Liabilities
Other accrued liabilities consist of the following:
1997 1998
------------- -------------
Property taxes.......................... $ 458,304 $ 449,675
Insurance reserves...................... 197,582 103,169
Interest................................ 145,459 103,208
Other................................... 113,881 157,376
------------- -------------
$ 915,226 $ 813,428
============= =============
(m) Net Income (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 earnings 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 second quarter of fiscal 1998. All prior year
weighted average and per share information has been restated in accordance with
SFAS No. 128.
The number of weighted average common shares outstanding used in the
computation of diluted net income (loss) per share includes the effect of
dilutive options using the treasury stock method. For fiscal years 1996, 1997
and 1998, there are 148,015, 233,065 and 54,380 options, respectively, to
purchase common stock that were not included in the computation of diluted net
income (loss) per share because to do so would have been antidilutive for the
fiscal years presented.
(n) Financial Instruments
The Company's financial instruments at June 29, 1997 and June 28, 1998,
consist of cash equivalents, accounts receivable, accounts payable and long-term
debt. The fair value of these financial instruments approximates the carrying
amounts reported in the consolidated balance sheets. The following methods were
used in estimating the fair value of each class of financial instrument: cash
equivalents, accounts receivable and accounts payable approximate their carrying
amounts due to the short duration of those items and long-term debt is based on
quoted market prices.
F-10
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(2) Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Land............................................. $ 8,571,206 $ 9,089,052
Buildings........................................ 27,654,242 30,671,057
Equipment, furniture and fixtures................ 24,556,542 26,244,315
Leasehold improvements........................... 11,120,348 11,402,457
------------- -------------
71,902,338 77,406,881
Less accumulated depreciation and amortization... (26,169,948) (29,483,047)
------------- -------------
$ 45,732,390 $ 47,923,834
============= =============
</TABLE>
In fiscal 1992, the Company purchased the existing Austin, Texas,
location and ceased development of an alternate Austin location. The Company
sold the alternate location in fiscal 1996 for an amount exceeding its recorded
book value, thus recognizing a $47,178 gain at the time of sale.
(3) Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Term note payable to banks, bearing interest at 6.8% at June 28, 1998,
unsecured, interest payable quarterly and $453,279 in principal
payable quarterly through July 1, 2001, at which date the
remaining principal balance is due.................................. $ 7,883,353 $ 5,439,344
------------ ------------
Less current portion.................................................. 1,478,127 1,359,837
------------ ------------
Long-term debt, excluding current portion....................... $ 6,405,226 $ 4,079,507
============ ============
</TABLE>
The Company has an unsecured revolving credit and term loan agreement
with two banks, enabling the Company to borrow up to $5,000,000 in revolving
credit loans. No amounts were outstanding under the revolving credit agreement
at the fiscal years ended 1997 and 1998. The Company also has $5,439,344 in term
loans borrowed under this credit agreement as of June 28, 1998. Revolving credit
loans bear interest at the Company's option of (a) the prime rate, (b) the
certificate of deposit rate plus the Federal Deposit Insurance Corporation
assessment rate plus 2.0% to 3.0% or (c) the LIBOR rate plus 2.0% to 3.0%. The
term loan bears interest at rates ranging between 6.8% and 8.5%, based on the
Company's performance. The Company incurs a commitment fee of 3/8 of 1% on the
unused portion of the revolving credit facility, payable on a quarterly basis.
The terms of the credit agreement require the Company to maintain certain
minimum financial ratios. Additionally, in the event that the Company has a
material default, as defined in the credit agreement, spanning two consecutive
quarters, the lenders may request that the Company grant to them a lien on a
sufficient number of properties in order to secure their interest in the loans.
As of June 28, 1998, the Company was in compliance with all requirements under
the credit agreement.
The aggregate maturities of long-term debt at June 28, 1998, are as
follows:
1999........................................ $1,359,837
2000........................................ 1,813,116
2001........................................ 1,813,112
2002........................................ 453,279
----------
Total................................ $5,439,344
==========
F-11
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Income Taxes
The Company's income (loss) before income tax expense (benefit)
attributable to its operations is summarized as follows for fiscal years 1996,
1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------ ------------
<S> <C> <C> <C>
Domestic operations.......................... $(13,950,506) $ 637,467 $ 1,572,550
Foreign operations........................... 309,724 335,621 336,348
------------- ------------ ------------
$(13,640,782) $ 973,088 $ 1,908,898
============= ============= =============
</TABLE>
The provision (benefit) for income taxes is summarized as follows for
fiscal years 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal................................... $ (3,487) $(1,391,676) $ -
State and local........................... (32,366) 53,160 65,161
Foreign................................... 29,721 46,564 56,001
Deferred..................................... (5,301,192) 1,606,105 595,071
------------ ------------ ------------
$ (5,307,324) $ 314,153 $ 716,233
============ ============ ============
</TABLE>
The actual income tax expense (benefit) differs from the expected income
tax expense (benefit) computed by applying the U.S. federal corporate tax rate
to income (loss) before income tax expense (benefit) as follows for fiscal years
1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)..... $ (4,637,866) $ 330,850 $ 649,025
State and local taxes, net of federal effect.. (545,631) 35,086 43,006
Rehabilitation credits lost due to sale
of properties.............................. - - 155,364
Other......................................... (123,827) (51,783) (131,162)
------------ ------------ ------------
$ (5,307,324) $ 314,153 $ 716,233
============ ============ ============
</TABLE>
F-12
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of June 29,
1997 and June 28, 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
General business credit carryforwards.................. $ 3,585,218 $ 3,444,882
Alternative minimum tax credit carryforwards........... 912,335 912,335
Federal and state net operating loss carryforwards..... 1,627,209 1,006,121
Restructuring related reserves......................... 404,091 -
Other.................................................. 609,994 563,673
------------ ------------
Deferred tax assets................................ 7,138,847 5,927,011
------------ ------------
Deferred tax liabilities:
Property and equipment................................. (2,668,221) (2,001,928)
Pre-opening costs...................................... - (41,791)
Other.................................................. (40,207) (55,786)
------------ ------------
Deferred tax liabilities........................... (2,708,428) (2,099,505)
------------ ------------
Net deferred tax asset............................. $ 4,430,419 $ 3,827,506
============ ============
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projections for future taxable
income over the periods which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the benefits of the
deductible differences.
The Company's general business credit carryforwards for income tax
purposes will begin to expire in 2006. These carryforwards are comprised of
targeted jobs tax credits, rehabilitation credits and FICA tax tip credits that
were generated in prior years, beginning in fiscal 1991.
The Company has a Federal tax net operating loss of approximately
$2,000,000 as of June 28, 1998, which will begin to expire in 2011.
(5) Common Stock and Options
(a) Stock Compensation Plans
At June 28, 1998, the Company had four stock based compensation plans
that are described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its Employee Stock Purchase plan ("ESP"). Additionally,
except for stock options granted to directors at exercise prices below market
value on the date of grant and for cashless exercises of stock options by
employees, no compensation cost has been recognized for the Company's fixed
stock option plans. Had compensation cost for the Company's four stock based
compensation plans been determined
F-13
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
using the alternative accounting method based on the fair value prescribed by
Financial Accounting Standards Board Statement No. 123 ("SFAS No. 123"), the
Company's pro-forma net income (loss) for fiscal years 1996, 1997 and 1998 would
have been $(9,213,906), $114,553 and $889,740, respectively, and the Company's
pro-forma net income (loss) per common share would have been $(1.64), $0.02 and
$0.16, respectively.
The fair value of each option grant under SFAS No. 123 is estimated on
the date of grant or repricing using the Black-Scholes option pricing model with
the following weighted-average assumptions for options granted or repriced in
fiscal years 1996, 1997 and 1998, respectively: amortization over the respective
vesting periods; no dividends; expected lives of 6.1, 6.6 and 6.4 years;
expected stock price volatility of approximately 41%, 40% and 39%; and risk free
interest rates of 5.6%, 6.6% and 5.7%. The above pro-forma results exclude
consideration of options granted prior to July 3, 1995, and may not be
representative of that to be expected in future years.
(b) Fixed Stock Option Plans
The Company has three fixed option plans. Under the 1990 Incentive Stock
Option Plan, the Company may grant options to its employees for up to 1,227,344
shares of common stock. This plan provides that options may be granted at option
prices not less than the fair market value of its shares on the date of grant,
or 110% of fair market value in the case of any employee holding in excess of
10% of the combined voting power of all classes of stock at the date of grant.
Options granted under this plan have a maximum term of 10 years. The options
currently outstanding are exercisable in installments of 33% to 100% per year.
In fiscal 1996, the Company repriced 461,425 options with a weighted average
exercise price of $7.03 to the then current fair market value of $5.13.
Compensation expense of $975,063 was recorded in fiscal 1998 for cashless
exercises of stock options under this plan.
Under the 1991 Nonemployee Director Stock Option Plan, the Company may
grant options to its nonemployee directors for up to 57,500 shares of common
stock. The option prices were the fair market values of the common stock on the
dates of grant and have a maximum term of 10 years. Options granted under this
plan are exercisable in installments of 60% to 100% per year.
Under the 1992 Bonus Stock Option Plan, the Company may grant options to
certain officers and directors for up to 100,000 shares of common stock. The
option prices were one-half of the fair market value of the common stock on the
dates of grant and have a maximum term of 10 years. Options granted under this
plan become exercisable six months subsequent to the dates of grant.
Compensation expense of $21,000 in fiscal 1996, $18,000 in fiscal 1997 and
$18,000 in fiscal 1998 was recorded for options granted as part of the
directors' compensation under this plan.
F-14
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the status of the Company's three fixed stock option plans
is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------------- ------------------- -------------------
Wt. Ave. Wt. Ave. Wt. Ave.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
-------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year......... 799,906 $7.34 817,214 $5.68 931,367 $5.68
Granted at fair market value............. 134,000 5.09 197,875 5.17 85,500 6.15
Granted at below fair market value....... 8,197 2.56 6,000 3.00 5,190 3.47
Exercised................................ (13,337) 2.08 (862) 3.25 (405,247) 5.12
Forfeited................................ (111,552) 5.81 (88,860) 5.21 (138,774) 5.98
--------- --------- ---------
Outstanding at end of year............... 817,214 5.68 931,367 5.68 478,036 6.12
========= ========= =========
Options exercisable at year-end.......... 371,051 6.35 536,495 6.01 318,951 6.36
Weighted-average fair value of
options granted during the year:
Granted at fair market value......... $2.62 $2.71 $3.01
Granted at below fair market value... 3.61 4.20 4.77
</TABLE>
The following table summarizes information about the fixed stock options
outstanding and exercisable at June 28, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- --------------------------------
Exercise Number Wt. Average Wt. Average Number Wt. Average
Price Ranges Outstanding Remaining Life Exercise Price Exercisable Exercise Price
------------ ----------- -------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.56 - 3.50 24,722 7.6years $2.91 24,722 $2.91
4.56 - 5.13 256,089 6.5 5.07 184,504 5.10
5.25 - 5.88 142,845 7.1 5.78 71,345 5.81
7.18 - 21.75 54,380 5.8 13.35 38,380 15.68
------------ ------------
2.56 - 21.75 478,036 6.7 6.12 318,951 6.36
============ ============
</TABLE>
(c) Employee Stock Purchase Plan
On August 23, 1993, the Company's Board of Directors approved an ESP
plan. The ESP plan authorizes 250,000 shares of the Company's common stock to be
purchased by eligible employees of the Company through payroll deductions. The
purchase price is the lesser of 85% of the fair market value of the stock on the
first business day of the plan year, or 85% of the fair market value of the
shares on the last business day of the plan year. A total of 56,624 shares,
51,598 shares and 54,707 shares were purchased by employees of the Company under
the ESP plan during fiscal years 1996, 1997 and 1998, respectively. Compensation
cost under SFAS No. 123 is based on the fair value of the employee's purchase
rights, which was estimated using the Black-Scholes model with the following
assumptions for fiscal years 1996, 1997 and 1998, respectively: no dividends;
expected life of one year for all years; expected stock price volatility of
approximately 41%, 37% and 27%; and risk free interest rates of 5.3%, 5.4% and
5.9%. The weighted-average fair value of those purchase rights granted in fiscal
years 1996, 1997 and 1998 was $1.50, $1.48 and $1.13, respectively.
F-15
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Commitments and Contingencies
The Company leases certain restaurant facilities under operating leases
expiring at various dates through 2029. These operating leases have renewal
options for up to five successive five-year periods. The minimum rental
commitments under all noncancelable operating leases as of June 28, 1998 are as
follows:
1999................................................ $ 732,333
2000................................................ 656,973
2001................................................ 604,300
2002................................................ 530,500
2003................................................ 486,441
Thereafter.......................................... 4,545,214
-----------
Total...................................... $ 7,555,760
===========
Rental expense under operating leases was approximately $710,000, $690,000
and $800,000 for fiscal years 1996, 1997 and 1998, respectively.
In fiscal 1996, the Company was notified that a claim had been submitted
against the Company to the American Arbitration Association (the "AAA") by
Bright-Kaplan International Corporation, the owner of the previous Spaghetti
Warehouse franchise restaurant in Knoxville, Tennessee, seeking damages in
excess of $9.0 million. Additionally, Elizabeth Bright and Thomas C. Bright,
III, the principal shareholders of Bright-Kaplan International Corporation,
filed a lawsuit against the Company, seeking damages in excess of $2.5 million,
along with trebling of such damages under the Texas Deceptive Trade Practices
Act. Following a hearing before an AAA panel in Dallas, the panel, in January
1997, unanimously ruled that the Company had no liability in this matter. In
June 1997, the lawsuit was dismissed by the trial judge on the grounds that
matters in controversy had been decided in the previous AAA ruling. A Court of
Appeals affirmed the trial court's dismissal of all claims. This judgement
became final subsequent to June 28, 1998, thereby ending the lawsuit and claim.
The Company is also a party to several legal proceedings arising in the
ordinary course of business. After consultation with legal counsel and a review
of available facts, management believes that damages, if any, arising from such
litigation will not be material to the Company's financial position or results
of operations.
(7) Advertising Expenses
The Company expenses advertising costs as they are incurred. Advertising
costs were approximately $3,230,000, $2,610,000 and $2,630,000 for fiscal years
1996, 1997 and 1998, respectively. These expenses are recorded under operating
expenses in the Consolidated Statement of Operations.
(8) Restructuring Charges
In January 1996, the Company's Board of Directors approved a
restructuring plan intended to strengthen the Company's competitive position and
improve cash flow and profitability. In conjunction with the plan, the Company
closed seven under-performing restaurants in February 1996 and identified one
additional restaurant to be sold as an operating unit. The seven stores closed
include those previously located in Hartford, Connecticut; Providence, Rhode
Island; Buffalo, New York; Rochester, New York; Columbia, South Carolina;
Greenville, South Carolina and Little Rock, Arkansas. Additionally, the Company
contracted to sell its Richmond, Virginia, location to its Virginia franchisee.
The Company recorded a pre-tax charge of $13,875,248 in the third quarter of
fiscal 1996 to cover costs related to the execution of this plan, including the
write-down of property and equipment to its net realizable value, severance
packages and various other store closing and corporate obligations.
F-16
<PAGE>
SPAGHETTI WAREHOUSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company disposed of six of the seven closed restaurants during fiscal
1996. The Company disposed of the seventh closed restaurant and the Richmond,
Virginia, location in fiscal 1997, and completed the disposal of all remaining
identified corporate assets in the first quarter of fiscal 1998, thus completing
its original plan. Excess reserves of $740,000 were reversed in fiscal 1997.
Restaurants closed under the restructuring plan recorded income (loss) from
operations of $(540,000) and $50,000 in fiscal years 1996 and 1997,
respectively, which are included in the Consolidated Statement of Operations.
(9) Quarterly Financial Data (Unaudited)
Unaudited summarized quarterly financial data is as follows:
<TABLE>
<CAPTION> Quarters ended
----------------------------------------------------------
September 29, December 29, March 30, June 29,
1996 (b) 1996 (c) 1997 1997 (d)
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Year ended June 29, 1997:
Revenues........................... $ 17,056,528 15,642,524 15,718,660 16,485,861
============= ============= ============= =============
Gross profit (a)................... $ 3,120,995 2,514,265 3,129,070 3,401,775
============= ============= ============= =============
Net income (loss).................. $ (830,271) 274,967 456,628 757,611
============= ============= ============= =============
Net income (loss) per common share...... $ (.15) .05 .08 .13
============= ============= ============= =============
<CAPTION>
Quarters ended
------------------------------------------------------------
September 28, December 28, March 29, June 28,
1997 1997 1998 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Year ended June 28, 1998:
Revenues........................... $ 15,931,467 15,452,222 17,060,933 17,582,252
============= ============= ============= =============
Gross profit (a)................... $ 3,177,802 2,535,654 3,429,212 3,411,283
============= ============= ============= =============
Net income (loss).................. $ 506,350 209,154 603,822 (126,661)
============= ============= ============= =============
Net income (loss) per common share...... $ .09 .04 .11 (.02)
============= ============= ============= =============
</TABLE>
(a) Gross profit is calculated as total revenues less cost of sales and
operating expenses.
(b) The adoption of SFAS No. 121 (see Note 1(i)) reduced net income by
$1,148,876, or $.21 per share, in the quarter ended September 29,
1996.
(c) The reversal of previously expensed restructuring charges (see Note
8) increased net income by $225,980, or $.04 per share, in the
quarter ended December 29, 1996.
(d) The recording of an additional SFAS No. 121 charge and reversal of
remaining restructuring charges increased net income by $99,357,
or $.02 per share, in the quarter ended June 29, 1997.
(10) Subsequent Event
On September 18, 1998, the Company entered into an agreement and plan of
merger to sell all outstanding shares of the Company's common stock to a
newly-formed subsidiary of the investment firm Cracken, Harkey, Street &
Hartnett, L.L.C. for $8.00 per share. This agreement is subject to certain
conditions including, but not limited to, financing, shareholder approval and
the Securities and Exchange Commission's approval.
F-17
<PAGE>
APPENDIX A
A-1
<PAGE>
AGREEMENT AND PLAN OF MERGER
dated September 18, 1998
by and among
SPAGHETTI WAREHOUSE, INC.
and
SPAGHETTI WAREHOUSE ACQUISITION, INC.,
and
CONSOLIDATED RESTAURANT COMPANIES, INC.,
-2-
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I - CERTAIN DEFINITIONS..............................................-1-
ARTICLE II - THE MERGER......................................................-6-
Section 2.1 The Merger...........................................-6-
Section 2.2 Closing..............................................-6-
Section 2.3 Effective Time of the Merger.........................-6-
Section 2.4 Effects of the Merger................................-6-
ARTICLE III - EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES..................-7-
Section 3.1 Effect of Merger on Capital Stock....................-7-
Section 3.2 Conversion of Securities.............................-7-
Section 3.3 Payment for Shares...................................-8-
Section 3.4 Stock Transfer Books.................................-9-
Section 3.5 Stock Plans..........................................-9-
Section 3.6 Dissenting Shares...................................-10-
Section 3.7 Further Assurances..................................-10-
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF PARENT.......................-10-
Section 4.1 Organization and Qualification......................-11-
Section 4.2 Information Supplied................................-11-
Section 4.3 Execution and Delivery..............................-11-
Section 4.4 Non-Contravention...................................-11-
Section 4.5 Statutory Approvals.................................-12-
Section 4.6 Ownership of Company Common Stock...................-12-
ARTICLE V - REPRESENTATIONS AND WARRANTIES OF SUB...........................-12-
Section 5.1 Organization and Standing...........................-12-
Section 5.2 Capital Structure...................................-12-
Section 5.3 Authority; Non-Contravention........................-12-
ARTICLE VI - REPRESENTATIONS AND WARRANTIES OF THE COMPANY..................-13-
Section 6.1 Organization and Qualification......................-13-
Section 6.2 Subsidiaries........................................-13-
Section 6.3 Capitalization......................................-14-
Section 6.4 Authority; Non-Contravention; Statutory Approvals;
Compliance........................................-14-
Section 6.5 Reports and Financial Statements....................-16-
Section 6.6 Absence of Undisclosed Liabilities..................-17-
Section 6.7 Real Property.......................................-18-
Section 6.8 Company Equipment...................................-19-
Section 6.9 Contracts and Commitments...........................-19-
Section 6.10 Intellectual Property..............................-21-
Section 6.11 Litigation.........................................-22-
Section 6.12 Employee Matters...................................-23-
-i-
<PAGE>
Section 6.13 Collective Bargaining Agreements; Compensation;
Employee Agreements..............................-24-
Section 6.14 Labor Matters......................................-24-
Section 6.15 Environmental Matters..............................-25-
Section 6.16 Vote Required......................................-25-
Section 6.17 Insurance..........................................-26-
Section 6.18 State Takeover Statutes; Absence of Supermajority
Provision........................................-26-
Section 6.19 Tax Matters........................................-26-
ARTICLE VII - COVENANTS RELATING TO CONDUCT OF BUSINESS.....................-27-
Section 7.1 Ordinary Course of Business.........................-27-
Section 7.2 Dividends...........................................-27-
Section 7.3 Issuance of Securities..............................-28-
Section 7.4 Charter Documents...................................-28-
Section 7.5 Capital Expenditures................................-28-
Section 7.6 No Dispositions.....................................-28-
Section 7.7 Intellectual Property...............................-29-
Section 7.8 Liabilities and Obligations.........................-29-
Section 7.9 Indebtedness .......................................-29-
Section 7.10 Compensation, Benefits.............................-30-
Section 7.11 Collective Bargaining..............................-30-
Section 7.12 Loans and Advances.................................-30-
Section 7.13 Accounting.........................................-30-
Section 7.14 Lease and Purchase Options.........................-30-
Section 7.15 Insurance..........................................-30-
Section 7.16 Permits............................................-31-
Section 7.17 Non-contravention..................................-31-
Section 7.18 Payments to Suppliers and Vendors..................-31-
ARTICLE VIII - ADDITIONAL AGREEMENTS........................................-31-
Section 8.1 Cooperation, Notification...........................-31-
Section 8.2 Third-Party Consents................................-31-
Section 8.3 Access to Information...............................-32-
Section 8.4 Regulatory Matters..................................-32-
Section 8.5 Shareholder Approval; Proxy Materials...............-33-
Section 8.6 Indemnification; Directors' and Officers' Insurance.-33-
Section 8.7 Disclosure Schedule.................................-35-
Section 8.8 Public Announcements................................-36-
Section 8.9 Stock Option, Stock Purchase and Bonus Plans........-36-
Section 8.10 No Solicitations...................................-36-
Section 8.11 No Withdrawal of Recommendation....................-37-
Section 8.12 Expenses...........................................-37-
Section 8.13 Inventory..........................................-38-
Section 8.14 Covenant to Satisfy Conditions.....................-38-
Section 8.15 Strategic Consultations............................-38-
Section 8.16 Guaranty of Equity of Sub..........................-38-
Section 8.17 Employee Benefit Matters; Severance................-38-
-ii-
<PAGE>
ARTICLE IX - CONDITIONS.....................................................-39-
Section 9.1 Conditions to Each Party's Obligation to Effect
the Merger........................................-39-
Section 9.2 Conditions to Obligation of Parent to Effect Merger.-39-
Section 9.3 Conditions to Obligation of the Company to Effect
the Merger........................................-41-
ARTICLE X - TERMINATION, AMENDMENT AND WAIVER...............................-42-
Section 10.1 Termination........................................-42-
Section 10.2 Termination In Connection with Certain Financing
Events...........................................-43-
Section 10.3 Effect of Termination..............................-44-
Section 10.4 Payment of Expenses and Termination Fee............-44-
Section 10.5 Amendment..........................................-45-
Section 10.6 Extension; Waiver..................................-45-
ARTICLE XI - GENERAL PROVISIONS.............................................-46-
Section 11.1 Non-survival of Representations and Warranties.....-46-
Section 11.2 Brokers............................................-46-
Section 11.3 Notices ...........................................-46-
Section 11.4 Interpretation.....................................-47-
Section 11.5 Miscellaneous......................................-47-
Section 11.6 Counterparts; Effect...............................-47-
Section 11.7 Parties in Interest................................-48-
Section 11.8 Further Assurances.................................-48-
Section 11.9 Governing Law......................................-48-
EXHIBITS
- --------
Exhibit A - Articles of Incorporation
Exhibit B - AMRESCO Letter
Exhibit C - USRP Letter
Exhibit D - Escrow Agreement
-iii-
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of September 18, 1998 (this
"Agreement"), is made and entered into by and among Consolidated Restaurant
Companies, Inc., a corporation formed under the laws of the State of Delaware
("Parent"), Spaghetti Warehouse Acquisition, Inc., a corporation formed under
the laws of the State of Texas ("Sub"), and Spaghetti Warehouse, Inc., a
corporation formed under the laws of the State of Texas (the "Company").
WHEREAS, the respective Boards of Directors of Parent, Sub and the Company
have approved, and the Company has declared advisable and in the best interests
of its shareholders, the acquisition of the Company by Parent, by means of the
merger (the "Merger") of the Sub with and into the Company, upon the terms and
subject to the conditions set forth in this Agreement;
WHEREAS, the Board of Directors of the Company has approved the Merger and
agreed to recommend to the shareholders of the Company that they vote in favor
of the Merger;
WHEREAS, pursuant to the Merger, each issued and outstanding share of
Company Common Stock not owned directly or indirectly by Parent or the Company
will be converted into the right to receive the Merger Consideration (as defined
herein); and
WHEREAS, Parent, Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the consummation thereof,
NOW, THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements herein contained, the parties hereto,
intending to be legally bound, hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
-------------------
As used in this Agreement, the following terms shall have the following
meanings:
"Articles of Merger" shall have the meaning set forth in Section 2.3.
"Certificates" shall have the meaning set forth in Section 3.3(b).
"Closing" and "Closing Date" shall have the meaning set forth in Section
2.2.
"Company Benefit Plans" shall have the meaning set forth in Section
6.12(a).
"Company Common Stock" shall mean the common stock, par value $0.01 per
share, of the Company.
<PAGE>
"Company Disclosure Schedule" shall have the meaning set forth in the
introductory sentence of Article VI.
"Company Financial Statements" shall have the meaning set forth in Section
6.5(d).
"Company Material Adverse Effect" shall mean a Material Adverse Effect with
respect to the Company.
"Company Preferred Stock" shall mean the preferred stock, par value $0.01
per share, of the Company.
"Company Required Consents" shall mean all required third-party consents or
other approvals necessary for (a) the execution and delivery by each of the
parties, as appropriate, of this Agreement and (b) the consummation of the
transactions contemplated hereby.
"Company Required Statutory Approvals" shall have the meaning set forth in
Section 6.4(c).
"Company SEC Reports" shall have the meaning set forth in Section 6.5(b).
"Company Shareholders' Approval" shall have the meaning set forth in
Section 6.4(a)(i).
"Confidentiality Agreement" shall mean that certain confidentiality
agreement, dated as of June 15, 1998, by and between Parent and the Company.
"Constituent Corporations" shall have the meaning set forth in Section 2.1.
"Dissenting Shares" shall have the meaning set forth in Section 3.6.
"Effective Time" shall have the meaning set forth in Section 2.3.
"Exchange Value" shall have the meaning set forth in Section 3.1(a).
"Environmental Claims" shall mean, with respect to any person, (A) any
and all administrative, regulatory, or judicial actions, suits, demands, demand
letters, directives, claims, liens, investigations, proceedings or notices of
noncompliance or violation in writing by or from any person or entity (including
any Governmental Authority), whether pending or threatened, or (B) any oral
information provided by a Governmental Authority that written action of the type
described in the foregoing clause is in process or is threatened, which (in case
of either (A) or (B)) alleges potential liability (including, without
limitation, potential liability for enforcement, investigatory costs, cleanup
costs, governmental response costs, removal costs, remedial costs, natural
resources damages, property damages, personal injuries, or penalties) arising
out of, based on or resulting from (a) the presence, or Release or threatened
Release into the environment, of any Hazardous Materials at any location,
whether or not owned, operated, leased or managed by such person, (b)
circumstances forming the basis of any violation, or alleged violation, of any
Environmental Law or (c) any and all claims by any third party seeking damages,
contribution,
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indemnification, cost recovery, compensation or injunctive relief resulting from
the presence or Release of any Hazardous Materials.
"Environmental Laws" shall mean all federal, state and local laws, rules,
regulations and guidances relating to pollution or protection of human health or
the environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata), including, without limitation,
laws, rules, regulations and guidances relating to Releases or threatened
Releases of Hazardous Materials or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of Hazardous Materials.
"Environmental Permits" shall mean all applicable environmental, health and
safety permits and authorizations.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Financing" shall have the meaning set forth in Section 8.16.
"GAAP" shall mean generally accepted accounting principles.
"Governmental Authority" shall mean any court, governmental or regulatory
body (including a stock exchange or other self-regulatory body) or authority,
domestic or foreign.
"Hazardous Materials" shall mean (a) any petroleum or petroleum products or
by-products, radioactive materials, asbestos in any form that is or could become
friable, urea formaldehyde foam insulation, and transformers or other equipment
that contain dielectric fluid containing polychlorinated biphenyls, (b) any
chemicals, materials or substances which are now defined as or included in the
definition of "hazardous substances," "hazardous wastes," "hazardous materials,"
"extremely hazardous wastes," "restricted hazardous wastes," "toxic substances,"
"toxic pollutants," or words of similar import, under any Environmental Law and
(c) any other chemical, material, substance or waste, exposure to which is now
prohibited, limited or regulated under any Environmental Law in a jurisdiction
in which such person operates.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"Indemnified Party" shall have the meaning set forth in Section 8.6.
"Indemnified Liabilities" shall have the meaning set forth in Section 8.6.
"In reasonable probability" shall mean more likely than not to occur.
"Material Adverse Effect" or "Material Adverse Change" means, with respect
to any party, any change, occurrence or effect (direct or indirect), other than
as a result of changes in general conditions, including economical or political
developments, applicable to the industry as
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a whole in which the Company operates, on the business, operations, properties
(including tangible properties), condition (financial or otherwise), assets,
obligations or liabilities (whether absolute, contingent or otherwise and
whether due or to become due) of such party and its subsidiaries taken as a
whole that reasonably could be expected to exceed $500,000.
"Material" or "materially" or words of like effect shall refer to items
capable of producing a monetary effect of at least $500,000 on the business,
operations, properties (including intangible properties), condition (financial
or otherwise), assets, obligations or liabilities (whether absolute, contingent
or otherwise and whether due or to become due) of the relevant party and its
subsidiaries taken as a whole.
"Merger Consideration" shall have the meaning set forth in Section 3.2(a).
"Options" shall have the meaning set forth in Section 3.5.
"Option Consideration" shall have the meaning set forth in Section 3.5.
"Parent Common Stock" shall mean the common stock, par value $.01 per
share, of Parent.
"Parent Material Adverse Effect" shall mean a Material Adverse Effect with
respect to Parent.
"Parent Required Statutory Approvals" shall have the meaning set forth in
Section 4.5(c).
"Paying Agent" shall have the meaning set forth in Section 3.3(a).
"Payment Fund" shall have the meaning set forth in Section 3.3(a).
"Proxy Materials" shall have the meaning set forth in Sections 6.4(c).
"Release" shall mean any release, spill, emission, leaking, injection,
deposit, disposal, discharge, dispersal, leaching or migration into the
atmosphere, soil, subsurface, surface water, groundwater or property.
"Rights Plan" shall mean that certain Rights Agreement, dated as of
February 2, 1995, between the Company and Chemical Bank.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Shares" shall mean the shares of Company Common Stock.
"Stock Plans" shall have the meaning set forth in Section 3.5.
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<PAGE>
"Sub Common Stock" shall mean the common stock, par value $.01 per share,
of Sub.
"Sub Material Adverse Effect" shall mean a Material Adverse Effect with
respect to Sub.
"Subsidiary" shall mean, with respect to any person, any corporation or
other entity (including partnerships and other business associations) in which a
person directly or indirectly owns at least a majority of the outstanding voting
securities or other equity interests having the power, under ordinary
circumstances, to elect a majority of the directors, or otherwise to direct the
management and policies, of such corporation or other entity.
"Superior Takeover Proposal" with respect to a party means any bona fide
Takeover Proposal to acquire, directly or indirectly, in a transaction or a
series of related transactions, for consideration consisting of cash, securities
or a combination thereof, 662/3% of the common stock of that party then
outstanding or all or substantially all of the assets of that party on terms
that the Board of Directors of that party determines in its good faith
reasonable judgment (after consultation with a financial advisor of nationally
recognized reputation) to be more favorable to that party's shareholders than
the Merger.
"Surviving Corporation" shall have the meaning set forth in Section 2.1.
"Takeover Proposal," with respect to a party, shall mean (i) any tender or
exchange offer, proposal for a merger, consolidation or other business
combination involving such party or any of its material Subsidiaries, (ii) any
proposal or offer to acquire from a party in any manner, directly or indirectly,
any equity or voting securities of that party in excess of 15% of the equity
voting securities of that party or any Subsidiary thereof or a material amount
of the assets of that party and its Subsidiaries, taken as a whole, or (iii) any
proposal or offer to acquire from the shareholders of that party by tender
offer, exchange offer or otherwise more than 15% of the outstanding common stock
of that party; provided, however, that a "Takeover Proposal" shall not mean the
Merger or any alternative transaction between the Company and Parent that may be
proposed as contemplated hereby.
"Taxes" shall mean any federal, state, county, local or foreign taxes,
charges, fees, levies or other assessments, including, without limitation, all
net income, gross income, sales and use, ad valorem, transfer, gains, profits,
excise, franchise, real and personal property, gross receipts, capital stock,
production, business and occupation, disability, employment, payroll, license,
estimated, stamp, custom duties, severance or withholding taxes or charges
imposed by any governmental entity, and includes any interest and penalties
(civil or criminal) on or additions to any such taxes, charges, fees, levies or
other assessments, and any expenses incurred in connection with the
determination, settlement or litigation of any liability for any of the
foregoing.
"Tax Return" shall mean any report, return or other information required to
be supplied to a governmental entity with respect to Taxes, including, where
permitted or required, combined or consolidated returns for any group of
entities that includes Parent or any of its Subsidiaries on the one hand, or the
Company or any of its Subsidiaries on the other hand.
"TBCA" shall mean the Texas Business Corporation Act, as amended.
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ARTICLE II
THE MERGER
----------
Section 2.1 The Merger. Upon the terms and subject to the conditions set
----------
forth in this Agreement, and in accordance with the TBCA, Sub shall be merged
with and into the Company at the Effective Time. At the Effective Time, the
separate corporate existence of Sub shall cease and the Company shall continue
as the surviving corporation and a direct wholly owned subsidiary of Parent (Sub
and the Company are sometimes hereinafter referred to as "Constituent
Corporations" and, as the context requires, the Company is sometimes hereinafter
referred to as the "Surviving Corporation"), and shall continue under the name
Spaghetti Warehouse, Inc.
Section 2.2 Closing. Unless this Agreement shall have been terminated and
-------
the transactions herein contemplated shall have been abandoned pursuant to
Article X , and subject to the satisfaction or waiver of the conditions set
forth in Article IX, the closing of the Merger (the "Closing") shall take place
at the offices of Jenkens & Gilchrist, a Professional Corporation, 1445 Ross
Avenue, Suite 3200, Dallas, Texas 75202 at 10:00 a.m. local time, on the later
to occur of (i) 90 days from the date of this Agreement or (ii) the second
business day after satisfaction and/or waiver of all of the conditions set forth
in Article IX (the "Closing Date"), unless another date, time or place is agreed
to in writing by the parties hereto.
Section 2.3 Effective Time of the Merger. The parties acknowledge that it
----------------------------
is their mutual desire and intent to consummate the Merger as soon as
practicable after the date hereof. Accordingly, the parties shall use all
commercially reasonable best efforts to bring about the satisfaction as soon as
practicable of all the conditions specified in Article IX and otherwise to
effect the consummation of the Merger as soon as practicable. Subject to Section
2.2 and the other terms hereof, as soon as practicable after all of the
conditions set forth in Article IX shall have been satisfied or waived, the
parties hereto will (i) file articles of merger (the "Articles of Merger")
executed in accordance with the relevant provisions of the TBCA and (ii) make
all other filings or recordings required under the TBCA. The Merger shall become
effective at such time as the Articles of Merger are duly filed with the
Secretary of State of Texas or at such other time as Sub and the Company shall
agree shall be specified in the Articles of Merger (the "Effective Time").
Section 2.4 Effects of the Merger.
---------------------
(a) The Merger shall have the effects as set forth in the applicable
provisions of the TBCA.
(b) The directors and the officers of Sub shall, from and after the
Effective Time, be the initial directors and officers of the Surviving
Corporation until their successors have been duly elected or appointed and
qualified, or until their earlier death, resignation or removal in accordance
with the Surviving Corporation's Articles of Incorporation and Bylaws.
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(c) The Articles of Incorporation of the Company, as amended and restated
at the Effective Time to read in their entirety as set forth in Exhibit A
---------
hereto, shall be the Articles of Incorporation of the Surviving Corporation
following the Effective Time, until duly amended.
(d) The Bylaws of Sub as in effect prior to the Effective Time shall be
the Bylaws of the Surviving Corporation following the Effective Time, until duly
amended.
ARTICLE III
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
------------------------------------------------
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
--------------------------------------------------
Section 3.1 Effect of Merger on Capital Stock. At the Effective Time, by
---------------------------------
virtue of the Merger and without any action on the part of Parent, Sub or any
holder of Shares of Company Common Stock, or shares of capital stock of Sub:
(a) Capital Stock of Sub. Each share of the capital stock of Sub issued
and outstanding immediately prior to the Effective Time shall be converted into
and become one fully paid and nonassessable share of Common Stock, par value
$0.01 per share, of the Surviving Corporation (the "Exchange Value").
(b) Cancellation of Treasury Stock and Parent-Owned/Sub-Owned Stock. Each
Share of Company Common Stock and all other shares of capital stock of the
Company that are owned by the Company and all shares of Company Common Stock and
other shares of capital stock of the Company owned by Parent or Sub shall be
canceled and retired and shall cease to exist and no consideration shall be
delivered or deliverable in exchange therefor.
Section 3.2 Conversion of Securities. At the Effective Time, by virtue of
------------------------
the Merger and without any action on the part of Parent, Sub, the Company or the
holders of any equity interests therein:
(a) Subject to the other provisions of this Section 3.2, each Share of
Company Common Stock issued and outstanding immediately prior to the Effective
Time (excluding shares owned, directly or indirectly, by the Company, any of the
Company's Subsidiaries, or by Parent, Sub or any other Subsidiary of Parent and
Dissenting Shares (as defined in Section 3.6)) shall be converted into the right
to receive, upon surrender and exchange of the Certificate representing such
Share of Company Common Stock, the per share amount of $8.00 (the "Merger
Consideration"). Such Merger Consideration shall be payable to the holders of
Company Common Stock in cash, without any interest thereon.
(b) All such shares of Company Common Stock, when converted as provided in
Section 3.2(a), no longer shall be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each Certificate previously
evidencing such Shares shall thereafter represent only the right to receive the
Merger Consideration. The holders of Certificates previously evidencing Shares
outstanding immediately prior to the Effective Time shall cease to have any
rights with respect to the Company Common Stock except as otherwise provided
herein
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<PAGE>
or by law and, upon the surrender of Certificates in accordance with the
provisions of Section 3.3, shall only represent the right to receive for their
Shares, the Merger Consideration, without any interest thereon.
Section 3.3 Payment for Shares.
------------------
(a) Paying Agent. Prior to the Effective Time, Sub shall appoint a
United States bank or trust company reasonably acceptable to the Company to act
as exchange and paying agent (the "Paying Agent") for the payment of the Merger
Consideration, and Sub shall deposit with the Paying Agent, in a separate fund
established for the benefit of the holders of shares of Company Common Stock,
for payment in accordance with this Article III, through the Paying Agent (the
"Payment Fund"), immediately available funds in amounts necessary to make the
payments pursuant to Section 3.2(a) and this Section 3.3 to holders (other than
the Company or Parent, Sub or any other Subsidiary of Parent, or holders of
Dissenting Shares) of the Shares of Company Common Stock. The Paying Agent
shall, pursuant to irrevocable instructions, pay the Merger Consideration. Such
cash will be invested by the Paying Agent in U.S. government securities maturing
in 30 days or less or mutual funds that invest solely in U.S. government
securities and all interest which is earned thereon prior to the time the cash
is fully paid to the shareholders of the Company shall be paid over by the
Paying Agent to Sub in accordance with the terms of the agreement with the
Paying Agent six months after the Closing Date (if not otherwise required to
satisfy obligations owing to the shareholders of the Company).
If for any reason (including losses) the Payment Fund is inadequate to pay
the amounts to those holders of Shares of Company Common Stock that are entitled
thereto under this Section 3.3, Parent shall take all steps necessary to deposit
in trust additional cash with the Paying Agent sufficient to make all payments
required under this Agreement and Parent shall in any event be liable for
payment thereof. The Payment Fund shall not be used for any purpose except as
expressly provided in this Agreement.
(b) Payment Procedures. As soon as reasonably practicable after the
Effective Time, Parent shall instruct the Paying Agent to mail to each holder of
record (other than the Company or Parent, Sub or any other Subsidiary of Parent)
of a Certificate or Certificates which, immediately prior to the Effective Time,
evidenced outstanding Shares of Company Common Stock (the "Certificates"), (i) a
form of letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
proper delivery of the Certificates to the Paying Agent, and shall be in such
form and have such other provisions as Parent may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for payment of the Merger Consideration. Upon surrender of a Certificate for
cancellation to the Paying Agent together with such letter of transmittal, duly
executed, and such other customary documents as may be required pursuant to such
instructions, the holder of such Certificate shall be entitled to receive the
Merger Consideration, and the Certificate so surrendered shall forthwith be
canceled. No interest shall be paid or accrued on the Merger Consideration
payable upon the surrender of any Certificate. If payment is to be made to a
person other than the person in whose name the surrendered Certificate is
registered, it shall be a condition of payment that the Certificate so
surrendered shall be properly endorsed or otherwise in proper form for transfer
and that the person requesting such payment shall pay
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<PAGE>
any transfer or other taxes required by reason of the payment to a person other
than the registered holder of the surrendered Certificate or established to the
satisfaction of the Surviving Corporation that such tax has been paid or is not
applicable. Until surrendered in accordance with the provisions of this Section
3.3, each Certificate (other than Certificates representing Shares owned by the
Company or Parent, Sub or any other Subsidiary of Parent) shall be deemed at any
time after the Effective Time to represent for all purposes only the right to
receive the Merger Consideration.
(c) Termination of Payment Fund; Interest. Any portion of the Payment Fund
that remains undistributed to the holders of Company Common Stock for six months
after the Effective Time shall be delivered to the Surviving Corporation, upon
demand, and any holders of Company Common Stock who have not theretofore
complied with this Article III and the instructions set forth in the letter of
transmittal mailed to such holder after the Effective Time shall thereafter look
only to the Surviving Corporation for payment of the Merger Consideration to
which they are entitled. All interest accrued in respect of the Payment Fund
shall inure to the benefit of and be paid from time to time to the Surviving
Corporation.
(d) No Liability. None of Parent, Sub, the Company or the Surviving
Corporation shall be liable to any holder of Shares of Company Common Stock for
any consideration from the Payment Fund delivered to a public official pursuant
to any applicable abandoned property, escheat or similar law.
Section 3.4 Stock Transfer Books. At the Effective Time, the stock transfer
--------------------
books of the Company shall be closed and there shall be no further registration
of transfers of Shares of Company Common Stock thereafter on the records of the
Company. On or after the Effective Time, any Certificates presented to the
Paying Agent or Parent for any reason shall be converted into the Merger
Consideration as provided in this Article III.
Section 3.5 Stock Plans.
-----------
(a) Stock Plans of the Company. At the Effective Time, each holder of a
then outstanding option or right to purchase or receive Shares under any of the
Company's stock option plans, stock purchase plan or deferred compensation plan
or arrangements (collectively, the "Stock Plans"), or otherwise set forth on
Schedule 6.3 of the Company Disclosure Schedule (whether or not vested or
exercisable) (collectively, the "Options") shall be terminated and automatically
converted into the right to receive for each Share subject to such Option an
amount (subject to any applicable withholding tax) of Merger Consideration equal
to the difference between the amount per share actually paid in the Merger and
the per share exercise price of such Option to the extent such difference is a
positive number (such amount being hereinafter referred to as, the "Option
Consideration"); provided, however, that with respect to any person subject to
Section 16(a) of the Exchange Act, any such amount shall be paid as soon as
practicable after the first date payment can be made without liability to such
person under Section 16(b) of the Exchange Act (although the Options will in
each case be terminated at or prior to the Effective Time). The receipt by each
Option holder of their Option Consideration shall constitute a release of any
and all rights the holder had or may have had in respect of such Option. Prior
to the Effective Time, the Company shall obtain (without paying amounts per
share that are greater than
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<PAGE>
the relevant Option Consideration) all necessary consents or releases from
holders of Options under the Stock Plans and take all such other lawful action
as may be reasonably necessary to give effect to the transactions contemplated
by this Section 3.5. The Stock Plans shall terminate as of the Effective Time,
and the provisions in the Company Benefit Plans of the Company or any Subsidiary
thereof shall be canceled as of the Effective Time. Prior to the Effective Time,
the Company shall take all action necessary (including causing the Board of
Directors of the Company to take such actions as are allowed by the Stock Plans)
to (i) ensure that, following the Effective Time, no participant in the Stock
Plans or any other plans, programs or arrangements shall have any right
thereunder to acquire equity securities of the Company, the Surviving
Corporation or any Subsidiary thereof and (ii) terminate all such plans,
programs and arrangements. The total number of Options subject to the provisions
of this Section 3.5 on the date hereof (assuming full vesting) is (i) under the
Company's stock option plans, 461,343 at a weighted average exercise price of
$5.28, (ii) under the Company's employee stock purchase plan, 56,345, and (iii)
under the Company's deferred compensation plan, 25,459.
Section 3.6 Dissenting Shares. Notwithstanding any other provisions of this
-----------------
Agreement to the contrary, shares of Company Common Stock outstanding
immediately prior to the Effective Time and which are held by shareholders who
shall have not voted in favor of the Merger or consented thereto in writing and
who shall have demanded properly an appraisal for such shares in accordance with
Article 5.11 of the TBCA (collectively, the "Dissenting Shares") shall not be
converted into or represent the right to receive the Merger Consideration. Such
shareholders instead shall be entitled to receive payment of the appraised value
of such shares of Company Common Stock held by them in accordance with the
provisions of such Article 5.11 of the TBCA, except that all Dissenting Shares
held by shareholders who shall have failed to perfect or who effectively shall
have withdrawn or otherwise lost their rights to appraisal of such shares of
Company Common Stock under such Article 5.11 of the TBCA shall thereupon be
deemed to have been converted into and to have become exchangeable, as of the
Effective Time, for the right to receive, without any interest thereon, the
Merger Consideration upon surrender in the manner provided in Section 3.3, of
the Certificate or Certificates that immediately prior to the Effective Time,
evidenced such shares of Company Common Stock.
Section 3.7 Further Assurances. At and after the Effective Time, the
------------------
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of the Company or Sub, any deeds,
bills of sale, assignments or assurances and to take and do, in the name and on
behalf of the Company or Sub, any other actions and things to vest, perfect or
conform of record or otherwise in the Surviving Corporation any and all right,
title and interest in, to and under any of the rights, properties or assets
acquired or to be acquired by the Surviving Corporation as a result of, or in
connection with, the Merger.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
----------------------------------------
Parent represents and warrants to the Company as follows:
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Section 4.1 Organization and Qualification. Parent is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all requisite corporate power and authority to enter into this
Agreement and, subject to the Parent Required Statutory Approvals, to consummate
the transactions contemplated thereby. Parent and Sub have heretofore made
available to the Company complete and correct copies of their Bylaws and
Certificate of Incorporation and Articles of Incorporation, respectively.
Section 4.2 Information Supplied. None of the information supplied or to be
--------------------
supplied by Parent or Sub for inclusion or incorporation by reference in the
Proxy Statement will, at the date it is first mailed to the Company's
shareholders or at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. If, at any time prior
to the Effective Time, any event with respect to Parent or Sub, or with respect
to information supplied by Parent or Sub for inclusion in the Proxy Statement,
shall occur which is required to be described in an amendment of, or a
supplement to, any of such documents, such event shall be so described to the
Company.
Section 4.3 Execution and Delivery. This Agreement has been duly and
----------------------
validly executed and delivered by Parent and Sub and, assuming the due
authorization, execution and delivery hereof by the Company, constitutes the
valid and binding obligation of Parent and Sub, enforceable against Parent and
Sub in accordance with its terms, except as would be limited by applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance or other similar
laws affecting the enforcement of creditors' rights generally and except that
the availability of equitable remedies, including specific performance, may be
subject to the discretion of any court before which any proceeding therefor may
be brought.
Section 4.4 Non-Contravention. The execution and delivery of this Agreement
-----------------
by Parent and Sub do not, and the consummation of the transactions contemplated
hereby and thereby will not (subject, in the cases of items (ii) and (iii)
below, to Parent and/or Sub obtaining the Parent Required Statutory Approvals),
result in any violation by Parent and Sub or any of their Subsidiaries under any
provisions of:
(a) the Bylaws and Certificate of Incorporation or Articles of
Incorporation of Parent and Sub, respectively;
(b) any statute, law, ordinance, rule, regulation, judgment, decree, order
or injunction of any Governmental Authority applicable to Parent and Sub or any
of their respective properties or assets;
(c) any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, concession, contract, lease or other instrument, obligation
or agreement of any kind to which Parent and Sub or any of their Subsidiaries is
now a party or by which it or any of its properties or assets may be bound or
affected;
excluding from the foregoing clauses (a), (b) and (c) such violations as would
not, in the aggregate, in reasonable probability have a Parent Material Adverse
Effect.
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Section 4.5 Statutory Approvals. Except for (i) filing by Parent and Sub of
-------------------
a pre-merger Notification Report form under the HSR Act and (ii) the filing of
the Articles of Merger with the Secretary of State of Texas with respect to the
Merger as provided in the TBCA, no declaration, filing or registration with, or
notice to or authorization, consent or approval of, any Governmental Authority
is necessary on the part of Parent of Sub for the execution and delivery of this
Agreement by Parent and Sub or the consummation by Parent and Sub of the
transactions contemplated hereby, the failure to obtain, make or give which
would in reasonable probability have a Parent Material Adverse Effect (the
"Parent Required Statutory Approvals"), it being understood that references in
this Agreement to "obtaining" such Parent Required Statutory Approvals shall
mean making such declarations, filings or registrations; giving such notice;
obtaining such consents or approvals; and having such waiting periods expire as
are necessary to avoid a violation of law.
Section 4.6 Ownership of Company Common Stock. Parent does not
---------------------------------
"beneficially own" (as such term is defined in Rule 13d-3 under the Exchange
Act) any shares of Company Common Stock, and no entity or person "beneficially
owning" any capital stock in Parent "beneficially owns" any shares of Company
Common Stock.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SUB
-------------------------------------
In addition to those warranties and representations of Sub contained in
Article IV hereof, Sub represents and warrants to the Company as follows:
Section 5.1 Organization and Standing. Sub is a corporation duly organized,
-------------------------
validly existing and in good standing under the laws of the State of Texas. Sub
was organized solely for the purpose of acquiring the Company and engaging in
the transactions contemplated by this Agreement and has not engaged in any
business since it was incorporated which is not in connection with the Merger
and this Agreement.
Section 5.2 Capital Structure. The authorized capital stock of Sub consists
-----------------
of 1,000 shares of common stock, par value $0.01 per share, all of which are
validly issued and outstanding, fully paid and nonassessable, free of preemptive
rights and are owned by Parent free and clear of all liens, claims and
encumbrances.
Section 5.3 Authority; Non-Contravention. Sub has all requisite power and
----------------------------
authority to enter into this Agreement and to consummate the Merger and the
other transactions contemplated hereby. The execution and delivery of this
Agreement by Sub, the performance by Sub of its obligations hereunder and the
consummation of the transactions contemplated hereby have been duly authorized
by its Board of Directors of Sub and Parent as its sole shareholder, and, except
for the corporate filings required by state law, no other corporate proceedings
on the part of Sub are necessary to authorize this Agreement and the Merger and
the other transactions contemplated hereby.
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ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
Except as set forth in the Company disclosure schedule attached hereto (the
"Company Disclosure Schedule"), the Company represents and warrants to Parent as
follows:
Section 6.1 Organization and Qualification. The Company is a
------------------------------
corporation duly organized, validly existing and in good standing, under the
laws of the State of Texas, and each of the Company's Subsidiaries is a
corporation or limited partnership duly organized, validly existing and in good
standing, under the laws of its jurisdiction of formation. Each of the Company
and its Subsidiaries has all requisite corporate power and authority, and is
duly authorized by all necessary regulatory approvals and orders, to own, lease
and operate its assets and properties and to carry on its business as it is now
being conducted, and is duly qualified and in good standing to do business in
each jurisdiction in which the nature of its business or the ownership or
leasing of its assets and properties makes such qualification necessary, other
than such failure which, individually or in the aggregate, would not in
reasonable probability have a Company Material Adverse Effect. The minute books
of the Company and of each Subsidiary thereof, as heretofore made available to
Parent, are correct and complete in all material respects.
Section 6.2 Subsidiaries.
------------
(a) Schedule 6.2 of the Company Disclosure Schedule identifies each
Subsidiary of the Company and sets forth, for each such Subsidiary, its capital
structure, place of organization and the other jurisdictions in which it is
qualified to do business. All of the issued and outstanding shares of capital
stock or other equity interests of each Subsidiary of the Company are (i)
validly issued, fully paid, and, in the case of each Subsidiary that is a
corporation, nonassessable, (ii) free of statutory rights and (iii) owned
directly or indirectly by the Company free and clear of any liens, claims,
encumbrances, security interests, equities, charges and options of any nature
whatsoever, and there are no outstanding subscriptions, options, calls,
contracts, voting trusts, proxies or other commitments, understandings,
restrictions, arrangements, rights or warrants, including any right of
conversion or exchange under any outstanding security, instrument or other
agreement, obligating any such Subsidiary to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of its capital stock or other
equity interests or obligating it to grant, extend or enter into any such
agreement or commitment.
(b) Except as described in Schedule 6.2 of the Company Disclosure
Schedule, the Company does not (i) own, beneficially or of record, any shares of
any other corporation or entity or any interests in any partnership or limited
liability companies or (ii) participate in any manner in any joint ventures,
corporate alliance agreements or corporate partnering agreements. Except for the
Company's interest in each Subsidiary of the Company identified on Schedule 6.2
of the Company Disclosure Schedule, neither the Company nor any such Subsidiary
of the Company has an interest in, or is subject to, any agreement, obligation
or commitment to make any equity investment in or loan or advance to any other
person or entity.
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Section 6.3 Capitalization.
--------------
(a) As of the date hereof, the authorized capital stock of the Company
consists of 20,000,000 shares of Company Common Stock and 1,000,000 shares of
Company Preferred Stock.
(b) As of the close of business on September 15, 1998, 5,662,085 shares of
Company Common Stock were issued and outstanding and no shares of Company
Preferred Stock were issued and outstanding. As of the close of business on
September 15, 1998, 1,057,341 shares of Company Common Stock and no shares of
Company Preferred Stock were held by the Company in its treasury or owned by any
of the Company's Subsidiaries.
(c) All of the issued and outstanding shares of the capital stock of the
Company are validly issued, fully paid, nonassessable and free of preemptive
rights, and were not issued in violation of any preemptive rights or any
applicable law.
(d) At the close of business on September 15, 1998, (i) 461,343 shares of
Company Common Stock were reserved for issuance pursuant to outstanding options
under the employee and director stock option plans as described in Schedule 6.3
of the Company Disclosure Schedule, and (ii) 221,319 shares of Company Common
Stock were reserved for future awards under the stock option plans as described
in Schedule 6.3 of the Company Disclosure Schedule.
(e) At the close of business on September 15, 1998, (i) 56,345 shares of
Company Common Stock were reserved for issuance pursuant to the employee stock
purchase plan as described in Schedule 6.3 of the Company Disclosure Schedule,
and (ii) 25,459 shares of Company Common Stock were reserved for issuance
pursuant to the deferred compensation plan as described in Schedule 6.3 of the
Company Disclosure Schedule.
(f) Except as described in Schedule 6.3 of the Company Disclosure
Schedule, there are no outstanding subscriptions, options, calls, contracts,
voting trusts, proxies or other understandings, restrictions, arrangements,
rights or warrants, including any right of conversion or exchange under any
outstanding security, instrument or other agreement, obligating the Company to
issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of the capital stock of the Company or obligating the Company to grant,
extend or enter into any such agreement or commitment.
(g) The Merger shall be an "Approved Acquisition" as that term is defined
in the Rights Plan, so that the entering into of this Agreement, the Merger and
the other transactions contemplated hereby and thereby will not result in the
grant of any rights to any person under the Rights Plan or enable or require any
rights thereunder to be exercised, distributed or triggered.
Section 6.4 Authority; Non-Contravention; Statutory Approvals; Compliance.
-------------------------------------------------------------
(a) Authority.
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(i) The Board of Directors of the Company has approved this
Agreement and the Merger. The Board of Directors of the Company has
approved and declared the Merger fair to and advisable and in the best
interests of the shareholders of the Company and has determined to
recommend to such shareholders that they vote in favor of the Merger. The
Company has all requisite power and authority to enter into this Agreement
and, subject to approval by the Company's shareholders in accordance with
the TBCA (the "Company Shareholders' Approval") and the Company Required
Statutory Approvals, to consummate the transactions contemplated hereby.
(ii) The execution and delivery of this Agreement and, subject to
obtaining the Company Shareholders' Approval, the consummation by the
Company of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of the Company.
(iii) This Agreement has been duly and validly executed and delivered
by the Company and, assuming the due authorization, execution and delivery
hereof by Parent and Sub, constitutes the valid and binding obligation of
the Company, enforceable against the Company in accordance with its terms,
except as would be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance or other similar laws affecting the
enforcement of creditors' rights generally and except that the availability
of equitable remedies, including specific performance, may be subject to
the discretion of any court before which any proceeding therefor may be
brought.
(b) Non-Contravention. The execution and delivery of this Agreement
by the Company do not, and the consummation of the transactions contemplated
hereby and thereby will not, (subject, in the cases of items (ii) and (iii)
below, to the Company obtaining the Company Required Statutory Approvals and
Company Required Consents, respectively) result in any violation by the Company
or any of its Subsidiaries under any provisions of or result in termination,
cancellation or modification of, or constitute a default under:
(i) the Articles of Incorporation, Bylaws or similar governing
documents of the Company or any of its Subsidiaries;
(ii) any statute, law, ordinance, rule, regulation, judgment,
decree, order or injunction of any Governmental Authority applicable to the
Company or any of its Subsidiaries or any of their respective properties or
assets;
(iii) any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, concession, contract, lease or other instrument,
obligation or agreement of any kind to which the Company or any of its
Subsidiaries is now a party or by which it or any of its properties or
assets may be bound or affected;
excluding from the foregoing clauses (ii) and (iii) such violations,
accelerations, terminations, modifications or defaults as would not, in the
aggregate, in reasonable probability have a Company Material Adverse Effect.
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(c) Statutory Approvals. Except for (i) filing by the Company of a
pre-merger Notification Report form under the HSR Act, (ii) the filing with the
SEC of (A) a preliminary and definitive proxy statement with respect to the
Merger in accordance with Regulation 14A under the Exchange Act (the "Proxy
Materials") and (B) such reports under Section 13(a) of the Exchange Act as may
be required in connection with this Agreement and the transactions contemplated
hereby and (iii) the filing of the Articles of Merger with the Secretary of
State of Texas with respect to the Merger as provided in the TBCA and
appropriate documents with the relevant authorities in other states in which the
Company is qualified to do business, no declaration, filing or registration
with, or notice to or authorization, consent or approval of, any Governmental
Authority is necessary for the execution and delivery of this Agreement by the
Company, the consummation by the Company of the transactions contemplated
hereby, the failure to obtain, make or give which would in reasonable
probability have a Company Material Adverse Effect (the "Company Required
Statutory Approvals"), it being understood that references in this Agreement to
"obtaining" such Company Required Statutory Approvals shall mean making such
declarations, filings or registrations; giving such notice; obtaining such
consents or approvals; and having such waiting periods expire as are necessary
to avoid a violation of law.
(d) Compliance.
(i) Except as disclosed in the Company SEC Reports, neither the
Company nor any of its Subsidiaries is in violation of or under
investigation with respect to, or has been given notice or been charged
with any violation of, any law, statute, order, rule, regulation, ordinance
or judgment (including, without limitation, any applicable environmental
law, ordinance or regulation) of any Governmental Authority, except for
violations that would not in reasonable probability have a Company Material
Adverse Effect.
(ii) The Company and its Subsidiaries have all permits, licenses,
franchises and other governmental authorizations, consents and approvals
(all of which are in full force and effect) necessary, to conduct their
respective businesses as currently conducted, except those the failure to
obtain which would not in reasonable probability have a Company Material
Adverse Effect, except those violations which would not in reasonable
probability have a Company Material Adverse Effect. No violations exist or,
to the best knowledge of the Company, have been reported in respect of such
permits, licenses, franchises, authorizations, consents and approvals,
except those violations which would not in reasonable probability have a
Company Material Adverse Effect. To the best knowledge of the Company, the
consummation of this Agreement will not require the transfer, modification
or amendment of any material permits, licenses (other than liquor
licenses), franchises, authorizations, consents and approvals.
Section 6.5 Reports and Financial Statements.
--------------------------------
(a) Since June 28, 1998, the filings required to be made by the
Company and its Subsidiaries under the Securities Act or the Exchange Act have
been filed with the SEC as required by each such law or regulation, including
all forms, statements, reports, agreements and
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all documents, exhibits, amendments and supplements appertaining thereto, and
the Company and its Subsidiaries have complied in all material respects
with all applicable requirements of the appropriate act and the rules and
regulations thereunder.
(b) The Company has made available to Parent a true and complete copy
of each report, schedule, registration statement and definitive proxy statement
filed by the Company with the SEC since June 28, 1998 and through the date
hereof (such documents as filed, and any and all amendments thereto, together
with the draft (dated September 11, 1998) of the Company's Form 10-K provided to
Parent by the Company, the "Company SEC Reports").
(c) The Company SEC Reports, including without limitation any
financial statements or schedules included therein, at the time filed, and all
forms, reports or other documents filed by the Company with the SEC after the
date hereof, did not and will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
(d) The audited consolidated financial statements and unaudited
interim financial statements of the Company included in the Company SEC Reports
(collectively, the "Company Financial Statements") have been prepared, and the
audited consolidated financial statements and unaudited interim financial
statements of the Company as included in all forms, reports or other documents
filed with the SEC after the date hereof will be prepared in accordance with
GAAP applied on a consistent basis (except as may be indicated therein or in the
notes thereto and except with respect to unaudited statements as permitted by
Form 10-Q), are accurate and correct in all material respects, and fairly
present in all material respects the financial position of the Company as of the
respective dates thereof or the results of operations and cash flows for the
respective periods then ended, as the case may be, subject, in the case of the
unaudited interim financial statements, to normal, recurring audit adjustments.
(e) True, accurate and complete copies of the Articles of
Incorporation and Bylaws of the Company and of each Subsidiary thereof, as in
effect on the date hereof, have been delivered to Parent.
Section 6.6 Absence of Undisclosed Liabilities.
----------------------------------
(a) Except as set forth in the Company SEC Reports or Schedule 6.6(a)
of the Company Disclosure Schedule, from June 28, 1998 through the date hereof,
the Company and each of its Subsidiaries has conducted its business only in the
ordinary course of business consistent with past practice and there has not been
(i) any declaration, setting aside or payment of any dividend (whether in cash,
stock or property) with respect to any of the Company's capital stock, (ii) (A)
any granting by the Company or any of its Subsidiaries to any executive officer
of the Company or any of its Subsidiaries of any increase in compensation,
except in the ordinary course of business consistent with prior practice or as
was required under employment agreements in effect as of June 28, 1998, (B) any
granting by the Company or any of its Subsidiaries to any such executive officer
of any increase in severance or termination pay, except as was required under
employment, severance or termination agreements in effect as of June 28, 1998,
or (C) any
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entry by the Company or any of its Subsidiaries into any employment, severance
or termination agreement with any such executive officer, (iii) any damage,
destruction or loss, whether or not covered by insurance, that would in
reasonable probability have a Company Material Adverse Effect; (iv) any mortgage
or pledge of any of its property, business or assets, tangible or intangible;
(v) any sale, transfer, lease or disposal of any of a material amount of its
assets, except for transactions in the ordinary course of business, or
cancellation or compromise of any material debt or claim (other than accounts
receivable compromised in the ordinary course of business consistent with its
prior practice), or waiver or release of any right, except for such rights the
loss of which, in any one case or in the aggregate, would not in reasonable
probability have, a Company Material Adverse Effect; (vi) receipt of any notice
or threat of termination of any contract, lease or other agreement or any
damage, destruction or loss (not covered by insurance) which, in any case or in
the aggregate, would in reasonable probability have a Company Material Adverse
Effect; (vii) the issuance of any shares of capital stock or voting securities
of the Company, any phantom stock, options or other rights to acquire from the
Company any capital stock, voting securities convertible into or exchangeable
for capital stock or voting securities of the Company (except pursuant to
warrants, options and other rights outstanding on the date hereof in accordance
with the terms of such agreements as of the date hereof); or (viii) any other
fact or condition exists that would in reasonable probability have a Company
Material Adverse Effect.
(b) Neither the Company nor any of its Subsidiaries has any material
liabilities or obligations (whether absolute, accrued, contingent or otherwise)
except liabilities, obligations or contingencies (i) that are accrued or
reserved against in the consolidated financial statements of the Company or
reflected in the notes thereto for the year ended June 28, 1998, or (ii) that
were incurred after June 28, 1998 in the ordinary course of business.
Section 6.7 Real Property.
-------------
(a) Set forth in Schedule 6.7 of the Company Disclosure Schedule is a
complete list of all real property that the Company or any of its Subsidiaries
currently owns or has owned in the past two years. The Company (or such
Subsidiary) has good and indefeasible title in fee simple to such currently
owned real property and to all buildings and improvements thereon, free and
clear of any mortgages, liens, claims, charges, pledges, security interests or
other encumbrances of any nature whatsoever.
(b) With respect to any deeds, title insurance policies, surveys,
mortgages, agreements and other documents granting to the Company or such
Subsidiary title to or an interest in or otherwise affecting any such real
property, (i) no breach or event of default on the part of the Company or such
Subsidiary, (ii) no material breach or event of default, to the best knowledge
of the Company, on the part of any other party thereto, and (iii) no event that,
with the giving of notice or lapse of time or both, would constitute such breach
or event of default on the part of the Company or such Subsidiary or, to the
best knowledge of the Company, on the part of any other party thereto, has
occurred and is continuing.
(c) Schedule 6.7 of the Company Disclosure Schedule contains a
complete and accurate list of all real property leases to which the Company or
any of its Subsidiaries is a party
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(collectively, the "Leases") (including all amendments thereof and modifications
thereto), including the address of each property, the name and address of each
landlord or tenant, if applicable, the expiration date of each Lease, whether an
option to renew or an option to purchase has been exercised or is available, and
whether the obligations of the Company or any Subsidiary thereunder have been
guaranteed by any other party. The Company's or Subsidiary's interests in and to
all Leases are free and clear of all mortgages, liens, claims, charges, pledges,
security interests or other encumbrances of any nature whatsoever including,
without limitation, subleases, chattel mortgages, mechanics' and materialmen's
liens, conditional sales contracts, collateral security arrangements and other
interest retention arrangements. Neither the Company nor any Subsidiary has
received notice of any default by the Company or such Subsidiary under any of
the Leases, and there are no facts or conditions that would, with notice or
lapse of time or both, constitute a default by the Company or such Subsidiary
under any of the Leases. To the best knowledge of the Company, none of the
landlords under any of the Leases is in default.
(d) The buildings and improvements owned or leased by the Company or
any Subsidiary on any real property owned by the Company or any Subsidiary and
on any Lease, and the operation and maintenance thereof as operated and
maintained, do not (i) contravene any zoning or building Law or ordinance or
other administrative regulation or (ii) violate any restrictive covenant or any
applicable Law. To the best knowledge of the Company, all of the plants,
buildings and structures located on any real property owned by the Company or
any Subsidiary or on any Lease are in a state of good maintenance and repair
(normal wear and tear excepted) suitable in all respects for the operation of
the Company's business.
(e) There is no pending or, to the best knowledge of the Company,
threatened condemnation, eminent domain or similar proceeding with respect to,
or that could affect, any real property owned by the Company or any Subsidiary
or any Lease.
Section 6.8 Company Equipment. The Company or its Subsidiaries have
-----------------
good and valid title to the equipment used in its business. To the best
knowledge of the Company, taken as a whole, such equipment is in good and normal
operating condition and repair and adequate for the uses to which it is being
put by the Company and such Subsidiaries. Neither the Company nor any Subsidiary
has received any notification from any governmental or regulatory authority
within the last five years that the Company or such Subsidiary is in violation
of any health, sanitation, fire, safety, zoning, building or other law,
ordinance or regulation in respect of such equipment or operations, which
violation has not been appropriately and completely resolved.
Section 6.9 Contracts and Commitments.
-------------------------
(a) All contracts, agreements and commitments to which the Company or
any Subsidiary is a party or is bound (and which provide for payment by the
Company or any Subsidiary or receipt by the Company or any Subsidiary of more
than $100,000 over the life of the contract, agreement or commitment or which
are otherwise material to the Company and the Subsidiaries, taken as a whole)
are listed in Schedule 6.9 of the Company Disclosure Schedule.
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(b) Neither the Company nor any Subsidiary is a party to or bound by
any agreements, contracts or commitments which individually or when aggregated
with all related agreements, contracts or commitments, provide for the grant of
any preferential rights to purchase or lease any of the Company's or any
Subsidiary's assets.
(c) The Company has delivered or made available to Parent and Sub true
and complete copies of each written agreement, contract or commitment listed in
Schedule 6.9 of the Company Disclosure Schedule, as well as true and accurate
summaries of any oral agreement listed thereon.
(d) The enforceability of the agreements, contracts and commitments
referred to in this Section 6.9 will not be affected in any respect by the
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby.
(e) No purchase contracts or commitments of the Company or any
Subsidiary are in excess of the normal, ordinary and usual requirements of the
Company or any Subsidiary, or to the best knowledge of the Company, were entered
into at prices in excess of those available in the industry in arm's length
transactions on the respective dates thereof.
(f) Except as set forth in Schedule 6.9(f), neither the Company nor
any Subsidiary is a party to or bound by any outstanding agreements,
arrangements or contracts with any of its officers, directors, employees,
agents, consultants, advisors or sales representatives (or any affiliates of
such persons) that (i) are cancelable by it only upon notice of longer than 30
days and with the imposition of a liability, penalty or premium, (ii) require
non-cancelable payment by the Company or any Subsidiary of over $50,000, or
(iii) provide for any bonus or other payment based on the sale of the Company or
any portion thereof.
(g) Except as set forth in Schedule 6.9(f), neither the Company nor
any Subsidiary is a party to or bound by any employment agreement, consulting
agreement or any other agreement that contains any provision for severance or
termination pay liabilities or obligations (including, without limitation,
change of control or "golden parachute" provisions).
(h) Neither the Company nor any Subsidiary is a party to or bound
by:
(i) any material mortgage, indenture, note, installment obligation
or other instrument, agreement or arrangement for or relating to any
borrowing of money by the Company or any Subsidiary;
(ii) any guaranty, direct or indirect, by the Company or any
Subsidiary of any material obligation for borrowings or otherwise,
excluding endorsements made for collection in the ordinary course of
business;
(iii) any obligation to make payments, contingent or otherwise, of
over $100,000 in the aggregate arising out of any prior acquisition of the
business, assets or stock of other persons, other than with respect to
acquisitions of food or supplies in the ordinary course of business;
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(iv) any collective bargaining agreement with any labor union;
(v) except as set forth in Schedule 6.9(h)(v), any agreement
containing noncompetition or other limitations restricting the conduct of
the business of the Company or any Subsidiary; and
(vi) except as set forth in Schedule 6.2, any partnership, joint
venture or similar agreement.
(i) Neither the Company nor any Subsidiary is bound by any agreement
or arrangement for the sale of any of the assets or capital stock of the Company
or the Subsidiaries or for the grant of any preferential rights to purchase any
of the assets or capital stock of the Company or the Subsidiaries.
(j) With respect to each contract and agreement listed in Schedule
6.9 of the Company Disclosure Schedule, except as set forth therein, (i) each of
such contracts and agreements is valid, binding and in full force and effect and
is enforceable by the Company (or its Subsidiary, as the case may be) in
accordance with its terms, subject to bankruptcy, insolvency, reorganization and
other laws and judicial decisions of general applicability relating to or
affecting creditors' rights and to general principles of equity; (ii) there have
been no cancellations or threatened cancellations thereof nor are there any
outstanding disputes thereunder; (iii) neither the Company or any Subsidiary,
nor, to the best knowledge of the Company, any other party is in breach of any
material provision thereof; and (iv) there does not exist any default under, or
any event or condition which with the giving of notice or passage of time or
both would become a breach or default under, the terms of any such contract or
agreement on the part of the Company or any Subsidiary or, to the best knowledge
of the Company, on the part of any other party thereto.
Section 6.10 Intellectual Property.
---------------------
(a) Schedule 6.10 of the Company Disclosure Schedule contains an
accurate and complete list of all U.S. and Canadian (i) patents, trademarks
(registered or unregistered), trade names, assumed names, registered copyrights
and all applications therefor, owned or filed by the Company or any Subsidiary
and used in or materially necessary for the conduct of the Company's business
and, with respect to registered trademarks and trade names, contains a list of
all jurisdictions in which such trademarks are registered and all registration
numbers; (ii) all licenses (including, but not limited to, liquor licenses),
permits and other agreements relating thereto; and (iii) all agreements relating
to technology (other than software licenses), recipes (including but not limited
to current recipes in use, previously developed recipes not currently in use and
recipes currently under development), know-how or processes used in or necessary
for the conduct of the business of the Company's business which the Company or
any Subsidiary is licensed or authorized to use by others. The Company has valid
licenses to all software currently being used by the Company.
(b) Except as set forth in Schedule 6.10, such patents, trademarks
(registered or unregistered), copyrights, licenses and permits are (i) valid,
subsisting and enforceable, and
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(ii) except for unregistered trademarks and copyrights, duly recorded in the
names of the persons set forth in Schedule 6.10 of the Company Disclosure
Schedule.
(c) The persons set forth in Schedule 6.10 of the Company Disclosure
Schedule have the full right, free from any liens, mortgages, security
interests, charges or encumbrances, to use the patents, trademarks (registered
or unregistered), copyrights and applications therefor set forth beside their
names, and the Company and/or its Subsidiaries has the full right, free from any
liens, mortgages, security interests, charges or encumbrances, to use the trade
names, assumed names, technology, recipes, know-how, inventions, works and
processes referred to in such lists and all trade secrets required for the
conduct of the Company's business in the jurisdictions in which such business is
conducted, and the consummation of the transactions contemplated hereby will not
alter or impair any such rights.
(d) Except as set forth in Schedule 6.10(d), no claims have been
asserted in writing delivered to the Company or any Subsidiary by any person
against the Company or any Subsidiary with respect to the ownership, validity,
enforceability, misappropriation or use of any product or service of the
Company's business or such patents, trademarks (registered or unregistered, or
of any confusingly similar or dilative trademarks), trade names, assumed names,
copyrights, applications therefor, technology, recipes, know-how, processes or
trade secrets or challenging or questioning the validity or effectiveness of any
such license, permits or agreement.
(e) To the best knowledge of the Company, the use or other
exploitation of any product or service of the Company or any Subsidiary or
patents, trademarks (registered or unregistered), trade names, assumed names,
copyrights, applications therefor, recipes, technology, know-how, processes and
trade secrets by the Company or any Subsidiary does not infringe the rights of
any person.
(f) To the best knowledge of the Company, no other person is
infringing the rights of the Company or any Subsidiary with respect to the
patents, trademarks (registered or unregistered), trade names, assumed names,
copyrights, and applications therefor, recipes, technology, know-how,
inventions, works, processes or trade secrets described in this section.
(g) Since the Company has no operations outside of the U.S. and Canada
(and has had no operations outside the U.S. and Canada in the last five years),
the scope of the representations contained in this Section 6.10 cover the U.S.
and Canada only.
Section 6.11 Litigation. Except as set forth in the Company SEC
----------
Reports, there are no claims, suits, actions or proceedings, pending or, to the
knowledge of the Company, threatened, nor are there, to the knowledge of the
Company, any investigations or reviews pending or threatened against, relating
to or affecting the Company or any of its Subsidiaries or the business or any
property or rights thereof or judgments, decrees, injunctions, rules or orders
of any court, governmental department, commission, agency, instrumentality or
authority or any arbitrator applicable to the Company or any of its
Subsidiaries, that, individually or in the aggregate, would in reasonable
probability have a Company Material Adverse Effect. The Company is not subject
to any continuing court or agency order, writ, injunction or decree applicable
specifically to its business, operations or assets or its employees, nor in
default with
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respect to any order, writ, injunction or decree of any court or agency with
respect to its assets, business, operations or employees, which order, writ,
injunction or decree or default with respect thereto would in reasonable
probability have a Company Material Adverse Effect.
Section 6.12 Employee Matters.
----------------
(a) Benefit Plans. Schedule 6.12 of the Company Disclosure Schedule
sets forth as of the date of this Agreement, all of the pension, profit sharing,
stock option, stock purchase, stock bonus, employee stock ownership, incentive,
bonus, life, health, disability or accident plans, deferred compensation plans,
and other employee compensation or benefit plans, agreements, practices,
policies, customs, contracts, arrangements or commitments, including, without
limitation, changes in control or severance agreements, holiday, vacation or
other similar plans, programs or arrangements, employee benefit plans (within
the meaning of section 3(3) of ERISA), and labor union agreements under or with
respect to which the Company or any person ("ERISA Affiliate") who would be
treated as being a "single employer" with the Company under Section 414 of the
Code, has any liability or obligation, whether current, contingent, secondary or
otherwise (collectively, the "Company Benefit Plans" and individually, a
"Company Benefit Plan"), and the Company has furnished to Parent and Sub
complete copies of all of the foregoing as amended and in effect on the date
hereof, including, where applicable, any trust agreements, insurance contracts
or other funding mediums related to any Company Benefit Plan. With respect to
all Company Benefit Plans, except as set forth in Schedule 6.12, except as set
forth in the Company SEC Reports and except, in the case of clauses (ii) through
(x), as would not, individually or in the aggregate, in reasonable probability
have a Company Material Adverse Effect: (i) none of the Company Benefit Plans is
a "multi-employer plan" within the meaning of ERISA; (ii) none of the Company
Benefit Plans promises or provides retiree medical or life insurance benefits to
any person, except as otherwise required by law; (iii) each Company Benefit Plan
intended to be qualified under Section 401(a) of the Code has received a
favorable determination letter from the Internal Revenue Service that it is so
qualified and nothing has occurred since the date of such letter that could in
reasonable probability be expected to affect the qualified status of such
Company Benefit Plan; (iv) each Company Benefit Plan has been operated in all
respects in accordance with its terms and the requirements of applicable law;
(v) neither the Company nor any of its Subsidiaries has incurred any direct or
indirect liability under, arising out of or by operation of Title IV of ERISA in
connection with the termination of, or withdrawal from, any Company Benefit Plan
or other retirement plan or arrangement, and no fact or event exists that could
in reasonable probability be expected to give rise to any such liability; (vi)
the Company and each Company Benefit Plan is in compliance with the provisions
of ERISA and the Code insofar as ERISA and the Code are applicable to such
Company Benefit Plan, except for such noncompliance as would not in reasonable
probability have a Company Material Adverse Effect; (vii) there has not occurred
with respect to any Company Benefit Plan any "Prohibited Transaction" as defined
in either Section 406 of ERISA or Section 4975 of the Code; (viii) that has not
occurred with respect to any Company Benefit Plan any "Reportable Event" as
defined in Section 4043 of ERISA; (ix) neither (A) the Company or a director,
officer, employee or agent of the Company or its Subsidiaries have, with respect
to any Company Benefit Plan, nor (B) any Company Benefit Plan or trust created
thereunder or trustee or administrator thereof have, engaged in any kind of
conduct that would result in any penalties under Section 502(i) of ERISA or any
liability under Section 409 of ERISA that would in reasonable probability
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have a Company Material Adverse Effect; and (x) each Company Benefit Plan
maintained by the Company specifically provides that it may be terminated at any
time by its sponsoring employer (subject, in the case of any Company Benefit
Plan which is subject to Title IV of ERISA, to the provisions of Section 4041 of
ERISA), and there are no circumstances or conditions that exist prior to the
Merger that would prevent the applicability of these provisions. The aggregate
accumulated benefit obligations of any Company Benefit Plan subject to Title IV
of ERISA do not exceed the fair market value of the assets of such Company
Benefit Plan. The Company has furnished Parent with true and complete copies of
the Company Benefit Plans.
Section 6.13 Collective Bargaining Agreements; Compensation; Employee
--------------------------------------------------------
Agreements.
- ----------
(a) Neither the Company nor any Subsidiary has in effect any
collective bargaining agreement and neither is currently engaged in any
bargaining with any labor union.
(b) To the best knowledge of the Company, no petition is on file with
the National Labor Relations Board submitted by a labor union seeking to
represent any of the employees of the Company or any Subsidiary and the Company
is not aware of any attempts to organize the employees of the Company or any
Subsidiary by any labor union.
(c) Schedule 6.13 of the Company Disclosure Schedule sets forth a
complete and accurate list showing the names, the rate of compensation and the
portions thereof attributable to salary and bonuses, respectively, as well as
the location of all officers of the Company and its Subsidiaries and of all
employees of or consultants to the Company or any Subsidiary that received
annual base salary and cash bonus totaling in excess of $50,000 for the fiscal
year ended June 28, 1998.
(d) There are no covenants, agreements or restrictions to which the
Company or any Subsidiary is a party, including but not limited to employee
noncompete agreements, prohibiting, limiting or in any way restricting any
current employee listed in Schedule 6.13 of the Company Disclosure Schedule from
engaging in any type of business activity in any location.
Section 6.14 Labor Matters.
-------------
(a) The Company and its Subsidiaries have complied and are presently
complying with all applicable laws respecting employment and employment
practices, terms and conditions of employment, and wages and hours, except for
any noncompliance that in the aggregate would not in reasonable probability have
a Company Material Adverse Effect.
(b) Except as set froth in Schedule 6.14(g), there is no open and
unresolved unfair labor practice charge or complaint against the Company or any
Subsidiary for which the Company or any Subsidiary has received service of
process or other appropriate notice or, to the best knowledge of the Company,
pending (without having been so served or noticed) being considered or
threatened before the National Labor Relations Board.
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<PAGE>
(c) There is no open and unresolved grievance or any open and
unresolved arbitration proceeding arising out of or under collective bargaining
agreements for which the Company or any Subsidiary has received service of
process or other appropriate notice and, to the best knowledge of the Company,
no such grievance or arbitration proceeding is pending (without having been so
served or noticed) or is being considered or threatened.
(d) There is no basis for any charge, complaint or grievance described
in this Section 6.14, and, to the best knowledge of the Company, none is being
considered.
(e) There is no labor strike, slowdown or work stoppage for which the
Company or any Subsidiary has received service of process or other appropriate
notice or, to the best knowledge of the Company, pending (without having been so
served or noticed) or threatened against the Company or any Subsidiary.
(f) Neither the Company nor any Subsidiary has been a party within the
past two years to any proceedings before the National Labor Relations Board, and
neither is a party to any arbitration proceeding arising out of or under
collective bargaining agreements.
(g) Except as set forth in Schedule 6.14(g) there is no open and
unresolved charge or complaint for which the Company or any Subsidiary has
received service of process or other appropriate notice or, to the best
knowledge of the Company, which is being considered or threatened against the
Company or any Subsidiary before the Equal Employment Opportunity Commission or
any state, local, federal or foreign agency responsible for the prevention of
unlawful employment practices.
(h) Neither the Company nor any Subsidiary has received notice of the
intent of any federal, state, local or foreign agency responsible for the
enforcement of labor or employment laws to conduct an investigation of or
relating to the Company or any Subsidiary, and, to the best knowledge of the
Company, no such investigation is in progress.
(i) There are no current Affirmative Action Plans to which the Company
or any Subsidiary is a party and, to the best knowledge of the Company, there
are no current or pending audits contemplated against the Company or any
Subsidiary by the Office of Federal Compliance Programs pursuant to Executive
Order 11246.
Section 6.15 Environmental Matters. Except as disclosed in the Company
---------------------
SEC Reports and except as would not, individually or in the aggregate, in
reasonable probability have a Company Material Adverse Effect, (i) the Company
and each of its Subsidiaries are in compliance with all applicable Environmental
Laws and the terms and conditions of all applicable Environmental Permits, (ii)
there are no Environmental Claims against the Company or any of its
Subsidiaries, and (iii) no Hazardous Materials have been released, discharged or
disposed of on any of the properties owned or occupied by the Company or its
Subsidiaries in any manner or quantity which requires investigation, assessment,
monitoring, remediation or cleanup under currently applicable Environmental
Laws.
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<PAGE>
Section 6.16 Vote Required. The approval of the Agreement by the holders of
-------------
at least two-thirds of the outstanding shares of Company Common Stock (the
"Company Shareholders' Approval") is the only vote of holders of any class or
series of the capital stock of the Company required to approve this Agreement,
the Merger and the other transactions contemplated hereby.
Section 6.17 Insurance. The Company and each of its Subsidiaries is, and
---------
has been continuously since June 28, 1998, insured in such amounts and against
such risks and losses (the related insurance polices hereinafter referred to as
the "Insurance Policies") as are (i) customary for companies conducting the
respective businesses conducted by the Company and its Subsidiaries during such
time period and (ii) sufficient for compliance with all requirements of law and
of all agreements with respect to the operation of the business of the Company.
Neither the Company nor any of its Subsidiaries has received any notice of
cancellation or termination with respect to any Insurance Policy. All Insurance
Policies of the Company and its Subsidiaries are valid and enforceable policies.
Section 6.18 State Takeover Statutes; Absence of Supermajority Provision.
-----------------------------------------------------------
The Company has taken all action to assure that no state takeover statute or
similar statute or regulation shall apply to the Merger or any of the other
transactions contemplated hereby. Except for the Company Shareholders' Approval,
no other shareholder action on the part of the Company is required for approval
of the Merger, this Agreement and the transactions contemplated hereby. No
provisions of the Company's Articles of Incorporation or Bylaws or other
governing instruments of its Subsidiaries or the terms of the Rights Plan or
other takeover defense mechanism of the Company would, directly or indirectly,
restrict or impair the ability of Parent to vote, or otherwise to exercise the
rights of a shareholder with respect to, securities of the Company and its
Subsidiaries that may be acquired or controlled by Parent or permit any
shareholder to acquire securities of the Company on a basis not available to
Parent in the event that Parent were to acquire securities of the Company.
Section 6.19 Tax Matters.
-----------
(a) For purposes of this Agreement, "Tax Return" means any report,
statement, form, return or other document or information required to be supplied
to a taxing authority in connection with Taxes.
(b) All Tax Returns required to be filed on or before the Closing Date
by the Company or any Subsidiary have been or will be filed within the time
prescribed by Law (including extensions of time approved by the appropriate
taxing authority). The Tax Returns so filed are complete, correct and accurate
representations of the Tax liabilities of the Company and its Subsidiaries and
such Tax Returns accurately set forth or will accurately set forth all items to
the extent required to be reflected or included in such returns.
(c) The Company and it Subsidiaries have timely paid or made adequate
provision in the Company's balance sheet for the payment of all Taxes due on
such Tax Returns that have been filed or will be filed for periods ending on or
before the date of the balance sheet.
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<PAGE>
(d) Except as set forth in Schedule 6.19(d), there is no action, suit,
investigation, proceeding, audit or claim that has been served against or
otherwise noticed to the Company or any Subsidiary, or, to the best knowledge of
the Company, pending or proposed against or with respect to the Company or any
Subsidiary in respect of any Tax. There are no material liens for Taxes upon any
of the assets of the Company or any Subsidiary.
(e) The Company and its Subsidiaries have withheld and paid all Taxes
required to have been withheld and paid in connection with amounts paid or owing
to any employee, creditor, independent contractor, or other person.
(f) Neither the Company nor any Subsidiary have waived any statute of
limitations in respect of Taxes or agreed to any extension of time with respect
to a Tax assessment or deficiency.
(g) Neither the Company nor any Subsidiary has in effect a consent under
Section 341(f) of the Code concerning collapsible corporations.
(h) Neither the Company nor any Subsidiary has made any payment, or
become obligated to make any payment, or become a party to any agreement that
could obligate it to make any payment that will not be deductible under section
280G of the Code or will be subject to Tax under section 4999 of the Code.
(i) There has never been a Tax sharing or allocation agreement in place
between the Company or any Subsidiary or any other Person other than those, if
any, with respect to which the applicable statute of limitations has run.
(j) Neither the Company nor any Subsidiary is liable for a Tax incurred
by any other corporation that was a member of a consolidated group of
corporations (within the meaning of Treasury regulation section 1.1502) that
included the Company or any Subsidiary.
ARTICLE VII
COVENANTS RELATING TO CONDUCT OF BUSINESS
-----------------------------------------
After the date hereof and prior to the Effective Time or earlier
termination of this Agreement, the Company shall, and shall cause its
Subsidiaries to, comply with the provisions of this Article VII.
Section 7.1 Ordinary Course of Business. The Company shall, and shall cause
---------------------------
its Subsidiaries to, conduct their respective businesses in the usual, regular
and ordinary course in substantially the same manner as heretofore conducted and
use all commercially reasonable best efforts to preserve their respective
business organizations and goodwill, preserve the goodwill and relationships
with customers, suppliers, distributors and others having business dealings with
them and, subject to prudent management of workforce needs and ongoing programs
currently in force, keep available the services of their present officers and
employees.
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<PAGE>
Section 7.2 Dividends. The Company shall not, nor shall it permit any of
---------
its Subsidiaries to:
(a) declare or pay any dividends or make other distributions in respect
of any of their capital stock other than to the Company or its Subsidiaries.
(b) split, combine or reclassify any of their capital stock or issue or
authorize or propose the issuance of any other securities in respect of, in lieu
of, or in substitution for, shares of their capital stock; or
(c) redeem, repurchase or otherwise acquire any shares of their capital
stock, other than
(i) intercompany acquisitions of capital stock, or
(ii) in connection with the administration of employee benefit and
dividend reinvestment plans as in effect on the date hereof in the ordinary
course of the operation of such plans.
Section 7.3 Issuance of Securities. The Company shall not, and shall not
----------------------
permit any of its Subsidiaries to, issue, agree to issue, deliver or sell, or
authorize or propose the issuance, delivery or sale of, any shares of their
capital stock or any class or any securities convertible into or exchangeable
for, or any rights, warrants or options to acquire, any such shares or
convertible or exchangeable securities except for:
(a) the issuance of common stock or other securities by the Company
pursuant to the plans and arrangements listed in Schedule 6.3 of the Company
Disclosure Schedule, in each case in the ordinary course of the operation of
such plans and arrangements in accordance with their current terms,
(b) shares issued in conversion, exchange or exercise of existing
outstanding securities of the Company in connection with rights currently
existing under such outstanding securities, or
(c) issuances by a wholly owned Subsidiary of its capital stock to the
Company.
Section 7.4 Charter Documents. The Company shall not amend or propose to
-----------------
amend its Articles of Incorporation or Bylaws in any way adverse to Parent.
Section 7.5 Capital Expenditures. Except as required by law and except for
--------------------
those expenditures specifically set forth in Schedule 7.5, the Company shall
not, nor shall it permit any of its Subsidiaries to, make any capital
expenditures, except for normal extensions to or replacements of properties or
in the ordinary course of business consistent with prior practice not in excess
of $100,000 in the aggregate; or merge or consolidate with any other
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<PAGE>
person or acquire, except in the ordinary course of business consistent with
prior practice, a material amount of assets of any other person.
Section 7.6 No Dispositions. Except as described in Schedule 7.6 of the
---------------
Company Disclosure Schedule, the Company shall not, nor shall it permit any of
its Subsidiaries to, sell, lease, license, encumber or otherwise dispose of any
assets that are material, except for normal extensions to or replacements or
dispositions of properties in the ordinary course of business consistent with
prior practice.
Section 7.7 Intellectual Property. The Company shall not, nor shall it
---------------------
permit any of its Subsidiaries to, dispose of or permit to lapse any right to
use any patent, trademark, assumed name, service mark, trade name, copyright,
license or application therefor or dispose of or disclose to any person other
than representatives of Parent and Sub any trade secret, recipe, formula,
process or know-how not theretofore a matter of public knowledge that is
currently used or in reasonable probability will be used in the Company's
business.
Section 7.8 Liabilities and Obligations.
---------------------------
(a) The Company shall not, nor shall it permit any of its Subsidiaries
to, voluntarily incur any liabilities or obligations of any nature whatsoever
(whether absolute, accrued, contingent or otherwise and whether due or to become
due), except for (i) liabilities or obligations incurred in the usual, regular
and ordinary course of business in substantially the same manner as heretofore
conducted and (ii) liabilities or obligations incurred in connection with the
construction and operation of the Company's restaurant that is being constructed
at the following location: 4201 South Padre Island Drive, Corpus Christi, Texas
78411 (the "New Restaurant").
(b) The Company shall not, nor shall it permit any of its Subsidiaries
to, pay, discharge or satisfy any claim, encumbrance, liability or obligation
(whether absolute, accrued, contingent or otherwise and whether due or to become
due), other than the payment, discharge or satisfaction of liabilities and
obligations in the usual, regular and ordinary course of business in
substantially the same manner as heretofore conducted.
Section 7.9 Indebtedness.
------------
(a) The Company shall not, nor shall it permit any of its Subsidiaries
to, incur or guarantee any indebtedness (including any debt borrowed or
guaranteed or otherwise assumed, including, without limitation, the issuance of
debt securities), except for:
(i) short-term indebtedness in the ordinary course of business
consistent with past practice,
(ii) long-term indebtedness in connection with the refinancing of
existing indebtedness either at its stated maturity or at a lower cost of
funds,
(iii) borrowings or letters of credit under existing credit
facilities, or
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<PAGE>
(iv) borrowings or letters of credit, not to exceed $2,500,000,
required to finance construction and/or finish out of the New Restaurant.
(b) The Company shall not, nor shall it permit any of its
Subsidiaries to, cancel any aggregate amount of indebtedness in excess of
$10,000 or waive any claims or rights of value in excess of $10,000.
(c) The Company shall not, nor shall it permit any of its
Subsidiaries to, increase or change any assumptions underlying, or methods of
calculating, any bad debt, contingency or other reserves.
Section 7.10 Compensation, Benefits. Except as may be required by
----------------------
applicable law or the provisions of any Company Benefit Plan, or as contemplated
by this Agreement, the Company shall not, nor shall it permit any of its
Subsidiaries to, (without the consent of Sub, which may be withheld in its sole
discretion) enter into, adopt or amend or increase the amount of or accelerate
the payment or vesting of any benefit or amount payable under any Company
Benefit Plan or any other contract, agreement, commitment, arrangement, plan or
policy maintained by, contributed to or entered into by the Company, as the case
may be, or their respective Subsidiaries, or increase, or enter into any
contract, agreement, commitment or arrangement to increase in any manner, the
compensation or fringe benefits, or otherwise to extend, expand or enhance the
engagement, employment or any related rights of any director, officer or other
employee of the Company, or its respective Subsidiaries, except for normal
increases in the ordinary course of business consistent with past practice that,
in the aggregate, do not result in a material increase in benefits or
compensation expense to Parent or the Company, as the case may be, or their
respective Subsidiaries, or enter into or amend any employment, severance, or
special pay arrangement with respect to the termination of employment or other
similar contract, agreement or arrangement with any director or officer or other
employee other than in the ordinary course of business consistent with past
practice.
Section 7.11 Collective Bargaining. The Company shall not, nor shall
---------------------
it permit any of its Subsidiaries to, enter into any collective bargaining or
labor agreement.
Section 7.12 Loans and Advances. The Company shall not, nor shall it
------------------
permit any of its Subsidiaries to, pay, loan or advance any amount (except for
the payment of salary and benefits) to any of the officers, directors or
shareholders of the Company, any of its Subsidiaries or any of their respective
affiliates.
Section 7.13 Accounting. The Company shall not, nor shall it permit
----------
any of its Subsidiaries to, make any material changes in its or their accounting
methods, except as required by law, rule, regulation or GAAP.
Section 7.14 Lease and Purchase Options. The Company shall not, nor
--------------------------
shall it permit any of its Subsidiaries to permit the expiration of, any Lease
option or option to purchase any property.
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<PAGE>
Section 7.15 Insurance. The Company shall, and shall cause its
---------
Subsidiaries to, maintain with financially responsible insurance companies (or
through self-insurance not inconsistent with such party's past practice)
insurance in such amounts and against such risks and losses as are customary for
companies engaged in the same industry and such other businesses as conducted by
such party and its Subsidiaries.
Section 7.16 Permits. The Company shall use commercially reasonable
-------
best efforts to maintain in effect all existing material permits pursuant to
which the Company operates.
Section 7.17 Non-contravention. The Company shall not, nor shall it
-----------------
permit any of its Subsidiaries to, omit to do any act, or permit any act or
omission to act, which may cause a breach of any contract, commitment or
obligation of the Company or of any Subsidiary of the Company, or any breach of
any representation, warranty, covenant or agreement made by the Company herein.
Section 7.18 Payments to Suppliers and Vendors. The Company shall not,
---------------------------------
nor shall it permit any of its Subsidiaries to, pre-pay any party for amounts
not yet due (except in the ordinary course of the Company's business and
consistent with past practice), or pay any party in a non-timely manner.
ARTICLE VIII
ADDITIONAL AGREEMENTS
Section 8.1 Cooperation, Notification. After the date hereof and prior
-------------------------
to the Effective Time or earlier termination of this Agreement, Parent shall,
and shall cause its Subsidiaries to, and the Company shall, and shall cause its
Subsidiaries to:
(a) confer on a regular and frequent basis with one or more
representatives of the other party to discuss matters pertinent to the proposed
business combination,
(b) promptly notify the other party of any significant changes
in its business, properties, assets, condition (financial or otherwise),
prospects or results of operations,
(c) advise the other party of any change or event that has had
or, to the knowledge of such party, would in reasonable probability have a
Parent Material Adverse Effect, a Sub Material Adverse Effect or a Company
Material Adverse Effect, and
(d) consult with each other prior to making any filings with any
state or federal court, administrative agency, commission or other Governmental
Authority in connection with this Agreement and the transactions contemplated
hereby, and promptly after each such filing provide the other with a copy
thereof.
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<PAGE>
Section 8.2 Third-Party Consents. Each of Parent and the Company
--------------------
shall, and shall cause its Subsidiaries to, use all commercially reasonable best
efforts to obtain all third-party consents necessary to consummate the Merger,
and specifically regarding the Leases, each of Parent and the Company agree to
use commercially reasonable best efforts to obtain prior to the Closing all
consents and landlord approvals necessary, in the reasonable determination of
Parent, to consummate the transactions contemplated hereby, including, without
limitation, estoppel certificates, consents to leasehold mortgage, memoranda of
leases and renewal options. All consents shall be in writing and in form and
substance reasonably satisfactory to Parent. Each party shall promptly notify
the other party of any failure or prospective failure to obtain any such
consents and, if requested by the other party, shall provide to the other party
copies of all such consents, as the case may be, obtained by such party.
Section 8.3 Access to Information.
(a) Upon reasonable notice, the Company shall, and shall cause its
Subsidiaries to, afford to the officers, directors, accountants, counsel,
investment bankers, financial advisors, consultants and other representatives of
Parent (collectively, the "Parent Personnel") reasonable access, during normal
business hours throughout the period prior to the Effective Time, to all of its
properties, books, contracts, commitments and records, including, but not
limited to, Tax Returns, but excluding (i) that information that is restricted
by applicable confidentiality and secrecy agreements, (ii) that information that
a party may be restricted from disclosing under applicable law, (iii) the
corporate proceedings of the Company in considering the Merger or other similar
transactions in the past, and, during such period, the Company shall, and shall
cause its Subsidiaries to, furnish promptly to the other:
(i) a copy of each report, schedule and other document filed by it
or any of its Subsidiaries with the SEC and any other document pertaining
to the transactions contemplated hereby filed with any Governmental
Authority that is not filed as an exhibit to an SEC filing or described in
an SEC filing, and
(ii) all information concerning itself, its Subsidiaries, directors,
officers and shareholders and such matters as may be reasonably requested
by Parent in connection with any filings, applications or approvals
required or contemplated by this Agreement.
In the event that any of the Parent Personnel desires to formally inspect any of
the Company's restaurants, such Parent Personnel shall provide reasonable prior
notice (which may be oral) to the Company of such desire and shall reasonably
cooperate with the Company in making such inspections and tours so as to
minimize the disruptive effect thereof on the operations of the affected
restaurants.
Section 8.4 Regulatory Matters.
------------------
(a) HSR Filings. Each party hereto shall, in cooperation with the
other, file or cause to be filed with the Federal Trade Commission and the
Department of Justice any notifications required to be filed by their respective
"ultimate parent entities" under the HSR Act, and the rules and regulations
promulgated thereunder with respect to the transactions
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<PAGE>
contemplated hereby. Each party hereto shall notify the other immediately upon
receiving any request for additional information from either of such agencies
with respect to such filings and shall respond promptly to any such requests.
(b) Other Regulatory Approvals.
(i) Each party hereto shall cooperate and use its commercially
reasonable best efforts promptly to prepare and file all necessary permits,
consents, approvals and authorizations of all Governmental Authorities and
all other persons necessary or advisable to consummate the transactions
contemplated by this Agreement, including, without limitation, the Company
Required Statutory Approvals.
(ii) Parent shall have the right to review and approve in advance all
characterizations of the information relating to Parent, on the one hand,
and the Company shall have the right to review and approve in advance all
characterizations of the information relating to the Company, on the other
hand, in either case, which appear in any filing made in connection with
the transactions contemplated by this Agreement or the Merger.
(iii) The Company and Parent shall each consult with the other with
respect to the obtaining of all such necessary or advisable permits,
consents, approvals and authorizations of Governmental Authorities.
Section 8.5 Shareholder Approval; Proxy Materials.
-------------------------------------
(a) The Company and Parent will, as soon as practicable following
the execution of the Agreement, prepare and file the Proxy Statement with the
SEC. The Company will use all commercially reasonable best efforts to respond to
all SEC comments with respect to the Proxy Statement and to cause the Proxy
Statement to be mailed to the Company's shareholders at the earliest practicable
date.
(b) The Company and Sub will, as soon as practicable following the
execution of this Agreement, duly call, give notice of, convene and hold
meetings of the Sub's and the Company's shareholders, respectively, for the
purpose of approving this Agreement and the transactions contemplated hereby. At
the Company's shareholders meeting, Parent shall cause all of the shares of
Company Common Stock then owned by Parent and Sub to be voted in favor of the
Merger.
(c) Cooperation. Parent shall furnish all information concerning
itself, Sub and its other Subsidiaries that is required or customary for
inclusion in the Proxy Materials.
Section 8.6 Indemnification; Directors' and Officers' Insurance.
---------------------------------------------------
(a) The Company shall, and from and after the Effective Time, the
Surviving Corporation shall, indemnify, defend and hold harmless each person who
is now, or has been at any time prior to the date hereof or who becomes prior to
the Effective Time, an officer or
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director of the Company or any of its Subsidiaries (the "Indemnified Parties")
against all losses, claims, damages, costs, expenses (including attorneys' fees
and expenses), liabilities or judgments or amounts that are paid in settlement
with the approval of the indemnifying party (which approval shall not be
unreasonably withheld) of or in connection with any threatened or actual claim,
action, suit, proceeding or investigation based in whole or in part on or
arising in whole or in part out of the fact that such person is or was a
director or officer of the Company or any of its Subsidiaries whether pertaining
to any matter existing or occurring at or prior to the Effective Time or any
acts or omissions occurring or existing at or prior to the Effective Time and
whether asserted or claimed prior to, or at or after, the Effective Time
("Indemnified Liabilities"), including all Indemnified Liabilities based in
whole or in part on, or arising in whole or in part out of, or pertaining to
this Agreement or the transactions contemplated hereby, in each case subject to
the limitations, terms and conditions set forth in the Company's Articles of
Incorporation and Bylaws) as in effect on June 28, 1998 (unless otherwise
limited by the applicable provisions of the TBCA); provided, however, that the
procedure for indemnification (if not in conflict with the Company's Articles of
Incorporation and Bylaws, as in effect on June 28, 1998, or the TBCA) shall be
set forth below. In addition to the foregoing right to indemnification, the
Company and the Surviving Corporation, as the case may be, shall promptly pay
all expenses upon receipt of evidence of the same in advance of the final
disposition of any such action or proceeding to each Indemnified Party subject
to the limitations, terms and the conditions set forth in the Company's current
Articles of Incorporation and Bylaws as in effect on June 28, 1998 (unless
otherwise limited by the applicable provisions of the TBCA). In connection with
the foregoing, in the event any such claim, action, suit, proceeding or
investigation is brought against any Indemnified Parties (whether arising before
or after the Effective Time), (i) the Indemnified Parties may retain legal
counsel satisfactory to them and reasonably satisfactory to the Company (or to
them and reasonably satisfactory to the Surviving Corporation after the
Effective Time) and the Company (or after the Effective Time, the Surviving
Corporation) shall pay all reasonable fees and expenses of such counsel for the
Indemnified Parties promptly as statements therefor are received, and (ii) the
Company (or after the Effective Time, the Surviving Corporation) will use all
commercially reasonable best efforts to assist in the vigorous defense of any
such matter (but shall not be required to provide additional legal counsel),
provided that neither the Company nor the Surviving Corporation shall be liable
for any settlement effected without its prior written consent (which consent
shall not unreasonably be withheld). Any Indemnified Party wishing to claim
indemnification under this Section 8.6, upon learning of any such claim, action,
suit, proceeding or investigation, shall notify the Company (or after the
Effective Time, the Surviving Corporation) (provided that the failure so to
notify shall relieve the Company or the Surviving Corporation, as the case may
be, from any liability which it may have under this Section 8.6 to the extent
such failure prejudices the Company or Surviving Corporation's position with
respect to such claims). The Indemnified Parties as a group may retain only one
law firm to represent them with respect to each such matter unless there is,
under applicable standards of professional conduct, a conflict on any
significant issue between the positions of any two or more Indemnified Parties
in which case such additional counsel as may be required (as shall be reasonably
determined by the Indemnified Parties and the Company or the Surviving
Corporation, as the case may be) may be retained by the Indemnified Parties at
the cost and expense of the Company (or Surviving Corporation). The foregoing
rights to indemnification and the foregoing rights to advances of expenses
incurred in defense existing in favor of the Indemnified Parties with respect to
matters occurring through the
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Effective Time, shall survive the Merger and shall continue in full force and
effect for not less than six years from the Effective Time; provided, however,
that all rights to indemnification in respect of any Indemnified Liabilities
asserted or made within such period shall continue until the disposition of such
Indemnified Liabilities. Furthermore, the provisions with respect to
indemnification set forth in the Articles of Incorporation of the Surviving
Corporation shall not be amended for a period of six years following the
Effective Time if such amendment would materially and adversely affect the
rights thereunder of individuals who at any time prior to the Effective Time
were directors, officers, employees or agents of the Company in respect of
actions or omissions occurring at or prior to the Effective Time. This agreement
is intended to provide protection that is no greater than that afforded by the
Company's Articles of Incorporation and Bylaws, as in existence on the date
hereof. The Company (and, after the Effective Time, the Surviving Corporation)
shall pay all costs (including attorneys fees) incurred by any Indemnified Party
in any lawsuit brought in good faith to enforce the provisions of this Section
8.6, or to enforce rights to indemnification under the Company's (or Surviving
Corporations, as the case may be) Articles of Incorporation or Bylaws or under
applicable law.
(b) Notwithstanding the foregoing, with respect to any Indemnified
Party, "Indemnified Liabilities" shall not include any matter arising as a
result of, or in connection with, any breach of any of the representations and
warranties set forth in Article VI hereof.
(c) For a period of six years after the Effective Time, the
Surviving Corporation shall cause to be maintained in effect the current
policies of directors' and officers' liability insurance maintained by the
Company and its Subsidiaries (provided that the Surviving Corporation may
substitute therefor policies of at least the same coverage and amounts
containing terms and conditions which are no less advantageous in any material
respect to the Indemnified Parties), with respect to matters arising before and
omissions occurring or existing at or prior to the Effective Time including the
transactions contemplated by this Agreement.
(d) The Surviving Corporation shall perform and discharge its
obligations under this Section 8.6 and its indemnification obligations under the
Surviving Corporation's Articles of Incorporation and Bylaws and under
applicable law.
(e) The provisions of this Section 8.6 are for the benefit of, and
shall be enforceable by, each Indemnified Party, his heirs and his personal
representatives as if such Indemnified Party were a party hereto and shall be
binding on all successors and assigns of Sub, the Company and the Surviving
Corporation; provided, however, that neither Parent nor its affiliates shall
bring any action against any Indemnified Parties on their own account for any
breaches of the representations and warranties set forth in Article VI hereof.
(f) Notwithstanding anything in this Agreement to the contrary, in
no circumstance shall Parent be obligated to contribute capital (or otherwise
fund) the Surviving Corporation's indemnification obligations under this Section
8.6, it being the intent of the parties to look solely to the assets of the
Surviving Corporation therefor.
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Section 8.7 Disclosure Schedule.
-------------------
(a) On or prior to the date of this Agreement, the Company shall have
delivered to Parent the Company Disclosure Schedule.
(b) The Company Disclosure Schedule when so delivered, shall constitute an
integral part of this Agreement and each schedule therein shall modify or
otherwise affect all of the representations, warranties, covenants or agreements
of the Company contained herein. The Company, acting reasonably and in good
faith, will supplement and/or amend the Company Disclosure Schedule to reflect
changes in facts occurring after the date hereof which, if existing on the date
of this Agreement, would have been required to be set forth or described in the
Company Disclosure Schedule. Parent and Sub shall be entitled to treat any such
supplemental disclosures by the Company as a breach of the appropriate
representation or warranty, whether or not the event or condition giving rise to
such supplemental disclosure occurred on or prior to the date of this Agreement,
unless such supplementation is a result of any of the activities not prohibited
by Article VII of this Agreement.
(c) Any and all statements, representations, warranties or disclosures set
forth in the Company Disclosure Schedule shall be deemed to have been made on
and as of the date of this Agreement and, again, at the Closing.
Section 8.8 Public Announcements. The Company, on the one hand, and Parent
--------------------
and Sub, on the other hand, shall cooperate with each other in the development
and distribution of all news releases and other public information disclosures
with respect to this Agreement or any of the transactions contemplated hereby
and shall not issue any public announcement or statement with respect thereto
prior to consultation with the other party, except that each party may respond
to questions from shareholders and may respond to inquiries from financial
analysts and media representatives in a manner consistent with its past practice
and each party may make such disclosure as may be required by applicable law or
by obligations pursuant to any listing agreement with any national securities
exchange or Nasdaq National Market without prior consultation to the extent such
consultation is not reasonably practicable. The parties agree that the initial
press release or releases to be issued in connection with the execution of this
Agreement shall be mutually agreed upon prior to the issuance thereof.
Section 8.9 Stock Option, Stock Purchase and Bonus Plans. The following
--------------------------------------------
provisions shall apply to each stock option plan, stock purchase plan, bonus
plan, deferred compensation plan and similar plans of the Company under which
the delivery of Company Common Stock is required to be used for purposes of the
payment of benefits, grant of awards or exercise of options, all of which are
described in Schedule 6.3 of the Company Disclosure Schedule. The Company shall
take such action as may be necessary so that (i) from and after the date hereof,
except as set forth in Schedule 6.3, no further grants of stock, options, or
other rights shall be made under the Stock Plans, and (ii) on or before the
Effective Time each outstanding option or restricted stock award (or any other
right to stock) that remains unexercised or unvested under the Stock Plans as of
the Effective Time shall be canceled at or prior to the Effective Time in
accordance with the provisions of Section 3.5.
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Section 8.10 No Solicitations.
----------------
(a) The Company shall not, and shall cause its Subsidiaries not to,
permit any of its representatives to, and shall use its best efforts to cause
such persons not to, directly or indirectly, initiate, solicit or encourage, or
take any action to facilitate the making of any inquiry, offer or proposal that
constitutes or in reasonable probability will lead to any Takeover Proposal with
respect to the Company.
(b) The Company shall notify Parent orally and in writing of any such
inquiries, offers or Takeover Proposals (including, without limitation, the
terms and conditions of any such proposal and the identity of the person making
it) within one business day of the receipt thereof.
(c) The Company shall immediately cease and cause to be terminated all
existing activities, discussions and negotiations, if any, with any other
persons conducted heretofore with respect to any Takeover Proposal regarding the
Company, and inform such other persons of its obligation in this Section 8.10.
(d) Notwithstanding anything in this Section 8.10 to the contrary:
(i) The Company may, prior to the vote of the shareholders of the Company
for approval of the Merger (and not thereafter if the Merger is approved
thereby) in response to an unsolicited request therefor, furnish information,
including non-public information, to any person or "group" (within the meaning
of Section 13(d)(3) of the Exchange Act) pursuant to a confidentiality
agreement on substantially the same terms as provided in the Confidentiality
Agreement to the extent and only to the extent that the Board of Directors of
the Company determines that the requester is offering a Superior Takeover
Proposal.
(ii) The Company may engage in discussions and negotiations with any
Person or group that has made an unsolicited Takeover Proposal, among other
things, to determine whether such proposal (as opposed to any further
negotiated proposal) is a Superior Takeover Proposal and (ii) the Company may
take and disclose to its shareholders a position contemplated by Rule 14e-2(a)
following the Company's receipt of a Takeover Proposal that is in the form of
a tender offer under Section 14(e) of the Exchange Act.
(iii) The Company may withdraw, adversely modify or take a public position
materially inconsistent with its recommendation referred to in Section 6.4(a)
(which may include making any statement required by Rule 14e-2 under the
Exchange Act) (a "Recommendation Modification/Withdrawal") if there exists a
Takeover Proposal and the Board of Directors of the Company determines that it
is a Superior Takeover Proposal.
(iv) The Company may make a "stop-look-and-listen" communication with
respect to a Takeover Proposal or this Agreement of the nature contemplated
in, and
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otherwise in compliance with, Rule 14d-9 under the Exchange Act as a result of
receiving a Takeover Proposal.
Section 8.11 No Withdrawal of Recommendation. Neither the Board of
-------------------------------
Directors of the Company nor any committee thereof shall, except in connection
with the termination of this Agreement pursuant to Section 10.1, (i) withdraw or
modify, or propose to withdraw or modify, in a manner adverse to Parent or Sub
the approval or recommendation by the Board of Directors of the Company or any
such committee of this Agreement or the Merger or take any action having such
effect or (ii) approve or recommend, or propose to approve or recommend, any
Takeover Proposal (other than a Superior Takeover Proposal, subject to the
rights and obligations of the parties under Sections 10.1 and 10.3).
Section 8.12 Expenses. Subject to Section 10.4, all costs and expenses
--------
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses.
Section 8.13 Inventory. The Company agrees that, in aggregate, at least
---------
$450,000 in food and beverage Inventory (valued on a cost basis) at the
Company's restaurants will be part of the Company's assets to be transferred to
Sub at the Closing and that, during the period between the date of this
Agreement and the Closing, the Company will continue to replenish such inventory
in good faith in accordance with the usual practices of the business of the
Company. The Company agrees to allow Parent and Sub to take a physical inventory
of the food and beverage inventory within the week prior to the Closing Date (or
at another time shortly before the Closing that is mutually acceptable to the
parties); the Company may designate one or more representatives to take such
physical inventory along with Parent's and/or Sub's representative(s).
Section 8.14 Covenant to Satisfy Conditions.
------------------------------
(a) Each of Parent, Sub and the Company shall take all reasonable actions
necessary, to comply promptly with all legal requirements that may be imposed on
it with respect to this Agreement.
(b) Subject to the terms and conditions hereof, and taking into account the
circumstances and giving due weight to the materiality of the matter involved or
the action required, Parent, Sub and the Company shall each use their
commercially reasonable best efforts to take or cause to be taken all actions,
and to do or cause to be done all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the Merger and
the other transactions contemplated hereby (subject to the Company Shareholders'
Approval), including fully cooperating with the other in obtaining the Company
Required Statutory Approvals and all other approvals and authorizations of any
Governmental Authorities necessary or advisable to consummate the transactions
contemplated hereby.
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Section 8.15 Strategic Consultations. Between the date hereof and the
-----------------------
Effective Time, the Board of Directors and the officers of the Company shall
consult from time to time with members of the Board of Directors of Parent with
regard to the determination of the Company's strategic direction and shall, when
in the best interest of the Company, adopt strategic initiatives proposed by
such members of Parent's Board.
Section 8.16 Guaranty of Equity of Sub. Subject to the fulfillment of the
-------------------------
conditions set forth in Section 9.1 and 9.2 (including without limitation the
condition that Parent and/or Sub shall have received transaction financing as
specified in Section 9.2(h)), Parent hereby guarantees that, at the Effective
Time, Sub shall have, over and above the amount realized from the financing as
contemplated by Section 9.2(h), the amount of $5,000,000 in immediately
available funds available to it to allow Sub to fund the Payment Fund under the
terms of this Agreement. Furthermore, Parent guarantees that Sub shall have all
funds necessary to satisfy obligations, if any, arising on its account under
Section 10.4(a) hereof.
Section 8.17 Employee Benefit Matters; Severance.
-----------------------------------
(a) Following the Closing, Parent shall, to the extent reasonably
practicable, maintain the level of benefits provided to the employees and all
former employees of the Company and its Subsidiaries that is in effect as of the
date hereof (other than benefits under any Stock Plans) until Parent shall
provide benefits to such employees and former employees on a basis consistent
with the provision of benefits provided otherwise to other employees and former
employees within the Parent system (other than benefits under any stock option
plans, stock purchase plan or deferred compensation plan or arrangements of
Parent or any affiliate of Parent within the Parent system).
(b) Parent shall maintain and give effect to each employment severance
policy of the Company that is in effect as of the date hereof with respect to
employees of the Company at the Closing until the date on which such employment
severance policy of the Company terminates or expires in accordance with its
terms (which date is six months following the Effective Time).
ARTICLE IX
CONDITIONS
Section 9.1 Conditions to Each Party's Obligation to Effect the Merger. The
----------------------------------------------------------
respective obligations of each party to effect the Merger or cause the Merger to
be effected shall be subject to the satisfaction on or prior to the Closing Date
of the following conditions, except, to the extent permitted by applicable law,
that such conditions may be waived in writing pursuant to Section 10.5:
(a) Shareholder Approval. The Company Shareholders' Approval shall have
been obtained on or prior to 90 days after the date of this Agreement.
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(b) No Injunction or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction preventing the consummation of the Merger shall be in
effect; provided, however, that prior to invoking this condition, each party
shall use all commercially reasonable best efforts to have any such decree,
ruling, injunction or order vacated.
(c) Statutory Approvals. The Company Required Statutory Approvals and the
Parent Required Statutory Approvals shall have been obtained at or prior to the
Effective Time (or, in the case of the filings required, if any, under the HSR
Act, all applicable waiting periods and any extensions thereof shall have
expired or otherwise been terminated).
Section 9.2 Conditions to Obligation of Parent to Effect Merger. The
---------------------------------------------------
obligation of Parent to effect the Merger or cause the Merger to be effected
shall be further subject to the satisfaction, on or prior to the Closing Date,
of the following conditions, except as may be waived by Parent in writing
pursuant to Section 10.5:
(a) Performance of Obligations of the Company. The Company shall have
performed its agreements and covenants contained in or contemplated by this
Agreement required to be performed by it at or prior to the Effective Time,
except as otherwise contemplated by Section 10.1(e).
(b) Representations and Warranties. The representations and warranties of
the Company set forth in this Agreement shall be true and correct as of the
Closing Date as if made on and as of the Closing Date, except as otherwise
contemplated by Section 10.1(g).
(c) Closing Certificates. Parent shall have received a certificate signed
by the Chief Executive Officer and Chief Financial Officer of the Company, dated
the Closing Date, to the effect that, to each such officer's knowledge, the
conditions set forth in Sections 9.2(a), (b), (d) and (g) have been satisfied.
(d) Company Material Adverse Change. Since the date hereof, there shall not
have been any changes or events which have resulted or would result, so far as
can be reasonably foreseen, in a net change to the Company that has or in
reasonable probability will have a Company Material Adverse Effect.
(e) Opinion of Jenkens & Gilchrist, a Professional Corporation. Parent
shall have received an opinion of Jenkens & Gilchrist, a Professional
Corporation, in form and substance reasonably satisfactory to Parent, addressed
to Parent and dated the Closing Date, which opinion may be based on appropriate
representations of the Company.
(f) Company Required Consents. The Company Required Consents shall have
been obtained except those that, if not received or obtained, in the aggregate
would not in reasonable probability result in a Company Material Adverse Effect.
(g) No Litigation. There shall not be threatened, instituted or pending any
suit, action, investigation, inquiry or other proceeding by or before any court
or governmental or other
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regulatory or administrative agency or commission requesting or looking toward
an order, judgment or decree that, individually or in the aggregate, would in
reasonable probability have a Material Adverse Effect on the business,
operations, condition (financial or otherwise), liabilities, assets or earnings
of the Surviving Corporation.
(h) Financing. Subject to the qualifications set forth in Section 10.2,
Parent and/or Sub shall have obtained secured senior debt financing for the
transactions contemplated hereby in an aggregate amount not less than
$30,000,000, on terms which are reasonable and satisfactory to them.
(i) Termination of Unexercised Rights Under Stock Plans. Each outstanding
option or restricted stock award (or any other right to stock) that remains
unexercised or unvested under the Stock Plans shall have been terminated under
the provisions of Section 3.5.
(j) Documents. All documents to be delivered by the Company to Parent and
Sub at the Closing shall be duly executed and in form and substance reasonably
satisfactory to Parent and Sub.
(k) Other. Parent and Sub shall have received such other documents or
certificates as Parent and Sub may reasonably have requested, including, without
limitation, certificates of good standing with respect to each of the Company
and its Subsidiaries from the appropriate authority in its jurisdiction of
incorporation and certificates of good standing with respect to the Company and
each of its Subsidiaries from the appropriate authority in each jurisdiction in
which it is qualified to do business.
Section 9.3 Conditions to Obligation of the Company to Effect the Merger.
------------------------------------------------------------
The obligation of the Company to effect the Merger or cause the Merger to be
effected shall be further subject to the satisfaction, on or prior to the
Closing Date, of the following conditions, except as may be waived by the
Company in writing pursuant to Section 10.5.
(a) Performance of Obligations of Parent. Parent shall have performed its
agreements and covenants contained in or contemplated by this Agreement required
to be performed by it at or prior to the Effective Time, except as otherwise
contemplated by Section 10.1(d).
(b) Representations and Warranties. The representations and warranties of
Parent and Sub set forth in this Agreement shall be true and correct as of the
Closing Date as if made on and as of the Closing Date, except as otherwise
contemplated by Section 10.1(d).
(c) Closing Certificates. The Company shall have received a certificate
signed by the Chief Executive Officer and Chief Financial Officer of Parent,
dated the Closing Date, to the effect that, to such officers' knowledge, the
conditions set forth in Sections 9.3(a) and (b) have been satisfied.
(d) Opinion of Andrews & Kurth L.L.P.. The Company shall have received an
opinion of Andrews & Kurth L.L.P., in form and substance reasonably satisfactory
to the
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<PAGE>
Company, addressed to the Company and dated the Closing Date, which opinion may
be based on appropriate representations of Parent and Sub.
(e) Fairness Opinion. The opinion delivered and addressed to the Board of
Directors on the date hereof by NationsBanc Montgomery Securities shall not have
been withdrawn.
(f) Documents. All documents to be delivered by Parent or Sub to the
Company at the Closing shall be duly executed and in form and substance
reasonably satisfactory to the Company.
(g) Other. The Company shall have received such other documents or
certificates as the Company may reasonably have requested, including, without
limitation, certificates of good standing with respect to each of Parent and Sub
from the appropriate authority in its jurisdiction of incorporation and
certificates of good standing with respect to each of Parent and Sub from the
appropriate authority in each jurisdiction in which it is qualified to do
business.
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
Section 10.1 Termination. This Agreement may be terminated and the Merger
-----------
may be abandoned at any time prior to the Effective Time, whether before or
after approval of the matters presented in connection with the Merger by the
shareholders of the Company contemplated by this Agreement:
(a) by mutual written consent of the Company and Parent;
(b) by the Company or Parent so long as the Company or Parent (as the case
may be) is not then in material breach of its obligations hereunder, if the
Merger shall not have been consummated on or before 100 days after the date of
this Agreement; provided, however, that this Agreement may be extended by
written notice of either Parent or the Company to a date not later than 130 days
after the date of this Agreement, if the Merger shall not have been consummated
as a direct result of the conditions in Section 9.1(a) and Section 9.1(c);
provided, that the right to terminate this Agreement under this Section 10.1
shall not be available to the Company (or Parent) as the case may be if its
failure to fulfill any obligation under this Agreement has been a cause of or
resulted in the failure of the Merger to occur on or before such date;
(c) by either the Company or Parent if any permanent injunction or other
order of a court or other competent authority preventing the consummation of the
Merger shall have become final and non-appealable;
(d) by the Company so long as the Company is not then in material breach of
its obligations hereunder, if there has been a breach of any representation,
warranty, covenant
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or agreement on the part of Parent set forth in this Agreement which breach has
not been cured within 20 calendar days following receipt by the breaching party
of notice of such breach, unless such breach could not, individually or in the
aggregate with other breaches, in reasonable probability materially adversely
affect the ability of the parties hereto to consummate the transactions
contemplated hereby;
(e) by Parent so long as Parent is not then in material breach of its
obligations hereunder, if there has been a breach of any covenant or agreement
on the part of the Company set forth in this Agreement which breach has not been
cured within 20 calendar days following receipt by the breaching party of notice
of such breach, unless such breach could not, individually or in the aggregate
with other breaches, in reasonable probability materially adversely affect the
ability of the parties hereto to consummate the transactions contemplated
hereby;
(f) by the Company, if (i) the Board of Directors of the Company shall have
accepted a Superior Takeover Proposal and (ii) the Company shall have paid the
termination fee set forth in Section 10.4(b);
(g) by Parent or Sub if the amount of the Net Adverse Effects
(as defined below) from breaches of the Company's representations and warranties
and statements identified by Parent or Sub prior to the Closing, if any, exceeds
$1,000,000. "Net Adverse Effects" shall mean the net aggregate adverse effects
on the reasonably determined valuation by Parent of the business operations,
properties (including intangible properties), condition (financial or
otherwise), assets, obligations or liabilities (whether absolute, contingent or
otherwise and whether due or to become due) of the Company and its Subsidiaries
or the transactions contemplated by this Agreement; and
(h) by Parent if (i) the Board of Directors of the Company makes a
Recommendation Modification/Withdrawal or (ii) the Company enters into a
definitive agreement for a Superior Takeover Proposal or any other Takeover
Proposal.
Section 10.2 Termination In Connection with Certain Financing Events.
-------------------------------------------------------
(a) Parent has received the draft funding commitment letter from AMRESCO
Commercial Finance, Inc. ("AMRESCO") attached hereto as Exhibit B (the "AMRESCO
---------
Letter") and the proposal from U.S. Restaurant Properties, Inc. ("USRP")
attached hereto as Exhibit C (the "USRP Letter").
---------
(b) Parent is herewith depositing the amount of $250,000 and agrees to
deposit an additional $250,000 on Day 60 (as defined below) (the aggregate
amount of such $500,000 being termed the "Escrow Fund") into escrow with Texas
Bank for the purposes of this Section 10.2 in accordance with the terms of the
Escrow Agreement attached hereto as Exhibit D (the "Escrow Agreement").
---------
(c) Parent shall use its commercially reasonable best efforts to cause
AMRESCO to (on or prior to the 30th day after the date of this Agreement ("Day
30")) (i)
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<PAGE>
remove from the AMRESCO Letter, as conditions to AMRESCO's funding commitment
thereunder, the conditions that AMRESCO (1) receive a satisfactory valuation
report from its appraisers regarding the collateral securing AMRESCO's loan, (2)
receive all material required by it to complete its due diligence and (3) find
such material to be in all things satisfactory and then (ii) execute and deliver
to Parent and Sub the AMRESCO Letter as so modified (such events being termed
the "AMRESCO Day 30 Events").
(d) Parent shall use its commercially reasonable best efforts to cause USRP
to (on or prior to Day 30) (i) remove from the USRP Letter, as conditions to
USRP's funding, the conditions that USRP (1) retain an inspection and review
period, (2) receive all material required by it to complete its due diligence
and (3) find such material to be in all things satisfactory and then (ii)
execute and deliver to Parent and Sub a funding commitment on the terms outlined
in the USRP Letter as so modified (such events being termed the "USRP Day 30
Events").
(e) Parent shall use its commercially reasonable best efforts to cause (on
or prior to the 60th day after the date of this Agreement ("Day 60")) each of
AMRESCO and USRP to deliver to Parent and Sub a firm funding commitment
(containing the financial terms of the AMRESCO Letter and the USRP Letter,
respectively) that is conditioned only on (i) the delivery of closing
documentation and (ii) the accuracy, in all material respects, of the Company's
representations and warranties hereunder (a "Firm Commitment").
(f) In addition to the provisions of Section 10.1, this Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time:
(i) by the Company, at any time during the five business days immediately
following Day 30, as long as the Company is not then in material breach of its
obligations hereunder and as long as the amount of the Net Adverse Effects
from breaches of the Company's representations and warranties and statements
does not exceed $1,000,000, if either the AMRESCO Day 30 Events have not
occurred on or prior to the date of such termination or the USRP Day 30 Events
have not occurred on or prior to the date of such termination; and
(ii) by the Company, at any time during the five business days immediately
following Day 60, as long as the Company is not then in material breach of its
obligations hereunder and as long as the amount of the Net Adverse Effects
from breaches of the Company's representations and warranties and statements
do not exceed $1,000,000, if either AMRESCO or USRP has not delivered to
Parent a Firm Commitment on or prior to the date of such termination.
Section 10.3 Effect of Termination. In the event of termination of this
---------------------
Agreement by either the Company or Parent as provided in Section 10.1 or Section
10.2, this Agreement shall forthwith become void and there shall be no liability
or obligation on the part of Parent, Sub or the Company or their respective
affiliates, officers, directors or shareholders except (i) with respect to the
provisions of Section 10.4 or Section 3 of the Escrow Agreement, as applicable,
and (ii) that, subject to the last proviso of Section 10.4(a), no such
termination
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shall relieve any party from liability for any willful breach hereof. Parent
further agrees that following such termination, it shall continue to be bound
under all of the terms and conditions contained in the Confidentiality
Agreement.
Section 10.4 Payment of Expenses and Termination Fee.
---------------------------------------
(a) Damages Payable Upon Termination. If this Agreement is terminated
pursuant to Section 10.1(d), (e) or (g), then the breaching party shall promptly
(but in no event later than five business days after receipt of notice that the
amount is due from the other party) pay to the other party, as liquidated
damages, an amount in cash equal to the out-of-pocket expenses and fees incurred
by the other party after the date hereof arising out of, or in connection with
or related to, the Merger or the transactions contemplated by this Agreement not
in excess of $500,000 (the "Out-of-Pocket Expenses"); provided, however, that if
this Agreement is terminated by a party as a result of a willful breach of a
representation, warranty, covenant or agreement by the other party, the
non-breaching party may pursue any remedies available to it at law or in equity
(subject, however, to the last proviso of this Section 10.4(a) and the
arbitration provisions of Section 11.10 hereof) and shall, in addition, to the
amount of Out-of-Pocket Expenses set forth above, be entitled to recover such
additional amounts as such non-breaching party may be entitled to receive at law
or in equity (subject, however, to the last proviso of this Section 10.4(a) and
the arbitration provisions of Section 11.10 hereof); provided, further, that the
payment by Parent of any Out-of-Pocket Expenses under the terms of this Section
10.4(a) and any amounts required under Section 3 of the Escrow Agreement shall
constitute the Company's sole and exclusive remedy against Parent or Sub for any
failure by the parties (or any party) to consummate the Merger.
(b) Termination Fee. In the event that (x) this Agreement is terminated by
the Company pursuant to Section 10.1(f), (y) this Agreement is terminated by
Parent pursuant to Section 10.1(h), or (z) the Company accepts any Takeover
Proposal (or Superior Takeover Proposal) within two years after this Agreement
is terminated by Parent pursuant to Section 10.1(e), then, in each such case,
the Company shall pay Parent a fee equal to the sum of (i) One Million Five
Hundred Thousand Dollars ($1,500,000) and (ii) Parent's Out-of-Pocket Expenses,
which aggregate amount (the "Section 10.4(b) Amount") the parties acknowledge is
a reasonable estimate (albeit a low estimate) as of the date of this Agreement
of the direct, indirect and opportunity costs and expenses that Parent will
incur in preparing for the Closing and which Section 10.4(b) Amount shall be
payable by wire transfer of same day funds within five business days after the
date of such termination (or in the case of (z) above, the amount of $1,500,000
shall be paid within five days after the Company accepts any Takeover Proposal
or Superior Takeover Proposal, the Out-of-Pocket Expenses having already been
paid). The Company acknowledges that the agreements contained in this Section
10.4(b) are an integral part of the transactions contemplated in this Agreement,
and that, without these agreements, Parent and Sub would not enter into this
Agreement; accordingly, if the Company fails to promptly pay the Section 10.4(b)
Amount due pursuant to this Section 10.4(b) and, in order to obtain such
payment, Parent or Sub commences an action in arbitration that results in a
judgment against the Company for such Section 10.4(b) Amount, the Company shall
pay to Parent its costs and expenses (including attorneys' fees) in connection
with such action in arbitration, together with interest on the Section 10.4(b)
Amount at the rate of 8.0% per annum. In the event Parent has
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<PAGE>
received the Section 10.4(b) Amount, it shall not (i) assert or pursue in any
manner, directly or indirectly, any claim or cause of action based in whole or
in part upon alleged tortious or other interference with rights under this
Agreement against any entity or person submitting a Takeover Proposal or (ii)
assert or pursue in any manner, directly or indirectly, any Claim or cause of
action against the Company or any of its officers or directors based in whole or
in part upon its or their receipt, consideration, recommendation or approval of
a Takeover Proposal for the Company's exercise of its right of termination.
Section 10.5 Amendment. Subject to applicable law, this Agreement may
---------
be amended, modified or supplemented only by written agreement of Parent, Sub
and the Company at any time prior to the Effective Date with respect to any of
the terms contained herein.
Section 10.6 Extension; Waiver. At any time prior to the Effective
-----------------
Time, the parties hereto, may, to the extent legally allowed and only if agreed
to by all parties hereto: (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto; (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto; and (iii) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in a
written instrument signed on behalf of such party. The failure of any party
hereto to assert any of its rights hereunder shall not constitute a waiver of
such rights.
ARTICLE XI
GENERAL PROVISIONS
------------------
Section 11.1 Non-survival of Representations and Warranties. The
----------------------------------------------
representations and warranties in this Agreement shall terminate at the
Effective Time. This Section 11.1 shall not limit any covenant or agreement of
the parties hereto that by its terms contemplates performance after the
Effective Time.
Section 11.2 Brokers.
-------
(a) The Company represents and warrants that, except for
NationsBanc Montgomery Securities, no broker, finder or investment bank is
entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of the Company.
(b) Parent represents and warrants that except for an arrangement with
El Chico Management Co., L.P. (for which the Company shall have no
responsibility or obligation), no broker, finder or investment bank is entitled
to any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Parent.
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<PAGE>
Section 11.3 Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed given (a) if delivered personally, or
(b) if sent by overnight courier service (receipt confirmed in writing), or (c)
if delivered by facsimile transmission (with receipt confirmed), or (d) five (5)
days after being mailed by registered or certified mail (return receipt
requested) to the parties, in each case to the following addresses (or at such
other address for a party as shall be specified by like notice):
(i) if to the Company:
Spaghetti Warehouse, Inc.
402 West Interstate 30
Garland, Texas 75043
Attention: Robert Bodnar, Chief Financial Officer
Fax: (972) 203-9594
with a copy to:
Jenkens & Gilchrist, a Professional Corporation
1445 Ross Avenue, Suite 3200
Dallas, Texas 75202
Attention: Ronald J. Frappier, Esq.
Fax: (214) 855-4300
(ii) if to Parent or Sub:
Consolidated Restaurant Companies, Inc.
5956 Sherry Lane, Suite 1450
Dallas, Texas 75225
Attention: John R.W. Cracken
Fax: (214) 785-7086
with a copy to:
Andrews & Kurth L.L.P.
1717 Main Street, Suite 3700
Dallas, Texas 75201
Attention: J. Gregory Holloway
Fax: (214) 659-4401
Section 11.4 Interpretation. When reference is made in this Agreement
--------------
to Articles, Sections or Exhibits, such reference shall be to an Article,
Section or Exhibit of this Agreement, as the case may be, unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include," "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."
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<PAGE>
Section 11.5 Miscellaneous.
-------------
(a) This Agreement, including the Company Disclosure Schedule, the
Escrow Agreement and the other documents and instruments referred to herein, (i)
constitutes the entire agreement and supersedes all other prior agreements and
understandings, both written and oral, among the parties, or any of them, with
respect to the subject matter hereof other than the Confidentiality Agreement,
(ii) shall not be assigned by operation of law or otherwise, and (iii) shall be
governed by and construed in accordance with the laws of the State of Texas
applicable to contracts executed in and to be fully performed in such State,
without giving effect to its conflicts of laws statutes, rules or principles.
(b) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect. The parties
hereto shall negotiate in good faith to replace any provision of this Agreement
so held invalid or unenforceable with a valid provision that is as similar as
possible in substance to the invalid or unenforceable provision.
Section 11.6 Counterparts; Effect. This Agreement may be executed in
--------------------
one or more counterparts, each of which shall be deemed to be an original, but
all of which shall constitute one and the same agreement.
Section 11.7 Parties in Interest. This Agreement shall be binding upon
-------------------
and inure solely to the benefit of each party hereto, and, except for rights of
Indemnified Parties and their heirs and representatives as set forth in Section
8.6, nothing in this Agreement, express or implied, is intended to confer upon
any person any rights or remedies of any nature whatsoever under or by reason of
this Agreement.
Section 11.8 Further Assurances. Each party hereto shall execute such
------------------
further documents and instruments and take such further actions as may
reasonably be requested by any other party hereto in order to consummate the
Merger in accordance with the terms hereof.
Section 11.9 Governing Law.
-------------
(a) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO ITS CONFLICTS
OF LAW RULES.
(b) Any controversy or claim arising out of or relating to this
Agreement, or the breach thereof, shall be settled by binding arbitration
administered by the American Arbitration Association (the "AAA") under its
Commercial Arbitration Rules ("Rules"), and shall be held in Dallas, Texas. Any
dispute submitted for arbitration shall be referred to a panel of three
arbitrators. The party or parties submitting ("Submitting Party") the intention
to arbitrate (the "Submission") shall nominate one arbitrator. Within 30 days of
receipt of the Submission, the party or parties receiving the Submission
("Answering Party") shall nominate one arbitrator. If the Answering Party fails
to timely nominate an arbitrator, then the second arbitrator shall be appointed
by the AAA in accordance with the Rules. If the arbitrator chosen
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<PAGE>
by the Submitting Party and the arbitrator chosen by or selected for the
Answering Party can agree upon a neutral arbitrator within fifteen (15) days of
the choice or selection of the Answering Party's arbitrator, then such
individual shall serve as the third arbitrator. If no such agreement is reached,
a third neutral arbitrator shall be appointed by the AAA in accordance with the
Rules. The parties agree that they will consent to an expedited proceeding under
the Rules, to the full extent the AAA can accommodate such a request. Any
disputes arising in respect to arbitration may be resolved, and judgment on the
award rendered by the arbitrators may be entered, only in a Texas State District
Court in Dallas County, Texas. The ruling of the arbitrators shall be binding
and conclusive upon Parent, Sub and the Company and any person with an interest
in the matter.
(c) In any proceeding regarding Indemnification Matters, all direct,
reasonable costs and expenses (including AAA administration fees and arbitrator
fees) incurred by the parties to the proceeding shall, at the conclusion of the
proceeding, be paid by the party incurring same.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized, and as of the
date first written above.
SPAGHETTI WAREHOUSE ACQUISITION,
INC.
By: /s/ John R. W. Cracken
-----------------------------------------
John R. W. Cracken,
President
CONSOLIDATED RESTAURANT
COMPANIES, INC.
By: /s/ E. Gene Street
-----------------------------------------
E. Gene Street,
Chairman of the Board, Chief Executive
Officer and President
SPAGHETTI WAREHOUSE, INC.
By: /s/ Robert R. Hawk
-----------------------------------------
Name: Robert R. Hawk
Title: Chairman of the Board of Directors,
President and Chief Financial Officer
<PAGE>
APPENDIX B
B-1
<PAGE>
September 17, 1998
Board of Directors
Spaghetti Warehouse, Inc.
402 West Interstate 30
Garland, Texas 75043
Gentlemen and Ladies:
We understand that Consolidated Restaurant Companies, Inc., a Delaware
corporation ("Buyer"), Spaghetti Warehouse Acquisition, Inc., a Texas
corporation ("Sub"), and Spaghetti Warehouse, Inc., a Texas corporation
("Seller"), propose to enter into an Agreement and Plan of Merger, a draft of
which has been provided to us by management of Seller dated September 17, 1998
(the "Merger Agreement") pursuant to which Sub will be merged with and into
Seller (the "Merger"), and Seller will become a wholly-owned subsidiary of
Buyer. Pursuant to the Merger, as more fully described in the Merger Agreement
and as further described to us by management of Seller, we understand that each
outstanding share of the common stock, $.01 par value per share, of Seller (the
"Seller Common Stock") shall be converted into the right to receive $8.00 per
share in cash (the "Merger Consideration"). The terms and conditions of the
Merger as we understand them are set forth in more detail in the Merger
Agreement.
You have asked for our opinion as investment bankers as to whether the
Consideration to be received by the shareholders of Seller pursuant to the
Merger is fair to such shareholders from a financial point of view, as of the
date hereof.
In connection with our opinion, we have, among other things: (i) reviewed
certain publicly available financial and other data with respect to Seller,
including the consolidated financial statements for recent years and interim
periods to June 28, 1998, and certain other relevant financial and operating
data relating to Seller made available to us from published sources and from the
internal records of Seller; (ii) reviewed the financial terms and conditions of
the Merger Agreement; (iii) reviewed certain publicly available information
concerning the trading of, and the trading market for, Seller Common Stock; (iv)
compared Seller from a financial point of view with certain other companies in
the restaurant industry which we deemed to be relevant; (v) considered the
financial terms, to the extent publicly available, of selected recent business
combinations involving companies in the restaurant industry which we deemed to
be comparable, in whole or in part, to the Merger; (vi) assisted Seller in
soliciting indications of interest and bids from third parties seeking to enter
into a transaction with Seller similar to, or as an alternative to, the Merger;
(vii) reviewed and discussed with representatives of the management of Seller
certain information of a business and financial nature regarding Seller
furnished to us by management of Seller, including financial forecasts and
related assumptions of Seller; (viii) made inquiries regarding and discussed the
Merger, Merger Agreement and other matters related thereto with Seller's
counsel; and (ix) performed such other analyses and examinations as we have
deemed appropriate.
In connection with our review, we have not assumed any obligation
independently to verify the foregoing information and have relied on its being
accurate and complete in all material respects. With respect to the financial
forecasts for Seller provided to us by management of Seller, upon your advice
and with your consent we have assumed for purposes of our opinion that the
forecasts have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of management of Seller as to the future
financial performance of Seller and that they provide a reasonable basis upon
which we can form our opinion. We have also assumed that there have been no
material changes in Seller's assets, financial condition, results of operations,
business or prospects since the respective dates of its last financial
statements made available to us. We have relied on advice of the counsel and the
independent accountants to Seller as to all legal, tax and financial reporting
matters with respect to Seller, the Merger and the Merger Agreement. We have
assumed that the Merger will be consummated in a manner that complies in all
respects with the Securities Exchange Act of 1934, as amended, and all other
applicable federal and state statutes, rules and regulations. In addition, we
have not assumed responsibility for making an independent evaluation, appraisal
or physical inspection of any of the assets or liabilities (contingent or
otherwise) of Seller, nor have we been furnished with any such appraisals.
Finally, our opinion is based on economic, monetary and market and other
conditions as in effect on, and the information made available to us as of, the
date hereof. Accordingly, although subsequent developments may affect this
opinion, we have not assumed any obligation to update, revise or reaffirm this
opinion.
<PAGE>
We have further assumed with your consent that the Merger will be
consummated in accordance with the terms described in the Merger Agreement,
without any amendments thereto, and without waiver by Seller of any of the
conditions to its obligations thereunder.
Based upon the foregoing and in reliance thereon, it is our opinion as
investment bankers that the Consideration to be received by the shareholders of
Seller pursuant to the Merger is fair to such shareholders from a financial
point of view, as of the date hereof.
In the ordinary course of our business, we trade the equity securities of
Seller for our own account and for the accounts of customers and, accordingly,
may at any time hold a long or short position in such securities.
This opinion is directed solely to the Board of Directors of Seller in
connection with its consideration of the Merger, and is not a recommendation to
any shareholder as to how shareholders should vote with respect to the Merger.
Shareholders of Seller are neither addressees nor intended beneficiaries of our
opinion (which is addressed solely to the members of the Board of Directors of
Seller for their personal use as directors in connection with their review and
evaluation of the Merger) or our underlying financial analysis, and no
shareholder of Seller may rely or allege any reliance on our opinion or analysis
in connection with such shareholder's consideration of the merits of the Merger
or otherwise. Further, this opinion addresses only the financial fairness of the
Consideration to the shareholders of Seller, as of the date hereof, and does not
address any other aspect of the Merger including, without limitation, the
relative merits of the Merger, any alternatives to the Merger or Seller's
underlying decision to proceed with or effect the Merger. This opinion may not
be used or referred to by Seller, or quoted or disclosed to any person in any
manner, without our prior written consent, which consent is hereby given to the
inclusion of this opinion in its entirety in any proxy statement filed by Seller
with the Securities and Exchange Commission in connection with the Merger that
requires a description of the factors considered by the Board of Directors of
Seller in connection with its approval of a proposed merger.
Very truly yours,
NationsBanc Montgomery
Securities LLC
<PAGE>
APPENDIX C
C-1
<PAGE>
Art. 5.11 Rights of Dissenting Shareholders in the Event of Certain
Corporate Actions
A. Any shareholder of a domestic corporation shall have the right to
dissent from any of the following corporate actions:
(1) Any plan of merger to which the corporation is a party if
shareholder approval is required by Article 5.03 or 5.16 of this Act and the
shareholder holds shares of a class or series that was entitled to vote thereon
as a class or otherwise;
(2) Any sale, lease, exchange or other disposition (not including
any pledge, mortgage, deed of trust or trust indenture unless otherwise provided
in the articles of incorporation) of all, or substantially all, the property and
assets, with or without good will, of a corporation if the special authorization
of the shareholders is required by this Act and the shareholders hold shares of
a class or series that was entitled to vote thereon as a class or otherwise;
(3) Any plan of exchange pursuant to Article 5.02 of this Act in
which the shares of the corporation of the class or series held by the
shareholder are to be acquired.
B. Notwithstanding the provisions of Section A of this Article, a
shareholder shall not have the right to dissent from any plan of merger in which
there is a single surviving or new domestic or foreign corporation, or from any
plan of exchange, if: (1) the shares held by the shareholder are part of a class
or series of shares which are on the record date fixed to determine the
shareholders entitled to vote on the plan of merger or plan of exchange: (a)
listed on a national securities exchange; (b) listed on the NASDAQ stock market
(or successor quotation system) or designated as a national market security on
an interdealer quotation system by the National Association of Securities
Dealers, Inc., or successor entity; or (c) held of record by not less than 2,000
holders; (2) the shareholder is not required by the terms of the plan of merger
or plan of exchange to accept for the shareholder's shares any consideration
that is different than the consideration (other than cash in lieu of fractional
shares that the shareholder would otherwise be entitled to receive) to be
provided to any other holder of shares of the same class or series of shares
held by such shareholder; and (3) the shareholder is not required by the terms
of the plan of merger or the plan of exchange to accept for the shareholder's
shares any consideration other than: (a) shares of a domestic or foreign
corporation that, immediately after the effective time of the merger or
exchange, will be part of a class or series, shares of which are: (i) listed, or
authorized for listing upon official notice of issuance, on a national
securities exchange; (ii) approved for quotation as a national market security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc., or successor entity; or (iii) held of record by not less than
2,000 holders; (b) cash in lieu of fractional shares otherwise entitled to be
received; or (c) any combination of the securities and cash described in
subdivisions (a) and (b) of this subsection.
Art. 5.12 Procedure for Dissent by Shareholders as to Said Corporate Actions
A. Any shareholder of any domestic corporation who has the right to
dissent from any of the corporate actions referred to in Article 5.11 of this
Act may exercise that right to dissent only by complying with the following
procedures:
(1)(a) With respect to proposed corporate action that is
submitted to a vote of shareholders at a meeting, the shareholder shall file
with the corporation, prior to the meeting, a written objection to the action,
setting out that the shareholder's right to dissent will be exercised if the
action is effective and giving the shareholder's address, to which notice
thereof shall be delivered or mailed in that event. If the action is effected
and the shareholder shall not have voted in favor of the action, the
corporation, in the case of action other than a merger, or the surviving or new
corporation (foreign or domestic) or other entity that is liable to discharge
the shareholder's right of dissent, in the case of a merger, shall, within ten
(10) days after the action is effected, deliver or mail to the shareholder
written notice that the action has been effected, and the shareholder may,
within ten (10) days from the delivery or mailing of the notice, make written
demand on the existing, surviving, or new corporation (foreign or domestic) or
other entity, as the case may be, for payment of the fair value of the
shareholder's shares. The fair value of the shares shall be the value thereof as
of the day immediately preceding the meeting, excluding any appreciation or
depreciation in anticipation of the proposed action. The demand shall state the
number and class of the shares owned by the shareholder and the fair value of
the shares as estimated by the shareholder. Any shareholder failing to make
demand within the ten (10) day period shall be bound by the action.
<PAGE>
(b) With respect to proposed corporate action that is approved
pursuant to Section A of Article 9.10 of this Act, the corporation, in the case
of action other than a merger, and the surviving or new corporation (foreign or
domestic) or other entity that is liable to discharge the shareholder's right of
dissent, in the case of a merger, shall, within ten (10) days after the date the
action is effected, mail to each shareholder of record as of the effective date
of the action notice of the fact and date of the action and that the shareholder
may exercise the shareholder's right to dissent from the action. The notice
shall be accompanied by a copy of this Article and any articles or documents
filed by the corporation with the Secretary of State to effect the action. If
the shareholder shall not have consented to the taking of the action, the
shareholder may, within twenty (20) days after the mailing of the notice, make
written demand on the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, for payment of the fair value of
the shareholder's shares. The fair value of the shares shall be the value
thereof as of the date the written consent authorizing the action was delivered
to the corporation pursuant to Section A of Article 9.10 of this Act, excluding
any appreciation or depreciation in anticipation of the action. The demand shall
state the number and class of shares owned by the dissenting shareholder and the
fair value of the shares as estimated by the shareholder. Any shareholder
failing to make demand within the twenty (20) day period shall be bound by the
action.
(2) Within twenty (20) days after receipt by the existing, surviving,
or new corporation (foreign or domestic) or other entity, as the case may be, of
a demand for payment made by a dissenting shareholder in accordance with
Subsection (1) of this Section, the corporation (foreign or domestic) or other
entity shall deliver or mail to the shareholder a written notice that shall
either set out that the corporation (foreign or domestic) or other entity
accepts the amount claimed in the demand and agrees to pay that amount within
ninety (90) days after the date on which the action was effected, and, in the
case of shares represented by certificates, upon the surrender of the
certificates duly endorsed, or shall contain an estimate by the corporation
(foreign or domestic) or other entity of the fair value of the shares, together
with an offer to pay the amount of that estimate within ninety (90) days after
the date on which the action was effected, upon receipt of notice within sixty
(60) days after that date from the shareholder that the shareholder agrees to
accept that amount and, in the case of shares represented by certificates, upon
the surrender of the certificates duly endorsed.
(3) If, within sixty (60) days after the date on which the corporate
action was effected, the value of the shares is agreed upon between the
shareholder and the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, payment for the shares shall be
made within ninety (90) days after the date on which the action was effected
and, in the case of shares represented by certificates, upon surrender of the
certificates duly endorsed. Upon payment of the agreed value, the shareholder
shall cease to have any interest in the shares or in the corporation.
(B) If, within the period of sixty (60) days after the date on
which the corporate action was effected, the shareholder and the existing,
surviving, or new corporation (foreign or domestic) or other entity, as the case
may be, do not so agree, then the shareholder or the corporation (foreign or
domestic) or other entity may, within sixty (60) days after the expiration of
the sixty (60) day period, file a petition in any court of competent
jurisdiction in the county in which the principal office of the domestic
corporation is located, asking for a finding and determination of the fair value
of the shareholder's shares. Upon the filing of any such petition by the
shareholder, service of a copy thereof shall be made upon the corporation
(foreign or domestic) or other entity, which shall, within ten (10) days after
service, file in the office of the clerk of the court in which the petition was
filed a list containing the names and addresses of all shareholders of the
domestic corporation who have demanded payment for their shares and with whom
agreements as to the value of their shares have not been reached by the
corporation (foreign or domestic) or other entity. If the petition shall be
filed by the corporation (foreign or domestic) or other entity, the petition
shall be accompanied by such a list. The clerk of the court shall give notice of
the time and place fixed for the hearing of the petition by registered mail to
the corporation (foreign or domestic) or other entity and to the shareholders
named on the list at the addresses therein stated. The forms of the notices by
mail shall be approved by the court. All shareholders thus notified and the
corporation (foreign or domestic) or other entity shall thereafter be bound by
the final judgment of the court.
C. After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The appraisers
shall have power to examine any of the books and records of the corporation the
shares of which they are charged with the duty of valuing, and they shall make a
determination of the fair value of the shares upon such investigation as to them
may seem proper. The appraisers shall also afford a reasonable opportunity to
the parties interested to submit to them pertinent evidence as to the value of
the shares. The appraisers shall also have such power and authority as may be
conferred on Masters in Chancery by the Rules of Civil Procedure or by the order
of their appointment.
<PAGE>
D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall be its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for those shares. Upon payment of the judgment, the
dissenting shareholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a reasonable fee as court
costs, and all court costs shall be allotted between the parties in the manner
that the court determines to be fair and equitable.
E. Shares acquired by the existing, surviving, or new corporation
(foreign or domestic) or other entity, as the case may be, pursuant to the
payment of the agreed value of the shares or pursuant to payment of the judgment
entered for the value of the shares, as in this Article provided, shall, in the
case of a merger, be treated as provided in the plan of merger and, in all other
cases, may be held and disposed of by the corporation as in the case of other
treasury shares.
F. The provisions of this Article shall not apply to a merger if, on
the date of the filing of the articles of merger, the surviving corporation is
the owner of all the outstanding shares of the other corporations, domestic or
foreign, that are parties to the merger.
G. In the absence of fraud in the transaction, the remedy provided by
this Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action. If
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article, any
shareholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the shareholder with respect to the action.
Art. 5.13 Provisions Affecting Remedies of Dissenting Shareholders
A. Any shareholder who has demanded payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act shall not thereafter be
entitled to vote or exercise any other rights of a shareholder except the right
to receive payment for his shares pursuant to the provisions of those articles
and the right to maintain an appropriate action to obtain relief on the ground
that the corporate action would be or was fraudulent, and the respective shares
for which payment has been demanded shall not thereafter be considered
outstanding for the purposes of any subsequent vote of shareholders.
B. Upon receiving a demand for payment from any dissenting
shareholder, the corporation shall make an appropriate notation thereof in its
shareholder records. Within twenty (20) days after demanding payment for his
shares in accordance with either Article 5.12 or 5.16 of this Act, each holder
of certificates representing shares so demanding payment shall submit such
certificates to the corporation for notation thereon that such demand has been
made. The failure of holders of certificated shares to do so shall, at the
option of the corporation, terminate such shareholder's rights under Articles
5.12 and 5.16 of this Act unless a court of competent jurisdiction for good and
sufficient cause shown shall otherwise direct. If uncertificated shares for
which payment has been demanded or shares represented by a certificate on which
notation has been so made shall be transferred, any new certificate issued
therefor shall bear similar notation together with the name of the original
dissenting holder of such shares and a transferee of such shares shall acquire
by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making demand for the payment of the
fair value thereof.
C. Any shareholder who has demanded payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act may withdraw such demand
at any time before payment for his shares or before any petition has
been filed pursuant to Article 5.12 or 5.16 of this Act asking for a finding and
determination of the fair value of such shares, but no such demand may be
withdrawn after such payment has been made or, unless the corporation shall
consent thereto, after any such petition has been filed. If, however, such
demand shall be withdrawn as hereinbefore provided, or if pursuant to Section B
of this Article the corporation shall terminate the shareholder's rights under
Article 5.12 or 5.16 of this Act, as the case may be, or if no petition asking
for a finding and determination of fair value of such shares by a court shall
have been filed within the time provided in Article 5.12 or 5.16 of this Act, as
<PAGE>
the case may be, or if after the hearing of a petition filed pursuant to Article
5.12 or 5.16, the court shall determine that such shareholder is not entitled to
the relief provided by those articles, the, in any such case, such shareholder
and all persons claiming under him shall be conclusively presumed to have
approved and ratified the corporate action from which he dissented and shall be
bound thereby, the right of such shareholder to be paid the fair value of his
shares shall cease, and his status as a shareholder shall be restored without
prejudice to any corporate proceedings which may have been taken during the
interim, and such shareholder shall be entitled to receive any dividends of
other distributions made to shareholders in the interim.
<PAGE>
SPAGHETTI WAREHOUSE, INC.
402 WEST I-30
GARLAND, TEXAS 75043
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON DECEMBER 17, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Robert R. Hawk and Robert E. Bodnar and
each of them, as Proxies, each with the power to appoint substitutes, and hereby
authorizes each of them to represent and to vote, as designated below, all of
the shares of the Common Stock, par value $0.01 per share, of Spaghetti
Warehouse, Inc. (the "Company") held of record by the undersigned at the close
of business on November 13, 1998, that the undersigned is entitled to vote, at
the Special Meeting of Shareholders of the Company to be held at 1815 N. Market
Street, Dallas, Texas on the second floor, on December 17, 1998, at 10:00 a.m.
Dallas time, or any adjournments thereof.
(1) Adoption of Agreement and Plan of Merger and approval of Merger.
/ / FOR / / AGAINST / / ABSTAIN
(2) As such proxies may in their discretion determine upon such other matters
as may properly come before the meeting.
/ / FOR / / AGAINST / / ABSTAIN
PLEASE NOTE
THIS PROXY IS TO BE VOTED AS DIRECTED. IN THE ABSENCE OF SPECIFIC DIRECTION, IT
IS INTENDED TO VOTE THE SHARES REPRESENTED BY THIS PROXY FOR EACH OF THE
PROPOSALS.
You are urged to sign and return your proxy without delay in the return envelope
provided for that purpose, which requires no postage if mailed in the United
States or Canada.
PLEASE SEND IN YOUR PROXY
In order that there may be proper representation at the Special Meeting, each
shareholder, whether he or she owns one or more shares, is requested to sign
this proxy and return it promptly in the enclosed envelope.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR EACH OF THE
PROPOSALS.
<PAGE>
This Proxy, when properly executed, will be voted in the manner
directed herein by the undersigned shareholder(s). IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED FOR THE PROPOSALS SET FORTH ABOVE, AND IN THE DISCRETION OF
THE PROXIES WITH RESPECT TO ANY OTHER MATTER THAT IS PROPERLY BROUGHT BEFORE THE
MEETING.
Dated:______________________________________, 1998.
--------------------------------------------
Signature
----------------------------------------------------------
Signature if Held Jointly
Please execute this Proxy as your name appears hereon.
When shares are held by joint tenants, both should sign.
When signing as attorney, executor, administrator, trustee
or guardian, please give full title as such. If a
corporation, please sign in full corporate name by the
president or other authorized officer. If a partnership,
please sign in partnership name by authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY
USING THE ENCLOSED ENVELOPE.
