<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the quarterly period ended September 29, 1996 or
Transition report pursuant to section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the transition period from to
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Commission file number 33-14051
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Family Restaurants, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 33-0197361
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
18831 Von Karman Avenue, Irvine, California 92715
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 757-7900
-----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
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Number of shares of outstanding common stock as of November 13, 1996 is
988,285.
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
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FAMILY RESTAURANTS, INC.
------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
($ in thousands, except per share)
<TABLE>
<CAPTION>
September 29, December 31,
1996 1995
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(Unaudited)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 31,844 $ 8,370
Restricted cash 23,621 0
Receivables 3,326 8,172
Inventories 4,744 5,645
Other current assets 4,992 4,813
Property held for sale 6,145 240,077
--------- ---------
Total current assets 74,672 267,077
Property and equipment, net 198,258 207,223
Reorganization value in excess of amounts allocable
to identifiable assets, net 38,280 39,332
Other assets 27,849 37,638
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$ 339,059 $ 551,270
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
Current liabilities:
Loans payable to banks $ 0 $ 79,815
Current portion of long-term debt, including
capitalized lease obligations 3,156 3,046
Accounts payable 19,723 22,400
Self-insurance reserves 36,765 35,488
Other accrued liabilities 67,384 78,319
Income taxes payable 2,968 2,895
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Total current liabilities 129,996 221,963
Other long-term liabilities 4,665 5,680
Long-term debt, including capitalized lease
obligations, less current portion 198,023 455,203
Stockholders' equity (deficit):
Common stock - authorized 1,500,000 shares, par
value $.01 per share, 997,277 shares issued 10 10
Additional paid-in capital 157,317 158,251
Notes receivable from stockholders 0 (869)
Accumulated deficit (149,569) (287,585)
Less treasury stock, at cost (8,992 shares) (1,383) (1,383)
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Total stockholders' equity (deficit) 6,375 (131,576)
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$ 339,059 $ 551,270
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
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FAMILY RESTAURANTS, INC.
------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
($ in thousands, except per share)
(Unaudited)
<TABLE>
<CAPTION>
For the Quarters Ended
----------------------------------
September 29, September 24,
1996 1995
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<S> <C> <C>
Sales $128,543 $281,337
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Product cost 34,785 78,832
Payroll and related costs 49,992 103,518
Occupancy and other operating expenses 32,223 68,958
Depreciation and amortization 5,797 14,838
General and administrative expenses 8,005 13,012
Loss on disposition of properties, net 1,012 5,453
Provision for divestitures 0 41,886
Restructuring costs 1,030 1,366
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Total costs and expenses 132,844 327,863
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Operating loss (4,301) (46,526)
Interest expense, net 4,127 15,838
Gain on sale of division 1,725 0
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Loss before income tax provision (benefit)
and extraordinary item (6,703) (62,364)
Income tax provision (benefit) (112) 277
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Loss before extraordinary item (6,591) (62,641)
Extraordinary gain on extinguishment of debt 123,080 0
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Net income (loss) $116,489 $(62,641)
======== ========
Net income (loss) per common share:
Loss before extraordinary item $ (6.67) $ (63.36)
Extraordinary item 124.54 0.00
-------- --------
Net income (loss) $ 117.87 $ (63.36)
======== ========
Weighted average common shares outstanding 988,285 988,602
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
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FAMILY RESTAURANTS, INC.
------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
($ in thousands, except per share)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
-------------------------------------
September 29, September 24,
1996 1995
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<S> <C> <C>
Sales $606,618 $852,040
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Product cost 168,398 241,854
Payroll and related costs 230,753 315,457
Occupancy and other operating expenses 148,954 208,741
Depreciation and amortization 28,751 43,783
General and administrative expenses 33,293 43,411
Loss on disposition of properties, net 5,207 6,848
Provision for divestitures 0 41,886
Restructuring costs 5,603 1,366
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Total costs and expenses 620,959 903,346
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Operating loss (14,341) (51,306)
Interest expense, net 32,604 45,988
Gain on sale of division 62,601 0
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Income (loss) before income tax provision
and extraordinary item 15,656 (97,294)
Income tax provision 720 1,251
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Income (loss) before extraordinary item 14,936 (98,545)
Extraordinary gain on extinguishment of debt 123,080 0
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Net income (loss) $138,016 $(98,545)
======== ========
Net income (loss) per common share:
Net income (loss) before extraordinary item $ 15.11 $ (99.26)
Extraordinary item 124.54 0.00
-------- --------
Net income (loss) $ 139.65 $ (99.26)
======== ========
Weighted average common shares outstanding 988,285 992,843
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
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FAMILY RESTAURANTS, INC.
------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
($ in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
----------------------------------------
September 29, September 24,
1996 1995
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<S> <C> <C>
Increase in Cash and Cash Equivalents
Cash flows from operating activities:
Cash received from customers, franchisees and
licensees $ 612,333 $ 857,289
Cash paid to suppliers and employees (597,740) (815,147)
Interest paid, net (33,134) (40,620)
Income taxes paid (647) (887)
Restructuring costs (5,603) (1,366)
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Net cash used in operating activities (24,791) (731)
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Cash flows from investing activities:
Proceeds from disposal of property and equipment 21,326 9,046
Proceeds from sale of Family Restaurant Division, net 121,342 0
Proceeds from sale of notes receivable, net 32,116 0
Capital expenditures (5,676) (32,056)
Capitalized opening costs (235) (1,671)
Other 796 (730)
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Net cash provided by (used in) investing activities 169,669 (25,411)
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Cash flows from financing activities:
Proceeds from (repayment of) working capital
borrowings, net (79,815) 32,564
Repurchases of Notes (13,113) 0
Reductions of long-term debt, including capitalized
lease obligations (4,855) (6,345)
(Increase) decrease in restricted cash (23,621) 1,850
Purchase of treasury stock 0 (1,383)
Payments of notes receivable from stockholders 0 766
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Net cash provided by (used in) financing activities (121,404) 27,452
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Net increase in cash and cash equivalents 23,474 1,310
Cash and cash equivalents at beginning of period 8,370 8,239
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Cash and cash equivalents at end of period $ 31,844 $ 9,549
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
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FAMILY RESTAURANTS, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
-----------------------------------------------------------
($ in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
---------------------------------
September 29, September 24,
1996 1995
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<S> <C> <C>
Reconciliation of net income (loss) to net cash
used in operating activities:
Net income (loss) $ 138,016 $(98,545)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 28,751 43,783
Amortization of debt issuance costs 1,918 2,464
Loss on disposition of properties 5,207 6,848
Provision for divestitures 0 41,886
Gain on sale of division (62,601) 0
Extraordinary gain on extinguishment of debt (123,080) 0
Accretion of interest on Discount Notes 8,201 9,973
Decrease in receivables, inventories and other
current assets 4,979 1,014
Decrease in accounts payable, self-insurance
reserves, other accrued liabilities and
income taxes payable (26,182) (8,154)
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Net cash used in operating activities $ (24,791) $ (731)
========= ========
Non-cash investing and financing activities: See Note 4 to the condensed consolidated
financial statements.
</TABLE>
See accompanying notes to condensed consolidated financial statements
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FAMILY RESTAURANTS, INC.
------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
1. COMPANY. Family Restaurants, Inc. (together with its
subsidiaries, the "Company") was incorporated in Delaware in 1986 and is
primarily engaged in the operation of full-service restaurants through its
subsidiaries. At September 29, 1996 the Company operated 296 restaurants in 30
states, with approximately 67% of its restaurants located in California, Ohio,
Pennsylvania, Illinois, Indiana and Michigan. The Company is the licensor of
four restaurants in Japan, the franchisor of one restaurant in the United
States and the franchisor of 21 restaurants outside the United States.
On May 23, 1996, the Company completed the sale of its family
restaurant division, which operated full-service family restaurants (the
"Family Restaurant Division"), to an indirect wholly-owned subsidiary of
Flagstar Companies, Inc. ("Flagstar") in exchange for cash of $125 million,
$150 million principal amount of 12-1/2% Senior Notes due in 2004 (the "FRD
Notes"), and the assumption of $31.5 million of long-term debt, primarily
consisting of capitalized lease obligations. Based on the subsequent
completion of a closing balance sheet, the purchase price was increased and
such increase was satisfied by the issuance of $6.9 million in additional FRD
Notes. The Company recorded a gain of $62.6 million on the sale of the Family
Restaurant Division, which gain included the effect of the increase in purchase
price of $6.9 million discussed above. Cash proceeds from the sale were used
to pay indebtedness outstanding under the Credit Facility (as defined below) of
$82 million. As of September 29, 1996, the Company had sold or exchanged
$150.4 million aggregate principal amount of the FRD Notes. The remaining
balance of $6.5 million is currently restricted in accordance with the sale
agreement with Flagstar to secure potential future indemnity claims. The
remaining FRD Notes are carried at their fair value which approximates their
cost.
2. FINANCIAL STATEMENTS. The Condensed Consolidated Financial
Statements in this Form 10-Q have been prepared in accordance with Securities
and Exchange Commission Regulation S-X. Reference is made to the Notes to the
Consolidated Financial Statements for the Year Ended December 31, 1995 included
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1995 (the "Form 10-K") for information with respect to the Company's
significant accounting and financial reporting policies, as well as other
pertinent information. The Company believes that all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
results of the interim periods presented have been made. The results of
operations for the quarter and nine months ended September 29, 1996 are not
necessarily indicative of those for the full year.
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3. IMPAIRMENT OF LONG-LIVED ASSETS. Effective January 1, 1996,
the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," which generally requires
the assessment of certain long-lived assets for possible impairment when events
or circumstances indicate the carrying value of these assets may not be
recoverable.
The Company evaluates property and equipment for impairment by
comparison of the carrying value of the assets to estimated undiscounted cash
flows (before interest charges) expected to be generated by the asset over its
estimated useful life. In addition, the Company's evaluation considers data
such as continuity of personnel, changes in the operating environment, name
identification, competitive information and market trends. Finally, the
evaluation considers changes in management's strategic direction or market
emphasis. When the foregoing considerations suggest that a deterioration of
the financial condition of the Company or any of its assets has occurred, the
Company measures the amount of an impairment, if any, based on the estimated
fair value of each of its assets over the remaining amortization period.
The Company believes that there has been no impairment of its
long-lived assets based on re-engineering and re-positioning plans currently
under development, other than impairment already recognized in connection with
various properties held for sale.
4. LONG-TERM DEBT. On July 3, 1996, the Company repurchased
$151.0 million aggregate principal amount of its 9-3/4% Senior Notes due 2002
(the "Senior Notes") and $108.6 million aggregate principal amount of its
10-7/8% Senior Subordinated Discount Notes due 2004 (the "Discount Notes" and
together with the Senior Notes, the "Notes") in exchange for (or from the
proceeds from the sale of) $133.5 million aggregate principal amount of the FRD
Notes. In separate transactions, the Company repurchased an additional $8.5
million aggregate principal amount of its Discount Notes in the third quarter
of 1996. The Company recognized an extraordinary gain of $123.1 million in the
third quarter of 1996 as a result of these repurchases.
5. INCOME (LOSS) PER COMMON SHARE. Income (loss) per common
share is computed based on the weighted average number of shares actually
outstanding. The impact of a warrant to acquire an additional 111,111 shares
of common stock of the Company and outstanding options have not been included
because the impact would be antidilutive for 1995 and would not provide
meaningful information in 1996 because the Company believes that neither the
warrant nor the outstanding options would be exercised at their current
exercise prices.
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<PAGE> 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain information and statements included in Management's Discussion
and Analysis of Financial Condition and Results of Operations, including,
without limitation, statements containing the words "believes," "anticipates,"
"expects" and words of similar import, constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 and
involve known and unknown risks and uncertainties that could result in actual
results of the Company or industry differing materially from expected results
expressed or implied by such forward-looking statements. Although it is not
possible to itemize all of the factors and specific events that could affect
the outlook of a restaurant company operating in a competitive environment,
factors that could significantly impact expected results include (i) the
implementation of a successful cost restructuring program and the development
of a successful marketing strategy for Chi-Chi's, (ii) the effect of national
and regional economic conditions, (iii) the availability of adequate working
capital, (iv) competitive products and pricing, (v) changes in legislation,
(vi) demographic changes, (vii) the ability to attract and retain qualified
personnel, (viii) changes in business strategy or development plans and (ix)
business disruptions. The Company disclaims any obligation to update any such
factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
The following should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
presented in the Form 10-K.
As used herein, "comparable restaurants" means restaurants operated by
the Company on January 1, 1995, which continued in operation through the end of
the third quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES.
- --------------------------------
A. LIQUIDITY
The Company currently relies primarily on internally generated funds,
supplemented by proceeds received from the sale of the Family Restaurant
Division, for its liquidity. The Company's viability is therefore dependent
upon its ability to generate sufficient cash flow to meet its obligations on a
timely basis.
Operating Cash Flow. During the first nine months of 1996, the
Company reported EBITDA (defined as earnings (loss) before gain (loss) on
disposition of properties, restructuring costs, interest, taxes, depreciation
and amortization) of $25.2 million. The Company has included information
concerning EBITDA herein because it understands that such information is used
by certain investors as one measure of a company's historical ability to
service debt. EBITDA should not be considered as an alternative to, or more
meaningful than, operating income (loss) as an indicator of
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<PAGE> 10
operating performance or to cash flows from operating activities as a measure
of liquidity.
Working Capital Deficiency. The Company operates with a substantial
working capital deficiency because (i) restaurant operations are conducted
primarily on a cash (and cash equivalent) basis with a low level of accounts
receivable, (ii) rapid turnover allows a limited investment in inventories and
(iii) cash from sales is usually received before related accounts payable for
food, beverages and supplies become due. The Company had a working capital
deficiency of $61.5 million on September 29, 1996 (excluding the impact of $6.1
million in property held for sale).
Credit Facility. On January 27, 1994, the Company, FRI-M Corporation
("FRI-M") and certain subsidiaries of FRI-M entered into a credit facility (the
"Credit Facility"). In connection with the sale of the Family Restaurant
Division, (i) the Company used a portion of the cash proceeds from the sale to
repay $82 million outstanding under the Credit Facility and (ii) the Credit
Facility was amended to change the borrower from FRI-M (which, following
consummation of the sale, is no longer owned by the Company) to FRI-MRD
Corporation, a wholly owned subsidiary of the Company, to remove all
restrictive covenants, and to reduce the commitment thereunder to up to $32
million of letters of credit with no provision for revolving loans. Letters of
credit are issued under the Credit Facility primarily to provide security for
future amounts payable under the Company's workers' compensation insurance
program ($21.8 million of such letters of credit were outstanding as of
November 13, 1996) and must be fully cash collateralized. On October 23, 1996,
the Company signed a letter of intent with another lending institution for a
five-year, $35 million credit facility (the "New Facility") to provide for the
ongoing working capital needs of the Company. The New Facility would provide
up to $15 million in revolving cash borrowings and up to $35 million in letters
of credit (less the outstanding amount of revolving cash borrowings). Although
the New Facility would not require that letters of credit be cash
collateralized (other than upon the occurrence of certain events), the New
Facility would be secured by all of the real and personal property of the
Company and would contain customary restrictive covenants, including the
maintenance of certain financial ratios. Completion of the New Facility is
subject to completion of due diligence, final documentation and other customary
terms and conditions. There can be no assurances that the New Facility will be
entered into.
Other. In the third quarter, the Company repurchased $151.0 million
aggregate principal amount of its Senior Notes and $108.6 million aggregate
principal amount of its Discount Notes in exchange for (or from the proceeds
from the sale of) $133.5 million aggregate principal amount of the FRD Notes.
In separate transactions, the Company repurchased an additional $8.5 million
aggregate principal amount of its Discount Notes in the third quarter of 1996.
As of September 29, 1996, the Company had sold or exchanged $150.4 million
aggregate principal amount of the FRD Notes. The remaining balance of $6.5
million is currently
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<PAGE> 11
restricted in accordance with the sale agreement to secure potential future
indemnity claims.
Notwithstanding the completion of the sale of the Family Restaurant
Division and the repurchases of the Notes, the Company continues to be highly
leveraged and have significant debt service requirements. Although management
believes that its current sources of cash should be sufficient to meet its
operating and debt service requirements for the foreseeable future, there can
be no assurance that the Company will be able to satisfy current debt service
requirements of the Notes or to repay or refinance the Notes at their
respective maturities. Notwithstanding the execution of the letter of intent
with respect to the New Facility, the Company is continuing to explore
alternatives to further reduce its debt (including additional open market
purchases or other transactions to further reduce remaining indebtedness
outstanding under the Notes). However, there can be no assurances that the
Company will be able to further reduce such debt on satisfactory terms.
B. CAPITAL EXPENDITURES
Net cash provided by investing activities was $169.7 million for the
first nine months of 1996 versus net cash used in investing activities of $25.4
million for the first nine months of 1995, primarily due to the completion of
the sale of the Family Restaurant Division and certain FRD Notes during the
first nine months of 1996 and a reduction in capital expenditures during such
period. The reduction in capital expenditures resulted primarily from the
indefinite suspension of the Company's remodel and new restaurant construction
programs for all restaurants, which was necessary due to the reduced levels of
operating cash flow.
RESULTS OF OPERATIONS.
- ----------------------
THIRD QUARTER OF 1996 AS COMPARED TO THE THIRD QUARTER OF 1995.
The Company's total sales decreased by $152,794,000 or 54.3%
for the third quarter of 1996 as compared to the same period in 1995. This
decrease was due to (i) the loss of sales from the Family Restaurant Division,
which was sold by the Company at the end of May 1996, (ii) decreased sales of
comparable restaurants and (iii) restaurants divested or closed.
<TABLE>
<CAPTION>
Third Quarter Sales
Decrease
-------------------
($ in thousands)
<S> <C>
Decrease in Sales of Family Restaurant
Division $(126,429)
Decrease in Sales of Comparable Restaurants (11,579)
Decrease in Sales of Restaurants Divested
or Closed (14,786)
---------
Total $(152,794)
=========
</TABLE>
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<PAGE> 12
Sales for comparable restaurants decreased by $11,579,000 or 8.7% for
the third quarter of 1996 as compared to the same period in 1995. This
comparable sales decrease reflects decreases in both the El Torito and
Chi-Chi's restaurants primarily due to an increasingly competitive operating
environment for restaurants. Also contributing to the comparable sales
decrease during the third quarter was the timing of the July 4th holiday during
1996 and the 1996 summer Olympics, which affected three weekends and two full
weeks during July and August. The Company continues to work to develop
appropriate long-term marketing plans for Chi-Chi's and El Torito.
Product cost decreased by $44,047,000 or 55.9% in the third quarter of
1996 as compared to the same period in 1995, reflecting the impact of 29
restaurants sold or closed since the end of the third quarter of 1995 and the
decrease in Family Restaurant Division's product cost, based on the sale of the
Family Restaurant Division at the end of May 1996. As a percentage of sales,
product cost declined to 27.1% in the third quarter of 1996 as compared to
28.0% in the same period in 1995.
Payroll and related costs decreased by $53,526,000 or 51.7% in the
third quarter of 1996 as compared to the same period in 1995. This decrease
reflects the impact of the restaurants sold or closed since the end of the
third quarter of 1995 and the sale of the Family Restaurant Division. As a
percentage of sales, payroll and related costs increased from 36.8% in the
third quarter of 1995 to 38.9% in the same period in 1996, primarily as a
result of labor inefficiencies due to the impact of declining sales on fixed
costs and higher management costs at the restaurant level due to salary
increases.
Effective October 1, 1996 the federal minimum wage has been increased
from $4.25 to $4.75 and effective September 1, 1997 it will be further
increased to $5.15. Increases in the minimum wage or decreases in the
allowable tip credit (tip credits reduce the minimum wage that must be paid to
tipped employees) increase the Company's payroll cost. A provision of the new
measure effectively freezes the minimum wage for tipped employees, in those
states which allow for a tip credit, at current levels by increasing the
allowable tip credit. In response to the minimum wage increase on October 1st,
the Company raised menu prices at its El Torito restaurants in an effort to
recover the higher payroll costs. Menu prices were not increased at Chi-Chi's,
however, due to marketing strategies and the fact that Chi-Chi's will
experience a lesser impact from the minimum wage increase due to the increased
allowable tip credit. On November 5, 1996, California voters approved a
proposition that would increase the state's minimum wage to $5.00 on March 1,
1997 and $5.25 on March 1, 1998. There is no tip credit in California.
Occupancy and other expenses decreased by $36,735,000 or 53.3% in the
third quarter of 1996 as compared to the same period in 1995. This decrease
reflects the impact of the restaurants sold or closed since the end of the
third quarter of 1995 and the sale of
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<PAGE> 13
the Family Restaurant Division. As a percentage of sales, occupancy and other
operating expenses increased from 24.5% in the third quarter of 1995 to 25.1%
in the same period in 1996 primarily due to lower costs as a percentage of
sales in the Family Restaurant Division in 1995.
Depreciation and amortization decreased by $9,041,000 or 60.9% in the
third quarter of 1996 as compared to the same period in 1995. The decrease
reflects the reduced depreciable asset base resulting from (i) the third
quarter 1995 adjustment for Chi-Chi's restaurants either held for sale or
having impaired values and (ii) the sale of the Family Restaurant Division.
The decrease is offset, in part, by additional depreciation related to capital
expenditures made from the fourth quarter of 1995 through the third quarter of
1996.
General and administrative expenses decreased by $5,007,000 or 38.5%
in the third quarter of 1996 as compared to the same period in 1995. The
decrease primarily resulted from overall cost reductions plus the impact of the
sale of the Family Restaurant Division. As a percentage of sales, general and
administrative expenses increased from 4.6% in the third quarter of 1995 to
6.2% in the same period of 1996 primarily resulting from corporate general and
administrative expenses in the third quarter of 1996 spread over fewer
restaurants due to the sale of the Family Restaurant Division as compared to
the same period in 1995. Management continues to closely evaluate the
Company's general and administrative cost structure in light of the sale of the
Family Restaurant Division.
Chi-Chi's management continues to work to significantly restructure
Chi-Chi's costs during 1996 in an attempt to bring operating margins in line
with the current sales levels. This restructuring is intended to reduce
restaurant operating costs and includes strong inventory and meal preparation
controls as well as closely monitored restaurant labor scheduling and
management staffing levels. El Torito management has also introduced several
programs early in the fourth quarter in an effort to improve margins.
The Company reported a loss on disposition of properties of $1.0
million in the third quarter of 1996 as compared to a loss of $5.5 million for
the same period in 1995. The loss in 1995 was primarily due to the write-off
of costs associated with cancelled capital projects (both remodels and new
restaurant expansion) and the loss associated with the closure of six
restaurants.
The Company reported restructuring costs of $1.0 million in the third
quarter of 1996 as compared to restructuring costs of $1.4 million for the same
period in 1995. These costs are primarily related to amounts paid to
consultants, professional fees, severance and related costs and other
restructuring related expenses.
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<PAGE> 14
Interest expense, net decreased by $11,711,000 or 73.9% in the third
quarter of 1996 as compared to the same period in 1995. This decrease
primarily resulted from (i) interest income related to the FRD Notes, (ii) no
working capital borrowings under the Credit Facility during the third quarter
of 1996, (iii) the impact of the elimination of Family Restaurant Division's
interest costs, primarily for capitalized lease obligations, and (iv) lower
accretion of interest related to the Discount Notes and interest expense
related to the Senior Notes due to the repurchases of the Notes, as previously
discussed.
The Company recorded an additional gain of $1.7 million in the third
quarter of 1996 as a result of the sale of the Family Restaurant Division.
This additional gain primarily represents the adjustment resulting from the
completion of the final balance sheet and the subsequent upward adjustment of
the purchase price.
The Company recognized an extraordinary gain of $123.1 million in the
third quarter of 1996 as a result of several repurchases of the Notes.
FIRST NINE MONTHS OF 1996 AS COMPARED TO FIRST NINE MONTHS OF 1995.
The Company's total sales decreased by $245,422,000 or 28.8%
for the first nine months of 1996 as compared to the same period in 1995. This
decrease was due to (i) the loss of sales from the Family Restaurant Division
which was sold by the Company at the end of May 1996, (ii) decreased sales of
comparable restaurants and (iii) restaurants divested or closed.
<TABLE>
<CAPTION>
First Nine Months
1996 Sales
Decrease
-----------------
($ in thousands)
<S> <C>
Decrease in Sales of Family Restaurant
Division $(175,595)
Decrease in Sales of Comparable Restaurants (36,441)
Decrease in Sales of Restaurants Divested
or Closed (33,386)
---------
Total $(245,422)
=========
</TABLE>
Sales for comparable restaurants decreased by $36,441,000 or 8.3% for
the first nine months of 1996 as compared to the same period in 1995. This
comparable sales decrease reflects decreases in both the El Torito and
Chi-Chi's restaurants.
Product cost decreased by $73,456,000 or 30.4% in the first nine
months of 1996 as compared to the same period in 1995, reflecting the impact of
29 restaurants sold or closed since the end of the second quarter of 1995 and
the sale of the Family Restaurant Division. As a percentage of sales, product
cost declined to 27.8% in the first nine months of 1996 as compared to 28.4% in
the same period in 1995.
- 14 -
<PAGE> 15
Payroll and related costs decreased by $84,704,000 or 26.9% in the
first nine months of 1996 as compared to the same period in 1995. This
decrease reflects the impact of the restaurants sold or closed since the end of
the second quarter of 1995 and the sale of the Family Restaurant Division. As
a percentage of sales, payroll and related costs increased from 37.0% in the
first nine months of 1995 as compared to 38.0% in the same period in 1996,
primarily as a result of labor inefficiencies due to the impact of declining
sales on fixed costs, higher management costs at the restaurant level due to
salary increases and higher bonuses earned in 1996 in the Family Restaurant
Division.
Occupancy and other expenses decreased by $59,787,000 or 28.6% in the
first nine months of 1996 as compared to the same period in 1995. This
decrease reflects the impact of the restaurants sold or closed since the end of
the second quarter of 1995 and the sale of the Family Restaurant Division. As
a percentage of sales, occupancy and other operating expenses increased
slightly from 24.5% in the first nine months of 1995 to 24.6% in the same
period in 1996.
Depreciation and amortization decreased by $15,032,000 or 34.3% in the
first nine months of 1996 as compared to the same period in 1995. The decrease
reflects the reduced depreciable asset base resulting from (i) the third
quarter 1995 adjustment for Chi-Chi's restaurants either held for sale or
having impaired values, (ii) the sale of certain owned properties and (iii) the
sale of the Family Restaurant Division. The decrease is offset, in part, by
additional depreciation related to capital expenditures made from the third
quarter of 1995 through the third quarter of 1996. Depreciation and
amortization of $11.2 million related to the Family Restaurant Division was
recorded in the first 21 weeks of 1996, as the Company treated the related
restaurants as operating assets until their sale.
General and administrative expenses decreased by $10,118,000 or 23.3%
in the first nine months of 1996 as compared to the same period in 1995. The
decrease resulted from overall cost reductions plus the impact of the sale of
the Family Restaurant Division. As a percentage of sales, general and
administrative expenses increased from 5.1% for the first nine months of 1995
to 5.5% for the same period in 1996.
The Company reported a loss on disposition of properties of $5.2
million in the first nine months of 1996 as compared to a loss of $6.8 million
for the same period in 1995. The loss in 1996 is primarily due to losses
related to the sale of certain owned properties. The loss in 1995 was
primarily due to the write-off of costs associated with cancelled capital
projects (both remodels and new restaurant expansion) and the loss associated
with the closure of six restaurants.
The Company reported restructuring costs of $5.6 million for the first
nine months of 1996 as compared to restructuring costs of $1.4 million for
the same period in 1995. These costs are
- 15 -
<PAGE> 16
primarily related to amounts paid to consultants, professional fees, severance
and related costs and other restructuring related expenses.
Interest expense, net decreased by $13,384,000 or 29.1% in the first
nine months of 1996 as compared to the same period in 1995. This decrease
primarily resulted from (i) interest income related to the FRD Notes, (ii) no
working capital borrowings under the Credit Facility for the five weeks of June
1996 and the third quarter of 1996, (iii) the impact of Family Restaurant
Division's June 1995 and third quarter 1995 interest costs, primarily for
capitalized lease obligations, and (iv) lower accretion of interest related to
the Discount Notes and interest expense related to the Senior Notes due to the
repurchases of the Notes, as previously discussed. The decrease is offset, in
part, by (i) interest on working capital borrowings which were outstanding
throughout the first 21 weeks of 1996 as compared to lower working capital
borrowings during the first 21 weeks of 1995, (ii) fees paid to the banks in
connection with an amendment to the Credit Facility, (iii) higher accretion of
interest related to the Discount Notes during the first 26 weeks of 1996 as
compared to 1995, and (iv) accelerated amortization of the Credit Facility debt
issuance costs as compared to the same period of 1995.
The Company recorded a gain of $62.6 million in 1996 as a result of
the sale of the Family Restaurant Division.
- 16 -
<PAGE> 17
PART II. OTHER INFORMATION
---------------------------
Item 1. LEGAL PROCEEDINGS
The Company is involved in various litigation matters incidental to
its business. The Company does not believe that any of the existing claims or
actions will have a material adverse effect upon the consolidated financial
position and results of operations of the Company.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In connection with the Company's previously announced repurchase of
certain Notes, on July 2, 1996, the Company obtained the requisite consents to
the adoption of certain amendments to the respective indentures relating to the
Notes (the "Indentures"). In accordance with the terms of the respective
Indentures, the holders of at least a majority in aggregate principal amount of
the notes outstanding thereunder are required to effectuate any amendment to
the Indentures. On July 2, 1996, there were outstanding $300,000,000 aggregate
principal amount of Senior Notes and $150,000,000 aggregate principal amount of
Discount Notes. The Company obtained the consent of the holders of
$150,966,000 aggregate principal amount of its Senior Notes and $108,600,000
aggregate principal amount of its Discount Notes.
The amendments to the Indentures (i) amended the definition of
"Restricted Payment" and made such other changes necessary to permit the
Company to repurchase Junior Debt (as defined) without restriction, (ii)
clarified that the maximum amount that can be borrowed under the Bank Credit
Agreement (as defined) is to be reduced by the amount of Excess Proceeds (as
defined), if any, applied to permanently repay Indebtedness (as defined)
outstanding thereunder, (iii) eliminated the requirement that any permitted
refunding or replacements of the Bank Credit Agreement take place within six
months of payment in full of such agreement, (iv) allowed any Subsidiary (as
defined) of the Company to incur certain debt, and (v) allowed the Company to
use Excess Proceeds from Asset Sales (as defined) to repay or repurchase any
Indebtedness of the Company, including the Senior Notes, the Discount Notes and
Junior Debt.
The foregoing is only a summary of, and is qualified in its entirety
by, the terms of the First Supplemental Indentures, dated as of July 3, 1996,
relating to the Indentures, copies of which were filed as Exhibits 10.1 and
10.2 to the Company's Current Report on Form 8-K filed on July 9, 1996.
- 17 -
<PAGE> 18
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Family Restaurants, Inc. and FRI-MRD Corporation
Value Creation Units Plan and sample Value Creation
Units Agreement.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
On July 9, 1996 the Company filed a report on Form 8-K
announcing the repurchase of $151.0 million aggregate
principal amount of its Senior Notes and $108.6 million
aggregate principal amount of its Discount Notes from
unrelated third parties in exchange for (or from the proceeds
from the sale of) $133.5 million aggregate principal amount of
the FRD Notes.
- 18 -
<PAGE> 19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Family Restaurants, Inc.
(Registrant)
By: /S/ Robert T. Trebing, Jr.
----------------------------------
Robert T. Trebing, Jr.
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 13, 1996
- 19 -
<PAGE> 1
EXHIBIT 10.1
FAMILY RESTAURANTS, INC.
AND
FRI-MRD CORPORATION
VALUE CREATION UNITS PLAN
1. PURPOSE
THE PURPOSE OF THE VALUE CREATION UNITS PLAN (THE "PLAN") OF
FAMILY RESTAURANTS, INC. ("FRI") AND FRI-MRD CORPORATION
("FRI-MRD") IS TO PROVIDE PARTICIPANTS WITH A CONTINGENT
FINANCIAL INCENTIVE TO CONTRIBUTE TO THE LONG-TERM SUCCESS OF
THE CORPORATION.
2. DEFINITIONS
As used in this Plan, the following terms shall have the
meanings set forth below:
a. "Adjustment Period" -- means September 1, 1996, through
the Expiration Date.
b. "Authorized Corporate VCUs" -- means 100,000 Corporate
VCUs.
c. "Authorized Chi-Chi's VCUs" -- means 100,000 Chi-Chi's
VCUs.
d. "Authorized El Torito VCUs" -- means 100,000 El Torito
VCUs.
e. "Board" -- means the Board of Directors of FRI.
f. "Change of Control" -- shall have the meaning given to
such term in the Indenture, dated as of January 27, 1994,
relating to FRI's 9 3/4% Senior Notes due 2002 as in
effect on the date this Plan is adopted (excluding any
such Change of Control occurring by reason of clause (ii)
of the definition thereof); provided, that such term
shall not include any Change of Control occurring by
reason of conversion or exchange of any indebtedness of
the Corporation.
g. "Chi-Chi's" -- means Chi-Chi's, Inc., a wholly owned
subsidiary of the Corporation, and each of said
subsidiary's wholly owned subsidiaries.
h. "Chi-Chi's Value Created" -- means Chi-Chi's EBITDA for
fiscal year 1998 plus $14,000,000, multiplied by six (6);
provided, that (a) if all or substantially all of the
capital stock or assets (on a consolidated basis) of
Chi-Chi's, Inc. is sold prior to the Expiration Date, the
Chi-Chi's Value Created shall be the higher of (i) the
Enterprise Value of Chi-Chi's, Inc. implied by such sale,
as determined by the Board, plus $84 million; and (ii)
Chi-Chi's EBITDA for the twelve (12) fiscal months
preceding the date of such sale, as adjusted by the
applicable provisions of Section 2.m. below, multiplied
by
1
<PAGE> 2
six (6), plus $84 million, and (b) if the El Torito Value
Created is less than $0, such amount shall be deducted
from the Chi-Chi's Value Created.
i. "Chi-Chi's VCU" -- means a unit granted pursuant to this
Plan, the value of which is determined based on increases
in Chi-Chi's and FRI's EBITDA.
j. "Chi-Chi's VCU Pool" -- means the dollar amount
determined by dividing Chi-Chi's Value Created by
Corporate Value Created, multiplying this percentage by
the Initial VCU Pool, and reducing this amount by 50%;
provided, that in no event shall the Chi-Chi's VCU Pool
be less than $0.
k. "Chi-Chi's VCU Value" -- means the Chi-Chi's VCU Pool
divided by 100,000, the number of Authorized Chi-Chi's
VCUs.
l. "Corporation" -- means Family Restaurants, Inc., a
Delaware corporation and FRI-MRD Corporation, a Delaware
corporation, jointly and severally.
m. "Corporate Value Created" or "CVC" -- means FRI's EBITDA
for fiscal year 1998 multiplied by six (6), with
adjustments as follows for a sale of a division, asset
sales and lease terminations:
(i) In the event that all or substantially all of the
capital stock or assets (on a consolidated basis) of
Chi-Chi's, Inc. is sold prior to the Expiration Date
(a) for the purpose of computing CVC, FRI's EBITDA
for fiscal year 1998 shall be reduced by $14 million
and if such sale occurs during fiscal year 1998,
FRI's EBITDA for fiscal year 1998 shall be further
reduced by Chi-Chi's EBITDA reported for said year
to the extent otherwise included in FRI's EBITDA and
(b) CVC shall be increased by the Enterprise Value
of Chi-Chi's, Inc. implied by such sale, as
determined by the Board, plus $84 million, and
further increased by a factor of 1% per month simple
interest times the number of full months elapsed
from the month of sale to the Expiration Date.
(ii) In the event that all or substantially all of the
capital stock or assets (on a consolidated basis) of
El Torito Restaurants, Inc. is sold prior to the
Expiration Date (a) for the purpose of computing
CVC, FRI's EBITDA for fiscal year 1998 shall be
increased by $14 million and if such sale occurs
during fiscal year 1998, FRI's EBITDA for fiscal
year 1998 shall be decreased by El Torito's EBITDA
reported for said year to the extent otherwise
included in FRI's EBITDA and (b) CVC shall be
increased by the Enterprise Value of El Torito
Restaurants, Inc. implied by such sale, as
determined by the Board, minus $84 million, and
further increased by a factor of 1% per month simple
interest times the number of full months elapsed
from the month of sale to the Expiration Date.
2
<PAGE> 3
(iii) For all sales of operating assets consummated
during the Adjustment Period other than (A) sales of
inventory and other sales in the ordinary course of
business, (B) sales of Traditional Dinnerhouse
Assets, (C) sale/leaseback transactions and (D)
contemplated by clauses (i) and (ii) above, CVC will
be increased by the amount of the after-tax net
proceeds received by FRI or its subsidiaries (in the
case of non-cash consideration, as valued by the
Board) and a factor of 1% per month simple interest
times the amount of such proceeds times the number
of full months elapsed from the month of sale to the
Expiration Date.
(iv) Sale of Traditional Dinnerhouse Assets will not
create additional CVC. To the extent that lease
termination payments incurred by FRI or any of its
subsidiaries during the Adjustment Period exceed the
after-tax net proceeds received by FRI or its
subsidiaries (in the case of non-cash consideration,
as valued by the Board) from the sale of Traditional
Dinnerhouse Assets (other than (i) sales of
inventory and other sales in the ordinary course of
business and (ii) sale/leaseback transactions), that
excess amount plus 1% per month simple interest
times the amount of such proceeds times the number
of full months elapsed from the month of sale to the
Expiration Date will reduce CVC.
(v) All additional rent expense reducing EBITDA in
fiscal 1998 and directly attributable to (i)
sale/leaseback financing of real property acquired
prior to January 1, 1996, consummated during the
Adjustment Period or (ii) sale/leaseback financings
of furniture, fixtures and equipment acquired prior
to January 1, 1996, will be added back to EBITDA
before determining CVC.
(vi) Prior to computing the El Torito and/or Chi-Chi's
Value Created, the adjustment to the CVC dictated in
m(iii) and m(v) will also be made to the divisions'
EBITDA from which the adjustment originated.
n. "Corporate VCU" -- means a unit granted pursuant to this
Plan, the value of which is determined based on increases
in FRI's EBITDA.
o. "Corporate VCU Pool" -- means the Initial VCU Pool less
the sum of (i) the Chi-Chi's VCU Pool and (ii) the El
Torito VCU Pool.
p. "Corporate VCU Value" -- means the Corporate VCU Pool
divided by 100,000, the number of Authorized Corporate
VCUs.
q. "Debt" -- shall have the meaning given to such term in
the Indenture, dated January 27, 1994, relating to FRI's
9 3/4% Senior Notes due 2002, as in effect on the date
this Plan is adopted.
3
<PAGE> 4
r. "EBITDA" -- means earnings (loss) before gain (loss) on
disposition of properties, provision for divestitures,
writedown of goodwill, interest, taxes, depreciation,
amortization, gain or loss on extinguishment of debt, and
extraordinary items, in each case as determined in
accordance with generally accepted accounting principles
consistently applied. EBITDA shall not be reduced by
reason of any accrual or payment with respect to VCUs
that would otherwise be reported as an operating expense
in accordance with generally accepted accounting
principles.
s. "El Torito" -- means El Torito Restaurants, Inc., a
wholly owned subsidiary of the Corporation, and each of
such subsidiary's wholly owned subsidiaries.
t. "El Torito Value Created" -- means El Torito's EBITDA for
fiscal year 1998 minus $14,000,000, multiplied by six
(6); provided, that (a) if all or substantially all of
the capital stock or assets (on a consolidated basis) of
El Torito Restaurants, Inc. is sold prior to the
Expiration Date, the El Torito Value Created shall be the
higher of (i) the Enterprise Value of El Torito
Restaurants, Inc. implied by such sale, as determined by
the Board, minus $84 million; and (ii) El Torito's EBITDA
for the twelve (12) fiscal months preceding the date of
such sale, as adjusted by the applicable provisions of
Section 2.m. above, multiplied by six (6), minus $84
million, and (b) if the Chi-Chi's Value Created is less
than $0, such amount shall be deducted from the El Torito
Value Created.
u. "El Torito VCU" -- means a unit granted pursuant to this
Plan, the value of which is determined based on increases
in El Torito's and FRI's EBITDA.
v. "El Torito VCU Pool" -- means the dollar amount
determined by dividing El Torito Value Created by
Corporate Value Created, multiplying this percentage by
the Initial VCU Pool, and reducing this amount by 50%;
provided, that in no event shall the El Torito VCU Pool
be less than $0.
w. "El Torito VCU Value" -- means the El Torito VCU Pool
divided by 100,000, the number of Authorized El Torito
VCUs.
x. "Employee" -- means any full-time employee of FRI or any
of its subsidiaries.
y. "Enterprise Value" -- means for any person the sum of (a)
the aggregate value of the fully diluted common equity of
such person, based on the price paid in the transaction
giving rise to the need to calculate Enterprise Value,
plus (b) the aggregate principal amount of all
indebtedness and the aggregate liquidation preference of
all preferred stock of such person and its subsidiaries
shown on the consolidated balance sheet of such person
prepared as of the date of such transaction in accordance
with generally accepted accounting principles, less (c)
all cash and cash equivalents of such person and its
subsidiaries, exclusive of restaurant safe and change
funds.
4
<PAGE> 5
z. "Exit Event" -- means the earliest to occur of (i) a bona
fide registered underwritten initial public offering of
unrestricted shares of common stock, par value $.01 per
share, of FRI and (ii) a Change of Control.
aa. "Expiration Date" -- means December 27, 1998, the date as
of which VCUs are to be initially valued.
bb. "Expiration Rate" -- means the sum of (i) the publicly
announced prime or base rate of Bank of America on the
Expiration Date (or, if such institution has no such
publicly announced rate on such date, the publicly
announced prime or base rate of such other nationally
recognized banking institution chosen by the Board) plus
(ii) a spread, which shall initially be 3.75%, and which
shall increase by 100 basis points on each full year
anniversary of the Expiration Date.
cc. "Initial VCU Pool" -- means an amount determined by using
the following formula:
<TABLE>
<CAPTION>
CORPORATE VALUE CREATED INITIAL VCU POOL
<S> <C>
$0 - $75,000,000 2% of Corporate Value Created (CVC)
$75,000,001 - $150,000,000 $1,500,000 plus 4% of CVC above $75,000,000
$150,000,001 - $250,000,000 $4,500,000 plus 6% of CVC above $150,000,000
$250,000,001+ $10,500,000 plus 7.5% of CVC above $250,000,000
</TABLE>
dd. "Involuntary Termination For Cause" -- means termination
of employment of a Participant if such Participant (i)
willfully breaches significant and material duties he or
she is required to perform; (ii) commits a material act
of fraud, dishonesty, misrepresentation, or other act of
moral turpitude; (iii) is convicted of a felony; (iv)
exhibits gross negligence in the course of his or her
employment; (v) is ordered removed by a regulatory or
other governmental agency pursuant to applicable law; or
(vi) fails to obey a lawful and reasonable direction from
the Board or the Participant's duly authorized manager.
ee. "Involuntary Termination Not For Cause" -- means
termination of employment of a Participant for reasons
other than those specified as reasons for Involuntary
Termination For Cause; provided, that said definition
shall not include termination of employment of a
Participant resulting from the sale of all or
substantially all of the capital stock or assets of
Chi-Chi's or El Torito prior to the Expiration Date.
ff. "Participant" -- means any Employee who is a party to a
VCU Agreement.
gg. "Traditional Dinnerhouse Asset" -- means all assets used
in the operation of FRI's Traditional Dinnerhouse
division.
5
<PAGE> 6
hh. "VCU" -- means collectively Corporate VCUs, Chi-Chi's
VCUs, and El Torito VCUs.
ii. "VCU Agreement" -- means an agreement between a
Participant and the Corporation evidencing an award of
VCUs pursuant to this Plan. The VCU Agreement shall
remain in effect until each VCU issued pursuant thereto
has been forfeited, converted, terminated or paid out. A
VCU shall automatically be forfeited if the Employee to
whom it has been granted does not execute a VCU Agreement
within 90 days of the date of grant of such VCU.
This Plan is established assuming that FRI is comprised of two
divisions, El Torito and Chi-Chi's, and that the total EBITDA
for FRI is equal to the sum of Chi-Chi's EBITDA plus El Torito
EBITDA, including a total allocation of G&A expenses. If in
the future another division is added to FRI, whether by
acquisition or otherwise, or one of the divisions is sold or
taken public, the Board will make such adjustments to this
Plan as it deems appropriate in its sole discretion.
Unless the context otherwise requires, other terms used herein
shall have the same meaning as in the Severance Plan of FRI as
in effect on the date hereof.
3. PLAN MECHANICS
The following steps describe the process that will be used to
calculate the amounts payable to Participants:
a. Determine the Corporate Value Created (CVC), Chi-Chi's
Value Created, and El Torito Value Created.
b. Using the CVC, compute the Initial VCU Pool.
c. Using the Initial VCU Pool, determine the Corporate VCU
Pool, the Chi-Chi's VCU Pool, and the El Torito VCU Pool.
d. Using the Corporate VCU Pool, the Chi-Chi's VCU Pool, the
El Torito VCU Pool, compute the Corporate VCU Value, the
Chi-Chi's VCU Value, and the El Torito VCU Value.
e. Using the VCU values computed in 3(d) and the number of
VCUs granted to each Participant (as set forth in each
Participant's VCU Agreement), compute each Participant's
incentive payment.
4. ADMINISTRATION
6
<PAGE> 7
a. This Plan will be administered by the Board. The Board
may delegate its authority to administer all or any part
of this Plan to an employee or a committee, in its sole
discretion.
b. The Board will have the final authority to determine, in
its sole discretion:
(i) The Employees who will participate in the Plan;
(ii) The number of VCUs to be granted to each Participant
(which need not be a whole number);
(iii) The time or times when VCUs will be granted; and
(iv) Any other conditions relating to the grant or
payment for each VCU.
c. Notwithstanding Section 4(b) above, on December 27, 1998,
all VCUs must be held by Employees. Accordingly, any VCUs
not previously granted by the Board on or before December
27, 1998, shall be allocated to Participants on said date
on a pro rata basis (based upon the % of VCU's held by
each Participant on said date).
d. The Board will have the discretionary authority to
interpret this Plan and to make all determinations
necessary in administering this Plan, including (without
limitation) all determinations relating to accounting
matters. Without limiting the foregoing, whenever any
amounts are required to be allocated between divisions,
the determination of the Board shall be final.
e. From time to time, the Board may adopt rules relating to
any of the determinations to be made by the Board under
this Plan. The Board may at any time amend or repeal any
such rules. The adoption, amendment, or repeal of any
such rules shall be deemed an amendment of this Plan.
5. VCU TERMS AND CONDITIONS
a. VCUs are non-transferable and non-assignable. On death,
benefits hereunder shall be paid to beneficiary or estate
as described below.
b. VCUs shall be valued within 90 days of the end of the
Expiration Date.
c. No payment on a Participant's part will be required to
receive a grant of VCUs or receive payment for the value
of VCUs previously granted.
6. EXIT EVENT
7
<PAGE> 8
If there is an Exit Event prior to June 30, 2000, and the Enterprise
Value of FRI implied by such Exit Event, as determined by the Board,
(the "Exit Event Enterprise Value") is in excess of the CVC, in
addition to the payments to which participants are entitled under
Section 3 of the Plan, each Participant shall be entitled to an
additional payment with respect to each VCU held by such Participant
(the "Excess Amount") equal to the excess of (i) the amount payable
under Section 3 of the Plan with respect to such VCU calculated as if
the Exit Event Enterprise Value had been the CVC, over (ii) the actual
amount payable under Section 3 of the Plan with respect to such VCU. At
the option of FRI, the Excess Amount may be paid in shares of common
stock of FRI or the acquiror, as the case may be, valued at the amount
per share of such common stock paid in the Exit Event; provided, that
immediately after such Exit Event such shares of common stock are not
restricted within the meaning of Rule 144 under the Securities Act of
1933, as amended and are traded on a national securities exchange.
7. PAYMENTS/TAX WITHHOLDING
All payments with respect to VCUs shall be made subject to all
applicable Federal, state, and local tax withholding requirements, and
will be made within 90 days following the Expiration Date; provided,
that if an Exit Event occurs after the Expiration Date, payments with
respect to the Excess Amount will be made within 90 days following the
Exit Event. Notwithstanding the foregoing, if the ratio of (a) the sum
of FRI's and its subsidiaries' Debt on the Expiration Date to (b)
EBITDA of FRI for the most recent four full fiscal quarters ending on
or prior to the Expiration Date equals or exceeds 6.0, all payments
may, at the option of the FRI, be postponed; provided, that (i) such
payments shall bear interest at the Expiration Rate from the Expiration
Date through the date such payment is made, (ii) such payments will
become automatically due and payable if, following the Expiration Date,
an event of default occurs and extends beyond any period of grace
applicable thereto under any instrument under which there may be issued
any indebtedness of FRI or any of its subsidiaries having an
outstanding principle amount of $10,000,000 or more in the aggregate
if, as a result of such event of default, such indebtedness has been
declared to be due and payable prior to its date of maturity; and (iii)
in any event, all payments with respect to VCUs shall be made to
Participants no later than December 31, 2000.
8. TERMINATION OF EMPLOYMENT
a. If a Participant ceases to be an Employee prior to the Expiration
Date due to death, disability, or Involuntary Termination Not For
Cause, the number of VCUs held by the Participant and paid in
accordance with the Plan will be reduced to equal that number of
VCUs granted to the Participant multiplied by the ratio of (i) the
number of full months of employment elapsed between the Date of
Grant and the date of termination divided by (ii) the number of
full months elapsed between the Date of Grant and the Expiration
Date; and all other VCUs granted to such Participant will be
forfeited and no payments will be made with respect thereto. In
the case of death, payment for VCUs will be made to the
Participant's designated beneficiaries or, if none exist, to the
Participant's estate. In no
8
<PAGE> 9
case shall any Participant have a right to any payment under
this Plan until the times expressly provided in Section 7 and
9 hereof.
b. If a Participant ceases to be an Employee prior to the
Expiration Date due to Involuntary Termination For Cause,
voluntary termination, or retirement, all VCUs held by such
Participant will be forfeited and no payments will be made
with respect thereto.
c. In no event shall a Participant's rights to payment under this
Plan be forfeited or reduced if the Participant's employment
terminates (i) as a direct result of the sale of all or
substantially all of the capital stock or assets (on a
consolidated basis) of Chi-Chi's, Inc. or El Torito
Restaurants, Inc. prior to the Expiration Date; or (ii) after
the Expiration Date; provided, that if a Participant
terminates his or her employment after the Expiration Date but
prior to an Exit Event, the Participant shall not be entitled
to receive any Excess Amount payable as a result of the Exit
Event.
9. LIQUIDATION OF THE CORPORATION
In the event of the liquidation of the Corporation before the
Expiration Date, all VCUs will accelerate and be valued and
paid as of the date of such liquidation. It is anticipated
that the value of the Corporation as determined in connection
with the liquidation will be used to determine the value of
all VCUs, in accordance with Section 3. The Board may
determine an alternative value(s) for VCUs if, in its opinion
and sound business judgment, an alternative VCU value(s) more
accurately reflects the value created by the Corporation, Chi-
Chi's, and/or El Torito.
10. RIGHTS OF PARTICIPANTS
VCUs are solely a device for the measurement and determination
of the incentive amounts to be paid to Participants under this
Plan and as such:
a. Shall not constitute or be treated as an entitlement to
any specific property of, or to participation in any
trust fund maintained by, the Corporation.
b. Shall give Participants no rights other than those of a
general creditor of the Corporation with respect to
amounts due from VCUs.
c. Shall represent unfunded and unsecured obligations of the
Corporation with respect to incentive amounts due for
VCUs.
d. Shall not entitle any individual to ownership or to the
right to ownership of assets, or shares of capital stock,
of the Corporation.
9
<PAGE> 10
e. Shall give Participants no rights to continued employment
with the Corporation or any of its subsidiaries, or to
continued participation in this Plan.
f. Shall not give any Participant any control, vote, or
management authority over any assets of the Corporation,
including, without limitation, any control over the
leasing, management, financing, refinancing, acquisition,
or disposition of all or any Corporation assets.
g. Shall not represent the fair market value of the
Corporation or any or all of its assets for any purpose
other than the valuation of VCUs granted pursuant to the
terms of this Plan.
11. PLAN AMENDMENT
The Board may modify or amend this Plan in writing at any time
in any manner without limitation, provided however, that no
such amendment shall materially adversely affect or impair the
rights of Participants with respect to VCUs previously granted
under the Plan without the consent of the holders of a
majority of the VCUs that have been granted and not forfeited
prior to the date of such modification or amendment. The Plan
itself is the controlling document. No other explanatory
materials, statements, representations, or examples, oral or
written, shall constitute an amendment to the Plan.
12. BINDING EFFECT
a. This Plan, and any VCU Agreements executed pursuant
hereto, shall be binding upon and enforceable against all
successors and assigns of the Corporation.
b. Notwithstanding any provision contained herein to the
contrary, the benefits accrued under this Plan and any
VCU Agreement shall not be payable unless the
shareholders of the Corporation approve this Plan in
accordance with the terms of Section 280G(b)(5) of the
Internal Revenue Code of 1986, as amended, and the
regulations thereunder. Any right to the payment of
benefits under this Plan and any VCU Agreement shall be
contingent on the receipt of such approval.
13. EFFECTIVE DATE
The effective date of this Plan is January 1, 1996.
14. GOVERNING LAW
This Plan shall be construed and its provisions enforced and
administered in accordance with the laws of the State of
California without regard to choice of law rules.
10
<PAGE> 11
FAMILY RESTAURANTS, INC.
AND
FRI-MRD CORPORATION
VALUE CREATION UNITS (VCU) AGREEMENT
Family Restaurants, Inc., a Delaware corporation ("FRI") and
FRI-MRD Corporation, a Delaware corporation ("FRI-MRD") (hereinafter
FRI and FRI-MRD are collectively referred to as the "Company"), hereby
grants as of the ____ day of _________, 19__, to ________________ (the
"Participant"), ________ VCUs. This grant of VCUs is subject to the
following terms and conditions:
1. GRANT UNDER VCU PLAN. These VCUs are granted pursuant to
and are governed by the Company's VCU Plan (the "Plan") and, unless the
context otherwise requires, terms used herein shall have the same
meaning as in the Plan. Determinations made in connection with these
VCUs shall be governed by the Plan.
2. RESTRICTIONS ON TRANSFER. VCUs may not be transferred.
During the Participant's lifetime, only the Participant can receive
payments upon the valuation of these VCUs.
3. METHOD OF VCU VALUATION AND PAYMENT. VCUs will be valued
and payments made to the Participant in the time and in the manner
provided for in the Plan.
4. NO OBLIGATION TO CONTINUE EMPLOYMENT. Neither the Plan,
this Agreement, nor the grant of these VCUs imposes any obligation on
the Company or its subsidiaries to continue to employ the Participant.
Employment with the Company and its subsidiaries remains at will and
can be terminated by either party, at any time, with or without notice
and with or without cause.
5. WITHHOLDING TAXES. Individual payments, subject to all
applicable Federal, state, and local tax withholding requirements, will
be made in the time and in the manner provided for in the Plan.
6. PROVISION OF DOCUMENTATION TO EMPLOYEE. By signing this
Agreement the Participant acknowledges receipt of a copy of this
Agreement and a copy of the Plan.
7. CONFIDENTIALITY. Participant agrees to keep strictly
confidential any information provided to the Participant by the Company
about the Company in connection with Participant's grant of VCUs,
valuation and payment for VCUs, or otherwise in connection with this
Agreement, including without limitation, information with respect to
the Company's financial
11
<PAGE> 12
statements and position and other information about its financial
condition, trade secrets, customer list, pricing, other such Company
transactions, and other such information.
Participation in this Plan shall not create any right for the
Participant or obligation by the Company for the Company to provide any
proprietary information to the Participant, including without
limitation, information with respect to the Company's financial
statements and position and other information about its financial
condition, trade secrets, customer list, pricing, other such Company
transactions, and other such information.
8. MISCELLANEOUS
(a) NOTICES: All notices hereunder shall be in
writing and shall be deemed given when sent by certified or registered
mail, postage prepaid, return receipt requested, to the address set
forth below. The addresses for such notices may be changed from time to
time by written notice given in the manner provided for herein.
(b) ENTIRE AGREEMENT; MODIFICATION: This Agreement
and the provisions of the Plan constitute the entire agreement between
the parties relative to the subject matter hereof, and supersedes all
proposals, written or oral, and all other communications between the
parties relating to the subject matter of the Plan and this Agreement.
This Agreement may be modified, amended or rescinded only by a written
agreement executed by both parties.
(c) SEVERABILITY: The invalidity, illegality or
unenforceability of any provision of this Agreement shall in no way
affect the validity, legality or enforceability of any other provision.
(d) SUCCESSORS AND ASSIGNS: This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, subject to the limitations set forth
in Section 3 hereof.
(e) GOVERNING LAW: This Plan shall be construed and
its provisions enforced and administered in accordance with the laws of
the State of California without regard to choice of law rules.
12
<PAGE> 13
IN WITNESS WHEREOF, the Company and the Participant have
caused this instrument to be executed as of the date first above
written.
Family Restaurants, Inc.
---------------------------- 18831 Von Karman Avenue
Participant Irvine, CA 92715
----------------------------
Print Name of Participant
By:
---------------------------- -----------------------
Street Address Kevin Relyea
President and CEO
----------------------------
City State Zip Code
FRI-MRD Corporation
18831 Von Karman Avenue
Irvine, CA 92715
By:
-----------------------
Robert T. Trebing, Jr.
President
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE QUARTER ENDED
SEPTEMBER 29, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM
10-Q FOR THE QUARTER ENDED SEPTEMBER 29, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> SEP-29-1996
<CASH> 55,465
<SECURITIES> 0
<RECEIVABLES> 3,326
<ALLOWANCES> 0
<INVENTORY> 4,744
<CURRENT-ASSETS> 74,672
<PP&E> 249,569
<DEPRECIATION> 51,311
<TOTAL-ASSETS> 339,059
<CURRENT-LIABILITIES> 129,996
<BONDS> 198,023
0
0
<COMMON> 10
<OTHER-SE> 6,365
<TOTAL-LIABILITY-AND-EQUITY> 339,059
<SALES> 606,618
<TOTAL-REVENUES> 606,618
<CGS> 168,398
<TOTAL-COSTS> 620,959
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,604
<INCOME-PRETAX> 15,656
<INCOME-TAX> 720
<INCOME-CONTINUING> 14,936
<DISCONTINUED> 0
<EXTRAORDINARY> 123,080
<CHANGES> 0
<NET-INCOME> 138,016
<EPS-PRIMARY> 139.65
<EPS-DILUTED> 0
</TABLE>
