<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
- ----- Act of 1934
For the fiscal year ended December 28, 1997 or
Transition report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
Commission file number 33-14051
FAMILY RESTAURANTS, INC.
Incorporated in Delaware I.R.S. Employer Identification No. 33-0197361
-------- ----------
18831 Von Karman Avenue, Irvine, CA 92612
Telephone: (714) 757-7900
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by a 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 the filing
requirements for at least the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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 [ ]
Index to exhibits appears on page 33.
The common stock of the registrant is not publicly traded. Therefore, the
aggregate market value of voting stock held by non-affiliates is not readily
determinable.
Number of shares of outstanding common stock as of March 27, 1998 is 988,285.
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FAMILY RESTAURANTS, INC.
PART I
Item 1. BUSINESS
BACKGROUND
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 December 28, 1997, the
Company operated 275 restaurants in 30 states, with approximately 65% of its
restaurants located in California, Ohio, Pennsylvania, Michigan, Illinois and
Indiana. Additionally, as of December 28, 1997, the Company was the franchisor
and licensor of two restaurants in the United States and 23 restaurants outside
the United States. See "--Franchised and Licensed Restaurants."
On January 27, 1994, Apollo FRI Partners, L.P. ("Apollo"), Green Equity
Investors, L.P. ("GEI") and Foodmaker, Inc. ("Foodmaker") acquired approximately
98% of the then outstanding common stock, par value $.01 per share (the "Common
Stock"), of the Company. Concurrently, Chi- Chi's, Inc. ("Chi-Chi's") was merged
with and into a subsidiary of the Company. On November 20, 1995, Apollo entered
into an Exchange Agreement with Foodmaker and GEI, pursuant to which, among
other things, (i) on December 20, 1995, Foodmaker transferred all of the shares
of the Common Stock and the Warrant (as defined below) owned by it to Apollo and
(ii) on November 20, 1995, GEI transferred 19,609 shares of the Common Stock
held by it to Apollo. See "--Change in Control."
On May 23, 1996, the Company completed the sale of its family restaurant
division, which operated full-service family-style restaurants primarily under
the Coco's and Carrows names (the "Family Restaurant Division"), to FRD
Acquisition Co. ("FAC"), an indirect, wholly-owned subsidiary of Flagstar
Companies, Inc. (now known as Advantica Restaurant Group, Inc.) ("Flagstar"), in
exchange for $125 million cash, $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. See "--Sale of Family Restaurant Division."
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 (i) an additional $8.5 million aggregate
principal amount of its Discount Notes in the third quarter of 1996 and (ii) an
additional $30.0 million aggregate principal amount of its Senior Notes and an
additional $2.0 million aggregate principal amount of its Discount Notes in the
fourth quarter of 1996. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital
Resources--Liquidity."
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On January 10, 1997, the Company entered into a five-year, $35 million
credit facility (the "Foothill Credit Facility") with Foothill Capital
Corporation ("Foothill") to provide for the ongoing working capital needs of the
Company. The Foothill Credit Facility, which replaced the Company's old credit
facility with Credit Lyonnais (the "Old Credit Facility"), provides for 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). The Foothill
Credit Facility is secured by substantially all of the real and personal
property of the Company and contains customary restrictive covenants, including
the maintenance of certain financial ratios. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital
Resources--Liquidity."
On August 12, 1997, FRI-MRD Corporation (a wholly-owned subsidiary of
the Company) ("FRI-MRD") issued new senior discount notes (the "Senior Discount
Notes") in the face amount of $61 million at a price of approximately 75% of
par. The Senior Discount Notes are due on January 24, 2002 and accrete at a rate
of 15% per annum until July 31, 1999, and thereafter, interest will be payable
in cash semi-annually at the rate of 15% per annum. The $61 million of Senior
Discount Notes were issued to an existing holder of the Company's Senior Notes
in exchange for $15.6 million of Senior Notes plus approximately $34 million of
cash, and are part of an agreement pursuant to which FRI-MRD had the ability to
issue up to a maximum of $75 million of Senior Discount Notes. In January 1998,
FRI-MRD issued the remaining $14 million in face value of the Senior Discount
Notes available under such agreement to the same purchaser at a price of 83% of
par. FRI-MRD received approximately $11.6 million in cash as a result of this
subsequent sale. Proceeds from the sales of the Senior Discount Notes will be
used to fund the Company's capital expenditure programs and for general
corporate purposes. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital Resources--
Liquidity."
Unless the context otherwise requires, reference to the "Company" refers
to The Restaurant Enterprises Group, Inc. and its consolidated subsidiaries (not
including Chi-Chi's) when used with respect to historical information relating
to periods prior to January 27, 1994 included herein, and refers to Family
Restaurants, Inc. and its consolidated subsidiaries when used with respect to
information relating to periods after January 27, 1994.
ONGOING RESTAURANT OPERATIONS
The Company operated 275 restaurants primarily under the Chi-Chi's, El
Torito and Casa Gallardo names as of December 28, 1997. The Chi-Chi's, El Torito
and Casa Gallardo restaurants serve moderately priced, high-quality Mexican food
and a wide selection of alcoholic beverages. The Company is the largest operator
of full-service Mexican restaurants in the United States, based upon both number
of restaurants and annual revenues. The average food check per person (excluding
alcoholic beverage sales) is approximately $7.62 for Chi-Chi's, $9.49 for El
Torito and $8.11 for Casa Gallardo restaurants. Chi-Chi's restaurants generally
contain from 5,000 to 10,600 square feet of floor space and accommodate
approximately 200 to 400 guests in the restaurant and lounge. El Torito
restaurants generally contain from 8,000 to 10,000 square feet of floor space
and accommodate approximately 300 to 400 guests in the restaurant and lounge.
The Company's restaurants are generally located in freestanding buildings in
densely populated suburban areas, and
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the Company believes their festive atmosphere and moderate prices are especially
appealing to family clientele.
SITE SELECTION
The selection of sites for new restaurants is the responsibility of the
senior management of El Torito and Chi-Chi's. Typically, potential sites are
brought to the attention of the Company by real estate brokers and developers
familiar with its needs. Sites are evaluated on the basis of a variety of
factors, including demographic data, land use and environmental restrictions,
competition in the area, ease of access, visibility, availability of parking and
proximity to a major traffic generator such as a shopping mall, office complex,
stadium or university.
EMPLOYEES
At December 28, 1997, the Company had 17,520 employees, of whom 16,038
were restaurant employees, 1,134 were field management and 348 were corporate
personnel. Employees are paid on an hourly basis, except restaurant managers,
corporate and field management and administrative personnel. Restaurant
employees include a mix of full-time and part-time, mostly hourly personnel,
enabling the Company to provide services necessary during hours of restaurant
operations. The Company has not experienced any significant work stoppages and
believes its labor relations are good.
COMPETITION AND MARKETS
The restaurant business is highly competitive and is affected by changes
in the public's eating habits and preferences, population trends and traffic
patterns, and local and national economic conditions affecting consumer spending
habits. Key competitive factors in the industry are the quality and value of the
food products offered, quality and speed of service, advertising, name
identification, attractiveness of facilities and restaurant location. The
Company's restaurants compete with a wide variety of restaurants ranging from
national and regional restaurant chains to locally owned restaurants.
GOVERNMENT REGULATION
Each of the Company's restaurants is subject to Federal, state and local
laws and regulations governing health, sanitation, environmental matters,
safety, the sale of alcoholic beverages and regulations regarding hiring and
employment practices. The Company believes it has all licenses and approvals
material to the operation of its business, and that its operations are in
material compliance with applicable laws and regulations.
The Company is subject to Federal and state laws governing matters such
as minimum wages, overtime and other working conditions. Approximately half of
the Company's employees are paid at rates related to the minimum wage.
Therefore, 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 in certain states) increase the Company's labor costs. This is
especially true in California, where there is no tip credit. Effective October
1, 1996, the Federal minimum wage was increased from $4.25 to
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$4.75, and effective September 1, 1997, it was further increased to $5.15.
However, a provision of the new measure effectively froze the minimum wage for
tipped employees at current levels by increasing the allowable tip credit in
those states which allow for a tip credit. Furthermore, California voters
approved a proposition on November 5, 1996 that increased the state's minimum
wage to $5.00 on March 1, 1997 and further increased the state's minimum wage to
$5.25 on March 1, 1998. In response to the minimum wage increases on October 1,
1996, March 1, 1997 and March 1, 1998, 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 during the first nine months of 1997 due to
marketing strategies and the fact that Chi-Chi's experienced a lesser impact
from the Federal minimum wage increases due to the increased allowable tip
credit in certain states. However, Chi-Chi's did raise menu prices in October
1997 as a result of the cumulative impact of these minimum wage increases. At
the request of President Clinton, the Congress is considering further increases
in the Federal minimum wage over the next two years.
The Company is also subject to both Federal and state regulations
governing disabled persons' access to its restaurant facilities, including the
Americans with Disabilities Act ("ADA"), which became effective in January 1992.
If the ADA were interpreted to require a higher degree of accessibility for
disabled persons than presently established, it could have a significant
economic impact on the Company, inasmuch as such interpretation could require
the Company, and the restaurant industry as a whole, to make substantial
modifications to its restaurant facilities.
Currently, the Company franchises and licenses two restaurants in the
United States and 23 restaurants internationally. The Company began franchising
its El Torito concept both domestically and internationally in 1997. See
"--Franchised and Licensed Restaurants." The Company believes its franchises are
operating in substantial compliance with applicable laws and regulations
governing such operations.
TRADEMARKS AND SERVICE MARKS
The Company regards its trademarks and service marks as important to the
identification of its restaurants and believes that they have significant value
in the conduct of its business. The Company has registered various trademarks
and service marks with the United States Patent and Trademark Office. In
addition to its Federal registrations, certain trademarks and service marks have
been registered in various states and selected international markets in which
the Company operates restaurants. Also, many of the Company's menus, training
manuals and other printed manuals utilized in conjunction with its business are
copyrighted.
FRANCHISED AND LICENSED RESTAURANTS
In May 1994, El Torito Restaurants, Inc. ("El Torito") and Coco's
Restaurants, Inc. ("Coco's"), a former indirect subsidiary of the Company,
entered into a license agreement, which, among other things, granted to Coco's
an exclusive right and license that permits Coco's to grant other parties a
sublicense to develop the Company's El Torito Mexican restaurant concept in
Japan. As a result, in April 1995, Coco's entered into a Technical Assistance
and License Agreement, which, among other things, granted to Coco's Japan Co.,
Ltd. ("CJCL") the
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right to develop the Company's El Torito Mexican restaurant concept in Japan.
At December 28, 1997, CJCL operated six El Torito restaurants in Japan.
On October 15, 1997, Chi-Chi's entered into a binding term sheet
agreement with its licensee, Chi-Chi's International Operations, Inc. ("CCIO"),
whereby the parties agreed to resolve various ongoing disputes. Under the
general provisions of the term sheet, (i) the rights to develop Chi-Chi's
restaurants throughout the world, except in areas of currently existing
Chi-Chi's franchises, have been transferred back to Chi-Chi's; (ii) for a period
of five years, CCIO shall operate the existing 16 international Chi-Chi's
restaurants for Chi-Chi's in exchange for a fee equal to all royalties and fees
payable from the international franchisees and licensees; (iii) CCIO has the
right to convert the existing 16 international Chi-Chi's restaurants to other
concepts; and (iv) under certain conditions, Chi-Chi's has the right to
terminate the management arrangement with CCIO within five years. As a result of
the term sheet, Chi-Chi's will not receive any royalties or license fees from
CCIO or the currently existing international Chi-Chi's restaurant operations
until Chi-Chi's terminates the management agreement with CCIO. In 1996,
Chi-Chi's received no royalties from CCIO due to a payment abatement, and during
1997, Chi-Chi's received royalties of $16,000 from CCIO.
In 1996, the Company established El Torito Franchising Company ("ETFC")
to market domestically and internationally the El Torito Mexican restaurant
concept. At December 28, 1997, ETFC was authorized to sell franchises in 41
states. On January 16, 1997, ETFC entered into a Master Franchise and
Development Agreement with Evliyaoglu Ltd. ("EL"), pursuant to which EL was
granted the rights to develop 50 El Torito restaurants over 15 years in Turkey.
At December 28, 1997, EL operated one El Torito restaurant in Turkey.
As described above, under existing license and other franchise
agreements, six El Torito restaurants are operated in Japan, one El Torito
restaurant is operated in Turkey, two El Torito restaurants are operated in the
United States and 16 Chi-Chi's restaurants are operated in international
markets. Franchise and license fees were $219,000 for the year ended December
28, 1997. This compares to $1,605,000 for the year ended December 29, 1996 and
$4,824,000 for the year ended December 31, 1995, of which 92% and 84%,
respectively, were from Coco's restaurants licensed by CJCL. The license
arrangement for Coco's restaurants was transferred to Flagstar upon completion
of the sale of the Family Restaurant Division.
CHANGE IN CONTROL
On November 20, 1995, Apollo entered into an Exchange Agreement with
each of Foodmaker and GEI (the "Exchange Agreements") pursuant to which, among
other things, (i) on December 20, 1995 Foodmaker transferred all of the shares
of Common Stock and a warrant to purchase, at an aggregate exercise price of
$26.7 million, 10% of the Common Stock outstanding assuming the full exercise
thereof (the "Warrant") held by it to Apollo, (ii) on November 20, 1995 GEI
transferred 19,609 shares of Common Stock held by it to Apollo and (iii) the
Shareholders' Agreement, dated as of January 27, 1994, by and among Apollo, GEI
and Foodmaker (the "Shareholders' Agreement") was terminated as between
themselves and the Company. In connection with the foregoing, Jackson W.
Goodall, Jr., Charles W. Duddles and Edward Gibbons, the three members of the
Company's Board of Directors (the "Board") nominated by Foodmaker pursuant to
the Shareholders' Agreement, and Leonard I. Green and Jonathan D. Sokoloff, the
two members of
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the Board nominated by GEI, resigned from the Board and from all other
positions, if any, held with the Company or its subsidiaries. The foregoing
transactions were consummated after the lenders under the Old Credit Facility,
in connection with their consent to an amendment thereto, required certain of
the Company's shareholders to purchase a participation in certain loans under
such agreement. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources." Apollo agreed to
purchase such participation and, in consideration therefor, Foodmaker and GEI
agreed to the transactions set forth above.
Prior to the consummation of the foregoing transactions, Apollo, GEI and
Foodmaker, the Company's three largest shareholders, held approximately 39%, 18%
and 39%, respectively, of the Company's Common Stock, and pursuant to the terms
of the Shareholders' Agreement, controlled the Company. Upon consummation of the
foregoing transactions, Apollo, GEI and Foodmaker held approximately 81%, 16%
and 0% of the Common Stock, respectively. Consequently, Apollo, through its
ownership of the Common Stock, controls the Company.
SALE OF FAMILY RESTAURANT DIVISION
On May 23, 1996, the Company completed the sale of the Family Restaurant
Division to Flagstar in exchange for $125 million cash, $150 million principal
amount of 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 Old Credit Facility of $82 million, help
fund the repurchases of the Notes and for general corporate purposes. As of
March 27, 1998, the Company had sold or exchanged $153.65 million aggregate
principal amount of the FRD Notes. The remaining balance of $3.25 million is
restricted until the fourth anniversary of the sale 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.
Item 2. PROPERTIES
Of the 275 restaurants operated by the Company as of December 28, 1997,
the Company owned the land and building for 34, owned the building and leased
the land for 53 and leased both land and building for the remaining 188
restaurants. The restaurants are primarily free-standing units ranging from
approximately 5,000-10,000 square feet. Most of the leases provide for the
payment of a base rental or approximately 5% to 6% of gross sales, whichever is
greater, plus real estate taxes, insurance and other expenses.
The leases (assuming exercise of all options) have terms expiring as
follows:
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<TABLE>
<CAPTION>
Number of
Lease Expiration Restaurants
---------------- -----------
<S> <C>
1998-2002 12
2003-2007 19
2008-2012 46
2013-2017 56
2018 and later 108
---
Total 241
===
</TABLE>
In addition, the Company owns a 43,120 square-foot building in Irvine,
California which houses support personnel for the Company. The Company leases
34,200 square feet of space in an office building in Irvine, California which
houses El Torito operations staff, the Company's headquarters personnel and
certain support functions of the Company. The Company also leases 26,270 square
feet of space in a building in Louisville, Kentucky which houses the Chi-Chi's
operations and support functions and various other smaller offices and
warehouses.
Substantially all of the Company's assets have been pledged under the
Foothill Credit Facility. However, of the 87 owned restaurants at December 28,
1997 (building or land and building), six were subject to security interests in
favor of other third parties.
The following table details the Company-operated restaurants by state of
operation as of December 28, 1997.
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<TABLE>
<CAPTION>
Total
Number of
State Chi-Chi's El Torito Restaurants
- ----- --------- --------- -----------
<S> <C> <C> <C>
California -- 76 76
Ohio 28 -- 28
Pennsylvania 25 -- 25
Michigan 17 -- 17
Illinois 15 1 16
Indiana 14 2 16
Maryland 10 -- 10
Missouri 2 8 10
Virginia 10 -- 10
Wisconsin 10 -- 10
Minnesota 7 -- 7
New Jersey 7 -- 7
Iowa 6 -- 6
Kentucky 6 -- 6
New York 5 -- 5
Florida 1 2 3
Kansas 3 -- 3
Massachusetts 3 -- 3
Oregon -- 3 3
West Virginia 3 -- 3
Arizona -- 2 2
Colorado 1 -- 1
Connecticut 1 -- 1
Delaware 1 -- 1
Nebraska 1 -- 1
Nevada -- 1 1
North Carolina 1 -- 1
North Dakota 1 -- 1
South Dakota 1 -- 1
Washington -- 1 1
--- --- ---
Total 179 96 275
=== === ===
</TABLE>
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Item 3. LEGAL PROCEEDINGS
The Company is involved in various litigation matters incidental to its
business. The Company does not believe that any of the claims or actions filed
against it will have a material adverse effect upon the consolidated financial
position or results of operations of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 7, 1997, Apollo, the majority stockholder of the Company,
acting by written consent, consented to the contribution by the Company to
FRI-MRD of $215.4 million of debt payable by Chi-Chi's to the Company. On August
7, 1997, Apollo, the majority stockholder of the Company, acting by written
consent, consented to the gratuitous forgiveness of $30.8 million of
intercompany debt owed by FRI-MRD to the Company. On October 20, 1997, Apollo,
the majority stockholder of the Company, acting by written consent, authorized
and approved the amendment and restatement of the Company's Value Creation Units
Plan, which Amended and Restated Value Creation Units Plan is attached to this
Form 10-K as Exhibit 10(dd).
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PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
There is no established public trading market for the Common Stock.
Accordingly, earnings per common share information has not been presented.
At March 27, 1998, there were 84 stockholders of record of Common Stock.
No other class of stock was outstanding as of that date. No dividends have been
paid by the Company to its common stockholders.
Each of the indentures, as amended, (collectively, the "Indentures")
governing the Company's outstanding Senior Notes and Discount Notes, the note
agreement governing the FRI-MRD Senior Discount Notes and the Foothill Credit
Facility imposes restrictions on the Company's ability to pay dividends.
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Item 6. SELECTED FINANCIAL DATA
($ in thousands)
<TABLE>
<CAPTION>
Successor Company(1)
-------------------------------------------------------------
As of and for
As of and for the Years Ended the Eleven
-------------------------------------------- Months Ended
Dec. 28, Dec. 29, Dec. 31, Dec. 25,
1997 1996 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales $ 463,724 $ 724,229 $ 1,134,359 $ 1,048,674
Cost of Sales:
Product cost 123,803 200,379 322,194 293,413
Payroll and related costs 162,807 273,536 419,185 377,569
Occupancy and other operating expenses 129,428 181,730 275,164 243,147
Depreciation and amortization 22,583 34,475 57,836 48,646
General and administrative expenses 30,186 41,742 56,245 49,059
Gain (loss) on disposition of properties (3,885) (8,600) (12,067) (5,685)
Gain on sale of division 0 62,601 0 0
Provision for divestitures and write-down of
long-lived assets 2,640 0 44,500 144,780(2)
Restructuring costs 0 6,546 4,392 0
Debt restructuring costs 0 0 0 0
Reorganization items 0 0 0 0
Interest expense, net 19,476 36,725 65,277 51,419
Income tax provision 509 890 1,208 1,773
----------- ----------- ----------- -----------
Income (loss) before extraordinary item (31,593) 2,207 (123,709) (166,817)
Extraordinary gain on extinguishment of debt 0 134,833 0 2,941
----------- ----------- ----------- -----------
Net income (loss) (31,593) 137,040 (123,709) (163,876)
Preferred dividends 0 0 0 0
----------- ----------- ----------- -----------
Net income (loss) attributable to common shares $ (31,593) $ 137,040 $ (123,709) $ (163,876)
=========== =========== =========== ===========
BALANCE SHEET DATA:
Working capital (deficiency) $ (66,412) $ (85,524) $ 45,114(3) $ (155,481)
Current assets 45,117 46,612 267,077 43,015
Total assets 289,768 307,606 551,270 734,598
Current liabilities 111,529 132,136 221,963 198,496
Liabilities subject to settlement under reorganization
proceedings 0 0 0 0
Non-current portion of long-term debt, including
capitalized lease obligations 199,955 165,325 455,203(5) 536,495
Redeemable cumulative exchangeable preferred stock 0 0 0 0
Common stockholders' equity (deficit) (26,194) 5,399 (131,576) (7,259)
SELECTED CONSOLIDATED FINANCIAL RATIOS
AND OTHER DATA:
EBITDA (6) $ 17,500 $ 26,842 $ 61,571 $ 85,486
Net income (loss) (31,593) 137,040 (123,709) (163,876)
Net cash provided by (used in) operating activities (13,105) (21,857) 6,083 18,346
Capital expenditures 13,588 9,848 38,022 65,618
Net cash provided by (used in) investing activities (16,631) 165,024 (19,615) (64,167)
Net cash provided by (used in) financing activities 28,434 (117,717) 13,663 31,858
Restaurants open at end of period 275 281 670 702
Ratio of EBITDA to interest expense 0.90x 0.73x 0.94x 1.66x
</TABLE>
<TABLE>
<CAPTION>
Predecessor Company(1)
-------------------------------
For the One As of and for
Month Ended the Year
Jan. 26, Dec. 26,
1994 1993
----------- -----------
<S> <C> <C>
INCOME STATEMENT DATA:
Sales $ 64,741 $ 884,910
Cost of Sales:
Product cost 19,184 259,512
Payroll and related costs 24,780 331,747
Occupancy and other operating expenses 13,712 197,797
Depreciation and amortization 2,800 32,224
General and administrative expenses 4,071 44,164
Gain (loss) on disposition of properties 12 (4,916)
Gain on sale of division 0 0
Provision for divestitures and write-down of
long-lived assets 0 10,400
Restructuring costs 0 0
Debt restructuring costs 0 4,239
Reorganization items 479,427 (1,091)
Interest expense, net 4,097 50,276
Income tax provision 55 658
----------- -----------
Income (loss) before extraordinary item 475,481 (52,114)
Extraordinary gain on extinguishment of debt 72,561 0
----------- -----------
Net income (loss) 548,042 (52,114)
Preferred dividends 1,698 20,232
----------- -----------
Net income (loss) attributable to common shares $ 546,344 $ (72,346)
=========== ===========
BALANCE SHEET DATA:
Working capital (deficiency) $ (95,209)
Current assets 77,109
Total assets 366,577
Current liabilities 172,318
Liabilities subject to settlement under reorganization
proceedings 320,194(4)
Non-current portion of long-term debt, including
capitalized lease obligations 78,658
Redeemable cumulative exchangeable preferred stock 183,921
Common stockholders' equity (deficit) (391,638)
SELECTED CONSOLIDATED FINANCIAL RATIOS
AND OTHER DATA:
EBITDA (6) $ 2,994 $ 51,690
Net income (loss) 548,042 (52,114)
Net cash provided by (used in) operating activities (18,252) 25,352
Capital expenditures 779 20,064
Net cash provided by (used in) investing activities (192,610) (10,717)
Net cash provided by (used in) financing activities 223,754 (19,839)
Restaurants open at end of period 524 528
Ratio of EBITDA to interest expense 0.73x(7) 1.03x(7)
</TABLE>
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<PAGE> 13
(1) Reference to the "Predecessor Company" refers to The Restaurant
Enterprises Group, Inc. and its consolidated subsidiaries (excluding
Chi-Chi's) with respect to information relating to periods prior to
January 27, 1994 included herein, and reference to the "Successor
Company" refers to Family Restaurants, Inc. and its consolidated
subsidiaries, giving effect to the acquisition on January 27, 1994, when
Apollo, GEI and Foodmaker acquired approximately 98% of the Common Stock
and Chi-Chi's was merged with and into a subsidiary of the
Company.
(2) Chi-Chi's reported significant sales declines in the second half of 1994
which continued into 1995. These sales declines resulted in operating
performance for Chi-Chi's which was significantly lower than anticipated
when Chi-Chi's was acquired on January 27, 1994. These operating results
caused the Company to reevaluate its business strategy for Chi-Chi's.
Consistent with this strategic reevaluation, the Company revised its
forecasts for the future operations of Chi-Chi's which resulted in a
significant reduction in projected future cash flows and a lower
valuation of the business. The Company determined that its projected
results for Chi-Chi's would not support the future amortization of the
remaining Chi-Chi's goodwill balance of $144,780,000 at December 25,
1994. Accordingly, the Company wrote off the remaining unamortized
Chi-Chi's goodwill balance of $144,780,000 in the fourth quarter of
1994.
(3) Includes the impact of working capital loan classification of
$79,815,000 in current liabilities and the classification of
$240,077,000 in property held for sale as a current asset.
(4) Liabilities that were canceled and extinguished as part of the
prepackaged joint plan of reorganization of the Company and REG-M Corp.
were separately classified in the consolidated balance sheet at December
26, 1993 as liabilities subject to settlement under reorganization
proceedings and include the following:
<TABLE>
<CAPTION>
1993
--------
($ in thousands)
<S> <C>
Old Senior Subordinated Notes $191,928
Old Subordinated Notes 78,916
Accrued interest 52,720
Debt issuance and other costs (3,370)
--------
$320,194
========
</TABLE>
(5) Excludes amounts related to the Family Restaurant Division and the
traditional dinnerhouse restaurants which were held for sale.
(6) EBITDA is defined as earnings (loss) before gain (loss) on disposition
of properties, provision for divestitures and write-down of long-lived
assets, interest, taxes, depreciation and amortization. The Company has
included information concerning EBITDA herein because it understands
that such information is used by certain investors as one measure of an
issuer's historical ability to service debt. EBITDA should not be
considered as an alternative to, or
- 13 -
<PAGE> 14
more meaningful than, operating income (loss) as an indicator of
operating performance or to cash flows from operating activities as a
measure of liquidity.
(7) Ratio of EBITDA to interest expense is based on the Company's historical
capital structure which is not representative of the Company's capital
structure subsequent to January 27, 1994.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain information and statements included in this Annual Report on
Form 10-K, including those in this 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 the restaurant 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 development of
successful marketing strategies for Chi-Chi's and El Torito, (ii) the effect of
national, regional and local 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,
(ix) business disruptions, (x) changes in consumer preferences, tastes and
eating habits and (xi) increases in food and labor costs. 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.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Company has been relying and will continue to rely primarily on
internally generated funds, supplemented if necessary by working capital
advances available under the Foothill Credit Facility, for its liquidity. In
addition, FRI-MRD has raised approximately $45.6 million in cash from the
issuance of the Senior Discount Notes to supplement its liquidity needs. The
Company's viability has been and will continue to be dependent upon its ability
to generate sufficient cash flow to meet its obligations on a timely basis and
to comply with the terms of its financing agreements.
Operating Cash Flow. For the year ending December 28, 1997, the Company
reported EBITDA (defined as earnings (loss) before gain (loss) on disposition of
properties, provision for divestitures and write-down of long-lived assets,
interest, taxes, depreciation and amortization) of $17.5 million, compared to
$8.0 million for the year ended December 29, 1996 for the comparable ongoing
operations of El Torito and Chi-Chi's. The $9.5 million improvement was due to
El Torito and Chi-Chi's cost reduction and reengineering strategies, which have
improved operating margins.
- 14 -
<PAGE> 15
The Company has included information concerning EBITDA herein because it
understands that such information is used by certain investors as one measure of
an issuer'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 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 $66.4 million on December 28, 1997.
Credit Facility. On January 10, 1997, the Company entered into the
Foothill Credit Facility to provide for the ongoing working capital needs of the
Company. The Foothill Credit Facility, which replaced the Old Credit Facility,
provides for 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). The Foothill Credit Facility is secured by substantially all of the
real and personal property of the Company and contains customary restrictive
covenants, including the maintenance of certain financial ratios. The Company is
in compliance with all financial ratios for the year ended December 28, 1997.
Letters of credit are issued under the Foothill Credit Facility primarily to
provide security for future amounts payable under the Company's workers'
compensation insurance program ($15.5 million of such letters of credit were
outstanding as of March 27, 1998). No revolving cash borrowings were outstanding
as of March 27, 1998.
Other. The Company sold the Family Restaurant Division on May 23, 1996
to Flagstar for $125 million cash, $150 million principal amount of the FRD
Notes, and the assumption of $31.5 million of long-term debt, primarily
consisting of capitalized lease obligations. Upon completion of the closing
balance sheet, the purchase price was increased by $6.9 million and was
satisfied by the issuance of $6.9 million in additional FRD Notes.
On July 3, 1996, the Company repurchased $151.0 million aggregate
principal amount of the Senior Notes and $108.6 million aggregate principal
amount of the 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 (i) an additional $8.5 million aggregate
principal amount of its Discount Notes in the third quarter of 1996 and (ii) an
additional $30.0 million aggregate principal amount of its Senior Notes and an
additional $2.0 million aggregate principal amount of its Discount Notes in the
fourth quarter of 1996.
As of March 27, 1998, the Company had sold or exchanged $153.65 million
aggregate principal amount of the FRD Notes. The remaining $3.25 million balance
is restricted until the fourth anniversary of the sale in accordance with the
sale agreement with Flagstar to secure potential future indemnity claims.
On August 12, 1997, FRI-MRD issued the Senior Discount Notes in the face
amount of $61 million to an existing holder of the Company's Senior Notes in
exchange for $15.6 million of Senior
- 15 -
<PAGE> 16
Notes plus approximately $34 million of cash. In January 1998, FRI-MRD issued
the remaining $14 million in face value of the Senior Discount Notes to the same
purchaser for approximately $11.6 million in cash. Proceeds from the sales of
the Senior Discount Notes will be used to fund the Company's capital expenditure
programs and for general corporate purposes. The Company is currently
considering additional sources of cash, such as the sale of non-core assets.
The Company continues to be highly leveraged and has 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 repay or refinance the Notes, or that FRI-MRD will be able to repay or
refinance the Senior Discount Notes, at their respective maturities.
CAPITAL RESOURCES
Net cash used in investing activities was $16.6 million for the year
ended December 28, 1997, including $13.6 million for capital expenditures, as
compared to net cash provided by investing activities of $165.0 million for
fiscal 1996 and net cash used in investing activities of $19.6 million for
fiscal 1995. The net cash provided by investing activities for 1996 was
primarily due to the completion of the sale of the Company's Family Restaurant
Division and certain notes receivable.
Capital expenditures of approximately $30 million are planned for fiscal
1998, including approximately $6 million devoted to normal improvements of the
Company's restaurants. The Company is continuing its remodeling of both El
Torito and Chi-Chi's restaurants and is committing approximately $13 million to
$14 million for this purpose in fiscal 1998. The Company also anticipates
opening up to seven new El Torito restaurants, including quick-service
casual-style restaurants, and the Company is also planning to upgrade El
Torito's in-store POS technology during fiscal 1998.
By December 28, 1997, the Company had completed the remodeling of nine
El Torito restaurants in the Los Angeles/Orange County market and 11 Chi-Chi's
restaurants, primarily in the Detroit market. In addition, Chi-Chi's had
completed the exterior painting of 78 restaurants. Certain of these newly
painted Chi-Chi's restaurants also had other exterior improvements, including
installation of new awnings. The Company has announced plans for an aggressive
remodel program for the Chi-Chi's chain over the next three years. This program
could cost up to $50 million.
Included in 1998 capital spending are continuing expenditures to replace
the Company's mainframe computer software applications with new software to be
run in a client/server environment. The new software includes work flow
capabilities allowing for improved processes and wider access to data. In
addition, acquisition of the new software will insure that the Company's
computer systems are year 2000 compliant. The Company spent $0.4 million during
fiscal 1997 and expects to spend an additional $1.6 million on the new software
and related hardware and installation costs in 1998. The project is expected to
be completed before year-end 1998. The Company is requesting year 2000
compliance reports from significant vendors and service providers. If the
computer systems of a significant vendor or service provider were not year 2000
compliant, it could have a material adverse effect on the Company.
- 16 -
<PAGE> 17
RESULTS OF OPERATIONS
As used herein, "comparable restaurants" are restaurants operated by the
Company on the first day of the earlier fiscal year and that continued in
operation through the last day of the later year being compared.
FISCAL YEAR 1997 AS COMPARED TO FISCAL YEAR 1996
Total sales of $463,724,000 for 1997 decreased by $260,505,000 or 36.0%
as compared to 1996. The decrease was due to (i) the loss of sales from the
Family Restaurant Division which was sold by the Company on May 23, 1996, (ii)
sales decreases for restaurants sold or closed and (iii) sales declines in the
comparable El Toritos and Chi-Chi's. The breakdown of the sales decline for 1997
is detailed below:
<TABLE>
<CAPTION>
1997 Sales
Decreases
----------
($ in thousands)
<S> <C>
Sales of the Family Restaurant Division $(194,464)
Decrease in Sales from Restaurants Sold or Closed (42,995)
Decrease in Sales from Comparable Restaurants (23,046)
----------
$(260,505)
==========
</TABLE>
Sales for comparable restaurants of $456,965,000 for 1997 decreased by
$23,046,000 or 4.8% compared to 1996. The decrease is comprised of a $21,816,000
or 8.2% decline in Chi-Chi's and a $1,230,000 or 0.6% decline in El Torito
primarily reflecting a continuing competitive operating environment for
restaurants.
<TABLE>
<CAPTION>
1997 Comparable
Sales Decrease
-----------------------
Amount Percent
-------- -------
($ in thousands)
<S> <C> <C>
Comparable Chi-Chi's $(21,816) (8.2)%
Comparable El Torito (1,230) (0.6)
--------
Total $(23,046) (4.8)%
======== ====
</TABLE>
El Torito comparable sales for fiscal 1997 were down slightly as
compared to the same period in 1996. El Torito has hired a new advertising
agency, Grey Advertising, to continue to refine and build upon its long-term
marketing strategy, positioning El Torito as a "Mexican Getaway." Both
television and radio commercials are being utilized to communicate this
position. In addition, the theme is incorporated into all in-store materials and
menus.
Chi-Chi's continued with its new marketing direction through the end of
1997 portraying the concept as a value-oriented, fun Mexican restaurant where
you can "put a little salsa in your life." A new menu was introduced in December
that expanded the product offerings to appeal to a greater
- 17 -
<PAGE> 18
segment of the population. Barbequed and grilled meats, related to Mexican
cuisine, but not considered traditional Mexican dishes, were added along with
additional Mexican entrees. To extend the marketing message with more emphasis
on the food and value components, Chi-Chi's will work with Evans, Hardy & Young,
formerly their media buyer, now their primary advertising agency. Chi- Chi's
comparable sales trend for 1997 improved 5.4 percentage points over that of 1996
with comparable sales down 8.2% for 1997 as compared with the 1996 versus 1995
negative trend of 13.6% for the same group of restaurants. Although the Company
believes that such improvement is a result of the new advertising campaign that
began at the end of the first quarter of 1997, there can be no assurances that
the advertising campaign will continue to result in improved comparable sales
versus prior periods.
Product cost of $123,803,000 for 1997 decreased by $76,576,000 or 38.2%
in 1997 as compared to 1996 primarily due to the sale of the Family Restaurant
Division which accounts for $54,187,000 or 70.8% of the decrease, as well as the
impact of the 47 other restaurants sold or closed since the end of fiscal 1995.
In addition, El Torito and Chi-Chi's cost reduction strategies further
contributed to product cost savings by revising product specifications, reducing
the number of ingredients used and controlling inventories. As a percentage of
sales, product cost declined to 26.7% in 1997 as compared to 27.7% in 1996.
Payroll and related costs of $162,807,000 for 1997 decreased by
$110,729,000 or 40.5% as compared to 1996 primarily due to the sale of the
Family Restaurant Division which accounts for $72,997,000 or 65.9% of the
decrease, as well as the impact of the 47 other restaurants sold or closed since
the end of fiscal 1995. As a percent of sales, payroll and related costs
decreased from 37.8% in 1996 to 35.1% in 1997 due in part to savings realized
from the El Torito and Chi-Chi's cost reduction strategies which have focused on
improving labor scheduling and efficiencies. The improvement in payroll and
related costs was offset, in part, by the impact of the minimum wage increases
nationally on October 1, 1996 and September 1, 1997 and on March 1, 1997 in
California.
The Company is subject to Federal and state laws governing matters such
as minimum wages, overtime and other working conditions. Approximately half of
the Company's employees are paid at rates related to the minimum wage.
Therefore, 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 in certain states) increase the Company's labor costs. This is
especially true in California, where there is no tip credit. Effective October
1, 1996, the Federal minimum wage was increased from $4.25 to $4.75, and
effective September 1, 1997, it was further increased to $5.15. However, a
provision of the new measure effectively froze the minimum wage for tipped
employees at current levels by increasing the allowable tip credit in those
states which allow for a tip credit. Furthermore, California voters approved a
proposition on November 5, 1996 that increased the state's minimum wage to $5.00
on March 1, 1997 and further increased the state's minimum wage to $5.25 on
March 1, 1998. In response to the minimum wage increases on October 1, 1996,
March 1, 1997 and March 1, 1998, 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 during the first nine months of 1997 due to marketing
strategies and the fact that Chi-Chi's experienced a lesser impact from the
Federal minimum wage increases due to the increased allowable tip credit in
certain states. However, Chi-Chi's did raise menu prices in October 1997 as a
result of the cumulative impact of these minimum wage
- 18 -
<PAGE> 19
increases. At the request of President Clinton, the Congress is considering
further increases in the Federal minimum wage over the next two years.
Occupancy and other operating expenses of $129,428,000 for 1997
decreased by $52,302,000 or 28.8% as compared to 1996 primarily due to the sale
of the Family Restaurant Division which accounts for $37,568,000 or 71.8% of the
decrease, as well as the impact of the 47 other restaurants sold or closed since
the end of fiscal 1995. As a percentage of sales, occupancy and other expenses
increased from 25.1% in 1996 to 27.9% in 1997. These increases primarily reflect
(i) the impact of declining sales without an offsetting reduction in fixed
expenses, (ii) an increase in planned media spending in both El Torito and
Chi-Chi's in connection with the implementation of new marketing campaigns in
1997 to reposition both concepts and (iii) the lower occupancy and other
operating expenses as a percentage of sales in the Family Restaurant Division in
the first five months of 1996.
Depreciation and amortization of $22,583,000 for 1997 decreased by
$11,892,000 or 34.5% as compared to 1996 primarily due to the sale of the Family
Restaurant Division which accounts for $11,162,000 or 93.9% of the decrease.
General and administrative expenses of $30,186,000 for 1997 decreased by
$11,556,000 or 27.7% as compared to 1996 primarily due to the sale of the Family
Restaurant Division and the elimination of its direct and allocated general and
administrative expenses of $10,014,000. The Company eliminated 134 positions in
its Louisville corporate office and 52 positions in its Irvine corporate offices
in connection with its reorganization after the sale of the Family Restaurant
Division. As a percentage of sales, general and administrative expenses
increased from 5.8% in 1996 to 6.5% in 1997 primarily reflecting general and
administrative expenses spread over fewer restaurants. Management continues to
closely evaluate the Company's general and administrative cost structure for
savings opportunities.
The Company reported a loss on disposition of properties of $3.9 million
for 1997 compared to a loss of $8.6 million in 1996. These amounts reflect
losses associated with restaurant divestments and closures in such periods.
As a result of a continued review of operating results, the Company
identified 18 unprofitable Chi-Chi's restaurants which may either take too long
to recover profitability or may not recover at all, despite current marketing
and cost control programs. In connection with this analysis, the Company
analyzed the carrying value of the long-lived assets of these restaurants and
recorded a write-down of long-lived assets of $2.6 million during the second
quarter of 1997 to reduce the assets' carrying value to their estimated fair
market value. The Company is actively marketing these restaurants for sale, and
the restaurants continue in operation.
The Company reported no restructuring costs in 1997 versus $6.5 million
in 1996. These costs were primarily related to amounts paid to consultants,
professional fees, severance and related costs, and other restructuring related
expenses that were not incurred in 1997.
Interest expense, net of $19,476,000 for 1997 decreased by $17,249,000
or 47.0% as compared to 1996 primarily resulting from (i) lower interest expense
due to the repurchases of $181.0 million aggregate principal amount of the
Company's Senior Notes and $119.1 million aggregate
- 19 -
<PAGE> 20
principal amount of its Discount Notes in the third and fourth quarters of 1996
and the exchange of $15.6 million of Senior Notes on August 12, 1997, (ii) the
repayment of outstanding revolving debt under the Old Credit Facility in May
1996 and (iii) the elimination of the Family Restaurant Division's interest
costs, primarily for capitalized lease obligations. These decreases were
partially offset by the increase due to the issuance of the Senior Discount
Notes on August 12, 1997 and the accretion of interest thereon.
The Company recorded a gain of $62,601,000 in 1996 as a result of the
sale of the Family Restaurant Division.
The Company recognized an extraordinary gain of $134,833,000 in 1996 as
a result of several repurchases of the Notes.
FISCAL YEAR 1996 AS COMPARED TO FISCAL YEAR 1995
Total sales of $724,229,000 for 1996 decreased by $410,130,000 or 36.2%
as compared to 1995. The decrease was due to (i) the loss of sales from the
Family Restaurant Division which was sold by the Company on May 23, 1996, (ii)
sales decreases for restaurants sold or closed, (iii) sales declines in the
comparable El Toritos and Chi-Chi's and (iv) the 53rd week in 1995. The
breakdown of the sales decline for 1996 is detailed below:
<TABLE>
<CAPTION>
1996 Sales
Decreases
---------
($ in thousands)
<S> <C>
Sales of the Family Restaurant Division $(308,021)
Decrease in Sales from Restaurants Sold or Closed (47,823)
Decrease in Sales from Comparable Restaurants (45,533)
Decrease in Sales for the 53rd Week in 1995 (8,753)
---------
$(410,130)
=========
</TABLE>
Sales for comparable restaurants of $484,655,000 for 1996 decreased by
$45,533,000 or 8.6% compared to a 52-week 1995. The decrease is comprised of a
$38,038,000 or 12.4% decline in Chi-Chi's and a $7,495,000 or 3.4% decline in El
Torito primarily reflecting a continuing competitive operating environment for
restaurants. Also contributing to the comparable sales decline was severe winter
weather in several markets in early 1996 and an overall weakness in summer sales
during the 1996 Summer Olympics which affected three weekends and two full weeks
during July and August.
Product cost of $200,379,000 for 1996 decreased by $121,815,000 or 37.8%
in 1996 as compared to 1995 primarily due to the sale of the Family Restaurant
Division which accounts for $89,347,000 or 73.3% of the decrease. Chi-Chi's cost
re-engineering project further contributed to product cost savings by
simplifying menus, reducing the number of ingredients used and controlling
inventories. As a percentage of sales, product cost declined to 27.7% in 1996 as
compared to 28.4% in 1995.
- 20 -
<PAGE> 21
Payroll and related costs of $273,536,000 for 1996 decreased by
$145,649,000 or 34.7% as compared to 1995 primarily due to the sale of the
Family Restaurant Division which accounts for $108,406,000 or 74.4% of the
decrease. As a percent of sales, payroll and related costs increased from 37.0%
in 1995 to 37.8% in 1996 due in part to labor inefficiencies resulting from the
declining sales without an offsetting reduction in fixed labor expense, combined
with the negative impact of the minimum wage increase on October 1, 1996.
Occupancy and other expenses of $181,730,000 for 1996 decreased by
$93,434,000 or 34.0% as compared to 1995 primarily due to the sale of the Family
Restaurant Division which accounts for $58,314,000 or 62.4% of the decrease. As
a percentage of sales, occupancy and other expenses increased from 24.3% in 1995
to 25.1% in 1996 due primarily to declining sales without an offsetting
reduction in fixed expenses and the lower costs as a percentage of sales in the
Family Restaurant Division in 1995.
Depreciation and amortization of $34,475,000 for 1996 decreased by
$23,361,000 or 40.4% as compared to 1995 primarily due to the sale of the Family
Restaurant Division which accounts for $16,744,000 or 71.7% of the decrease. The
decrease also reflects the third quarter 1995 adjustment to the depreciable
asset base of Chi-Chi's restaurants either held for sale or having impaired
values.
General and administrative expenses of $41,742,000 for 1996 decreased by
$14,503,000 or 25.8% as compared to 1995 primarily due to the sale of the Family
Restaurant Division and the elimination of its related general and
administrative expenses of $10,187,000. As a percentage of sales, general and
administrative expenses increased from 5.0% in 1995 to 5.8% in 1996 primarily
reflecting general and administrative expenses spread over fewer restaurants due
to the sale of the Family Restaurant Division.
Loss on disposition of properties of $8.6 million for 1996 compared to a
loss of $12.1 million in 1995. These amounts reflect losses associated with
restaurant divestments and closures and the 1995 write-off of costs associated
with canceled capital projects, both remodels and new restaurant expansion.
During the third quarter of 1995, the Company closed seven Chi-Chi's
restaurants and identified additional restaurants to be sold or having impaired
asset value. Approximately 32 marginally profitable or unprofitable restaurants
were offered for sale. In conjunction with this divestment program, the Company
analyzed the carrying value of the Chi-Chi's long-lived assets to determine if
any impairment had occurred. In connection with this analysis, the Company
recorded a charge for divestitures and writedowns of long-lived assets of $41.9
million.
The Company reported restructuring costs of $6.5 million in 1996 versus
$4.4 million in 1995. These costs are primarily related to amounts paid to
consultants, professional fees, severance and related costs, and other
restructuring related expenses.
Interest expense, net of $36,725,000 for 1996 decreased by $28,552,000
or 43.7% as compared to 1995 primarily resulting from (i) lower accretion of
interest expense due to the repurchases of the Notes, as previously discussed,
(ii) paying off outstanding revolving debt under
- 21 -
<PAGE> 22
the Old Credit Facility in May 1996, (iii) the elimination of the Family
Restaurant Division's interest costs, primarily for capitalized lease
obligations and (iv) interest income related to the FRD Notes.
ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share." This Statement specifies the computation, presentation, and
disclosure requirements for earnings per share for entities with publicly held
common stock. Therefore, this Statement is not applicable to the Company.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure." This Statement is effective for fiscal
years ending after December 15, 1997. This statement, requiring only additional
information disclosures, is effective for the Company's fiscal year ended
December 28, 1997. The Company has complied with all requirements of this
Statement.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This Statement shall be
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required. This statement, requiring only additional informational disclosures,
is effective for the Company's fiscal year ending December 27, 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This Statement established standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. This Statement shall be effective for fiscal years
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. This statement,
requiring only additional information disclosures, is effective for the
Company's fiscal year ending December 27, 1998.
SELECTED OPERATING DATA
The Company primarily operates full-service Mexican restaurants in two
divisions under the El Torito, Chi-Chi's, Casa Gallardo and other names. At
December 28, 1997 the Company's El Torito restaurant division operated 96
full-service restaurants and the Company's Chi-Chi's restaurant division
operated 179 full-service restaurants.
The following table sets forth certain information regarding the
Company, its El Torito and Chi-Chi's restaurant divisions, and the various
operations divested in 1996.
- 22 -
<PAGE> 23
<TABLE>
<CAPTION>
For the Year Ended
----------------------
Dec. 28, Dec. 29,
1997 1996
-------- --------
($ in thousands, except
average check amounts)
<S> <C> <C>
El Torito Restaurant Division
Restaurants Open at End of Period:
Owned/operated 96 97
Franchised and Licensed 9 7
Sales $ 217,949 $ 219,466
Restaurant Level Cashflow 30,051 26,355
Divisional EBITDA (a) 17,627 11,956
Percentage decrease in comparable restaurant sales (0.6)% (3.0)%
Average check $ 9.87 $ 9.47
Chi-Chi's Restaurant Division
Restaurants Open at End of Period:
Owned/operated 179 184
Franchised and Licensed 16 18
Sales $ 245,775 $ 278,065
Restaurant Level Cashflow 16,515 9,674
Divisional EBITDA (a) 36 (4,278)
Percentage decrease in comparable restaurant sales (8.2)% (11.5)%
Average check $ 7.62 $ 7.54
Ongoing Operations
Restaurants Open at End of Period:
Owned/operated 275 281
Franchised and Licensed 25 25
Sales $ 463,724 $ 497,531
Divisional EBITDA (a) 17,663 7,678
Divested Operations (b)
Restaurants Open at End of Period:
Owned/operated 0 0
Franchised and Licensed 0 0
Sales $ 0 $ 226,698
Divisional EBITDA (a) 0 18,877
Total Company
Restaurants Open at End of Period:
Owned/operated 275 281
Franchised and Licensed 25 25
Sales $ 463,724 $ 724,229
EBITDA (c) 17,500 26,842
</TABLE>
- ----------
(a) Divisional EBITDA with respect to any operating division is defined as
earnings (loss) before gain (loss) on disposition of properties,
interest, taxes, depreciation and amortization.
(b) Divested Operations in 1996 includes the results of the Family
Restaurant Division until it was divested on May 23, 1996 and the
traditional dinnerhouse restaurants that were divested by year-end 1996.
(c) EBITDA is defined as earnings (loss) before gain (loss) on disposition
of properties, provision for divestitures and write-down of long-lived
assets, restructuring costs, interest, taxes, depreciation and
amortization. The Company has included information concerning EBITDA
herein because it understands that such information is used by certain
investors as one measure of an issuer'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 operating
performance or to cash flows from operating activities as a measure of
liquidity.
- 23 -
<PAGE> 24
INFLATION
The inflationary factors which have historically affected the Company's
results of operations include increases in the cost of food, alcoholic
beverages, labor and other operating expenses. In ad dition, most of the
Company's real estate leases require the Company to pay taxes, maintenance,
insurance, repairs and utility costs, all of which are subject to the effects of
inflation. To date, the Company has offset the effects of inflation, at least in
part, through periodic menu price increases and various cost-cutting programs,
but no assurance can be given that the Company will continue to be able to
offset such increases in the future.
During 1997 and 1996, the effects of inflation did not have a
significant impact on the Company's results of operations.
SEASONALITY
The Company, as a whole, does not experience significant seasonal
fluctuations in sales. However, the Company's sales tend to be slightly greater
during the spring and summer months.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements on page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
- 24 -
<PAGE> 25
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
current Directors and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position With Company
---- --- ---------------------
<S> <C> <C>
Peter P. Copses 39 Director
David B. Kaplan 30 Director
Antony P. Ressler 37 Director
Kevin S. Relyea 43 President, Chief Executive Officer and a Director
William D. Burt 45 Executive Vice President, President of El Torito Restaurants, Inc.
Roger K. Chamness 45 Executive Vice President, President of Chi-Chi's, Inc.
Robert T. Trebing, Jr. 48 Executive Vice President and Chief Financial Officer
Michael E. Malanga 44 Executive Vice President, Corporate Development
Gayle A. DeBrosse 40 Senior Vice President, Quality Assurance and Product Safety,
Purchasing and Distribution, Public Affairs
Todd E. Doyle 36 Vice President, General Counsel and Secretary
Janie M. Bereczky 42 Vice President, Taxes
</TABLE>
Mr. Copses has served as a Director of the Company since January 1994.
Since 1990, Mr. Copses has been a principal of Apollo Advisors, L.P. ("Apollo
Advisors") which, together with an affiliate, serves as managing general partner
of Apollo Investment Fund, L.P. ("AIF"), AIF II, L.P. ("AIF II") and Apollo
Investment Fund III, L.P., private securities investment funds, and of Lion
Advisors, L.P. ("Lion Advisors"), which acts as financial advisor to and
representative for certain institutional investors with respect to securities
investments. AIF II is the general partner of Apollo. Mr. Copses is also a
director of Dominick's Supermarkets, Inc., Paragon Health Network, Inc. and
Zale Corporation.
Mr. Kaplan has served as a Director of the Company since December 1996.
Since 1991, Mr. Kaplan has been associated with and is a limited partner of
Apollo Advisors. Prior to 1991, Mr. Kaplan was a member of the Investment
Banking Department of Donaldson, Lufkin & Jenrette Securities Corporation. Mr.
Kaplan is also a director of Allied Waste Industries, Inc., Dominick's
Supermarkets, Inc., PRI Holdings, Inc. and WMC Finance Co., Inc.
Mr. Ressler has served as a Director of the Company since January 1994.
In 1990, Mr. Ressler was one of the founding principals of Apollo Advisors. Mr.
Ressler is also a director of Allied Waste Industries, Inc., Dominick's
Supermarkets, Inc., United International Holdings, Inc., PRI Holdings, Inc. and
Vail Resorts, Inc.
Mr. Relyea has served as Chief Executive Officer and a Director of the
Company since December 1995. He has also served as President since August 1995.
Mr. Relyea joined the Company in January 1994 as Executive Vice President and
President of the Family Restaurant
- 25 -
<PAGE> 26
Division. From 1988 to January 1994, Mr. Relyea had been Regional Vice President
of Jack In The Box Operations for Foodmaker. Mr. Relyea received an M.B.A. from
Pepperdine University in 1988.
Mr. Burt serves as Executive Vice President and President of El Torito.
He joined the Company on April 8, 1996 in these positions. Prior to joining the
Company, Mr. Burt was the Vice President of Operations at the Krystal Company
from 1995 to 1996, and an Executive Vice President at Taco Cabana from 1994 to
1995. Prior to 1994, Mr. Burt spent 23 years with Foodmaker. Mr. Burt received
his M.B.A. from Pepperdine University in 1988.
Mr. Chamness serves as Executive Vice President and President of
Chi-Chi's and has so served since December 1995 and March 1996, respectively. He
joined the Company at its inception. His previous position was Executive Vice
President of Finance and Administration for the Family Restaurant Division which
he held from October 1995 until June 1996. Mr. Chamness received a B.A. in
Business Economics from UCLA in 1975 and an M.B.A. in Finance and International
Business from UCLA in 1980.
Mr. Trebing serves as Executive Vice President and Chief Financial
Officer and has so served since July 1995. He joined the Company at its
inception and has held the positions of Senior Vice President and Chief
Financial Officer, Senior Vice President of Finance, Vice President of Finance,
Vice President and Controller and Manager of Financial Reporting. Mr. Trebing is
a Certified Public Accountant. Mr. Trebing received a B.A. from California State
University at Fullerton in 1972 and an M.B.A. from the University of Southern
California in 1973.
Mr. Malanga serves as Executive Vice President, Corporate Development.
He joined the Company at its inception as Director of Mergers and Acquisitions.
He was promoted to his current position in October 1995. Mr. Malanga received a
B.S. in Business Administration from the University of Southern California in
1976.
Ms. DeBrosse serves as a Senior Vice President, Quality Assurance and
Product Safety, Purchasing and Distribution, Public Affairs and has so served
since June 1996. She joined the Company in December 1994 as a Vice President.
Prior to joining the Company, she was Director of Product Development and
Continuous Improvement at Taco Bell from 1991 until 1994 and Director, Research
and Development for Flagstar from 1982 to 1991. Ms. DeBrosse received a B.S. in
Nutritional Sciences from Arizona State University in 1979 and an M.S. in
Agribusiness with Emphasis in Food Science, Quality Assurance and Food Chemistry
from Arizona State University in 1982.
Mr. Doyle serves as Vice President, General Counsel and Secretary and
has so served since October 1995. He joined the Company as Senior Legal Counsel
in 1992. Prior to joining the Company, Mr. Doyle spent six years as a business
transactional attorney and a business litigation attorney with Seltzer Caplan
Wilkins & McMahon in San Diego, California. Mr. Doyle received a B.A. in
Political Science and a B.A. in Sociology from the University of California,
Santa Barbara in 1983, and he received a J.D. from Loyola Law School, Los
Angeles, California in 1986.
Ms. Bereczky serves as Vice President, Taxes and has so served since
August 1992. She joined the Company in 1987 as Director of Taxes. Ms. Bereczky
has been a Certified Public
- 26 -
<PAGE> 27
Accountant since 1981. Ms. Bereczky received a B.A. in Political Science from
the University of California at Santa Barbara in 1978 and an M.B.A. in Taxation
from Golden Gate University in 1985.
All directors hold office for a period of one year until their
successors have been duly elected and qualified. Directors receive no
compensation for serving as directors and received no such compensation during
the last fiscal year. Officers serve at the discretion of the Board of
Directors.
Item 11. EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
Summarized below are the principal components of compensation of the
individual serving as the Company's Chief Executive Officer ("CEO") during
fiscal year 1997 and the four most highly compensated executive officers other
than the CEO, with income in excess of $100,000, for each of the last three
completed fiscal years.
- 27 -
<PAGE> 28
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Other Annual All Other
Name and Compensation Compensation
Principal Position Year Salary ($) Bonus ($) ($) ($)(a)
------------------ ---- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Kevin S. Relyea, 1997 400,000 192,000 - 4,226(b)
President and Chief Executive 1996 390,385 1,172,057(c) - 4,145(d)
Officer 1995 312,727 149,520 - 918
William D. Burt, 1997 225,000 180,000 - 3,372(e)
Executive Vice President 1996(f) 159,635 180,000(g) 86,762(h) 1,822(i)
Roger K. Chamness, 1997 275,000 99,000 - 3,214(j)
Executive Vice President 1996 256,940 590,856(k) 69,958(l) 2,982(m)
1995 153,086 40,357 - 493
Michael E. Malanga 1997 148,886 51,943 - 507
Executive Vice President 1996 142,614 125,695(n) - 478
1995 128,137 34,645 - 457
Robert T. Trebing, Jr., 1997 185,321 64,654 - 1,116
Executive Vice President 1996 174,806 287,031(o) - 1,020
Chief and Chief
Financial Officer 1995 150,459 43,973 - 858
</TABLE>
- ------------
(a) Unless otherwise indicated, amounts shown represent the value of term
life insurance premiums paid by the Company.
(b) Mr. Relyea received $918 representing the imputed value of life
insurance provided by the Company and $3,308 representing the Company's
matching funds under its Deferred Compensation Plan.
(c) Mr. Relyea received $320,000 pursuant to the Company's 1996 Management
Incentive Compensation Plan bonus program; $548,461 pursuant to the
Company's Divestiture Bonus Plan; and $303,596 in connection with the
cancellation of Mr. Relyea's stock purchase loan with the Company.
(d) Mr. Relyea received $913 representing the imputed value of life
insurance provided by the Company and $3,232 representing the Company's
matching funds under its Deferred Compensation Plan.
(e) Mr. Burt received $1,476 representing the imputed value of life
insurance provided by the Company and $1,896 representing the Company's
matching funds under its Deferred Compensation Plan.
(f) The amount set forth in the table for fiscal 1996 for Mr. Burt
represents less than a full year's compensation. Mr. Burt joined the
Company on April 8, 1996.
(g) Represents bonus earned pursuant to the Company's 1996 Management
Incentive Compensation Plan bonus program.
(h) Mr. Burt received $9,000 representing the value of automobile benefits
and $77,762 representing relocation expenses.
- 28 -
<PAGE> 29
(i) Mr. Burt received $577 representing the imputed value of life insurance
provided by the Company and $1,245 representing the Company's matching
funds under its Deferred Compensation Plan.
(j) Mr. Chamness received $918 representing the imputed value of life
insurance provided by the Company and $2,296 representing the Company's
matching funds under its Deferred Compensation Plan.
(k) Mr. Chamness received $220,000 pursuant to the Company's 1996 Management
Incentive Compensation Plan bonus program; $241,323 pursuant to the
Company's Divestiture Bonus Plan; and $129,533 in connection with the
cancellation of Mr. Chamness' stock purchase loan with the Company.
(l) Mr. Chamness received $1,600 representing the value of automobile
benefits and $68,358 representing relocation expenses.
(m) Mr. Chamness received $865 representing the imputed value of life
insurance provided by the Company and $2,117 representing the Company's
matching funds under its Deferred Compensation Plan.
(n) Mr. Malanga received $71,604 pursuant to the Company's 1996 Management
Incentive Compensation Plan bonus program; $44,635 pursuant to the
Company's Divestiture Bonus Plan; and $9,456 in connection with the
cancellation of Mr. Malanga's stock purchase loan with the Company.
(o) Mr. Trebing received $87,500 pursuant to the Company's 1996 Management
Incentive Compensation Plan bonus program; $134,765 pursuant to the
Company's Divestiture Bonus Plan; and $64,766 in connection with the
cancellation of Mr. Trebing's stock purchase loan with the Company.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Severance benefits for Messrs. Relyea, Burt and Chamness are governed by
their respective employment agreements, which agreements are described below.
The maximum salary severance benefits for Messrs. Relyea, Burt and Chamness are
one year from the date of termination or the remaining period of employment
under their respective employment agreements, whichever is greater. In addition,
upon the occurrence of certain events constituting a change of control, the
holders of stock options, including the executive officers named above, shall be
entitled to receive cash equal to the difference between the price per share
paid in connection with such change of control and the exercise price of the
underlying option.
The Company's President and Chief Executive Officer, Kevin S. Relyea,
entered into an Employment Agreement with the Company on January 1, 1996 for the
period from January 1, 1996 though January 1, 1999, providing for annual
compensation of not less than $400,000, to increase to $500,000 upon the
attainment of $40,000,000 in Company EBITDA, and other periodic increases as
determined by the Company's Board. In 1997, the Company's Board elected to (i)
increase Mr. Relyea's annual compensation by five percent (5%) effective January
1, 1998, and again on January 1, 1999 and (ii) extend his Employment Agreement
with the Company until January 1, 2000.
The Company's Executive Vice President and the President of Chi-Chi's,
Roger K. Chamness, entered into an Employment Agreement with the Company on
March 1, 1996 for the period from March 1, 1996 through March 1, 1999, providing
for annual compensation of not less than $275,000 and periodic increases as
determined by the Company's Board. In 1997, the Company's Board elected to (i)
increase Mr. Chamness' annual compensation by five percent (5%) effective
January 1,
- 29 -
<PAGE> 30
1998, and again on January 1, 1999 and (ii) extend his Employment Agreement with
the Company until March 1, 2000.
The Company's Executive Vice President and El Torito's President,
William D. Burt, entered into an Employment Agreement with the Company on April
8, 1996 for the period from April 8, 1996 through April 8, 1999, providing for
annual compensation of not less than $225,000 and periodic increases as
determined by the Company's Board. In 1997, the Company's Board elected to (i)
increase Mr. Burt's annual compensation by five percent (5%) effective January
1, 1998, and again on January 1, 1999 and (ii) extend his Employment Agreement
with the Company until April 8, 2000.
The employment agreements with each of Messrs. Relyea, Chamness and Burt
also provide that during the terms thereof, such executives will participate in
the Company's Management Incentive Compensation Plan, will be eligible to
participate in the Company's VCU Plan (see discussion below) and will be
entitled to participate in the Company's standard medical, dental, life,
accident, disability, retirement plans, quality review privileges and similar
plans as are generally available to executive employees of the Company from time
to time.
A new supplemental bonus plan was implemented on January 1, 1996 called
the Value Creation Units Plan (the "VCU Plan"). The VCU Plan provides
participants with a contingent financial incentive to contribute to the
long-term success of the Company. In 1997 the VCU Plan was amended to, inter
alia, (i) add El Torito Restaurants, Inc. and Chi-Chi's, Inc. as obligors and
(ii) provide that payouts will be calculated based on the improvement in the
Company's EBITDA between year-end 1995 and year-end 1999 and in proportion to
the amount and type of Value Creation Units awarded to each participant. At
December 28, 1997, there were 28 participants in the VCU Plan, including Kevin
S. Relyea, William D. Burt, Roger K. Chamness, Michael E. Malanga and Robert T.
Trebing, Jr.
In connection with the Company's decision to pursue the sale of the
Family Restaurant Division in January 1996, the Board adopted a Divestiture
Bonus Plan for certain members of management (the "DBP"). The purpose of the DBP
was to retain and reward key executives who would be required to assist with the
sale of the Family Restaurant Division. The DBP provided certain key executives
with a monetary bonus upon the consummation of the sale of the Family Restaurant
Division (calculated as a percentage of the purchase price as defined in the
DBP). Kevin S. Relyea, Roger K. Chamness, Michael E. Malanga and Robert T.
Trebing, Jr. received such a bonus upon the sale of the Family Restaurant
Division to Flagstar in May 1996. The DBP is no longer in effect.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 27, 1998 the number of shares
and percentage of Common Stock owned by each person known to the Company to be
the beneficial owner of more than 5% of any class of the Company's voting
securities, each director and executive officer of the Company and all executive
officers and directors of the Company as a group.
- 30 -
<PAGE> 31
<TABLE>
<CAPTION>
Common Stock
-------------------------------
Amount and Nature
of Beneficial Percent
Ownership(a) of Class
-------------- ---------
<S> <C> <C>
Apollo FRI Partners, L.P.(b) 909,989(c) 82.77%(c)
2 Manhattanville Rd
Purchase, NY 10577
Green Equity Investors, L.P.(d) 160,222 16.21%
11111 Santa Monica Blvd.
Suite 2000
Los Angeles, CA 90025
Kevin S. Relyea 12,747(e) 1.28%(e)
William D. Burt 1,500(f) (g)
Roger K. Chamness 3,000(h) (g)
Robert T. Trebing, Jr 1,300(i) (g)
Michael E. Malanga 633(j) (g)
Gayle A. DeBrosse 500 (g)
Todd E. Doyle 574(k) (g)
Janie M. Bereczky 330(l) (g)
All Executive Officers and
Directors of the Company
as a Group (11 persons) 20,525 2.07%
</TABLE>
- ----------
(a) All shares (other than shares held by Apollo and GEI) are subject to,
and shall be voted in accordance with, the Shareholders' Agreement.
(b) The general partner of Apollo is AIF II. The managing general partner of
AIF II is Apollo Advisors. The general partner of Apollo Advisors is
Apollo Capital Management, Inc. ("Apollo Capital"). Messrs. Copses,
Kaplan and Ressler are officers of Apollo Capital. The directors of
Apollo Capital are Leon Black and John Hannan, each of whom is also an
officer of Apollo Capital. Each of Messrs. Copses, Kaplan and Ressler
and the directors of Apollo Capital disclaim beneficial ownership of any
shares beneficially held by Apollo.
(c) Includes 111,111 shares of Common Stock exercisable at $240 per share
and issuable upon exercise of the Warrant.
(d) The general partner of GEI is Leonard Green & Associates, L.P. ("LGP").
Messrs. Green and Sokoloff are managing general partners of LGP. Each of
Messrs. Green and Sokoloff and the general partners of LGP disclaims
beneficial ownership of any shares beneficially held by GEI.
- 31 -
<PAGE> 32
(e) Includes 938 shares of Common Stock covered by options granted to Mr.
Relyea, which are currently exercisable or exercisable within the next
60 days in the following amounts and prices: 469 shares at $160 per
share, 235 shares at $40 per share and 234 shares at $100 per share.
(f) Includes 1,172 shares of Common Stock covered by options assigned to
Mr. Burt, which are currently exercisable at "Fair Market Value"
as defined in the Company's 1994 Incentive Stock Option Plan.
(g) Represents less than 1% ownership.
(h) Includes 700 shares of Common Stock covered by options granted to Mr.
Chamness, which are currently exercisable or exercisable within the
next 60 days in the following amounts and prices: 150 shares at $160
per share, 475 shares at $40 per share and 75 shares at $100 per share.
(i) Includes 400 shares of Common Stock covered by options granted to Mr.
Trebing, which are currently exercisable or exercisable within the next
60 days in the following amounts and prices: 100 shares at $160 per
share, 250 shares at $40 per share and 50 shares at $100 per share.
(j) Includes 148 shares of Common Stock covered by options granted and
assigned to Mr. Malanga, which are currently exercisable or exercisable
within the next 60 days in the following amounts and prices: 77 shares
at "Fair Market Value" as defined in the Company's 1994 Incentive Stock
Option Plan, 35 shares at $160 per share, 18 shares at $40 per share
and 18 shares at $100 per share.
(k) Includes 199 shares of Common Stock covered by options granted and
assigned to Mr. Doyle, which are currently exercisable or exercisable
within the next 60 days in the following amounts and prices: 140 shares
at $1 per share, 29 shares at $160 per share, 15 shares at $40 per
share and 15 shares at $100 per share.
(l) Includes 110 shares of Common Stock covered by options granted to Ms.
Bereczky, which are currently exercisable or exercisable within the
next 60 days in the following amounts and prices: 55 shares at $160 per
share, 28 shares at $40 per share and 27 shares at $100 per share.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Apollo charged a monthly fee of $100,000 during 1997 and 1996 which
Apollo will continue to earn in the future, and Apollo and GEI each charged a
monthly fee of $50,000 during 1995 for providing certain management services to
the Company. In November 1995, the management services arrangement with GEI was
terminated. For the years ended December 28, 1997, December 29, 1996 and
December 31, 1995, the Company was charged $1.2 million each year in connection
with this arrangement. The Company had management services fees payable of
$3,250,000 and $2,050,000 due to Apollo and GEI as of December 28, 1997 and
December 29, 1996, respectively.
On January 27, 1994, the Company entered into the Shareholders'
Agreement and a Registration Rights Agreement with Apollo, GEI and Foodmaker.
The Shareholders' Agreement was terminated as between Apollo, GEI, Foodmaker and
the Company in connection with the Exchange Agreements. See "BUSINESS--Change in
Control."
The Company loaned $150,000 to Mr. Relyea (evidenced by recourse notes
which bore interest at a rate of 7% per annum and were due on May 31, 1999) in
connection with his purchase of Common Stock. In July 1996, the loan to Mr.
Relyea was canceled which resulted in additional income to Mr. Relyea. See
"--Directors and Executive Officers," "Executive Compensation."
The Company loaned $64,000 to Mr. Chamness (evidenced by recourse notes
which bore interest at a rate of 7% per annum and were due on May 19, 1999) in
connection with his purchase of Common Stock. In July 1996, the loan to Mr.
Chamness was canceled which resulted in additional income to Mr. Chamness. See
"--Directors and Executive Officers," "Executive Compensation."
- 32 -
<PAGE> 33
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page
----
<S> <C>
(a) (1) Financial Statements. See the Index to Financial Statements on
page F-1. --
(2) Financial Statement Schedule
Schedule II - Valuation and qualifying accounts S-1
</TABLE>
(3) Exhibits
2(a) Stock Purchase Agreement dated as of March
1, 1996 by and among Family Restaurants, Inc.,
Flagstar Companies, Inc., Flagstar Corporation
and FRD Acquisition Co. (Filed as Exhibit 2.1 to
the Company's Form 10-Q filed with the SEC on
May 15, 1996.)
3(a) Fourth Restated Certificate of Incorporation of
the Company. (Filed as Exhibit 4.1 to the
Company's Form S-8 filed with the SEC on March
23, 1994.)
3(b) Bylaws of the Company. (Filed as Exhibit 4.2 to
the Company's Form S-8 filed with the SEC on
March 23, 1994.)
4(a) Indenture Dated as of January 27, 1994 Re:
$300,000,000 9-3/4% Senior Notes Due 2002.
(Filed as Exhibit 4(a) to the Company's Form
10-K filed with the SEC on March 28, 1994.)
4(b) Indenture Dated as of January 27, 1994 Re:
$150,000,000 10-7/8% Senior Subordinated
Discount Notes Due 2004. (Filed as Exhibit 4(b)
to the Company's Form 10-K filed with the SEC on
March 28, 1994.)
4(c) First Supplemental Indenture, dated as of July
3, 1996, between the Registrant and IBJ Schroder
Bank & Trust Company, a New York Banking
corporation, as Trustee. (Filed as Exhibit 10.1
to the Company's Form 8-K filed with the SEC on
July 9, 1996.)
- 33 -
<PAGE> 34
4(d) First Supplemental Indenture, dated as of July
3, 1996, between the Registrant and Fleet
National Bank, as successor by merger to Fleet
National Bank of Massachusetts, formerly known
as Shawmut Bank, N.A., as Trustee. (Filed as
Exhibit 10.2 to the Company's Form 8-K filed
with the SEC on July 9, 1996.)
4(e) Note Agreement Dated as of August 12, 1997 Re:
Up to $75,000,000 FRI-MRD Corporation Senior
Discount Notes Due January 24, 2002. (Filed as
Exhibit 4(e) to the Company's Form 10-Q filed
with the SEC on November 12, 1997.)
*4(f) Joinder Agreement Dated as of January 14, 1998
Re: FRI-MRD Corporation Senior Discount Notes
due January 24, 2002.
9 Shareholders' Agreement, dated as of January 27,
1994, among the Company and certain of its
Shareholders. (Filed as Exhibit 4.3 to the
Company's Form S-8 filed with the SEC on March
23, 1994.)
10(a) The Company's 1994 Incentive Stock Option Plan.
(Filed as Exhibit 10(g) to the Company's Form
10-K filed with the SEC on March 28, 1994.)
10(b) The Company's Deferred Compensation Plan. (Filed
as Exhibit 10(k) to the Company's Form 10-K
filed with the SEC on March 27, 1995.)
10(c) The Company's Severance Plan. (Filed as Exhibit
10(m) to the Company's Form 10-K filed with the
SEC on March 27, 1995.)
10(d) Form of Management Stock Subscription Agreement
of the Company. (Filed as Exhibit 10(bb) to the
Company's Form 10- K filed with the SEC on March
28, 1994.)
10(e) Form of Management Pledge Agreement of the
Company. (Filed as Exhibit 10(cc) to the
Company's Form 10-K filed with the SEC on March
28, 1994.)
10(f) Management Services Agreement, dated as of
January 27, 1994, by and between the Company and
Apollo Advisors, L.P. (Filed as Exhibit 10(ff)
to the Company's Form 10-K filed with the SEC on
March 28, 1994.)
- 34 -
<PAGE> 35
10(g) Lease Indemnification Agreement, dated as of
January 27, 1994, by and between the Company and
W. R. Grace & Co.-Conn. (Filed as Exhibit 10(ii)
to the Company's Form 10-K filed with the SEC on
March 28, 1994.)
10(h) Tax Sharing Agreement, dated as of January 27,
1994, by and among the Company, Foodmaker, Inc.
and Chi-Chi's, Inc. (Filed as Exhibit 10(ll) to
the Company's Form 10-K filed with the SEC on
March 28, 1994.)
10(i) Registration Rights Agreement, dated as of
January 27, 1994, by and among the Company and
certain of its shareholders. (Filed as Exhibit
10(mm) to the Company's Form 10-K filed with the
SEC on March 28, 1994.)
10(j) Agreement, dated as of January 5, 1996, by and
between Kevin S. Relyea and the Company. (Filed
as Exhibit 10(w) to the Company's Form 10-K
filed with the SEC on April 1, 1996.)
10(k) The Company's 1996 Management Incentive
Compensation Plan Description. (Filed as Exhibit
10(r) to the Company's Form 10-K filed with the
SEC on March 31, 1997.)
10(l) Termination of Management Services Agreement
between Leonard Green & Associates, L.P. and the
Company, dated as of November 20, 1995. (Filed
as Exhibit 10(s) to the Company's Form 10-K
filed with the SEC on March 31, 1997.)
10(m) Employment Agreement, dated as of January 1,
1996 by and between Kevin S. Relyea and the
Company. (Filed as Exhibit 10(t) to the
Company's Form 10-K filed with the SEC on March
31, 1997.)
10(n) Employment Agreement, dated as of March 1, 1996
by and between Roger K. Chamness and the
Company. (Filed as Exhibit 10(u) to the
Company's Form 10-K filed with the SEC on March
31, 1997.)
10(o) Employment Agreement, dated as of April 8, 1996,
by and between William D. Burt and the Company.
(Filed as Exhibit 10(v) to the Company's Form
10-K filed with the SEC on March 31, 1997.)
10(p) Loan and Security Agreement, dated as of January
10, 1997, between Foothill Capital Corporation
and the Company and its
- 35 -
<PAGE> 36
subsidiaries named therein. (Filed as Exhibit
10(w) to the Company's Form 10-K filed with the
SEC on March 31, 1997.)
10(q) General Continuing Guarantee, dated as of
January 10, 1997, by the Company in favor of
Foothill Capital Corporation. (Filed as Exhibit
10(x) to the Company's Form 10-K filed with the
SEC on March 31, 1997.)
10(r) Form of subsidiary General Continuing Guarantee,
dated as of January 10, 1997. (Filed as Exhibit
10(y) to the Company's Form 10-K filed with the
SEC on March 31, 1997.)
10(s) Security Agreement, dated as of January 10,
1997, between Foothill Capital Corporation and
the Company. (Filed as Exhibit 10(z) to the
Company's Form 10-K filed with the SEC on March
31, 1997.)
10(t) Form of subsidiary Security Agreement, dated as
of January 10, 1997, between Foothill Capital
Corporation and the subsidiary named therein.
(Filed as Exhibit 10(aa) to the Company's Form
10-K filed with the SEC on March 31, 1997.)
10(u) Stock Pledge Agreement, dated as of January 10,
1997, between the Company and Foothill Capital
Corporation. (Filed as Exhibit 10(bb) to the
Company's Form 10-K filed with the SEC on March
31, 1997.)
10(v) Form of subsidiary Stock Pledge Agreement, dated
as of January 10, 1997, between the subsidiary
named therein and Foothill Capital Corporation.
(Filed as Exhibit 10(cc) to the Company's Form
10-K filed with the SEC on March 31, 1997.)
10(w) Trademark Security Agreement, dated as of
January 10, 1997, by Chi-Chi's, Inc. in favor of
Foothill Capital Corporation. (Filed as Exhibit
10(dd) to the Company's Form 10-K filed with the
SEC on March 31, 1997.)
10(x) Trademark Security Agreement, dated as of
January 10, 1997, by El Torito Restaurants, Inc.
in favor of Foothill Capital Corporation. (Filed
as Exhibit 10(ee) to the Company's Form 10-K
filed with the SEC on March 31, 1997.)
10(y) First Amendment to the Loan and Security
Agreement dated as of May 23, 1997 by and among
the parties thereto. (Filed as Exhibit 10(gg) to
the Company's Form 10-Q filed with the SEC on
August 13, 1997.)
- 36 -
<PAGE> 37
10(z) Amendment Number Two to Loan and Security
Agreement dated as of August 12, 1997 by and
among the parties thereto. (Filed as Exhibit
10(hh) to the Company's Form 10-Q filed with the
SEC on November 12, 1997.)
10(aa) The Company's Divestiture Bonus Plan for Key
Management, dated January 9, 1996. (Filed as
Exhibit 10(ff) to the Company's Form 10-K filed
with the SEC on March 31, 1997.)
*10(bb) Distribution Service Agreement, dated as of
November 1, 1997, between El Torito Restaurants,
Inc. and The SYGMA Network, Inc. (Portions of
this document have been omitted pursuant to a
request for confidential treatment.)
*10(cc) Distribution Service Agreement, dated as of
April 30, 1997, between Chi-Chi's, Inc. and
Sysco Corporation. (Portions of this document
have been omitted pursuant to a request for
confidential treatment.)
*10(dd) Family Restaurants, Inc., FRI-MRD Corporation,
Chi-Chi's, Inc. and El Torito Restaurants, Inc.
Amended and Restated Value Creation Units Plan
and Sample Value Creation Units Agreement.
*21(a) List of Subsidiaries.
*21(b) Names Under Which Subsidiaries Do Business.
*23 Consent of KPMG Peat Marwick LLP.
*27 Financial Data Schedule.
99 (a) Press Release, dated May 23, 1996. (Filed as
Exhibit 99.1 to the Company's Form 8-K filed
with the SEC on May 30, 1996.)
99 (b) Press Release, dated July 3, 1996. (Filed as
Exhibit 99.1 to the Company's Form 8-K filed
with the SEC on July 9, 1996.)
(b) Reports on Form 8-K
None.
- ----------
* Filed herewith.
- 37 -
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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.
By /S/ Robert T. Trebing, Jr. March 30, 1998
------------------------------------ --------------
Robert T. Trebing, Jr. Date
Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Director, President and
Chief Executive Officer
(Principal Executive
/S/ Kevin S. Relyea Officer) March 30, 1998
- ----------------------
Kevin S. Relyea
/S/ Peter P. Copses Director March 30, 1998
- ----------------------
Peter P. Copses
/S/ David B. Kaplan Director March 30, 1998
- ----------------------
David B. Kaplan
/S/ Antony P. Ressler Director March 30, 1998
- ----------------------
Antony P. Ressler
Executive Vice President
and Chief Financial Officer
(Principal Financial and
/S/ Robert T. Trebing, Jr. Accounting Officer) March 30, 1998
- --------------------------
Robert T. Trebing, Jr.
</TABLE>
- 38 -
<PAGE> 39
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT
No annual report covering the registrant's last fiscal year has been or
will be sent to security holders, other than a copy of this Annual Report on
Form 10-K.
No proxy statement, form of proxy or other proxy solicitation materials
with respect to any annual or other meeting of security holders were sent in
1997, and none will be sent with respect to 1997, to security holders.
- 39 -
<PAGE> 40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Family Restaurants, Inc.
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 28, 1997 and December 29, 1996 F-3
Consolidated Statements of Operations for the Years Ended December 28, 1997,
December 29, 1996 and December 31, 1995 F-4
Consolidated Statements of Common Stockholders' Equity (Deficit) for the Years
Ended December 28, 1997, December 29, 1996 and December 31, 1995 F-5
Consolidated Statements of Cash Flows for the Years Ended December 28, 1997,
December 29, 1996 and December 31, 1995 F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE> 41
INDEPENDENT AUDITORS' REPORT
Board of Directors
Family Restaurants, Inc.:
We have audited the accompanying consolidated balance sheets of Family
Restaurants, Inc. and its subsidiaries as of December 28, 1997 and December 29,
1996, and the related consolidated statements of operations, common
stockholders' equity (deficit) and cash flows for the years ended December 28,
1997, December 29, 1996 and December 31, 1995. In connection with our audits of
the consolidated financial statements, we also audited the financial statement
schedule as listed in the accompanying index. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
consolidated financial statements and financial statement schedule 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Family
Restaurants, Inc. and its subsidiaries at December 28, 1997 and December 29,
1996, and the results of their operations and their cash flows for the years
ended December 28, 1997, December 29, 1996 and December 31, 1995 in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information shown therein.
KPMG PEAT MARWICK LLP
Orange County, California
March 5, 1998
F-2
<PAGE> 42
FAMILY RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
($ in thousands except share amounts)
<TABLE>
<CAPTION>
December 28, December 29,
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 32,518 $ 33,820
Receivables 3,944 5,043
Inventories 4,569 4,537
Other current assets 4,086 3,212
--------- ---------
Total current assets 45,117 46,612
Property and equipment, net 183,601 196,872
Reorganization value in excess of amounts allocable
to identifiable assets, net 36,529 37,930
Other assets 24,521 26,192
--------- ---------
$ 289,768 $ 307,606
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt, including capitalized
lease obligations $ 2,694 $ 3,927
Accounts payable 13,959 19,000
Self-insurance reserves 32,515 34,972
Other accrued liabilities 58,573 70,696
Income taxes payable 3,788 3,541
--------- ---------
Total current liabilities 111,529 132,136
Other long-term liabilities 4,478 4,746
Long-term debt, including capitalized lease obligations,
less current portion 199,955 165,325
Stockholders' equity (deficit):
Common stock - authorized 1,500,000 shares, par
value $.01, 997,277 shares issued 10 10
Additional paid-in capital 157,317 157,317
Accumulated deficit (182,138) (150,545)
Less treasury stock, at cost (8,992 shares) (1,383) (1,383)
--------- ---------
Total stockholders' equity (deficit) (26,194) 5,399
--------- ---------
$ 289,768 $ 307,606
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 43
FAMILY RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands)
<TABLE>
<CAPTION>
For the Year Ended
----------------------------------------------
December 28, December 29, December 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Sales $ 463,724 $ 724,229 $ 1,134,359
----------- ----------- -----------
Product cost 123,803 200,379 322,194
Payroll and related costs 162,807 273,536 419,185
Occupancy and other operating expenses 129,428 181,730 275,164
Depreciation and amortization 22,583 34,475 57,836
General and administrative expenses 30,186 41,742 56,245
Loss on disposition of properties, net 3,885 8,600 12,067
Provision for divestitures and write-down
of long-lived assets 2,640 0 44,500
Restructuring costs 0 6,546 4,392
----------- ----------- -----------
Total costs and expenses 475,332 747,008 1,191,583
----------- ----------- -----------
Operating loss (11,608) (22,779) (57,224)
Interest expense, net 19,476 36,725 65,277
Gain on sale of division 0 62,601 0
----------- ----------- -----------
Income (loss) before income tax provision
and extraordinary item (31,084) 3,097 (122,501)
Income tax provision 509 890 1,208
----------- ----------- -----------
Income (loss) before extraordinary item (31,593) 2,207 (123,709)
Extraordinary gain on extinguishment
of debt 0 134,833 0
----------- ----------- -----------
Net income (loss) $ (31,593) $ 137,040 $ (123,709)
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 44
FAMILY RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 28, 1997
($ in thousands)
<TABLE>
<CAPTION>
Notes
Additional Receivable Treasury
Common Paid-in from Stock- Accumulated Stock,
Stock Capital holders Deficit at Cost Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 25, 1994 $ 10 $ 159,554 $ (2,947) $(163,876) $ 0 $ (7,259)
Net loss 0 0 0 (123,709) 0 (123,709)
Payments and cancellation of notes
receivable from stockholders 0 (1,303) 2,078 0 0 775
Purchase of treasury stock 0 0 0 0 (1,383) (1,383)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1995 10 158,251 (869) (287,585) (1,383) (131,576)
Net income 0 0 0 137,040 0 137,040
Cancellation of notes receivable
from stockholders 0 (934) 869 0 0 (65)
--------- --------- --------- --------- --------- ---------
Balance at December 29, 1996 10 157,317 0 (150,545) (1,383) 5,399
Net loss 0 0 0 (31,593) 0 (31,593)
--------- --------- --------- --------- --------- ---------
Balance at December 28, 1997 $ 10 $ 157,317 $ 0 $(182,138) $ (1,383) $ (26,194)
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 45
FAMILY RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
<TABLE>
<CAPTION>
For the Year Ended
----------------------------------------------
December 28, December 29, December 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Cash received from customers $ 464,780 $ 727,849 $ 1,133,206
Cash received from franchisees and licensees 2,074 2,762 7,897
Cash paid to suppliers and employees (465,069) (711,462) (1,084,758)
Interest received 2,119 4,176 266
Interest paid (16,747) (38,392) (45,198)
Restructuring costs 0 (6,546) (4,392)
Income taxes paid (262) (244) (938)
----------- ----------- -----------
Net cash provided by (used in) operating activities (13,105) (21,857) 6,083
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from disposal of property and equipment 1,492 25,115 20,425
Proceeds from sale of FRD, net 0 121,342 0
Proceeds from sale of notes receivable, net 3,514 32,116 0
Capital expenditures (13,588) (9,848) (38,022)
Mandatory lease buyback, net (2,690) 0 0
Lease termination payments (2,891) (3,398) 0
Capitalized opening costs (532) (235) (2,155)
Other (1,936) (68) 137
----------- ----------- -----------
Net cash provided by (used in) investing activities (16,631) 165,024 (19,615)
----------- ----------- -----------
Cash flows from financing activities:
Repurchases of notes 0 (32,513) 0
Net proceeds from issuance of notes 33,947 0 0
Proceeds from (repayment of) working capital
borrowings, net 0 (79,815) 20,215
Payment of debt issuance costs (2,418) (278) 0
Reductions of long-term debt, including capitalized
lease obligations (3,095) (5,111) (7,794)
Decrease in restricted cash and collateral deposit 0 0 1,850
Purchase of treasury stock 0 0 (1,383)
Payments of notes receivable from stockholders 0 0 775
----------- ----------- -----------
Net cash provided by (used in) financing activities 28,434 (117,717) 13,663
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (1,302) 25,450 131
Cash and cash equivalents at beginning of period 33,820 8,370 8,239
----------- ----------- -----------
Cash and cash equivalents at end of period $ 32,518 $ 33,820 $ 8,370
=========== =========== ===========
</TABLE>
F-6
<PAGE> 46
FAMILY RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
($ in thousands)
<TABLE>
<CAPTION>
For the Year Ended
-----------------------------------------
December 28, December 29, December 31,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Reconciliation of Net Income (Loss) to Net Cash Provided
by (Used in) Operating Activities
Net income (loss) $ (31,593) $ 137,040 $(123,709)
--------- --------- ---------
Adjustments to reconcile net income (loss) to net
cash provided by (used in)
operating activities:
Depreciation and amortization 22,583 34,475 57,836
Amortization of debt issuance costs 1,084 2,125 6,726
Loss on disposition of properties 3,885 8,600 12,067
Provision for divestitures and write-down of
long-lived assets 2,640 0 44,500
Gain on sale of division 0 (62,601) 0
Extraordinary gain on extinguishment of debt 0 (134,833) 0
Accretion of interest on notes 2,845 9,025 13,454
Decrease in receivables 304 1,661 708
(Increase) decrease in inventories (32) 1,176 1,976
(Increase) decrease in other current assets (530) 2,890 (3,382)
Increase (decrease) in accounts payable (5,041) (4,792) 1,403
Increase (decrease) in self-insurance reserves (2,457) (382) 1,664
Decrease in other accrued liabilities (7,040) (17,507) (7,430)
Increase in income taxes payable 247 1,266 270
--------- --------- ---------
Total adjustments 18,488 (158,897) 129,792
--------- --------- ---------
Net cash provided by (used in) operating activities $ (13,105) $ (21,857) $ 6,083
========= ========= =========
</TABLE>
Supplemental schedule of noncash investing and financing activities:
See Note 6 for discussion of repurchases of the Notes.
Disclosure of accounting policy:
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 47
FAMILY RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 28, 1997
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 December 28, 1997, the
Company operated 275 restaurants in 30 states, with approximately 65% of its
restaurants located in California, Ohio, Pennsylvania, Michigan, Illinois and
Indiana. Additionally, as of December 28, 1997, the Company was the franchisor
and licensor of two restaurants in the United States and 23 restaurants outside
the United States.
Fiscal year
The Company reports results of operations based on 52 or 53 week periods
ending on the last Sunday in December. The fiscal years ended December 28, 1997
and December 29, 1996 included 52 weeks, and the fiscal year ended December 31,
1995 included 53 weeks.
Principles of consolidation
The consolidated financial statements include the accounts of the
Company and all its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Estimations
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Inventories
Inventories consist primarily of food and liquor and are stated at the
lower of cost or market. Costs are determined using the first-in, first-out
(FIFO) method.
Property and equipment
Property and equipment are stated at cost and are depreciated on a
straight-line basis over their estimated useful lives (buildings principally
over 25 to 35 years and furniture, fixtures and equipment over 3 to 10 years).
Leasehold improvements are amortized on a straight-line basis over
F-8
<PAGE> 48
the shorter of their estimated useful lives or the terms of the related leases.
Property under capitalized leases is amortized over the terms of the leases
using the straight-line method.
Losses on disposition of properties are recognized when a commitment to
divest a restaurant property is made by the Company and include estimated
carrying costs through the expected date of disposal.
Advertising
Production costs of commercials and programming are charged to
operations when aired. The costs of other advertising, promotion and marketing
programs are charged to operations in the year incurred.
Franchise and license fees
Initial franchise and license fees are recognized when all material
services have been performed and conditions have been satisfied. Initial fees
for the periods presented are insignificant. Monthly fees for all franchise and
license arrangements are accrued as earned based on the respective monthly
sales. Such fees totaled $2,215,000 for 1997, $2,802,000 for 1996 and $6,036,000
for 1995 and are included as an offset to general and administrative expenses.
The Company previously hedged its foreign currency royalties through
forward exchange contracts. These contracts reduced the exposure to currency
movements affecting the royalty receivable. Each contract's duration typically
ended when the receivable was expected to be paid. The future value of each
contract and the related currency position were subject to off-setting market
risk. On December 4, 1995, these contracts were terminated, resulting in a
realized gain of $2,405,000, which is included as a reduction to general and
administrative expenses in the consolidated financial statements.
Reorganization value
Reorganization value in excess of amounts allocable to identifiable
assets is amortized using the straight-line method over 30 years. Accumulated
amortization of reorganization value amounted to $5,496,000 at December 28, 1997
and $4,095,000 at December 29, 1996. During 1995, the Company determined that an
impairment of the portion of this asset related to its traditional dinnerhouse
restaurants had occurred and wrote off $2,049,000.
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.
F-9
<PAGE> 49
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.
As a result of a continued review of operating results, the Company
identified 18 unprofitable Chi-Chi's restaurants which may either take too long
to recover profitability or may not recover at all, despite current marketing
and cost control programs. In connection with this analysis, the Company
analyzed the carrying value of the long-lived assets of these restaurants and
recorded a write-down of long-lived assets of $2.6 million during the second
quarter of 1997 to reduce the assets' carrying value to their estimated fair
market value. The Company is actively marketing these restaurants for sale, and
the restaurants continue in operation.
During the third quarter of 1995, the Company closed seven Chi-Chi's
restaurants and identified additional restaurants to be sold or having impaired
asset value. Approximately 32 marginally profitable or unprofitable restaurants
were offered for sale. In conjunction with this divestment program, the Company
analyzed the carrying value of the Chi-Chi's long-lived assets to determine if
any impairment had occurred. In connection with this analysis, the Company
recorded a charge for divestitures and writedowns of long-lived assets of $41.9
million.
Income taxes
The Company accounts for income taxes using the principles specified in
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (see Note 9).
Reclassifications
Certain amounts as previously reported have been reclassified to conform
to the 1997 presentation.
F-10
<PAGE> 50
NOTE 2 - RECEIVABLES:
A summary of receivables follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
($ in thousands)
<S> <C> <C>
Trade, principally credit cards $2,057 $2,027
License and franchise fees and related receivables 341 195
Interest on FRD Notes 186 370
Notes receivable 127 926
Other 1,233 1,525
------ ------
$3,944 $5,043
====== ======
</TABLE>
NOTE 3 - SALES OF RESTAURANTS:
On March 1, 1996, the Company entered into a definitive agreement (the
"Sale Agreement") to sell its family restaurant division which operated
full-service family restaurants (the "Family Restaurant Division") to an
indirect wholly-owned subsidiary of Flagstar Companies, Inc. (now known as
Advantica Restaurant Group, Inc.) ("Flagstar"). On May 23, 1996, the Company
completed the sale of the Family Restaurant Division in exchange for $125
million cash, $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 Old Credit Facility (see Note 6) of $82
million, help fund the repurchases of the Notes and for general corporate
purposes. As of December 28, 1997, the Company had sold or exchanged $153.65
million aggregate principal amount of the FRD Notes. The remaining balance of
$3.25 million is restricted until the fourth anniversary of the sale 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 (see Note 5).
During the fourth quarter of 1995, the Company determined that its
traditional dinnerhouse restaurants would be held for sale. The net assets of
these restaurants were written down to their estimated fair value (based in part
on a previously received offer in late 1995), less estimated selling costs, of
$12,908,000, resulting in a loss of $3,565,000 (including the write-off of
reorganization value of $2,049,000 associated with these restaurants, which is
included in loss on disposition of properties in the accompanying consolidated
statement of operations for the year ended December 31, 1995). During 1996, the
net losses associated with the sale of the traditional dinnerhouse restaurants
totalled $4,076,000, which is included in loss on disposition of properties in
the accompanying consolidated statement of operations.
F-11
<PAGE> 51
NOTE 4 - PROPERTY AND EQUIPMENT:
A summary of property and equipment follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
($ in thousands)
<S> <C> <C>
Land $ 26,890 $ 26,729
Buildings and improvements 150,223 152,350
Furniture, fixtures and equipment 73,218 69,342
Projects under construction 5,684 4,638
--------- ---------
256,015 253,059
Accumulated depreciation and amortization (72,414) (56,187)
--------- ---------
$ 183,601 $ 196,872
========= =========
</TABLE>
Property under capitalized leases in the amount of $20,880,000 at
December 28, 1997 and $21,323,000 at December 29, 1996 is included in buildings
and improvements. Accumulated amortization of property under capitalized leases
amounted to $8,871,000 at December 28, 1997 and $6,894,000 at December 29, 1996.
Capitalized leases primarily relate to the buildings on certain restaurant
properties; the land portions of these leases are accounted for as operating
leases.
Depreciation and amortization relating to property and equipment was
$20,994,000 for 1997, $30,253,000 for 1996 and $45,766,000 for 1995, of which
$2,236,000, $4,357,000 and $7,578,000, respectively, was related to amortization
of property under capitalized leases.
A majority of the capitalized and operating leases have original terms
of 25 years, and substantially all of these leases expire in the year 2008 or
later. Most leases have renewal options. The leases generally provide for
payment of minimum annual rent, real estate taxes, insurance and maintenance
and, in most cases, contingent rent, calculated as a percentage of sales, in
excess of minimum rent. The total amount of contingent rent under capitalized
leases for the years ended December 28, 1997, December 29, 1996 and December 31,
1995 was $934,000, $2,425,000 and $5,491,000, respectively. Total rental expense
for all operating leases comprised the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
($ in thousands)
<S> <C> <C> <C>
Minimum rent $ 35,521 $ 45,063 $ 56,577
Contingent rent 1,235 2,058 3,775
Less: Sublease rent (6,434) (6,293) (5,815)
-------- -------- --------
$ 30,322 $ 40,828 $ 54,537
======== ======== ========
</TABLE>
F-12
<PAGE> 52
At December 28, 1997, the present value of capitalized lease payments
and the future minimum lease payments on noncancellable operating leases were:
<TABLE>
<CAPTION>
Capitalized Operating
Due in Leases Leases
----------- ----------
($ in thousands)
<S> <C> <C>
1998 $ 3,430 $ 33,350
1999 3,164 32,886
2000 2,909 32,427
2001 2,584 29,931
2002 2,419 27,334
Later years 6,713 108,647
----------- ----------
Total minimum lease payments 21,219 $ 264,575
==========
Interest (6,624)
-----------
Present value of minimum lease payments $ 14,595
===========
</TABLE>
The future lease payments summarized above include commitments for
leased properties included in the Company's divestiture program.
NOTE 5 - OTHER ASSETS:
A summary of other assets follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
($ in thousands)
<S> <C> <C>
Liquor licenses $ 5,910 $ 5,977
Debt issuance costs 4,918 3,931
Notes receivable 9,898 9,239
FRD Notes 3,250 6,500
Other 545 545
------- -------
$24,521 $26,192
======= =======
</TABLE>
Debt issuance costs are amortized over the terms of the respective loan
agreements.
F-13
<PAGE> 53
NOTE 6 - LONG-TERM DEBT, INCLUDING CAPITALIZED LEASE OBLIGATIONS:
Long-term debt, including capitalized lease obligations, is comprised of
the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
($ in thousands)
<S> <C> <C>
9-3/4% Senior Notes $103,456 $119,034
10-7/8% Senior Subordinated Discount Notes 30,900 30,606
15% Senior Discount Notes 48,514 0
Capitalized lease obligations 14,595 16,795
Mortgage notes, 12-1/4% - 12-1/2%, due 1998 169 353
Other 1,753 2,464
-------- --------
199,387 169,252
Deferred gain on debt exchange 3,262 0
-------- --------
202,649 169,252
Amounts due within one year 2,694 3,927
-------- --------
$199,955 $165,325
======== ========
</TABLE>
On January 27, 1994, the Company sold $300.0 million principal amount of
9-3/4% Senior Notes due in full in 2002 (the "Senior Notes") and $150.0 million
principal amount ($109.0 million in proceeds) of 10-7/8% Senior Subordinated
Discount Notes due in full in 2004 (the "Discount Notes" and, together with the
Senior Notes, the "Notes"), and the Company and certain of its subsidiaries
entered into a $150.0 million senior secured revolving credit facility with a
$100.0 million sub-limit for standby letters of credit, which was to be used for
general corporate purposes including working capital, debt service and capital
expenditure requirements (the "Old Credit Facility").
On January 10, 1997, the Company entered into a five-year, $35 million
credit facility with Foothill Capital Corporation (the "Foothill Credit
Facility"), which replaced the Old Credit Facility, to provide for the ongoing
working capital needs of the Company. The Foothill Credit Facility provides for
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). The
Foothill Credit Facility is secured by substantially all of the real and
personal property of the Company and contains customary restrictive covenants,
including the maintenance of certain financial ratios. The Company is in
compliance with all financial ratios for the year ended December 28, 1997.
Standby letters of credit are issued under the Foothill Credit Facility
primarily to provide security for future amounts payable by the Company under
its workers' compensation insurance program ($18,381,000 of such letters of
credit were outstanding as of December 28, 1997). No revolving cash borrowings
were outstanding as of December 28, 1997.
The Senior Notes require semiannual interest payments on February 1 and
August 1 of each year and will mature on February 1, 2002. The Senior Notes will
not be redeemable at the option of the Company prior to February 1, 1999.
Thereafter, such notes may be redeemed at prices starting at 102.786% and
declining ratably to 100% at February 1, 2001. Cash interest payments on the
Discount Notes began on August 1, 1997 and will continue to be paid on February
1 and August 1
F-14
<PAGE> 54
of each year, and such notes will mature on February 1, 2004. The Discount Notes
will not be redeemable at the option of the Company prior to February 1, 1999.
Thereafter, such notes may be redeemed at prices starting at 104.078% and
declining ratably to 100% at February 1, 2002.
On July 3, 1996, the Company repurchased $151.0 million aggregate
principal amount of the Senior Notes and $108.6 million aggregate principal
amount of the Discount Notes in exchange for (or from the proceeds from the sale
of) $133.5 million aggregate principal amount of the FRD Notes. On December 19,
1996, the Company repurchased $30.0 million aggregate principal amount of the
Senior Notes for $18.6 million. In separate transactions, the Company
repurchased (i) an additional $8.5 million aggregate principal amount of the
Discount Notes in the third quarter of 1996 and (ii) $2.0 million aggregate
principal amount of the Discount Notes in the fourth quarter of 1996. The
Company recognized an extraordinary gain of $134.8 million as a result of these
repurchases.
On August 12, 1997, FRI-MRD Corporation (a wholly-owned subsidiary of
the Company) ("FRI-MRD") issued new senior discount notes (the "Senior Discount
Notes") in the face amount of $61 million at a price of approximately 75% of
par. The Senior Discount Notes are due on January 24, 2002 and accrete at a rate
of 15% per annum until July 31, 1999, and thereafter, interest will be payable
in cash semi-annually at the rate of 15% per annum. The $61 million of Senior
Discount Notes were issued to an existing holder of the Company's Senior Notes
in exchange for $15.6 million of Senior Notes plus approximately $34 million of
cash, and are part of an agreement pursuant to which FRI-MRD had the ability to
issue up to a maximum of $75 million of Senior Discount Notes. The gain of
$3,548,000 realized on the exchange of Senior Notes has been deferred and
classified as an element of long-term debt in accordance with the guidelines of
Emerging Issues Task Force Issue No. 96-19 because the present value of the cash
flows of the Senior Discount Notes was not at least 10% different from the
present value of the cash flows of the Senior Notes exchanged. The deferred gain
is being amortized as a reduction of interest expense over the life of the
Senior Discount Notes. In January 1998, FRI-MRD issued the remaining $14 million
in face value of the Senior Discount Notes available under such agreement to the
same purchaser at a price of 83% of par. FRI-MRD received approximately $11.6
million in cash as a result of this subsequent sale. Proceeds from the sales of
the Senior Discount Notes will be used to fund the Company's capital expenditure
programs and for general corporate purposes.
The Company continues to be highly leveraged and has 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 repay or refinance the Notes, or that FRI-MRD will be able to repay or
refinance the Senior Discount Notes, at their respective maturities.
The mortgage notes were issued to a group of institutional lenders and
are collateralized by mortgages covering five restaurants having a net book
value of approximately $6,689,000 at December 28, 1997.
Maturities of long-term debt, including capitalized lease obligations,
during the four years subsequent to December 27, 1998 are as follows: $2,141,000
in 1999, $2,083,000 in 2000, $1,954,000 in 2001 and $166,439,000 in 2002.
F-15
<PAGE> 55
NOTE 7 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The recorded amounts of the Company's cash and cash equivalents,
receivables, accounts payable, self-insurance reserves, other accrued
liabilities and certain financial instruments included in other assets at
December 28, 1997 and December 29, 1996 approximate fair value. The fair value
of the Company's long-term debt, excluding capitalized lease obligations, is
estimated as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
Recorded Fair Recorded Fair
Amount Value Amount Value
-------- ----- -------- -----
($ in thousands)
<S> <C> <C> <C> <C>
Senior Notes $103,456 $ 82,765 $119,034 $ 86,895
Discount Notes 30,900 22,866 30,606 11,742
Senior Discount Notes 48,514 50,630 0 0
Mortgage notes 169 165 353 347
Other 1,753 1,527 2,464 2,096
</TABLE>
The fair values of the Notes are based on an average market price of
these instruments as of the end of fiscal 1997 and 1996. The fair value of the
Senior Discount Notes is based on the subsequent issuance of the remaining $14
million in face value at a price of 83% of par. The fair value of the mortgage
notes and other debt was estimated using a discount rate which the Company
believes would be currently available to it for debt with similar terms and
average maturities.
The Company does not maintain investments or commitments for which the
application of SFAS 119, "Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments," would cause a material effect.
F-16
<PAGE> 56
NOTE 8 - OTHER ACCRUED LIABILITIES:
A summary of other accrued liabilities follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
($ in thousands)
<S> <C> <C>
Wages, salaries and bonuses $16,251 $22,249
Carrying costs of closed properties 12,407 10,500
Reserve for divestitures 0 10,004
Interest 5,773 5,038
Property taxes 2,993 3,110
Sales tax 2,612 2,132
Utilities 1,996 1,313
Accrued rent 452 537
Other 16,089 15,813
------- -------
$58,573 $70,696
======= =======
</TABLE>
Carrying costs of closed properties represent the estimated future costs
associated with the Company's closed and subleased restaurants which consists
primarily of the net present value of lease subsidies which are mainly comprised
of the excess of future lease payments for which the Company is liable, over
amounts estimated to be received from related subleases.
NOTE 9 - INCOME TAXES:
The Company reported a loss for tax purposes in 1997, 1996 and 1995.
Accordingly, the income tax provisions for each year primarily reflect certain
state, local and foreign taxes. On a tax return basis, the Federal regular
operating loss carryforwards amounted to approximately $203.6 million ($200.6
million of alternative minimum tax operating loss carryforwards) and expire in
2003 through 2013. The Company had approximately $711,000 of tax credit
carryforwards which expire in 2003 and 2004.
Upon consummation of the acquisition of the Company on January 27, 1994,
the Company's net operating loss carryovers and other tax attributes were
reduced significantly for Federal income tax purposes. In addition, because the
consummation of the acquisition of the Company triggered an ownership change of
the Company for Federal income tax purposes, the Company's use of its remaining
net operating loss carryovers for regular and alternative minimum Federal income
tax purposes is subject to an annual limitation in an amount equal to the
product of (i) the long-term tax-exempt rate prevailing on January 27, 1994 and
(ii) the value of the Company's stock, increased to reflect the cancellation of
indebtedness pursuant to the prepackaged joint plan of reorganization of the
Company and REG-M Corp. (but without taking into account contributions to
capital pursuant to the acquisition of the Company). The Company's annual limit
is approximately $5.3 million. The amount of NOL subject to the annual limit is
approximately $22.2 million.
F-17
<PAGE> 57
At December 28, 1997, the Company and its subsidiaries had tax credit
carryforwards of approximately $2.1 million not utilized by W. R. Grace &
Co.-Conn. ("Grace"). In accordance with the 1986 acquisition from Grace, the
Company must reimburse Grace for 75% of the benefit of these tax credits if they
are utilized in future Company tax returns. Further, El Torito Restaurants, Inc.
(a wholly owned subsidiary of the Company) has approximately $12.0 million of
tax depreciation deductions not claimed in Grace tax returns as a result of a
tax sharing agreement. The Company will also reimburse Grace for 75% of any tax
savings generated by these deductions.
Further, as a result of the acquisition of Chi-Chi's, the Company has
net operating loss and credit carryforwards not used by Chi-Chi's of $53.2
million and $6.8 million, respectively. The net operating losses expire
beginning in 2004 through 2009 and the credit carryovers expire in various years
from 1998 through 2009. The acquisition of Chi-Chi's, as well as the 1992
acquisition of a previous franchisee by Chi-Chi's, triggered ownership changes
for Federal income tax purposes which result in separate annual limitations on
the availability of these losses and credits.
A reconciliation of income tax expense to the amount of income tax
benefit that would result from applying the Federal statutory rate (35% for
1997, 1996 and 1995) to loss before income taxes is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
Dec. 28, Dec. 29, Dec. 31,
1997 1996 1995
-------- --------- ---------
($ in thousands)
<S> <C> <C> <C>
Provision (benefit) for income taxes at
statutory rate $(10,879) $ 48,276 $(42,875)
State taxes, net of Federal income tax
benefit 219 249 332
benefit
Foreign taxes 0 92 270
Nondeductible goodwill 490 1,242 3,312
Change in deferred tax asset which is subject
to a full valuation reserve and other 10,679 (48,969) 40,169
-------- -------- --------
$ 509 $ 890 $ 1,208
======== ======== ========
</TABLE>
At December 28, 1997 and December 29, 1996, the Company's deferred tax
asset was $134,717,000 and $124,838,000, respectively, and deferred tax
liability was $17,456,000 and $17,969,000, respectively. The major components of
the Company's net deferred taxes of $117,261,000 at December 28, 1997 and
$106,869,000 at December 29, 1996 are as follows:
F-18
<PAGE> 58
<TABLE>
<CAPTION>
1997 1996
--------- ---------
($ in thousands)
<S> <C> <C>
Depreciation $ (17,456) $ (17,969)
Net operating loss and credit carryforwards 103,909 91,176
Capitalized leases 817 719
Carrying costs and other reserves 5,120 8,787
Self-insurance reserves 12,915 14,700
Straight-line rent 1,811 1,872
Reorganization costs 4,700 4,913
Other 5,445 2,671
--------- ---------
117,261 106,869
Valuation allowance (117,261) (106,869)
--------- ---------
$ 0 $ 0
========= =========
</TABLE>
The increase in the valuation allowance for 1997 resulted primarily from
the normal occurrence of temporary differences and the current year tax loss.
NOTE 10 - BENEFIT PLANS:
The Company maintains certain incentive compensation and related plans
for executives and key operating personnel, including restaurant and field
management. Total expenses for these plans were $4,062,000, $10,374,000 and
$10,151,000 for 1997, 1996 and 1995, respectively.
The Company maintains a savings plan pursuant to Section 401(k) of the
Internal Revenue Code, which allows administrative and clerical employees who
have satisfied the service requirements to defer from 2% to 12% of their pay on
a pre-tax basis. The Company contributes an amount equal to 20% of the first 4%
of compensation that is deferred by the participant. The Company's contributions
under this plan were $156,000, $164,000 and $288,000 in 1997, 1996 and 1995,
respectively. The Company also maintains an unfunded, non-qualified deferred
compensation plan, which was created in 1994 for key executives and other
members of management who were then excluded from participation in the qualified
savings plan. This plan allows participants to defer up to 50% of their salary
on a pre-tax basis. The Company contributes an amount equal to 20% of the first
4% contributed by the employee. The Company's contributions under the
non-qualified deferred compensation plan were $37,000, $38,000 and $67,000 in
1997, 1996 and 1995, respectively. In each plan, a participant's right to
Company contributions vests at a rate of 25% per year of service.
The Company has no defined benefit plans.
NOTE 11 - RELATED PARTY TRANSACTIONS:
Foodmaker, Inc. ("Foodmaker") provided distribution services through May
1997 to a portion of the Company's restaurants, principally those operated under
the Chi-Chi's name. Distribution sales
F-19
<PAGE> 59
to those restaurants for the years ended December 28, 1997, December 29, 1996
and December 31, 1995 aggregated $21,844,000, $63,785,000 and $76,423,000,
respectively. Due to the termination of distribution sales, there were no
accounts payable due to Foodmaker at December 28, 1997. The Company had accounts
payable of $2,301,000 due to Foodmaker at December 29, 1996.
Apollo FRI Partners, L.P. ("Apollo") charged a monthly fee of $100,000
during 1997 and 1996 which Apollo will continue to earn in the future, and
Apollo and Green Equity Investors, L.P. ("GEI") each charged a monthly fee of
$50,000 during 1995 for providing certain management services to the Company. In
November 1995, the management services arrangement with GEI was terminated. For
the years ended December 28, 1997, December 29, 1996 and December 31, 1995, the
Company was charged $1.2 million each year in connection with this arrangement.
The Company had management services fees payable of $3,250,000 and $2,050,000
due to Apollo and GEI at December 28, 1997 and December 29, 1996, respectively.
NOTE 12 - COMMON STOCK:
Certain officers and employees of the Company were granted the right to
purchase up to 40,900 shares of Common Stock (constituting up to 4.1% of the
Common Stock outstanding immediately following such purchases) at $160 per
share, the same per share price paid by Apollo and GEI in January 1994. The
Employee Stock Purchase was consummated on January 27, 1994 with respect to
certain officers (15,625 shares of Common Stock) and on May 19, 1994 and July
31, 1994 with respect to the other participants (22,552 shares of Common Stock).
No more than fifty percent of the purchase price was authorized to be financed
through interest-bearing recourse notes payable to the Company. In July 1996,
the Company canceled all such interest-bearing recourse notes. The Company has
repurchased 8,992 shares of Common Stock due to employee terminations, leaving
28,905 shares currently owned by management stockholders and terminated
employees. The individuals who purchased Common Stock were also granted options
to purchase 20,822 shares of Common Stock in the future at an exercise price
initially set at $160 per share. The Company also granted options to purchase
approximately 30,000 shares of Common Stock to approximately 800 other
employees. All these options expire in 2004 and 2005 and become exercisable at a
rate of 25% on the grant date and 25% on each of the next three anniversaries of
the grant date. Approximately 44,500 options have expired due to terminations.
NOTE 13 - CONTINGENCIES:
The Company is involved in various litigation matters incidental to its
business. The Company does not believe that any of the claims or actions filed
against it will have a material adverse effect upon the consolidated financial
position or results of operations of the Company.
F-20
<PAGE> 60
SCHEDULE II
FAMILY RESTAURANTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
($ in thousands)
<TABLE>
<CAPTION>
Additions
----------------------
Balance at Charged to Charged Balance
beginning costs and to other at end
Description of period expenses accounts Deductions of period
----------- ---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for uncollectible
receivables:
For the year 1997 $ 879 $ 78 $ 300 $ (206)(1) $1,051
For the year 1996 997 0 0 (118)(1) 879
For the year 1995 813 184 0 0 997
</TABLE>
(1) Represents write-off of uncollectible receivables against allowance and
includes transfers to other accounts.
S-1
<PAGE> 1
EXHIBIT 4.f
FRI-MRD CORPORATION
JOINDER AGREEMENT
$14.0 MILLION 15.0% SENIOR DISCOUNT NOTES
DUE JANUARY 24, 2002
This JOINDER AGREEMENT (the "Agreement") is entered into as of
January 14, 1998, by and among FRI-MRD Corporation, a Delaware corporation (the
"Company"), and those persons whose names appear on Schedule I attached hereto
(collectively, the "Purchasers"). All capitalized terms not herein defined shall
have the meanings ascribed to them in the FRI-MRD Corporation Note Agreement,
dated August 12, 1997 (the "Note Agreement").
WHEREAS, the Company has authorized the issue and sale of up to
$75,000,000 aggregate principal amount of its 15.0% Senior Discount Notes due
January 24, 2002 (the "Notes") to be dated the date of issue; and
WHEREAS, pursuant to the Note Agreement, on August 12, 1997, the
Company issued Notes in an aggregate principal amount of $61.0 million, leaving
$14.0 million available for issuance thereunder.
NOW, THEREFORE, the Company agrees with each Purchaser as
follows:
1. Purchase and Sale of Securities. Subject to the terms and
conditions of the Note Agreement, the Company agrees to issue and sell to each
Purchaser, and each Purchaser agrees to purchase from the Company, the aggregate
principal amount of Additional Notes, set forth under such Purchaser's name on
Schedule I attached hereto (the "Additional Notes"). Each Additional Note will
be issued at a substantial discount from its principal amount, for a price equal
to its Purchase Price on the date of purchase as set forth on Schedule I
attached hereto. The obligations of the Purchasers hereunder shall be the
several obligations of each Purchaser to purchase that amount of Additional
Notes set forth under such Purchaser's name on Schedule I attached hereto and
shall not be the joint obligation of any other Purchaser hereunder. The Company
and the Purchasers hereby agree that the Additional Notes will be deemed to be
issued under, subject to and governed by, all terms and conditions of, and that
each of the Purchasers will be deemed to be Purchasers under, the Note
Agreement.
2. Representations of the Purchasers. Each Purchaser hereby
represents and warrants that all representations set forth in Section 3.2 of the
Note Agreement as they apply to the issuance and purchase of the Additional
Notes are true and correct as of the date
<PAGE> 2
hereof and are incorporated herein by reference with the same force and effect
as though herein set forth in full.
3. Representations of the Company. The Company hereby represents
and warrants that the Company and its Subsidiaries have performed or complied in
all material respects with all covenants contained in the Note Agreement and
that certain Side Letter, dated as of August 12, 1997 from the Company to
MacKay-Shields Financial Corporation, that are required to be performed or
complied with by them at or prior to the date hereof.
4. Legends. All certificates evidencing the Additional Notes
purchased and sold hereunder shall bear the following legends:
FOR PURPOSES OF SECTIONS 1272 ET SEQ. OF THE INTERNAL
REVENUE CODE OF 1986, AS AMENDED, THE ISSUE PRICE WITH RESPECT TO EACH $1,000.00
OF PRINCIPAL AT MATURITY OF THIS NOTE IS $830.00, THE AMOUNT OF ORIGINAL
DISCOUNT IS $170.00, THE ISSUE DATE IS JANUARY 14 , 1998, AND THE YIELD TO
MATURITY IS 13.919%.
<PAGE> 3
The execution hereof by you shall constitute a contract between
us for the uses and purposes hereinabove set forth, and this Agreement may be
executed in any number of counterparts, each executed counterpart constituting
an original but all together only one agreement.
FRI-MRD CORPORATION, as Company
By: /s/ R.T. Trebing, Jr.
--------------------------------
Name: R.T. Trebing, Jr.
Title: President
[signature pages continued on next page]
<PAGE> 4
MELLON BANK, N.A., solely in its
capacity as Trustee for the MASTER
TRUST for the EMPLOYEE'S RETIREMENT
FUND OF THE CITY OF FORT WORTH, as
directed by MacKay-Shields Financial
Corporation (as Investment Advisor),
and not in its individual capacity
By: /s/ Carole Bruno
-----------------------------------
Name: Carole Bruno
Title: Authorized Signatory
[signature pages continued on next page]
<PAGE> 5
HIGHBRIDGE CAPITAL CORPORATION
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ Jeffry B. Platt
------------------------------------
Name: Jeffry B. Platt
Title: Director
[signature pages continued on next page]
<PAGE> 6
THE MAINSTAY FUNDS, ON BEHALF OF
HIGH YIELD CORPORATE BOND FUND
SERIES
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ Jeffry B. Platt
--------------------------------------
Name: Jeffry B. Platt
Title: Director
[signature pages continued on next page]
<PAGE> 7
LOCAL 1199 HEALTHCARE
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ Jeffry B. Platt
------------------------------------
Name: Jeffry B. Platt
Title: Director
[signature pages continued on next page]
<PAGE> 8
THE MAINSTAY FUNDS, ON BEHALF OF
ITS STRATEGIC VALUE FUND SERIES
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ Jeffry B. Platt
-----------------------------------
Name: Jeffry B. Platt
Title: Director
<PAGE> 9
SCHEDULE I
TO
JOINDER AGREEMENT
Purchaser: EMPLOYEE'S RETIREMENT FUND OF THE CITY OF FORT WORTH
1. Principal Amount.
In U.S. Dollars: $1,100,000
The Purchase Price of the Note will be
$913,000 of cash
2. In the case of payments on account of the Notes:
By wire transfer of Federal or other immediately available funds
(identifying each payment as to issuer, security and principal or
interest) to:
ABA # 011-001-234/BOSTON SAFE DEP.
FEDERAL RESERVE BANK OF BOSTON
FFC ACCT NAME: CITY OF FT. WORTH
DDA ACCT # 162299
FFC. # ACCT CFWF8542902
3. All communications shall be delivered or mailed to:
MacKay-Shields Financial Corporation
9 West 57th Street
New York, New York 10019
Attn: Steven Tananbaum
Fax: (212) 758-4735
with a copy to:
Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue
New York, New York 10176
Attn: Fredric A. Kleinberg, Esq.
Fax: (212) 986-8866
4. Tax I.D. #: 75-6022714
<PAGE> 10
Purchaser: HIGHBRIDGE CAPITAL CORPORATION
1. Principal Amount.
In U.S. Dollars: $610,000
The Purchase Price of the Note will be
$506,300 of cash
2. In the case of payments on account of the Notes:
By wire transfer of Federal or other immediately available funds
(identifying each payment as to issuer, security and principal or
interest) to:
CITIBANK
ABA # 021-000-089
BEAR STEARNS SECURITIES INC.
ACCT # 09253186
ACCT NAME: HIGHBRIDGE CAPITAL CORPORATION
ACCT # 101-44079-2-6
3. All communications shall be delivered or mailed to:
MacKay-Shields Financial Corporation
9 West 57th Street
New York, New York 10019
Attn: Steven Tananbaum
Fax: (212) 758-4735
with a copy to:
Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue
New York, New York 10176
Attn: Fredric A. Kleinberg, Esq.
Fax: (212) 986-8866
4. Tax I.D. #: Bear Stearns Securities Corp.-Foreign (no tax i.d. #).
<PAGE> 11
Purchaser: THE MAINSTAY FUNDS, ON BEHALF OF ITS HIGH YIELD
CORPORATE BOND FUND SERIES
1. Principal Amount.
In U.S. Dollars: $8,140,000
The Purchase Price of the Note will be
$6,756,200 of cash
2. In the case of payments on account of the Notes:
By wire transfer of Federal or other immediately available funds
(identifying each payment as to issuer, security and principal or
interest) to:
ABA # 011000028
STATE STREET BANK AND TRUST COMPANY
BOSTON, MASS 02101
FOR CREDIT TO:
ACCT NAME: MAINSTAY HIGH YIELD CORPORATE BOND FUND
DDA ACCT # 4266 0761
ACCT # SN04
3. All communications shall be delivered or mailed to:
MacKay-Shields Financial Corporation
9 West 57th Street
New York, New York 10019
Attn: Steven Tananbaum
Fax: (212) 758-4735
with a copy to:
Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue
New York, New York 10176
Attn: Fredric A. Kleinberg, Esq.
Fax: (212) 986-8866
4. Tax I.D. #: 04-2910780
<PAGE> 12
Purchaser: THE 1199 HEALTH CARE EMPLOYEES PENSION FUND
1. Principal Amount.
In U.S. Dollars: $3,900,000
The Purchase Price of the Note will be
$3,237,000 of cash
2. In the case of payments on account of the Notes:
By wire transfer of Federal or other immediately available funds
(identifying each payment as to issuer, security and principal or
interest) to:
ABA # 071-000-152
NORTHERN TRUST/CHGO TRUST
FOR CREDIT TO:
ACCT # 5186061000
ACCT NAME: LOCAL 1199 HEALTHCARE
ACCT # 26-44894
3. All communications shall be delivered or mailed to:
MacKay-Shields Financial Corporation
9 West 57th Street
New York, New York 10019
Attn: Steven Tananbaum
Fax: (212) 758-4735
with a copy to:
Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue
New York, New York 10176
Attn: Fredric A. Kleinberg, Esq.
Fax: (212) 986-8866
4. Tax I.D. #: 74-6036541
<PAGE> 13
Purchaser: THE MAINSTAY FUNDS, ON BEHALF OF ITS STRATEGIC VALUE
FUND SERIES
1. Principal Amount.
In U.S. Dollars: $250,000
The Purchase Price of the Note will be
$207,500 of cash
2. In the case of payments on account of the Notes:
By wire transfer of Federal or other immediately available funds
(identifying each payment as to issuer, security and principal or
interest) to:
ABA # 021000018
BANK OF NEW YORK/CUST.
ACCT # GLA 111612
FOR CREDIT TO:
ACCT NAME: MAINSTAY STRATEGIC VALUE FUND
ACCT # 267446
3. All communications shall be delivered or mailed to:
MacKay-Shields Financial Corporation
9 West 57th Street
New York, New York 10019
Attn: Steven Tananbaum
Fax: (212) 758-4735
with a copy to:
Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue
New York, New York 10176
Attn: Fredric A. Kleinberg, Esq.
Fax: (212) 986-8866
4. Tax I.D. #: 133924140
<PAGE> 1
EXHIBIT 10.bb
DISTRIBUTION SERVICE AGREEMENT
THIS DISTRIBUTION SERVICE AGREEMENT ("AGREEMENT") is made as of the 1st
day of November, 1997, by and between El Torito Restaurants, Inc., a Delaware
corporation (hereinafter "EL TORITO"), and The SYGMA Network, Inc., a Delaware
corporation (hereinafter "SYGMA").
RECITALS
A. El Torito is the owner, licensor, operator and manager of El
Torito's Mexican Restaurants (the "Restaurants"). A current list
of the Restaurants is attached as Exhibit A.
B. El Torito desires to designate SYGMA as its primary distributor
for certain products to all of the Restaurants within the
geographic service areas (the "SERVICE AREA") designated by the
dark shaded areas in Exhibit B.
C. SYGMA will carry and distribute certain products, as determined
by El Torito, pursuant to the terms of this Agreement.
In consideration of the above recitals and the mutual covenants and agreements
set forth herein, the receipt and sufficiency of which are hereby acknowledged,
the parties agree as follows:
I. BASIC AGREEMENT
El Torito will purchase from SYGMA and SYGMA will purchase, warehouse
and distribute for and to sell to El Torito, substantially all of the
needs of the Restaurants within the Service Area and/or on Exhibit A for
all products (the "Products") in the following categories: dairy, frozen
and refrigerated items, poultry, meat, seafood, canned and dry goods,
beverages, frozen bakery, soft drink syrup products, paper and
disposables, janitorial supplies to include cleaning chemicals and other
non-food products requiring frequent replacement. An initial product
listing is attached as Exhibit C. As El Torito's primary distributor,
SYGMA will be entitled to substantially all of the product requirements
of the Restaurants within the Service Area and/or on Exhibit A. SYGMA
will not sell or distribute any Proprietary Products (hereinafter
defined) to customers other than the Restaurants and El Torito's
Franchisees (hereinafter defined) without the prior written approval of
the Vice President, Supply Chain Management of Family Restaurants, Inc.
("FRI"), the sole stockholder of El Torito. "PROPRIETARY PRODUCTS"
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<PAGE> 2
means Products which are labeled with the trademarks or proprietary
logos of El Torito or are manufactured expressly for El Torito at El
Torito's direction and specifications.
II. PRODUCT DESIGNATION
A. Product Selection - El Torito shall have the right to designate
the brands and/or suppliers of Products it requires to have
SYGMA supply. [*]
B. Inventory Management - SYGMA shall use reasonable, good-faith
efforts to utilize proper inventory management for a continuous
supply of Products while minimizing the risk of inventory
obsolescence. SYGMA will provide El Torito with a monthly status
report of slow-moving and obsolete Products and those Products
approaching the expiration of their shelf life. A slow moving
Product is defined as having less than 10 cases movement in the
last 13 weeks. An obsolete item is defined as having zero case
movement in the last 60 days. Within two weeks of its receipt of
the monthly status report of slow-moving Products, obsolete
Products and Products approaching the expiration of their shelf
life, El Torito and SYGMA agree to review all products whose
risk of obsolescence is apparent. Joint resolutions to assign
and reduce obsolete inventory exposure will be initiated within
forty-five (45) days after the expiration of the two week period
referred to in the preceding sentence.
El Torito will communicate with SYGMA regarding anticipated menu
or Product mix changes to help avoid obsolete inventory issues
and will assist SYGMA in removal or disposition of slow-moving
and obsolete Products and those Products approaching the
expiration of their shelf life. If SYGMA has been authorized to
purchase and then purchases the Product in reasonable
anticipation of its sale to El Torito and the volume of
purchases of the Product declines substantially to the point
where the risk of obsolescence is apparent, El Torito will
either: 1) assume financial responsibility for the cost to
return any unsold inventory of such Product to the supplier;
unless the inventory obsolescence or a portion thereof was
caused by SYGMA in which case SYGMA will be responsible for the
cost of any unsold inventory of such Products; or 2) designate a
specific Restaurant or Restaurants to purchase and use the
subject Product inventory within a reasonable period of time; or
3) implement other disposal alternatives, to be mutually
determined, inclusive of moving such Product to SYSCO Central
Warehouse; or 4) if such Product is not sold or otherwise
disposed of in accordance with this paragraph IIB, and after
- ----------
* Confidential material in this section has been omitted pursuant to a request
for confidential treatment; the omitted material has been filed separately with
the SEC.
2
<PAGE> 3
the above alternatives have been exhausted, then SYGMA may
invoice El Torito for such product and El Torito shall, within 30
days after receipt of such invoice, pay SYGMA the Cost (herein
defined) of any unsold inventory of such Product. SYGMA will make
such Product available for pick up by El Torito or its designee.
If Product is designated to a third party, other than the
original supplier, SYGMA may require payment at the time of
pick-up.
Notwithstanding anything to the contrary in this Agreement, El
Torito will not be responsible for SYGMA orders of discontinued
Product made after El Torito has given SYGMA written notice of
discontinuance of such Product. SYGMA will use reasonable good
faith efforts to cancel or return vendor Product on order or in
transit to reduce El Torito's liability in the event of
discontinuation of such Product.
C. Approved Items by Brand Name - Certain Products are brand name
items approved by El Torito and these items shall be inventoried
by SYGMA to service El Torito. These Products do not bear any El
Torito name or logo. It is understood that these Products may
bear the brand name of the manufacturer or a brand name owned by
the manufacturer or distributor. El Torito has no objection to
these Products being sold to other customers and, in fact,
encourages such sale in hopes of a reduction in both SYGMA's and
El Torito's cost. Such other sales shall not, however,
jeopardize El Torito pricing hereunder nor include Proprietary
Products.
III. SERVICE
A. Delivery Frequency - SYGMA shall determine order and delivery
schedules and SYGMA will make deliveries to each Restaurant
according to the required frequency noted on Exhibit A. Unless
otherwise mutually agreed between El Torito and SYGMA, the
Restaurants listed on Exhibit A shall receive the identified
deliveries per week. However, no changes to Exhibit A will be
authorized without the approval of the Vice President of Supply
Chain Management of FRI. Restaurants outside the Service Area
may be added to Exhibit A upon mutual agreement by El Torito and
SYGMA which approval shall not be unreasonably denied or
declined.
[*]
- ----------
* Confidential material in this section has been omitted pursuant to a request
for confidential treatment; the omitted material has been filed separately with
the SEC.
3
<PAGE> 4
During a 45 day period after the program start-up date listed in
Paragraph III.I., Restaurants being serviced by SYGMA shall
receive reasonable and necessary additional deliveries at no
charge.
After the opening of a new Restaurant within the Service Area
and/or on Exhibit A, a 30 day grace period will be granted where
additional delivery charges will be waived for that particular
Restaurant for reasonable and necessary additional deliveries.
B. Service Area - Pursuant to the terms of this Agreement, SYGMA
shall deliver Products to all future Restaurants located in the
Service Area.
C. Scheduling; Access - SYGMA may schedule such deliveries on any
day of the week and from 1:30 p.m. - 5:30 p.m. and 7:30 p.m. -
11:30 a.m. SYGMA will maintain [*] or higher on-time delivery
performance which performance shall be either earlier or within
one (1) hour later of the stated delivery time. It is understood
that either El Torito or SYGMA may have particular scheduling
needs for specific Restaurants where unusual circumstances may
exist, and each party agrees to address such needs in good
faith. Should SYGMA drivers arrive at the Restaurant more than
one hour prior to the scheduled delivery time, it is the
prerogative of the Restaurant manager to accept the delivery or
instruct the driver to return within the agreed upon delivery
windows, as defined as plus or minus one hour from the scheduled
delivery times.
Order Balancing - It is understood that Restaurants receiving
two deliveries per week will use reasonable, good-faith efforts
to balance the orders such that each delivery consists of
approximately the same number of cases.
E. Product Unloading at Restaurants - SYGMA delivery drivers will
bring all Products into those Restaurants where it is possible
to safely roll a two-wheel cart. Further, for those Restaurants
where it is possible to roll a two-wheel cart, SYGMA delivery
drivers will separate and deliver the order to the Restaurants'
freezer, cooler and storeroom. If it is not possible to roll a
two-wheel cart into the refrigerated, frozen or dry area of the
Restaurant, SYGMA delivery drivers will wheel the Products to
another designated area of the Restaurant as determined by El
Torito. El Torito will have personnel available to check and
sign for the order at the time the delivery is being made for
all but unattended deliveries.
- ----------
* Confidential material in this section has been omitted pursuant to a request
for confidential treatment; the omitted material has been filed separately with
the SEC.
4
<PAGE> 5
F. Order Accuracy - SYGMA will maintain a [*] or higher average
fill-rate performance of cases of Product delivered accurately
according to the Restaurant's needs, as calculated on an [*]. El
Torito and SYGMA agree to designate certain Products in Exhibit
D which shall be considered "essential" Products. SYGMA will
give special attention to the inventory management of essential
Products and use good faith efforts to ensure these items are
in-stock at all times. Should El Torito, due to a SYGMA delivery
error, purchase Product on a local basis, SYGMA will reimburse
El Torito for the difference between the Sell Price of that
Product and the price paid by El Torito for such Product; and
for the reasonable cost of the labor involved for a El Torito
employee to leave the Restaurants to purchase a Product on a
local basis.
G. Recovery for Ordering Errors - In situations where Product is
out-of-stock or missing as the result of an order error, SYGMA
will use its best good faith efforts to provide Product to the
Restaurants as soon as possible. Should this effort require
extra expense, it will be the responsibility of the erring party
to pay those expenses. In the event of a Restaurant ordering
error, SYGMA will advise the Restaurant of the estimated amount
of this special charge. The Restaurant manager has the authority
to accept or decline the delivery based on the special charge,
communicated at the time the special order is requested. If the
Restaurant manager places the order and that order is delivered,
the Restaurant is responsible for the special charge.
H. Route Change Notice - SYGMA will provide Restaurant managers not
less than two weeks written notice, with copies to FRI's Vice
President, Supply Chain Management, of any significant route
change. The notice will include a brief statement for the reason
for the route change. SYGMA will provide FRI's Vice President of
Supply Chain Management not less than three weeks written notice
of any significant route change.
I. Commencement of Service - SYGMA will begin servicing El Torito's
Restaurants from its SYGMA-Los Angeles distribution center in
Rancho Cucamonga, California on November 1, 1997.
J. Special Shipments - SYGMA will, on behalf of El Torito or the El
Torito's Franchisees and at each of their expense and risk,
arrange C.O.D. and freight-collect, common carrier shipments of
Products from the SYGMA distribution
- ----------
* Confidential material in this section has been omitted pursuant to a request
for confidential treatment; the omitted material has been filed separately with
the SEC.
5
<PAGE> 6
center direct to (i) Restaurants owned by franchisees of El
Torito (the "EL TORITO FRANCHISEES") that are domestic and (ii)
Restaurants owned by El Torito that are outside the described
Service Area, upon El Torito communicating such orders to SYGMA.
For this service, SYGMA will bill El Torito or such El Torito
Franchisees, as applicable, for the Cost of the Product plus [*]
per case mark-up.
SYGMA will, on behalf of the El Torito's Franchisees and at
their expense and risk, arrange shipments of Products direct
from the SYGMA distribution center to El Torito Franchisees that
are international. For this service, SYGMA will bill
international El Torito Franchisees for the Cost of the Product
plus [*] per case mark-up. Such El Torito Franchisees are
responsible for all freight costs, customs, brokerage,
clearance, tariffs costs and will be asked to pay for same at
the time of shipment.
Should SYGMA be required to inventory special product for export
purposes only an additional fee will be charged. This fee will
be determined on a case by case basis.
K. Expansion of Service - SYGMA will provide distribution service
for El Torito's expansion in the service area of another SYGMA
distribution center, at El Torito's request, when El Torito has
twenty (20) Restaurants open in such area and once mark-ups have
been agreed upon by El Torito and SYGMA. In the event no SYGMA
distribution center is within the new service area, El Torito
may select a SYSCO operating company within the service area.
Notwithstanding the above, SYGMA will evaluate the feasibility
of service to fewer than twenty (20) Restaurants at any time
during the term of this Agreement.
L. Information Services - Electronic Communication - SYGMA will, in
a timely manner, electronically transmit data in SYGMA standard
formats which will permit El Torito to design specialty reports
and to facilitate automation of input to El Torito's accounts
payable and purchasing systems. [*] SYGMA's and El Torito's
Information Services departments will consult to determine
mutually agreed upon transmission protocols, timing, and any
customized requirements. SYGMA will provide non standard
elements of information if that data is available. In the event
of a communications line failure, SYGMA will provide data via
disk or a mutually agreed upon magnetic media, within three days
of request via overnight service.
- ----------
* Confidential material in this section has been omitted pursuant to a request
for confidential treatment; the omitted material has been filed separately with
the SEC.
6
<PAGE> 7
Information Services - Reports - Prior to the time El Torito
implements reporting systems using SYGMA-supplied electronic
data, calendar month thirteen period usage reports by item will
be made available. SYGMA order accuracy and on-time delivery
performance reports will be mailed on a regular monthly basis.
Administrative Reports - SYGMA will provide on a monthly basis
the following reports: the number of special deliveries by
Restaurant, ordering balancing and compliance, cases ordered per
Restaurant, and gross margin per Restaurant per week.
M. Restaurant Service - In the event of a conflict between SYGMA
and Restaurant operators arising out of service under this
Agreement, the resolution will be negotiated by FRI's Vice
President of Supply Chain Management and SYGMA's Vice
President/General Manager of the delivering distribution center.
N. El Torito Calendar - Electronic transmissions, order guides and
price lists will be consistent with El Torito's fiscal calendar
attached as Exhibit E.
O. Unattended Deliveries - El Torito agrees to provide keys and
security codes for night deliveries where necessary. SYGMA will
be responsible for expenses incurred by El Torito to re-key door
locks when caused by SYGMA to do so. In the event SYGMA is not
notified five (5) days in advance of changes to the Restaurants
locks and not provided the appropriate keys and alarm codes,
SYGMA may elect to charge El Torito for the expenses associated
in route delays or re-deliveries. El Torito and its employees,
officers and directors are not liable for injury, illness and/or
death to SYGMA drivers arising from criminal events during
delivery (i.e. robberies, attacks, kidnaping or hostage
situations), except to the extent same is caused by the gross
negligence or willful misconduct of El Torito, its employees,
officers or directors.
P. Designated SYGMA Distribution Center - It is understood that
SYGMA will perform the terms of this Agreement through its
SYGMA-Los Angeles distribution center located in Rancho
Cucamonga, California.
IV. PRICING
A. Definition of Cost - The price to El Torito for all Products
sold under this Agreement (the "SELL PRICE") will be calculated
on the basis of Cost. "COST" is defined as the cost of the
Product as shown on the invoice to the delivering SYGMA
distribution center, plus applicable freight. Invoices used to
determine Cost will be the invoice issued to the delivering
SYGMA distribution center by
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<PAGE> 8
the vendor or by the Merchandising Services Department of Sysco
Corporation ("SYSCO"). Applicable freight, in those cases where
the invoice cost to the delivering SYGMA distribution center is
not a delivered cost, means that a reasonable freight charge for
delivering Products to the distribution center has been added.
Freight charges may include common or contract carrier charges
by the Product supplier or a carrier, or charges billed by
Alfmark, SYSCO's freight management service. Applicable freight
for any Product will not exceed the rate charged by nationally
recognized carriers operating in the same market for the same
type of freight service. Cost is not reduced by cash discounts
for prompt payment available to any SYGMA distribution center.
B. Calculation of Sell Price - The Sell Price of each Product sold
under this Agreement will equal [*]:
DISTRIBUTION CENTER PER CASE MARK-UP
[*] [*]
1. For example, a Product with a Cost of $10.00 per case and
a mark-up of [*] per case will have a Sell Price
calculated as follows: [*].
2. For Products with a temporary promotional allowance, the
following formula will apply:
A Product with a Cost of $10.00 and a promotional
allowance of $1.00 will have a Sell Price calculated as
follows:
[*]
3. Soft drink syrup products will be priced according to the
appropriate agency billing program.
4. SYGMA will provide additional deliveries to Restaurants at
El Torito's request. The charges for additional regular
scheduled deliveries will be according to the following:
- ----------
* Confidential material in this section has been omitted pursuant to a request
for confidential treatment; the omitted material has been filed separately with
the SEC.
8
<PAGE> 9
Mileage from Additional Fee
Distribution Center Not to Exceed
[*] [*]
SYGMA will also distribute to new locations outside the
boundaries of this Agreement, provided that SYGMA and El
Torito have negotiated in good faith the additional
charges required for this service.
5. The additional delivery fees associated with a third
delivery for those Restaurants receiving two deliveries
per week will be waived as long as the average gross
profit per delivery for all Restaurants is equal to or
greater than [*].
C. Purchase Requirements - [*]
D. Merchandising Services - SYGMA and Sysco Corporation perform
value-added services for suppliers of SYSCO(R)brand and other
products over and above procurement activities typically
provided. These value-added services include national marketing,
freight management, consolidated warehousing, quality assurance
and performance-based product marketing. SYGMA and Sysco
Corporation may recover the costs of providing these services
and may also be compensated for these services and consider this
compensation to be earned income. Receipt of such cost recovery
or earned income does not affect Cost and does not diminish
SYGMA's commitment to provide competitive prices to its
customers. Exhibit F briefly describes some of these services
provided to suppliers.
E. Freight Charges - [*]
- ----------
* Confidential material in this section has been omitted pursuant to a request
for confidential treatment; the omitted material has been filed separately with
the SEC.
9
<PAGE> 10
F. Inventory Management - SYGMA will typically purchase product for
El Torito in quantities sufficient to provide to SYGMA the
lowest cost bracket available from a particular supplier for
each Product, as long as the quantity required to be purchased
to be eligible for such cost bracket does not exceed three weeks
normal usage for any one item. In those cases where SYGMA, at
the request of El Torito, purchases any Product in such
quantities that exceeds three weeks normal usage, El Torito
agrees, if requested by SYGMA, to compensate SYGMA for any
additional costs incurred in carrying the additional inventory
of such Product.
G. Order Guides; Ordering - SYGMA will provide El Torito with order
guides, weekly price lists, and weekly price change notices or,
if preferred by El Torito, will provide SYGMA's standard SYGNET
software to facilitate order placement through El Torito
personal computer equipment. Orders will be placed directly by
Restaurants ordering by item number as specified in the order
guides or through SYGNET. Only El Torito approved items will
appear on order guides and there will be no other changes to the
order guides without El Torito approval.
H. Intentionally Omitted.
I. Cost Verification - El Torito has the right, once annually, to
verify the Cost for purchases made under this Agreement. SYGMA
will furnish verification of Costs for the Products to be price
verified, subject to the following limitations:
1. Date, time and place of Cost verification must be
mutually agreed;
2. Ten (10) working days' notice must be provided to SYGMA;
and
3. The period for which pricing is to be verified shall be
limited to the preceding twelve (12) months.
4. When price verification shows, to the satisfaction of
both parties, a discrepancy between the agreed Sell
Price and the actual Sell Price, the appropriate party
will reimburse the other party. In the event of a net
undercharge, El Torito will deliver to SYGMA a check for
the difference within five (5) working days. If El
Torito gives SYGMA written notice of what El Torito
believes to be a net overcharge, SYGMA shall, within
five (5) business days, issue a check to El Torito. With
regard to any disputed net overcharge or undercharge,
the parties shall continue to negotiate in good faith,
the proper amount (if any) to be reimbursed to El Torito
or SYGMA including interest thereon. If net overcharges
exceed .5% of purchases during any six month period,
SYGMA shall reimburse El Torito for all reasonable costs
incurred in connection with said price verification.
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<PAGE> 11
Any and all information examined by El Torito shall be held in
strict confidence and not disclosed to any person or entity
except those employees of El Torito with
a need to know such information and who are notified by El
Torito to keep such information confidential.
J. Issuance of Price List - SYGMA's price list will be issued once
per week, effective on Sunday. On the preceding Thursday, a
notice of price changes will be faxed to the Vice-President,
Purchasing & Distribution of FRI.
V. PAYMENT TERMS
A. 1. [* Two pages deleted.]
5. El Torito will complete, execute, and deliver to SYGMA a New
Account Form, in the form of Exhibit G, attached hereto, which
will be provided by El Torito to SYGMA before this Agreement
becomes binding upon SYGMA. El Torito will also deliver
completed resale sales tax exemption certificates to SYGMA, for
all jurisdictions that would require these, or where they are
reasonably deemed to be necessary by SYGMA. El Torito
understands and agrees that it is solely responsible for payment
of any sales and use taxes that any taxing authority deems to be
due, based on purchases by El Torito from SYGMA.
SYGMA will charge and collect appropriate sales taxes where
authorized to do so on El Torito's behalf. The responsibility of
payment of these taxes is solely that of El Torito.
B. Delinquency Charge - If any amount due SYGMA is not paid in
accordance with this Agreement, a delinquency charge shall be
added to the sum due, which charge shall equal the amount
obtained by multiplying the delinquent balance by the lesser of
(a) one (1%) per month, or (b) the maximum lawful rate permitted
to be charged under applicable law.
C. Guaranty - In consideration of the sale to the Restaurants by
SYGMA hereunder and other good and valuable consideration, the
sufficiency of which is hereby acknowledged, FRI hereby
covenants and agrees as follows: FRI guarantees to SYGMA the
prompt payment of any obligation to SYGMA of any subsidiary or
affiliated entity of FRI, including without limitation El
Torito, but excluding El Torito's franchisees, arising out of
deliveries made pursuant to this Agreement. FRI further agrees
to pay on demand any such sum to SYGMA whenever any
- ----------
* Confidential material in this section has been omitted pursuant to a request
for confidential treatment; the omitted material has been filed separately with
the SEC.
11
<PAGE> 12
such subsidiary or affiliated entity of FRI fails to pay the
same when due. It is understood that this guaranty is an
absolute, continuing and irrevocable guaranty for payments due
under this Agreement. FRI expressly waives presentment, demand,
protest, notice of protest, dishonor, diligence, notice of
default or nonpayment, notice of acceptance of this guaranty,
notice of extending of any guaranteed indebtedness already or
hereafter contracted by any such subsidiary or affiliated entity
of FRI or notice of any modification or renewal of any payments
hereby guaranteed.
D. Financial Reporting and Credit - FRI will forward to SYGMA FRI's
consolidated unaudited quarterly financial statements within
fifty (50) days after the end of each quarter. Within
ninety-five (95) days after each fiscal year end, FRI will
forward to SYGMA, FRI's audited, consolidated financial
statements for such fiscal year consisting of an income
statement, balance sheet and statement of cash flow.
E. Financial Information - El Torito shall notify SYGMA in writing
within three business days after any change of controlling
ownership of El Torito or FRI. El Torito warrants to SYGMA that
all financial information provided to SYGMA for the purpose of
obtaining and continuing credit is true, correct and complete in
all material respects, and El Torito authorizes SYGMA to
investigate all references furnished pertaining to El Torito
credit and financial responsibility.
VI. FRANCHISEE PARTICIPATION
SYGMA shall extend to any present or future El Torito Franchisees the
same or similar terms and conditions for distribution of Products to
Restaurants in the Service Area as the terms and conditions of this
Agreement, provided each El Torito Franchisee meets SYGMA's credit
standards and enters into and performs its obligations under an
agreement with SYGMA satisfactory to SYGMA in its sole discretion. At
SYGMA's reasonable election, each El Torito Franchisee will provide to
SYGMA either a standby letter of credit in an amount to be determined by
SYGMA or personal guarantees of the individuals involved with such El
Torito Franchisee. Notwithstanding the above, SYGMA may alter the
payment and other terms (but not mark-ups or delivery schedules) with
any El Torito Franchisee from the terms set forth in this Agreement if
SYGMA, in its sole discretion, determines that the El Torito
Franchisees's financial condition or credit history does not merit the
terms extended to El Torito under this Agreement. Unless otherwise
agreed by the parties in writing, El Torito shall not be liable to SYGMA
for payment obligations of its El Torito Franchisees. El Torito and FRI
will be notified of any action SYGMA has taken against a El Torito
Franchisee as a result of any failure by the El Torito Franchisee to
comply with its agreement with SYGMA. SYGMA will
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<PAGE> 13
be notified of any action El Torito and FRI have taken against a El
Torito Franchisee as a result of any failure by the El Torito Franchisee
to comply with its agreement with El Torito or FRI.
VII. INDEMNIFICATION AGAINST FRANCHISEES
El Torito and/or FRI is a franchisor and permits distribution of
Products to El Torito Franchisees. If for any reason El Torito and SYGMA
cease doing business and El Torito or FRI directs SYGMA to cease
distribution or sales of Proprietary Products to one or more of the El
Torito Franchisees, El Torito will defend, indemnify and hold harmless
SYGMA from and against any and all losses, damages or claims by any such
El Torito Franchisee which may arise from SYGMA ceasing further sales to
such Franchisee.
VIII. SPECIAL PRODUCT INDEMNITY
SYGMA's policy is that all suppliers provide indemnity agreements and
insurance coverage for products purchased by SYGMA. In order to protect
SYGMA when it stocks Proprietary Products or special order items at El
Torito's request and the supplier of such items will not provide an
indemnity and/or insurance coverage acceptable to SYGMA, El Torito will
defend, indemnify and hold harmless SYGMA and its employees, officers
and directors from all actions, claims and proceedings, and any
judgments, damages and expenses resulting therefrom, brought by any
person or entity for injury, illness and/or death or for damage to
property in either case arising out of the delivery, sale, resale, use
or consumption of any Proprietary Product or special order item except
to the extent such claims are caused by the negligence or misconduct of
SYGMA, its agents or employees.
IX. INDEMNIFICATION
SYGMA agrees to indemnify, defend, and save harmless El Torito, its
officers, directors, agents, and employees, parent companies and
subsidiaries (collectively "INDEMNIFIED PARTIES") from and against any
and all claims, losses, damages, liability, or liens arising out of
injury to or death of persons (including, but not limited to any
employee of Indemnified Party), or loss of or damage to property,
resulting directly from (i) the negligence of SYGMA and its employees or
(ii) from the violation by SYGMA of copyrights or trademarks of El
Torito arising out of the publication, translation, reproduction,
delivery, performance, use or disposition of any data furnished under
this Agreement, except to the extent that such loss, damage, injury,
liability or claim is the result of the negligence or willful misconduct
of any Indemnified Party. The right of the Indemnified Parties to
indemnification by SYGMA under the foregoing shall be independent of the
right of the Indemnified Parties to the insurance to be provided
pursuant to this Agreement. Such indemnification shall include all costs
of suit and reasonable attorney's fees incurred in defending against, or
negotiating settlement of any
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<PAGE> 14
claim or suit, but only if the Indemnified Party provides SYGMA with
prompt written notice of the initiation of any claim or lawsuit seeking
damages against the Indemnified Party and the opportunity to assume the
defense thereof.
X. COMPLIANCE WITH EL TORITO DISTRIBUTOR QUALITY PROGRAM
SYGMA agrees to comply with El Torito's Distributor Quality Program as
referenced in Exhibit H.
XI. SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon and inure to the benefit of the
successors and assigns of the parties hereto; provided, however, that
neither party may assign this Agreement without the prior written
consent of the other party which approval shall not be unreasonably
withheld or delayed.
XII. NOTICES
All notices required or permitted to be given hereunder shall be in
writing and sent by facsimile (to be followed by any of the following)
and personal delivery, overnight delivery service or United States
registered or certified mail, postage prepaid, return receipt requested,
addressed to the parties as follows:
SYGMA: The SYGMA Network
7125 West Jefferson Avenue #400
Lakewood, CO 80235
Attention: Gregory K. Marshall
Chairman and CEO
Facsimile: (303) 988-4057
El Torito Restaurants, Inc.:
El Torito Restaurants, Inc.
c/o FRI Purchasing Department
18831 Von Karman Avenue
Irvine, CA 92612
Attn: David R. Parsley, C.P.M.
Vice President of Supply Chain Management
Facsimile: (714) 757-8054
With copies to:
Family Restaurants, Inc.
18831 Von Karman Avenue
Irvine, CA 92612
Attn: Todd Doyle
Vice President, General Counsel
Facsimile: (714) 757-7984
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<PAGE> 15
Notices given by personal delivery will be effective on delivery; by
overnight service on the next business day; by United States mail on the
third business day after Pre-payment in the mail, all in accordance with
the notice provisions set forth above.
XIII. FORCE MAJEURE
Each party shall be excused for failures and delays in performances,
other than for the payment of money, caused by war, governmental
proclamations, ordinances, or regulations or strikes (except by SYGMA
employees), lockouts, floods, fires, explosions, or other events beyond
the reasonable control and without the fault of such party. In the event
of a work stoppage, the SYGMA Emergency Preparedness Plan will be
implemented. In the event of any such force majeure, the terms of this
Agreement shall be extended for the period during which either party is
prevented from performing any material portion of this Agreement. This
section shall not, however, relieve any party from using reasonable
efforts to remove or avoid any such events, and any party so affected
shall continue performance hereunder as soon as reasonably practicable
whenever such causes are eliminated. Any party claiming any such excuse
for failure or delay in performance shall give notice thereof to the
other party.
XIV. TERM OF AGREEMENT AND IMPLEMENTATION
This Agreement will be binding on both parties for [*] term beginning
[*] through [*], and will automatically renew for successive [*].
However, either party, after the initial term of this Agreement, can
terminate this Agreement with [*] written notice.
XV. TERMINATION
A. Breach by SYGMA - Notwithstanding the term set forth above, El
Torito has the right to terminate this Agreement at any time
with written notice to SYGMA [*] prior to the termination date
set forth in such notice if SYGMA has materially breached the
terms of this Agreement.
B. Breach by El Torito - Notwithstanding the term set forth above,
SYGMA has the right to terminate this Agreement at any time with
written notice to El Torito [*] prior to termination date set
forth in such notice if El Torito or FRI has materially breached
the terms of this Agreement.
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* Confidential material in this section has been omitted pursuant to a request
for confidential treatment; the omitted material has been filed separately with
the SEC.
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<PAGE> 16
C. Service Interruption - Notwithstanding any other provision of
this Agreement, SYGMA has the right to withhold all service
under this Agreement in the event El Torito or FRI fails to pay
when due any amount due under this Agreement; and SYGMA may
continue to withhold all service under this Agreement until
SYGMA is paid in full.
D. Change in Control - Notwithstanding the term set forth above,
SYGMA has the right to terminate this Agreement with written
notice to El Torito of at least [*] if SYGMA has received a
notice of change of controlling ownership of El Torito or FRI
pursuant to Paragraph V.E.
E. Inventory Purchase on Termination - Upon termination of this
Agreement for any reason, El Torito and FRI or its designated
distributor agrees to purchase, at SYGMA's Cost plus [*] per
case to cover transfer and warehouse handling charges, all
Products in SYGMA's inventory which SYGMA purchased specifically
for distribution to FRI and El Torito or any El Torito
Franchisee. In such event, El Torito and FRI shall purchase all
perishables purchased in accordance with the terms of this
Agreement within seven (7) days of the termination of this
Agreement and all frozen and dry Products purchased in
accordance with the terms of this Agreement within fifteen (15)
days of the termination of this Agreement.
XVI. GOVERNING LAW
This Agreement shall be governed by the internal law, and not the law of
conflicts in accordance with the laws of the State of California.
XVII. ENTIRE AGREEMENT/AMENDMENTS
The parties expressly acknowledge that this Agreement contains the
entire agreement of the parties with respect to the relationship
specified in this Agreement and supersedes any prior arrangements or
understandings between the parties with respect to such relationship.
This Agreement may only be amended by a written document signed by both
El Torito and SYGMA.
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* Confidential material in this section has been omitted pursuant to a request
for confidential treatment; the omitted material has been filed separately with
the SEC.
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<PAGE> 17
XVIII. CONFIDENTIALITY
El Torito and SYGMA each agree that they will keep all terms of this
Agreement completely confidential, and that neither party will disclose
any information concerning this Agreement to any person or entity
without the prior express written consent of the other party; provided,
however, that neither party will be in breach of this requirement if
such party reasonably believes such disclosure is required based on the
advise of counsel under applicable law, regulation or court order. In
the event that such disclosure is required by applicable law, regulation
or court order, however, El Torito and SYGMA each agree that, if
reasonably practicable, such disclosure will not be made to any person
or entity until after such time as the other party has received written
notice with regard to any required disclosure, and the other party has
had a reasonable opportunity to contest the basis for disclosure and
review the content of any disclosure proposed to be made to any person
or entity. El Torito and SYGMA further agree that disclosure of the
terms and conditions of this Agreement in violation of this Section
constitutes a material breach of the Agreement.
Executed as of the date set forth at the beginning of this Agreement.
EL TORITO RESTAURANTS, INC.
By: ____________________________________
William D. Burt
President
THE SYGMA NETWORK, Inc.
By: __________________________
Gregory K. Marshall
Chairman and Chief Executive Officer
For purposes of FRI's specific agreements under the Agreement, including,
without limitation, its agreements under Paragraphs V.C., V.D. and V.E.
FAMILY RESTAURANTS, INC.
By: _________________________________
Robert T. Trebing Jr.
Executive Vice President and CFO
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<PAGE> 1
EXHIBIT 10.cc
DISTRIBUTION SERVICE AGREEMENT
THIS DISTRIBUTION SERVICE AGREEMENT ("AGREEMENT") is made as of the 30th
day of April 1997, by and between Chi-Chi's, Inc., a Delaware corporation,
(hereinafter "CC") and Sysco Corporation, a Delaware Corporation and certain of
its operating subsidiaries and/or divisions or units listed in Attachment One
attached hereto (collectively, "SYSCO"). The SYSCO operating subsidiaries,
divisions and/or units listed on Attachment One shall be referred to herein
collectively as "OPERATING COMPANIES" and individually as "OPERATING COMPANY",
and the facilities of the operating company The SYGMA Network of Ohio, Inc.
("SYGMA") are referred to herein as "DISTRIBUTION CENTERS."
RECITALS
A. CC and its subsidiaries and affiliated entities are the owners,
licensors, operators and managers of Chi-Chi's Mexican
Restaurants (the "Restaurants"). A current list of the
Restaurants is attached as Exhibit A.
B. CC desires to designate SYSCO as its primary distributor for
certain products to all of the Restaurants within the geographic
service areas (the "SERVICE AREA") designated by the shaded areas
in Exhibit B.
C. SYSCO will carry and distribute certain products, as determined
by CC, pursuant to the terms of this Agreement.
In consideration of the above recitals and the mutual covenants and agreements
set forth herein, the receipt and sufficiency of which are hereby acknowledged,
the parties agree as follows:
I. BASIC AGREEMENT
CC will purchase from SYSCO and SYSCO will purchase, warehouse and
distribute for and to sell to CC, substantially all of the needs of the
Restaurants for all products (the "Products") in the following
categories: dairy, frozen and refrigerated items, poultry, meat,
seafood, canned and dry goods, beverages, frozen bakery, soft drink
syrup products, paper and disposables, janitorial supplies to include
cleaning chemicals and other non-food products requiring frequent
replacement, and glassware and china. An initial product listing is
attached as Exhibit C. As CC's primary distributor, SYSCO will be
entitled to substantially all of the product requirements of the
Restaurants. SYSCO will not sell or distribute any Proprietary Products
(hereinafter defined) to customers other than the Restaurants and
Chi-Chi's Franchisees (hereinafter defined) without the prior written
approval of the Vice- President, Purchasing & Distribution of Family
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<PAGE> 2
Restaurants, Inc. ("FRI"), the sole stockholder of CC. "PROPRIETARY
PRODUCTS" means Products which are labeled with the trademarks or
proprietary logos of CC or are manufactured expressly for CC at CC's
direction and specifications.
II. PRODUCT DESIGNATION
A. Product Selection -- CC shall have the right to designate the
brands and/or suppliers of Products it requires to have SYSCO
supply. [*]
B. Inventory Management -- SYSCO shall use reasonable, good-faith
efforts to utilize proper inventory management for a continuous
supply of Products while minimizing the risk of inventory
obsolescence. SYSCO will provide CC with a monthly status report
of slow-moving and obsolete Products and those Products
approaching the expiration of their shelf life. A slow moving
Product is defined as having less than 10 cases movement in the
last 13 weeks. An obsolete item is defined as having zero case
movement in the last 60 days. Within two weeks of its receipt of
the monthly status report of slow-moving Products, obsolete
Products and Products approaching the expiration of their shelf
life, CC and SYSCO agree to review all products whose risk of
obsolescence is apparent. Joint resolutions to assign and reduce
obsolete inventory exposure will be initiated within forty-five
(45) days after the expiration of the two week period referred
to in the preceding sentence.
CC will communicate with SYSCO regarding anticipated menu or
Product mix changes to help avoid obsolete inventory issues and
will assist SYSCO in removal or disposition of slow-moving and
obsolete Products and those Products approaching the expiration
of its shelf life. If SYSCO has been authorized to purchase and
then purchases a Product in reasonable anticipation of sale to
CC and the volume of purchases of a Product declines
substantially to the point where the risk of obsolescence is
apparent, CC will either: 1) assume financial responsibility for
the cost to return any unsold inventory of such Product to the
supplier; unless the inventory obsolescence or a portion thereof
was caused by SYSCO in which case SYSCO will be responsible for
the cost of any unsold inventory of such Products; or 2)
designate a specific Restaurant or Restaurants to purchase and
use the subject Product inventory within a reasonable period of
time; or 3) implement other disposal alternatives, to be
mutually determined inclusive of moving such Product to SYSCO
Central Warehouse; or 4) if such Product is not sold or
otherwise disposed in accordance with this paragraph IIB, and
after the above alternatives have been exhausted, then SYSCO may
invoice CC for such
- ----------
* Confidential material in this section has been omitted pursuant to a request
for confidential treatment; the omitted material has been filed separately with
the SEC.
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<PAGE> 3
product and CC shall, within 30 days after receipt of such
invoice, pay SYSCO the Cost (herein defined) of any unsold
inventory of such Product. SYSCO will make such Product
available for pick up by CC or its designee. If Product is
designated to a third party, other than the original supplier,
SYSCO may require payment at the time of pick-up.
Notwithstanding anything to the contrary in this Agreement, CC
will not be responsible for SYSCO orders of discontinued Product
made after CC has given SYSCO written notice of discontinuance
of such Product. SYSCO will use reasonable good faith efforts to
cancel or return vendor Product on order or in transit to reduce
CC liability in the event of discontinuation of such Product.
C. Approved Items by Brand Name -- Certain Products are brand name
items approved by CC and these items shall be inventoried by
SYSCO to service CC. These Products do not bear any CC name or
logo. It is understood that these Products may bear the brand
name of the manufacturer or a brand name owned by the
manufacturer or distributor. CC has no objection to these
Products being sold to other customers and, in fact, encourages
such sale in hopes of a reduction in both SYSCO's and CC's cost.
Such other sales shall not, however, jeopardize CC pricing
hereunder nor include Proprietary Products.
III. SERVICE
A. Delivery Frequency -- SYSCO shall determine order and delivery
schedules and SYSCO will make deliveries to each Restaurant
according to the required frequency noted on Exhibit A. Unless
otherwise mutually agreed between CC and SYSCO, the Restaurants
listed on Exhibit A shall receive the identified deliveries per
week. However, no changes to Exhibit A will be authorized
without the approval of the Vice President Purchasing and
Distribution of FRI. Restaurants outside the Service Area may be
added to Exhibit A upon mutual agreement by CC and SYSCO which
approval shall not be unreasonably denied or declined.
[*]
During a 45 day period after the applicable program start-up
date listed in Paragraph III.I., Restaurants being serviced by
the respective operating company
- ----------
* Confidential material in this section has been omitted pursuant to a request
for confidential treatment; the omitted material has been filed separately with
the SEC.
3
<PAGE> 4
or distribution center shall receive reasonable and necessary
additional deliveries at no charge.
After the opening of a new Restaurant, a 30 day grace period
will be granted where additional delivery charges will be waived
for that particular Restaurant for reasonable and necessary
additional deliveries.
B. Service Area -- Pursuant to the terms of this Agreement, SYSCO
shall deliver Products to all future Restaurants located in the
Service Area.
C. Scheduling; Access -- SYSCO may schedule such deliveries on any
day of the week and from 1:30 p.m. - 5:30 p.m. and 7:30 p.m. -
11:30 a.m. SYSCO will maintain [*] or higher on-time delivery
performance which performance shall be either earlier or within
one (1) hour later of the stated delivery time. It is understood
that either CC or SYSCO may have particular scheduling needs for
specific Restaurants where unusual circumstances may exist, and
each party agrees to address such needs in good faith.
D. Order Balancing -- It is understood that Restaurants receiving
two deliveries per week will use reasonable, good-faith efforts
to balance the orders such that each delivery consists of
approximately the same number of cases.
E. Product Unloading at Restaurants -- SYSCO delivery drivers will
bring all Products into those Restaurants where it is possible
to safely roll a two-wheel cart. Further, for those Restaurants
where it is possible to roll a two-wheel cart, SYSCO delivery
drivers will separate and deliver the order to the Restaurants'
freezer, cooler and storeroom. If it is not possible to roll a
two-wheel cart into the refrigerated, frozen or dry area of the
Restaurant, SYSCO delivery drivers will deliver the Products to
another designated area of the Restaurant as determined by CC.
CC will have personnel available to check and sign for the order
at the time the delivery is being made for all but unattended
deliveries.
F. Order Accuracy -- SYSCO will maintain a [*] or higher average
fill-rate performance of cases of Product delivered accurately
according to the Restaurant's needs, as calculated on an [*]. CC
and SYSCO agree to designate certain Products in Exhibit D which
shall be considered "essential" Products. SYSCO will give
special attention to the inventory management of essential
Products and
- ----------
* Confidential material in this section has been omitted pursuant to a request
for confidential treatment; the omitted material has been filed separately with
the SEC.
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<PAGE> 5
use good faith efforts to ensure these items are in-stock at all
times. Should CC, due to a SYSCO delivery error, purchase
Product on a local basis, SYSCO will reimburse CC for the
difference between the Sell Price of that Product and the price
paid by CC for such Product; and for the reasonable cost of the
labor involved for a CC employee to leave the Restaurants to
purchase a Product on a local basis.
G. Recovery for Ordering Errors -- In situations where Product is
out-of-stock or missing as the result of an order error, SYSCO
will use its best good faith efforts to provide Product to the
Restaurants as soon as possible. Should this effort require
extra expense, it will be the responsibility of the erring party
to pay those expenses. In the event of a Restaurant ordering
error, SYSCO will advise the Restaurant of the estimated amount
of this special charge. The Restaurant manager has the authority
to accept or decline the delivery based on the special charge,
communicated at the time the special order is requested. If the
Restaurant manager places the order and that order is delivered,
the Restaurant is responsible for the special charge.
H. Route Change Notice -- SYSCO will provide Restaurant managers
not less than two weeks written notice, with copies to FRI's
Vice President of Purchasing & Distribution, of any significant
route change. The notice will include a brief statement for the
reason for the route change. SYSCO will provide FRI
Vice-President, Purchasing & Distribution not less than three
weeks written notice of any significant route change.
I. Commencement of Service -- SYSCO will begin servicing CC's
Restaurants from its distribution centers and operating
companies according to the following:
<TABLE>
<CAPTION>
<S> <C>
SYGMA-Chicago May 5, 1997
SYGMA-Pennsylvania May 19, 1997
Pegler-Sysco April 30, 1997
SYSCO Central Warehouse April 30, 1997
</TABLE>
J. Special Shipments -- SYSCO will, on behalf of CC or the CC's
Franchisees and at their expense and risk, arrange C.O.D. and
freight-collect, common carrier shipments of Products from the
distribution center or operating company direct to (i)
Restaurants owned by franchisees of CC (the "CC FRANCHISEES")
that are domestic and (ii) Restaurants owned by CC that are
outside the described Service
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<PAGE> 6
Area, upon CC communicating such orders to SYSCO. For this
service, SYSCO will bill CC or such CC Franchisees, as
applicable, for the Cost of the Product plus [*] per case
mark-up.
SYSCO will, on behalf or the CC's Franchisees and at their
expense and risk, arrange shipments of Products direct from the
distribution center or operating company to CC Franchisees that
are international. For this service, SYSCO will bill
international CC Franchisees for the Cost of the Product plus
[*] per case mark-up. Such CC Franchisees are responsible for
all freight costs, customs, brokerage, clearance, tariffs costs
and will be asked to pay for same at the time of shipment.
K. Expansion of Service -- SYSCO will provide distribution service
for CC's expansion in the service area of another SYSCO
distribution center, at CC's request, when CC has twenty (20)
Restaurants open in such area and once mark-ups have been
agreed upon by CC and SYSCO. In the event no SYGMA distribution
center is within the new service area, CC may select a SYSCO
operating company within the service area. Notwithstanding the
above, SYSCO will evaluate the feasibility of service to fewer
than twenty (20) Restaurants at any time during the term of this
Agreement.
L. Electronic Communication -- SYSCO will, in a timely manner,
electronically transmit data which will permit CC to design
specialty reports. [*] In the event of emergency, SYSCO will
provide the data via disk, within 3 days from request via
overnight service.
M. Restaurant Service -- In the event of a conflict between SYSCO
and Restaurant operators arising out of service under this
Agreement, the resolution will be negotiated by FRI's
Vice-President of Purchasing and SYSCO's Vice President/General
Manager of the delivering distribution center or operating
company.
N. CC Calendar -- Electronic transmissions, order guides and price
lists will be consistent with CC's fiscal calendar attached as
Exhibit E.
O. Unattended Deliveries -- CC agrees to provide keys and security
codes for night deliveries where necessary. SYSCO will be
responsible for expenses incurred by CC to re-key door locks
when caused by SYSCO to do so. In the event SYSCO is not
notified five (5) days in advance of changes to the Restaurants
locks and not
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* Confidential material in this section has been omitted pursuant to a request
for confidential treatment; the omitted material has been filed separately with
the SEC.
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<PAGE> 7
provided the appropriate keys and alarm codes, SYSCO may elect
to charge CC for the expenses associated in route delays or
re-deliveries. CC and its employees, officers and directors are
not liable for injury, illness and/or death to SYSCO drivers
arising from criminal events during delivery (i.e. robberies,
attacks, kidnapping or hostage situations), except to the extent
same is caused by the gross negligence or willful misconduct of
CC, its employees, officers or directors.
P. Designated SYSCO Operating Companies -- It is understood that
SYSCO will perform the terms of this Agreement through the
operating companies (and their distribution centers) designated
on Attachment One, unless Attachment One is amended in writing.
IV. PRICING
A. Definition of Cost -- The price to CC for all Products sold
under this Agreement (the "SELL PRICE") will be calculated on
the basis of Cost. "COST" is defined as the cost of the Product
as shown on the invoice to the delivering SYSCO operating
company or distribution center, plus applicable freight.
Invoices used to determine Cost will be the invoice issued to
the delivering SYSCO operating company or distribution center by
the vendor or by the Merchandising Services Department of SYSCO
Corporation. Applicable freight, in those cases where the
invoice cost to the delivering SYSCO operating company or
distribution center is not a delivered cost, means that a
reasonable freight charge for delivering Products to the Sysco
operating company or distribution center has been added. Freight
charges may include common or contract carrier charges by the
Product supplier or a carrier, or charges billed by Alfmark,
SYSCO's freight management service. Applicable freight for any
Product will not exceed the rate charged by nationally
recognized carriers operating in the same market for the same
type of freight service. Cost is not reduced by cash discounts
for prompt payment available to Sysco Corporation or any SYSCO
operating company.
B. Calculation of Sell Price for Products other than Smallwares --
For all Products other than smallwares, the pricing for which is
covered under Paragraph IV.C. below, the Sell Price of each
Product sold under this Agreement will equal [*]:
DISTRIBUTION CENTER/OPERATING COMPANY PER CASE MARK-UP
[*] [*]
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* Confidential material in this section has been omitted pursuant to a request
for confidential treatment; the omitted material has been filed separately with
the SEC.
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<PAGE> 8
1. For example, a Product with a Cost of $10.00 per case
and a mark-up of [*] per case will have a Sell Price
calculated as follows: [*]
2. For Products with a temporary promotional allowance, the
following formula will apply:
A Product with a Cost of $10.00 and a promotional
allowance of $1.00 will have a Sell Price calculated as
follows:
[*]
3. Soft drink syrup products will be priced according to
the appropriate agency billing program.
4. SYSCO will provide additional deliveries to Restaurants
at CC's request. The charges for additional regular
scheduled deliveries will be according to the following:
Mileage from Additional Fee
Distribution Center/Operating Company Not to Exceed
[*] [*]
SYSCO will also distribute to new locations outside the
boundaries of this Agreement, provided that SYSCO and CC
have negotiated in good faith the additional charges
required for this service.
5. The additional delivery fees associated with a second
delivery for those Restaurants receiving one delivery
per week will be waived as long as the average gross
profit per delivery for all Restaurants is equal to or
greater than [*]. Notwithstanding the above, the
following locations, Colorado Springs, CO and
Fayetteville, NC will only receive one delivery per week
and any additional deliveries will be subject to the
fees set forth in Paragraph IV.B.4, regardless of the
average gross profit per delivery.
C. Calculation of Sell Price for Smallwares
1. For smallwares Product shipments from SYSCO Central
Warehouse, the Sell Price of each Product sold under
this Agreement will equal (i) the
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* Confidential material in this section has been omitted pursuant to a request
for confidential treatment; the omitted material has been filed separately with
the SEC.
8
<PAGE> 9
Cost of such Product plus (ii) the percentage of Cost
mark-up of [*]. For example, a Product with a Cost of
$10.00 per case, plus a Mark-up of [*]will have a Sell
Price calculated as follows: [*]
Freight for drop ship orders for all smallware items
shipped from Sysco Central Warehouse will be as follows:
Order Size Freight
[*] [*]
2. SYSCO will carry full-case china and glassware at the
distribution centers and operating companies identified
in Section IV.B. above. Other than full-case china and
glassware orders, which shall be placed with such
designated distribution centers and operating companies,
all orders of smallwares must be placed to the Sysco
Central Warehouse. For full-case china and glassware
orders placed direct with the operating companies, the
pricing set forth in Paragraph IV.B. shall apply; and
for smallwares orders placed through Sysco Central
Warehouse, the pricing set forth in Paragraph IV.C.1.
shall apply.
D. Purchase Requirements -- [*]
E. Merchandising Services -- Sysco Corporation and the SYSCO
operating companies perform value-added services for suppliers
of SYSCO(R)brand and other products over and above procurement
activities typically provided. These value-added services
include national marketing, freight management, consolidated
warehousing, quality assurance and performance-based product
marketing. Sysco Corporation and the SYSCO operating companies
may recover the costs of providing these services and may also
be compensated for these services and consider this compensation
to be earned income. Receipt of such cost recovery or earned
income does not affect Cost and does not diminish 's commitment
to provide competitive prices to its customers. Exhibit F
briefly describes some of these services provided to suppliers.
F. Freight Charges -- [*]
G. Inventory Management -- SYSCO will typically purchase product
for CC in quantities sufficient to provide to SYSCO the lowest
cost bracket available from a particular supplier for each
Product, as long as the quantity purchased does not
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* Confidential material in this section has been omitted pursuant to a request
for confidential treatment; the omitted material has been filed separately with
the SEC.
9
<PAGE> 10
exceed three weeks normal usage for any one item. In those cases
where SYSCO, at the request of CC, purchases any Product in such
quantities that exceeds three weeks normal usage, CC agrees, if
requested by SYSCO, to compensate SYSCO for any additional costs
incurred in carrying the additional inventory of such Product.
H. Order Guides; Ordering -- SYSCO will provide CC with order
guides, weekly price lists, and weekly price change notices or,
if preferred by CC, will provide SYSCO's standard SYGNET or
Customer Companion order-entry software to facilitate order
placement through CC personal computer equipment. Orders will be
placed directly by Restaurants ordering by item number as
specified in the order guides or through the SYGNET or Customer
Companion software. Only CC approved items will appear on order
guides and there will be no other changes to the order guides
without CC approval. Within 120 days after the date of this
Agreement, SYSCO shall provide CC with order entry software to
facilitate order placement through CC personal computer
equipment for the SYSCO Central Warehouse.
I. Cost Verification -- CC has the right, once annually, to verify
the Cost for purchases made under this Agreement. SYSCO will
furnish verification of Costs for the Products to be price
verified, subject to the following limitations:
1. Date, time and place of Cost verification must be
mutually agreed;
2. Ten (10) working days' notice must be provided to SYSCO;
and
3. The period for which pricing is to be verified shall be
limited to the preceding twelve (12) months.
4. When price verification shows, to the satisfaction of
both parties, a discrepancy between the agreed Sell
Price and the actual Sell Price, the appropriate party
will reimburse the other party. In the event of a net
undercharge, CC will deliver to SYSCO a check for the
difference within five (5) working days. If CC gives
SYSCO written notice of what CC believes to be a net
overcharge, SYSCO shall, within five (5) business days,
issue a check to CC. With regard to any disputed net
overcharge or undercharge, the parties shall continue to
negotiate in good faith, the proper amount (if any) to
be reimbursed to CC or SYSCO including interest thereon.
If net overcharges exceed .5% of purchases during any
six month
10
<PAGE> 11
period, SYSCO shall reimburse CC for all reasonable
costs incurred in connection with said price
verification.
Any and all information examined by CC shall be held in strict
confidence and not disclosed to any person or entity except
those employees of CC with a need to know such information and
who are notified by CC to keep such information confidential.
J. Issuance of Price List -- SYSCO's price list will be issued once
per week, effective on Sunday. On the preceding Thursday, a
notice of price changes will be faxed to the Vice-President,
Purchasing & Distribution of FRI.
V. PAYMENT TERMS
A. [* - Two pages deleted].
5. CC will complete, execute, and deliver to SYSCO a New Account
Form, in the form of Exhibit G, attached hereto, which will be
provided by CC to SYSCO before this Agreement becomes binding
upon SYSCO. CC will also deliver completed resale sales tax
exemption certificates to SYSCO, for all jurisdictions that
would require these, or where they are reasonably deemed to be
necessary by SYSCO. CC understands and agrees that it is solely
responsible for payment of any sales and use taxes that any
taxing authority deems to be due, based on purchases by CC from
SYSCO.
SYSCO will charge and collect appropriate sales taxes where
authorized to do so on CC's behalf. The responsibility of
payment of these taxes is solely that of CC.
6. For the period May 1, 1997 through September 1, 1997 for direct
shipments of smallwares from SYSCO Central Warehouse to CC
Restaurants, SYSCO Central Warehouse will invoice Restaurants
directly and CC will have fifteen (15) days to remit. After
September 1, 1997 all remittances will be included in the ACH
debits under provisions of Paragraph V.A.
B. Delinquency Charge -- If any amount due SYSCO is not paid in
accordance with this Agreement, a delinquency charge shall be
added to the sum due, which charge shall equal the amount
obtained by multiplying the delinquent balance by the lesser of
(a) one and one-half percent (1 1/2%) per month, or (b) the
maximum lawful rate permitted to be charged under applicable
law.
- ----------
* Confidential material in this section has been omitted pursuant to a request
for confidential treatment; the omitted material has been filed separately with
the SEC.
11
<PAGE> 12
C. Guaranty -- In consideration of the sale to the Restaurants by
SYSCO hereunder and other good and valuable consideration, the
sufficiency of which is hereby acknowledged, FRI hereby
covenants and agrees as follows: FRI guarantees to SYSCO the
prompt payment of any obligation to SYSCO of any subsidiary or
affiliated entity of FRI, including without limitation CC, but
excluding CC's franchisees, arising out of deliveries made
pursuant to this Agreement. FRI further agrees to pay on demand
any such sum to SYSCO whenever any such subsidiary or affiliated
entity of FRI fails to pay the same when due. It is understood
that this guaranty is an absolute, continuing and irrevocable
guaranty for payments due under this Agreement. FRI expressly
waives presentment, demand, protest, notice of protest,
dishonor, diligence, notice of default or nonpayment, notice of
acceptance of this guaranty, notice of extending of any
guaranteed indebtedness already or hereafter contracted by any
such subsidiary or affiliated entity of FRI or notice of any
modification or renewal of any payments hereby guaranteed.
D. Financial Reporting and Credit -- FRI will forward to SYSCO
FRI's consolidated unaudited quarterly financial statements
within fifty (50) days after the end of each quarter. Within
ninety-five (95) days after each fiscal year end, FRI will
forward to SYSCO, FRI's audited, consolidated financial
statements for such fiscal year consisting of an income
statement, balance sheet and statement of cash flow.
E. Financial Information -- CC shall notify SYSCO in writing within
three business days after any change of controlling ownership of
CC or FRI. CC warrants to SYSCO that all financial information
provided to SYSCO for the purpose of obtaining and continuing
credit is true, correct and complete in all material respects,
and CC authorizes SYSCO to investigate all references furnished
pertaining to CC credit and financial responsibility.
VI. FRANCHISEE PARTICIPATION
SYSCO shall extend to any present or future CC Franchisees the same or
similar terms and conditions for distribution of Products to Restaurants
in the Service Area as the terms and conditions of this Agreement,
provided each CC Franchisee meets SYSCO's credit standards and enters
into and performs its obligations under an agreement with SYSCO
satisfactory to SYSCO in its sole discretion. At SYSCO's reasonable
election, each CC Franchisee will provide to SYSCO either a standby
letter of credit in an amount to be
12
<PAGE> 13
determined by SYSCO or personal guarantees of the individuals involved
with such CC Franchisee. Notwithstanding the above, SYSCO may alter the
payment and other terms (but not mark-ups or delivery schedules) with
any CC Franchisee from the terms set forth in this Agreement if SYSCO,
in its sole discretion, determines that the CC Franchisees's financial
condition or credit history does not merit the terms extended to CC
under this Agreement. Unless otherwise agreed by the parties in writing,
CC shall not be liable to SYSCO for payment obligations of its CC
Franchisees. CC and FRI will be notified of any action SYSCO has taken
against a CC Franchisee as a result of any failure by the CC Franchisee
to comply with its agreement with SYSCO. SYSCO will be notified of any
action CC and FRI have taken against a CC Franchisee as a result of any
failure by the CC Franchisee to comply with its agreement with CC or
FRI.
VII. INDEMNIFICATION AGAINST FRANCHISEES
CC and/or FRI is a franchisor and permits distribution of Products to CC
Franchisees. If for any reason CC and SYSCO cease doing business and CC
or FRI directs SYSCO to cease distribution or sales of Proprietary
Products to one or more of the CC Franchisees, CC will defend, indemnify
and hold harmless SYSCO from and against any and all losses, damages or
claims by any such CC Franchisee which may arise from SYSCO ceasing
further sales to such Franchisee.
VIII. SPECIAL PRODUCT INDEMNITY
SYSCO's policy is that all suppliers provide indemnity agreements and
insurance coverage for products purchased by SYSCO. In order to protect
SYSCO when it stocks Proprietary Products or special order items at CC's
request and the vendor of such items will not provide an indemnity
and/or insurance coverage acceptable to SYSCO, CC will defend, indemnify
and hold harmless SYSCO and its employees, officers and directors from
all actions, claims and proceedings, and any judgments, damages and
expenses resulting therefrom, brought by any person or entity for
injury, illness and/or death or for damage to property in either case
arising out of the delivery, sale, resale, use or consumption of any
Proprietary Product or special order item except to the extent such
claims are caused by the negligence or misconduct of SYSCO, its agents
or employees.
IX. INDEMNIFICATION
SYSCO agrees to indemnify, defend, and save harmless CC, its officers,
directors, agents, and employees, parent companies and subsidiaries
(collectively "INDEMNIFIED PARTIES") from and against any and all
claims, losses, damages, liability, or liens arising out of injury to or
death of persons (including, but not limited to any employee of
Indemnified
13
<PAGE> 14
Party), or loss of or damage to property, resulting directly from (i)
the negligence of SYSCO and its employees or (ii) from the violation by
SYSCO of copyrights or trademarks of CC arising out of the publication,
translation, reproduction, delivery, performance, use or disposition of
any data furnished under this Agreement, except to the extent that such
loss, damage, injury, liability or claim is the result of the negligence
or willful misconduct of any Indemnified Party. The right of the
Indemnified Parties to indemnification by SYSCO under the foregoing
shall be independent of the right of the Indemnified Parties to the
insurance to be provided pursuant to this Agreement. Such
indemnification shall include all costs of suit and reasonable
attorney's fees incurred in defending against, or negotiating settlement
of any claim or suit, but only if the Indemnified Party provides SYSCO
with prompt written notice of the initiation of any claim or lawsuit
seeking damages against the Indemnified Party and the opportunity to
assume the defense thereof.
X. COMPLIANCE WITH CC DISTRIBUTOR QUALITY PROGRAM
SYSCO agrees to comply with CC's Distributor Quality Program as
referenced in Exhibit H.
XI. SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon and inure to the benefit of the
successors and assigns of the parties hereto; provided, however, that
neither party may assign this Agreement without the prior written
consent of the other party which approval shall not be unreasonably
withheld or delayed.
XII. NOTICES
All notices required or permitted to be given hereunder shall be in
writing and sent by facsimile (to be followed by any of the following)
and personal delivery, overnight delivery service or United States
registered or certified mail, postage prepaid, return receipt requested,
addressed to the parties as follows:
SYSCO: SYSCO Corporation
1390 Enclave Parkway
Houston, TX 77077
Attention: Gregory K. Marshall
Senior Vice President, Multi-Unit Sales
Facsimile: (281) 584-2725
14
<PAGE> 15
Chi-Chi's, Inc.:
Chi-Chi's, Inc.
C/o FRI Purchasing Department
18831 Von Karman Avenue
Irvine, CA 92612
Attn: David R. Parsley, C.P.M.
Vice President, Purchasing and Distribution
Facsimile: (714) 757-8054
With copies to:
Family Restaurants, Inc.
18831 Von Karman Avenue
Irvine, CA 92612
Attn: Todd Doyle
Vice President, General Counsel
Facsimile: (714) 757-8054
Notices given by personal delivery will be effective on delivery; by
overnight service on the next business day; by United States mail on the
third business day after Pre-payment in the mail, all in accordance with
the notice provisions set forth above.
XIII. FORCE MAJEURE
Each party shall be excused for failures and delays in performances,
other than for the payment of money, caused by war, governmental
proclamations, ordinances, or regulations or strikes (except by SYSCO
employees), lockouts, floods, fires, explosions, or other events beyond
the reasonable control and without the fault of such party. In the event
of a work stoppage, the SYSCO Emergency Preparedness Plan will be
implemented. In the event of any such force majeure, the terms of this
Agreement shall be extended for the period during which either party is
prevented from performing any material portion of this Agreement. This
section shall not, however, relieve any party from using reasonable
efforts to remove or avoid any such events, and any party so affected
shall continue performance hereunder as soon as reasonably practicable
whenever such causes are eliminated. Any party claiming any such excuse
for failure or delay in performance shall give notice thereof to the
other party.
15
<PAGE> 16
XIV. TERM OF AGREEMENT AND IMPLEMENTATION
This Agreement will be binding on both parties for a [*] term beginning
[*] through [*], and will automatically renew for successive [*].
However, either party, after the initial term of this Agreement, can
terminate this Agreement with [*] written notice.
XV. TERMINATION
A. Breach by SYSCO -- Notwithstanding the term set forth above, CC
has the right to terminate this Agreement at any time with
written notice to SYSCO [*] prior to the termination date set
forth in such notice if SYSCO has materially breached the terms
of this Agreement.
B. Breach by CC -- Notwithstanding the term set forth above, SYSCO
has the right to terminate this Agreement at any time with
written notice to CC [*] prior to termination date set forth in
such notice if CC or FRI has materially breached the terms of
this Agreement.
C. Service Interruption -- Notwithstanding any other provision of
this Agreement, SYSCO has the right to withhold all service
under this Agreement in the event CC or FRI fails to pay when
due any amount due under this Agreement; and SYSCO may continue
to withhold all service under this Agreement until SYSCO is paid
in full.
D. Change in Control -- Notwithstanding the term set forth above,
SYSCO has the right to terminate this Agreement with written
notice to CC of at least [*] if SYSCO has received a notice of
change of controlling ownership of CC or FRI pursuant to
Paragraph V.E.
E. Inventory Purchase on Termination -- Upon termination of this
Agreement for any reason, CC and FRI or its designated
distributor agrees to purchase, at SYSCO's Cost plus [*] per
case to cover transfer and warehouse handling charges, all
Products in SYSCO's inventory which SYSCO purchased specifically
for distribution to FRI and CC or any CC Franchisee. In such
event, CC and FRI shall purchase all perishables purchased in
accordance with the terms of this Agreement within seven (7)
days of the termination of this Agreement and all frozen and dry
Products purchased in accordance with the terms of this
Agreement within fifteen (15) days of the termination of this
Agreement.
- ----------
* Confidential material in this section has been omitted pursuant to a request
for confidential treatment; the omitted material has been filed separately with
the SEC.
16
<PAGE> 17
XVI. GOVERNING LAW
This Agreement shall be governed by the internal law, and not the law of
conflicts in accordance with the laws of the State of Kentucky.
XVII. ENTIRE AGREEMENT/AMENDMENTS
The parties expressly acknowledge that this Agreement contains the
entire agreement of the parties with respect to the relationship
specified in this Agreement and supersedes any prior arrangements or
understandings between the parties with respect to such relationship.
This Agreement may only be amended by a written document signed by each
of the CC and SYSCO.
Executed as of the date set forth at the beginning of this Agreement.
CHI-CHI'S, INC.
By: ROGER CHAMNESS
------------------------------
Roger Chamness
President
SYSCO CORPORATION
By: GREGORY K. MARSHALL
------------------------------
Gregory K. Marshall
Senior Vice President, Multi-Unit Sales
For purposes of FRI's specific agreements under the Agreement, including,
without limitation, its agreements under Paragraphs V.C., V.D. and V.E.
FAMILY RESTAURANTS, INC.
By: ROBERT T. TREBING JR.
------------------------------
Robert T. Trebing Jr.
Senior Vice President and CFO
17
<PAGE> 1
EXHIBIT 10.dd
FAMILY RESTAURANTS, INC.,
FRI-MRD CORPORATION,
CHI-CHI'S, INC.
AND
EL TORITO RESTAURANTS, INC.
AMENDED AND RESTATED VALUE CREATION UNITS PLAN
1. PURPOSE
THE PURPOSE OF THIS AMENDED AND RESTATED VALUE CREATION UNITS PLAN (THE
"PLAN") OF FAMILY RESTAURANTS, INC. ("FRI"), FRI-MRD CORPORATION
("FRI-MRD"), CHI-CHI'S, INC. AND EL TORITO RESTAURANTS, INC. 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 FRI-MRD, and each of said subsidiary's wholly owned
subsidiaries.
h. "Chi-Chi's Value Created" -- means Chi-Chi's EBITDA for fiscal
year 1999 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
1
<PAGE> 2
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 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, FRI-MRD Corporation, a Delaware corporation,
Chi-Chi's, Inc., a Delaware corporation, and El Torito
Restaurants, Inc., a Delaware corporation, jointly and
severally.
m. "Corporate Value Created" or "CVC" -- means FRI's EBITDA for
fiscal year 1999 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 1999 shall be reduced by $14 million and if
such sale occurs during fiscal year 1999, FRI's EBITDA
for fiscal year 1999 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 1999 shall be increased by $14 million
and if such sale occurs
2
<PAGE> 3
during fiscal year 1999, FRI's EBITDA for fiscal year
1999 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.
(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
1999 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.
3
<PAGE> 4
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.
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 FRI-MRD, and each of such subsidiary's wholly
owned subsidiaries.
t. "El Torito Value Created" -- means El Torito's EBITDA for fiscal
year 1999 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.
4
<PAGE> 5
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.
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 26, 1999, 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
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<PAGE> 6
(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.
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:
6
<PAGE> 7
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
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 26, 1999, all
VCUs must be held by Employees. Accordingly, any VCUs not
previously granted by the Board on or before December 26, 1999,
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,
7
<PAGE> 8
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
If there is an Exit Event prior to June 30, 2001, 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
8
<PAGE> 9
ending on or prior to the Expiration Date equals or exceeds 5.0, 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 January 1,
1999, 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
December 31, 1998; 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 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
<PAGE> 10
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 FRI, FRI-MRD, 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.
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.
10
<PAGE> 11
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.
11
<PAGE> 12
FAMILY RESTAURANTS, INC.,
FRI-MRD CORPORATION, CHI-CHI'S, INC.
AND EL TORITO RESTAURANTS, INC.
VALUE CREATION UNITS (VCU) AGREEMENT
Family Restaurants, Inc., a Delaware corporation ("FRI"), FRI-MRD
Corporation, a Delaware corporation ("FRI-MRD"), Chi-Chi's, Inc., a Delaware
corporation ("Chi-Chi's"), and El Torito Restaurants, Inc., a Delaware
corporation ("El Torito") (hereinafter FRI, FRI-MRD, Chi-Chi's and El Torito are
collectively referred to as the "Company"), hereby grants as of the ___ day of
________, 1998, 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 Amended and Restated 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 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.
1
<PAGE> 13
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.
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 92612
____________________________
Print Name of Participant
____________________________ By: _______________________________
Street Address
____________________________
City State Zip Code
FRI-MRD Corporation
18831 Von Karman Avenue
Irvine, CA 92612
By: ________________________________
[SIGNATURES CONTINUE ON PAGE 3]
2
<PAGE> 14
Chi-Chi's, Inc.
10200 Linn Station Road
Louisville, KY 40223
By: ________________________________
El Torito Restaurants, Inc.
18831 Von Karman Avenue
Irvine, CA 92612
By: _______________________________
3
<PAGE> 1
EXHIBIT 21.a
FAMILY RESTAURANTS, INC.
1997 FORM 10-K
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction of
Subsidiaries as of December 28, 1997 Incorporation
------------------------------------ ---------------
<S> <C>
CCMR Advertising Agency, Inc. Kentucky
CCMR of Catonsville, Inc. Kentucky
CCMR of Cumberland, Inc. Kentucky
CCMR of Frederick, Inc. Kentucky
CCMR of Golden Ring, Inc. Kentucky
CCMR of Greenbelt, Inc. Kentucky
CCMR of Harford County, Inc. Kentucky
CCMR of Inner Harbor, Inc. Kentucky
CCMR of Maryland, Inc. Delaware
CCMR of Ritchie Highway, Inc. Kentucky
CCMR of Timonium, Inc. Delaware
Chi-Chi's, Inc. Delaware
Chi-Chi's Franchise Operations Corporation Kentucky
Chi-Chi's Management Corporation Kentucky
Chi-Chi's of Greenbelt, Inc. Kentucky
Chi-Chi's of Kansas, Inc. Kansas
Chi-Chi's of South Carolina, Inc. Kentucky
Chi-Chi's of West Virginia, Inc. Kentucky
El Torito Franchising Company Delaware
El Torito Restaurants, Inc. Delaware
FRI-Admin Corporation Delaware
FRI-MRD Corporation Delaware
Maintenance Support Group, Inc. Kentucky
</TABLE>
<PAGE> 1
EXHIBIT 21.b
FAMILY RESTAURANTS, INC.
1997 FORM 10-K
NAMES UNDER WHICH OPERATING
SUBSIDIARIES DO BUSINESS - 12/28/97
El Torito Restaurants, Inc.
Casa Gallardo
Casa Gallardo Grill
El Torito
El Torito Grill
El Torito Restaurant & Cantina
GuadalaHARRY's
Hola Amigos
Keystone Grill
Las Brisas
Original El Torito Restaurant
Specialty Catering
Tequila Willie's
Who-Song & Larry's Restaurant
and Cantina
Chi-Chi's, Inc.
Chi-Chi's
Chi-Chi's El Pronto
Chi-Chi's Mexican Restaurante
HomeTown Buffet
FRI-Admin Corporation
Carrows
Charley Brown's
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Family Restaurants, Inc.
We consent to incorporation by reference in the Registration Statement
(No. 33-52795) on Form S-8 of Family Restaurants, Inc. of our report dated March
5, 1998, relating to the consolidated balance sheets of Family Restaurants, Inc.
and its subsidiaries as of December 28, 1997 and December 29, 1996 and the
related statements of operations, common stockholders' equity (deficit) and cash
flows and related financial statement schedule for the years ended December 28,
1997, December 29, 1996 and December 31, 1995 which report appears in the
December 28, 1997 annual report on Form 10-K of Family Restaurants, Inc.
KPMG PEAT MARWICK LLP
Orange County, California
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 28, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K FOR THE YEAR
ENDED DECEMBER 28, 1997
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> DEC-28-1997
<CASH> 32,518
<SECURITIES> 0
<RECEIVABLES> 3,944
<ALLOWANCES> 0
<INVENTORY> 4,569
<CURRENT-ASSETS> 45,117
<PP&E> 256,015
<DEPRECIATION> 72,414
<TOTAL-ASSETS> 289,768
<CURRENT-LIABILITIES> 111,529
<BONDS> 199,955
0
0
<COMMON> 10
<OTHER-SE> (26,204)
<TOTAL-LIABILITY-AND-EQUITY> 289,768
<SALES> 463,724
<TOTAL-REVENUES> 463,724
<CGS> 123,803
<TOTAL-COSTS> 475,332
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,476
<INCOME-PRETAX> (31,084)
<INCOME-TAX> 509
<INCOME-CONTINUING> (31,593)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,593)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
