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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 26, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 33-14051
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(TM)
[LOGO OF PRANDIUM(TM) INC. APPEARS HERE]
(Exact name of registrant as specified in its charter)
Delaware 33-0197361
(Incorporated in) (I.R.S. Employer
Identification No.)
18831 Von Karman Avenue, Irvine, CA 92612
(Address of principal executive offices)
Telephone: (949) 757-7900
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value.
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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. [_]
The aggregate market value of the registrant's common stock held by non-
affiliates of the registrant as of March 17, 2000 was approximately $19.2
million. All directors, officers and more than 10% stockholders of registrant
are deemed affiliates of registrant for the purpose of calculating such
aggregate market value. The registrant, however, does not represent that such
persons, or any of them, would be deemed "affiliates" of the registrant for
any other purpose under the Securities Exchange Act of 1934 or the Securities
Act of 1933.
As of March 17, 2000, the registrant had issued and outstanding 180,380,513
shares of common stock, $.01 par value per share.
Documents Incorporated by Reference:
Notice of 2000 Annual Meeting and Proxy Statement (Part III of Form 10-K)
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PRANDIUM, INC.
FORM 10-K
For the Fiscal Year Ended December 26, 1999
INDEX
<TABLE>
<C> <S> <C>
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5. Market for the Registrant's Common Equity and Related 13
Stockholder Matters........................................
Item 6. Selected Financial Data..................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition 15
and Results of Operations..................................
Item 8. Financial Statements and Supplementary Data................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting 27
and Financial Disclosure...................................
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 28
Item 11. Executive Compensation...................................... 28
Item 12. Security Ownership of Certain Beneficial Owners and 28
Management.................................................
Item 13. Certain Relationships and Related Transactions.............. 28
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on From 29
8-K........................................................
Signatures............................................................ 33
</TABLE>
2
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PRANDIUM, INC.
PART I
Item 1. BUSINESS
Background
Prandium, Inc., formerly known as Koo Koo Roo Enterprises, Inc. and as
Family Restaurants, Inc. (together with its subsidiaries, the "Company"), was
incorporated in Delaware in 1986. The Company is primarily engaged in the
operation of restaurants in the full-service and fast-casual segments.
Information relating to periods ending prior to October 30, 1998 included in
this report relates to the historical operations of Family Restaurants, Inc.
and, except as otherwise indicated, does not reflect the operations of Koo Koo
Roo, Inc., a Delaware corporation ("KKR") and KKR's previously wholly owned
subsidiary The Hamlet Group, Inc., a California corporation ("Hamlet"), both
of which the Company acquired on October 30, 1998. At December 26, 1999, the
Company operated 308 restaurants in 27 states, approximately 68% of which are
located in California, Ohio, Pennsylvania, Indiana and Michigan, and
franchised and licensed 24 restaurants outside the United States.
Subsequent Event
On March 27, 2000, the Company entered into a definitive agreement to sell
substantially all of its El Torito Division to Acapulco Acquisition Corp.
("Acapulco") in a transaction with an enterprise value of approximately $130.0
million, subject to certain post-closing adjustments based on a closing
balance sheet, with consideration consisting of cash and the assumption of
certain capitalized lease obligations and other debt (the "El Torito Sale").
Consummation of the El Torito Sale is subject to customary terms and
conditions. There can be no assurance that the Company will successfully
complete the El Torito Sale. See "--Sale of El Torito Division."
1998 Merger
On October 30, 1998, the Company, FRI-Sub, Inc. ("Merger Sub"), an indirect
wholly-owned subsidiary of the Company, and KKR consummated a merger (the
"Merger"), pursuant to which Merger Sub was merged with and into KKR, with KKR
as the surviving corporation. As a result of the Merger, each outstanding
share of common stock of KKR was converted into the right to receive one share
of common stock of the Company (the "Company Common Stock"). Immediately prior
to the Merger, a stock dividend was declared pursuant to which approximately
121.96 shares of Company Common Stock were distributed for each share of
Company Common Stock outstanding. Prior to the Merger, the Company provided a
$3 million loan (the "Bridge Loan") to a subsidiary of KKR, which was repaid
after completion of the Merger. Additionally, in connection with the Merger,
FRI-MRD Corporation, a wholly owned subsidiary of the Company ("FRI-MRD"),
issued $24 million aggregate face amount of senior secured discount notes (the
"MRD Merger Notes") for net proceeds of $21.7 million, and the Company
expanded the Foothill Credit Facility (as defined below) by an additional
$20 million. The proceeds from the sale of the MRD Merger Notes were used to
acquire all of the outstanding capital stock of Hamlet from KKR immediately
prior to the consummation of the Merger (the "Hamlet Acquisition"). The Merger
and the Hamlet Acquisition were accounted for as a purchase. Accordingly, the
results of operations and financial position of KKR (including Hamlet) were
combined with the results of operations and financial position of the
Company's operations from October 30, 1998 forward.
After completion of the Merger, confusion between the Company's prior name,
Koo Koo Roo Enterprises, Inc., and the Koo Koo Roo restaurant concept led to
numerous misunderstandings within the restaurant industry and among the
Company's shareholders, vendors and other audiences. As a result, the Company
adopted its new name in April 1999.
Other Historical Events
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
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the Company. The Foothill Credit Facility replaced the Company's old credit
facility (the "Old Credit Facility"). In connection with the Merger, the
Company increased the Foothill Credit Facility to $55 million. The Foothill
Credit Facility now provides for up to $35 million in revolving cash
borrowings and up to $55 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 restrictive covenants.
On August 12, 1997, FRI-MRD issued senior discount notes (the "Senior
Discount Notes") in an aggregate face amount of $61 million at a price of
approximately 75% of par. The Senior Discount Notes are due on January 24,
2002. No cash interest was payable on the Senior Discount Notes until July 31,
1999, at which time interest became payable in cash semi-annually at the rate
of 15% per annum, with the first cash interest payment made on January 31,
2000. The Senior Discount Notes were issued to certain existing holders of the
Company's 9 3/4% Senior Notes due 2002 (the "Senior Notes") in exchange for
$15.6 million of Senior Notes plus approximately $34 million of cash. On
January 14 and 15, 1998, FRI-MRD issued an additional $14 million aggregate
face amount of the Senior Discount Notes to the same purchasers 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
were used to fund the Company's capital expenditure programs and for general
corporate purposes.
On June 9, 1998, FRI-MRD entered into a Note Agreement pursuant to which on
October 30, 1998 FRI-MRD issued $24 million aggregate face amount of MRD
Merger Notes at a price of approximately 90% of par resulting in net proceeds
of $21.7 million. The MRD Merger Notes are due on January 24, 2002. No cash
interest was payable on the MRD Merger Notes until July 31, 1999, at which
time interest became payable in cash semi-annually at the rate of 14% per
annum with the first cash interest payment made on January 31, 2000. Proceeds
from the sale of the MRD Merger Notes were used exclusively to purchase all of
the outstanding shares of Hamlet, and the MRD Merger Notes are secured by all
of the outstanding shares of Hamlet.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Liquidity and Capital Resources--Liquidity."
Restaurant Operations
The Company operated 308 restaurants primarily under the Chi-Chi's, El
Torito, Casa Gallardo, Koo Koo Roo and Hamburger Hamlet concepts at December
26, 1999. The Chi-Chi's, El Torito and Casa Gallardo restaurants serve
moderately priced, high-quality Mexican food and a wide selection of alcoholic
and non-alcoholic beverages. Koo Koo Roo restaurants are in the emerging food
category of fresh, convenient meals--meals with the convenience and value
associated with quick service, but the quality, freshness and variety
associated with upscale, casual full-service restaurants. The Hamburger Hamlet
restaurants are full-service casual dining restaurants known for their quality
service and their extensive variety of distinctive products.
The average food check per person (excluding alcoholic beverage sales) for
1999 is as follows (the average food check per person for El Torito represents
all restaurants in the El Torito Division including Casa Gallardo):
<TABLE>
<S> <C>
Chi-Chi's.............................................................. $9.23
El Torito.............................................................. 10.61
Koo Koo Roo............................................................ 9.13
Hamburger Hamlet....................................................... 11.03
</TABLE>
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 7,500 to 11,000
square feet of floor space and accommodate approximately 300 to 400 guests in
the restaurant and lounge. The Company's Mexican restaurants are generally
located in freestanding buildings in densely populated suburban areas, and the
Company believes their festive atmosphere and moderate prices are especially
appealing to family clientele. Koo Koo Roo restaurants generally contain from
2,700 to 3,100 square feet of floor space and accommodate approximately 75 to
85 guests.
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Site Selection
The selection of sites for new restaurants is the responsibility of the
senior management of El Torito Restaurants, Inc. ("El Torito"), Chi-Chi's,
Inc. ("Chi-Chi's") and KKR. Typically, potential sites are brought to the
attention of the Company by real estate brokers and developers familiar with
the Company's 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 26, 1999, the Company had a total of 17,813 employees, of whom
16,306 were restaurant employees, 1,169 were field management and 338 were
corporate personnel. Upon the completion of the El Torito Sale, the Company
estimates it will have approximately 11,600 employees. 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
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,
attractiveness of facilities, advertising, name identification and restaurant
location. Each of the Company's restaurants competes directly or indirectly
with locally-owned restaurants, as well as with restaurants with national or
regional images, many of which have greater financial, marketing, personnel
and other resources than the Company. The Company is required to respond to
various factors affecting the restaurant industry, including changes in
consumer preferences, tastes and eating habits, demographic trends and traffic
patterns, increases in food and labor costs, competitive pricing and national,
regional and local economic conditions. The failure to compete successfully
could have a material adverse effect on the Company's financial condition and
results of operations.
The Company's Mexican restaurants have encountered increased competition in
recent years, both from new Mexican full-service restaurants and from
restaurants offering Mexican food products as part of an overall casual dining
concept.
Koo Koo Roo restaurants participate in the quick-service segment which is
highly competitive with respect to price, service and location. In addition,
the quick-service segment is characterized by the frequent introduction of new
products, accompanied by substantial promotional campaigns. In recent years
numerous competitors, including those in the casual dining and quick-service
segment have introduced products, including products featuring chicken, that
were developed to capitalize on growing consumer preference for food products
that are, or are perceived to be, more healthful, nutritious, lower in
calories and lower in fat content. Management believes that Koo Koo Roo will
be subject to increased competition from companies whose products or marketing
strategies address these consumer preferences. There can be no assurance that
consumers will regard the Koo Koo Roo products as sufficiently distinguishable
from competitive products (such as, for example, those offered by El Pollo
Loco and Boston Market) or that substantially equivalent products will not be
introduced by existing or new competitors.
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
5
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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
September 1, 1997, the Federal minimum wage was increased from $4.75 to $5.15.
However, a provision of this law effectively froze the minimum wage for tipped
employees at then current levels by increasing the allowable tip credit in
those states that allow for a tip credit. Furthermore, in California, the
state's minimum wage was increased to $5.00 on March 1, 1997 and most recently
increased to $5.75 on March 1, 1998. In response to the minimum wage increases
on 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. Chi-Chi's
also raised menu prices in October and December 1997 as a result of the
cumulative impact of these minimum wage increases. Similarly, in March 1998,
KKR also raised menu prices for its Koo Koo Roo restaurants. No minimum wage
increases are currently scheduled for 2000 at this time, but it is anticipated
that the Federal legislature will pass a minimum wage increase later this
year.
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 24 restaurants
internationally. 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 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 right to develop the
Company's El Torito Mexican restaurant concept in Japan. At December 26, 1999,
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 15 international Chi-Chi's restaurants
for Chi-Chi's in
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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 15 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 March 1999, KKR's original Canadian licensee ("KKR Canada") filed a
bankruptcy proceeding in Ontario, Canada. As a result thereof, KKR Canada lost
its license rights to own and develop Koo Koo Roo restaurants in Canada. In
April 1999, KKR entered into a Master License and Development Agreement with
1337855 Ontario, Inc., a Canadian company ("Ontario") which, among other
things, granted to Ontario an exclusive right and license to develop Koo Koo
Roo restaurants throughout Canada and requires Ontario to pay KKR quarterly
royalties beginning in 2000. Ontario currently has one Koo Koo Roo restaurant
in the Toronto area, which restaurant is not in material compliance with the
terms of the Master License and Development Agreement. In addition, KKR has
entered into license agreements covering England and Israel. No restaurants
have been developed to date under these agreements.
In 1996, the Company established El Torito Franchising Company ("ETFC") to
market domestically and internationally the El Torito Mexican restaurant
concept. There is currently no domestic franchise activity. 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
a minimum of 20 El Torito restaurants over 15 years in Turkey. At December 26,
1999, EL operated one El Torito restaurant and one El Torito Express
restaurant in Turkey. In addition, on February 13, 1998, ETFC entered into a
Master Franchise and Development Agreement with UVECO Holding, Inc. ("UVECO"),
pursuant to which UVECO was granted the rights to develop 21 El Torito
restaurants over 20 years in seven countries in the Middle East.
As described above, under existing license and other franchise agreements,
six El Torito restaurants are operated in Japan, two El Torito restaurants are
operated in Turkey, 15 Chi-Chi's restaurants are operated in international
markets and one Koo Koo Roo restaurant is operated in Toronto, Canada.
Franchise and license fees were $190,000 for the year ended December 26, 1999.
This compares to $235,000 for the year ended December 27, 1998 and $219,000
for the year ended December 28, 1997.
Sale of El Torito Division
On March 27, 2000, the Company entered into a definitive agreement (the
"Sale Agreement") to sell substantially all of the El Torito Division to
Acapulco in a transaction with an enterprise value of approximately $130.0
million. Consummation of the El Torito Sale is subject to customary terms and
conditions. There can be no assurance that the Company will successfully
complete the El Torito Sale.
Under the terms of the Sale Agreement, the Company will receive, subject to
certain post-closing adjustments based on a closing balance sheet, cash of
$130.0 million ($5.0 million of which will be placed in escrow for a
designated period following the consummation of the El Torito Sale) less the
amount of the El Torito Division's long-term debt, primarily capitalized lease
obligations, assumed by Acapulco at the closing ($10.7 million of such long-
term debt was outstanding as of February 20, 2000). Six restaurants currently
operated by the El Torito Division will not be sold and will continue to be
operated by the Company. The Company expects the sale to be finalized in the
second quarter of fiscal 2000 and to record a pretax gain in fiscal 2000 as a
result of this transaction. In connection with the El Torito Sale, the Company
and FRI-MRD have agreed, subject to certain limitations, to indemnify Acapulco
against certain losses if they occur, primarily related to events prior to the
closing. Acapulco has agreed to indemnify the Company, with certain
exceptions, for certain events occurring after the closing. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--
Liquidity and Capital Resources."
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Certain Risk Factors
Substantial Leverage
The Company currently has (and following completion of the El Torito Sale
will continue to have) a significant amount of indebtedness. The following
chart shows certain important credit statistics as of the dates specified
below:
<TABLE>
<CAPTION>
For the Years Ended
-------------------------
December 26, December 27,
1999 1998
------------ ------------
($ in thousands)
<S> <C> <C>
Total Debt......................................... $260,721 $239,649
Stockholders' deficit.............................. (57,605) (21,137)
Deficiency of losses to cover fixed charges........ (35,999) (62,733)
</TABLE>
This substantial indebtedness could have important consequences. For
example, it could:
. increase the Company's vulnerability to adverse general economic and
industry conditions;
. limit the Company's ability to obtain additional financing to fund
future working capital, capital expenditures, acquisitions and other
general corporate requirements;
. require the Company to dedicate a substantial portion of its cash flow
from operations to payments on indebtedness, thereby reducing the
availability of cash flow to fund working capital, capital expenditures,
acquisitions and other general corporate purposes;
. limit the Company's flexibility in planning for, or reacting to, changes
in its business and the industry in which it operates;
. place the Company at a competitive disadvantage compared to its
competitors that have less debt; and
. subject the Company to covenants that will restrict, among other things,
its ability to borrow money, conduct affiliate transactions, lend or
otherwise advance money to non-subsidiaries, pay dividends or advances
and make certain other payments and, under its credit facility, require
it to maintain specified financial ratios and earnings.
Failure to comply with certain covenants in the Company's debt instruments
could result in an event of default which, if not cured or waived, could have
a material adverse effect on the Company.
Ability to Service Debt
The Company's ability to make payments on and to refinance its indebtedness
and to fund planned capital expenditures will depend on its ability to
generate cash in the future. This, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors
that are beyond the Company's control.
The Company can give no assurance that its business will generate
sufficient cash flow from operations, that currently anticipated cost savings
and operating improvements will be realized on schedule or that future
borrowings will be available in an amount sufficient to enable the Company to
pay its indebtedness or to fund other liquidity needs. If the Company is
unable to generate sufficient cash flow from operations in the future to
service its debt, it may be required, among other things, to seek additional
financing in the debt or equity markets, to refinance or restructure all or a
portion of its indebtedness, to sell selected assets or to reduce or delay
planned capital expenditures. Such measures may not be sufficient for the
Company to service its debt. In addition, there can be no assurance that any
such financing, refinancing or sale of assets will be available on
commercially reasonable terms or at all. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and
Capital Resources--Liquidity."
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History of Losses
For the years ended December 26, 1999, December 27, 1998 and December 28,
1997, the Company recorded net losses of $36.5 million, $63.1 million and
$31.6 million, respectively. For the same periods, the Company recorded
operating losses of $4.6 million, $38.1 million and $11.6 million,
respectively. Although the Company believes that the use of proceeds from the
El Torito Sale, if consummated, the ongoing impact of the Merger and other
initiatives will result in improvements to operations, there can be no
assurance that the Company will achieve profitable operations in the future.
Future Growth and Financing
The Company's business strategy includes remodeling existing restaurants
and developing new restaurants, which may include future development,
construction and renovation projects. The extent and timing of any such
projects will depend upon various factors, including available cash flow, the
ability to obtain additional financing (including landlord contributions) and
the availability of suitable locations, many of which are beyond the Company's
control. In addition, the Company is subject to the risks inherent in any
development activity, including, but not limited to, disruption of existing
operations, delays in receipt of permits, licenses or other regulatory
approvals, shortages of materials or skilled labor, work stoppages, and
weather interferences, any of which could delay development or result in
substantial cost increases.
Sale of El Torito Division
On March 27, 2000, the Company entered into a definitive agreement to
complete the El Torito Sale. Planning and implementing the separation of the
El Torito Division from the Company has and will require the dedication of
management resources, and the Company expects to incur certain incremental
expenses in future periods related to the separation. Efforts required to
separate the operations of the El Torito Division may disrupt the Company's
ongoing business activities. These factors could have an adverse affect on the
Company's results of operations or financial condition. In addition, a
significant portion of the Company's administrative infrastructure represents
costs that are fixed. Accordingly, these costs may represent a greater
percentage of sales after the separation and thus could adversely affect the
Company's results of operations.
It is anticipated that the Company will provide transitional services to
support the ongoing El Torito Division operations for some period of time.
These transitional services relate to certain of the Company's administrative
functions. After expiration of the transitional service arrangement, the
Company may not be able to effectively re-deploy the employees performing
these services in a timely manner, and the Company's financial results could
be adversely affected.
Control by Principal Stockholder
The former partners of Apollo FRI Partners, L.P. ("Apollo") own
approximately 55% of the Company's outstanding common stock and have the
ability to control the election of directors and the results of virtually all
other matters submitted to a vote of the stockholders. Such concentration of
ownership, together with the anti-takeover effects of certain provisions in
the Delaware General Corporate Law and the Company's charter documents may
have the effect of delaying or preventing a change of control of the Company.
Key Personnel
The Company's success depends to a significant extent on retaining the
services of its executive officers and directors, particularly Mr. Kevin
Relyea, the Company's Chief Executive Officer and Chairman of the Board. The
Company does not maintain key man insurance. The loss of the services of key
employees or directors (whether such loss is through resignation or other
causes) or the inability to attract additional qualified personnel could have
an adverse effect on the Company's financial condition and results of
operations. The Company has entered into an employment agreement with Mr.
Relyea that expires on December 31, 2001.
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Forward Looking Statements
This document includes "forward looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act
including, in particular, the statements about the Company's plans,
strategies, and prospects. When used in this document and the documents
incorporated herein by reference, the words "believes," "expects,"
"anticipates," "intends," "plans," "estimates" or similar expressions are
intended to identify in certain circumstances, forward looking statements.
Although the Company believes that its plans, intentions and expectations
reflected in or suggested by such forward looking statements are reasonable,
it can give no assurance that such plans, intentions or expectations will be
achieved. Important factors that could cause actual results to differ
materially from the forward looking statements made in this document are set
forth above and elsewhere in this document and in the documents incorporated
herein by reference. Given these uncertainties, the Company cautions against
undue reliance on such statements or projections. The Company does not
undertake any obligation to update these forward looking statements or
projections. All forward looking statements attributable to the Company or
persons acting on the Company's behalf are expressly qualified in their
entirety by the preceding cautionary statements. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Item 2. PROPERTIES
Of the 308 restaurants operated by the Company as of December 26, 1999, the
Company owned the land and buildings for 28, owned the buildings and leased
the land for 55 and leased both land and buildings for the remaining 225
restaurants. The full-service restaurants are primarily free-standing units
ranging from approximately 5,000-11,000 square feet. KKR restaurants generally
approximate 2,700 to 3,100 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:
<TABLE>
<CAPTION>
Number of
Lease Expiration Restaurants
---------------- -----------
<S> <C>
2000-2004........................................................ 13
2005-2009........................................................ 32
2010-2014........................................................ 72
2015-2019........................................................ 56
2020 and later................................................... 107
---
Total.......................................................... 280
===
</TABLE>
In addition, the Company owns a 43,120 square-foot building in Irvine,
California which houses support personnel for the Company. Adjacent to this
building the Company has started construction of a new 4,000 square-foot
research and development facility, which will house quality assurance and the
Company's test kitchen. Construction is expected to be completed in the second
quarter of 2000. The Company leases 34,200 square feet of space in an office
building in Irvine, California which houses El Torito and KKR 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. In connection with
the El Torito Sale, the Company will review its office and warehouse
requirements and reduce available square footage as necessary and allowable
under its various lease agreements.
Substantially all of the Company's assets have been pledged under the
Foothill Credit Facility. However, of the 83 owned restaurants at December 26,
1999 (buildings or land and buildings), two were subject to security interests
in favor of other third parties.
10
<PAGE>
Approximately 42% of the Company's restaurants are located in California.
Revenues are dependent on discretionary spending by consumers, particularly by
consumers living in the communities in which the restaurants are located. A
significant weakening in any of the local economies in which the restaurants
operate (particularly California) may cause the residents of such communities
to curtail discretionary spending which, in turn, could have a material effect
on the results of operations and financial position of the entire Company. In
addition, the results achieved to date by the Koo Koo Roo restaurants in the
core Southern California market may not be indicative of the prospects or
market acceptance of a larger number of restaurants, particularly in wider and
more geographically dispersed areas with varied demographic characteristics.
The Company's geographic concentration of restaurants could have a material
adverse effect on its financial condition and results of operations. The
following table details the Company-operated restaurants by state of operation
as of December 26, 1999:
<TABLE>
<CAPTION>
Total
Hamburger Number of
Chi-Chi's El Torito* Koo Koo Roo Hamlet Restaurants
--------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
California.............. 0 83 37 10 130
Ohio.................... 28 0 0 0 28
Pennsylvania............ 23 0 0 0 23
Indiana................. 13 2 0 0 15
Michigan................ 14 0 0 0 14
Virginia................ 9 0 0 2 11
Maryland................ 8 0 0 2 10
Wisconsin............... 10 0 0 0 10
Missouri................ 0 8 0 0 8
Minnesota............... 7 0 0 0 7
New Jersey.............. 7 0 0 0 7
Kentucky................ 6 0 0 0 6
Illinois................ 5 1 0 0 6
Iowa.................... 5 0 0 0 5
Florida................. 0 0 4 0 4
New York................ 4 0 0 0 4
Massachusetts........... 3 0 0 0 3
Nevada.................. 0 1 2 0 3
Oregon.................. 0 3 0 0 3
West Virginia........... 3 0 0 0 3
Arizona................. 0 2 0 0 2
Connecticut............. 1 0 0 0 1
Delaware................ 1 0 0 0 1
Kansas.................. 1 0 0 0 1
North Dakota............ 1 0 0 0 1
South Dakota............ 1 0 0 0 1
Washington.............. 0 1 0 0 1
--- --- --- --- ---
Total................. 150 101 43 14 308
=== === === === ===
</TABLE>
- --------
* All but six restaurants (five in California and one in Nevada) to be sold
to Acapulco if the El Torito Sale is consummated--See "BUSINESS--Sale of El
Torito Division."
In the past five years, the Company has divested more than 115 restaurants,
and the Company currently has a substantial portfolio of closed, subleased and
assigned properties. Because the ability of any particular acquiror to satisfy
its obligations under any subleased or assigned lease depends on its ability
to generate sufficient revenues in the acquired restaurant, there can be no
assurance that the Company will not incur significant and unplanned costs in
connection with such leases. It is expected that ongoing divestment activities
will add to this
11
<PAGE>
portfolio of closed, subleased and assigned properties. From time to time, the
Company has been required to reassume leases associated with these properties,
but it has generally been able to relet them within a reasonable period of
time. As of December 26, 1999, the Company was attempting to lease nine closed
properties with an annual carrying cost of $1.5 million. The failure to relet
such leases on favorable economic terms, or at all, or increases in the
carrying costs associated with such leases, could have a material adverse
effect on the Company's financial condition and results of operations.
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
None.
12
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
From September 15, 1986 (date of incorporation) through October 30, 1998,
there was no established public trading market for the Company's Common Stock.
Commencing November 2, 1998 with the consummation of the Merger, and
continuing until February 1, 1999, the Company's Common Stock traded in and
was listed for quotation through the National Association of Securities
Dealers Automated Quotation System ("Nasdaq") National Market. Beginning
February 2, 1999, the Company's Common Stock has traded in the NASD Over-the-
Counter Bulletin Board Market.
The following table sets forth for the periods identified the high and low
closing price of the Company's Common Stock, as reported by the applicable
market.
<TABLE>
<CAPTION>
High Low
----- -----
<S> <C> <C>
Year Ended December 1997
First Quarter................................................. N/A N/A
Second Quarter................................................ N/A N/A
Third Quarter................................................. N/A N/A
Fourth Quarter................................................ N/A N/A
Year Ended December 1998
First Quarter................................................. N/A N/A
Second Quarter................................................ N/A N/A
Third Quarter................................................. N/A N/A
Fourth Quarter (beginning November 2, 1998)................... $1.25 $0.53
Year Ended December 1999
First Quarter................................................. $1.00 $0.47
Second Quarter................................................ $1.09 $0.52
Third Quarter................................................. $0.55 $0.31
Fourth Quarter................................................ $0.36 $0.13
</TABLE>
At March 17, 2000, there were 1,032 stockholders of record of Company
Common Stock.
The Securities and Exchange Commission ("SEC") has amended certain rules
under the Securities Exchange Act of 1934 regarding the use of a company's
discretionary proxy voting authority with respect to stockholder proposals
submitted to a company for consideration at such company's next annual
meeting. Stockholder proposals submitted to the Company outside the processes
of Rule 14a-8 (i.e., the procedures for placing a stockholders' proposal in
the Company's proxy materials) will be considered untimely with respect to the
2000 annual meeting of stockholders and all subsequent annual meetings of
stockholders if received by the Company more than 120 days or less than 90
days prior to the anniversary date of the immediately preceding annual meeting
of stockholders.
The Company has not paid cash dividends to holders of Company Common Stock
since its incorporation. The Company has retained, and expects to continue to
retain, all available earnings, if any, generated by its operations for the
maintenance, development and growth of its business, and does not anticipate
paying dividends on Company Common Stock in the foreseeable future. In
addition, each of the indentures, as amended, (collectively, the "Indentures")
governing the Company's outstanding Senior Notes and Senior Subordinated
Discount Notes, the note agreements governing the FRI-MRD Senior Discount
Notes and the MRD Merger Notes and the Foothill Credit Facility restricts or
prohibits the Company's ability to pay dividends.
13
<PAGE>
Item 6. SELECTED FINANCIAL DATA(1)
<TABLE>
<CAPTION>
As of and for the Years Ended
-----------------------------------------------------------------
Dec. 26, Dec. 27, Dec. 28, Dec. 29, Dec. 31,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
($ in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Sales................... $ 536,579 $ 472,653 $ 463,724 $ 724,229 $ 1,134,359
Cost of Sales:
Product cost........... 141,881 126,788 123,803 200,379 322,194
Payroll and related
costs................. 190,772 165,207 162,807 273,536 419,185
Occupancy and other
operating expenses.... 139,153 125,177 129,428 181,730 275,164
Depreciation and
amortization........... 28,031 22,916 22,395 33,802 52,561
General and
administrative
expenses............... 32,742 27,417(2) 30,186 41,742 56,245
Opening expense......... 2,879 3,345 188 673 5,275
Loss on disposition of
properties............. 5,265 7,993 3,885 8,600 12,067
Gain on sale of
division............... 0 0 0 62,601 0
Provision for
divestitures and write-
down of long-lived
assets................. 484 27,661 2,640 0 44,500
VCU termination expense
(3).................... 0 4,223 0 0 0
Restructuring costs..... 0 0 0 6,546 4,392
Interest expense, net... 31,371 24,659 19,476 36,725 65,277
Income tax provision.... 492 400 509 890 1,208
----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary item..... (36,491) (63,133) (31,593) 2,207 (123,709)
Extraordinary gain on
extinguishment of
debt................... 0 0 0 134,833 0
----------- ----------- ----------- ----------- -----------
Net income (loss)....... $ (36,491) $ (63,133) $ (31,593) $ 137,040 $ (123,709)
=========== =========== =========== =========== ===========
Net income (loss) per
share--basic and
diluted:
Income (loss) before
extraordinary item.... $ (0.20) $ (0.48) $ (0.26) $ 0.02 $ (1.02)
Extraordinary item..... -- -- -- 1.11 --
----------- ----------- ----------- ----------- -----------
Net income (loss)...... $ (0.20) $ (0.48) $ (0.26) $ 1.13 $ (1.02)
=========== =========== =========== =========== ===========
Weighted average shares
outstanding--basic and
diluted................ 180,380,513 131,309,797 121,515,391 121,515,391 121,515,391
=========== =========== =========== =========== ===========
Balance Sheet Data:
Working capital
(deficiency) (4)(5).... $ (28,415) $ (74,116) $ (66,412) $ (85,524) $ 45,114
Current assets.......... 67,613 35,790 45,117 46,612 267,077
Total assets............ 286,633 348,186 289,768 307,606 551,270
Current liabilities
(5).................... 96,028 109,906 111,529 132,136 221,963
Non-current portion of
long-term debt,
including capitalized
lease obligations (6).. 237,871 237,151 199,955 165,325 455,203
Common stockholders'
equity (deficit)....... (57,605) (21,137) (26,194) 5,399 (131,576)
Selected Consolidated
Financial Ratios and
Other Data:
EBITDA (7).............. $ 32,031 $ 28,064(2) $ 17,500 $ 26,842 $ 61,571
Net income (loss)....... (36,491) (63,133) (31,593) 137,040 (123,709)
Net cash provided by
(used in) operating
activities............. (1,202) (2,495) (13,105) (21,857) 6,083
Capital expenditures.... 30,335 27,691 13,588 9,848 38,022
Net cash provided by
(used in) investing
activities............. (32,081) (41,760) (16,631) 165,024 (19,615)
Net cash provided by
(used in) financing
activities............. 19,176 29,444 28,434 (117,717) 13,663
Deficiency of earnings
(losses) to cover fixed
charges (8)............ (35,999) (62,733) (31,084) (59,504) (122,501)
Restaurants open at end
of period.............. 308 314 275 281 670
Ratio of EBITDA to
interest expense, net 1.02x 1.14x 0.90x 0.73x 0.94x
</TABLE>
- --------
(1) The results of operations and financial position of KKR (including Hamlet)
have been combined with the results of operations and financial position
of the Company from October 30, 1998 forward.
(2) Includes the reversal of accrued management fees of $2,500,000 payable to
Apollo that the Company will not be required to pay.
14
<PAGE>
(3) Compensation expense of $4.2 million was recorded in the fourth quarter of
1998 in connection with the termination of the Company's Value Creation
Units Plan. Such expense consisted of a $4 million cash payment and
approximately $0.2 million for the intrinsic value of stock options
granted on December 9, 1998 in connection with the termination of awards
under the Value Creation Units Plan. The stock options are fully vested
options to purchase up to, in the aggregate, 3% of the fully diluted
Company Common Stock immediately following the Merger (including shares to
be reserved for issuance under the Company's 1998 Stock Incentive Plan).
Such options have a per share strike price of $.50 and were not
exercisable for a period of 90 days after issuance.
(4) Includes the impact of working capital borrowings classification discussed
in Note 7 of the Consolidated Financial Statements and the classification
of $55,835,000 in property held for sale discussed in Note 17 of the
Consolidated Financial Statements.
(5) As of December 27, 1998, the Company has separated its self-insurance
reserves into current and long-term portions. Accordingly, working capital
(deficiency) and current liabilities are not comparable with the amounts
listed for 1997, 1996 and 1995.
(6) Excludes $7,077,000 related to the El Torito Division which is included as
a reduction of property held for sale.
(7) EBITDA is defined as earnings (loss) before opening costs, loss on
disposition of properties, gain on sale of division, provision for
divestitures and write-down of long-lived assets, VCU termination expense,
restructuring costs, interest, taxes, depreciation and amortization and
extraordinary items. 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. Furthermore, other companies may compute EBITDA differently,
and therefore, EBITDA amounts among companies may not be comparable.
(8) For the periods presented, the Company's earnings (losses) are inadequate
to cover fixed charges by the amounts disclosed. For the purposes of
calculating the deficiency of earnings (losses) to fixed charges
(i) earnings (losses) represent income (loss) before income taxes, fixed
charges, gain on sale of division and extraordinary gain on extinguishment
of debt and (ii) fixed charges consist of interest on all indebtedness,
interest related to capital lease obligations and amortization of debt
issuance costs and discounts relating to indebtedness.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain information and statements included in this Management's Discussion
and Analysis of Financial Condition and Results of Operations, including,
without limitation, statements containing the words "believes," "anticipates,"
"expects," "intends," "plans," "estimates" 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 cause actual results of the Company or the
restaurant industry to differ 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:
. the continuing development of successful marketing strategies for each
of the Company's concepts;
. the effect of national and regional economic conditions;
. the ability of the Company to satisfy its debt obligations;
. the availability of adequate working capital;
. competitive products and pricing;
15
<PAGE>
. changes in legislation;
. demographic changes;
. the ability to attract and retain qualified personnel;
. changes in business strategy or development plans;
. business disruptions;
. changes in consumer preferences, tastes and eating habits; and
. 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.
On October 30, 1998, the Company, Merger Sub and KKR consummated the
Merger, pursuant to which Merger Sub was merged with and into KKR, with KKR as
the surviving corporation. As a result of the Merger, each outstanding share
of common stock of KKR was converted into the right to receive one share of
Company Common Stock. Immediately prior to the Merger, a stock dividend was
declared pursuant to which approximately 121.96 shares of Company Common Stock
were distributed for each share of Company Common Stock outstanding
immediately prior to the Merger. Prior to the Merger, the Company provided the
Bridge Loan to a subsidiary of KKR. Additionally, in connection with the
Merger, FRI-MRD issued the MRD Merger Notes pursuant to the Senior Secured
Discount Note Agreement dated June 9, 1998 for which it received net proceeds
of $21.7 million, and the Company expanded the Foothill Credit Facility by an
additional $20 million. The proceeds from the sale of the MRD Merger Notes
were used to complete the Hamlet Acquisition immediately prior to the
consummation of the Merger.
Information relating to periods ending prior to October 30, 1998 included
herein relates to the historical operations of Prandium, Inc. (formerly known
as Koo Koo Roo Enterprises, Inc. and as Family Restaurants, Inc.) and does not
reflect the operations of KKR and Hamlet which the Company acquired on October
30, 1998.
Liquidity and Capital Resources
Liquidity
The Company reported net cash used in operating activities for the years
ended December 26, 1999 and December 27, 1998 of $1.2 million and $2.5
million, respectively. Cash needs are being funded by available cash balances,
supplemented, as necessary, by working capital advances available under the
Foothill Credit Facility. In addition, in 1997 and 1998 FRI-MRD raised
approximately $67.3 million in cash from the issuance of the Senior Discount
Notes and the MRD Merger Notes to supplement its cash needs. The Company's
viability has been and will continue to be dependent upon its ability to
generate sufficient operating cash flow or cash flow from other sources to
meet its obligations on a timely basis, and to comply with the terms of its
financing agreements.
Statement of Cash Flows. For the year ended December 26, 1999, net cash
used in operating activities was $1.2 million compared to $2.5 million for the
year ended December 27, 1998. The difference in cash received from customers,
franchisees and licensees as compared to cash paid to suppliers and employees
decreased by $1.2 million from 1998 to 1999. This decrease combined with $1.6
million in lower interest received were more than offset by the lack of VCU
termination expense in 1999. For 1999, net cash used in investing activities
was $32.1 million compared to $41.8 million for the same period in 1998. The
decrease in net cash used in investing activities of $9.7 million was due to
the decrease of Merger-related expenditures of $14.7 million, an increase in
proceeds from payment on notes receivable of $2.2 million, and an increase in
proceeds from sale of notes receivable of $3.2 million, offset in part by an
increase in capital expenditures of $2.6 million, an increase in lease
termination payments of $2.2 million, other divestment expenditures of $2.3
million and a decrease in proceeds from disposal of property and equipment of
$2.4 million. For 1999, net cash provided by financing
16
<PAGE>
activities was $19.2 million compared to $29.4 million for the same period in
1998. During 1998, $33.3 million in net proceeds from the issuance of notes
was received, as compared to $21.9 million in proceeds from working capital
borrowings in 1999.
For the year ended December 27, 1998, net cash used in operating activities
was $2.5 million compared to $13.1 million for the year ended December 28,
1997. The difference in cash received from customers, franchisees and
licensees as compared to cash paid to suppliers and employees improved by
$17.9 million from 1997 to 1998 which more than offset cash paid for opening
costs of $3.0 million and for VCU termination expense of $4.0 million in 1998.
For 1998, net cash used in investing activities was $41.8 million compared to
$16.6 million in 1997. The increase in net cash used in investing activities
of $25.2 million was due to Merger-related expenditures of $17.0 million and
an increase in capital expenditures of $14.1 million which more than offset
decreases in mandatory lease buybacks of $2.7 million, lease termination
payments of $1.5 million and an increase in proceeds from disposal of property
and equipment of $3.4 million. For 1998, net cash provided by financing
activities was $29.4 million compared to net cash used in financing activities
of $28.4 million in 1997. During 1998 and 1997, $33.3 million and $33.9
million in net proceeds from the issuance of notes was received, respectively,
while reductions of long-term debt decreased by $0.4 million and payment of
debt issuance costs decreased by $1.3 million from 1997.
EBITDA. For the year ended December 26, 1999, the Company reported EBITDA
(defined as earnings (loss) before opening costs, loss on disposition of
properties, gain on sale of division, provision for divestitures and write-
down of long-lived assets, VCU termination expense, restructuring costs,
interest, taxes, depreciation and amortization and extraordinary items) of
$32.0 million, compared to $28.1 million for 1998. The $3.9 million
improvement was due to the continuing impact of cost reduction and
reengineering strategies which have improved operating margins, continuing
positive comparable restaurant sales trends at El Torito and $4.4 million
contributed by KKR and Hamlet in 1999 compared to $0.4 million for November
and December 1998, partially offset by the $2.5 million reversal in 1998 of
certain management fee accruals that the Company was not required to pay. This
improved EBITDA is the continuation of the trend that began in 1996 when new
management was installed at both El Torito and Chi-Chi's. Since 1995, the
divisional EBITDA of the Company's ongoing operations is set forth in the
following table.
<TABLE>
<CAPTION>
Divisional EBITDA
--------------------------------
El Chi-
Fiscal Year Ended Torito Chi's Koo Koo Roo(b)
----------------- ------- -------- --------------
($ in thousands)
<S> <C> <C> <C>
December 31, 1995(a)........................ $13,508 $(10,455) $ --
December 29, 1996........................... 11,956 (4,278) --
December 28, 1997........................... 17,627 36 --
December 27, 1998........................... 22,869 1,426 364
December 26, 1999........................... 22,000 5,942 4,384
</TABLE>
- --------
(a) Includes 53 weeks of operations and, in accordance with Company policy at
that time, excludes certain unallocated corporate overhead.
(b) The Merger and Hamlet Acquisition were completed on October 30, 1998.
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. Furthermore, other companies
may compute EBITDA differently, and therefore, EBITDA amounts among companies
may not be comparable.
Working Capital Deficiency. The Company operates with a substantial working
capital deficiency because:
. restaurant operations are conducted primarily on a cash (and cash
equivalent) basis with a low level of accounts receivable;
17
<PAGE>
. rapid turnover allows a limited investment in inventories; and
. 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 $62.4 million on December
26, 1999 (excluding the impact of $55.8 million in property held for sale
discussed in Note 17 of the Financial Statements and the impact of $21.9
million in working capital borrowings classified as a current liability).
Credit Facility. The Foothill Credit Facility:
. provides for up to $35 million in revolving cash borrowings and up to
$55 million in letters of credit (less the outstanding amount of
revolving cash borrowings);
. is secured by substantially all of the real and personal property of the
Company;
. contains covenants which restrict, among other things, the Company's
ability to incur debt, pay dividends on or redeem capital stock, make
certain types of investments, make dispositions of assets and engage in
mergers and consolidations; and
. expires on January 10, 2002.
The Company was in compliance with all financial ratios at December 26,
1999. 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 ($18.3 million of such letters of
credit were outstanding as of March 17, 2000). $27.5 million of working
capital borrowings were outstanding as of March 17, 2000.
Senior Discount Notes. On August 12, 1997, FRI-MRD issued an aggregate
principal amount of $61 million of its Senior Discount Notes to certain
holders of the Company's Senior Notes in exchange for $15.6 million of Senior
Notes plus approximately $34 million of cash. On January 14 and 15, 1998, FRI-
MRD issued an additional $14 million aggregate principal amount of its Senior
Discount Notes to the same purchasers for approximately $11.6 million in cash.
The Senior Discount Notes are due on January 24, 2002. No cash interest was
payable on the Senior Discount Notes until July 31, 1999, at which time
interest became payable in cash semi-annually at the rate of 15% per annum,
with the first cash interest payment made on January 31, 2000. The Senior
Discount Notes are redeemable by FRI-MRD, in whole or in part, on or before
January 23, 2001, at a price of 107.5% of the accreted value thereof, or after
January 23, 2001, at a price of 103.75% of the accreted value thereof. The
Senior Discount Notes contain covenants that restrict FRI-MRD, including
limitations on (i) the incurrence of certain indebtedness and liens, (ii) the
ability to make certain restricted payments, (iii) certain mergers,
consolidations and asset sales and (iv) certain transactions with affiliates.
Proceeds from the sales of the Senior Discount Notes were used to fund the
Company's capital expenditure programs and for general corporate purposes.
Senior Secured Discount Notes. On June 9, 1998, FRI-MRD entered into a Note
Agreement pursuant to which on October 30, 1998 FRI-MRD issued $24 million
aggregate face amount of MRD Merger Notes at a price of approximately 90% of
par resulting in net proceeds of $21.7 million. The MRD Merger Notes are due
on January 24, 2002. No cash interest was payable on the MRD Merger Notes
until July 31, 1999, at which time interest became payable in cash semi-
annually at the rate of 14% per annum, with the first cash interest payment
made on January 31, 2000. The MRD Merger Notes are redeemable by FRI-MRD, in
whole or in part, on or before January 23, 2001, at a price of 105% of the
accreted value thereof, or after January 23, 2001, at a price of 102.5% of the
accreted value thereof. The MRD Merger Notes contain covenants that restrict
FRI-MRD, including limitations on (i) the incurrence of certain indebtedness
and liens, (ii) the ability to make certain restricted payments, (iii) certain
mergers, consolidations and asset sales, (iv) certain transactions with
affiliates and (v) the issuance of any equity securities of Hamlet. Proceeds
from the sale of the MRD Merger Notes were used exclusively to purchase all of
the outstanding shares of Hamlet, and the MRD Merger Notes are secured by all
of such outstanding shares of Hamlet.
18
<PAGE>
Other. During 1999, the Company explored several financing transactions and
other strategic alternatives in an effort to meet its debt service
requirements and retained Donaldson, Lufkin & Jenrette Securities Corporation
and U.S. Bancorp Libra as financial advisors to assist in these efforts. This
process culminated in the execution of the Sale Agreement on March 27, 2000 to
sell substantially all of the El Torito Division to Acapulco in a transaction
with an enterprise value of $130.0 million, subject to certain adjustments
based on a closing balance sheet. Cash proceeds from the sale will be used to
repay certain indebtedness and for general corporate purposes. Consummation of
the El Torito Sale is subject to customary terms and conditions, and there can
be no assurances that this transaction will be consummated.
Upon completion of the El Torito Sale, the Company will continue to be
highly leveraged and have significant debt service requirements, excluding
requirements under the Foothill Credit Facility, as follows:
<TABLE>
<CAPTION>
Cash
Interest Principal
-------- ---------
($ in millions)
<S> <C> <C>
2000...................................................... $28.4 $ 1.1
2001...................................................... 28.3 0.9
2002...................................................... 15.6 203.2
2003...................................................... 3.4 0.5
2004...................................................... 1.7 31.1
</TABLE>
Although management believes that the proceeds available to the Company as
a result of the El Torito Sale should be sufficient to meet its operating and
debt service requirements for the next two years, there can be no assurance
that the Company will be able to repay or refinance its Senior Notes and
Senior Subordinated Discount Notes, or that FRI-MRD will be able to repay or
refinance the Senior Discount Notes or the MRD Merger Notes, at their
respective maturities. The Company will continue to explore various
alternatives to further reduce its debt.
Capital Resources
Net cash used in investing activities was $32.1 million for the year ended
December 26, 1999, including $30.3 million for capital expenditures, as
compared to net cash used in investing activities of $41.8 million for fiscal
1998 and $16.6 million for fiscal 1997.
Capital expenditures of up to approximately $37.3 million (including
approximately $16.3 million for the El Torito Division) have been identified
for fiscal 2000, including approximately $9.2 million (including approximately
$2.6 million for the El Torito Division) devoted to normal improvements of the
Company's restaurants. The Company is considering continuing its remodeling of
both El Torito and Chi-Chi's restaurants and is allocating approximately $9.5
million (including approximately $3.8 million for the El Torito Division) for
this purpose in fiscal 2000. The Company anticipates that up to three new El
Torito restaurants and up to seven new Koo Koo Roo restaurants could open in
2000 and beginning to accelerate the Koo Koo Roo growth plan in 2001. Actual
capital expenditures for fiscal 2000 will be dependent on the availability of
required funds and the timing of the consummation of the El Torito Sale.
By December 26, 1999, the Company had completed the remodeling of 42 El
Torito restaurants in various markets, and 83 Chi-Chi's restaurants, in
various markets.
Year 2000
The Company believes it has successfully addressed the potential business
risks associated with the Year 2000. The Year 2000 issue involved the use of a
two-digit year field instead of a four-digit year field in computer systems.
If computer systems could not distinguish between the year 1900 and the year
2000, system failures or other computer errors could have resulted. To date,
the Company is not aware of the occurrence of any significant Year 2000
problems being reported in connection with its business. Some business risks
associated with the Year 2000 issue may remain throughout 2000. However, it is
not anticipated that future Year 2000 issues, if any, will have a material
adverse effect on the Company.
19
<PAGE>
The total cost to the Company of addressing Year 2000 issues was
approximately $9.0 million, a significant portion of which was lease financed.
This amount was incurred for new software and related hardware and
installation costs during 1998 and 1999 in the Company's corporate offices and
operating restaurants.
Interest Rate Risk
The Company's primary exposure to financial market risks is the impact that
interest rate changes could have on the Foothill Credit Facility, of which
$21,850,000 was outstanding as of December 26, 1999. Borrowings under the
Foothill Credit Facility bear interest at the prime rate as announced by Wells
Fargo & Company plus 1.875% for borrowings less than $23,333,333 and at the
prime rate plus 2.875% for borrowings equal to or greater than $22,333,333
(averaging 10.14% in fiscal 1999). A hypothetical increase of 100 basis points
in short-term interest rates would result in an increase of approximately
$219,000 in annual pretax losses. The estimated increase is based upon the
outstanding balance of the Foothill Credit Facility, and assumes no change in
the volume, index or composition of debt at December 26, 1999.
Results of Operations
As used herein, "comparable restaurants" are restaurants operated by the
Company for at least eighteen months and that continued operating through the
last day of the later year being compared. The Company has adjusted its
comparable restaurant sales calculation to conform to the general industry
standard of an 18-month base versus the prior 12-month base. This change has
not had a material impact on reported comparable restaurant sales results due
to the Company's relatively low levels of new restaurant growth in the past
three years.
Fiscal year 1999 as compared to fiscal year 1998
Total sales of $536,579,000 for 1999 increased by $63,926,000 or 13.5% as
compared to 1998. The increase was due to (i) additional sales from the Koo
Koo Roo and Hamburger Hamlet restaurants which were acquired in the Merger and
the Hamlet Acquisition on October 30, 1998 and (ii) sales from new
restaurants, partially offset by sales decreases for restaurants sold or
closed. The breakdown of the sales increase for 1999 is detailed below:
<TABLE>
<CAPTION>
1999 Sales
Increase
----------
($ in
thousands)
----------
<S> <C>
Increased Sales from the KKR Restaurant Division.................. $ 73,635
Sales from New Restaurants........................................ 6,398
Decrease in Sales of Comparable Restaurants....................... (42)
Decrease in Sales from Restaurants Sold or Closed................. (16,065)
--------
$ 63,926
========
</TABLE>
Overall sales for comparable restaurants were relatively flat in 1999.
Sales for comparable restaurants of $433,604,000 for 1999 decreased by $42,000
compared to 1998. The decrease is comprised of a $1,177,000 or 0.5% decrease
in Chi-Chi's sales and a $1,135,000 or 0.5% increase in El Torito sales.
<TABLE>
<CAPTION>
1999 Comparable
Sales Decrease
----------------
Amount Percent
------- -------
($ in
thousands)
<S> <C> <C>
Comparable Chi-Chi's....................................... $(1,177) (0.5)%
Comparable El Torito....................................... 1,135 0.5
-------
Total.................................................... $ (42) 0.0 %
======= ====
</TABLE>
20
<PAGE>
El Torito comparable sales for 1999 were up 0.5% as compared to the same
period in 1998. Throughout 1999, the primary marketing tool was a print
campaign featuring various coupon offers. The focus throughout the year was El
Torito's 45th Anniversary Celebration combined with a quarterly introduction
of an innovative product or line of products. El Torito comparable sales were
up 3.0% in the first quarter compared to the same period in 1998. These
results were in part associated with the introduction of El Torito's 45th
Anniversary Celebration and in part associated with the rollover of the El
Nino weather system which negatively impacted sales in the first quarter of
1998. The first quarter marketing effort consisted of a print campaign
focusing on the Fiesta Favorites Chef's Specials. Second quarter comparable
sales results were also positive, up 1.0% versus prior year. The second
quarter advertising continued the focus on the 45th Anniversary with a print
campaign introducing El Torito's signature product for the quarter
"Enchi"WOW"das." In the third quarter, comparable sales results were 1.0%
unfavorable versus prior year. The signature product during the quarter, the
"45 RPM Revolutionary Platter from Mexico" was designed and priced as a meal
to be shared by two guests. To offset softening sales in the fourth quarter
(comparable sales were unfavorable 2.0% in the fourth quarter), the XXL 45th
Anniversary Fajitas and Holiday Combinations were introduced. The print
campaign in the quarter included a Buy One Get One Free Coupon designed to
create incremental guest traffic.
Chi-Chi's comparable sales for 1999 were 0.5% lower than 1998 compared to a
1.8% increase for 1998 over 1997. Comparable sales through the third quarter
were up 0.5% over prior year. However, in the fourth quarter of 1999, Chi-
Chi's switched from broadcast media advertising to freestanding inserts in
print media ("FSIs"). When compared to the fourth quarter of 1998 when Chi-
Chi's was running broadcast media advertising, comparable sales in the fourth
quarter of 1999 were 3.6% lower. Concurrently, advertising expense was lowered
approximately $1.1 million as a result of the net media savings. The FSIs
featured a variety of Chi-Chi's signature items like the Outrageous Burrito,
Sizzling Enchiladas and Grilled Steak & Chicken Fajitas. In the Cantina, a
special Countdown Margarita, served in a commemorative take-home glass for
$7.25, helped guests celebrate the Millennium. In October 1999, Chi-Chi's
began testing an extensive new food offering, Menu 2000, in a three-unit,
midwestern market. Menu 2000 is the result of intensive testing for consumer
tastes and interests, food research and operational planning. During all 10
weeks of the advertising-supported test in 1999, both sales and customer
counts in the test market have shown significant increases over prior year.
Menu 2000 will be introduced to the rest of the Chi-Chi's system in the second
quarter of 2000 and will be the primary focus of broadcast media advertising
in 2000.
During 1999, Koo Koo Roo initiated four marketing events including the
introduction of a line of Chicken Chop bowls, $5.99 combo meals and a focus on
take home meals. Each promotion was supported with print advertising and in-
store merchandising materials. During the first quarter, Koo Koo Roo
introduced the Chargrilled Chicken Chop, now one of its top-selling products.
With the success of this product, Koo Koo Roo introduced two additional
Chicken Chop bowls in the third quarter. During the second quarter, Koo Koo
Roo offered a selection of four combo meals for $5.99, featuring Koo Koo Roo
Original Skinless Flame Broiled Chicken(R), Country Herb and Garlic Rotisserie
Chicken and Fresh-Roasted Turkey. Each combo meal included an entree, any two
hot or cold side dishes and a beverage. In the fourth quarter, the marketing
focused on one of its signature products, Country Herb and Garlic Rotisserie
Chicken. The print advertising focused on building the take home business with
a coupon incentive for a $5.99 Rotisserie Chicken. Along with the focus on
Rotisserie Chicken, Koo Koo Roo teamed up with Dreamworks to promote their
video release of The Prince of Egypt. This promotion centered on building
awareness of the Koo Koo Roo Kid's Meals. During this promotion, each Kid's
Meal (while supplies were available) came with a souvenir The Prince of Egypt
cup and a small stuffed camel from The Prince of Egypt. Following these two
promotions, Koo Koo Roo focused on Thanksgiving Day which resulted in an
increase of 10% in turkey sales on Thanksgiving Day.
Hamburger Hamlet introduced two new Hamlet At Night menus in 1999. These
new menus included products such as Halibut Macadamia, Santa Fe Chicken,
Grilled Pork Chop, Shepherd's Pie and Mediterranean Shrimp Penne Pasta.
Hamburger Hamlet also teamed up with Oreo(R) in 1999 and introduced a new
dessert--Oreo(R) Cookie Mudd Pie. These menus were supported with in-store
merchandising and direct mail distributed around the West and East Coast
Hamburger Hamlet locations. During the summer of 1999, Hamburger Hamlet
21
<PAGE>
also introduced five "New Gourmet Burgers From Around The World." The French
Onion Burger became a core menu item following its introduction during this
promotion.
Product costs of $141,881,000 for 1999 increased by $15,093,000 or 11.9% as
compared to 1998 due to the acquisition of the Koo Koo Roo and Hamburger
Hamlet restaurants in the Merger which accounted for $22,795,000 or 151.0% of
the increase, partially offset by the impact of the 32 restaurants sold or
closed since the beginning of 1998. As a percentage of sales, product costs
decreased to 26.4% in 1999 from 26.8% in 1998.
Payroll and related costs of $190,772,000 for 1999 increased by $25,565,000
or 15.5% as compared to 1998 due to (i) the acquisition of the Koo Koo Roo and
Hamburger Hamlet restaurants in the Merger which accounted for $24,393,000 or
95.4% of the increase, (ii) the impact of the minimum wage increase in
California on March 1, 1998 and (iii) the impact of improved management
staffing in many of the Company's restaurants, partially offset by the impact
of the 32 restaurants sold or closed since the beginning of 1998. As a
percentage of sales, payroll and related costs increased from 35.0% in 1998 to
35.6% in 1999. The increase in payroll and related costs as a percentage of
sales was offset in part by a continuing focus on improving labor scheduling
and efficiencies.
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
September 1, 1997, the Federal minimum wage was increased from $4.75 to $5.15.
However, a provision of this law effectively froze the minimum wage for tipped
employees at then current levels by increasing the allowable tip credit in
those states that allow for a tip credit. Furthermore, in California, the
state's minimum wage was increased to $5.00 on March 1, 1997 and most recently
increased to $5.75 on March 1, 1998. In response to the minimum wage increases
on 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. Chi-Chi's
also raised menu prices in October and December 1997 as a result of the
cumulative impact of these minimum wage increases. Similarly, in March 1998,
KKR also raised menu prices for its Koo Koo Roo restaurants. No minimum wage
increases are currently scheduled for 2000 at this time, but it is anticipated
that the Federal legislature will pass a minimum wage increase later this
year.
Occupancy and other operating expenses of $139,153,000 for 1999 increased
by $13,976,000 or 11.2% as compared to 1998. The increase was due to the
acquisition of the Koo Koo Roo and Hamburger Hamlet restaurants in the Merger
which added $17,488,000 in additional costs, partially offset by (i) the
impact of the 32 restaurants sold or closed since the beginning of 1998 and
(ii) the impact of the Company's cost reduction strategies. As a percentage of
sales, occupancy and other expenses decreased from 26.5% in 1998 to 25.9% in
1999.
Depreciation and amortization of $28,031,000 for 1999 increased by
$5,115,000 or 22.3% as compared to 1998 due to the acquisition of the Koo Koo
Roo and Hamburger Hamlet restaurants in the Merger which accounted for
$4,126,000 or 80.7% of the increase and additional depreciation related to the
Company's ongoing capital expenditure program, partially offset by the impact
of the 32 restaurants sold or closed since the beginning of 1998 and the
reduced depreciable basis from the write-down of certain long-lived assets in
the fourth quarter of 1998.
General and administrative expenses of $32,742,000 for 1999 increased by
$5,325,000 or 19.4% as compared to 1998. General and administrative expenses
of $4,844,000 were incurred by and allocated to the Koo Koo Roo and Hamburger
Hamlet restaurant operations in 1999. As a percentage of sales, general and
administrative expenses increased from 5.8% in 1998 to 6.1% in 1999. General
and administrative expenses in 1998 would have been 6.3% of sales if the
impact of $2,500,000 in prior year management fee accrual reversals were added
back. Management continues to closely evaluate the Company's general and
administrative cost structure for savings opportunities.
22
<PAGE>
Opening costs are incurred in connection with the opening or remodeling of
a restaurant and are principally related to stocking the restaurant and
training its staff. Opening costs of $2,879,000 for 1999 decreased by $466,000
or 13.9% as compared to 1998, primarily due to expensing $344,000 of December
28, 1997 unamortized opening costs in the quarter ended March 29, 1998 as a
result of adopting Statement of Position 98-5 ("SOP 98-5"), "Reporting on the
Costs of Start-up Activities," in the first quarter of 1998.
The Company reported a loss on disposition of properties of $5.3 million
for 1999 compared to a loss of $8.0 million in 1998. These amounts reflect
losses associated with restaurant divestments and closures and remodeled
restaurant asset retirements in such periods. In addition, also included in
1998 is a $3.0 million increase in the Company's reserve for carrying costs of
closed properties and the write-off of $2.2 million in notes receivable
related to prior restaurant divestments.
In the fourth quarter of 1999, three non-strategic Koo Koo Roo restaurants
were designated for divestment, and the Company recorded a provision for
divestitures of $0.9 million. Also during the fourth quarter of 1999, the
Company reevaluated its divestment program for Chi-Chi's restaurants and
removed 20 operating restaurants from the divestment list. As a result, $1.0
million previously recorded in conjunction with a 1998 provision for
divestitures has been reversed. Finally, the Company identified two other
restaurants with impaired values and recorded a write-down of long-lived
assets of $0.6 million.
Interest expense, net of $31,371,000 for 1999 increased by $6,712,000 or
27.2% as compared to 1998 primarily resulting from (i) the issuance of Senior
Discount Notes in January 1998 and the additional accretion and accrual of
interest thereon, (ii) the issuance of the MRD Merger Notes on October 30,
1998 and the accretion and accrual of interest thereon, (iii) interest on
working capital borrowings in 1999 and (iv) reduced interest income on
invested cash balances.
Fiscal year 1998 as compared to fiscal year 1997
Total sales of $472,653,000 for 1998 increased by $8,929,000 or 1.9% as
compared to 1997. The increase was due to (i) the addition of sales from the
Koo Koo Roo and Hamburger Hamlet restaurants which were acquired in the Merger
and the Hamlet Acquisition on October 30, 1998 and (ii) sales increases in the
comparable El Torito and Chi-Chi's, partially offset by sales decreases for
restaurants sold or closed. The breakdown of the sales increase for 1998 is
detailed below:
<TABLE>
<CAPTION>
1998 Sales
Increase
----------------
($ in thousands)
<S> <C>
Sales from the KKR Restaurant Division...................... $ 14,617
Increase in Sales of Comparable Restaurants................. 4,814
Decrease in Sales from Restaurants Sold or Closed........... (10,502)
--------
$ 8,929
========
</TABLE>
Sales for comparable restaurants of $451,928,000 for 1998 increased by
$4,814,000 or 1.1% compared to 1997. The increase was comprised of a
$4,223,000 or 1.8% increase in Chi-Chi's and a $591,000 or 0.3% increase in El
Torito, achieved in the face of a continuing competitive operating environment
for restaurants.
<TABLE>
<CAPTION>
1998
Comparable
Sales Increase
--------------
Amount Percent
------ -------
($ in
thousands)
<S> <C> <C>
Comparable Chi-Chi's.......................................... $4,223 1.8%
Comparable El Torito.......................................... 591 0.3
------
Total....................................................... $4,814 1.1%
====== ===
</TABLE>
23
<PAGE>
El Torito comparable sales for 1998 were up 0.3% as compared to the same
period in 1997. After the negative impact of the El Nino weather system in the
first quarter of 1998, comparable sales for the second, third and fourth
quarters were up 0.3%, 0.1% and 2.6%, respectively, as compared to the same
periods in 1997. During the third and fourth quarters, El Torito suspended the
use of electronic media for advertising, opting to reach targeted customers
utilizing alternative print media strategies. July began with the introduction
of El Torito's "All New Fajitas" campaign featuring a series of bounce-back
programs. In the fourth quarter, El Torito introduced the "XXL Fajitas
Skillets" promotion which featured seven new Fajitas entrees served on
oversize cast iron skillets. The in-restaurant marketing for the promotion
included brightly colored in-store material featuring an "actual size" Fajitas
skillet. The campaign was advertised utilizing print media and included
special discount offers designed to both generate new guest trial and increase
frequency of existing guests. In addition, El Torito introduced a Traditional
Holiday Combinations menu insert in December in an effort to trade guests into
higher margin entrees. Also contributing to El Torito's improving sales trends
were the positive results of the remodel program which started in 1997. As of
the end of fiscal 1998, El Torito had completed 32 remodels.
Comparable sales for Chi-Chi's were up 1.8% for 1998 as compared to the
same period in 1997. During the third and fourth quarters of 1998, Chi-Chi's
comparable sales were up 3.1% and 4.7%, respectively, as compared to the same
periods in 1997. July began with the media-supported introduction of Chi-Chi's
"Sizzling Sensation" campaign featuring the new Grilled Steak & Chicken Tower
and other items such as the Sizzling Enchiladas and the new Sizzling Burrito
and Sizzling Chimichanga. A free-standing insert extended the campaign through
mid-September and included special discount offers for all times of the day to
boost sales during the historic back-to-school sales lull. Chi-Chi's continued
with its marketing direction through the end of 1998 portraying the concept as
a value-oriented, fun Mexican restaurant where you can "put a little salsa in
your life." Also contributing to Chi-Chi's improving comparable sales trends
were the favorable results of the remodel program begun in 1997. Through the
end of fiscal 1998, Chi-Chi's remodeled 45 restaurants, five of which
incorporated an enhanced, more extensive version of the original remodel
concept.
Product costs of $126,788,000 for 1998 increased by $2,985,000 or 2.4% as
compared to 1997 due to the acquisition of the Koo Koo Roo and Hamburger
Hamlet restaurants in the Merger which accounted for $4,699,000 or 157.4% of
the increase, partially offset by the impact of the 22 restaurants sold or
closed since the beginning of 1997. As a percentage of sales, product costs
remained relatively flat, increasing slightly to 26.8% in 1998 from 26.7% in
1997.
Payroll and related costs of $165,207,000 for 1998 increased by $2,400,000
or 1.5% as compared to 1997 due to the acquisition of the Koo Koo Roo and
Hamburger Hamlet restaurants in the Merger which accounted for $5,308,000 or
221.2% of the increase, partially offset by the impact of the 22 restaurants
sold or closed since the beginning of 1997. As a percentage of sales, payroll
and related costs decreased slightly from 35.1% in 1997 to 35.0% in 1998 due
in part to a continuing focus on improving labor scheduling and efficiencies.
The improvement in payroll and related costs as a percentage of sales was
offset, in part, by the impact of the minimum wage increases nationally on
September 1, 1997, and on March 1, 1997 and March 1, 1998 in California.
Occupancy and other operating expenses of $125,177,000 for 1998 decreased
by $4,251,000 or 3.3% as compared to 1997. The decrease was due to (i) the
impact of the 22 restaurants sold or closed since the beginning of 1997, (ii)
the impact of El Torito and Chi-Chi's cost reduction strategies and (iii) a
decrease in media advertising expense in El Torito, partially offset by the
acquisition of the Koo Koo Roo and Hamburger Hamlet restaurants in the Merger
which added $3,234,000 in additional costs. As a percentage of sales,
occupancy and other expenses decreased from 27.9% in 1997 to 26.5% in 1998.
Depreciation and amortization of $22,916,000 for 1998 increased by $521,000
or 2.3% as compared to 1997 due to the acquisition of the Koo Koo Roo and
Hamburger Hamlet restaurants in the Merger which accounted for $1,087,000 or
208.6% of the increase and additional depreciation related to the Company's
ongoing capital expenditure program, partially offset by the impact of the 22
restaurants sold or closed since the beginning of 1997 and the write-down of
certain long-lived assets in 1997 and 1998.
24
<PAGE>
General and administrative expenses of $27,417,000 for 1998 decreased by
$2,769,000 or 9.2% as compared to 1997. As a percentage of sales, general and
administrative expenses decreased from 6.5% in 1997 to 5.8% in 1998. General
and administrative expenses were relatively flat for the year after taking
into account the impact of $2,500,000 in prior year management fee accrual
reversals and no similar fees accrued in 1998, partially offset by $1,012,000
in incremental expenses related to completing the Merger and the Hamlet
Acquisition and absorbing the KKR divisional operations.
Opening costs are incurred in connection with the opening or remodeling of
a restaurant and are principally related to stocking the restaurant and
training its staff. Through the year ended December 28, 1997, the Company's
policy had been to capitalize such opening costs and amortize them over one
year. In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5 which specifies that all costs of start-up activities,
including restaurant opening costs, should be expensed as incurred. Although
SOP 98-5 was effective for fiscal years beginning after December 15, 1998,
early adoption was allowed, and the Company elected to adopt the provisions of
SOP 98-5 in the quarter ended March 29, 1998. Accordingly, $344,000 of
unamortized opening costs at December 28, 1997 (classified as other current
assets) was expensed in the condensed consolidated statement of operations for
the quarter ended March 29, 1998. Opening costs incurred during the year ended
December 27, 1998 were $3,001,000. Amortization of opening costs of $188,000
in the comparable period of 1997 was reclassified.
The Company reported a loss on disposition of properties of $8.0 million
for 1998 compared to a loss of $3.9 million in 1997. These amounts reflect
losses associated with restaurant divestments and closures in such periods. In
addition, also included in 1998 is a $3.0 million increase in the Company's
reserve for carrying costs of closed properties and the write-off of $2.2
million in notes receivable related to prior restaurant divestments.
As a result of a continued review of operating results and as part of its
strategic planning process for 1999, the Company identified 48 non-strategic
Chi-Chi's restaurants which are not part of the Chi-Chi's long-term core
market focus. In connection with this analysis, the Company analyzed the
carrying value of the long-lived assets of these restaurants, determined the
anticipated costs of divestment and recorded a provision for divestitures of
$22.9 million, which included reducing the assets' carrying value to their
estimated fair market value. In addition, the Company identified 12 other
restaurants with impaired values and recorded a write-down of long-lived
assets of $4.8 million.
Compensation expense of $4.2 million was recorded in the fourth quarter of
1998 in connection with the termination of the Company's Value Creation Units
Plan. Such expense consisted of a $4 million cash payment and approximately
$0.2 million for the intrinsic value of stock options granted on December 9,
1998 in connection with the termination of awards under the Value Creation
Units Plan. The stock options are fully vested options to purchase up to, in
the aggregate, 3% of the fully diluted Company Common Stock immediately
following the Merger (including shares to be reserved for issuance under the
Company's 1998 Stock Incentive Plan). Such options have a per share strike
price of $.50 and were not exercisable for a period of 90 days after issuance.
Interest expense, net of $24,659,000 for 1998 increased by $5,183,000 or
26.6% as compared to 1997 primarily resulting from (i) the issuance of the
Senior Discount Notes in August 1997 and January 1998 and the accretion of
interest thereon and (ii) the issuance of the MRD Merger Notes on October 30,
1998 and the accretion of interest thereon, partially offset by the
elimination of cash interest expense associated with the $15.6 million of
Senior Notes received as part of the exchange on August 12, 1997.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and hedging activities. SFAS 133 is
effective for all fiscal quarters of fiscal years beginning after June 15,
2000. The FASB has proposed extending the effective date of SFAS 133 for one
year. The Company has no instruments or transactions subject to SFAS 133.
25
<PAGE>
Selected Operating Data
Until the Merger on October 30, 1998, the Company primarily operated full-
service Mexican restaurants in two divisions under the El Torito, Chi-Chi's,
Casa Gallardo and other names. In connection with the Merger and the Hamlet
Acquisition, the Company acquired the Koo Koo Roo and Hamburger Hamlet
restaurant operations. At December 26, 1999 the Company's El Torito restaurant
division operated 101 full-service and fast-casual restaurants, the Company's
Chi-Chi's restaurant division operated 150 full-service restaurants and the
Company's KKR restaurant division operated 57 fast-casual and full-service
restaurants.
The following table sets forth certain information regarding the Company
and its El Torito, Chi-Chi's and KKR restaurant divisions.
<TABLE>
<CAPTION>
For the Years Ended
---------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
($ in thousands, except average check
amount)
<S> <C> <C> <C>
El Torito Restaurant Division (a)
Restaurants Open at End of Period:
Owned/operated...................... 101 95 96
Franchised and Licensed............. 8 8 9
Sales................................. $220,611 $214,370 $217,949
Restaurant Level Cashflow (b)......... 33,869 34,807 30,051
Divisional EBITDA (c)................. 22,000 22,869 17,627
Percentage increase (decrease) in
comparable restaurant sales.......... 0.5 % 0.3% (0.6)%
Average check......................... $ 10.61 $ 10.15 $ 9.87
Chi-Chi's Restaurant Division
Restaurants Open at End of Period:
Owned/operated...................... 150 165 179
Franchised and Licensed............. 15 12 16
Sales................................. $227,716 $243,666 $245,775
Restaurant Level Cashflow (b)......... 20,569 18,285 16,515
Divisional EBITDA (c)................. 5,942 1,426 36
Percentage increase (decrease) in
comparable restaurant sales.......... (0.5)% 1.8% (8.2)%
Average check......................... $ 9.23 $ 8.50 $ 7.82
KKR Restaurant Division (d)
Restaurants Open at End of Period:
Owned/operated...................... 57 54 0
Franchised and Licensed............. 1 3 0
Sales................................. $ 88,252 $ 14,617 $ 0
Restaurant Level Cashflow (b)......... 10,335 1,376 0
Divisional EBITDA (c)................. 4,384 364 0
Percentage increase (decrease) in
comparable restaurant sales.......... N.A. N.A. N.A.
Average check (Koo Koo Roo restaurants
only)................................ $ 9.13 $ 8.70 $ N.A.
Total Company
Restaurants Open at End of Period:
Owned/operated...................... 308 314 275
Franchised and Licensed............. 24 23 25
Sales................................. $536,579 $472,653 $463,724
EBITDA (e)............................ 32,031 28,064(f) 17,500
</TABLE>
- --------
(a) The El Torito Division (minus six restaurants) is to be sold to
Acapulco if the El Torito Sale is consummated--See "BUSINESS--Sale of
El Torito Division."
26
<PAGE>
(b) Restaurant Level Cashflow with respect to any operating division
represents Divisional EBITDA (as defined below) before general and
administrative expenses and any net franchise profit or miscellaneous
income (expense) reported by the respective division.
(c) Divisional EBITDA with respect to any operating division is defined as
earnings (loss) before opening costs, gain (loss) on disposition of
properties, interest, taxes, depreciation and amortization.
(d) Reflects operations since the Merger and Hamlet Acquisition on October
30, 1998.
(e) EBITDA is defined as earnings (loss) before opening costs, loss on
disposition of properties, gain on sale of division, provision for
divestitures and write-down of long-lived assets, VCU termination
expense, restructuring costs, interest, taxes, depreciation and
amortization and extraordinary items. 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. Furthermore, other companies may
compute EBITDA differently, and therefore, EBITDA amounts among
companies may not be comparable.
(f) Includes the reversal of accrued management fees of $2,500,000 in 1998
payable to Apollo that will not be paid.
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 addition, 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 1999 and 1998, 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.
27
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers of the Registrant
is incorporated herein by reference to the Company's definitive proxy
statement which will be filed with the Commission within 120 days of the
Company's fiscal year end.
Item 11. EXECUTIVE COMPENSATION
Information concerning executive compensation of the Registrant is
incorporated herein by reference to the Company's definitive proxy statement
which will be filed with the Commission within 120 days of the Company's
fiscal year end.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management of the Registrant is incorporated herein by reference to the
Company's definitive proxy statement which will be filed with the Commission
within 120 days of the Company's fiscal year end.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions with
the Registrant is incorporated herein by reference to the Company's definitive
proxy statement which will be filed with the Commission within 120 days of the
Company's fiscal year end.
28
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page
----
(a) (1) Financial Statements. See the Index to Financial Statements on page
F-1.
(2) Financial Statement Schedule
<C> <S> <C>
Schedule II--Valuation and qualifying accounts S-1 S-1
(3) Exhibits
2 (a) Agreement and Plan of Merger, dated as of June 9, 1998 by
and among the Company, Fri-Sub, Inc. and Koo Koo Roo, Inc.
("KKR"). (Filed as Exhibit 2.1 to the Company's Form S-4
filed with the SEC on July 1, 1998.)
*2 (b) Stock Purchase Agreement, dated as of March 27, 2000, by
and among the Company, FRI-MRD Corporation and Acapulco
Acquisition Corp.
3 (a) Sixth Restated Certificate of Incorporation of the
Company. (Filed as Exhibit 3(a) to the Company's Form 10-Q
filed with the SEC on May 12, 1999.)
3 (b) Second Amended and Restated Bylaws of the Company. (Filed
as Exhibit 3(c) to the Company's Form 10-K filed with the
SEC on March 29, 1999.)
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.)
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. (Filed as Exhibit 4(f) to the Company's Form 10-
K filed with the SEC on March 30, 1998.)
4 (g) First Amendment dated as of June 9, 1998 to the Note
Agreement dated August 12, 1997. (Filed as Exhibit 4.7 to
the Company's Form S-4 filed with the SEC on July 1,
1998.)
</TABLE>
29
<PAGE>
<TABLE>
<C> <S> <C>
4 (h) Note Agreement dated as of June 9, 1998 Re: $24,000,000
FRI-MRD Corporation Senior Secured Discount Notes due
January 24, 2002. (Filed as Exhibit 4.8 to the
Company's Form S-4 filed with the SEC on July 1, 1998.)
4 (i) First Amendment dated as of October 30, 1998 to the
Note Agreement dated as of June 9, 1998. (Filed as
Exhibit 4(i) to the Company's Form 10-Q filed with the
SEC on November 12, 1998.)
4 (j) Waiver dated as of January 29, 1999 to the Note
Agreements dated as of August 12, 1997 and June 9,
1998. (Filed as Exhibit 4(j) to the Company's Form 10-K
filed with the SEC on March 29, 1999.)
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) 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 (e) 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 (f) 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 (g) The Company's 1998 Management Incentive Compensation
Plan Description. (Filed as Exhibit 10(h) to the
Company's Form 10-K filed with the SEC on March 29,
1999.)
*10 (h) The Company's 1999 Management Incentive Compensation
Plan Description.
10 (i) Loan and Security Agreement, dated as of January 10,
1997, between Foothill Capital Corporation and the
Company and its subsidiaries named therein. (Filed as
Exhibit 10(w) to the Company's Form 10-K filed with the
SEC on March 31, 1997.)
10 (j) 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 (k) 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 (l) 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 (m) 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 (n) 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.)
</TABLE>
30
<PAGE>
<TABLE>
<C> <S> <C>
10 (o) 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 (p) 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 (q) 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 (r) 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.)
10 (s) 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 (t) 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.) (Filed as Exhibit 10(bb) to the Company's
Form 10-K filed with the SEC on March 30, 1998.)
10 (u) 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.) (Filed as
Exhibit 10(cc) to the Company's Form 10-K filed with
the SEC on March 30, 1998.)
10 (v) Stock Purchase Agreement dated as of June 9, 1998 by
and between FRI-MRD Corporation and KKR. (Filed as
Exhibit 10.1 to the Company's Form S-4 filed with the
SEC on July 1, 1998.)
10 (w) Bridge Loan Agreement dated as of June 9, 1998 among
the Hamlet Group, Inc., as borrower, KKR, H.H.K. of
Virginia, and H.H. of Maryland, Inc., as guarantors,
and FRI-MRD Corporation, as lender. (Filed as Exhibit
10.2 to the Company's Form S-4 filed with the SEC on
July 1, 1998.)
10 (x) Amendment Number Three to Loan and Security Agreement
dated as of April 9, 1998 by and among the parties
thereto. (Filed as Exhibit 10.29 to Amendment No. 1 to
the Company's Form S-4 filed with the SEC on August 18,
1998.)
10 (y) Amendment Number Four to Loan and Security Agreement
dated as of June 9, 1998 by and among the parties
thereto. (Filed as Exhibit 10.30 to Amendment No. 1 to
the Company's Form S-4 filed with the SEC on August 18,
1998.)
10 (z) Amendment Number Five to Loan and Security Agreement
dated as of October 30, 1998 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, 1998.)
10 (aa) Koo Koo Roo Enterprises, Inc. 1998 Stock Incentive
Plan. (Filed as Exhibit 10(ii) to the Company's Form
10-Q filed with the SEC on November 12, 1998.)
10 (bb) General Continuing Guarantee dated October 30, 1998 by
The Hamlet Group, Inc. (Filed as Exhibit 10(cc) to the
Company's Form 10-K filed with the SEC on March 29,
1999.)
</TABLE>
31
<PAGE>
<TABLE>
<C> <S> <C>
10 (cc) Amendment Number One to General Continuing Guarantee
and Security Agreement, dated as of October 30, 1998
between Foothill and the Company. (Filed as Exhibit
10(dd) to the Company's Form 10-K filed with the SEC
on March 29, 1999.)
10 (dd) Amendment Number One to Security Agreement dated
October 30, 1998 between Foothill and FRI-MRD
Corporation. (Filed as Exhibit 10(ee) to the Company's
Form 10-K filed with the SEC on March 29, 1999.)
10 (ee) Amendment Number One to Stock Pledge Agreement dated
October 30, 1998 between Foothill Capital Corporation
and FRI-MRD Corporation. (Filed as Exhibit 10(ff) to
the Company's Form 10-K filed with the SEC on March
29, 1999.)
10 (ff) General Continuing Guarantee dated October 30, 1998 by
KKR. (Filed as Exhibit 10(gg) to the Company's Form
10-K filed with the SEC on March 29, 1999.)
10 (gg) Security Agreement dated October 30, 1998 between
Foothill Capital Corporation and KKR. (Filed as
Exhibit 10(hh) to the Company's Form 10-K filed with
the SEC on March 29, 1999.)
10 (hh) Amended and Restated Employment Agreement dated as of
November 9, 1998 by and between Kevin S. Relyea, the
Company and certain subsidiaries. (Filed as Exhibit
10(ii) to the Company's Form 10-K filed with the SEC
on March 29, 1999.)
10 (ii) Amended and Restated Employment Agreement dated as of
November 9, 1998 by and between Roger K. Chamness, the
Company and certain subsidiaries. (Filed as Exhibit
10(jj) to the Company's Form 10-K filed with the SEC
on March 29, 1999.)
10 (jj) Amended and Restated Employment Agreement dated as of
November 9, 1998 by and between William D. Burt, the
Company and certain subsidiaries. (Filed as Exhibit
10(kk) to the Company's Form 10-K filed with the SEC
on March 29, 1999.)
10 (kk) Employment Agreement dated as of November 1, 1998 by
and between Gayle A. DeBrosse, the Company and certain
subsidiaries. (Filed as Exhibit 10(ll) to the
Company's Form 10-K filed with the SEC on March 29,
1999.)
10 (ll) Nominating Agreement dated as of December 1, 1998
between the Company and AIF II, L.P. (Filed as Exhibit
10(mm) to the Company's Form 10-K filed with the SEC
on March 29, 1999.)
10 (mm) Amendment Number Six to Loan and Security Agreement
dated as of February 26, 1999 by and among the parties
thereto. (Filed as Exhibit 10(nn) to the Company's
Form 10-K filed with the SEC on March 29, 1999.)
*10 (nn) Prandium, Inc. Divestiture Bonus Plan for Key
Management for 1999-2000.
*21 (a) List of Subsidiaries.
*21 (b) Names Under Which Subsidiaries Do Business.
*23 Consent of KPMG LLP.
*27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
None.
- --------
* Filed herewith.
32
<PAGE>
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.
PRANDIUM, INC.
/s/ Robert T. Trebing, Jr.
By: _________________________________
Robert T. Trebing, Jr.
Executive Vice President and
Chief Financial Officer
Date: March 27, 2000
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>
/s/ Kevin S. Relyea Chairman, President and Chief March 27, 2000
____________________________________ Executive Officer (Principal
Kevin S. Relyea Executive Officer)
/s/ A. William Allen, III Director March 27, 2000
____________________________________
A. William Allen, III
/s/ Peter P. Copses Director March 27, 2000
____________________________________
Peter P. Copses
/s/ George G. Golleher Director March 27, 2000
____________________________________
George G. Golleher
/s/ David B. Kaplan Director March 27, 2000
____________________________________
David B. Kaplan
/s/ Antony P. Ressler Director March 27, 2000
____________________________________
Antony P. Ressler
/s/ Robert T. Trebing, Jr. Executive Vice President and March 27, 2000
____________________________________ Chief Financial Officer
Robert T. Trebing, Jr. (Principal Financial and
Accounting Officer)
</TABLE>
33
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PRANDIUM, INC.
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of December 26, 1999 and December 27,
1998..................................................................... F-3
Consolidated Statements of Operations for the Years Ended December 26,
1999, December 27, 1998 and December 28, 1997............................ F-4
Consolidated Statements of Common Stockholders' Deficit for the three
Years Ended December 26, 1999, December 27, 1998 and December 28, 1997... F-5
Consolidated Statements of Cash Flows for the Years Ended December 26,
1999, December 27, 1998 and December 28, 1997............................ F-6
Notes to Consolidated Financial Statements................................ F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Prandium, Inc.:
We have audited the accompanying consolidated balance sheets of Prandium,
Inc. (formerly known as Koo Koo Roo Enterprises, Inc. and as Family
Restaurants, Inc.) and its subsidiaries as of December 26, 1999 and December
27, 1998, and the related consolidated statements of operations, common
stockholders' deficit and cash flows for the years ended December 26, 1999,
December 27, 1998 and December 28, 1997. 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 Prandium,
Inc. and its subsidiaries as of December 26, 1999 and December 27, 1998, and
the results of their operations and their cash flows for the years ended
December 26, 1999, December 27, 1998 and December 28, 1997 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 LLP
Orange County, California
February 19, 2000, except for
note 17 which is as of
March 27, 2000
F-2
<PAGE>
PRANDIUM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 26, December 27,
1999 1998
------------ ------------
($ in thousands)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents........................... $ 3,600 $ 17,707
Receivables......................................... 2,408 9,106
Inventories......................................... 2,672 5,020
Other current assets................................ 3,098 3,957
Property held for sale.............................. 55,835 0
--------- ---------
Total current assets.............................. 67,613 35,790
Property and equipment, net........................... 137,460 201,314
Reorganization value in excess of amount allocable to
identifiable assets, net............................. 0 35,129
Costs in excess of net assets of business acquired,
net.................................................. 66,293 56,455
Other assets.......................................... 15,267 19,498
--------- ---------
$ 286,633 $ 348,186
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Working capital borrowings.......................... $ 21,850 $ 0
Current portion of long-term debt, including
capitalized lease obligations...................... 1,000 2,498
Accounts payable.................................... 9,228 22,447
Current portion of self-insurance reserves.......... 2,601 7,225
Other accrued liabilities........................... 57,711 73,994
Income taxes payable................................ 3,638 3,742
--------- ---------
Total current liabilities......................... 96,028 109,906
Self-insurance reserves............................... 6,560 17,815
Other long-term liabilities........................... 3,779 4,451
Long-term debt, including capitalized lease
obligations, less current portion.................... 237,871 237,151
Commitments and contingencies
Stockholders' deficit:
Common stock--authorized 300,000,000 shares, par
value $.01, 180,380,513 shares issued and
outstanding in 1999 and 178,105,294 shares issued
and outstanding in 1998............................ 1,804 1,781
Additional paid-in capital.......................... 222,353 222,353
Accumulated deficit................................. (281,762) (245,271)
--------- ---------
Total stockholders' deficit....................... (57,605) (21,137)
--------- ---------
$ 286,633 $ 348,186
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
PRANDIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
----------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
($ in thousands, except per share
amounts)
<S> <C> <C> <C>
Sales............................... $ 536,579 $ 472,653 $ 463,724
------------ ------------ ------------
Product costs....................... 141,881 126,788 123,803
Payroll and related costs........... 190,772 165,207 162,807
Occupancy and other operating
expenses........................... 139,153 125,177 129,428
Depreciation and amortization....... 28,031 22,916 22,395
General and administrative
expenses........................... 32,742 27,417 30,186
Opening costs....................... 2,879 3,345 188
Loss on disposition of properties,
net................................ 5,265 7,993 3,885
Provision for divestitures and
write-down of
long-lived assets.................. 484 27,661 2,640
VCU termination expense............. 0 4,223 0
------------ ------------ ------------
Total costs and expenses.......... 541,207 510,727 475,332
------------ ------------ ------------
Operating loss...................... (4,628) (38,074) (11,608)
Interest expense, net............... 31,371 24,659 19,476
------------ ------------ ------------
Loss before income tax provision.... (35,999) (62,733) (31,084)
Income tax provision................ 492 400 509
------------ ------------ ------------
Net loss............................ $ (36,491) $ (63,133) $ (31,593)
============ ============ ============
Net loss per share--basic and
diluted............................ $ (0.20) $ (0.48) $ (0.26)
============ ============ ============
Weighted average shares
outstanding--basic and diluted..... 180,380,513 131,309,797 121,515,391
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
PRANDIUM, INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' DEFICIT
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 26, 1999
<TABLE>
<CAPTION>
Common Stock Additional
------------------ Paid-in Accumulated
Shares Amount Capital Deficit Total
----------- ------ ---------- ----------- --------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 29,
1996..................... 121,515,391 $1,215 $154,729 $(150,545) $ 5,399
Net loss.................. 0 0 0 (31,593) (31,593)
----------- ------ -------- --------- --------
Balance at December 28,
1997..................... 121,515,391 1,215 154,729 (182,138) (26,194)
Net loss.................. 0 0 0 (63,133) (63,133)
Issuance of common stock
to acquire KKR........... 56,589,903 566 67,437 0 68,003
VCU termination expense... 0 0 187 0 187
----------- ------ -------- --------- --------
Balance at December 27,
1998..................... 178,105,294 1,781 222,353 (245,271) (21,137)
Net loss.................. 0 0 0 (36,491) (36,491)
Issuance of common stock.. 2,275,219 23 0 0 23
----------- ------ -------- --------- --------
Balance at December 26,
1999..................... 180,380,513 $1,804 $222,353 $(281,762) $(57,605)
=========== ====== ======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PRANDIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
($ in thousands)
<S> <C> <C> <C>
Decrease in Cash and Cash Equivalents
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers.......... $ 537,619 $ 471,716 $ 464,780
Cash received from franchisees and
licensees............................ 1,726 2,018 2,074
Cash paid to suppliers and employees.. (520,792) (454,024) (465,069)
Cash paid for VCU termination
expense.............................. 0 (4,036) 0
Interest received..................... 365 1,931 2,119
Interest paid......................... (16,645) (16,653) (16,747)
Opening costs......................... (2,879) (3,001) 0
Income taxes paid..................... (596) (446) (262)
--------- --------- ---------
Net cash used in operating
activities......................... (1,202) (2,495) (13,105)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of property and
equipment............................ 2,510 4,862 1,492
Proceeds from payments on notes
receivable........................... 2,238 0 0
Proceeds from sale of notes
receivable, net...................... 3,246 0 3,514
Cash required for Merger and Hamlet
Acquisition.......................... (2,356) (17,016) 0
Capital expenditures.................. (30,335) (27,691) (13,588)
Mandatory lease buyback, net.......... 0 0 (2,690)
Lease termination payments............ (3,557) (1,349) (2,891)
Capitalized opening costs............. 0 0 (532)
Other divestment expenditures......... (2,307) 0 0
Other................................. (1,520) (566) (1,936)
--------- --------- ---------
Net cash used in investing
activities......................... (32,081) (41,760) (16,631)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of notes... 0 33,304 33,947
Proceeds from working capital
borrowings, net...................... 21,850 0 0
Payment of debt issuance costs........ (347) (1,141) (2,418)
Reductions of long-term debt,
including capitalized lease
obligations.......................... (2,327) (2,719) (3,095)
--------- --------- ---------
Net cash provided by financing
activities......................... 19,176 29,444 28,434
--------- --------- ---------
Net decrease in cash and cash
equivalents............................ (14,107) (14,811) (1,302)
Cash and cash equivalents at beginning
of period.............................. 17,707 32,518 33,820
--------- --------- ---------
Cash and cash equivalents at end of
period................................. $ 3,600 $ 17,707 $ 32,518
========= ========= =========
</TABLE>
F-6
<PAGE>
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
For the Years Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
($ in thousands)
Reconciliation of Net Loss to Net Cash Used in Operating Activities
<S> <C> <C> <C>
Net loss............................... $(36,491) $(63,133) $(31,593)
-------- -------- --------
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization........ 28,031 22,916 22,395
Amortization of debt issuance costs.. 1,550 1,250 1,084
Expense of unamortized opening
costs............................... 0 344 0
Loss on disposition of properties.... 5,265 7,993 3,885
Provision for divestitures and write-
down of long-lived assets........... 484 27,661 2,640
VCU termination expense related to
stock options....................... 0 187 0
Accretion of interest on notes....... 6,954 8,757 2,845
(Increase) decrease in receivables... 1,285 (819) 304
(Increase) decrease in inventories... 17 93 (32)
(Increase) decrease in other current
assets.............................. 70 30 (342)
Increase (decrease) in accounts
payable............................. (5,086) 4,767 (5,041)
Decrease in self-insurance reserves.. (3,457) (7,475) (2,457)
Increase (decrease) in other accrued
liabilities......................... 280 (5,020) (7,040)
Increase (decrease) in income taxes
payable............................. (104) (46) 247
-------- -------- --------
Total adjustments.................. 35,289 60,638 18,488
-------- -------- --------
Net cash used in operating activities.. $ (1,202) $ (2,495) $(13,105)
======== ======== ========
</TABLE>
Supplemental schedule of noncash investing and financing activities:
Capital expenditures and cash flows from financing activities exclude
capitalized leases of $5,123 in 1999 and $977 in 1998.
See Note 2 for discussion of the Merger.
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>
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 26, 1999
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Prandium, Inc., formerly known as Koo Koo Roo Enterprises, Inc. and as
Family Restaurants, Inc. (together with its subsidiaries, the "Company"), was
incorporated in Delaware in 1986. The Company is primarily engaged in the
operation of restaurants in the full-service and fast-casual segments, through
its subsidiaries. Information relating to periods ending prior to October 30,
1998 included herein relates to the historical operations of Family
Restaurants, Inc. and, except as otherwise indicated, does not reflect the
operations of Koo Koo Roo, Inc., a Delaware corporation, or The Hamlet Group,
Inc., a California corporation (collectively "KKR"), which the Company
acquired on October 30, 1998. At December 26, 1999, the Company operated 308
restaurants in 27 states, approximately 68% of which are located in
California, Ohio, Pennsylvania, Indiana and Michigan, and franchised and
licensed 24 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 26,
1999, December 27, 1998 and December 28, 1997 included 52 weeks.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and 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 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 disposal date.
F-8
<PAGE>
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Advertising
Production costs of commercials and programming are charged to operations
when aired. 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. No initial
fees were recognized in 1999. Initial fees for 1998 and 1997 totaled $350,000
and $100,000, respectively. Monthly fees for all franchise and license
arrangements are accrued as earned based on the respective monthly sales. Such
fees totaled $1,542,000 for 1999, $1,331,000 for 1998 and $2,115,000 for 1997
and offset general and administrative expenses.
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 $8,298,000 at December 26,
1999 and $6,896,000 at December 27, 1998.
Costs in excess of net assets of business acquired
Costs in excess of net assets of business acquired is amortized using the
straight-line method over 40 years. Accumulated amortization amounted to
$2,002,000 at December 26, 1999 and $244,000 at December 27, 1998.
Impairment of long-lived assets
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be
Disposed Of," which generally requires the assessment of certain long-lived
assets for possible impairment when events or circumstances indicate the
carrying value of these assets may not be recoverable.
The Company evaluates property and equipment for impairment by comparison
of the carrying value of the assets to estimated undiscounted cash flows
(before interest charges) expected to be generated by the asset over its
estimated remaining 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 one unprofitable Chi-Chi's and one unprofitable El Torito
restaurant 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 $628,000 during the fourth quarter of 1999 to reduce the assets'
carrying value to their estimated fair market value.
During 1998, the Company identified nine unprofitable Chi-Chi's and three
unprofitable El Torito restaurants with impaired values. 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
$4.8 million during the fourth quarter of 1998 to reduce the assets' carrying
value to their estimated fair market value.
F-9
<PAGE>
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Also, during 1997, the Company identified 18 unprofitable Chi-Chi's
restaurants with impaired values. 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.
Opening costs
Opening costs are incurred in connection with the opening or remodeling of
a restaurant and are principally related to stocking the restaurant and
training its staff. Through the year ended December 28, 1997, the Company's
policy had been to capitalize such opening costs and amortize them over one
year. In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities," which specifies that all costs of start-up activities,
including restaurant opening costs, should be expensed as incurred. Although
SOP 98-5 was effective for fiscal years beginning after December 15, 1998,
early adoption was allowed, and the Company adopted the provisions of SOP 98-5
in the quarter ended March 29, 1998.
Accordingly, $344,000 of unamortized opening costs at December 28, 1997
(classified as other current assets) was expensed in the condensed
consolidated statement of operations for the quarter ended March 29, 1998.
Opening costs incurred during 1999 and 1998 were $2,879,000 and $3,001,000,
respectively. Amortization of opening costs of $188,000 in 1997 has been
reclassified in the accompanying consolidated statements of operations.
Net loss per common share
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share" specifies the computation, presentation and disclosure requirements for
earnings (loss) per share for entities with publicly held common stock. The
impact of common stock equivalents has not been included since the impact
would be antidilutive for all periods presented.
Share and per share restatement
On October 30, 1998, the Company declared a stock dividend pursuant to
which approximately 121.96 shares of Company Common Stock were distributed for
each share of Company Common Stock outstanding immediately prior to the
Merger. All data with respect to loss per share and share information in the
consolidated financial statements has been retroactively adjusted to reflect
the stock dividend.
Stock-based employee compensation
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company measures stock-based employee compensation cost for financial
statement purposes in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and its related
interpretations and includes pro forma information in Note 15. Accordingly,
compensation cost for the stock option grants to employees is measured as the
excess of the quoted market price of the Company's common stock at the grant
date over the amount the employee must pay for the stock.
Segment disclosures
In 1998, the Company adopted SFAS No. 131 ("SFAS 131"), "Disclosures about
Segments of an Enterprise and Related Information." SFAS 131 establishes
standards for reporting information about operating segments. The Company's
reportable segments are based on restaurant operating divisions.
F-10
<PAGE>
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income taxes
The Company recognizes income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred tax assets are reduced by a valuation allowance when
it is more likely than not that they will not be realized.
Reclassifications
Certain amounts as previously reported have been reclassified to conform to
the 1999 presentation.
NOTE 2--KKR MERGER:
On October 30, 1998, the Company, FRI-Sub, Inc. ("Merger Sub"), an indirect
wholly owned subsidiary of the Company, and KKR consummated a merger (the
"Merger"), pursuant to which Merger Sub was merged with and into KKR, with KKR
as the surviving corporation. The Merger was effected after KKR received
stockholder approval for the Merger at a special meeting of KKR stockholders
held on October 30, 1998.
As a result of the Merger, each outstanding share of common stock, $.01 par
value, of KKR was converted into the right to receive one share of common
stock, par value $.01 per share, of the Company (the "Company Common Stock").
Accordingly, the aggregate number of shares of Company Common Stock issued in
the Merger was approximately 56.6 million. Immediately prior to the Merger, a
stock dividend was declared pursuant to which approximately 121.96 shares of
Company Common Stock were distributed for each share of Company Common Stock
outstanding immediately prior to the Merger. Prior to the Merger, the Company
provided a $3 million loan to a subsidiary of KKR which was repaid after
completion of the Merger. Additionally, in connection with the Merger, FRI-MRD
Corporation, a wholly owned subsidiary of the Company ("FRI-MRD"), issued $24
million aggregate face amount of new senior secured discount notes (the "MRD
Merger Notes") pursuant to the Senior Secured Discount Note Agreement dated
June 9, 1998 for which it received net proceeds of $21.7 million and the
Company expanded the Foothill Credit Facility by an additional $20 million.
The proceeds from the sale of the MRD Merger Notes were used to acquire all of
the outstanding capital stock of The Hamlet Group, Inc. ("Hamlet") from KKR
immediately prior to the consummation of the Merger (the "Hamlet
Acquisition"). The Merger and the Hamlet Acquisition were accounted for as a
purchase. Accordingly, the results of operations and financial position of KKR
(including Hamlet) are combined with the results of operations and financial
position of the Company subsequent to the purchase.
The assets acquired, including the costs in excess of net assets of
business acquired, and liabilities assumed in the Merger and the Hamlet
Acquisition are as follows ($ in thousands):
<TABLE>
<S> <C>
Tangible assets acquired at fair value........................... $ 33,866
Costs in excess of net assets of business acquired............... 68,295
Liabilities assumed at fair value................................ (17,142)
--------
Total purchase price............................................. $ 85,019
========
</TABLE>
An appraisal of the acquired real estate, restaurant equipment, furniture,
fixtures and leasehold interests was concluded in 1999, and the final
allocation of purchase price to the fair value of tangible assets acquired and
liabilities assumed has been completed, resulting in a $10.8 million reduction
in such assets.
F-11
<PAGE>
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes unaudited pro forma combined financial
information for the Company, assuming the Merger and the Hamlet Acquisition
occurred as of the beginning of fiscal 1998. The unaudited pro forma combined
financial information is not indicative of the results of operations of the
combined companies that would have occurred had the Merger and the Hamlet
Acquisition occurred at the beginning of the periods presented, nor is it
indicative of future operating results. The unaudited pro forma adjustments are
based upon currently available information and certain assumptions that
management believes are reasonable under the circumstances.
<TABLE>
<CAPTION>
Fiscal Year Ended
December 27, 1998
-----------------------
(Pro Forma)
($ in thousands, except
per share data)
<S> <C>
Consolidated Statements of Operations Information--
Sales............................................. $546,683
Net loss.......................................... $(87,509)
Pro forma basic and diluted loss per common
share............................................ $ (0.49)
Pro forma weighted average number of common shares
outstanding (in thousands)....................... 178,105
</TABLE>
NOTE 3--RECEIVABLES:
A summary of receivables follows:
<TABLE>
<CAPTION>
1999 1998
------ ------
($ in
thousands)
<S> <C> <C>
Trade, principally credit cards................................ $1,259 $3,113
License and franchise fees and related receivables............. 154 254
FRD Notes...................................................... 0 3,250
Interest on FRD Notes.......................................... 0 186
Notes receivable............................................... 47 153
Other.......................................................... 948 2,150
------ ------
$2,408 $9,106
====== ======
</TABLE>
NOTE 4--STRATEGIC DIVESTMENT PROGRAMS:
In the fourth quarter of 1999, three non-strategic Koo Koo Roo restaurants
were designated for divestment (the "KKR Strategic Divestment Program"). In
conjunction with the KKR Strategic Divestment Program, the Company recorded a
provision for divestitures of $904,000. This provision consisted of costs
associated with lease terminations, subsidized subleases, brokerage fees and
other divestment costs. During 1999, these restaurants had sales of $1,852,000
and restaurant level operating losses of $457,000. The restaurants are still in
operation and accordingly, none of the divestiture reserves have been utilized
as of December 26, 1999. The KKR Strategic Divestment Program is scheduled to
be completed within the next 12 months, and the operating
F-12
<PAGE>
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
results will be included in the Company's consolidated statement of operations
until the divestments are completed.
In the fourth quarter of 1998, 48 non-strategic Chi-Chi's restaurants were
designated for divestment (the "CC Strategic Divestment Program"). In
conjunction with the CC Strategic Divestment Program, the Company recorded a
provision for divestitures of $22,884,000, including divestment reserves of
$12,256,000. For the fiscal years ended December 26, 1999 and December 27,
1998, the Company paid (i) $287,000 and zero, respectively, for severance
costs associated with certain restaurants and regional managers in connection
with the restaurants divested and (ii) $1,913,000 and $1,645,000,
respectively, for net costs associated with lease terminations, subsidized
subleases, brokerage fees and other divestment costs. The Company does not
believe it will be able to satisfactorily negotiate lease terminations or
subleases for 20 operating restaurants of the 48 Chi-Chi's restaurants
designated for divestment. As a result, these 20 restaurants have been removed
from the Strategic Divestment Program, and $1,048,000 previously recorded in
conjunction with the provision for divestitures has been reversed during the
fourth quarter of 1999. Such amount is included as a reduction of provision
for divestitures and write-down of long-lived assets. After this reversal,
eight restaurants with sales of $6,650,000 and restaurant level operating
losses of $860,000 during 1999, remain in the divestment program. The CC
Strategic Divestment Program is scheduled to be completed over the next 12
months, and the operating results will be included in the Company's
consolidated statement of operations until the divestments are completed.
NOTE 5--PROPERTY AND EQUIPMENT:
A summary of property and equipment follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
($ in thousands)
<S> <C> <C>
Land................................................... $ 15,943 $ 23,700
Buildings and improvements............................. 110,397 156,220
Furniture, fixtures and equipment...................... 60,009 92,887
Projects under construction............................ 8,152 13,592
-------- --------
194,501 286,399
Accumulated depreciation and amortization.............. (57,041) (85,085)
-------- --------
$137,460 $201,314
======== ========
</TABLE>
Property under capitalized leases in the amount of $2,829,000 at December
26, 1999 and $12,104,000 at December 27, 1998 is included in buildings and
improvements. Accumulated amortization of property under capitalized leases
amounted to $2,755,000 at December 26, 1999 and $6,287,000 at December 27,
1998. These capitalized leases primarily relate to the buildings on certain
restaurant properties; the land portions of these leases are accounted for as
operating leases.
In addition, property under capitalized leases in the amount of $1,802,000
at December 26, 1999 and $977,000 at December 27, 1998 is included in
furniture, fixtures and equipment. Accumulated amortization of this property
under capitalized leases amounted to $35,000 at December 26, 1999 and $184,000
at December 27, 1998.
Depreciation and amortization relating to property and equipment was
$24,871,000 for 1999, $21,271,000 for 1998 and $20,994,000 for 1997, of which
$2,176,000, $2,169,000 and $2,236,000, respectively, was related to
amortization of property under capitalized leases.
F-13
<PAGE>
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A majority of the capitalized and operating leases have original terms of
25 years, and substantially all of these leases expire in the year 2010 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 26, 1999, December 27, 1998 and December
28, 1997 was $890,000, $938,000 and $934,000, respectively. Total rental
expense for all operating leases comprised the following:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
($ in thousands)
<S> <C> <C> <C>
Minimum rent......................................... $44,220 $35,476 $35,521
Contingent rent...................................... 1,798 1,417 1,235
Less: Sublease rent.................................. (6,163) (5,903) (6,434)
------- ------- -------
$39,855 $30,990 $30,322
======= ======= =======
</TABLE>
At December 26, 1999, the present value of capitalized lease payments and
the future minimum lease payments on noncancellable operating leases were:
<TABLE>
<CAPTION>
Capitalized Operating
Due in Leases Leases
------ ----------- ---------
($ in thousands)
<S> <C> <C>
2000................................................. $ 931 $ 29,927
2001................................................. 600 29,167
2002................................................. 408 27,016
2003................................................. 197 24,561
2004................................................. 107 20,820
Later years.......................................... 57 61,820
------- --------
Total minimum lease payments......................... 2,300 $193,311
========
Interest............................................. (343)
-------
Present value of minimum lease payments.............. $ 1,957
=======
</TABLE>
The future lease payments summarized above include commitments for leased
properties included in the Company's divestiture programs and exclude
commitments for leased properties included in the El Torito Division which is
reported as property held for sale (see note 17).
NOTE 6--OTHER ASSETS:
A summary of other assets follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
($ in
thousands)
<S> <C> <C>
Liquor licenses........................................... $ 5,235 $ 6,014
Debt issuance costs....................................... 3,653 4,857
Notes receivable.......................................... 5,440 7,655
Deferred compensation plan................................ 222 0
Other..................................................... 717 972
------- -------
$15,267 $19,498
======= =======
</TABLE>
Debt issuance costs are amortized over the terms of the respective loan
agreements.
F-14
<PAGE>
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 7--LONG-TERM DEBT, INCLUDING CAPITALIZED LEASE OBLIGATIONS:
Long-term debt, including capitalized lease obligations, is comprised of
the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
($ in thousands)
<S> <C> <C>
9 3/4% Senior Notes..................................... $103,456 $103,456
10 7/8% Senior Subordinated Discount Notes.............. 30,900 30,900
15% Senior Discount Notes............................... 75,000 69,111
14% Senior Secured Discount Notes....................... 24,000 22,179
Capitalized lease obligations........................... 1,957 8,310
Other................................................... 1,766 3,145
-------- --------
237,079 237,101
Deferred gain on debt exchange.......................... 1,792 2,548
-------- --------
238,871 239,649
Amounts due within one year............................. 1,000 2,498
-------- --------
$237,871 $237,151
======== ========
</TABLE>
On January 27, 1994, the Company sold $300 million principal amount of 9
3/4% Senior Notes due in full in 2002 (the "Senior Notes") and $150 million
principal amount ($109 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 million senior secured revolving credit
facility with a $100 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").
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
are redeemable at the option of the Company after February 1, 1999. Such notes
may now be redeemed at 101.393%, declining 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 of each year, and such notes
will mature on February 1, 2004. The Discount Notes are redeemable at the
option of the Company after February 1, 1999. Such notes may now be redeemed
at 102.719%, declining to 100% at February 1, 2002.
On August 12, 1997, FRI-MRD issued 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. No cash
interest was payable on the Senior Discount Notes until July 31, 1999, at
which time interest became payable in cash semi-annually at the rate of 15%
per annum, with the first cash interest payment made on January 31, 2000. The
Senior Discount Notes were issued to certain existing holders of the Company's
Senior Notes in exchange for $15.6 million of Senior Notes plus approximately
$34 million of cash. 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. On January 14 and
15, 1998, FRI-MRD issued an additional $14 million aggregate face amount of
the Senior Discount Notes to the same purchasers 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 were
used to fund the Company's capital expenditure programs and for general
corporate purposes.
F-15
<PAGE>
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On June 9, 1998, FRI-MRD entered into a Note Agreement pursuant to which
FRI-MRD issued $24 million aggregate face amount of MRD Merger Notes on
October 30, 1998 at a price of approximately 90% of par resulting in net
proceeds of $21.7 million. The MRD Merger Notes are due on January 24, 2002.
No cash interest was payable on the MRD Merger Notes until July 31, 1999, at
which time interest became payable in cash semi-annually at the rate of 14%
per annum with the first cash interest payment made on January 31, 2000. The
MRD Merger Notes are redeemable by FRI-MRD, in whole or in part, on or before
January 23, 2001, at a price of 105% of the accreted value thereof, or after
January 23, 2001, at a price of 102.5% of the accreted value thereof. Proceeds
from the sale of the MRD Merger Notes were used exclusively to purchase all of
the outstanding shares of Hamlet, and the MRD Merger Notes are secured by all
of such outstanding shares of Hamlet.
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. In connection with the Merger, the
Company increased the Foothill Credit Facility to $55 million. The Foothill
Credit Facility now provides for up to $35 million in revolving cash
borrowings and up to $55 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 restrictive covenants. The Company is in compliance with all
financial ratios at December 26, 1999. 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 ($16,057,000 of such letters of credit were outstanding as of December
26, 1999). $21,850,000 in working capital borrowings were outstanding as of
December 26, 1999 with an interest rate of 10.375%. These working capital
borrowings are classified as a current liability in the accompanying
Consolidated Balance Sheet due to the potential impact of the El Torito Sale
discussed in note 17.
The Company's viability has been and will continue to be dependent upon its
ability to generate sufficient operating cash flow or cash flow from other
sources to meet its obligations on a timely basis, and to comply with the
terms of its financing agreements. There can be no assurance that the Company
will be able to repay or refinance its Senior Notes and its 10 7/8% Senior
Subordinated Discount Notes due 2004, or that FRI-MRD will be able to repay or
refinance the Senior Discount Notes or the MRD Merger Notes, at their
respective maturities.
Maturities of long-term debt, including capitalized lease obligations,
during the four years subsequent to December 31, 2000 are as follows:
$1,693,000 in 2001, $203,331,000 in 2002, $480,000 in 2003 and $31,094,000 in
2004.
NOTE 8--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The recorded amounts of the Company's cash and cash equivalents,
receivables, accounts payable, self-insurance reserves, other accrued
liabilities and certain financial instruments included in other assets at
December 26, 1999 and December 27, 1998 approximate fair value. The fair value
of the Company's long-term debt, excluding capitalized lease obligations, is
estimated as follows:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
Recorded Fair Recorded Fair
Amount Value Amount Value
-------- ------- -------- -------
($ in thousands)
<S> <C> <C> <C> <C>
Senior Notes............................ $103,456 $46,555 $103,456 $65,177
Discount Notes.......................... 30,900 13,905 30,900 18,540
Senior Discount Notes................... 75,000 75,000 69,111 67,781
Senior Secured Discount Notes........... 24,000 24,000 22,179 22,179
Working capital borrowings.............. 21,850 21,850 0 0
Other................................... 2,266 2,024 3,145 2,903
</TABLE>
F-16
<PAGE>
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair values of the Senior Notes and Discount Notes are based on an
average market price of these instruments as of the end of fiscal 1999 and
1998. The fair values of the Senior Discount Notes and Senior Secured Discount
Notes as of the end of fiscal 1999 and 1998 are based on an assessment of the
value of the notes by an investment banking firm which takes into account the
accreted values of the Senior Discount Notes and Senior Secured Discount Notes
on such date, historical sale price information and other relevant pricing
information. The fair value of working capital borrowings equals the recorded
amount as a result of the variable interest rate of such debt. The fair value
of the other debt is estimated using discount rates which the Company believes
would be available to it for debt with similar terms and average maturities.
The Company has no instruments or transactions subject to the provisions of
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities."
NOTE 9--OTHER ACCRUED LIABILITIES:
A summary of other accrued liabilities follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
($ in
thousands)
<S> <C> <C>
Wages, salaries and bonuses............................... $11,943 $17,618
Carrying costs of closed properties....................... 7,405 12,282
Reserve for divestitures.................................. 8,267 10,611
Interest.................................................. 12,090 5,689
Property taxes............................................ 2,138 2,744
Sales tax................................................. 1,839 3,443
Utilities................................................. 1,507 3,340
Gift certificates......................................... 1,616 2,644
Deferred license fees..................................... 1,050 1,842
Other..................................................... 9,856 13,781
------- -------
$57,711 $73,994
======= =======
</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 over estimated sublease
revenues.
NOTE 10--INCOME TAXES:
The Company incurred losses for tax purposes in 1999, 1998 and 1997.
Accordingly, the income tax provisions for each year primarily reflect certain
state and local taxes. On a tax return basis, the Federal regular operating
loss carryforwards amounted to approximately $291.6 million ($294.8 million of
alternative minimum tax operating loss carryforwards) and expire in 2003
through 2020. The Company had approximately $711,000 of tax credit
carryforwards which expire in 2003 and 2004.
At December 26, 1999, 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 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.
F-17
<PAGE>
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $52.5 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 2004
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.
Further, as a result of the Merger and the Hamlet Acquisition, the Company
has net operating losses not used by KKR of $54.4 million. The net operating
losses expire beginning in 2005 through 2018. The Merger triggered an
ownership change for KKR in 1998 for Federal income tax purposes, which, along
with an ownership change for KKR in 1995, results in separate annual
limitations on the availability of these losses.
The Company does not believe that it underwent an ownership change causing
a limitation on the use of tax attributes as a result of the Merger and the
Hamlet Acquisition. Nevertheless, no assurance can be given that there were
not or will not be other transactions that could cause the Company to undergo
such an ownership change.
A reconciliation of income tax expense to the amount of income tax benefit
that would result from applying the Federal statutory rate (35% for 1999, 1998
and 1997) to loss before income taxes is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------
Dec. 26, Dec. 27, Dec. 28,
1999 1998 1997
-------- -------- --------
($ in thousands)
<S> <C> <C> <C>
Benefit for income taxes at statutory rate.. $(12,600) $(21,956) $(10,879)
State taxes, net of Federal income tax
benefit benefit............................ 311 242 219
Nondeductible goodwill...................... 1,071 556 490
Change in deferred tax asset attributable to
continuing operations subject to a full
valuation reserve and other................ 11,710 21,558 10,679
-------- -------- --------
$ 492 $ 400 $ 509
======== ======== ========
</TABLE>
At December 26, 1999 and December 27, 1998, the Company's deferred tax
asset was $184,738,000 and $165,686,000, respectively, and deferred tax
liability was $5,438,000 and $5,667,000, respectively. The major components of
the Company's net deferred taxes of $179,300,000 at December 26, 1999 and
$160,019,000 at December 27, 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
($ in thousands)
<S> <C> <C>
Depreciation........................................ $ (5,438) $ (5,667)
Net operating loss and credit carryforwards......... 155,368 132,257
Capitalized leases.................................. 882 852
Carrying costs and other reserves................... 7,798 8,717
Self-insurance reserves............................. 8,795 9,642
Straight-line rent.................................. 1,530 1,423
Reorganization costs................................ 5,720 6,479
Other............................................... 4,645 6,316
--------- ---------
179,300 160,019
Valuation allowance................................. (179,300) (160,019)
--------- ---------
$ 0 $ 0
========= =========
</TABLE>
F-18
<PAGE>
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The increase in the valuation allowance for 1999 resulted from the normal
occurrence of temporary differences, including the current year tax loss plus
the effect of acquired deferred assets subject to full valuation allowance.
NOTE 11--OTHER LONG-TERM LIABILITIES:
A summary of other long-term liabilities follows:
<TABLE>
<CAPTION>
1999 1998
------ ------
($ in
thousands)
<S> <C> <C>
Straight-line rents.......................................... $3,047 $3,612
Deferred compensation........................................ 732 839
------ ------
$3,779 $4,451
====== ======
</TABLE>
NOTE 12--BENEFIT PLANS:
The Company maintains certain incentive compensation and related plans for
executives and key operating personnel, including restaurant and field
management. Expenses for these plans were $4,827,000, $4,261,000 and
$4,062,000 for 1999, 1998 and 1997, respectively.
The Company provides 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 contribute 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 contributed by the participant. The Company's
contributions under this plan were $186,000, $151,000 and $156,000 in 1999,
1998 and 1997, 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. The plan was amended in 1999 to include a split-dollar investment
vehicle. 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 $87,000, $70,000 and $37,000 in
1999, 1998 and 1997, respectively. In each plan, a participant's right to
Company contributions vests at a rate of 25% per year of service.
NOTE 13--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. No distribution services were provided during 1998
and 1999. Distribution sales to those restaurants for the year ended December
28, 1997 aggregated $21,844,000.
Apollo FRI Partners, L.P. ("Apollo") and Green Equity Investors, L.P.
("GEI") charged a combined monthly fee of $100,000 for providing certain
management services to the Company until October 30, 1998. In November 1995,
the management services arrangement with GEI was terminated. In the fourth
quarter of 1998, it was determined that the Company would not be required to
pay $2.5 million of such fees accrued for the benefit of Apollo at December
28, 1997 and any fees charged in 1998. Accordingly, the reversal of such fees
is included as a reduction in 1998 general and administrative expenses. The
Company had total management services fees payable to Apollo and GEI of
$750,000 at December 26, 1999 and December 27, 1998.
F-19
<PAGE>
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 14--STOCK OPTIONS:
At December 26, 1999, the Company had three stock option plans. Options to
purchase common stock are generally granted at the fair market value of the
Company's stock on date of grant.
Certain officers and employees of the Company were granted stock options
under the Family Restaurants, Inc. 1994 Incentive Stock Option Plan. As a
result of the Merger, the stock option agreements for these individuals were
amended to convert the number of options and strike prices for the merged
Company's common stock. Additionally, the Company assumed existing stock
option plans of KKR in connection with the Merger, and all options under such
KKR plans are fully vested.
Certain officers, employees and directors of the Company were granted stock
options to purchase 1,202,000 shares during 1999 and 12,703,000 shares during
1998 under the Prandium, Inc. 1998 Stock Incentive Plan, which was approved
November 9, 1998 by the Company's board of directors. The stock options
granted to officers and employees vest ratably over a four year period and
have a ten year term. The stock options granted to directors were immediately
vested and have a ten year term. Under the Company's 1998 Stock Incentive
Plan, approximately 1,865,000 shares of common stock are available for stock
option grants.
The Family Restaurants, Inc. Value Creation Units Plan was terminated in
connection with the Merger. An expense in the fiscal year ended December 27,
1998 of $4,223,000 was incurred in connection with the termination. Such
expense consisted of a $4,036,000 cash payment and $187,000 for the intrinsic
value of stock options granted on December 9, 1998 under the Company's 1998
Stock Incentive Plan to purchase approximately 6,236,000 shares. Such options
have a per share strike price of $.50, were not exercisable for a period of 90
days after issuance and have a five year term.
A summary of the status of the Company's plans as of December 26, 1999,
December 27, 1998 and December 28, 1997 and changes during the years then
ended is presented below:
<TABLE>
<CAPTION>
Dec. 26, 1999 Dec. 27, 1998 Dec. 28, 1997
-------------------------- -------------------------- ------------------------
Weighted- Weighted- Weighted-
Number of Average Number of Average Number of Average
Options Exercice Price Options Exercise Price Options Exercise Price
---------- -------------- ---------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 26,299,689 $1.21 934,652 $ .89 934,652 $.89
Granted................. 1,202,000 .54 18,939,232 .75 0 0
Impact of Merger-KKR
plans.................. 0 0 6,432,305 2.67 0 0
Cancelled............... (1,700,922) 1.20 (6,500) 1.56 0 0
---------- ---------- -------
Outstanding at end of
year................... 25,800,767 $1.18 26,299,689 $1.21 934,652 $.89
========== ===== ========== ===== ======= ====
Options exercisable at
end of year............ 16,373,231 7,858,517 700,989
========== ========== =======
</TABLE>
Options granted during 1999 were approximately 1% of the weighted average
common shares outstanding representing 128 employees. There were no options
exercised during the periods presented.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
December 26, 1999 December 26, 1999
-------------------------------------------- ---------------------------
Weighted-Average
Number of Remaining Weighted-Average Number of Weighted-Average
Range of Exercise Prices Options Life (Years) Exercise Price Options Exercise Price
- ------------------------ ---------- ---------------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
$.18 to $.50............ 6,934,859 4.50 $ .48 6,505,859 $ .49
$.51 to $1.00........... 12,849,005 8.75 .86 3,852,005 .85
$1.01 to $3.00.......... 4,236,486 5.65 1.56 4,234,950 1.56
$3.01 to $8.75.......... 1,780,417 4.37 5.34 1,780,417 5.34
---------- ---- ----- ---------- -----
$.18 to $8.75........... 25,800,767 6.76 $1.18 16,373,231 $1.18
========== ==== ===== ========== =====
</TABLE>
F-20
<PAGE>
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma net loss and net loss per common share were determined if the
Company had accounted for its employee stock options under the fair value
method of SFAS 123 and are presented in the table below ($ in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Dec. 26, 1999 Dec. 27, 1998
------------- -------------
<S> <C> <C>
Net loss--pro forma.......................... $(36,554) $(63,852)
Net loss per common share--pro forma--basic
and diluted................................. $ (.20) $ (.49)
Weighted average fair value of options
granted..................................... $ .19 $ .26
</TABLE>
For pro forma disclosures, the options' estimated fair value was amortized
over their expected life of ten years. These pro forma disclosures do not
apply to 1997 nor are they necessarily indicative of anticipated future
disclosures because there were no options granted in 1997, 1996 and 1995, and
SFAS 123 does not apply to grants before 1995. The fair value for these
options was estimated at the date of grant using an options pricing model. The
model was designed to estimate the fair value of exchange traded options
which, unlike employee stock options, can be traded at any time and are fully
transferable. In addition, such models require the input of highly subjective
assumptions, including the expected volatility of the stock price. Therefore,
in management's opinion, the existing models do not provide a reliable single
measure of the value of employee stock options. The following weighted average
assumptions were used to estimate the fair value of these options:
<TABLE>
<CAPTION>
Dec. 26, 1999 Dec. 27, 1998
------------- -------------
<S> <C> <C>
Expected dividend yield........................ 0% 0%
Expected stock price volatility................ 10% 10%
Risk free interest rate........................ 6.00% 5.00%
Expected life of options (in years)............ 10 10
</TABLE>
NOTE 15--SEGMENT INFORMATION:
The Company operates exclusively in the food-service industry.
Substantially all revenues result from the sale of menu products at
restaurants operated by the Company. The Company's reportable segments are
based on restaurant operating divisions. Operating income (loss) includes the
operating results before interest.
The accounting policies of the segments are the same as those described in
Note 1. The corporate component of operating income (loss) represents
corporate general and administrative expenses. Corporate assets include
corporate cash, investments, receivables, asset portions of financing
instrument and the two full-service and four fast-casual restaurants not
included in the El Torito Sale (see note 17).
F-21
<PAGE>
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Dec. 26, 1999 Dec. 27, 1998 Dec. 28, 1997
------------- ------------- -------------
($ in thousands)
<S> <C> <C> <C>
Sales
El Torito Division............. $220,611 $214,370 $217,949
Chi-Chi's Division............. 227,716 243,666 245,775
Koo Koo Roo Division........... 88,252 14,617 0
-------- -------- --------
Total Sales.................. $536,579 $472,653 $463,724
======== ======== ========
Depreciation and Amortization
El Torito Division............. $ 10,529 $ 9,688 $ 10,779
Chi-Chi's Division............. 11,189 10,610 9,956
Koo Koo Roo Division........... 5,213 1,087 0
Corporate...................... 1,100 1,531 1,660
-------- -------- --------
Total Depreciation and
Amortization................ $ 28,031 $ 22,916 $ 22,395
======== ======== ========
Operating Income (Loss)
El Torito Division............. $ 5,291 $ 6,605 $ 3,457
Chi-Chi's Division............. (3,161) (39,699) (12,052)
Koo Koo Roo Division........... (2,482) (831) 0
Corporate...................... (4,276) (4,149) (3,013)
-------- -------- --------
Total Operating Loss......... $ (4,628) $(38,074) $(11,608)
======== ======== ========
Interest (Income) Expense, net
El Torito Division............. $ 1,356 $ 856 $ 995
Chi-Chi's Division............. 818 571 635
Koo Koo Roo Division........... 72 (24) 0
Corporate...................... 29,125 23,256 17,846
-------- -------- --------
Total Interest Expense, net.. $ 31,371 $ 24,659 $ 19,476
======== ======== ========
Capital Expenditures
El Torito Division............. $ 11,040 $ 10,980 $ 5,684
Chi-Chi's Division............. 15,379 13,395 6,599
Koo Koo Roo Division........... 3,297 1,450 0
Corporate...................... 619 1,866 1,305
-------- -------- --------
Total Capital Expenditures... $ 30,335 $ 27,691 $ 13,588
======== ======== ========
Total Assets
El Torito Division............. $ 55,835 $100,056 $103,210
Chi-Chi's Division............. 111,077 112,328 134,141
Koo Koo Roo Division........... 100,607 108,410 0
Corporate...................... 19,114 27,392 52,417
-------- -------- --------
Total Assets................. $286,633 $348,186 $289,768
======== ======== ========
</TABLE>
NOTE 16--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-22
<PAGE>
PRANDIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 17--SUBSEQUENT EVENT:
On March 27, 2000, the Company entered into a definitive agreement (the
"Sale Agreement") to sell substantially all of the El Torito Division to
Acapulco Acquisition Corp. ("Acapulco") in a transaction with an enterprise
value of approximately $130.0 million. Consummation of the sale is subject to
customary terms and conditions. At December 26, 1999, the El Torito Division
operated 97 full-service restaurants and four fast-casual restaurants in eight
states and franchised and licensed eight restaurants outside the United
States. All but two full-service restaurants and none of the four fast-casual
restaurants are to be included in the sale to Acapulco. Under the terms of the
Sale Agreement, the Company will receive, subject to certain post-closing
adjustments based on a closing balance sheet, cash of $130.0 million less the
El Torito Division's long-term debt, primarily capitalized lease obligations,
which will be assumed by Acapulco at the closing ($9.6 million at December 26,
1999). The Company expects the sale to be finalized in the second quarter of
fiscal 2000 and to record a pretax gain in fiscal 2000 as a result of this
transaction. Cash proceeds from the sale are assumed to be used to repay
certain indebtedness with remaining funds available for general corporate
purposes.
The 95 full-service El Torito Division restaurants to be sold generated
sales of $214,679,000 and $209,745,000 for the years ended December 26, 1999
and December 27, 1998, respectively, and related El Torito Division operating
income of $9,954,000 and $6,176,000, respectively. Such operating income
includes charges for allocated corporate general and administrative expenses
of $5,515,000 and $6,690,000 for the years ended December 26, 1999 and
December 27, 1998, respectively.
As a result of this transaction, the assets and liabilities of the El
Torito Division to be sold have been classified as property held for sale in
the accompanying consolidated balance sheet. The components of property held
for sale are as follows ($ in thousands):
<TABLE>
<S> <C>
Current assets................................................... $ 5,045
Property and equipment, net...................................... 59,370
Reorganization value, net........................................ 33,727
Other assets..................................................... 1,488
Current liabilities.............................................. (27,410)
Self-insurance reserves.......................................... (7,816)
Other long-term liabilities...................................... (1,492)
Long-term debt, excluding current portion........................ (7,077)
--------
$ 55,835
========
</TABLE>
F-23
<PAGE>
SCHEDULE II
PRANDIUM, 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 1999..... $3,462 $ 138 $ 0 $(294)(1) $3,306
For the year 1998..... 1,051 3,060 0 (649)(1) 3,462
For the year 1997..... 879 78 300 (206)(1) 1,051
</TABLE>
- --------
(1) Represents write-off of uncollectible receivables against allowance and
includes transfers to other accounts.
S-1
<PAGE>
STOCK PURCHASE AGREEMENT
by
and
among
PRANDIUM, INC.,
FRI-MRD CORPORATION
and
ACAPULCO ACQUISITION CORP.
Dated as of March 27, 2000
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
PURCHASE AND SALE OF STOCK.............................................................................. 1
SECTION 1.1 Purchase and Sale....................................................................... 1
SECTION 1.2 Purchase Price.......................................................................... 1
SECTION 1.3 Seller's Certificate.................................................................... 2
SECTION 1.4 Assumption of Liability for Uncashed Checks............................................. 2
SECTION 1.5 Required Reorganization................................................................. 2
ARTICLE II
THE CLOSING............................................................................................. 5
SECTION 2.1 Closing Date............................................................................ 5
SECTION 2.2 Transactions To Be Effected at the Closing.............................................. 5
SECTION 2.3 Post-Closing Adjustment ................................................................ 6
ARTICLE III
REPRESENTATIONS AND WARRANTIES.......................................................................... 8
SECTION 3.1 Representations and Warranties of Prandium and Seller................................... 8
SECTION 3.2 Representations and Warranties of Purchaser............................................. 29
ARTICLE IV
COVENANTS............................................................................................... 31
SECTION 4.1 Conduct of Business..................................................................... 31
SECTION 4.2 Access to Information................................................................... 32
SECTION 4.3 Consents................................................................................ 33
SECTION 4.4 Further Assurances...................................................................... 34
SECTION 4.5 Employee Benefit Plans.................................................................. 34
SECTION 4.6 Employees............................................................................... 35
SECTION 4.7 Section 338(h)(10) Election............................................................. 35
SECTION 4.8 Cooperation With Respect to Tax Matters................................................. 37
SECTION 4.9 Tax Indemnity........................................................................... 39
SECTION 4.10 Financial Information.................................................................. 40
SECTION 4.11 Expenses............................................................................... 41
SECTION 4.12 Insurance.............................................................................. 41
SECTION 4.13 Publicity.............................................................................. 41
SECTION 4.14 Certain Understandings................................................................. 41
SECTION 4.15 Non-competition; Non-solicitation...................................................... 42
SECTION 4.16 Confidentiality........................................................................ 43
SECTION 4.17 Acquisition of Rights to Confidentiality............................................... 44
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
SECTION 4.18 No-Shop....................................................................... 44
SECTION 4.19 Cooperation with respect to Insurance Matters................................. 45
SECTION 4.20 Transition Services Agreement................................................. 46
SECTION 4.21 Anaheim Lease Agreement....................................................... 46
SECTION 4.22 Notification.................................................................. 46
SECTION 4.23 Foothill Consent and Waiver................................................... 47
SECTION 4.24 Payroll and Credit Card Receivables........................................... 47
SECTION 4.25 Non-Renewal of Guaranties..................................................... 47
SECTION 4.26 POS Agreement................................................................. 48
ARTICLE V
CONDITIONS PRECEDENT........................................................................... 49
SECTION 5.1 Conditions Precedent to Obligations of Purchaser............................... 49
SECTION 5.2 Conditions Precedent to Seller's Obligation.................................... 52
ARTICLE VI
INDEMNIFICATION................................................................................ 53
SECTION 6.1 Indemnification Generally...................................................... 53
SECTION 6.2 Indemnification of Purchaser Indemnitees....................................... 53
SECTION 6.3 Indemnification of Seller Indemnitees.......................................... 54
SECTION 6.4 Limitation on Indemnification Obligations...................................... 55
SECTION 6.5 Cooperation.................................................................... 56
SECTION 6.6 Third Party Claims Procedure................................................... 56
SECTION 6.7 General........................................................................ 58
ARTICLE VII
TERMINATION AND AMENDMENT...................................................................... 59
SECTION 7.1 Termination.................................................................... 59
SECTION 7.2 Effect of Termination.......................................................... 60
SECTION 7.3 Amendment...................................................................... 60
ARTICLE VIII
MISCELLANEOUS.................................................................................. 60
SECTION 8.1 Notices........................................................................ 60
SECTION 8.2 Interpretation................................................................. 62
SECTION 8.3 Severability................................................................... 62
SECTION 8.4 Counterparts................................................................... 63
SECTION 8.5 Entire Agreement............................................................... 63
SECTION 8.6 Governing Law.................................................................. 63
SECTION 8.7 Assignment..................................................................... 63
SECTION 8.8 No Third-Party Beneficiaries................................................... 63
</TABLE>
ii
<PAGE>
SCHEDULES
Schedule 1.4 Assumption of Liability
Schedule 1.5 International Restaurants
Schedule 3.1(b) Subsidiaries
Schedule 3.1(d) Capital Stock
Schedule 3.1(e) No Conflict
Schedule 3.1(f) Financial Statements
Schedule 3.1(g) No Undisclosed Liabilities
Schedule 3.1(h) Absence of Certain Changes or Events
Schedule 3.1(i) Compliance with Applicable Laws
Schedule 3.1(j) Litigation; Decrees
Schedule 3.1(k) Title to Properties
Schedule 3.1(l) Applicable Contracts
Schedule 3.1(m) Taxes
Schedule 3.1(n) Employee Benefit Plans
Schedule 3.1(o) Labor Matters
Schedule 3.1(p) Intellectual Property
Schedule 3.1(q) Insurance
Schedule 3.1(r) Environmental Matters
Schedule 3.1 (t) Brokers, Finders
Schedule 3.1(v) Liquor Licenses
Schedule 3.1(x) Transactions with Related Parties
Schedule 3.1(y) Compliance with Health and Food Service Requirements
Schedule 3.1(z) Suppliers; Franchises
Schedule 3.1(cc) Franchising Agreements
Schedule 3.1(ee) Letters of Credit/Security Deposits
Schedule 3.2(c) No Conflict
Schedule 3.2(d) Financing
Schedule 4.1 Conduct of Business
Schedule 4.5(a) Severance Plan
Schedule 4.14(d) Restaurants
Schedule 5.1(h) Landlord Consents
Schedule 6.3(c) Lease Guarantees
iii
<PAGE>
EXHIBITS
Exhibit A Form of Escrow Agreement
Exhibit B Form of Landlord Consent
Exhibit C Form of Waiver and Release
Exhibit D Form of Employee Release
Exhibit E Form of Opinion of Seller's Counsel
Exhibit F Form of Opinion of Purchaser's Counsel
iv
<PAGE>
TABLE OF DEFINITIONS
--------------------
<TABLE>
<CAPTION>
Defined Term Initial Section Reference
- ------------ -------------------------
<S> <C>
Accountants........................................................................... 4.7(b)
Acquired Companies.................................................................... Recitals
Acquired Companies' Intellectual Property............................................. 1.5(c)
Acquired Restaurants.................................................................. 3.1(v)(2)
Acquisition........................................................................... 1.1
Affected Persons...................................................................... 3.1(n)
Anaheim Restaurant.................................................................... 1.5(a)(2)
Applicable Contracts.................................................................. 3.1(l)
Applicable Rate....................................................................... 2.3(b)
Apollo................................................................................ 2.2(c)
Audit................................................................................. 4.8(f)(iii)
Balance Sheet Date.................................................................... 3.1(f)
Base Working Capital.................................................................. 2.3(b)
Closing............................................................................... 2.1
Closing Date.......................................................................... 2.1(b)
Code.................................................................................. 3.1(n)
Confidentiality Agreement............................................................. 4.2(b)
Confidentiality Letters............................................................... 4.17
Contracts............................................................................. 3.1(e)
Damages............................................................................... 6.6(d)
Debt Commitments...................................................................... 3.2(d)
DLJ................................................................................... 3.1(bb)
Election Forms........................................................................ 4.7(a)
Employee Benefit Plans................................................................ 3.1(n)
Employees............................................................................. 3.1(o)
Environmental Laws.................................................................... 3.1(r)
Equity Commitment..................................................................... 3.2(d)
ERISA................................................................................. 3.1(n)
ERISA Affiliate....................................................................... 3.1(n)
Escheat Liability..................................................................... 1.4
Escrow Agent.......................................................................... 2.2(d)
Escrow Agreement...................................................................... 2.2(d)
Escrow Funds.......................................................................... 2.2(d)
ETX Restaurants....................................................................... 1.5(a)(1)
Final Section 338 Asset Allocation Schedule........................................... 4.7(b)
Financial Statements.................................................................. 3.1(f)
Foothill.............................................................................. 4.23
Foothill Loan Documents............................................................... 4.23
Franchising........................................................................... Recitals
</TABLE>
v
<PAGE>
<TABLE>
<S> <C>
GAAP.................................................................................. 3.1(f)
Hazardous Substance................................................................... 3.1(r)
HSR Act............................................................................... 2.1(a)
Indebtedness.......................................................................... 1.2
Indemnified Party..................................................................... 6.5
Indemnifying Party.................................................................... 6.5
Independent Firm...................................................................... 2.3(a)
Information Technology................................................................ 3.1(p)(vi)
Intellectual Property................................................................. 3.1(p)(ii)
International Restaurants............................................................. 1.5(a)(i)
IRS................................................................................... 3.1(n)
Lease................................................................................. 3.1(k)(ii)
Lease Agreement....................................................................... 4.21
Leases................................................................................ 3.1(k)(ii)
Liens................................................................................. 3.1(k)
Liquor Licenses....................................................................... 3.1(v)
Material Adverse Effect............................................................... 3.1(a)
New Provider.......................................................................... 4.26
Notice................................................................................ 3.1(r)
Objection Notice...................................................................... 2.3(a)
Ownership Change Notice............................................................... 5.1(t)
Pension Plan.......................................................................... 3.1(n)
Permitted Liens....................................................................... 3.1(k)
POS Agreement......................................................................... 1.2
POS System............................................................................ 4.26
Post-Closing Period................................................................... 4.8(c)
Prandium.............................................................................. Recitals
Prandium Consolidated Group........................................................... 4.8(a)
Pre-Closing Claims.................................................................... 4.19(a)
Pre-Closing Liabilities............................................................... 4.19(a)
Pre-Closing Period.................................................................... 4.8(c)
Preliminary Section 338 Asset Allocation Schedule..................................... 4.7(b)
Progressive........................................................................... 4.26
Progressive POS System................................................................ 4.26
Purchase Price........................................................................ 1.2
Purchaser............................................................................. Recitals
Purchaser Indemnitee.................................................................. 6.2
Purchaser Indemnitees................................................................. 6.2
Related Party......................................................................... 3.1(x)
Required Reorganization............................................................... 1.5(b)
Restaurant Liabilities................................................................ 1.5(b)
Restaurants........................................................................... Recitals
Restricted Parties.................................................................... 4.15(a)
</TABLE>
vi
<PAGE>
<TABLE>
<S> <C>
Retained Assets...................................................................... 1.5(a)(4)
Retained Employees................................................................... 4.5(d)
Retained Equipment................................................................... 1.5(a)(3)
Retained Fee......................................................................... 1.5(a)(2)
Retained Intellectual Property....................................................... 1.5(a)(4)
Retained Leases...................................................................... 1.5(a)(1)
Retained Liabilities................................................................. 1.5(b)
Retained Real Property............................................................... 1.5(a)(2)
Retained Restaurants................................................................. [1.5(a)(2)
Section 338(h)(10) Election.......................................................... 4.7(a)
Securities Act....................................................................... 3.2(e)
Seller............................................................................... Recitals
Seller Indemnitee.................................................................... 6.3
Seller Indemnitees................................................................... 6.3
Sellers' Insurance Policies.......................................................... 4.19(a)
Shared Intellectual Property......................................................... 1.5(a)(4)
Stock................................................................................ Recitals
Straddle Tax Return.................................................................. 4.8(c)
Tax.................................................................................. 4.8(f)(i)
Tax Returns.......................................................................... 4.8(f)(ii)
Taxes................................................................................ 4.8(f)(i)
Third Party Claim.................................................................... 6.6(e)
Threshold Amount..................................................................... 6.4(b)
TRAC Agreement....................................................................... 3.1(w)
Transition Services Agreement........................................................ 4.20
WARN Act............................................................................. 4.6
Working Capital...................................................................... 2.3(c)
Working Capital Statement............................................................ 2.3(a)
</TABLE>
vii
<PAGE>
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT, dated as of March 27, 2000, by and among
Prandium, Inc., a Delaware corporation ("Prandium"), FRI-MRD Corporation, a
Delaware corporation, ("Seller") and Acapulco Acquisition Corp., a Delaware
corporation ("Purchaser").
WHEREAS, Seller owns all of the outstanding shares of capital stock
(the "Stock") of El Torito Franchising Company ("Franchising") and El Torito
Restaurants, Inc. ("Restaurants" and together with Franchising, the "Acquired
Companies"); and
WHEREAS, Seller desires to sell to Purchaser, and Purchaser desires to
purchase from Seller, all of the shares of Stock owned by Seller, upon the terms
and subject to the conditions set forth herein.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF STOCK
SECTION 1.1 Purchase and Sale. Upon the terms and subject to the
-----------------
conditions set forth herein, Seller agrees to sell, assign, transfer, convey and
deliver to Purchaser, and Purchaser agrees to purchase and accept from Seller,
on the Closing Date (as defined below), all of Seller's rights, title and
interest in and to the Stock (the "Acquisition").
SECTION 1.2 Purchase Price. In consideration for the purchase by
--------------
Purchaser of the Stock, Purchaser shall pay to Seller on the Closing Date an
aggregate of $130.0 million less the aggregate amount of the principal and
accrued and unpaid interest in respect of the Acquired Companies' Indebtedness
(as defined below) outstanding on the Closing Date (the "Purchase Price"). The
Purchase Price shall be paid as follows: $5.0 million to the Escrow Agent in
accordance with Section 2.2(d) hereof and the balance of the Purchase Price by
wire transfer of immediately available funds to such account or accounts as
Seller shall have designated at least two business days prior to the Closing
Date. The Purchase Price shall be subject to adjustment pursuant to Section 2.3
hereof.
"Indebtedness" shall mean all (i) indebtedness for borrowed money,
including, without limitation, purchase money indebtedness, (ii) indebtedness
evidenced by bonds, notes,
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debentures or similar instruments, (iii) indebtedness epresented by capital
lease obligations and (iv) to the extent not included in (iii), indebtedness
related to POS equipment provided under the Systems Acquisition Agreement, dated
February 12, 1999, with Progressive Software, Inc. (the "POS Agreement").
SECTION 1.3 Seller's Certificate. Within two (2) days prior to the
--------------------
Closing Date, Seller shall deliver to Purchaser a certificate signed by an
authorized officer of Seller certifying as to the aggregate amount of the
Acquired Companies' Indebtedness expected to be outstanding immediately prior to
the Closing.
SECTION 1.4 Assumption of Liability for Uncashed Checks. In
--------------------------------------------
connection with the Acquisition, Seller shall assume at Closing all liability
(including, without limitation, liability under escheat and unclaimed property
laws, including interest, fines and penalties) for any and all uncashed checks
issued by the Acquired Companies that are summarized on Schedule 1.4 hereto (the
"Escheat Liability").
SECTION 1.5 Required Reorganization.
-----------------------
(a) On or prior to the Closing Date, Seller shall cause
Restaurants to transfer to Seller, without consideration (other than
consideration consisting solely of intercompany obligations that will be
eliminated pursuant to Section 2.2(c) below), all of Restaurant's right, title
and interest in and to the following assets:
(1) all real property leases (the "Retained Leases") in
respect of the El Torito Express restaurants (other than the international
El Torito Express Restaurants listed on Schedule 1.5 (together, with any
future El Torito Express Restaurants located outside of the United States
and the United States territories, the "International Restaurants")) (the
"ETX Restaurants"),
(2) the fee interest in the Anaheim El Torito
restaurant property (the "Retained Fee" and, together with the Retained
Leases, the "Retained Real Estate") located at 1801 E. Katella Avenue,
Anaheim, California (the "Anaheim Restaurant" and, together with the ETX
Restaurants, the "Retained Restaurants"),
(3) all equipment, furnishings, fixtures and inventory
located at the Retained Restaurants and presently used or contemplated to
be used in the ordinary course of business in the operations of the
Retained Restaurants (collectively, the "Retained Equipment"),
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<PAGE>
(4) other than the name "El Torito Express" (or any
variant thereof) and any logo associated with El Torito Express (or any
variant thereof), all Intellectual Property owned or licensed by the
Acquired Companies and used exclusively in connection with the operation of
the ETX Restaurants, including without limitation, all trademarks, service
marks, trade dress and other indicia of source associated with El Torito
Express, all patents and copyrights and all other proprietary or
confidential information (the "Retained Intellectual Property" and,
together with the Retained Equipment, the Retained Restaurants and the
Retained Real Estate, the "Retained Assets"); provided that the Retained
Intellectual Property shall not include (i) recipes and methods of food
preparation currently used by the ETX Restaurants or (ii) menu item names
currently offered by the ETX Restaurants (collectively, the "Shared
Intellectual Property"); and
(5) a common interest in the Shared Intellectual
Property.
At the Closing, Seller shall grant the Acquired Companies a royalty free
perpetual license to use outside of the United States and United States
territories, all Retained Intellectual Property used in connection with the
operation of the International Restaurants.
(b) On or prior to the Closing Date, Seller shall, pursuant
to an instrument of assumption reasonably satisfactory to Purchaser, assume,
without consideration (other than consideration consisting solely of
intercompany obligations that will be eliminated pursuant to Section 2.2(c)
below), all of the Acquired Companies' liabilities and obligations relating to
the operation of the Retained Restaurants or the Retained Assets, including,
without limitation, (i) all obligations under the leases referred to in clause
1.5(a)(1) above, (ii) any obligation to any former or present employee of the
Acquired Companies that works or worked primarily at the Retained Restaurants,
(iii) any liabilities relating to the Retained Restaurants related to or arising
from current or future environmental laws or common law with respect to
environmental matters and (iv) any liabilities relating to the lawsuit filed by
Temecula Towne Center Assoc., Inc. against Restaurants (Orange County,
California Superior Court Case No. 815314) (the "Restaurant Liabilities" and,
together with the Escheat Liability, the "Retained Liabilities"). The transfer
by Restaurants of the Retained Assets to Seller, and the assumption by Seller of
the Retained Liabilities is referred to herein as the "Required Reorganization."
Seller shall consult with Purchaser with respect to effectuating the Required
Reorganization. Seller shall be responsible for all transfer and other Taxes and
all out-of-pocket costs and expenses arising out of or relating to the Required
Reorganization. Each party hereto shall execute and deliver, or cause to be
executed and delivered, all such documents and instruments and shall take, or
cause to be taken, all such other actions as may be reasonably necessary to
consummate the transactions contemplated by this Section 1.5, whether before or
after Closing.
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<PAGE>
Seller and Prandium hereby jointly and severally agree to indemnify, save and
hold Purchaser and the Acquired Companies harmless against and from all of the
Retained Liabilities, including without limitation, any liability resulting from
the continuance of an Acquired Company as a party to the leases referred to in
clause 1.5(a)(1) above. Notwithstanding anything to the contrary herein, the
International Restaurants shall be the responsibility of Purchaser after Closing
(it being understood that Seller and Prandium shall remain liable with respect
to any breach of the representations and warranties made by Prandium and Seller
herein or pursuant hereto insofar as such breaches relate to the International
Restaurants for periods prior to the Closing in accordance with the
indemnification provisions set forth in Article VI).
(c) After the Closing Date, Prandium and Seller shall cease
using the name "El Torito" (or any variant thereof) and the other Intellectual
Property owned by or licensed to the Acquired Companies (the "Acquired
Companies' Intellectual Property") other than as contemplated by this Agreement.
Prandium and Seller shall use commercially reasonable efforts to cease using the
name "El Torito Express" (or any variant thereof) and any logo associated with
El Torito Express (or any variant thereof) as soon as practicable after the
Closing but in no event later than 90 days following the Closing. Other than as
contemplated by this Agreement, no rights in or to the Acquired Companies'
Intellectual Property shall be transferred as part of the Required
Reorganization, and from and after the Closing Date, neither Prandium, Seller
nor any of their affiliates shall have any right to use such Intellectual
Property other than as contemplated by this Agreement, including, without
limitation, the marks EL TORITO and EL TORITO EXPRESS (or any variants thereof)
and any other trademarks, service marks, logos, trade dress or other indicia of
source associated with the Acquired Companies, any patents, any copyrights, or
any proprietary recipes, methods of food preparation, or other proprietary or
confidential information. Without limiting the generality of the foregoing, at
or prior to the Closing (or in the case of the El Torito Express name and logo,
as soon as practicable after the Closing, but in no event later than 90 days
following the Closing), Prandium and Seller shall remove all signs, decorations
and displays, and destroy all marketing materials (in any media), menus or other
written or printed materials that contain or make reference to the El Torito
Express name and logo (or any variant thereof). In addition, other than as
contemplated by this Agreement, neither Prandium nor Seller shall adopt or use
any trademarks, service marks, logos, trade dress or other indicia of source
included in the Acquired Companies' Intellectual Property.
(d) On or prior to the Closing Date, Prandium and Seller
shall transfer to Restaurants, without consideration (other than consideration
consisting solely of intercompany obligations that will be eliminated pursuant
to Section 2.2(c) below), all of Prandium and Seller's right, title and interest
in any equipment used solely in the ordinary course of business in the
operations of the Acquired Companies, including, without limitation,
4
<PAGE>
the personal computers and equipment of the Acquired Companies' administrative
staff, in each case to the extent used solely in the ordinary course of business
in the operations of the Acquired Companies.
ARTICLE II
THE CLOSING
SECTION 2.1 Closing Date. The consummation of the Acquisition (the
------------
"Closing") shall take place at the offices of Skadden, Arps, Slate, Meagher &
Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071, or such other
place as the parties shall mutually agree, at 10:00 a.m. (local time) on the
later of:
(a) the first business day after expiration or termination
of all waiting periods prescribed under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), if applicable, and
(b) the date on which the conditions set forth in Article V
shall be satisfied or waived, or such other date as the parties shall mutually
agree upon (the date of the Closing being herein referred to as the "Closing
Date").
SECTION 2.2 Transactions To Be Effected at the Closing. At the
------------------------------------------
Closing:
(a) Seller shall deliver to Purchaser (i) free and clear of
all Liens (other than those created by Purchaser), certificates representing the
Stock, duly endorsed in blank, or accompanied by stock powers duly executed in
blank, by Seller and (ii) such other documents as provided in Sections 4.7 and
5.1 of this Agreement;
(b) Purchaser shall deliver to Seller (i) payment as
provided in Section 1.2 and (ii) such other documents as provided in Section 5.2
of this Agreement;
(c) (i) all intercompany payables or other obligations of
any Acquired Company to Apollo FRI Partners, L.P. ("Apollo") or any member of
the Prandium Consolidated Group (as defined below) shall be paid by way of
offset against intercompany receivables of such Acquired Company from Apollo or
members of the Prandium Consolidated Group (which receivables exceed the
aggregate amount of such payables or other obligations for any Acquired
Company), (ii) the resulting net intercompany receivables of any Acquired
Company from any member of the Prandium Consolidated Group shall be transferred
to Seller and (iii) Purchaser shall not have any rights or obligations with
respect to any intercompany
5
<PAGE>
obligations or receivables of any Acquired Company; provided that nothing in
this Section 2.2(c) shall affect any of the covenants, agreements, obligations
or liabilities of Prandium, Seller or Purchaser set forth in this Agreement; and
(d) Prandium, Seller and Purchaser shall enter into an
Escrow Agreement, substantially in the form attached hereto as Exhibit A (the
"Escrow Agreement"), with a bank or trust company as shall be acceptable to
Prandium, Seller and Purchaser as trustee on behalf of the parties as their
interests may appear (the "Escrow Agent"), and Purchaser shall deposit $5.0
million (the "Escrow Funds") in cash with the Escrow Agent pursuant to the
Escrow Agreement.
(e) Seller shall assume the Escheat Liability.
SECTION 4.6 Post-Closing Adjustment.
-----------------------
(a) Within 60 days following the Closing Date, Purchaser
shall deliver to Seller a statement of Working Capital (the "Working Capital
Statement"). Purchaser and its auditors will:
(i) make available to Seller and its agents, attorneys
and accountants upon reasonable advance notice all records and workpapers
reasonably necessary to understand the Working Capital Statement and to
calculate Working Capital and
(ii) allow Seller and its agents, attorneys and
accountants upon reasonable advance notice to interview all personnel and
independent auditors involved in the preparation of the Working Capital
Statement.
If Seller disagrees with the computation of Working Capital
contained in the Working Capital Statement, Seller may, within 30 days after
receipt of the Working Capital Statement, deliver a notice (the "Objection
Notice") to Purchaser setting forth Seller's objections and Seller's
determination of Working Capital, to the extent reasonably possible. At the time
of delivery of Seller's Objection Notice, if any, Seller shall pay to Purchaser
or Purchaser shall pay to Seller, as applicable, any net amount not disputed by
Seller's Objection Notice. If no Objection Notice is received by Purchaser
within such 30 day period, then the Working Capital Statement shall be deemed to
have been accepted by Seller, and shall become final and binding upon the
parties hereto. Purchaser and Seller will use reasonable efforts to resolve any
disagreements as to the computation of Working Capital, but if they do not
obtain a final resolution within 15 days after Purchaser has received the
Objection Notice, Purchaser and Seller will jointly retain an independent
accounting firm of recognized national standing
6
<PAGE>
that is not a public accountant of Purchaser, Prandium, Seller or any of their
respective affiliates (an "Independent Firm") to resolve any remaining
disagreements. If Purchaser and Seller are unable to agree on the choice of an
Independent Firm, the choice will be selected by lot from those "big-four"
accounting firms that are Independent Firms or, if no "big-four" accounting firm
is an Independent Firm or is willing to serve, selected by lot from those
Independent Firms that are willing to serve. Purchaser and Seller will direct
the retained Independent Firm to render a determination within 30 days of its
retention and Purchaser and Seller and their respective agents will cooperate
with the chosen Independent Firm during its engagement. The retained Independent
Firm will consider only those issues related to the determination of Working
Capital set forth in the Objection Notice which Purchaser and Seller have been
unable to resolve. The determination of the retained Independent Firm will be
based on and consistent with the definition of Working Capital included herein.
The determination of the chosen Independent Firm will be conclusive and binding
upon Purchaser and Seller.
In resolving any disagreement described above in this Section 2.3, all
costs and expenses of the chosen Independent Firm shall be borne by Purchaser in
the proportion that the aggregate dollar amount of the disputed items submitted
to the Independent Firm that are successfully disputed by Seller (as determined
by the Independent Firm) bears to the aggregate dollar amount of all the
disputed items that are so submitted (whether successfully or unsuccessfully
disputed by Seller); Seller shall bear all other such costs and expenses.
(b) If the Working Capital exceeds $(13,530,000) ("Base
Working Capital") by more than $75,000, Purchaser shall pay to Seller within 5
business days of the final determination of Working Capital the amount of such
excess (together with interest at the Applicable Rate as provided below), which
shall be payable in cash by wire transfer or delivery of other immediately
available funds. If Working Capital is less than Base Working Capital by more
than $75,000, Seller shall pay to Purchaser within 5 business days of the final
determina tion of Working Capital the amount of such deficit (together with
interest at the rate of 10% per annum calculated on the basis of a 360-day year
and compounded daily (the "Applicable Rate")), which shall be payable in cash by
wire transfer or delivery of other immediately available funds. Interest at the
Applicable Rate shall be paid from the Closing Date to the date of payment with
respect to any adjustment amount due and payable pursuant to this subsection.
(c) "Working Capital" means the Acquired Companies' current
assets, less current liabilities as would be reflected on a balance sheet of the
Acquired Companies as of the close of business on the day immediately preceding
the Closing Date prepared in accordance with generally accepted accounting
principles applied consistent with the combined audited balance sheet of the
Acquired Companies as of December 26, 1999 included in the Financial Statements
but (i) excluding current portion of Indebtedness, accrued
7
<PAGE>
interest on Indebtedness, self-insurance reserves, the Escheat Liability,
construction receivables and payables, pre-paid Enron expenses and Sygma
deposits, any item related to the Retained Assets, deferred tax assets and
liabilities and (except as set forth in clause (ii) below) accrued vacation
liability and closed/subleased store liability, and (ii) including accrued
vacation liability in the amount of $1,329,000 carried at the Prandium corporate
level (but which is a liability of the Acquired Companies), outstanding payroll
checks (other than Escheat Liability) carried at the Prandium corporate level
(but which are a liability of the Acquired Companies) and closed/subleased store
liability in the amount of $2,316,000; provided that the closed/subleased store
liability shall be reduced solely with respect to cash payments on account of
such liability since December 26, 1999.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 Representations and Warranties of Prandium and Seller.
-----------------------------------------------------
Prandium and Seller each represents and warrants to Purchaser as follows:
(a) Organization, Standing and Power. Prandium, Seller and
--------------------------------
each of the Acquired Companies (i) is a corporation duly organized, validly
existing and in good standing under the laws of its state of incorporation, (ii)
has all requisite power and authority to own, lease or operate the assets it now
owns, leases or operates or are necessary to carry on its business as currently
conducted, and (iii) is duly qualified or licensed to do business in each
jurisdiction in which the ownership or use of its assets or conduct of its
business requires it to be so qualified, in each case except for such failures
that would not, singly or in the aggregate, reasonably be expected to have a
Material Adverse Effect. For purposes of this Agreement, "Material Adverse
Effect" means any material adverse effect on (i) the business, operations,
results of operations, financial condition, assets or liabilities of the
Acquired Companies taken as a whole, or (ii) the ability of Prandium or Seller
to consummate the transactions contemplated hereby. Prandium, Seller and each
Acquired Company has maintained their respective separate corporate existence
and individually and collectively have conducted their affairs such that a court
would not pierce or otherwise disregard the separate legal status of such
entities.
(b) Subsidiaries. Except as set forth on Schedule 3.1(b), as
------------
of the Closing, none of the Acquired Companies will own, directly or indirectly,
any of the capital stock or other equity securities of any other person other
than holdings of less than 1,000 shares of common stock of publicly traded
restaurant companies. The El Torito restaurant chain has been operated by
Restaurants for at least the three year period ending on the date of the
Agreement.
8
<PAGE>
(c) Authority. Prandium and Seller each has all requisite
---------
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement,
and the performance by each of Prandium and Seller of its obligations hereunder,
have been duly authorized by all necessary action on the part of Prandium and
Seller, including shareholder approval, if necessary. This Agreement has been
duly executed and delivered by each of Prandium and Seller and, assuming the due
execution and delivery of this Agreement by Purchaser, this Agreement
constitutes a valid and binding obligation of each of Prandium and Seller,
enforceable against each of Prandium and Seller in accordance with its terms,
except as such enforcement may be limited by (i) bankruptcy, insolvency,
reorganization, moratorium (whether general or specific) or similar laws now or
hereafter in effect relating to creditors' rights generally and (ii) general
principles of equity (regardless of whether such enforcement is sought in a
proceeding in equity or at law).
(d) Capital Stock. (i) The entire authorized capital stock
-------------
of each of the Acquired Companies is set forth on Schedule 3.1(d). There are
currently 100 shares of common stock, no par value, of Franchising issued and
outstanding, none of which are treasury stock and 100 shares of common stock,
par value $.01 per share, of Restaurants issued and outstanding, none of which
are treasury stock. Seller is the record and beneficial owner and holder of the
shares of Stock and has been the record and beneficial owner and holder of the
Shares of Stock during the three year period ending on the date of this
Agreement. The shares of Stock are duly authorized, have been validly issued and
are fully paid and nonassessable. The shares of Stock have not been issued in
violation of, and are not subject to, any preemptive rights. Upon consummation
of the Acquisition, Purchaser will acquire title to the Stock, free and clear of
all Liens, other than those arising from the actions of Purchaser. Prandium has
never been the record holder of the Stock.
(ii) There is no existing option, warrant, call, right,
commitment or other agreement of any character to which Franchising or
Restaurants or Prandium or Seller is a party requiring, and there are no
securities of either Franchising or Restaurants outstanding which upon
conversion or exchange would require, the issuance, sale or transfer of any
additional shares of capital stock or other equity securities of either
Franchising or Restaurants or other securities convertible into, exchangeable
for or evidencing the right to subscribe for or purchase shares of capital stock
or other equity securities of either Franchising or Restaurants. None of
Prandium, Seller, Franchising or Restaurant is a party to any voting trust or
other voting agreement with respect to any of the Stock or to any agreement
relating to the issuance, sale, redemption, transfer or other disposition of the
capital stock of Franchising or Restaurants.
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(e) No Conflict. None of the execution and delivery by each
-----------
of Prandium and Seller of this Agreement, the consummation of the transactions
hereunder or compliance by each of Prandium and Seller with any of the
provisions hereof will require the consent of any party to any material real
property lease, franchise or license agreement, note, bond, mortgage, indenture,
deed of trust, contract, lease, permit, concession, license or other instrument,
obligation or agreement (including, without limitation, the agreements governing
the terms of Prandium's 9 3/4% Senior Notes due 2002, Prandium's 10% Senior
Subordinated Discount Notes due 2004, Seller's 15.0% Senior Discount Notes due
2002 or Seller's 14.0% Senior Secured Discount Notes due 2002) (collectively,
"Contracts") to which Prandium, Seller or any Acquired Company is a party or by
which any of its assets are or, to the knowledge of Seller or Prandium, may be
bound, or the consent, approval, order or authorization of, or the registration,
declaration or filing with, any governmental authority, except for those (i)
required under the HSR Act, (ii) set forth on Schedule 3.1(e) or (iii) that
become applicable solely as a result of the specific regulatory status of
Purchaser or its affiliates.
Except as set forth on Schedule 3.1(e), assuming the consents,
approvals, orders, authorizations, registrations, declarations and filings
contemplated by the first sentence of the immediately preceding paragraph are
obtained or made, as applicable, the execution, delivery and performance by each
of Prandium and Seller of this Agreement will not (i) violate any law, statute,
ordinance, rule, regulation, judgment, decree, order or injunction applicable to
Prandium, Seller or any of the Acquired Companies, (ii) result in a breach or
violation of any material provision of, or constitute a material default under,
any Contract to which either Prandium, Seller or any Acquired Company is a party
or by which any of their assets are or, to the knowledge of Seller and Prandium,
may be bound, or (iii) conflict with any provision of the certificate of
incorporation or by-laws of either Prandium, Seller or any of the Acquired
Companies, except in the case of (i) and (ii) for any such violation, breach,
default or conflict which would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
(f) Financial Statements. Attached hereto as Schedule 3.1(f)
--------------------
are copies of the audited combined balance sheets of the Acquired Companies
(excluding assets, liabilities, results of operations and cash flows relating to
the Retained Restaurants) at December 26, 1999 (the "Balance Sheet Date"), at
December 27, 1998 and at December 28, 1997 and the related statements of
operations, net combined equity and cash flows for the years then ended, as
applicable, (excluding assets, liabilities, results of operations and cash flows
relating to the Retained Restaurants) (all of the financial statements referred
to in this Section 3.1(f) being hereinafter collectively referred to as the
"Financial Statements"). The Financial Statements have been prepared from and
are in accordance with the books and records of Seller, present fairly, in all
material respects, the combined financial position, results of operations and
10
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cash flows of the Acquired Companies (excluding assets, liabilities, results of
operations and cash flows relating to the Retained Restaurants) as of the dates
and periods indicated, in each case in accordance with generally accepted
accounting principles ("GAAP") applied on a basis consistent with prior periods
(except as otherwise indicated in the notes thereto).
(g) No Undisclosed Liabilities. The Acquired Companies do
--------------------------
not have any liabilities (whether accrued, absolute, contingent or otherwise and
whether due or to become due) of a nature required by GAAP to be reflected on a
balance sheet or disclosed in notes thereto, except (i) as set forth or
reflected on the Financial Statements (or disclosed in the notes thereto), (ii)
as disclosed in Schedule 3.1(g) hereto, or (iii) for liabilities incurred since
the Balance Sheet Date in the ordinary course of business and not in violation
of Section 4.1.
(h) Absence of Certain Changes or Events. Since the Balance
------------------------------------
Sheet Date, except (i) as and to the extent set forth on Schedule 3.1(h), and
(ii) for the transactions contemplated by this Agreement neither of the Acquired
Companies has:
(1) suffered any physical damage, destruction or loss to
its properties or assets that, without taking into account any insurance
recoveries payable in respect thereof, would, singly or in the aggregate,
reasonably be expected to have a Material Adverse Effect,
(2) made any (i) declaration, setting aside or payment
of any non-cash dividend on, (ii) redemption, purchase, acquisition, or
offer, sale or issuance of any shares of capital stock or other securities
(including options, warrants or rights to acquire securities) of, or (iii)
share exchange, reclassification or subdivision with respect to, the
capital stock of Franchising or Restaurants,
(3) granted any employee of such Acquired Company (i)
any increase in compensation, except in the ordinary course of business
consistent with past practice, (ii) any bonus or other increase in
compensation that does not increase such employee's base annual salary
except in the ordinary course of business consistent with past practice, or
(iii) any bonus, profit sharing, incentive contract or similar plan,
contract or commitment for the benefit of any employees, or entered into
any employment, severance or termination agreement with any such employee,
(4) except, in the case of hourly employees transferred
in the ordinary course of business consistent with past practice,
transferred any employee (i) from the restaurants owned or operated by the
Acquired Companies to any other restaurant or business owned or operated by
Prandium, Seller or any of their affiliates,
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(ii) from the restaurants owned or operated by the Acquired Companies
(other than the Retained Restaurants) to any Retained Restaurant or (iii)
from the Retained Restaurants to any restaurants owned or operated by the
Acquired Companies (other than the Retained Restaurants),
(5) mortgaged or pledged any of its property, business
or assets, tangible or intangible,
(6) sold, transferred, leased or disposed of any amount
of its assets with a fair market value exceeding $100,000, except for
transactions in the ordinary course of business, or cancelled or
compromised any debt or claim involving more than $25,000 (other than
accounts receivable cancelled or compromised in the ordinary course of
business consistent with its prior practice), or waived or released any
material right, except in the ordinary course of business,
(7) received any notice or threat of termination of any
Contract that individually or in the aggregate, would reasonably be
expected to have a Material Adverse Effect,
(8) made any change in its assumptions underlying, or
methods of calculating, any bad debt, contingency, tax or other reserves or
any change in its accounting practices, methods or assumptions (including
changes in estimates or valuation methods),
(9) leased or subleased real property, assigned any
material leasehold estate or exercised any purchase options or rights of
first refusal contained in any of the Leases or terminated, surrendered,
cancelled or assigned any material properties demised under the Leases, or
any material part thereof,
(10) entered into any Contract for the purchase or sale
of any material real property;
(11) taken any material write-down in the value of its
assets (including material write-downs by reason of shrinkage or mark-
down),
(12) suffered any disposal or lapse in any rights to the
use of any of the Acquired Companies' material intellectual property or
disposal of or disclosure (except as necessary in the conduct of its
business) to any person of, other than consultants under an appropriate
obligation of confidentiality, suppliers, vendors,
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<PAGE>
contractors and representatives of Purchaser, any material trade secret,
recipe, process or know-how not theretofore a matter of public knowledge,
(13) made any single capital expenditure or commitment
in excess of $150,000 for additions to property, plant, equipment or
intangible capital assets or made aggregate capital expenditures and
commitments in excess of $500,000 for additions to property, plant,
equipment or intangible capital assets, or any acquisition of the stock,
assets or business of any other person,
(14) made any payment, distribution, loan or advance of
any amount to, or sold, transferred or leased any properties or assets
(real, personal or mixed, tangible or intangible) to, or entered into any
Contract with, any shareholder, officer or director of any of the Acquired
Companies, or any "affiliate" or "associate" (as defined in Rule 405 under
the Securities Act of 1933, as amended) of any Acquired Company except for
cash management transactions or payment of management fees in the ordinary
course of business,
(15) made or revoked any election for Tax purposes or
made any change in method of accounting for Tax purposes or entered into
any agreement, arrangement or settlement with respect to Taxes imposed on
the basis of net income or with respect to other material Taxes (or had any
such action in this paragraph (15) taken on its behalf),
(16) granted or repurchased any franchise, development
rights or option to purchase any franchise,
(17) made any agreement whether in writing or otherwise,
to take any action described in this Section 3.1(h),
(18) operated their businesses other than in the
ordinary course, or
(19) suffered any change, occurrence, circumstance,
effect or events which, singly or in the aggregate, has resulted or is
reasonably likely to result in a Material Adverse Effect (other than as a
result of general economic or political conditions or general conditions of
the restaurant industry).
(i) Compliance with Applicable Laws. Except as set forth on
-------------------------------
Schedule 3.1(i) and except for environmental matters (which are addressed in
Section 3.1(r) of
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this Agreement), the conduct of the Acquired Companies is in compliance in all
material respects with all material statutes, laws, regulations and ordinances
applicable thereto. Each of the Acquired Companies has all material permits,
licenses and franchises from governmental authorities necessary to conduct their
respective businesses as currently conducted. No material violations exist or,
to the knowledge of Seller and Prandium, have been reported in respect of such
permits, licenses and franchises.
(j) Litigation; Decrees. Except as set forth on Schedule
-------------------
3.1(j) and On except for environmental matters (which are addressed in Section
3.1(r) of this Agreement) (i) there are no suits, actions or proceedings pending
or, to the knowledge of Seller and Prandium, threatened against the Acquired
Companies in any Federal, state, local or foreign court or agency that seek (A)
more than $100,000 in damages for any one such suit, action or proceeding or
less than $100,000 for any one such suit, action or proceeding that, in the
aggregate together with all such suits, actions and proceedings which seek less
than $100,000 combined, seek $500,000 or more in damages (B) any material
injunctive relief or (C) unspecified damages and (ii) the Acquired Companies are
not in material default under any judgment, order or decree of any governmental
authority applicable to their business, except for any such default which would
not, singly or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
(k) Title to Properties; Equipment. (i) Set forth in
------------------------------
Schedule 3.1(k)(i) is a complete list of all real property that the Acquired
Companies currently own. The Acquired Companies have good, marketable and
indefeasible title in fee simple to such real property and to all buildings and
improvements thereon, and to all of their respective other assets (including
that reflected in the balance sheets included in the Financial Statements,
except for assets disposed of since the Balance Sheet Date in the ordinary
course of business) free and clear of any mortgages, liens, claims, charges,
pledges, security interests or other encumbrances of any nature whatsoever
(collectively, "Liens") other than Liens that are listed in Schedule 3.1(k)(i)
and Liens for Taxes not yet due and payable (collectively, "Permitted Liens").
Prandium has delivered to Purchaser complete and correct copies of all existing
title insurance policies held by the Acquired Companies, and all surveys
possessed by the Acquired Companies with respect to real property owned by the
Acquired Companies or any Lease (as hereinafter defined). To the knowledge of
Seller and Prandium, such surveys are accurate in all material respects and no
changes or improvements have been made to such properties which would be
reflected in an updated new survey.
(ii) Schedule 3.1(k)(ii) contains a complete and
accurate list of all real property leases, subleases, licenses and other
occupancy agreements to which any of the Acquired Companies are a party
(individually, a "Lease", and collectively, the "Leases"), including the address
of each property. Except as specifically disclosed on Schedule 3.1(k)(i),
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<PAGE>
the Acquired Companies' interests in and to all Leases are free and clear of all
Liens other than Permitted Liens. Except as specifically disclosed on Schedule
3.1(k)(v), neither Prandium, Seller nor any of the Acquired Companies has
received notice of any default by the Acquired Companies under any of the
Leases, and, to the knowledge of Seller and Prandium, there are no facts or
conditions that would, with notice or lapse of time or both, constitute a
default by any of the Acquired Companies in any material respect under any of
the Leases. Except as specifically disclosed on Schedule 3.1(k)(v), to the
knowledge of Seller and Prandium, none of the landlords or tenants under any of
the Leases is in default. A true and correct copy of each of the Leases has been
made available to Purchaser, together with all amendments and modifications
thereto, and all subordination, non-disturbance and/or attornment agreements
related to any Lease or owned property, and no material changes have been made
thereto since the date of such availability. Each Lease as delivered constitutes
the entire agreement between the landlord and the tenant affecting the real
property. Each of the Acquired Companies is in compliance with all rent
threshold requirements in any Lease, to the extent required by any such Lease.
(iii) To the knowledge of Prandium and Seller, the
buildings and improvements owned or leased by the Acquired Companies, and the
operation and maintenance thereof as operated and maintained, do not in any
material respect (x) contravene any zoning or building law or ordinance or other
administrative regulation or (y) violate any restrictive covenant or any
applicable law.
(iv) Except as set forth in Schedule 3.1(k)(iv), all work
required to be performed under the Leases by the Acquired Companies or, to the
knowledge of Prandium and Seller, by the landlords thereunder has been
performed, and to the extent that the Acquired Companies are responsible for
payment of such work, has been fully paid for, whether directly to the
contractor performing such work or to such landlord as reimbursement therefor,
except for amounts or items which the Acquired Companies are disputing in good
faith.
(v) Except as set forth in Schedule 3.1(k)(v), to the
knowledge of Seller and Prandium, all of the buildings and structures located on
any real property owned by any of the Acquired Companies or on any Lease (and
all furnishings, furniture and equipment and other tangible personal property
located in such buildings and structures) are in a state of good maintenance and
repair (normal wear and tear excepted) suitable in all material respects for the
operation of the Acquired Companies' business.
(vi) Except as set forth in Schedule 3.1(k)(vi), the
Acquired Companies are in actual, exclusive possession of all the real property
currently owned or leased by the Acquired Companies. Except as set forth in
Schedule 3.1(k)(vi), the basic rent and all
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<PAGE>
additional rent payable under the Leases have been paid to date. Except as set
forth on Schedule 3.1(k)(vi), there are no brokerage commissions or finder's
fees due from the Acquired Companies which are unpaid with regard to any of the
Leases, or which will become due at any time in the future with regard to the
Leases.
(vii) Except as set forth on Schedule 3.1(k)(vii) hereto,
(x) no consent to the transactions contemplated by this Agreement is required
from the landlord or any other party under any Lease, or from any person
claiming by or through such landlord or any such other party, (A) for such Lease
to remain in effect following the Closing Date in accordance with its terms, (B)
to avoid any material modification of the terms of such Lease, or (C) to allow
the Acquired Companies to enforce all rights of the tenant under the Leases,
including without limitation all renewal rights and options, without impairment,
subsequent to the consummation of the transactions contemplated by this
Agreement; and (y) to the knowledge of Seller and Prandium, no casualties (such
as fire, earthquakes, tornados, floods and similar events) have occurred which
are reasonably likely to result in the termination of any of the Leases or the
exercise of any buy out provision contained in any of the Leases related to
damage caused by casualty.
(viii) There is no (x) pending or, to the knowledge of
Seller and Prandium, threatened condemnation, eminent domain or similar
proceeding with respect to any real property owned by the Acquired Companies or
any Lease or (y) except as set forth on Schedule 3.1(k)(viii)(y), pending or, to
the knowledge of Seller and Prandium, threatened investigation by any
governmental authority which relates to the ownership, maintenance, use or
operation of any of the real property owned by the Acquired Companies or any
Lease.
(1) Contracts. Except for the Contracts listed on Schedule
---------
3.1(l) (the "Applicable Contracts"), the Acquired Companies are not a party to
any of the following Contracts currently in force or effect:
(i) Contract relating to the borrowing or lending of
money, or the granting of consensual Liens by the Acquired Companies;
(ii) employment agreement (other than oral at-will
arrange ments);
(iii) Contract not made in the ordinary course of
business involving an estimated total future payment or payments in excess of
$250,000 unless terminable upon no more than 30 days' notice;
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(iv) Contract for the sale of any of the Acquired
Companies' assets (other than inventory sales in the ordinary course of
business), or the grant of any preferential rights to purchase or lease any of
the Acquired Companies' assets, having a value in excess of $300,000;
(v) guaranty, direct or indirect, by any of the
Acquired Companies of any obligation of any person other than an Acquired
Company for borrowings, lease obligations or otherwise, excluding endorsements
made for collection in the ordinary course of business;
(vi) Contract that provides, whether under a plan or
otherwise, for bonuses, pensions, options, stock purchases, deferred
compensation, retirement payments, profit sharing, or the like;
(vii) material Contract with any Related Party;
(viii) Contract that provides for the purchase of all or
substantially all of the Acquired Companies' requirements of a particular
product from a particular supplier having a value in excess of $500,000 per
annum;
(ix) Contract that deals with any bonding or surety
agencies or relates to bonding capacity;
(x) license or similar agreement for the Acquired
Companies' intellectual property, whether as licensee or licensor;
(xi) franchise agreement, whether as franchisee or
franchisor;
(xii) agreement concerning confidentiality or non-
competition other than vendor supply and purchasing agreements entered in the
ordinary course of business;
(xiii) agreement which provides for future payments that
are conditioned on, or result from, in whole or in part, a change in control of
any of the Acquired Companies;
(xiv) agreement to acquire all or substantially all of
the assets or stock of another company, whether by merger, consolidation, sale
or other transfer;
17
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(xv) Contract that is otherwise material to the Acquired
Companies' business and is terminable by the other party thereto upon the
occurrence of the transactions contemplated hereby that, if terminated, could,
singly or in the aggregate, reasonably be expected to result in a Material
Adverse Effect; or
(xvi) purchase orders which cannot be terminated by the
Acquired Companies, Prandium or Seller (without penalty) for a period of six
months or greater (true and correct copies of which have been delivered to
Purchaser).
With respect to each Applicable Contract, except as specifically
disclosed on Schedule 3.1(l), none of the Acquired Companies is in default in
any material respect under, nor to the knowledge of Seller and Prandium, no
other party is in breach or default in any material respect under any material
Contract described in clauses (ii) through (xiv) above, except for such breaches
and defaults as to which requisite waivers or consents have been or will be
obtained prior to the Closing Date. Complete and correct copies of all
Applicable Contracts, together with all modifications and amendments thereto,
have been delivered or made available to Purchaser; provided that to the extent
any of such Contracts are items susceptible to duplication and are either (i)
used in connection with any of Prandium's or Seller's businesses other than
those relating to the Acquired Companies or (ii) are required by law to be
retained by Prandium or Seller, Prandium and Seller may deliver photostatic
copies or other reproduc tions from which information concerning Prandium's or
Seller's businesses other than those relating to the Acquired Companies may be
deleted. For purposes of this subsection 3.1(l), the term "Contract" shall not
include Employee Benefit Plans referred to in Section 3.1(n).
(m) Taxes. Except as disclosed in Schedule 3.1(m):
-----
(i) All material Tax Returns required by applicable law
to be filed by or on behalf of any Acquired Company prior to or as of the
Closing Date have been timely filed or will be timely filed as of the Closing
Date, and all such Tax Returns are or will be true, complete and correct in all
material respects.
(ii) All material Taxes that are due or claimed to be due
from any Acquired Company on or prior to the Closing Date have been paid or will
have been paid as of the Closing Date, other than those (A) currently payable
without penalty or interest or (B) being contested in good faith and by
appropriate proceedings, which proceedings are described in Schedule 3.1(m) and
for which adequate reserves have been established in accordance with GAAP. Each
of the Acquired Companies has adequately provided for, on its books and accounts
and related records, liability for current Taxes not yet due and payable.
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(iii) None of the Acquired Companies has requested, nor
has there been granted, an extension of time within which to file a material Tax
Return.
(iv) No Audit is pending with respect to any Tax Returns
filed by any Acquired Company. No deficiency or adjustment for any Taxes has
been proposed, asserted, or assessed against the Acquired Companies. No written
claim for material Taxes (or request for Tax Returns) has ever been made against
any Acquired Company in a jurisdiction where such Acquired Company does not file
Tax Returns.
(v) Except as provided under Treasury Regulations
section 1.1502-6 (or any similar provision of state, local or foreign law), none
of the Acquired Companies has any material liability for, or any material
obligation to pay, Taxes of any other person or entity as a transferee or
successor, by contract or otherwise.
(vi) Each of the Acquired Companies has withheld and
paid all material Taxes (other than Taxes on amounts with respect to which
Restaurants has had in effect a TRAC Agreement with the Internal Revenue
Service) required to be withheld by the Acquired Companies and paid as owing to
any employee, independent contractor, creditor, stockholder or third party prior
to or as of the Closing Date.
(vii) None of the Acquired Companies has waived any
statute of limitations in respect of material Taxes or agreed to any extension
of time with respect to a material Tax assessment or deficiency. None of the
Acquired Companies is a party to a closing agreement concerning Taxes the
liability of which has not been satisfied. No member of the Prandium
Consolidated Group has requested or received a private ruling issued by a tax
authority concerning Taxes that would have a continuing effect on the Acquired
Companies after Closing.
(viii) There are no liens for Taxes upon the stock or
assets of any Acquired Company, except liens for current Taxes not yet due.
(ix) Prandium and Seller are each a United States person
within the meaning of section 7701(a)(30) of the Code.
(x) None of the Acquired Companies (A) has filed a
consent under section 341(f) of the Code concerning collapsible corporations,
(B) has made any payments, is obligated to make any payments, or is a party to
any agreement, including this Agreement, that could obligate it to make any
payments that will not be deductible under section 280G of the Code, (C) is
required to make any adjustment under section 481 of the Code
19
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(or comparable provision of state, local or foreign law) by reason of a change
in accounting method, or (D) is a partner in any entity considered to be a
partnership for Federal income tax purposes.
(xi) None of the Acquired Companies is a party to any
Tax sharing agreements, arrangements, policies or guidelines (including those
for reimbursement of Tax benefits), whether express or implied, formal or
informal, with any member of the Prandium Consolidated Group.
(n) Employee Benefit Plans. (i) Set forth on Schedule 3.1(n)
----------------------
is a list of the only bonus, incentive, deferred compensation, pension, profit-
sharing, retirement, stock purchase, stock ownership or stock option,
hospitalization or other medical, vision, dental, disability, life or other
insurance plans, including any policy, plan, program or agreement that provides
for the payment of severance benefits, salary continuation, salary in lieu of
notice or similar benefits (collectively, the "Employee Benefit Plans"),
maintained, sponsored or contributed to by the Acquired Companies, Prandium,
Seller or any other employer that is, or at any relevant time was, together with
the Acquired Companies, or any of them, treated as a "single employer" under
Section 414 of the Code (an "ERISA Affiliate"), under which the Acquired
Company, Seller or an ERISA Affiliate has any present or future material
obligations or liability, with respect to the employees or former employees of
the Acquired Companies (collectively, the "Affected Persons") or their
dependents or beneficiaries.
(ii) Each Employee Benefit Plan is in compliance in all
material respects with the provisions of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), and the Internal Revenue Code of 1986, as
amended (the "Code") applicable to each such Employee Benefit Plan, and each
such Employee Benefit Plan has been maintained, operated and administered in
compliance in all material respects with its terms, except that in any case in
which any Employee Benefit Plan is currently required to comply with a provision
of ERISA or of the Code, but is not yet required to be amended to reflect such
provision, it has been administered in accordance with such provision.
(iii) All contributions made or required to be made under
any Employee Benefit Plan meet the requirements for deductibility under the Code
in all material respects, and all such contributions and payments to be made
from any Employee Benefit Plan that are required to have been made have been
timely made in accordance with the Employee Benefit Plans and, when applicable,
Section 302 of ERISA or Section 412 of the Code. All such contributions and
payments, except those to be made from a trust qualified under Section 401(a) of
the Code, for any period ending before the Closing Date that are not yet, but
will be, required to be made are properly recorded on the balance sheet of the
Acquired Companies.
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(iv) No Acquired Company and no ERISA Affiliate has
contributed to, or been required to contribute to, any "multiemployer plan"
(within the meaning of Section 3(37) of ERISA), and no Acquired Company and no
ERISA Affiliate has any liability (contingent or otherwise) relating to the
withdrawal or partial withdrawal from a multiemployer plan. No asset of an
Acquired Company is subject to any lien under Section 401(a)(29) or Section
412(n) of the Code or Section 302(f) or Section 4068 of ERISA or arising out of
any action filed under Section 4301(b) of ERISA, and to the best knowledge of
Seller and Prandium, no event has occurred in connection with which the Acquired
Companies could be subject to any material liability or Lien with respect to any
Employee Benefit Plan under ERISA or the Code.
(v) A true and complete copy of each Employee Benefit
Plan, and in the case of an unwritten Employee Benefit Plan, a written
description thereof, and where applicable a copy of the current summary plan
description and any material modifications thereto, the most recent IRS
Determination Letter received and the three most recent IRS Forms 5500 filed,
with respect to each such Employee Benefit Plan has been made available to
Purchaser.
(vi) Except as set forth on Schedule 3.1(n), no Employee
Benefit Plan nor any other employee benefit plan, as defined in Section 3(3) of
ERISA, maintained at any time by an Acquired Company or an ERISA Affiliate is or
at any time has been subject to Part 3, Subtitle B of Title I of ERISA or Title
IV of ERISA.
(vii) Each Employee Benefit Plan which is an "employee
pension benefit plan" within the meaning of Section 3(2) of ERISA and which is
intended to meet the qualification requirements of Section 401(a) of the Code
(each a "Pension Plan") now meets, and at all times since its inception has met
the requirements for such qualification, and the related trusts are now, and at
all times since their inception have been, exempt from taxation under Section
501(a) of the Code. All Pension Plans have received determination letters from
the Internal Revenue Service (the "IRS") to the effect that such Pension Plans
are qualified and the related trusts are exempt from federal income taxes and no
determination letter with respect to any Pension Plan has been revoked nor, to
the best knowledge of Seller and Prandium is there any reason for such
revocation, nor has any Pension Plan been amended since the date of its most
recent determination letter in any respect which would adversely affect its
qualification.
(viii) There are no pending audits or investigations by
any governmental agency for which Prandium or Seller has received notice
involving any Employee Benefit Plan, and no pending claims or, to the best
knowledge of Prandium and Seller, threatened claims (except for individual
claims for benefits payable in the normal operation of
21
<PAGE>
the Employee Benefit Plans), suits or proceedings involving any Employee Benefit
Plan, any fiduciary thereof or service provider thereto, nor to the best
knowledge of Seller and Prandium is there any reasonable basis for any such
claim, suit or proceeding. None of the Acquired Companies, any ERISA Affiliate,
or, to the knowledge of Seller and Prandium, any fiduciary, trustee or
administrator of any Employee Benefit Plan, has engaged in or, in connection
with the transactions contemplated by this Agreement, will engage in any
transaction with respect to any Employee Benefit Plan which would subject any
such Employee Benefit Plan, any of the Acquired Companies, any ERISA Affiliate
or Purchaser to a tax, penalty or liability for a "prohibited transaction" under
Section 406 of ERISA or Section 4975 of the Code. Except as provided on Schedule
3.1(n), none of the assets of any Employee Benefit Plan is invested in any
property constituting "employer real property" or any "employer security" (other
than a "qualifying employer security") within the meaning of Section 407 of
ERISA.
(ix) With respect to any Employee Benefit Plan that is
an employee welfare benefit plan (as defined in Section 3(1) of ERISA), (i) no
such Employee Benefit Plan provides benefits, including without limitation,
death or medical benefits, except as set forth on Schedule 3.1(n), beyond
termination of employment or retirement other than coverage mandated by law and
(ii) each such Employee Benefit Plan (including any such plan covering retirees
or other former employees or the beneficiaries or dependents of any of the
foregoing) may be amended or terminated at or after the Closing Date without
liability.
(x) No amounts payable under the Employee Benefit Plans
will fail to be deductible for federal income tax purposes by virtue of sections
162(a)(1), 162(m) or 280G of the Code.
(o) Labor Matters. Set forth on Schedule 3.1(o) are
-------------
all current agreements with labor unions or associations representing employees
of the Acquired Companies (collectively, "Employees"). No material work stoppage
against the Acquired Companies is actually pending or, to the knowledge of
Seller and Prandium, threatened. Except as set forth on Schedule 3.1(o), there
are no pending, or, to the knowledge of Seller and Prandium, threatened, labor
disputes, arbitrations, lawsuits or administrative proceedings relating to labor
matters involving the Employees (excluding routine workers' compensation claims)
that would, singly or in the aggregate, reasonably be expected to have a
Material Adverse Effect. Schedule 3.1(o) sets forth the Employees of the
Acquired Companies and the employees of the Retained Restaurants, in each case
listing employees below the level of General Manager by category.
22
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(p) Intellectual Property.
---------------------
(i) Schedule 3.1(p) contains an accurate list of all
material patents and patent applications, trademarks, service marks, trade
names, trade dress, copyrights, and registrations and applications for
registration of material industrial designs, copyrights, trademarks, service
marks, trade names, trade dress and domain names used or held for use by the
Acquired Companies in the conduct of their current respective businesses and
specifies as to each such item, as applicable: (1) the owner of the item, (2)
the jurisdictions in which the item is issued or registered or in which any
application for issuance or registration has been filed, and (3) the respective
issuance, registration, or application number of the item.
(ii) Other than "shrink wrap" and similar standard-form
end-user licenses for widely available commercial software, Schedule 3.1(p) also
contains an accurate list of all material licenses, sublicenses, consents and
other agreements (whether written or otherwise) (1) pertaining to any patents
and patent applications, industrial design rights, trademarks, service marks,
trade names, trade dress, copyrights, mask works, trade secrets, inventions and
technology (whether or not patentable), confidential and proprietary
information, domain names, software, databases and other collections and
compilations of data, rights of publicity/privacy, or other intellectual
property (collectively, "Intellectual Property") used by the Acquired Companies
in the conduct of their current respective businesses, and (2) by which the
Acquired Companies license or otherwise authorize a third party to use any
Intellectual Property. None of the Acquired Companies nor, to the knowledge of
Seller and Prandium, any other party is in breach of or default under any such
license or other agreement and each such license or other agreement is now and
immediately following the Closing shall be valid and in full force and effect.
(iii) Except as set forth on Schedule 3.1(p), to the
knowledge of Seller and Prandium, each of the Acquired Companies owns or is
licensed or otherwise has the right to use all Intellectual Property necessary
for the operation of business of such Acquired Company as it is currently
conducted or currently proposed to be conducted. To the knowledge of Seller and
Prandium, the business operations of the Acquired Companies do not, infringe,
dilute, misappropriate, or otherwise violate the Intellectual Property of any
third party, or constitute unfair competition or trade practices under the laws
of any jurisdiction, and, except as set forth on Schedule 3.1(p), no claim has
been made, notice given, or dispute arisen to that effect. Except as set forth
on Schedule 3.1(p), no Acquired Company has any pending claim that a third party
has infringed, diluted, misappropriated or otherwise violated any Intellectual
Property owned or used by such Acquired Company, and is not aware of the basis
for any such claim. No Acquired Company has given any indemnification to any
third party against infringement, dilution, misappropriation or other violation
of such Intellectual Property. Except
23
<PAGE>
as set forth on Schedule 3.1(p), no Intellectual Property owned or used by the
Acquired Companies is subject to any outstanding decree, order, judgment,
settlement agreement or stipulation that restricts in any manner the use,
transfer or licensing thereof by the Acquired Companies other than decrees,
orders, judgments, settlement agreements or stipulations that would not, singly
or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(iv) Except as set forth on Schedule 3.1(p), all of the
patents, industrial design registrations, trademark and service mark
registrations, copyright registrations, mask work registrations and domain name
registrations indicated in Schedule 3.1(p) are valid and in full force, are held
of record in the name of the Acquired Companies free and clear of all liens,
encumbrances and other claims, and are not the subject of any cancellation or
reexamination proceeding or any other proceeding challenging their extent or
validity. Except as set forth on Schedule 3.1(p), one of the Acquired Companies
is the applicant of record in all patent applications, and applications for
trademark, service mark, trade dress, industrial design, and copyright
registration indicated in Schedule 3.1(p), and as of the date of this Agreement
no opposition, extension of time to oppose, interference, final rejection, or
final refusal to register has been received in connection with any such
application other than oppositions, extensions of time to oppose, interferences,
final rejections, or final refusals to register that would not, singly or in the
aggregate, reasonably be expected to have a Material Adverse Effect.
(v) Except as indicated on Schedule 3.1(p), to the
knowledge of Seller and Prandium, no officer of Seller or the Acquired Companies
has disclosed any of the Acquired Companies' material trade secrets, know-how or
other material confidential or proprietary information to any third party (other
than Seller's agents or advisors, including without limitation, attorneys,
accountants, consultants, bankers and financial advisors) unless such disclosure
was in the ordinary conduct of business and the recipient of such information
was under an appropriate obligation of confidentiality.
(vi) Except as indicated in Schedule 3.1(p), to the
knowledge of Seller, all of the Acquired Companies' Information Technology (as
defined below) is capable of accurately processing, calculating, manipulating,
storing and exchanging date/time data from, into, and between the twentieth and
twenty-first centuries, including, without limitation, the years 1999 and 2000
and any leap year calculations, provided that all other information technology
used in combination with such Information Technology, properly exchanges
date/time data with such software, and has not, and will not, cause an
interruption in the ongoing operations of the Acquired Companies' respective
businesses after January 1, 2000. For purposes of the foregoing, the term
"Information Technology" shall mean and include all software, hardware,
telecommunications systems, network systems, embedded systems and other systems,
components and/or services (other than general utility services including gas,
24
<PAGE>
electric, telephone and postal) that are owned or used by the Acquired Companies
in the conduct of their respective businesses, or purchased or otherwise
obtained by the Acquired Companies from third-party suppliers.
(q) Insurance. Copies of all material insurance
---------
policies held by the Acquired Companies have been made available to Purchaser.
Such policies (together with self-insurance programs in effect) provide coverage
for the Acquired Companies' business in amounts and against risks consistent
with past practice. No representation or warranty is made by Prandium or Seller
hereunder that any such policy will not lapse or terminate by reason of
consummation of the transactions contemplated hereby. Each of the Acquired
Companies is and has been insured sufficiently for material compliance with all
requirements of laws and of all material agreements with respect to maintaining
insurance in the operation of the respective businesses of the Acquired
Companies. None of the Acquired Companies has received any notice of
cancellation or termination or is in default with respect to any material
insurance policy. All insurance policies of the Acquired Companies are valid and
enforceable policies and are in full force and effect. Except as disclosed on
Schedule 3.1(q), no insurance policy provides for (i) retrospective or
retroactive premium adjustments or (ii) requires any of Prandium, Seller or the
Acquired Companies to provide letters of credit to secure amounts payable under
such insurance policies.
(r) Environmental Matters. Except as set forth on
---------------------
Schedule 3.1(r) or as would not, singly or in the aggregate, reasonably be
expected to have a Material Adverse Effect (i) the Acquired Companies are in
compliance and, to the knowledge of Seller and Prandium, have complied with all
applicable federal, state and local laws, statutes, regulations and ordinances
governing or relating to pollution or the management, handling, disposal or
release of Hazardous Substances, as that term is defined herein, or the
protection of human health or the environment ("Environmental Laws"), (ii) the
Acquired Companies have not received any written notice, request for
information, order, complaint, notice of potential responsibility, penalty
(each, a "Notice") or claim from any governmental authority or third party
alleging that the Acquired Companies are not in compliance with any
Environmental Law or alleging that the Acquired Companies are responsible or
liable under Environmental Laws or under common law (with respect to
environmental matters), nor to the knowledge of Seller and Prandium, is any such
Notice or claim threatened, (iii) the Acquired Companies have not released or
disposed of any Hazardous Substances in a manner which is reasonably likely to
result in any material liability or responsibility under any Environmental Law
on, at, under or from any of the real properties now or formerly owned or leased
by the Acquired Companies during the period of ownership or lease by the
Acquired Companies; (iv) to the knowledge of Seller and Prandium, no property
currently owned by the Acquired Companies is currently impacted by releases of
Hazardous Substances at levels requiring investigation or remediation
25
<PAGE>
under Environmental Laws; and (v) the Acquired Companies have obtained and are
in compliance with all permits, licenses and authorizations necessary for their
operations to comply with all Environmental Laws, and all such permits, licenses
and authorizations are in good standing. Seller has provided access to Purchaser
to copies of all material environmental reports, inspections and investigations
which are in the possession of Seller or the Acquired Companies. As used herein,
"Hazardous Substance" has the meaning set forth in Section 101(14) of the
Comprehensive Environmental Response, Compensation and Liability Act of 1980 and
also includes petroleum products, solid wastes and asbestos.
(s) Government Regulations. The Acquired Companies are
----------------------
not subject to regulation under the Investment Company Act of 1940, as amended,
the Public Utility Holding Act of 1935, as amended, the Federal Power Act, the
Interstate Commerce Act, the Commodity Exchange Act or any Federal or State
statute or regulation limiting its ability to incur or assume indebtedness for
borrowed money.
(t) Brokers, Finders, etc. Except as set forth on
---------------------
Schedule 3.1(t), neither Prandium nor Seller is subject to any valid claim of
any broker, investment banker, finder or other intermediary in connection with
the transactions contemplated by this Agreement. Prandium and/or Seller are
solely responsible for any payment, fee or commission that may be due to the
parties referenced on Schedule 3.1(t) in connection with the transactions
contemplated hereby.
(u) Absence of Unlawful Payments. None of the Acquired
----------------------------
Companies, nor, to the knowledge of Seller and Prandium, any of their respective
directors, officers, agents, employees or other person acting on their behalf,
has used any corporate or other funds for unlawful contributions, payments,
gifts, or entertainment, or made any unlawful expenditures relating to political
activity to government officials or others or established or maintained any
unlawful or unrecorded funds. None of the Acquired Companies, nor, to the
knowledge of Seller and Prandium, any of their respective directors, officers,
agents, employees or other persons acting on its behalf, has accepted or
received any unlawful contributions, payments, gifts, or expenditures.
(v) Liquor Licenses. Schedule 3.1(v) contains a list of
---------------
each restaurant owned and/or operated by the Acquired Companies (other than
restaurants operated by unaffiliated third parties on properties leased by the
Acquired Companies) (the "Acquired Restaurants") showing the state, county, city
or other jurisdiction in which such Acquired Restaurant is located. Schedule
3.1(v) also contains a list of all liquor licenses held by the Acquired
Companies in connection with the operation of the Acquired Restaurants (the
"Liquor Licenses"). To the extent required by applicable law or regulation, each
Acquired Restaurant
26
<PAGE>
possesses a Liquor License. Each of the Liquor Licenses is in full force and
effect and adequate for the current conduct of operations at the Acquired
Restaurant for which it is issued, and, subject to the matters disclosed in the
following sentence, has been validly issued. Except as set forth in Schedule
3.1(v), none of the Acquired Companies has received any written notice of any
pending or threatened modification, suspension or cancellation of a Liquor
License, or any proceeding relating thereto. Except as set forth on Schedule
3.1(v), during the last three years there have been no such proceedings relating
to any of the Liquor Licenses. Except as disclosed in Schedule 3.1(v), with
regard to the Liquor Licenses, there are no (i) pending disciplinary actions or
(ii) past disciplinary actions that could have any adverse impact on current
operations or the nature or level of discipline imposed on account of future
violations of the laws related to sales and service of alcoholic beverages.
(w) Payment of Payroll Taxes. Restaurants has had in
------------------------
effect a Tip Reporting Alternative Commitment Agreement (a "TRAC Agreement"),
with the Internal Revenue Service since July 1, 1996, scheduled to expire on May
31, 2005 and Restaurants, to the knowledge of Prandium and Seller, has always
been and is in compliance in all material respects with the terms of such TRAC
Agreement.
(x) Transactions with Related Parties.
---------------------------------
Except as disclosed on Schedule 3.1(x), no Related Party:
(1) has borrowed money from or loaned money to any of the Acquired
Companies that has not been repaid;
(2) has any contractual or other claim, express or implied, of any
kind whatsoever against any of the Acquired Companies;
(3) has any ownership interest in any assets or property owned by any
of the Acquired Companies; or
(4) has been engaged, since January 1, 1999, in any other transaction
(or series of transactions) with any of the Acquired Companies (other than
employment relationships at the salaries disclosed on Schedule 3.1(x)) except in
the ordinary course of business.
"Related Party" means (i) Prandium, (ii) Seller, (iii) any of the
officers or directors of any of the Acquired Companies or (iv) any affiliate of
Prandium, Seller or any of the Acquired Companies.
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<PAGE>
(y) Compliance with Health and Food Service Requirements. Except as
----------------------------------------------------
set forth on Schedule 3.1(y), during the last 12 months, none of the Acquired
Companies has experienced a restaurant closure or material fine relating to
health and food service requirements of any governmental regulatory authority.
(z) Suppliers; Franchises. Except as set forth on Schedule 3.1(z),
---------------------
to the knowledge of Seller and Prandium, (a) there has not been any material
adverse change in the business relationship of Prandium, Seller or any of the
Acquired Companies with any of their material suppliers and (b) there has not
been a material adverse change in the business relationship of any Acquired
Company with any of its franchisees. Schedule 3.1(z) contains a true, correct
and complete list of all franchise agreements, development right agreements and
franchise option agreements currently in effect to which any of the Acquired
Companies is a party, as amended.
(aa) Solvency. (i) The fair value of the assets of Seller, at a fair
--------
valuation, exceeds its debts, subordinated, contingent or otherwise; (ii) the
present fair saleable value of the property of Seller is greater than the amount
that will be required to pay its probable liability on its existing debts,
subordinated, contingent or otherwise, as such debts become absolute and
matured; (iii) Seller is able to pay its debts, subordinated, contingent or
otherwise, as such debts and liabilities become absolute and matured; and (iv)
Seller does not have unreasonably small capital with which to conduct the
business in which it is engaged as such business is now conducted and is
proposed to be conducted.
(bb) Sale Process. Prandium engaged Donaldson, Lufkin & Jenrette
-------------
Securities Corporation ("DLJ") among other things to conduct the sale of the
Acquired Companies. Based upon the results of the sale process and discussions
with DLJ, each of Seller and Prandium believe that the Purchase Price represents
fair value for the Stock.
(cc) Franchising Agreements. Except as disclosed on Schedule
----------------------
3.1(cc), none of the Acquired Companies is a party to any franchising agreement
in respect of franchises located in the United States.
(dd) Letters of Credit/Security Deposits. Schedule 3.1(ee) sets forth
-----------------------------------
the amount and a description of (i) letters of credit outstanding that relate to
the business and operations of the Acquired Companies and (ii) all security
deposits with governmental authorities, utilities and other third parties
deposited by, or on behalf of, the Acquired Companies in connection with their
business and operations in excess of $10,000.
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(ee) No Mandatory Prepayment. Except for Indebtedness that will be
-----------------------
repaid by Seller or the Acquired Companies (or with respect to which the
Acquired Companies will otherwise be released) prior to Closing, none of the
principal or interest in respect of the Acquired Companies' Indebtedness is
subject to mandatory prepayment as a result of the Acquisition or the
transactions contemplated by this Agreement.
(ff) Disclosure. No representation or warranty made by Prandium or
----------
Seller in this Agreement or any disclosure schedule or certificate delivered
hereunder contains any untrue statement of a material fact or omits any material
fact necessary to make the statements contained herein or therein not materially
misleading.
(gg) Opinion of Financial Advisor. Prandium and Seller have received
----------------------------
the opinion of DLJ, their financial advisor, to the effect that, as of the date
of this Agreement, the Purchase Price is fair to Prandium and Seller, from a
financial point of view, and such opinion has not been withdrawn or revoked or
modified in any material respect. When reduced to writing (but in any event
prior to Closing), a copy of such opinion will be made available to Purchaser.
SECTION 3.2 Representations and Warranties of Purchaser. Purchaser
------------------------------------------
hereby represents and warrants to Seller as follows:
(a) Organization and Standing. Purchaser is a corporation duly
-------------------------
organized, validly existing and in good standing under the laws of its state of
incorporation.
(b) Authority. Purchaser has all requisite power and authority
---------
to execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement, and the
performance by Purchaser of its obligations hereunder, have been duly authorized
by all necessary action on the part of Purchaser. This Agreement has been duly
executed and delivered by Purchaser and, assuming the due execution and delivery
of this Agreement by each of Prandium and Seller, this Agreement constitutes a
valid and binding obligation, enforceable against Purchaser in accordance with
its terms, except as such enforcement may be limited by (i) bankruptcy,
insolvency, reorganization, moratorium (whether general or specific) or similar
laws now or hereafter in effect relating to creditors' rights generally and (ii)
general principles of equity (regardless of whether such enforcement is sought
in a proceeding in equity or at law).
(c) No Conflict. The consummation of the transactions
hereunder will not require the consent of any party to any material Contract to
which Purchaser is a party or by which it is bound, or the consent, approval,
order or authorization of, or the registration,
29
<PAGE>
declaration or filing with, any governmental authority, except for those (i)
required under the HSR Act, (ii) set forth on Schedule 3.2(c) or (iii) that
become applicable solely as a result of the specific regulatory status of Seller
and its affiliates. Except as set forth on Schedule 3.2(c), assuming the
consents, approvals, orders, authorizations, registrations, declarations and
filings contemplated by the immediately preceding sentence are obtained or made,
as applicable, the execution, delivery and performance by Purchaser of this
Agreement will not (i) violate any material law applicable to Purchaser or any
of its respective affiliates, (ii) result in a breach or violation of any
material provision of, or constitute a material default under, any Contract to
which Purchaser is a party, or (iii) conflict with any provision of the
certificate of incorporation or by-laws of Purchaser.
(d) Financing. Purchaser has received a binding written
---------
commitment (the "Equity Commitment") from Bruckmann, Rosser, Sherrill & Co., II
L.P. to contribute equity capital to Purchaser in the aggregate amount of $32.0
million. Purchaser has binding written commitments from responsible financial
institutions to provide Purchaser with the funds (the "Debt Commitments")
necessary, together with the Equity Commitment, to consummate the Acquisition.
True and correct copies of the Equity Commitment and the Debt Commitments are
attached hereto in Schedule 3.2(d). As of its most recent fiscal year ended
October 3, 1999, Purchaser owned and operated 47 restaurants and had total
revenues for the fiscal year ended October 3, 1999 of approximately $94 million.
(e) Purchase For Investment. Purchaser is acquiring the Stock
-----------------------
being acquired by it hereunder for investment (for its own account or for
accounts over which it exercises investment control), and not with a view to, or
for offer or sale in connection with, any distribution thereof, which would be
in violation of the Securities Act of 1933, as amended (the "Securities Act"),
or any applicable state securities law, without prejudice, however, to
Purchaser's right at all times to sell or otherwise dispose of all or any part
of said Stock pursuant to an effective registration statement under the
Securities Act and applicable state securities laws, or under an exemption from
such registration available under the Securities Act and other applicable state
securities laws. Purchaser (i) is knowledgeable, sophisticated and experienced
in business and financial matters and fully understands the limitations on
transfer described above; and (ii) is an "accredited investor" as such term is
defined in Rule 501(a) of Regulation D under the Securities Act.
(f) Brokers, Finders, etc. Purchaser is not subject to any
---------------------
valid claim of any broker, investment banker, finder or other intermediary in
connection with the transactions contemplated by this Agreement.
30
<PAGE>
ARTICLE VII
COVENANTS
SECTION 4.1 Conduct of Business. From the date of this Agreement
-------------------
through the Closing, Prandium and Seller agree that, except (i) as disclosed in
Schedule 4.1 of this Agreement or otherwise specifically provided for in, or
contemplated by, this Agreement or (ii) as approved by Purchaser:
(a) Each of the Acquired Companies shall carry on its
business and operate in the ordinary course in substantially the same manner as
currently conducted and shall use all commercially reasonable efforts to
preserve its assets and business organizations, preserve relationships with
customers, suppliers, distributors and others having business dealings with them
and, subject to prudent management of workforce needs and ongoing programs
currently in force, keep available the services of their present officers and
employees, in each case in the ordinary course of business consistent with past
practice.
(b) Except as required by law or the transactions
contemplated by this Agreement, the Acquired Companies shall not knowingly
perform any act, or knowingly omit to perform any act within their reasonable
control, which will cause a breach of any representation or warranty contained
in this Agreement.
(c) There shall be no material change in method of
accounting, keeping of books of account or accounting practices with respect to
the Acquired Companies except in accordance with GAAP.
(d) None of the Acquired Companies shall make any material
election for Tax purposes or for purposes of a Tax Return (or have any such
election made on its behalf or which would affect it), nor shall any of the
Acquired Companies enter into any material agreement, arrangement or settlement
with respect to Taxes (or have another person or entity enter into such on its
behalf).
(e) None of the Acquired Companies shall open any new
restaurant or execute any lease in respect of any new restaurant (or make any
agreement whether in writing or otherwise, to do the same).
(f) None of the Acquired Companies shall make any (i)
declaration, setting aside or payment of any non-cash dividend on, (ii)
redemption, purchase, acquisition, or offer, sale or issuance of any shares of
capital stock or other securities (including options,
31
<PAGE>
warrants or rights to acquire securities) of, or (iii) share exchange,
reclassification or subdivision with respect to, the capital stock of
Franchising or Restaurants.
(g) None of the Acquired Companies shall enter into any
severance or termination agreement with any employee or transfer any employee
(other than hourly employees in the ordinary course of business consistent with
past practice) (i) from the restaurants owned or operated by the Acquired
Companies to any other restaurant or business owned or operated by Prandium,
Seller or any of their subsidiaries, (ii) from the restaurants owned or operated
by the Acquired Companies (other than the Retained Restaurants) to any Retained
Restaurant or (iii) from the Retained Restaurants to any restaurants owned or
operated by the Acquired Companies (other than the Retained Restaurants).
(h) None of the Acquired Companies shall grant, repurchase
or waive any franchise, development rights or options to purchase any franchise.
SECTION 4.4 Access to Information.
---------------------
(a) Access. Seller shall afford to representatives of
------
Purchaser, including its counsel, accountants, consultants and lenders,
reasonable access during normal business hours during the period prior to the
Closing Date to all the properties, books, Contracts and records of the Acquired
Companies. Purchaser shall indemnify each of Prandium and Seller and hold each
harmless from all liabilities, and for all losses, arising out of such
representatives' acts or omissions in connection with such access and, after
making any investigation of such properties, books, Contracts or records,
Purchaser shall promptly restore such properties, books, Contracts and records
to their condition prior to such investigation. If, in the course of any
investigation pursuant to this Section 4.2(a), Purchaser discovers any breach of
any representa tion or warranty contained in this Agreement or any circumstance
or condition that, upon Closing, would constitute such a breach, Purchaser shall
promptly inform Seller in writing.
(b) Confidentiality. Purchaser acknowledges that the
---------------
information being provided to Purchaser and its representatives by Seller is
subject to the terms of a confidentiality agreement between Donaldson, Lufkin &
Jenrette Securities Corporation and Acapulco Restaurants, Inc., dated September
21, 1999 (the "Confidentiality Agreement"), which terms are incorporated herein
by reference.
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SECTION 4.3 Consents.
--------
(a) Subject to the terms and conditions of this Agreement,
Prandium, Seller and Purchaser agree (without being obligated to make any
payment to any third party) to use their best efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary, proper
or advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement and to cooperate with the others in
connection with the foregoing, including using its best efforts to:
(i) obtain all necessary waivers, consents and
approvals from other parties to Contracts,
(ii) obtain all consents, approvals and authorizations
that are required to be obtained under any Federal, state, local or foreign law
or regulations,
(iii) prevent the entry, enactment or promulgation of
any threatened or pending injunction or order that would adversely affect the
ability of the parties hereto to consummate the transactions contemplated
hereby,
(iv) lift or rescind any injunction or order adversely
affecting the ability of the parties hereto to consummate the transactions
contemplated hereby, and
(v) effect all necessary registrations and filings,
including filings under the HSR Act, and submissions of information requested by
governmental authorities.
(b) Purchaser recognizes that certain consents to the
transactions contemplated by this Agreement may have been or may be required
from third parties, including parties to the Applicable Contracts and
governmental authorities. Purchaser agrees that Prandium and Seller shall not
have any liability whatsoever (other than as a result of a breach by Prandium or
Seller of any of its respective representations, warranties or covenants
contained herein) arising out of or relating to the failure to obtain any such
consent or because of the termination of any Contract or any permit, license or
other governmental authorization as a result thereof.
(c) Except as approved by Purchaser in writing (which
approval shall not be unreasonably withheld with respect to modifications that
have no economic effect on the Acquired Companies), Prandium and Seller agree
(and shall cause the Acquired Companies) not to amend or modify any lease in
connection with obtaining any consent under any lease.
33
<PAGE>
SECTION 4.4 Further Assurances. From time to time, whether before,
------------------
at, or after the Closing, each party hereto, shall execute and deliver, or cause
to be executed and delivered, all such documents and instruments and shall take,
or cause to be taken, all such other actions as may be reasonably necessary to
consummate the transactions contemplated by this Agreement, including, without
limitation, approving the forms of opinion as soon as practicable after the date
of this Agreement.
SECTION 4.5 Employee Benefit Plans.
----------------------
(a) If an Affected Person (other than a Retained Employee)
is terminated from employment during the six month period following the Closing
Date, Purchaser shall provide such Affected Person with a severance benefit at
least equal to the severance benefit the Affected Person would receive under the
Prandium Severance Plan summarized on Schedule 4.5(a). Subject to the foregoing,
Purchaser shall have the right to amend, terminate or modify its severance plans
at any time. As of the Closing, Seller shall cease to provide coverage or
benefits for Affected Persons, other than the Affected Persons who are the
Retained Employees (as defined below), and their dependents and beneficiaries
under any Employee Benefit Plans maintained by Seller or any of its
Subsidiaries, except as required by applicable law or otherwise agreed to by the
parties hereto.
(b) For the six month period following the Closing Date,
Purchaser shall provide Affected Persons who are employees of the Acquired
Companies, other than the Retained Employees, as a whole with compensation and
benefits comparable to the compensation and benefits provided by the Acquired
Companies immediately prior to the Closing Date (without regard to any stock
options or other equity based compensation arrangement offered by the Acquired
Companies or Prandium); provided that (i) nothing shall prohibit Purchaser from
reducing such compensation and benefits so long as such reduction applies to all
similarly situated employees of Purchaser and its other subsidiaries and (ii)
nothing herein shall restrict Purchaser from amending its benefit plans.
Following the Closing Date, service by Affected Persons with the Acquired
Companies or Seller shall be recognized under each benefit plan or arrangement
established, maintained or contributed to by Purchaser or the Acquired Companies
after the Closing for the benefit of any Affected Persons for purposes of (i)
eligibility to participate and (ii) vesting, but in no event shall such service
be taken into account in determining the accrual of benefits under any such
benefit plan or arrangement, including, but not limited to, a defined benefit
plan. If permitted by law, Purchaser shall waive any pre-existing conditions,
limitations or waiting periods under such employee benefit plans. Each Affected
Person, other than a Retained Employee, shall receive full credit under the
vacation, sick leave and paid-time off policies of Purchaser or the Acquired
Companies applicable to such
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Affected Person, for all accrued and unused vacation, sick leave and paid-time
off to which such Affected Person is entitled as of the Closing Date.
(c) Seller and Purchaser agree to cooperate in carrying out
the duties and responsibilities contained in this Section 4.5. In addition,
Seller agrees to make available to Purchaser such information as Purchaser may
reasonably request to facilitate the determina tion of (i) the period of service
of any Affected Person with the Acquired Companies, Prandium or Seller prior to
the Closing Date, (ii) individual service accruals and salary histories of
Affected Persons, and (iii) such other information as Purchaser may reasonably
request to carry out the provisions of this Section 4.5.
(d) Notwithstanding anything contained in this Agreement, no
employee of Prandium or Seller or Restaurants employed at the Retained
Restaurants (the "Retained Employees") shall become an employee of the Acquired
Companies or Purchaser from and after the Closing Date, and neither the Acquired
Companies nor Purchaser shall be liable for any payments in respect of the
Retained Employees for any purpose whatsoever.
SECTION 4.6 Employees. Purchaser acknowledges and agrees that any
---------
employment loss within the meaning of the Worker Adjustment and Retraining
Notification Act (the "WARN Act"), 29 U.S.C. (S)(S)2101 et seq., suffered by any
Employee (other than a Retained Employee) immediately upon or within 90 days of
the Closing, shall have been caused by Purchaser's decision not to continue the
employment of such Employee, and not by the sale of the Acquired Companies.
Purchaser further acknowledges and agrees that it shall be responsible for
giving any notices required by the WARN Act, that it is liable to any Employee
who does not receive notice under, and who suffers an employment loss, as
defined in, the WARN Act and that it is responsible to and shall indemnify and
hold harmless Prandium, Seller and their affiliates for any and all claims
asserted under the WARN Act because of a "plant closing" or "mass layoff," as
defined therein, occurring on or after the Closing Date. For purposes of this
Agreement, the Closing Date is and shall be the same as the "effective date" of
the sale within the meaning of the WARN Act.
SECTION 4.7 Section 338(h)(10) Election.
---------------------------
(a) Unless Prandium has delivered an Ownership Change Notice
(as defined herein) to Purchaser prior to the Closing, in which case this
Section 4.7 shall not apply, Prandium and Seller (as required) shall join with
Purchaser in making an election under section 338(h)(10) of the Code and the
Treasury regulations promulgated thereunder (and any comparable election under
state Tax law) for each of the Acquired Companies (a "Section 338(h)(10)
Election"). Each of Prandium, Seller and Purchaser represents that it is
qualified to
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make a Section 338(h)(10) Election. Each of Prandium and Seller covenant that it
will not elect out of treating the Acquisition, for state Tax law purposes, as
an acquisition for which a Section 338(h)(10) Election has been made. In
connection with the making of a Section 338(h)(10) Election, at Closing, (i)
Seller shall deliver to Purchaser identical duly signed Internal Revenue Service
Forms 8023 (and identical signed originals of any comparable forms for state Tax
law purposes) (the "Election Forms"), fully and properly completed except with
respect to Sections E and F of Forms 8023 (and any corresponding sections of the
election forms for state Tax law purposes) and (ii) Purchaser shall cause each
Election Form to be duly signed. Purchaser shall file an original of each type
of Election Form with the IRS, or applicable state Tax authority, promptly after
the Closing without making any additions, deletions, or other changes thereto.
Purchaser and Seller shall each retain an original copy of each type of Election
Form. Prandium agrees to promptly notify Purchaser in writing if it believes it
is reasonably likely to deliver an Ownership Change Notice; provided that if
Prandium becomes aware of such fact prior to the sixth day before Closing,
Prandium agrees to notify Purchaser no later than five days before Closing.
(b) As soon as reasonably practicable after the Closing
Date, Purchaser shall prepare and deliver to Seller a schedule (the "Preliminary
Section 338 Schedule") setting forth a preliminary allocation of the Purchase
Price of the Acquired Companies among the assets of the Acquired Companies that
are deemed to have been acquired pursuant to Section 338(h)(10) of the Code and
comparable state Tax provisions and a preliminary determination of the amounts
required to be entered in Sections E and F of IRS Form 8023 (and comparable
sections of any Election Forms for state Tax law purposes). Such schedule shall
be subject to the review and approval of Seller. If Seller and Purchaser are
unable to resolve any disagreement between them as to any particular allocation
or amount set forth on the Preliminary Section 338 Schedule within 30 days of
Seller's receipt of such Schedule, the disputed allocation or amount shall be
reviewed and determined by a certified public accounting firm of national
reputation, as may be chosen mutually by Seller and Purchaser (the
"Accountants"), which determination shall be final. Upon Seller's approval (as
described above) of the Preliminary Section 338 Schedule (or a determination by
the Accountants of all disputed allocations and amounts), Purchaser shall
deliver to Seller a "Final Section 338 Schedule". Purchaser and Seller shall
cooperate and take all actions reasonably necessary to complete the Election
Forms on a basis consistent with the Final Section 338 Schedule. If any changes
are required to be made to the Election Forms or schedules (including the Final
Section 338 Schedule) as a result of information that first becomes available
after Purchaser has delivered to Seller the Final Section 338 Schedule, the
parties shall promptly and in good faith reach an agreement as to the precise
changes required to be made. Seller and Purchaser shall use the Final Section
338 Schedule for purposes of preparing all reports and returns with respect to
Taxes. The parties acknowledge and agree that if, for any reason, a Final
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Section 338 Schedule is not obtained, any Section 338(h)(10) Election filed in
accordance with Section 4.7(a) above shall be irrevocable and binding on the
parties and shall not be challenged by any party. The parties agree that all
costs and expenses in connection with the preparation and delivery of the
Preliminary Section 338 Schedule and the Final Section 338 Schedule shall be
borne by Purchaser; provided that any fees incurred in resolving any
disagreement over the Preliminary Section 338 Schedule shall be borne equally by
Purchaser and Seller.
(c) In order to avoid an ownership change of Prandium during
the three-year period ending on the Closing Date, Prandium hereby agrees to use
its reasonable best efforts, from the date hereof until the Closing Date, to
prevent any direct or indirect transfer of its common stock that would trigger
an ownership change under Section 382 of the Code.
SECTION 4.8 Cooperation With Respect to Tax Matters.
---------------------------------------
(a) Prandium, Seller and Purchaser recognize that the
Acquired Companies have joined with Prandium and Seller in filing unitary,
consolidated, or combined Tax Returns as members of a unitary, consolidated or
combined group, as applicable (the "Prandium Consolidated Group"). After the
Closing Date, Prandium and Seller shall include (to the extent required by law)
the taxable income or loss, and all other items, of the Acquired Companies for
periods ending before or on the Closing Date, in their unitary, consolidated or
combined Tax Returns and shall not cease to include the Acquired Companies in
such Tax Returns for any tax year that ends on or before or that includes the
Closing Date.
(b) Seller shall be responsible for, and shall have ultimate
discretion with respect to, (i) the timely filing of all Tax Returns (and
payment of Tax with respect thereto) required or permitted by applicable law to
be filed by the Acquired Companies (or by Seller on their behalf) with respect
to periods that end on or before the Closing Date, (ii) any elections related to
such Tax Returns (other than Section 338(h)(10) Elections, the rights and
obligations of the parties hereto of which are set forth in Section 4.7), and
(iii) any Audit (including the execution of any waiver of limitation with
respect to any Audit) relating to any such Tax Returns; provided, however, that
in the event that any Audit for which Prandium or Seller is responsible pursuant
to this Section 4.8(b) could reasonably be expected to result in a material
increase in Tax liability for which Purchaser would be responsible, Seller shall
consult in good faith with Purchaser in respect of the specific issues that
could give rise to such increased Tax liability. Purchaser and the Acquired
Companies shall cooperate with Seller for the purpose of making any Tax election
under applicable law that would not have a Material Adverse Effect, including
any election to permit Seller to file any short period Tax Return for the
taxable period ending on the Closing Date.
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(c) Purchaser and the Acquired Companies shall be
responsible for, and shall have ultimate discretion with respect to, (i) the
timely filing of all Tax Returns (and payment of Tax with respect thereto)
required to be filed by the Acquired Companies with respect to periods that
begin after the Closing Date and (ii) the Straddle Tax Returns (as defined
below), if any, and (iii) any Audit (including the execution of any waiver of
limitation with respect to any Audit) relating to any such Tax Returns;
provided, however, that (x) in the case of any Straddle Tax Return, the
preparation and filing of such Return shall be subject to review and approval of
Seller, which approval shall not be unreasonably withheld, and (y) in the event
that any Audit for which Purchaser is responsible pursuant to this Section
4.8(c) could reasonably be expected to result in a material increase in Tax
liability for which Prandium or Seller would be responsible, Purchaser shall
consult in good faith with Prandium or Seller in respect of the specific issues
that could give rise to such increased Tax liability. A "Straddle Tax Return" is
a Tax Return for any taxable period that includes but does not end on the
Closing Date. For purposes of any Straddle Tax Return, the allocation of Taxes
of the Acquired Companies between the portion of the taxable period up to and
including the Closing Date (the "Pre-Closing Period") and the portion of the
taxable period commencing with the first day after the Closing Date (the "Post-
Closing Period") shall, with respect to income, sales, use, payroll and similar
Taxes, be based on the operations of the Acquired Companies as if their books
were closed at the end of the day of the Closing Date. The parties agree that
real and personal property and similar Taxes shall be apportioned on a daily pro
rata basis.
(d) After the Closing Date, each of Purchaser and the
Acquired Companies, on the one hand, and Prandium and Seller, on the other,
shall (i) provide, or cause to be provided, to each other's respective
subsidiaries, officers, employees, representatives and affiliates, such
assistance as may reasonably be requested, including making available employees
and the books and records of the Acquired Companies, by any of them in
connection with the preparation of any Tax Return or any Audit of the Acquired
Companies in respect of which Purchaser, the Acquired Companies or Prandium or
Seller, as the case may be, is responsible pursuant to Sections 4.8(b) or (c) of
this Agreement and (ii) retain, or cause to be retained, for so long as any such
taxable years or Audits shall remain open for adjustments, any records or
information which may be relevant to any such Tax Returns or Audits.
(e) Each of Purchaser and the Acquired Companies, on the one
hand, and Prandium and Seller, on the other, shall promptly inform, keep
regularly apprised of the progress with respect to, and notify the other party
in writing not later than (i) ten business days after the receipt of any notice
of any Audit or (ii) fifteen business days prior to the settlement or final
determination of any Audit for which it was responsible pursuant to Section
4.8(b) or (c) of this Agreement which could affect the Tax liability of such
other party for any taxable year.
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(f) As used in this Agreement:
(i) "Tax" or "Taxes" shall mean all Federal, state,
local and foreign taxes and other assessments of similar nature, (whether
imposed directly or through withholdings), including any interest, penalties
(including penalties for failure to file Tax Returns) and additions to Tax
applicable thereto;
(ii) "Tax Returns" shall mean any Federal, state, local
and foreign tax returns, declarations, elections, statements, reports, schedules
and any amendments thereto; and
(iii) "Audit" shall mean any audit, assessment of Taxes,
reassessment of Taxes, or other examination by any taxing authority or any
judicial or administrative proceedings or appeal of such proceedings.
(g) Seller and Purchaser each acknowledge that the other
party is a party to a TRAC Agreement that is currently in effect. Within 30 days
after the date hereof, Seller and Purchaser shall cooperate with each other
(including providing any necessary information reasonably requested by the other
party) in preparing corresponding addenda to their respective TRAC Agreements,
which addenda shall set forth the information required under such agreements to
report the change in ownership of the Acquired Restaurants contemplated in
connection with the Closing. At Closing, Seller and Purchaser shall each deliver
to the other party a copy of the addendum to its TRAC Agreement, as completed in
cooperation with the other party. Seller and Purchaser each agree to file with
the IRS the addendum to its TRAC Agreement within three business days after the
Closing. Neither party shall make any changes to the addendum to its TRAC
Agreement, prior to such filing, without the prior consent of the other party.
After the Closing, Purchaser shall not in bad faith fail to comply as an
Employer under its TRAC Agreement in a manner that would reasonably be expected
to cause and which does cause an Audit with respect to any Taxes imposed
pursuant to the Federal Insurance Contribution Act under Section 3101 et seq. of
the Code on the tip income of employees of the Acquired Restaurants for taxable
periods ending on or before the Closing Date and any Pre-Closing Period.
SECTION 4.9 Tax Indemnity.
-------------
(b) Prandium and Seller shall each be liable for, shall pay
to the appropriate Tax authorities (or shall pay to the Acquired Companies as a
reimbursement of Taxes paid to the appropriate Tax authorities for a Straddle
Tax Return), and shall hold Purchaser and the Acquired Companies harmless
against, all Taxes (other than Taxes included
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in Working Capital determined pursuant to Section 2.3 above) of the Acquired
Companies that relate to (i) the taxable periods ending before or on the Closing
Date, (ii) the Pre-Closing Period, (iii) any liability for Taxes arising under
Treasury Regulations section 1.1502-6 (or similar provision of state, local or
foreign law) attributable to any taxable period ending before or on the Closing
Date or the tax year that includes the Closing Date (but with respect to Taxes
attributable to such tax year, only to the extent that such Taxes relate to
members of the Prandium Consolidated Group), and (iv) the Required
Reorganization. Prandium and Seller shall be entitled to all Tax refunds
(including interest) attributable to the taxable periods in respect of which
either is so obligated to indemnify Purchaser and the Acquired Companies, other
than refunds included in the Working Capital determined pursuant to Section 2.3
above.
(b) Purchaser and the Acquired Companies shall be jointly
and severally liable for, shall pay to the appropriate Tax authorities, and
shall hold Prandium and Seller harmless against all Taxes of the Acquired
Companies that relate to (i) the taxable periods that begin after the Closing
Date and (ii) the Post-Closing Period. Purchaser and the Acquired Companies
shall be entitled to any Tax refund (including interest) attributable to the
taxable periods in respect of which Purchaser and the Acquired Companies are so
obligated to indemnify Seller.
(c) Any indemnity payment made pursuant to this Section 4.9
shall be treated by all parties as an adjustment to the Purchase Price.
(d) The obligations of the parties to indemnify each other
pursuant to this Section 4.9 shall continue until the statutory period of
limitations (taking into account any extensions or waivers thereof) for the
assessment of Taxes, covered by this Section 4.9, has expired. Any payment due
to an indemnified party pursuant to this Section 4.9 shall be paid promptly by
the indemnifying party upon receipt of written notice.
(e) Neither party shall take any action the purpose and
intent of which is to prejudice the defense of any claim subject to
indemnification hereunder or to induce a third party to assert a claim subject
to indemnification hereunder.
SECTION 4.10 Financial Information.
---------------------
(a) After the Closing, upon reasonable written notice,
Purchaser, Prandium and Seller shall furnish or cause to be furnished to each
other and their respective accountants, counsel and other representatives
access, during normal business hours, such information (including records
pertinent to the Acquired Companies) as is reasonably necessary for financial
reporting and accounting matters.
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(b) Purchaser shall retain all of the books and records of
the Acquired Companies for a period of ten years after the Closing Date or such
longer time as may be required by law. After the end of such period, before
disposing of such books or records, Purchaser shall give notice to such effect
to Seller and give Seller an opportunity to remove and retain all or any part of
such books or records as Seller may select.
SECTION 4.11 Expenses. Whether or not the Closing takes place,
--------
except as otherwise provided herein, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall be
paid by the party incurring such costs or expenses; provided, however, that (a)
except as otherwise provided in Section 1.5, Seller and Purchaser shall each be
responsible for 50% of all sales, use, realty, transfer and other transfer and
similar Taxes in connection with this Agreement and the consummation of the
transactions contemplated hereby and (b) Seller shall pay any pre-Closing
expenses of the Acquired Companies incurred in connection with this Agreement
and the transactions contemplated hereby (including, without limitation, any
fees of DLJ or Seller's counsel incurred in connection with the Acquisition and
the transactions contemplated by this Agreement).
SECTION 4.12 Insurance. Purchaser shall secure insurance with
---------
respect to the Acquired Companies' business from the Closing Date covering
general liability (including, without limitation, premises liability), products
liability and workers' compensation in amounts consistent with insurance it
currently secures.
SECTION 4.13 Publicity. Prandium, Seller and Purchaser agree that,
---------
prior to the Closing, no public release or announcement concerning the
transactions contemplated hereby shall be issued by any party without the prior
written consent (which consent shall not be unreasonably withheld) of the other
party, except as such release or announcement may be required by law. Prandium,
Seller and Purchaser agree that, prior to the Closing, no disclosure of the
terms or provisions of this Agreement shall be made except to representatives,
advisors, counsel, and lenders to the parties hereto who acknowledge the
confidentiality of this Agreement, and except as required by law; provided that
in the event such disclosure, announcement or release is required by law, each
party shall have an opportunity to review such disclosure and such disclosure
shall be reasonably acceptable to each party.
SECTION 4.14 Certain Understandings.
----------------------
(a) Purchaser has received from Seller certain projections
and forecasts relating to the Acquired Companies. Purchaser acknowledges that
(i) there are uncertainties inherent in attempting to make such projections and
forecasts, (ii) Purchaser is familiar with such uncertainties and is taking full
responsibility for making its own evaluation
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of the adequacy and accuracy of all projections and forecasts so furnished to
them and (iii) Purchaser shall not have any claim against Seller or its agents
with respect thereto. Accord ingly, Seller makes no representation or warranty
with respect to such projections and forecasts.
(b) Purchaser acknowledges that, except as expressly set
forth herein, neither Prandium, Seller, nor any other person, has made any
representation or warranty, express or implied, as to the accuracy or
completeness of any information regarding the Acquired Companies, and, except as
set forth herein, neither Prandium, Seller nor any other person will be subject
to any liability to Purchaser or any other person resulting from the
distribution to Purchaser, or the use of, any such information. Purchaser
acknowledges that, should the Closing occur, Purchaser will acquire the Acquired
Companies' business in an "as is" condition and on a "where is" basis, without
any representation or warranty of any kind, express or implied, except such
representations and warranties expressly set forth herein or in any certificate
delivered pursuant hereto.
(c) Purchaser acknowledges that, except as expressly set
forth herein, neither Prandium, Seller, nor any other person, has made any
representation or warranty, express or implied, as to (i) the physical condition
or state of repair of the Acquired Companies' real property, the improvements
constituting a part thereof or the equipment and fixtures appurtenant thereto,
(ii) the gross or net income derived therefrom, (iii) the cost, book value or
market value thereof, (iv) the use or potential use thereof, or (v) any other
matter affecting, or relating to, such property or the operation or management
thereof.
(d) Purchaser acknowledges that the restaurants listed on
Schedule 4.14(d) shall be the responsibility of Purchaser after Closing (it
being understood that Seller and Prandium shall remain liable with respect to
any breach of the representations and warranties made by Prandium and Seller
herein or pursuant hereto insofar as such breaches relate to the restaurants
listed on Schedule 4.14(d) for periods prior to the Closing in accordance with
the indemnification provisions set forth in Article VI).
SECTION 4.15 Non-competition; Non-solicitation.
---------------------------------
(a) For a period of three years from and after the Closing
Date, neither Prandium, Seller nor any of their respective subsidiaries
(collectively, the "Restricted Parties") shall, directly or indirectly own,
manage, operate, join, control or participate in the ownership, management,
operation or control of Mexican-style dinner houses in California.
Notwithstanding this Section 4.15(a), (i) Prandium and Seller may, directly or
indirectly, own, manage, operate, join, control or participate in the ownership,
management, operation or control of any fast-casual Mexican-style restaurants in
California and (ii) any subsequent non-affiliated
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purchaser of Prandium's Chi-Chi's restaurant chain may directly or indirectly,
own, manage, operate, join, control or participate in the ownership, management,
operation or control any Mexican-style dinner houses in California.
(b) From the date hereof until the first anniversary of the
Closing Date, Purchaser, Prandium and Seller shall not, and shall each cause
their subsidiaries and representatives to not, without prior written approval of
the other party, directly or indirectly, solicit for employment any current
general manager, assistant general manager or chef of: (i) in the case of
Prandium and Seller, the Acquired Companies and (ii) in the case of Purchaser,
Prandium and its current subsidiaries (including, without limitation, the
employees of the Retained Restaurants), provided, however, that solicitations of
employment published in a journal, newspaper or other publication of general
circulation and not specifically directed towards such employees shall not be
deemed to constitute solicitation for purposes of this Section 4.15.
(c) If, at the time of enforcement of this Section 4.15, a
court holds that the restrictions stated herein are unreasonable under
circumstances then existing, Prandium, Seller and Purchaser agree that the
maximum period, scope or geographical area reasonable under such circumstances
shall be substituted for the stated period, scope or area, it being specifically
agreed by Prandium, Seller and Purchaser that it is their continuing desire that
this covenant be enforced to the full extent of its terms and conditions or if a
court finds the scope of the covenant unenforceable, the court shall redefine
the covenant so as to comply with applicable law. The parties agree that money
damages would not be an adequate remedy for any breach of this Section 4.15.
Therefore, in the event of a breach or threatened breach of this Section 4.15,
Purchaser or its successors or assigns may, in addition to other rights and
remedies existing in their favor, apply to any court of competent jurisdiction
for specific performance and/or injunctive or other relief in order to enforce,
or prevent any violation of, the provisions hereof (without posting a bond or
other security). Prandium and Seller agree that the restrictions contained in
this Section 4.15 are reasonable.
SECTION 4.16 Confidentiality. (a) Except as required by law, after
---------------
the Closing, Prandium, Seller and their affiliates shall not knowingly disclose
to any third party (other than their respective agents or advisors, including
without limitation, attorneys, accountants, consultants, bankers and financial
advisors) any proprietary information used exclusively by the Acquired
Companies' (other than proprietary information that is in the public domain or
generally known in the industry) in any form, whether acquired prior to or after
the Closing Date, relating to the business and operations of the Acquired
Companies, including, without limitation, any exclusive information regarding
written recipes, customers, vendors, suppliers, trade secrets, training
programs, manuals or materials, technical information,
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contracts, systems, procedures, mailing lists, know-how, trade names, financial
or other data (including the revenues, costs or profits associated with the
Acquired Companies' products or services), business plans, code books, invoices
and other financial statements, computer programs, software systems, databases,
industry lists, correspondence, internal reports, personnel files, sales and
advertising material, telephone numbers, names, addresses or other compilations
of information, written or unwritten, which is or was used exclusively in
connection with the business of the Acquired Companies.
(b) Except as required by law or as otherwise contemplated by
this Agreement, after the Closing, Purchaser and its affiliates shall not
knowingly disclose to any third party (other than their respective agents or
advisors, including without limitation, attorneys, accountants, consultants,
bankers and financial advisors) any proprietary information used exclusively by
the ETX Restaurants (other than proprietary information that is in the public
domain or generally known in the industry) in any form, whether acquired prior
to or after the Closing Date, relating to the business and operations of the ETX
Restaurants, including, without limitation, any exclusive information regarding
written recipes, customers, vendors, suppliers, trade secrets, training
programs, manuals or materials, technical information, contracts, systems,
procedures, mailing lists, know-how, trade names, financial or other data
(including the revenues, costs or profits associated with the ETX Restaurants'
products or services), business plans, code books, invoices and other financial
statements, computer programs, software systems, databases, industry lists,
correspondence, internal reports, personnel files, sales and advertising
material, telephone numbers, names, addresses or other compilations of
information, written or unwritten, which is or was used exclusively in
connection with the business of the ETX Restaurants.
SECTION 4.17 Acquisition of Rights to Confidentiality. To the extent
----------------------------------------
not yet otherwise prohibited thereby, at the Closing, Prandium and Seller shall
assign, grant and convey to Purchaser all their rights to keep information
relating to the Acquired Companies confidential under confidentiality agreements
between them and persons other than Purchaser that were entered into in
connection with or relating to a possible sale of the Stock or any part thereof
(collectively, "Confidentiality Letters"), including the right to enforce all
terms of the Confidentiality Letters. Promptly after the date hereof, to the
extent provided, Prandium and Seller shall request the return or destruction of
all confidential information provided to other persons pursuant to the
Confidentiality Letters. At the Closing, Seller shall deliver to Purchaser
copies of the Confidentiality Letters to the extent permitted by the terms
thereof; provided that if any Confidentiality Letter shall not be assignable,
Seller shall disclose to Purchaser the parties to such Confidentiality Letter.
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SECTION 4.18 No-Shop. During the period beginning on the date hereof
-------
and ending on the earlier of (i) the Closing Date, (ii) 60 days from the date of
this Agreement (if the failure to consummate the Acquisition by such date is due
primarily to a breach by Purchaser of any of its representations, warranties,
covenants or other obligations contained in this Agreement or a failure by
Purchaser to obtain financing in order to satisfy the condition set forth in
5.1(f)) and (iii) the date of termination of this Agreement, Prandium and Seller
shall not (and shall cause their affiliates and representatives not to) solicit,
initiate or encourage the submission of any proposal or offer from any person
relating to, or participate in any discussions or negotiations regarding, or
furnish any information with respect to, the direct or indirect acquisition of
all or any substantial portion of the Stock or assets of the Acquired Companies.
SECTION 4.19 Cooperation with respect to Insurance Matters.
---------------------------------------------
(a) Notwithstanding the provisions of Section 4.5, to the
extent that (i) any insurance policies controlled by Prandium, Seller or their
subsidiaries (collectively, "Sellers' Insurance Policies") cover any loss,
liability, claim, damage or expense relating to any of the Acquired Companies
relating to or arising out of occurrences (known or unknown) prior to the
Closing Date (the "Pre-Closing Liabilities") and (ii) Seller's Insurance
Policies continue after the Closing to permit claims to be made thereunder with
respect to Pre-Closing Liabilities (the "Pre-Closing Claims") and (iii) neither
Prandium nor Seller would incur any cost or expense in connection with the
submission of such claims, Prandium and Seller shall cooperate and cause their
subsidiaries to cooperate with Purchaser and the Acquired Companies in
submitting Pre-Closing Claims (or pursuing Pre-Closing Claims previously made)
on behalf of Purchaser or the Acquired Companies under Sellers' Insurance
Policies. It is further understood and agreed that any deductibles and/or self-
insured retentions applicable to any Pre-Closing Claims made under Seller's
insurance policies will be the sole responsibility of Purchaser.
(b) To the extent that, after the Closing Date, Purchaser or
Seller reasonably requires any information regarding claim data, payroll or
other similar information in order to make filings with insurance carriers,
Seller or Purchaser, as the case may be, shall promptly supply such information
to the other.
(c) At or prior to the Closing, each party hereto, shall
execute and deliver, or cause to be executed and delivered, all such documents
and instruments and shall take, or cause to be taken, all such other actions as
may be reasonably necessary to separate the Acquired Companies' insurance
programs (including self-insurance policies for workers' compensation, general
liability, automobile liability and health insurance) from Seller and Prandium's
insurance programs, including, without limitation, entering into agreements with
the applicable insurance carriers (reasonably satisfactory to each party) in
order to transfer insurance
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obligations or a portion thereof, which agreements shall include (to the extent
available from the applicable insurance carriers) provisions relating to (i) the
claims handling process, (ii) separate billing statements, (iii) control of
security and letters of credit, (iv) conversion of historical paid loss
retrospective programs and (v) retrospective adjustments.
SECTION 4.20 Transition Services Agreement. At the Closing,
-----------------------------
Purchaser and Prandium shall enter into a transition services agreement (the
"Transition Services Agreement"), in form and substance reasonably acceptable
to Purchaser and Prandium, pursuant to which Prandium shall provide (or cause to
be provided) to the Acquired Companies services at such fees and upon such other
terms and conditions as may mutually be agreed upon. The parties shall use
their best efforts to negotiate in good faith the form of such agreement within
30 days from the date hereof; provided that the parties shall continue to use
their best efforts to negotiate such agreement in good faith until the earlier
of (i) the finalization of such agreement and (ii) the two month anniversary of
the Closing Date. If the parties are unable to agree to a mutually acceptable
Transition Services Agreement prior to the Closing Date, Prandium shall for a
period of three months from the Closing Date provide services for accounting,
administration of benefits and MIS (in each case excluding any third party
expenses or fees related thereto) to the Acquired Companies at the levels
provided immediately prior to Closing in exchange for a fee of $150,000 per
month plus reimbursement for any third party fees or expenses related to such
services or, if earlier, until a mutually acceptable Transition Services
Agreement has been negotiated.
SECTION 4.21 Anaheim Lease Agreement. At the Closing, Purchaser and
-----------------------
Seller shall enter into a lease agreement (the "Lease Agreement"), in form and
substance reasonably acceptable to Purchaser and Seller, pursuant to which
Seller shall lease the Anaheim El Torito for an initial period of one year,
automatically renewable at Purchaser's option in year increments thereafter and
cancellable by Seller at any time upon 60 days notice to Purchaser, for an
annual rent of $200,000. The parties shall use their best efforts to negotiate
in good faith the form of such agreement within 30 days from the date hereof.
SECTION 4.22 Notification. Between the date of this Agreement and
------------
the Closing Date, the parties will promptly notify each other in writing if such
party becomes aware of any fact or condition occurring after the date of this
Agreement that causes or constitutes a breach of any of that party's own
representations and warranties as of the date of this Agreement, or such party
becomes aware of the occurrence after the date of this Agreement of any fact or
condition (except for such facts or conditions expressly contemplated by this
Agreement which shall not be deemed to constitute a breach of such party's
representations or warranties) that would cause or constitute a breach of any of
that party's own representations or warranties had such representation or
warranty been made as of the time of occurrence or
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discovery of such fact or condition. Should any such fact or condition require
any change in the Schedules if the Schedules were dated the date of the
occurrence or discovery of any such fact or condition, such party will promptly
deliver to the other party a supplement to the Schedules specifying such change.
During the same period, the parties will promptly notify each other if such
party breaches any of its own covenants in this Article IV or of the occurrence
of any event that may make the satisfaction of the conditions in Article V
impossible or unlikely.
SECTION 4.23 Foothill Consent and Waiver. At or prior to the
---------------------------
Closing, Seller shall either (a) obtain a Consent and Waiver of Foothill Capital
Corporation ("Foothill") in form reasonably satisfactory to Purchaser consenting
to the transactions contemplated hereby or (b) pay all amounts outstanding under
the Foothill Loan Documents with a portion of the Purchase Price concurrently
with the Closing, in either case: (i) releasing the Acquired Companies from any
and all obligations under that certain Loan and Security Agreement, by and among
Prandium, Seller, Restaurants, Franchising, Chi-Chi's, Inc., each of their
subsidiaries and Foothill, dated as of January 10, 1997, and any security,
collateral or similar document securing amounts payable thereunder
(collectively, including all amendments thereto, the "Foothill Loan Documents")
and (ii) releasing all Liens in respect of the assets or Stock of the Acquired
Companies created pursuant to the Foothill Loan Documents.
SECTION 4.24 Payroll and Credit Card Receivables. Prior to Closing,
-----------------------------------
Seller shall establish a separate payroll account for Restaurants. Prior to
Closing, Seller shall use its best efforts to ensure that credit card
receivables relating exclusively to the Acquired Companies are deposited in the
Acquired Companies' depository accounts, including by notifying credit card
service providers to redirect wire transfers.
SECTION 4.25 Non-Renewal of Guaranties.
-------------------------
(a) Prandium and Seller shall not, and shall not permit
their subsidiaries to, (i) renew any Contract under which either Acquired
Company is currently liable, either by way of a guaranty or as a party to such
Contract, without removing such Acquired Company as a guarantor or party to such
Contract, as applicable or (ii) amend any such Contract to increase the amount
of payments or other obligations due under any such Contract while any Acquired
Company is liable thereunder.
(b) Purchaser shall not, and shall not permit its
subsidiaries to, (i) renew any Contract under which Prandium or Seller or any of
their subsidiaries are currently liable, either by way of a guaranty or as a
party to such Contract, without removing Prandium, Seller or such subsidiary, as
applicable, as a guarantor or a party to such Contract, as applicable
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or (ii) amend any such Contract to increase the amount of payments or other
obligations due under any such Contract while Prandium, Seller or any of their
subsidiaries is liable thereunder.
SECTION 4.26 POS Agreement.
-------------
(a) Promptly after the date of this Agreement, Seller and
Purchaser shall work jointly (i) with Progressive Software, Inc. ("Progressive")
to provide for the ability of Restaurants to continue the use of the Progressive
POS system currently used by Restaurants (the "Progressive POS System"), pending
the implementation of the new POS System referred to in clause (ii) of this
sentence and (ii) with a new system provider selected by Purchaser and
reasonably acceptable to Seller ("New Provider"), to implement a new POS System,
including any necessary training and hardware (the "POS System"), for and to be
owned by Restaurants as soon as practicable after such system is chosen, the
form and extent of which shall be determined by Purchaser and reasonably
acceptable to Seller; provided that (x) the POS System selected shall be able to
perform the basic functions needed to operate and manage a Mexican-style
restaurant chain and, in any event, at least the functions that were expected to
be provided by the Progressive POS System and (y) the timing of the payments due
to the New Provider in connection with the POS System (other than customary up-
front costs) will be based on the roll-out of the POS System. Seller
acknowledges that each of Micros and HSI is a reasonably acceptable New
Provider.
(b) The parties agree that all costs and expenses due to the
New Provider in connection with the POS System shall be paid 2/3 by Seller and
1/3 by Purchaser; provided that in no event shall Seller's 2/3 share of costs
and expenses due to New Provider exceed $1,066,667; provided that if Purchaser
engages Micros as the New Provider, Prandium shall make available to Purchaser
Prandium's outstanding credit with Micros (which credit is at least $400,000)
and such credit shall not count as a credit against or otherwise reduce Seller's
maximum liability as set forth above. The parties agree that all costs and
expenses due to Progressive in connection with the Progressive POS System shall
be paid (i) up to the first $500,000, 2/3 by Seller and 1/3 by Purchaser and
(ii) any costs and expenses in excess of $500,000, by Seller. Subject to the
limitations and caps in the preceding sentences, (i) to the extent payments are
due to Progressive or to the New Provider after Closing, they shall be paid in
the applicable proportions by Seller and Purchaser, and (ii) to the extent
payments are due to Progressive or the New Provider prior to Closing, they shall
be paid by Seller and the Purchase Price shall be increased by the appropriate
percentage thereof in accordance with this Section 4.26.
(c) For a period of six months from the Closing Date (or
until the completion of the roll-out of the POS System, if earlier), Prandium
shall provide (or cause to
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be provided) to Restaurants help-desk support with respect to the Progressive
POS System at the same level of service provided by Progressive immediately
prior to the date of this Agreement.
(d) The parties agree that all representations, warranties
and covenants of Prandium and Seller and conditions precedent of Purchaser with
respect to the Acquired Companies or the operation thereof shall be deemed to
exclude any POS system and support thereof.
ARTICLE V
CONDITIONS PRECEDENT
SECTION 5.1 Conditions Precedent to Obligations of Purchaser. The
------------------------------------------------
obligation of Purchaser to purchase the Stock shall be subject to the
satisfaction or waiver on the Closing Date of the following conditions precedent
(which shall not be construed as covenants):
(a) HSR Act. The waiting period under the HSR Act, if
-------
applicable to the purchase and sale of the Stock, shall have expired or been
terminated.
(b) No Litigation. There shall not be instituted or pending
-------------
any suit, action, investigation, inquiry or other proceeding by or before any
court or governmental or other regulatory or administrative agency or commission
requesting or looking toward an order, judgment or decree that, individually or
in the aggregate, would in reasonable probability prohibit the purchase of the
Stock by Purchaser or have a Material Adverse Effect.
(c) Consents. All material consents, approvals and waivers
--------
to the transactions contemplated hereby from third parties and governmental
authorities and other parties, including those set forth on Schedule 3.1(e)
(other than landlord consents which are governed by 5.1(h) below and other than
the consents set forth in numbers 1 and 2 of Schedule 3.2(c)) and those
necessary to permit Seller to transfer the Stock to Purchaser shall have been
obtained.
(d) Representations and Warranties. The representations and
------------------------------
warranties of Prandium and Seller set forth in this Agreement (i) shall be true
and correct in all material respects if such representations and warranties are
not qualified as to materiality and (ii) shall be true and correct if such
representations and warranties are qualified as to materiality, on and as of the
date hereof and the Closing Date, as though made on and as of the Closing Date
(without giving effect to any supplement to the Schedules), except as otherwise
expressly
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contemplated by this Agreement, and Purchaser shall have received a certificate
signed by an authorized officer of Seller and Prandium to such effect.
(e) Performance of Obligations of Prandium and Seller.
-------------------------------------------------
Prandium and Seller shall have performed in all material respects all
obligations required to be performed by it under this Agreement on or prior to
the Closing Date, and Purchaser shall have received a certificate signed by an
authorized officer of Seller and Prandium to such effect.
(f) Financing. Purchaser shall have satisfied all
---------
conditions necessary to obtain funds pursuant to the Debt Commitments (or
alternative financing reasonably acceptable to Purchaser) sufficient, together
with the Equity Commitments (the provision of which is not a condition to the
obligation of Purchaser to effect the Acquisition), to consummate the
Acquisition.
(g) Certain Approvals. Any and all approvals necessary for
-----------------
the consummation of the transactions contemplated hereby in connection with the
Liquor Licenses (and any other material governmental permits or authorizations
of any of the Acquired Companies) or required in connection with such Liquor
Licenses, permits or authorizations for the Acquired Companies to carry on its
businesses immediately after the Closing Date as currently conducted, or to
maintain such Liquor Licenses, permits or other authorizations in effect
immediately after the Closing Date, shall have been obtained (it being
understood that Seller may deliver replacement Liquor Licenses in lieu of
delivering the current Liquor Licenses of the El Torito restaurants located in
Long Beach and Camarillo which were obtained by lottery).
(h) Landlord Consents. Seller shall have delivered to
-----------------
Purchaser all landlord consents, substantially in the form attached hereto as
Exhibit B, from each real property lessor of each Lease listed on Schedule
3.1(e); provided that the failure to obtain required Lease consents with respect
to restaurants #145, #179, #209 and #234 shall not be deemed to be a condition
precedent of Purchaser. In the event the consent or approval of any party to the
Leases for restaurants #209 and #234 has not been obtained by Closing, Seller
shall use commercially reasonable efforts to enter into one or more arrangements
reasonably satisfactory to Purchaser such that Purchaser will receive the
benefits of each such Lease notwithstanding that such consent or approval shall
not have been obtained; provided that if Seller is unable to obtain such consent
prior to Closing, the parties shall take such action set forth on Schedule
5.1(h). In the event the consent or approval of any party to the Leases for
restaurants #145 and #179 has not been obtained by Closing, such restaurants
shall be treated as Retained Restaurants in accordance with Section 1.5(a).
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(i) Director Resignations. All directors of the Acquired
---------------------
Companies shall have tendered their resignations effective as of the Closing.
(j) Company Material Adverse Change. Since the date hereof,
-------------------------------
there shall not have been any change or events which, singly or in the
aggregate, have resulted or in reasonable probability could result in a Material
Adverse Effect.
(k) Stock Certificates. Certificates representing 100% of
------------------
the Stock shall have been, or at the Closing be, validly delivered and
transferred to Purchaser, free and clear of any and all Liens;
(l) Ancillary Agreements. Purchaser shall have received the
--------------------
Escrow Agreement, duly executed by Seller.
(m) Waiver. Purchaser shall have received a waiver and
------
release of any and all claims (other than claims arising directly pursuant to
this Agreement) Prandium, Seller and their affiliates may have, now or in the
future, against the Acquired Companies in substantially the form attached as
Exhibit C hereto, duly executed by Prandium and Seller.
(n) Employment Agreement Releases. Purchaser shall have
-----------------------------
received an executed Release and Satisfaction in the form attached as Exhibit D
hereto from each of Kevin Relyea, Roger Chamness and Gayle DeBrosse, releasing
the Acquired Companies from any and all liability and further obligations under
such person's respective employment agreement with the Acquired Companies.
(o) Legal Opinion. Purchaser shall have received from
-------------
Skadden, Arps, Slate, Meagher & Flom LLP, counsel to Seller, an opinion dated
the Closing Date, in substantially the form attached hereto as Exhibit E, and
shall have received from Richards, Layton & Finger, counsel to Purchaser
("RLF"), an opinion, in substantially the form attached hereto as Exhibit F.
(p) Transfer of Domain Names. Purchaser shall have received
------------------------
documents representing the fully executed transfer from Seller to Restaurants of
all right, title and interest in all domain name registrations currently used by
or necessary to the business of the Acquired Companies, including, without
limitation, ELTORITO.COM, LASBRISASDELAGUNA.COM, CASAGALLARDO.COM,
KEYSTONEGRILL.COM and EL-TORITO.COM as effected through Network Solutions, Inc.,
Register.com, or such other entity authorized to transfer Internet domain names.
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(q) Required Reorganization. Seller and its subsidiaries
-----------------------
shall have effected the Required Reorganization in accordance with the terms of
Section 1.5.
(r) Foothill. Seller shall (a) have obtained a Consent and
--------
Waiver of Foothill in form reasonably satisfactory to Purchaser consenting to
the transactions contemplated hereby or (b) pay all amounts outstanding under
the Foothill Loan Documents with a portion of the Purchase Price concurrently
with the Closing, in either case: (i) releasing the Acquired Companies from any
and all obligations under the Foothill Loan Documents and (ii) releasing all
Liens in respect of the assets or Stock of the Acquired Companies created
pursuant to the Foothill Loan Documents.
(s) Section 338(h)(10) Election. Purchaser shall have
---------------------------
received from Seller, with respect to each Acquired Company, the executed
Election Forms, together with such other documentation Purchaser is entitled to
request at Closing pursuant to Section 4.7(a).
SECTION 5.2 Conditions Precedent to Seller's Obligation. The
-------------------------------------------
obligation of Seller to sell, assign, transfer, convey and deliver the Stock is
subject to the satisfaction or waiver on the Closing Date of each of the
following conditions precedent (which shall not be construed as covenants):
(a) HSR Act. The waiting period under the HSR Act, if
-------
applicable to the purchase and sale of the Stock, shall have expired or been
terminated.
(b) No Litigation. There shall not be instituted or pending
-------------
any suit, action, investigation, inquiry or other proceeding by or before any
court or governmental or other regulatory or administrative agency or commission
requesting or looking toward an order, judgment or decree that, individually or
in the aggregate, would in reasonable probability prohibit the sale of the Stock
by Seller.
(c) Consents. All consents, approvals and waivers from
--------
third parties and governmental authorities and other parties set forth on
Schedule 3.2(c) and necessary to permit Purchaser to purchase the Stock from
Seller as contemplated hereby shall have been obtained, except where the failure
to obtain any such consent, approval or waiver would not, singly or in the
aggregate, reasonably be expected to have a Material Adverse Effect.
(d) Representations and Warranties. The representations and
------------------------------
warranties of Purchaser set forth in this Agreement shall be true and correct in
all material respects if such representations and warranties are not qualified
as to materiality and shall be true and correct if such representations and
warranties are qualified as to materiality on and as
52
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of the Closing Date, as though made on and as of the Closing Date (without
giving effect to any supplement to the Schedules), except as otherwise
contemplated by this Agreement, and Seller shall have received a certificate
signed by an authorized officer of Purchaser to such effect.
(e) Performance of Obligations of Purchaser. Purchaser shall
---------------------------------------
have performed all material obligations required to be performed by it under
this Agreement on or prior to the Closing Date, and Seller shall have received a
certificate signed by an authorized officer of Purchaser to such effect.
(f) Waiver. Seller shall have received a waiver and release
------
of any and all claims (other than claims arising pursuant to this Agreement) the
Acquired Companies and their affiliates may have, now or in the future, against
Seller and its affiliates in substantially the form attached as Exhibit C
hereto, duly executed by the Acquired Companies.
(g) Ancillary Agreements. Seller and Prandium shall have
--------------------
received the Escrow Agreement, duly executed by Purchaser.
(h) Ownership Change. Prandium shall not have undergone an
----------------
"ownership change" for the purposes of Section 382 of the Code during the three-
year period ending on the Closing Date.
ARTICLE XII
INDEMNIFICATION
SECTION 6.1 Indemnification Generally. In addition to and not in
-------------------------
limitation of the indemnities provided in Section 4.9, from and after the
Closing, subject to the other provisions of this Article VI, the parties shall
be indemnified as provided in this Article VI. For purposes of calculating the
amount of Damages (as defined below) subject to indemnification pursuant to this
Article VI and for determining if any breach of this Agreement has occurred, all
references to materiality or Material Adverse Effect shall be disregarded. All
amounts payable pursuant to this Article VI shall be treated as adjustments to
the Purchase Price.
SECTION 6.2 Indemnification of Purchaser Indemnitees. Prandium and
----------------------------------------
Seller, jointly and severally, shall indemnify, save and keep Purchaser and the
Acquired Companies and their successors and permitted assigns, and their
respective directors, officers, employees and agents, and the heirs, executors
and personal representatives of each of the foregoing (each a "Purchaser
Indemnitee" and collectively the "Purchaser Indemnitees"), harmless against and
from all Damages (including Damages arising out of Third Party Claims (as
defined below)) sustained or incurred by any Purchaser Indemnitee as a result of
or arising out of:
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(a) any inaccuracy in or breach of any representation and
warranty made by Prandium or Seller to Purchaser herein or in the Schedules or
in any other document or certificate executed in connection with the Closing
(including, without limitation, any inaccuracy in the Officer's Certificate
setting forth the amount of the Acquired Companies' Indebtedness);
(b) any breach by Prandium or Seller of, or failure of
Prandium or Seller to comply with, any of the covenants or obligations under
this Agreement to be performed by Prandium or Seller (including, without
limitation, the obligations of Prandium and Seller under this Article VI);
(c) the Required Reorganization and the Retained
Liabilities; or
(d) any Indebtedness not reflected on the Seller's
Certificate set forth in Section 1.3 (it being understood that in the event of
any such inaccuracy Purchaser's Damages shall equal the amount by which the
Acquired Companies' Indebtedness exceeded the amount set forth in such Seller's
Certificate).
SECTION 6.3 Indemnification of Seller Indemnitees.
-------------------------------------
Purchaser shall indemnify, save and keep Prandium and Seller and their
successors and permitted assigns, and their directors, officers, employees and
agents, and the heirs, executors and personal representatives of each of the
foregoing (each a "Seller Indemnitee" and collectively the "Seller
Indemnitees"), harmless against and from all Damages (including Damages arising
out of Third Party Claims) sustained or incurred by any Seller Indemnitee, as a
result of or arising out of:
(a) any inaccuracy in or breach of any representation and
warranty made by Purchaser to Seller herein or in the Schedules or in any other
document or certificate executed in connection with the Closing;
(b) any breach by Purchaser, or failure of Purchaser to
comply with, any of the covenants or obligations under this Agreement to be
performed by Purchaser (including, without limitation, the obligations of
Purchaser under this Article VI);
(c) any and all liability arising out of an Acquired
Company's failure to perform an obligation with respect to: (i) the Guaranty
dated August 24, 1990 by The Restaurant Enterprises Group, Inc. (now known as
Prandium) of Restaurants' obligations under the lease for restaurant #219
(Oakland), (ii) the Guaranty dated August 4, 1995 by Family
54
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Restaurants, Inc. (now known as Prandium) of Restaurants' obligations under the
lease for restaurant #46 (Laguna Beach), (iii) the Corporate Guaranty of
Restaurants' obligations to GTE Leasing Corporation dated December 22, 1999 by
Prandium, Inc. in favor of GTE Leasing Corporation, (iv) the Guaranty of
Restaurants' obligations dated September 4, 1998 by Family Restaurants, Inc.
(now known as Prandium) in favor of The CIT Group - Equipment Financing, Inc.
(v) Prandium's obligations under the Enron Master Firm Natural Gas Sales
Agreement, between Enron Energy Services, Inc., Restaurants and Family
Restaurants, Inc. (now known as Prandium), dated as of August 21, 1998 and (vi)
Prandium's obligations under the Enron Energy Sales Agreement - California
Facilities, between Enron Energy Services, Inc., Restaurants and Koo Koo Roo
Enterprises, Inc. (now known as Prandium) (it being understood that Seller and
Prandium shall remain liable with respect to any breach of the representations
made by Prandium and Seller herein or pursuant hereto insofar as such breaches
relate to these agreements for periods prior to the Closing in accordance with
the indemnification provisions set forth in this Article VI); or
(d) any and all liability arising out of the Amended and
Restated Employment Agreement for William D. Burt (the "Burt Employment
Agreement"), dated as of November 9, 1998 by and among William Burt, Koo Koo Roo
Enterprises, Inc. (now known as Prandium), Chi-Chi's, Inc., Restaurants and Koo
Koo Roo, Inc. and any other employment arrangement entered into at or after the
Closing by or among, Purchaser and/or an Acquired Company and William D. Burt or
arising in connection with this Agreement or the transactions contemplated
hereby (it being understood that Seller and Prandium shall remain liable with
respect to any breach of the representations made by Prandium and Seller herein
or pursuant hereto insofar as such breaches relate to the Burt Employment
Agreement for periods prior to the Closing in accordance with the
indemnification provisions set forth in this Article VI)
SECTION 6.4 Limitation on Indemnification Obligations.
-----------------------------------------
(a) Subject to the provisions of Section 6.4(c) below, all
representa tions and warranties of Prandium, Seller and Purchaser contained in
this Agreement, other than the representations and warranties of Prandium and
Seller in Sections 3.1(m) (Taxes), 3.1(n) (ERISA) and 3.1(r) (Environmental),
shall survive the Closing and continue in full force and effect for a period
equal to the later of twelve (12) months from the Closing or April 30, 2001.
Subject to the provisions of Section 6.4(c) below, each of the representations
and warranties of Seller and Prandium contained in Sections 3.1(m) (Taxes) and
3.1(n) (ERISA) shall survive the Closing and continue in full force and effect
until sixty (60) days after the expiration of the statute of limitations
applicable to the subject thereof. Subject to the provisions of Section 6.4(c)
below, any claims for breach of Prandium's and Seller's representations and
warranties in Subsection 3.1(r) (Environmental) related to properties formerly
owned or leased by the
55
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Acquired Companies, the former operations of the Acquired Companies, or the off-
site treatment or disposal of any Hazardous Substances or by the Acquired
Companies must be brought within three (3) years of the Closing Date. Subject to
the provisions of Section 6.4(c) below, any claims for breach of Prandium's and
Seller's representations and warranties in Subsection 3.1(r) (Environmental)
related to properties currently owned by the Acquired Companies or the current
operations of the Acquired Companies must be brought within 18 months of the
Closing Date. Subject to the provisions of Section 6.4(c) below, a claim by a
Purchaser Indemnitee or a Seller Indemnitee for indemnification under Section
6.2(a) or 6.3(a), respectively, shall be ineffective unless such Person delivers
a written claim for indemnification within the survival period specified in this
Section 6.4(a) applicable to the representation or warranty that is the subject
of such claim.
(b) Subject to the provisions of Section 6.4(c) below,
Purchaser Indemnitees shall only be entitled to indemnification pursuant to
Section 6.2 (a) and (b) once the aggregate amount otherwise payable to the
Purchaser Indemnitees pursuant to such Section exceeds an amount equal to $1.0
million (the "Threshold Amount"), and after such aggregate amount exceeds such
dollar amount the Purchaser Indemnitees shall be entitled to seek
indemnification only for indemnification claims above the Threshold Amount.
Subject to the provisions of Section 6.4(c) below, the indemnification to which
the Purchaser Indemnitees are entitled pursuant to Section 6.2 (a) and (b) shall
be subject to an aggregate ceiling equal to $5.0 million.
(c) Notwithstanding anything to the contrary set forth
herein, no limitation or condition of liability or indemnity applicable to any
party shall apply to (A) fraud in-fact, (B) 3.1(c) (authority), 3.1(d) (capital
stock), 3.1(t) (brokers), 3.1(ee) (no mandatory prepayment) and 3.2(b)
(authority) and 3.2(f) (brokers), (C) any breach by any party, or failure of any
party to comply with, any of the covenants or obligations under this Agreement
to be performed by such party after the Closing or (D) any wilful breach of any
covenant to be performed prior to Closing.
(d) Notwithstanding anything to the contrary set forth
herein, a Purchaser Indemnitee shall be entitled to seek indemnification for
Damages relating to Taxes of the Acquired Companies under Section 6.2 only to
the extent (i) such Damages arose out of any inaccuracy in or breach of any
representation or warranty set forth in Section 3.1(m) or the Schedules related
thereto and (ii) Purchaser would not be entitled to seek indemnification for
such Damages under Section 4.9.
SECTION 6.5 Cooperation.
-----------
56
<PAGE>
The party that is required to provide indemnification to another party
pursuant to this Article VI (and "Indemnifying Party") shall have the right, at
the Indemnifying Party's own expense, to participate in (but not control) the
defense of any Third Party Claim, and if said right is exercised, the
Indemnifying Party and any party that is entitled to indemnification from
another party pursuant to this Article VI (an "Indemnified Party") shall
cooperate in the investigation and defense of said Third Party Claim.
SECTION 6.6 Third Party Claims Procedure.
----------------------------
(a) Promptly following the receipt of notice of a Third
Party Claim for which it may seek indemnification hereunder, the party receiving
the notice of the Third Party Claim shall notify the Indemnifying Party of such
Third Party Claim explaining in reasonable detail the Third Party Claim. The
failure to give such notice shall not relieve the Indemnifying Party of its
obligations under this Agreement except to the extent that the Indemnifying
Party is prejudiced as a result of the failure to give such notice. Within 15
business days after receipt of the notice by the Indemnifying Party pursuant to
the preceding sentence, the Indemnifying Party shall notify the Indemnified
Party whether it elects to undertake the defense of the Third Party Claim;
provided that the Indemnifying Party may so elect to undertake the defense of
such claim without the consent of the Indemnified Party only if such claim
involves solely money damages and if the adverse determination of such claim,
singly or in the aggregate, would not reasonably be expected to have a material
adverse effect on the business of the Indemnified Party. Each Indemnified Party
shall make available to the Indemnifying Party all information reasonably
available to it relating to such Third Party Claim. In addition, the parties
hereunder shall render to each other such assistance as may reasonably be
requested in order to ensure the proper and adequate defense of any such action
or claim. If the Indemnifying Party elects to undertake the defense of such
Third Party Claim, it shall do so at its own expense with counsel of its own
choosing and it shall acknowledge in writing its indemnification obligations as
provided in this Agreement to the Indemnified Party as to such Third Party
Claim. If the Indemnifying Party elects not to defend such Third Party Claim or
fails to pursue the defense of such Third Party Claim diligently, the
Indemnified Party shall have the right to undertake the defense of such Third
Party Claim through counsel of its own choosing. The Party that defends the
Third Party Claim shall keep the other Party fully advised of the progress and
disposition of such claim.
(b) In the event the Indemnifying Party elects not to
undertake the defense of a Third Party Claim or fails to pursue diligently the
defense of such claim and the Indemnified Party litigates or otherwise contests
or settles the Third Party Claim, then, the Indemnifying Party shall promptly
reimburse the Indemnified Party for all Damages, including without limitation
any amounts paid to litigate or otherwise contest or settle such claim and all
57
<PAGE>
amounts paid in satisfaction of a judgment against the Indemnified Party in
contesting such claim and in providing its right to indemnification hereunder,
all in accordance with the provisions of this Section 6.6.
(c) No Third Party Claim will be settled by the Indemnifying
Party or the Indemnified Party without the consent of the other, which consent
will not be unreasonably withheld or delayed; provided, however, that if such
claim asserts that the Indemnifying Party is jointly and severally liable and
the Indemnified Party shall be fully released from all liability relating to
such Third Party Claim in connection with such settlement, the Indemnifying
Party shall not be required to obtain the consent of the Indemnified Party. The
party in charge of the defense or any settlement negotiations shall keep the
other party apprised at all times as to the status of the defense or any
settlement negotiations with respect thereto.
(d) "Damages" shall mean all liabilities, assessments,
levies, losses, fines, penalties, damages (including punitive damages),
settlements, costs and expenses, including, without limitation, reasonable fees
and expenses of attorneys, accountants, consultants and other professionals
sustained or incurred by an Indemnified Party and resulting from, arising out of
or incident to (i) any matter for which indemnification is provided under this
Agreement or (ii) the enforcement by an Indemnified Party of its rights to
indemnification under this Agreement; provided that Damages shall not include
Losses to the extent the amounts thereof have been paid in connection with
Section 2.3 of this Agreement.
(e) "Third Party Claim" shall mean any claims which are
asserted or threatened by a Person, other than a Party or a successor or assign
of a Party, against any Indemnified Party or to which an Indemnified Party is
subject from such a Person.
SECTION 6.7 General.
-------
(a) Each Indemnified Party shall be obligated in connection
with any claim for indemnification under this Article VI to use commercially
reasonable efforts to obtain any insurance proceeds available to such
Indemnified Party with regard to the applicable claims under the Indemnified
Party's insurance policies. The amount that an Indemnifying Party is or may be
required to pay to any Indemnified Party pursuant to this Article VI shall be
reduced (retroactively, if necessary) by the insurance proceeds attributable to
the Damages (net of any collection costs) actually received under any applicable
insurance policies of the Indemnified Party, but only to the extent the receipt
of such insurance proceeds does not result in any additional insurance premium
or cost to the Indemnified Party.
(b) In addition to the requirements of Section 6.7(a), each
58
<PAGE>
Indemnified Party shall be obligated in connection with any claim for
indemnification under this Article VI to use commercially reasonable efforts
consistent with generally prevailing business practices to mitigate Damages upon
and after becoming aware of any event which could reasonably be expected to give
rise to such Damages. Notwithstanding the foregoing, (i) Damages incurred by any
Indemnified Party in pursuit of such mitigation shall constitute indemnifiable
Damages hereunder and (ii) no Indemnified Party shall be so obligated if such
mitigation could adversely affect such Indemnified Party in a significant manner
other than solely as a result of monetary damages for which such persons would
be entitled to indemnifica tion hereunder and for which such persons have a
reasonable expectation of recovery.
(c) Notwithstanding anything else to the contrary and in
addition to any other limitations and exclusions set forth in this Agreement, an
Indemnifying Party shall not indemnify and hold an Indemnified Party harmless
pursuant to this Article VI from: (i) Damages that arise from or in connection
with any claim made by an Indemnified Party against an Indemnifying Party (x)
for Purchaser's or any of its affiliate's consequential damages or (y) punitive
or treble damages against an Indemnifying Party; or (ii) Damages attributable to
or arising from overhead allocations or general and administrative costs and
expenses. Nothing in this subsection shall be deemed to prohibit an Indemnified
Party from receiving indemnification from an Indemnifying Party for Damages
incurred as a result of a Third Party Claim related to consequential damages
sustained by a third party or punitive or treble damages sustained in the Third
Party Claim.
(d) The indemnification provided in this Article VI and the
specific remedies provided for elsewhere in this Agreement shall be the
exclusive post-Closing remedy for monetary damages available to any party with
respect to any breach of any representation or warranty made by the other party
in this Agreement and any agreement, certificate or instrument executed in
connection herewith of this Agreement at law or in equity.
(e) Notwithstanding anything contained in any provision of
this Agreement to the contrary, each party understands and agrees that the other
party is not making any representation or warranty whatsoever, express or
implied, other than those representations and warranties of each party expressly
set forth in this Agreement and any agreement, certificate or instrument
executed in connection herewith.
ARTICLE VII
TERMINATION AND AMENDMENT
SECTION 7.1 Termination. This Agreement may be terminated and the
-----------
59
<PAGE>
Acquisition may be abandoned at any time prior to the Closing:
(a) by mutual written consent of Seller and Purchaser;
(b) by either Seller or by Purchaser, by written notice to
the other party or parties, if there has been a violation or breach of any of
such other party's or parties' covenants, agreements, or representations or
warranties which has not been cured within 20 days after written notice thereof
by the terminating party to the other party or if there has been a failure on a
scheduled Closing Date of satisfaction of any of the conditions to the
obligations of the terminating party or parties (or the occurrence of any event
that would make the satisfaction of such conditions impossible);
(c) by either Seller or by Purchaser, by written notice to
the other party or parties, if the Acquisition has not been consummated by July
31, 2000 (or such later date, as is agreed to by Seller and Purchaser), and such
failure to consummate is not caused by a breach of this Agreement (or any
representation, warranty, covenant, or agreement included herein) by the party
or parties electing to terminate pursuant to this clause (c); or
(d) by either Seller or by Purchaser, by written notice to
the other party or parties, if there shall be any law or regulation that makes
consummation of the Acquisition illegal or otherwise prohibited or if any
judgment, permanent injunction, order or decree enjoining Seller or Purchaser
from consummating the Acquisition is entered and such judgment, injunction,
order or decree shall become final and nonappealable; or
(e) by Seller, by written notice to the other party or
parties, if the Acquisition has not been consummated by June 30, 2000, and all
of Purchaser's conditions have been satisfied or waived other than the
conditions set forth in Section 5.1(f) or 5.1(o).
SECTION 7.2 Effect of Termination. In the event of termination of
---------------------
this Agreement in accordance with Section 7.1, this Agreement shall forthwith
become void and have no effect, except (a) to the extent that such termination
results from the breach by a party hereto of its obligations hereunder (in which
case such breaching party shall be liable for all damages allowable at law and
any relief available at equity), (b) as otherwise set forth in any written
termination agreement and (c) that Sections 4.2(b), 4.11, 4.13 and this 7.2
shall survive termination of this Agreement.
SECTION 7.3 Amendment. This Agreement may not be amended except by
---------
an instrument in writing signed by the party against whom enforcement of any
such amendment is sought. Any party hereto may, only by an instrument in
writing, waive compliance by any
60
<PAGE>
other party hereto with any term or provision of this Agreement on the part of
such other party hereto to be performed or complied with. The waiver by any
party hereto of a breach of any term or provision of this Agreement shall not be
construed as a waiver of any subsequent breach.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1 Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed given (i) when delivered personally or
by documented overnight courier or (ii) upon return of the receipt after being
mailed by registered or certified mail (return receipt requested) to the parties
at the following addresses (or at such other address for a party as shall be
specified by like notice):
(a) if to Purchaser, to:
Acapulco Acquisition Corp.
4001 Via Oro Avenue, Suite 200
Long Beach, California 90810
Attention: President
and
Bruckmann, Rosser, Sherrill & Co., Inc.
126 East 56th Street, 29th Floor
New York, New York 10022
Attention: Harold O. Rosser
with a copy to:
Dechert Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, Pennsylvania 19103-2793
Attention: Carmen J. Romano, Esq.
(b) if to Prandium or Sellers, to:
61
<PAGE>
Prandium, Inc.
18831 Von Karman Avenue
Irvine, California 92715
Attention: Todd E. Doyle, Esq.
and
FRI-MRD Corporation
c/o Prandium, Inc.
18831 Von Karman Avenue
Irvine, California 92715
Attention: Todd E. Doyle, Esq.
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
300 South Grand Avenue, Suite 3400
Los Angeles, California 90071
Attention: Michael A. Woronoff, Esq.
SECTION 8.2 Interpretation. When a reference is made in this
--------------
Agreement to a Section, Schedule or Exhibit, such reference shall be to a
Section, Schedule or Exhibit of this Agreement unless otherwise indicated. When
a reference is made in this Agreement to a specific Schedule, such reference
shall be deemed to include, to the extent applicable, all the other Schedules;
provided, however, that the relevance of the disclosure item on such specific
Schedule to the other Schedules is reasonably clear. The table of contents,
table of definitions and headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. When the words "includes" or "including" are used in this
Agreement, they shall be deemed to be followed by the words "without
limitation." When any representation or warranty in Section 3.1 is made to the
knowledge of Seller or Prandium, such term shall mean only the actual knowledge
of Prandium's and Seller's executive officers and the knowledge of no other
person shall be imputed to any such executive officer or to Seller; provided,
however, that where the term "knowledge" is used in Section 3.1(r) such term
shall mean knowledge of the current officers, directors or general managers who
would reasonably be expected to have knowledge of environmental matters. All
accounting terms not defined in this Agreement shall have the meanings
determined by generally accepted accounting principles as of the date of this
Agreement. All capitalized terms defined herein are equally applicable to both
the singular and plural forms of such terms. The right to indemnification,
payment of Damages or other remedy
62
<PAGE>
based on Prandium's or Seller's representations, warranties, covenants, and
obligations will not be affected by any investigation conducted with respect to,
or any knowledge of Purchaser acquired (or capable of being acquired) at any
time, whether before or after the execution and delivery of this Agreement or
the Closing Date, with respect to the accuracy or inaccuracy of or compliance
with, any such representation, warranty, covenant, or obligation.
SECTION 8.3 Severability. If any provision of this Agreement or the
------------
application of any such provision shall be held invalid, illegal or
unenforceable in any respect by a court of competent jurisdiction, such
invalidity, illegality or unenforceability shall not affect any other provision
of this Agreement. In lieu of any such invalid, illegal or unenforce able
provision, the parties hereto intend that there shall be added as part of this
Agreement a provision as similar in terms to such invalid, illegal or
unenforceable provision as may be possible and be valid, legal and enforceable.
SECTION 8.4 Counterparts. This Agreement may be executed in one or
------------
more counterparts, all of which shall be considered one and the same agreement
and shall become effective when one or more counterparts have been signed by
each of the parties and delivered to the other parties.
SECTION 8.5 Entire Agreement. This Agreement (including agreements
----------------
incorporated herein) and the Schedules and Exhibits hereto constitute the entire
agreement, and supersede all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter of this
Agreement, except for the Confidentiality Agreement, which shall remain in full
force and effect until the Closing.
SECTION 8.6 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of New York, including,
without limitation, Sections 5-1401 and 5-1402 of the New York General
Obligations Law and Rule 327(b) of the New York Civil Practice Laws and Rules.
SECTION 8.7 Assignment. This Agreement shall be binding upon and
----------
inure to the benefit of the parties hereto and their respective successors and
assigns. Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned or delegated by any of the parties hereto without
the prior written consent of the other parties; provided that Purchaser may make
a collateral assignment of its rights (but not its obligations) under this
Agreement to any institutional lender providing financing to Purchaser or the
Acquired Companies; and provided, further, that in no event shall any such
assignment of this Agreement or any of the rights or obligations of a party
hereunder relieve the assignment of its obligations hereunder.
63
<PAGE>
SECTION 8.8 No Third-Party Beneficiaries. Nothing herein expressed
----------------------------
or implied shall be construed to give any person other than the parties hereto
(and their successors and assigns permitted by Section 8.7) any legal or
equitable rights hereunder.
[signature page follows]
64
<PAGE>
IN WITNESS WHEREOF, this Agreement has been signed by or on behalf of
Prandium, Seller and Purchaser, all as of the date first written above.
PRANDIUM, INC.
By: /s/ Robert T. Trebing, Jr.
-----------------------------------
Name: Robert T. Trebing, Jr.
Title: Executive Vice President and Chief
Financial Officer
FRI-MRD CORPORATION
By: /s/ Robert T. Trebing, Jr.
-----------------------------------
Name: Robert T. Trebing, Jr.
Title: President
ACAPULCO ACQUISITION CORP.
By: /s/ Maris Laipenieks
-------------------------
Name: Maris Laipenieks
Title: President
65
<PAGE>
EXHIBIT 10.(h)
[LETTERHEAD OF PRANDIUM, INC. APPEARS HERE]
1999 MANAGEMENT INCENTIVE COMPENSATION PLAN
PLAN DESCRIPTION
OBJECTIVE
- ---------
The Prandium, Inc. Management Incentive Compensation Plan (MICP) is designed to
motivate and reward employees who, by virtue of their position and
responsibilities, are in a position to make a significant contribution toward
attaining and exceeding the annual business objectives of Prandium, Inc. or any
of its Operating Divisions.
ELIGIBILITY
- -----------
Employees of Prandium, Inc. and its Operating Divisions are eligible to
participate in MICP based on the following criteria:
. Vice Presidents, Vice President equivalents and above who are not
eligible to participate in other incentive programs.
. Directors, Managers and equivalents who are not eligible to
participate in other incentive programs.
. A performance level of at least solid as defined by the Company's
performance standards, must have been achieved by an eligible
participant.
Individual bonus targets for participants will differ and will reflect levels of
responsibility and authority, as well as the relative impact and complexity of
their positions. Individual target incentive awards are expressed as a percent
of a participant's weighted annual base salary for the calendar year in which
this bonus applies.
ADMINISTRATION
- --------------
The Nominating and Human Resources (Compensation) Committee of the Prandium,
Inc. Board of Director's ("Committee") shall have full authority for the
administration of MICP including, but not limited to, eligibility, performance
criteria, and Plan modification or termination.
<PAGE>
INCENTIVE AWARD LEVELS
- ----------------------
Individual incentive awards will be based on four, five or six performance
components, depending on a participant's position within the organization. The
factors that comprise each participant's MICP award will include one or more of
the following factors:
. Prandium, Inc. EBITDA Performance
. Division EBITDA Performance
. Division or Department G&A Budget
. Personal Objectives
EBITDA is defined as operating profit plus miscellaneous income/(expense),
depreciation and opening expense.
The relative weighing of the above factors reflects the degree to which a
participant can impact the performance of one or all operating divisions. For
example, the incentive for a corporate participant is weighted between Chi-
Chi's, El Torito, Koo Koo Roo and Hamburger Hamlet performance, whereas a
Division participant's incentive is weighted more heavily on Divisional
performance. A combination of any of the above factors may be used in
determining a participant's award.
The measurement criteria for MICP will be set for Prandium, Inc. and Operating
Divisions at the beginning of each plan year. These objectives will be based on
many criteria including, but not limited to, the established operating profit
for the previous year, general economic conditions, the industry's competitive
environment, and senior management's judgement as to what constitutes
outstanding results.
A portion of the incentive will be awarded based on achievement of Departmental
G&A budgets.
Personal Objectives are established on an individual basis and approved by the
CEO. Incentives will be awarded based on the level to which the objectives are
achieved as determined by the Department Head and the CEO.
TRANSFERS/PROMOTIONS/MERIT INCREASES
- ------------------------------------
If an eligible participant is promoted to a new position during the year and if
such new position reflects a different bonus opportunity percentage, such
factors will be taken into consideration by management insofar as award
determination is concerned. The same factors will be considered by management
insofar as transfers among and between Prandium, Inc. and its Operating
Divisions are concerned. In the case of merit increases during the year, the
MICP awards will be based on the weighted average of a participant's base
salary.
<PAGE>
MICP PAYOUT
- -----------
Payment of MICP awards will be made annually, following management's
determination of the operating results for Prandium, Inc. and each of its
Operating Divisions and, barring unforeseen circumstances, will be paid before
the end of the first quarter of the following year, to the extent performance
warrants payment. In the event that a participant becomes eligible during the
calendar year, any applicable award will be prorated for the number of months of
service. Payroll and other associated statutory taxes will be withheld from all
MICP awards.
TERMINATION
- -----------
An eligible participant whose employment terminates, voluntarily or
involuntarily, prior to the end of the fiscal year, will not be eligible to
receive a MICP award. If termination occurs after the end of the fiscal year,
but before payment, the Committee reserves the right to determine if payment, or
portion thereof, will be made.
PENALTIES
- ---------
A penalty of up to 100% of the MICP award can be assessed for any actions
detrimental to the assets, reputation, or best interest of Prandium, Inc. and/or
its Operating Divisions including, but not limited to, any lowering of standards
in order to increase operating results, violation of established policies and
procedures, substandard personal performance, etc.
PLAN MODIFICATION
- -----------------
In the event of unusual circumstances which materially impact the performance of
Prandium, Inc., its Operating Divisions, and/or the individual participant over
which management and/or the individual participant has little or no control, the
Committee may, through the exercise of prudent business judgment, amend the
performance criteria of MICP and, in their discretion, raise or lower MICP
awards. Such conditions as increased competition, forecasting errors, weather,
etc., are ongoing business factors and would not, in and of themselves, warrant
adjustment in performance criteria.
This MICP does not confer or create any rights in employees or any duties or
obligation upon Prandium, Inc. Prandium, Inc. will make all interpretations
concerning the conditions and qualification covered under this Plan and senior
management reserves the right to modify or terminate the Plan, should
circumstances so warrant. Notification of MICP modifications or terminations of
MICP will be communicated to participating employees as appropriate.
<PAGE>
EXHIBIT 10.(nn)
PRANDIUM, INC.
DIVESTITURE BONUS PLAN
FOR KEY MANAGEMENT
OBJECTIVE:
- ---------
The Prandium, Inc. ("Prandium") Divestiture Bonus Plan for Key Management
("DBP") has been created in connection with Prandium's decision to explore the
sale of either or both of its El Torito Restaurants, Inc. subsidiary ("El
Torito") and its Chi-Chi's, Inc. subsidiary ("Chi-Chi's"). The DBP is designed
to retain and reward key executives who will assist with any such sale.
ELIGIBILITY:
- -----------
The following individuals have been identified by the Board of Directors of
Prandium as participants in the DBP: William Burt, President of El Torito;
Madelaine Bergen, Vice President Finance of El Torito; Joe Herrera, Senior Vice
President Marketing of El Torito; Chuck Rink, Executive Vice President
Operations of El Torito; Roger Chamness, President of Chi-Chi's; Laurie
Katapski, Senior Vice President Marketing of Chi-Chi's; Azam Malik, Executive
Vice President Operations of Chi-Chi's; Lisa Manuel, Vice President Finance of
Chi-Chi's; William Zavertnik, Vice President Operations of Chi-Chi's; Janie
Bereczky, Vice President Taxes of Prandium; Todd Doyle, Executive Vice President
and General Counsel of Prandium; Robert Gonda, Vice President and Treasurer; Ken
Gowen, Senior Vice President Human Resources of Prandium; Michael Malanga,
Executive Vice President Corporate Development of Prandium; Dan Rothblum, Vice
President Information Services of Prandium; Peter Salomon, Vice President
Controller of Prandium; and Robert Trebing, Jr., Executive Vice President and
Chief Financial Officer of Prandium.
A "Bonus Pool" equal to 35 basis points (with 100 basis points equal to 1%)
of the "Purchase Price" (as defined below) shall be created for each of the
sales of El Torito or Chi-Chi's. Purchase Price is defined for purposes of any
DBP payout calculation as the aggregate amount or value of all cash and non-cash
consideration actually received by Prandium and/or its subsidiaries or
shareholders, plus the aggregate principal amount of any debt assumed, retired
or defeased (and for which Prandium or any of its subsidiaries does not continue
to act as a guarantor or obligor) in connection with a sale. In the event that
the sale price is paid in whole or in part in the form of securities or other
assets, the value of such securities or other assets shall be the fair market
value thereof, as determined by the Board of Directors of Prandium; provided,
that if such consideration includes securities with an existing public trading
market, the value thereof shall be determined by calculating the average sales
price for such securities during the last ten (10) trading days prior to such
consummation. In the event that all or some portion of the consideration is
related to the future earnings or operations of El Torito or Chi-Chi's, the
portion of the compensation relating thereto and not paid at closing shall be
calculated and shall be paid to the participants when and as such future
earnings are realized and related consideration is paid to Prandium.
1
<PAGE>
The above-named participants are eligible for the following percentages of
the Bonus Pool(s) created for a sale of El Torito or Chi-Chi's:
<TABLE>
<CAPTION>
Participant El Torito Sale Chi-Chi's Sale
=========================================================
<S> <C> <C>
William Burt 24.89% 0%
- ---------------------------------------------------------
Madelaine Bergen 8.16% 0%
- ---------------------------------------------------------
Joe Herrera 8.16% 0%
- ---------------------------------------------------------
Chuck Rink 16.33% 0%
- ---------------------------------------------------------
Roger Chamness 0% 16.74%
- ---------------------------------------------------------
Laurie Katapski 0% 8.16%
- ---------------------------------------------------------
Azam Malik 0% 12.24%
- ---------------------------------------------------------
Lisa Manuel 0% 8.16%
- ---------------------------------------------------------
William Zavertnik 0% 12.24%
- ---------------------------------------------------------
Janie Bereczky 2.46% 2.46%
- ---------------------------------------------------------
Todd Doyle 11.0% 11.0%
- ---------------------------------------------------------
Robert Gonda 2.46% 2.46%
- ---------------------------------------------------------
Ken Gowen 2.46% 2.46%
- ---------------------------------------------------------
Michael Malanga 8.16% 8.16%
- ---------------------------------------------------------
Dan Rothblum 2.46% 2.46%
- ---------------------------------------------------------
Peter Salomon 2.46% 2.46%
- ---------------------------------------------------------
Robert Trebing, Jr. 11.0% 11.0%
- ---------------------------------------------------------
Total: 100% 100%
- ---------------------------------------------------------
</TABLE>
TERM:
- ----
This DBP shall apply to any written agreement of purchase and sale of
either El Torito or Chi-Chi's executed and delivered on or before June 30, 2000.
DBP PAYOUT:
- ----------
Except as provided above, each DBP participant shall receive their bonus in
a lump sum
2
<PAGE>
payment made within five (5) days after the consummation of a sale of either El
Torito or Chi-Chi's. For purposes of the DBP, a sale shall be deemed to be
consummated upon the earliest of any of the following events to occur:
(a) The acquisition by a person or entity other than Prandium or any of its
subsidiaries or affiliates of a majority of the outstanding common
stock of (i) El Torito or (ii) Chi-Chi's;
(b) A merger or consolidation of (i) El Torito or (ii) Chi-Chi's with
another person or entity other than Prandium or any of its subsidiaries
or affiliates; or
(c) The acquisition by another person or entity other than Prandium or any
of its subsidiaries or affiliates of (i) assets of El Torito
representing a majority of such assets, as measured by book value, or
(ii) assets of Chi-Chi's representing a majority of such assets, as
measured by book value.
Payroll and other associated taxes will be withheld from all DBP bonus
payments in accordance with all applicable laws, rules and regulations.
TERMINATION:
- -----------
A DBP participant (i) who voluntarily terminates their employment with El
Torito, Chi-Chi's or Prandium, as applicable; or (ii) whose employment is
terminated for cause, in either case prior to the consummation of a sale of
either El Torito or Chi-Chi's, as applicable to the participant, shall not be
eligible to receive his or her DBP bonus. A DBP participant whose employment
terminates involuntarily without cause prior to the consummation of a sale of
either El Torito or Chi-Chi's, as applicable to the participant, shall be
entitled to receive his or her DBP bonus if the sale of El Torito or Chi-Chi's,
as applicable to the participant, is consummated within twelve (12) months after
the participant's termination date.
ADMINISTRATION:
- --------------
The DBP shall be administered by the Board of Directors of Prandium, which
shall have the sole discretion and authority to make, amend, interpret and
enforce all appropriate rules and regulations for the administration of the DBP,
decide or resolve any and all questions, including interpretations of the DBP,
as may arise, and adjust participants' Bonus Pool percentages in the event a
participant is no longer eligible to receive his or her DBP bonus. The decision
or action of the Board of Directors of Prandium with respect to any question or
matter arising out of or in connection with the administration, interpretation
and application of the DBP shall be final and conclusive and binding upon all
persons having any interest in the DBP.
Prandium shall indemnify and hold harmless the members of the Board of
Directors of Prandium against any and all claims, losses, damages, expenses and
liabilities arising from any action or failure to act with respect to the DBP,
except in the case of willful misconduct.
3
<PAGE>
MISCELLANEOUS:
- -------------
Unsecured General Creditor. DBP participants and their heirs, successors
--------------------------
and assigns shall have no legal or equitable rights, interest or claims in any
property or assets of Prandium or any of its subsidiaries or affiliates.
Prandium's obligation under the DBP shall be merely that of an unfunded and
unsecured promise to pay money in accordance with the DBP. Amounts payable to a
DBP participant shall be paid from the general assets of Prandium exclusively.
Prandium's Liability. The DBP shall supplement and shall not supersede,
--------------------
modify or amend any other plan or program, except as may otherwise be expressly
provided. Despite the foregoing, and except for the benefits specifically
provided for in the DBP, the DBP shall not be construed as entitling a DBP
participant to receive any other benefit offered by Prandium or any of its
subsidiaries or affiliates. Neither Prandium nor any of its subsidiaries or
affiliates shall have any obligation to a DBP participant under the DBP, except
as expressly provided herein.
Nonassignability. A DBP participant shall not have any right to commute,
----------------
sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber,
transfer, hypothecate or convey in advance of actual receipt, the amounts, if
any, payable hereunder, or any part thereof, which are, and all rights to which
are expressly declared to be, unassignable and non-transferable, except that the
foregoing shall not apply to any family support obligations set forth in a court
order. No part of the amount payable shall, prior to actual payment, be subject
to seizure or sequestration for the payment of any debts, judgments, alimony or
separate maintenance owed by a DBP participant or any other person, nor be
transferable by operation of law in the event of a DBP participant's or any
other person's bankruptcy or insolvency.
Not a Contract of Employment. The terms and conditions of the DBP shall
----------------------------
not be deemed to constitute a contract of employment. Except as may be
expressly provided in a written employment contract between a participant and
Prandium or any of its subsidiaries, nothing in the DBP shall be deemed to give
a participant the right to be employed in the service of Prandium or any of its
subsidiaries or affiliates, or to interfere with the right of any of them to
discipline the DBP participant at any time.
Plan Not Subject to ERISA. The DBP is not subject to the Employee
-------------------------
Retirement Income Security Act of 1973.
Captions. The captions hereof are for convenience only and shall not
--------
control or affect the meaning or construction of any of its provisions.
4
<PAGE>
Governing Law. The provisions of the DBP shall be construed and
-------------
interpreted according to the laws of the State of California.
Entire Benefit. The DBP constitutes the entire agreement and understanding
--------------
with regard to the subject matter hereof and supersedes all prior oral or
written agreements, arrangements and understandings with respect thereto. No
representation, promise, inducement, statement or intention has been made by
Prandium or any of its subsidiaries or affiliates that is not embodied herein,
and no person shall be bound by or be liable for any alleged representation,
promise, inducement or statement not set forth in this document.
\ \ \
5
<PAGE>
EXHIBIT 21(a)
PRANDIUM, INC.
--------------
1999 FORM 10-K
--------------
LIST OF SUBSIDIARIES
--------------------
Subsidiaries as of December 26, 1999
- ------------------------------------
Arrosto Coffee Company, Inc. Koo Koo Roo, Inc.
Arrosto Coffee Company Franchising, Inc. Koo Koo Roo Licensing Systems, Inc.
Caulk 'N Paw, Inc. Lean Chick - 792 Lexington, Inc.
CCMR Advertising Agency, Inc. Maintenance Support Group, Inc.
CCMR of Catonsville, Inc. 1170060 Ontario Limited
CCMR of Cumberland, Inc. RAC/KKR/LP Florida, Ltd.
CCMR of Frederick, Inc. RAC/KKR/G.P., L.C.
CCMR of Golden Ring, Inc.
CCMR of Greenbelt, Inc.
CCMR of Harford County, Inc.
CCMR of Inner Harbor, Inc.
CCMR of Maryland, Inc.
CCMR of Ritchie Highway, Inc.
CCMR of Timonium, Inc.
Chi-Chi's, Inc.
Chi-Chi's Franchise Operations Corporation
Chi-Chi's Management Corporation
Chi-Chi's of Greenbelt, Inc.
Chi-Chi's of Kansas, Inc.
Chi-Chi's of South Carolina, Inc.
Chi-Chi's of West Virginia, Inc.
CMM Dissolution, Inc.
El Torito Franchising Company
El Torito Restaurants, Inc.
Food-Eez, Inc.
FRI-Admin Corporation
FRI-MRD Corporation
The Hamlet Group, Inc.
H.H. of Maryland, Inc.
H.H.K. of Virginia, Inc.
Koo Koo Roo Florida, 102J, Ltd.
RAC 102J, L.C.
Koo Koo Roo Florida, 103J, Ltd.
RAC 103J, L.C.
Koo Koo Roo Florida, 104J, Ltd.
RAC 104J, L.C.
Koo Koo Roo Florida, 107J, Ltd.
RAC107J, L.C.
<PAGE>
EXHIBIT 21(b)
PRANDIUM, INC.
--------------
1999 FORM 10-K
--------------
NAMES UNDER WHICH OPERATING
SUBSIDIARIES DO BUSINESS - 12/26/99
-----------------------------------
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
Koo Koo Roo, Inc.
- -----------------
Koo Koo Roo
The Hamlet Group, Inc.
- ----------------------
Hamburger Hamlet
Portner's
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Prandium, Inc.
We consent to incorporation by reference in the Registration Statement (No.
333-67149) on Form S-8 of Prandium, Inc. of our report dated February 19, 2000,
except for note 17 which is as of March 27, 2000, relating to the consolidated
balance sheets of Prandium, Inc. and its subsidiaries as of December 26, 1999
and December 27, 1998 and the related consolidated statements of operations,
common stockholders' deficit and cash flows and related financial statement
schedule for the years ended December 26, 1999, December 27, 1998 and December
28, 1997 which report appears in the December 26, 1999 annual report on Form
10-K of Prandium, Inc.
KPMG LLP
Orange County, California
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) AUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR YEAR ENDED DECEMBER 26, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM 10K FOR THE YEAR ENDED
DECEMBER 26, 1999
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> DEC-26-1999
<CASH> 3,600
<SECURITIES> 0
<RECEIVABLES> 2,408
<ALLOWANCES> 0
<INVENTORY> 2,672
<CURRENT-ASSETS> 67,613
<PP&E> 194,501
<DEPRECIATION> 57,041
<TOTAL-ASSETS> 286,633
<CURRENT-LIABILITIES> 96,028
<BONDS> 237,871
0
0
<COMMON> 1,804
<OTHER-SE> (59,409)
<TOTAL-LIABILITY-AND-EQUITY> 286,633
<SALES> 536,579
<TOTAL-REVENUES> 536,579
<CGS> 141,881
<TOTAL-COSTS> 541,207
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,371
<INCOME-PRETAX> (35,999)
<INCOME-TAX> 492
<INCOME-CONTINUING> (36,491)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (36,491)
<EPS-BASIC> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
